The danger of the new business culture
It’s a term that almost immediately conjures up images of grey-haired men in dark suits sitting in leather chairs around an enormous, glossy, wood table, stroking their chins and discussing arcane points of law and protocol.
But in the wake of the financial crisis, the public spotlight on corporate governance has never been brighter. That glare will intensify over the next few weeks as annual general meetings for the 2012 fiscal year get underway for most public companies.
Even though it may not be immediately apparent, the big business headlines of the past year are largely about corporate governance issues.
Hedge fund managers have become increasingly “activist” when it comes to pressuring companies to “unlock value” by selling assets or distributing special dividends. There’s also a push for companies that have accumulated large stockpiles of cash, to pay it out -- or spend it faster.
For example, Telus is still doing battle with hedge fund Mason Capital over its share structure. Canadian Pacific had its entire management team ousted by Pershing Square Capital Management’s Bill Ackman -- who has since made headlines in his public attack on Herbalife. Both SNC-Lavalin and Talisman Energy are now the targets of Greg Boland of West Face Capital, who wants the troubled companies to, yes, “unlock value” in their underperforming shares.
Even Apple is coming under attack from hedgies at Greenlight Capital who take exception to the company’s capital allocation strategy -- aka its stockpile of about $137 billion in cash.
Hyper-aggressive hedge fund managers aren’t the only ones who are having a revolutionary impact on the historically sedate world of corporate governance. With an aging population and erratic capital markets, pension funds have also increased their scrutiny of corporate governance practices and the directors who sit around the table to -- at least ostensibly -- represent their interests as shareholders.
The extreme focus on performance and accountability these days doesn’t stop at share price. It also extends to broader issues like executive compensation (“say on pay” has been in effect in Canada for two years, and last year 58 per cent of shareholders voted to reject the salary, bonus and stock options for senior management at QLT Inc.), risk management strategies and even the human resources practices that ensure bench strength -- and often succession -- for the existing management team.
In a climate of stringent financial reporting standards, boards are also contending with the implementation of evolving accounting rules like the recently adopted International Financial Reporting Standards and emerging areas like environmental liability and contingency planning.
It’s generally estimated that in the aftermath of Enron and other corporate scandals a decade ago, the demands on directors increased from six to eight meetings a year to a commitment of at least 300 hours a year. And the relationship with corporate executives also became far closer and more inclusive.
It’s impossible to argue that tougher reporting requirements, more vigilant boards of directors and higher shareholder expectations are negative in any way. But the extremes bear close watching when a pendulum swings from one direction to the other.
The current risk is embedded in the “short-termism” that results from the constant clamor for short-term results and immediate gratification for shareholders. Especially in volatile, competitive global markets, it can take longer than three or even six months to respond intelligently to a new challenge or market reality. Just because computer technology has accustomed people to instant answers and information, doesn’t mean it’s always the right answer or information.
Furthermore, after everything investors have been through since 2008, it might be time to question the long-held faith in the innate efficiency of the market. It’s generally held that anything that improves share price must be good and anything that impedes corporate break-ups, sales or other value maximizing measures must be beaten back.
The ends of short-termists are also handily abetted by a sanitized, new lexicon. Corporate raiders are now called shareholder activists. Leveraged buyouts are now referred to as private equity transactions. And the lines between hedge funds and private equity funds are increasingly blurred.
It’s also worth noting that the hedge funds that apply such pressure to corporations are not transparent themselves. Because many of them use proprietary methodology to attain value, they’re loathe to disclose their holdings or approach.
Given the direct impact that these shifting dynamics have on the economy -- and on everything from jobs and skills training to ownership to generating the taxes that support society to the security of retirement savings and pensions -- the whole subject of governance deserves more attention than ever.
And not just when it’s time for annual general meetings.
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