Pause for thought.....future governance? - 4th Apr 2017

Shareholder democracy is ailing. Snap’s refusal to hand out any voting shares is part of a wider trend towards corporate autocracy

DEMOCRACY is in decline around the world, according to Freedom House, a think-tank. Only 45% of countries are considered free today, and their number is slipping. Liberty is in retreat in the world of business, too. The idea that firms should be controlled by diverse shareholders who exercise one vote per share is increasingly viewed as redundant or even dangerous.

Consider the initial public offering (IPO) of Silicon Valley’s latest social-media star, Snap. It plans to raise $3-4bn and secure a valuation of $20bn-25bn. The securities being sold have no voting rights, so all the power will stay with Evan Spiegel and Bobby Murphy, its co-founders. Snap’s IPO has echoes of that of Alibaba, a Chinese internet giant. It listed itself in New York in 2014, in the world’s largest-ever IPO, raising $25bn. It is worth $252bn today and is controlled by an opaque partnership using legal vehicles in the Cayman Islands. Its ordinary shareholders are supine.

Optimists may dismiss the two IPOs as isolated events, but there is a deeper trend towards autocracy. Eight of the world’s 20 most valuable firms are not controlled by outside shareholders. They include Samsung, Berkshire Hathaway, ICBC (a Chinese bank) and Google. Available figures show that about 30% of the aggregate value of the world’s stockmarkets is governed undemocratically, because voting rights are curtailed, because core shareholders have de facto control, or because the shares belong to passively managed funds that have little incentive to vote.

Cheerleaders for corporate governance, particularly in America, often paint a rosy picture. They point out that fewer bosses are keeping control through legal skulduggery, such as poison pills that prevent takeovers. Unfortunately, these gains have been overwhelmed by three bigger trends. The first is that technology firms can dictate terms to infatuated investors. Young and with a limited need for outside capital, many have come of age when growth is scarce. Google floated in 2004 with a dual voting structure expressly designed to ensure that outside investors would have “little ability to influence its strategic decisions”. Facebook listed in 2012 with a similar structure and in 2016 said that it would issue new non-voting shares. Alibaba listed in New York after Hong Kong’s stock exchange refused to countenance its peculiar arrangements. Undaunted, American investors piled in.

At the same time there has been a drift away from the model of dispersed ownership in emerging economies, with 60% of the typical bourse being closely held by families or governments, up from 50% before the global financial crisis, according to the IMF. One reason has been lots of IPOs of state-backed firms in which the relevant government retains a controlling stake. Hank Paulson, a former boss of Goldman Sachs, helped design many of China’s privatisations in the early 2000s. “The Chinese could not surrender control,” his memoirs recall. Mr Paulson hoped that the government would eventually take a back seat, but that has not happened. Other emerging economies, including Brazil and Russia, copied the Chinese strategy of partial privatisation. And across the emerging world, tightly held family firms, such as Tata in India and Samsung in South Korea, are bigger than ever.

Voter apathy is the third trend, owing to the rise of low-cost index funds that track the market. Passive funds offer a good deal for savers, but their lean overheads mean that they don’t have the skills or resources to involve themselves in lots of firms’ affairs. Such funds now own 13% of America’s stockmarket, up from 9% in 2013, and are growing fast. A slug of the shareholder register of most listed firms is now comprised of professional snoozers.

For many in business the decay of shareholder democracy is irrelevant. After all, they argue, investors own lots of other securities—bonds, options, swaps and warrants—that don’t have any voting rights and it doesn’t seem to matter. At well-run firms such as Berkshire, shares with different voting rights trade at similar prices, suggesting those rights are not worth much. Some managers go further and argue that less shareholder democracy is good, because voters are myopic. Last year Mark Zuckerberg, Facebook’s boss, pointed out that with a normal structure the firm would have been forced to sell out to Yahoo in 2006.

It doesn’t take a billionaire to poke holes in this logic. For economies, toothless shareholders are damaging. In China and Japan firms allocate capital badly because they are not answerable to outside owners, and earn returns on equity of 8-9%. A study in 2016 by Sanford C. Bernstein, a research firm, got Wall Street’s attention by calling passive investing “the silent road to serfdom”. Without active ownership, it said, capitalism would break down.

