There have been a handful of activist threats to Canadian companies recently.
What these engagements have drawn focus on are defects in public company governance, including the skill sets of existing directors, the board's focus on value creation vs compliance, and the very ways boards function and operate, particularly compared to private equity boards.
What follows is a series of recommendations that could apply to any public board to: make it more focused on value creation; to strengthen real director independence, including from management; to strengthen management accountability to the board; and, perhaps most importantly, to strengthen board accountability to shareholders.
These recommendations are expected to form a journal article I am authoring, and will be incorporated into a case on Canadian Pacific I am co-authoring. I will post the journal article once it is published, but I thought I would post the recommendations below, for commentary and criticism.
The recommendations are based on, in no particular order: interviews with activist investors, private equity leaders, directors and CEOs; advisory work with regulators; assessments of leading boards; expert-witness work; academic and practitioner literature and regulations in other countries; director conferences and webinars; lectures I have delivered to the Institute of Corporate Directors and Directors College; discussions in my LinkedIn group, Board and Advisors; and a book I am writing including with Henry D. Wolfe and Frank Feather entitled Building High Performance Boards.
Several recommendations may result in significant restructuring and change in how a public company board operates, functions, is composed, engages, and focuses.
What follows is a listing of the recommendations, organized into three groupings, as follows:
I. Increase Board Engagement, Expertise and Incentives to Focus on Value Creation (proposals 1-19)
II. Increase Director Independence from Management and Management Accountability to the Board (proposals 20-30)
III. Increase Director Accountability to Shareholders (proposals 31-38)
We will now begin with grouping I.
I. Increase Board Engagement, Expertise and Incentives to Focus on Value Creation
1. Reduce the size of the Board.
2. Increase the frequency of Board meetings.
3. Limit Director overboardedness.
4. Limit Chair of the Board overboardedness.
5. Increase Director work time.
6. Increase the Board Chair's role in the value creation process.
7. Focus the majority of Board time on value creation and company performance.
8. Increase Director roles and responsibilities relative to value creation.
9. Increase Director compensation, and match incentive compensation to long-term value creation and individual performance.
10. Enable Director access to information and reporting Management.
11. Enable Director and Board access to expertise to inform value creation as needed.
12. Require active investing in the Company by Directors.
13. Select Directors who can contribute directly to value creation.
14. Revise the Board's committee structure to address value creation.
15. Hold Management to account.
16. Disclose individual Director areas of expertise directly related to value creation.
17. Increase Board engagement focused on value creation.
18. Establish and fund an independent Office of the Chairman.
19. Limit Board homogeneity and groupthink.
We will now continue with grouping II.
II. Increase Director Independence from Management and Management Accountability to the Board
20. Increase objective Director and advisory independence.
21. Limit Director interlocks.
22. Limit over-tenured Directors.
23. Limit potential Management capture and social relatedness of Directors.
24. Decrease undue Management influence on Director selection.
25. Decrease undue Management influence on Board Chair selection.
26. Increase objective independence of governance assurance providers.
27. Limit management control of board protocols.
28. Address fully perceived conflicts of interest.
29. Establish independent oversight functions reporting directly to Committees of the Board to support compliance oversight.
30. Match Management compensation with longer-term value creation, corporate performance and risk management.
We will now conclude with grouping III.
Increase Director Accountability to Shareholders
31. The Board Chair and Committee Chairs shall communicate face-to-face and visit regularly with major Shareholders.
32. Communicate the value creation plan to Shareholders.
33. Implement integrated, longer-term reporting focused on sustained value creation that includes non-financial performance and investment.
34. Implement independent and transparent Director performance reviews with Shareholder input linked to re-nomination.
35. Each Director, each year, shall receive a majority of Shareholder votes cast to continue serving as a Director.
36. Make it easier for Shareholders to propose and replace Directors.
37. Limit any undue Management influence on Board - Shareholder communication.
38. Limit Shareholder barriers to the governance process that can be reasonably seen to promote Board or Management entrenchment.
There have been significant changes to corporate governance in the last few years. Most notably, boards and regulators are now dealing with a defective legacy of independent directors who do not possess the relevant expertise. The scholarship has never supported independent board or separate chairs and the causal relationship to corporate performance. Regulators and most recently shareholders are now are focusing on competencies.
Second, there has been an under-emphasis on strategy and value creation by many boards, at the expense and crowding out of compliance obligations. Shareholders are now addressing this shortcoming.
Third, there is a movement towards shareholders exerting ownership rights to effect the governance of the company and select and remove directors who can address the earlier two points: competencies and skills, and fulfillment of the strategic and value creation role of the board.
Fourth, there is the real perception that directors are beholden to management.
