The final words at the International Corporate Governance Network’s two-day conference in New York last week were presented by PepsiCo CEO Indra Nooyi, in a fluff-free keynote with a clear call to action for its listeners: If sustainable capitalism is ever to move from the realm of theory to reality, corporate governance professionals will be instrumental in getting it there.
“Corporate governance professionals, you play a crucial role,” Nooyi said. “Please help infuse a longer-term point of view … [by] always trying for honest and thoughtful engagement of your companies.”
Nooyi was one of the conference’s most straightforward purveyors of this message, but she was far from its only one—if the ICGN’s 450 attendees and guests, who had gathered in New York from all over the world (more than half of them came from outside the US), could be said to largely agree on one point, it would be this one: that for the world’s markets to function smoothly and sustainably, companies must put in place reasonable corporate governance policies and shareholders must keep them in check.
Where panelists and audience members occasionally hit upon notes of tension, however, was in discussing the particularities of how, exactly, to do that.
The importance of fostering relationships between investors and board directors, for example, seemed like a predictably uncontroversial topic until London-based Amra Balic, head of corporate governance and responsible investment in EMEA at BlackRock, noted in her panel discussion on director-shareholder engagement that the trust between investors and directors is steadily eroding, because “investors want to talk when there are problems, and directors shut down.” She said that the best way to ease those relationships would be in forums where investors and directors could periodically meet to talk openly and share updates.But another member of the panel, Chicago-based Peggy Foran, who is chief governance officer at Prudential Financial, bridled at the suggestion.
“Be careful with cultural differences!” she said. “This is a different culture, and we have a different litigation system.” Hosting conversations is not the way to build trust and open channels of communication between directors and shareholders, she said—more effective rulemaking is.
“We need to get over who should be talking and realize that we do have differences here [in the U.S.],” she went on. “We have a more diverse group of institutional investors. We need to have more rules—for example, who do you deal with on compensation issues?—and we’re still working through that.
“Help us without saying, ‘You need to have this model,’” she added. “Let us develop in a way that has our characteristics.”
The U.S.’s relative litigiousness was a recurring undercurrent throughout the conference; when former New York attorney general and governor Eliot Spitzer asked his engagement-focused panel why U.S. institutional investors “are so hesitant to push fundamental strategic issues” with their portfolio companies, Cevian Capital senior partner Harlan Zimmerman said he could pinpoint the very reason: U.S. proxy rules limit any conversation among such parties to 10 people before making it a regulated activity. “That’s a real chill on collective action,” Zimmerman said.
The lightning rod for much of the frustration around shareholder-hobbling legislation in the U.S. immediately became Martin Lipton, a senior partner at New York-based law firm Wachtell, Lipton, Rosen & Katz. Lipton delivered the opening keynote, in which lamented the activist influence small groups of shareholders can have.
He also defended his 1982 creation, the Shareholder Rights Plan (informally known as the “poison pill”), which allows a company’s directors to require takeover bidders to negotiate directly with them, rather than with shareholders. Such shareholder plans are illegal without shareholder approval in many jurisdictions, including the U.K.
London-based Zimmerman—who manages a €3 billion fund at Cevian dedicated to active ownership and activist investments in European listed companies—jumped at Lipton’s dig at activist shareholders in the following panel.
“Marty said activists can come along and get an institutional investor to work against its own interests by working with some greedy activist—this is an offensive point of view,” Zimmerman said. “Ultimately, real activism depends on institutional support and cooperation … We need to have the same long-term interests as the institutional investor.”
Zimmerman’s fellow panelist, Roy Katzovicz—chief legal officer at Pershing Square Capital Management, and investment manager of multi-billion dollar hedge funds—added that a study coming out this week beliesLipton’s stance on activist shareholders: these investors hold their companies for an average of two years, he said, and after the activist leaves, the stock outperforms for an average three years.
“The idea is that activists are looking for a ‘pop,’ which suggests the stock will go down afterward”—but that’s just not the case, Katzovicz said.
Amidst the differences, the conference panelists found plenty to be optimistic about. Several of them made the point that shareholder-director conversations are growing increasingly substantive and bilateral—rather than consistently coming from shareholders and targeting a reticent director.
“Five to 10 years ago in the U.S., the conversation used to be one-way,” said Abe Friedman, founder of San Francisco-based CamberView Partners. “But now there’s real demand on the corporate side to see what investors are thinking.”
Pershing Square’s Kotzovicz agreed: “What we’ve been seeing in last decade in the U.S. is a real shift,” he said. “People who work at public funds and other large asset managers have come to realize that they can move the needle by exercising their voice.”