Nell Minow is on the board of GovernanceMetrics International (GMI, formerly known as the Corporate Library), an independent research firm that rates boards of directors of public companies and compiles research, studies and critical thinking about corporate governance.
Minow is a former president of proxy firm ISS, and has written many corporate governance articles and chapters in treatises on executive compensation. Here she talks to deputy editor Aarti Maharaj.
1. What role is GMI playing in shaping the direction of the governance profession over the next five years, and how can corporate secretaries and general counsel help?
The governance field is experiencing significant changes for various internal and external reasons. The data we provide influences how investors, insurers, ratings agencies, regulators, and the companies themselves perceive governance. The grades we assign to companies can alter their behavior and how they engage with their investors. Our data, research, and other governance-related activities are deeply integrated into many areas of the investor community, which is one of the key reasons our work can affect a company’s operations and future choices.
Corporate secretaries and general counsel can review their companies’ ratings and give us feedback, which includes the option to share an unedited response on our website for free. Companies can access the information GMI offers about them at no cost, which can assist them in improving and adjusting their current strategies – although not all corporate secretaries are utilizing this resource. We look forward to engagement, and feedback from these governance professionals is valuable over time.
Our ratings rely heavily on publicly available data. When we rate the effectiveness of a board, we use this information to evaluate the board in areas such as understanding of investments, liability and risks. We look at all the decisions the board makes, so if you want a good rating, you need to make good compensation and risk management decisions. We also compile information about directors across different companies, so if a director is serving on two compensation committees where the CEO is overpaid, we can red-flag that director. These are just some of the ways GMI can help companies improve their governance measures and equip governance professionals with the tools needed to make sound decisions.
2. What is the biggest improvement you have seen in the realm of corporate governance over the past few years, and why do you see it as a major improvement or accomplishment?
Boards are no longer asleep. These days, every director is energized and more aware of the risks of failing or being actively involved in a failing company. If you look back on the crises and failures of the last 20 years, going back to the missteps of the Enron, WorldCom and, most recently, MF Global boards, directors have been the ones responsible for the bad decisions made.
Also, investors are becoming more active and are interacting more with the board. Technology is playing a crucial role in this because it is changing the way in which we communicate and is reshaping the governance arena.
3. In terms of corporate governance, what industries do you feel will experience the most change over the next five years, and what will those governance changes be?
There is no one-size-fits-all approach to corporate governance, but the basic principles are universally important in every sector. In terms of change, the fact that executive compensation is becoming increasingly out of alignment with the creation of shareholder value shows that corporate governance has not been fully brought on board just yet. I suspect there will be big changes in the institutional investor sector, both with regard to financial services firms and to other kinds of companies in the management of their pension funds. These organizations constitute what I call the ‘demand side’ of corporate governance, and their increasing sophistication and focus will be an important change driver.
4. Given all the media attention on protests such as Occupy Wall Street and the fight of the 99 percent to eliminate/mitigate CEOs cashing out on huge bonuses, how do you think the SEC or the profession will respond to this outcry over the next few months?
The SEC and profession should fundamentally reconsider the way they approach this issue of executive compensation. Compensation should be evaluated like any other asset allocation – in ROI terms. Right now you can get better returns on a piggy bank than on many of these compensation plans. The companies that get it right and go beyond check-the-box risk management and regulatory strategies will essentially have a lower cost of capital, which will result in greater investor confidence.
5. What do you think are the five biggest concerns for shareholders in 2012, and why?
• Executive compensation. There has been a tipping point – shareholders now recognize it as a critical issue and an indicator of board oversight and risk management. Last year, Occidental Petroleum, GE and other companies had to revise pay plans to respond to shareholder concerns, and this year we’ll see a lot more of that. Say on pay has placed more emphasis on compensation, and that is going to become even more significant.
• Quality of the board/individual directors. Shareholders are looking for resources to provide alternatives to management-nominated candidates for the board. They are carefully scrutinizing those who serve on the audit committees, compensation committees and so on. The education and experience of board directors is becoming more relevant.
• Political expenditures. The rise of undisclosed contributions is going to be a huge issue. I believe the Supreme Court will clarify that the right corporations have to engage in political speech depends on accountability and transparency, and will require that the amount of contributions made does not remain undisclosed.
• Sustainability and transparency analysis. This is a core element of strategic planning. Companies will need to re-evaluate their use of this resource and how it is going to be allocated over a period of time.
• Majority voting for directors and other shareholder initiatives. Majority voting on directors will be a key shareholder initiative. According to research, more than 80 directors have continued to serve even though a majority of shareholders voted against them.
There is no excuse for this, and I believe the courts will not extend the protection of the business judgment rule to directors who shareholders do not want on the board. Other shareholder initiatives will include human rights, environmental impact, executive and director compensation, and financial reform.