I have addressed in the above recommendations all four defects in the current governance model for public companies: (i) directors selected primarily with a view to formal independence; (ii) not addressing fully the strategic and value creation role of the board; (iii) shareholders having greater say on directors and value creation; and (iv) making boards more independent of management, and management more accountable to boards.
J.P. Morgan Chase & Co. (NYSE: JPM) was for years considered the best-run bank in America, and its CEO, Jamie Dimon, the top banker. Dimon steered it through the financial crisis of 2008 in a way its competitors could not match. Unfortunately, J.P. Morgan is one more brand that was tarnished almost overnight. A single trader in J.P. Morgan’s London office lost the bank $6.2 billion, and there are concerns the write-off process is not over. Dimon erred by saying the incident was isolated and based on management stupidity. The federal government did not accept that, and neither did investors. The Office of the Comptroller of the Currency and the Federal Reserve made harsh assessments of the bank’s risk management in January. Both agencies found “unsafe or unsound practices and violations of law or regulation.” The criticism did not end there. In March, the Office of the Comptroller downgraded J.P. Morgan’s management rating. The reputation of the bank, almost entirely intertwined with Dimon, suffered one last blow. Investors have pushed to strip Dimon of his role as chairman, which has caused speculation that an incident that began in London could eventually cost him his job as CEO. Read more at 24/7 Wall St.
Research In Motion renamed itself after its most famous product — the BlackBerry — earlier this year. New management has said that the BlackBerry Z10 and the redesigned operating system, which was delayed three times, are critical to turning around the business. But the product, which the company is betting on, is of only limited interest to the public. The BlackBerry brand already has been pressed to near extinction by competitors, including the Apple iPhone and Google Android OS smartphones, led by Samsung products. Apple’s iPhone had about half of BlackBerry’s (NASDAQ: BBRY) market share in 2008, and Google Android was in its infancy. By the end of 2011, BlackBerry had less than 9% market share, Apple had almost 24%, and Android OS phones dominated with more than 50%. In the history of smartphones, the 2013 launch of the BlackBerry Z10 may be only a footnote. The release was late, and most reviews have been mixed, at best. Early sales of the new device have been modest, and certainly not enough to dent the market share of Apple, which sold 47.8 million iPhones in its most recently released quarter. The Z10 was hardly the start of the downfall of the BlackBerry brand, but it may be the final chapter. Read more at 24/7 Wall St.
Shortly after launching in November 2008, Groupon Inc. (NASDAQ: GRPN) began to revolutionize the coupon business. The company sent retail offers online to customers, which it targeted based on where they lived and worked, as well as their stated interests. Merchants and customers adopted the new model at a blazing pace, at least early on. Revenue increased from $3.3 million in the second quarter of 2009 to $644.7 million in the first quarter of 2011, the company reported. When Groupon went public in November 2011, its trouble with the SEC about overstating revenue already had begun. Another SEC investigation caused the company to restate fourth-quarter 2011 revenue and drove down the share price 10%. In addition to accounting scandals, Groupon is having trouble fending off competition from peers LivingSocial, Amazon and brick-and-mortar retailers who do not want to be flanked by online coupon competition. After three years of hyper-expansion, Groupon forecasts 2013 revenue growth at a tepid 0% to 9%. Earlier this year, Groupon co-founder and CEO Andrew Mason was fired. Rejecting Google’s $6 billion dollar offer (the company is now worth $4 billion), issues with the SEC and zero growth did not sit well with his board and co-founders after all. Read more at 24/7 Wall St.
If the stock market is any indication of the success of electronics retailer Best Buy Co. Inc. (NYSE: BBY), it is worth remembering that its shares traded just below $49 nearly three years ago. Even after rallying since the start of the year, shares currently trade under $26. Best Buy has been its own worst enemy. CEO Brian Dunn, who was charged with the company’s turnaround, was fired in May 2012 for a relationship with a female employee. Founder and chairman Richard Schulze left under a dark cloud shortly thereafter when it was discovered he knew of the affair and did not tell the rest of the board. Then, last August, Schulze offered to take Best Buy private. Recently, he dropped the deal and rejoined the board. Even Schulze could not make the case that the company was healthy enough to be taken over, which raises the question of whether he believes the company he started has a dim future. One of Best Buy’s problems is that it has become the showroom for Amazon.com Inc. (NASDAQ: AMZN). This was on display when it announced the financials for the quarter that ended on March 3, 2012. The company said that it had lost $1.7 billion, compared to a profit of $651 million the year before, and would close 50 stores. Best Buy also said that the critical marker of same-store sales had fallen, and that it expected the slide to continue. Read more at 24/7 Wall St.