Democratic deficit

At the firm level, voting rights are critical during takeovers, or if performance slips. At Viacom, a media firm with dual-class shares, which ran MTV in its heyday but which has stagnated for the past decade, outside investors are helpless. Control sits with the patriarch, Sumner Redstone, aged 93, who has 80% of its votes but only 10% of its shares. Yahoo (once as sexy as Snap) has lost its way, too. But because it has only one class of shares, outsider investors have been able to step in and, using their voting power, force the firm to break itself up and return cash to its owners.

The system may be partially self-correcting. Some passive managers, such as BlackRock, are stepping up their engagement with companies. If index funds get too big, shares will be mispriced, creating opportunities for active managers. If shares without votes are sold for inflated prices, their owners will eventually be burned, and won’t buy them again. And if fashionable young firms miss targets, they will need more cash and will get it on worse terms. But in the end shareholder democracy depends on investors asserting their right to vote in return for providing capital to risky firms. If they don’t bother, shareholder democracy will continue to decline. That is something to think about as fund managers queue up for Snap’s IPO.

This article appeared in the Business section of The Economist February 11th 2017.


Political Pressure on Directors - 14th Dec 2016

This recent post on Kiwiblog looks at the sutuation whereby politicians are demanding directors risk five years jail:

A former union boss (Andrew Little) who campaigned on worker safety, along with Winston Peters, is basically demanding that the Government allow entry into the Pike River mine, instead of sealing it.

Now let's be clear that the only ones who can make the decision about Pike River are the directors of Solid Energy. The Board have had advice that it is unsafe to allow entry, and that it should be sealed.

So what would happen to a Director who because of political pressure said "Let's risk it" and allowed entry - and someone was harmed.

That Director would face a jail term of up to five years imprisonment and/or a fine of up to $600,000 which can not be covered by insurance.

This legal liability can not be waived or avoided. Why? Because of the law brought into place due to the Pike River tragedy. It does not matter who volunteers to go in, and what waivers they offer. If a director is found not to have done due diligence (which ignoring your own official advice and the advice of Worksafe would surely qualify) they will be found guilty of a criminal offence.

So when politicians such as Peters and Little demand Solid Energy allow entry into Pike River, they are demanding the Directors expose themselves to a five year jail term, and a $600,000 fine.

It doesn't matter if you transfer it to another entity. The decision makers in that entity would face the same liability.

Now you could argue that Parliament could pass a special law exempting Solid Energy from the workplace safety law. So then you are arguing that the very site which led to the tougher health and safety laws, should have an exemption from the same laws. That lies somewhere between irony and hypocrisy.

Now again the Government can not order the Directors of Solid Energy to allow access. The Directors can not avoid liability just because a shareholder requests or even instructs them to.  They can not get a waiver and they ca9n not get insurance to cover them.

So as Peters and Little politic to gain advantage from the tragedy that happened at Pike, just remember what they are actually doing - undermining the very law that resulted from Pike River, and effectively bullying directors to expose themselves to criminal liability and five years in jail.
As posted in Kiwiblog 14 Dec 2016

Voicing Dissent - 31st Aug 2016

A common issue in board practice concerns disagreement or a dissenting voice at the boardroom table.  The following is the current TBPL view:

Abstention is not really a viable option for a director and collective action was the underlying philosophy behind a board (see for example Section 40 of the Companies Act 1993).

Can a director abstain
In an absolutely literal sense a director can abstain from voting in the sense that nobody can be forced, at least in New Zealand, to vote on anything. Consequently, if a director remains silent he or she is in effect abstaining. Their vote therefore would not be counted in any resolution which was passed or rejected by the board.

There are however some important caveats and some context which needs to be understood in respect of this.

Responsibility cannot be rejected except by resignation
Simply because a director cannot be “physically” forced to vote and in that narrow technical sense they are abstaining, does not in any way absolve them of the responsibilities of a director. The most recent case on this is the James Hardie case in Australia – which New Zealand courts follow – in which the judgment stated that it is always the duty of a director to take responsibility for making a reasoned and reasonable assessment of the issues surrounding any particular resolution. Thus “blame or responsibility” cannot be shifted to management, ignored (for example because you intend to abstain from voting) or otherwise done away with. The director is required to investigate to a reasonable extent and assess, discuss, and form an opinion of some kind.