The deterioration of one of America’s oldest retailers has been going on for some time. In the five years before Ron Johnson’s appointment in late 2011, the J.C. Penney share price dropped 60% under CEO Myron “Mike” Ullman. Johnson embarked on an expensive turnaround plan, which included a new logo, advertising and the end of deep discounts, coupons and sales events once popular with customers. None of this appears to have worked. Total sales fell 24.8% last year to $13 billion, while same-store sales fell 25.2%. Internet sales, absolutely critical to retailers as e-commerce emerges as a primary source of revenue, dropped 33% during the year. The day after Johnson’s dismissal, share prices hit a 12-year low. Firing Johnson this week was the clearest repudiation of his turnaround strategy and the only sane decision by the board. According to recent reports, same-store sales dropped 10% in the quarter that just ended, likely contributing to his dismissal. Reinstating the former CEO responsible for the company’s previous woes defies explanation. Read more at 24/7 Wall St.
The huge aerospace company has turned years of delays in the launch of its 787 Dreamliner into a nightmare for carriers. And passengers have become concerned whether the plane will be safe once it returns to service. Major production delays began in 2007. The first passengers did not step aboard a 787 until an October 26, 2011, flight from Tokyo to Hong Kong — three and a half years later than initially planned. However, the events after that flight make the delays seem insignificant by comparison. Incidents of burning lithium-ion batteries caused the entire 787 fleet to be grounded. Despite further battery tests by Boeing Co. (NYSE: BA) and regulators, the FAA has yet to allow the plane to go back into service. Ultimately, the 787 will be recertified, but the brand will be badly damaged for a very long time, at least in the eyes of the flying public. As the Los Angeles Times recently reported, “Boeing Co. is now battling on two fronts: fixing the source of the problem and regaining the trust of the flying public.” Read more at 24/7 Wall St.
The South Korean vehicle maker and its stablemate Kia have been among the fastest growing car and light truck brands in America over the past decade. Hyundai’s share of the U.S. market grew from about 2% in 2001 to more than 4% in 2011. During that period, Hyundai and Kia offered what Japanese companies had for decades — high-quality vehicles at affordable prices. They burnished their images with a 100,000-mile warranty package dubbed “Hyundai Assurance.” However, in November 2012, the EPA charged the companies with inflated MPG claims, and they lowered the stated MPG ratings on many of their vehicles. USA Today described Hyundai’s reaction as “shocking.” It said, “Hyundai, in a burst of hubris, deals with the issue by portraying itself as a consumer champion on its home page — even though the reduction resulted from an Environmental Protection Agency investigation.” More recently, Hyundai and Kia said they would recall approximately 1.9 million cars in the United States to “fix a potentially faulty brake light switch,” Yahoo! News reported. Read more at 24/7 Wall St.
Steve Jobs built Apple Inc. (NASDAQ: AAPL) into a seemingly unassailable juggernaut — and the world’s most valuable public company. The reputation was carefully crafted for more than a decade by Jobs, who created entirely new product categories, and then dominated them with devices such as the iPod, iPhone and iPad. Apple’s single most public disaster was its decision to dump rival Google Inc.’s (NASDAQ: GOOG) Maps system and replace it with its own product. Following a huge wave of negative press, Apple CEO Tim Cook wrote a public letter apologizing for the mess and, at one point, even suggested users rely on Google Maps instead. At the heart of Apple’s brand decline is the simple fact that it has lost reputation as the prime innovator in the industries it once led. A year ago, no one could have imagined that a product like the Samsung Galaxy SIII would compete with the iPhone 5, or that the Galaxy S4 would be viewed as better than the iPhone. Apple lost its position as one of the world’s top brands in a remarkably short time. It has not launched a revolutionary product in more than two years. For most companies, the launch of such a device once a decade would be sufficient. For Apple, it is nothing short of a failure. Read more at 24/7 Wall St.
Leave aside Stewart’s five months in prison for lying about her sale of ImClone stock. Disregard her unbelievably high compensation as nonexecutive chairman of Martha Stewart Living Omnimedia Inc. (NYSE: MSO) — even as the company’s revenue has consistently dropped, and its shares have plummeted more than 60% during the past five years, while the S&P 500 has jumped 20%. The domestic diva and her namesake company have landed on the front pages again, this time in a legal battle between Macy’s Inc. (NYSE: M) and J.C. Penney Co. Inc. (NYSE: JCP) about which retailer has the rights to sell Stewart-labeled products. Omnimedia cut a deal with J.C. Penney in late 2011, giving the retailer the right to sell Stewart-branded goods in its store. At the same time, J.C. Penney also bought 16.6% of Stewart’s company for $38.5 million. Macy’s promptly sued, claiming that its exclusive rights to the Stewart product line, set in 2006, had been violated. The latest public blunder has further damaged a brand that began a downward trend years ago. Read more at 24/7 Wall St.
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