Note that the validity of the opinion, its popularity, its political implications or indeed any other matter of content is not at issue. What is at issue is the requirement to make some kind of adequate assessment.
Regardless of whether a director abstains or votes “yes” or “no” that director remains a member of the collective which is the board. Consequently they are responsible (and at the limit) liable for decisions made by the board. It is not therefore possible to “walk away” from any particular issue on the grounds that a director wishes to be no part of the decision or that they wish to have “nothing to do with this one” or other like protestations.
It would be difficult if not impossible for example to successfully claim that one was not liable for a decision on the grounds that one had abstained from voting. In that sense it is not possible to abstain from the responsibility. One may walk from physically voting but one may not walk from one’s responsibilities and the liability associated with those.
But I didn’t say “Yes”
This form of argument does not succeed 100% either. It may be that in abstaining or remaining silent or refusing to vote one did not say “yes”. At the same time there was the full opportunity to say “no” and thus the decision not to exercise that opportunity means that the director is in some form of “voting vacuum” but not in any form of vacuum in respect of responsibilities and very likely liability. In other words the responsibility must still be discharged and liabilities accompanying it are likely to survive. Abstention does not remove one.

It would perhaps be easier if there was black and white associated with abstentions and votes. There is not, and the reasons for that are set out above. What is black and white is that as a director one must exercise one’s responsibilities quite regardless of the “awkwardness” of the situation.

Ultimately if there are too many issues on which a director would rather not be a director (for that is effectively what one is saying in attempting to absent oneself through abstention) then the more useful course is to resign or not become appointed in the first place.

Governance for Success - 23rd Mar 2016

TBPL is presenting this short course based on theory, practice and the skills required to operate effectively in a boardroom and give you confidence as a director. It is run by two experienced directors who are also practitioners. The course will be run in conjunction with the University of Auckland in July. For further information: Governance for Success (browser back button to return to our site)

NZ directors" fees slipping, study says - 17th Aug 2015

Directors on New Zealand owned companies are slipping behind their overseas counterparts when it comes to their fees, a study out this morning shows.

The Institute of Directors Fees Report also indicated New Zealand non executive directors were spending much more time on their duties without their fees moving up by a corresponding amount.

IOD chief executive Simon Arcus said in 2014, New Zealand owned company director fees were on average 58% less than overseas owned companies. In 2015, they were 63% less.

Many variables needed to be considered when determining a fair and reasonable fee. Directors played a central role in the economic health of the country.

''Economies are about confidence. Directors are the backbone of that confidence. I am not afraid to say that directors are worth it. We pay directors to do the right thing, not the commercially safe thing.''

That could involve taking risks, he said.

New Zealand needed directors who were courageous but for whom the risk and reward balance in remuneration made sense.

The report showed director fees rose modestly in the year but workloads almost doubled, reflecting an environment where boards were facing more scrutiny and regulation than ever before.

The median increase in non executive fees rose by 4% but most (88%) had a median increase of 41% in time commitment, Mr Arcus said.

The right balance between risk and reward was critical to attracting skilled, competent and diverse talent to the board table.

There could be pressure on director remuneration levels in an era of increased liability and compliance. Members said the burden of compliance had grown, he said.

''What New Zealand needs is highly skilled, fairly remunerated directors. It's not enough to say there are plenty of directors lining up out there. New Zealand needs a focus on quality, not quantity.''

This was the first year the institute had worked with EY to undertake the annual fee survey and there was a 27% boost in survey participation, making it the most comprehensive.

Survey data showed only 50.6% of directors were satisfied with their current level of remuneration. EY partner Una Diver said diversity in the boardroom was another area where progress had been slow.

''There are good economic arguments for getting the right skill mix and gender on to boards. Research shows even one woman on a board can enhance its performance. It's time to see the diversity statistics improve.''

Thanks to Dene MacKenzie, ODT for this article

Governance for Tough Times - 20th Jul 2015

A recent paper by Brent Wheeler, Chair of The Boardroom Practice Limited
Governance for Tough Times

Corporate Governance Leadership Asset - 27th May 2015

Featured Article by Professor Bob Garrett, TBPL Affiliate
Corporate Governance Leadership Asset

Are You Getting all you can from your Board of Directors? - 9th Mar 2015

Boards of directors have always, in all cultures, represented the shareholders in publicly traded companies—validating financial results, protecting their assets, and counseling the CEO on strategy and on finding, then nurturing, the next generation of leaders. It’s a tough and demanding responsibility, requiring individual directors to learn as much as they can about a company and its operations so that their insights and advice can stand up alongside those of executives. That, at least, is the ideal.

Read more......

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