Ken Bertsch - Corporate Governance Series Interview

The role of a corporation in society has been debated for generations. What should be the role of a corporation in society, and do the existing rules for corporate governance and fiduciary duty align with your views? (0:55)

Ken: It’s a good question and it has come up a lot in recent months partly because the Business Roundtable put out a new statement about purpose of corporations in society. Our view is that the public company entity, and maybe corporations more generally, really serve economic interests. We are interested in the long term and in order to thrive in the long term, corporations need to respect various stakeholders, particularly their communities and employees, as well as suppliers and creditors and so on. We do think that shareowners have a particular role to play as owners of the corporation. A key piece of that is accountability of the board and management to shareholders. Otherwise there is limited accountability, except through legal mechanisms, and litigation is not that satisfactory. Shareholders elect the board of directors and they have that right partly because they are the holders of residual risk in a company. They are the last people to get paid. I think that’s all appropriate. I think our general framework of laws is appropriate. I’m basically positive about how that is set up in the United States at this time.

The SEC has been reviewing the proxy process over the last year. Do you think the proxy process needs to be changed? If so, how?

(2:30)

Ken: Yes, so there are different aspects of that. The piece of the proxy process that we have been concerned about that we think has not received as much attention as it should, because it is incredibly boring in part, is the proxy plumbing. That is, how votes actually get cast. Many of our members are not totally confident that their votes get through in the number of shares that they own and in the manner that they intended to vote. They would like a vote confirmation. That has been something that has been out there forever as a request. So, we would like to see some movement on that. We have some ideas about very long-term change that could be based on newer technologies, possibly a block chain technology that could give much more assurance about the integrity of the voting process and other things involved in ownership of equity. That is a piece that we are interested in fixing.

We do think there has been a lot of attention on two other aspects that don’t necessarily need fixing. One is shareholder proposals, of which there are not a whole lot. They are about two percent of the voting items at U.S. companies. Everything else is in the form of management proposals. If you talk to people who do proxy voting at institutional investors, they say they spend the bulk of their time on management proposals. We think the shareholder proposal rule as it exists now works fine.

There have been a number of different areas of corporate governance as well as certain environmental and social issues with which the shareholder proposal has been an early indicator of needed change. For example, around board diversity or around independent leadership of the board in some form or another. So, we like that.

Also there has been a lot of focus on proxy advisors. Our members view their relationships with proxy advisors as a matter of contract and are concerned about a potentially punitive regulation which would limit the market for proxy advisors. We’re worried about the ability of new entrant and how it will work with institutional investors if there is a heavy regulatory burden place on the proxy advisors and even the potential for further shrinkage of a field that is right now dominated by two firms.

There has been a rise in the use of environmental, social, and governance (ESG) criteria for making investment decisions. How do you think policymakers and public policy should react?

(5:29)

Ken: Yeah so, I have a little bit of concern about the label ESG. I know it is widely used. I think they [“E”, “S” and “G”] are really different things. On governance, we actually have quite good disclosure now and pretty good ability of investors to engage on that. On environmental and social issues more broadly, at least certain issues, there is rising demand and rising interest in intangibles in investment and not necessarily great disclosure. Part of that is due to it being harder to disclose in these areas. The economy increasingly is based on intangible factors. We are seeing a shift going on and disclosure rules have not really kept up with that. The number one public policy area in here is to try and look at disclosure rules, not just rules, but disclosure regimes more generally. Are there ways to make this information useful? A lot of our members see a lot in ESG reporting by companies, but it is not necessarily comparable or based on the same measures. You end up with apples to oranges even within a given industry. That is a major priority right now. In terms of how people invest and how much they weigh climate change risk, I think that is a judgment call to be made by the individual investors. People are going to have different views, so you just want to enable people to be able to invest intelligently.

Are there any other corporate governance issues, such as the debate around short-termism, you would like to talk about?

(7:30)

Ken: Sure. As mentioned earlier, our organization has always been committed to the long term and I think a lot of the role of corporations in society can have tensions resolved if the real aim is long term shareholder value. There are ways in which markets can focus too much on the near term, the immediate term. It’s not really about share price tomorrow or share price at the end of the quarter. It’s about whether you are creating value over the longer term. The stock value gives a report card along the way. It is sometimes hard to distinguish between a management team that is building value for the long run but not necessarily getting recognized in the market, as opposed to one that is not necessarily getting recognized in the market because the management team doesn’t know what they are doing. There are tensions there, but we should be thinking about the long term. We think it is not necessarily a good idea for companies as a routine matter to give earnings guidance quarter to quarter. That tends to sort of commit the management team to try and fulfill that guidance. That is way too short term. Some of the executive pay elements are really putting too much focus on the short term. There are things that need to be done to address the long term.

One thing that we are particularly concerned about is that we have seen an increased number of companies that IPO with dual class stock structure that gives founders, typically, outsized voting control. They have control of companies even though they own a minority of shares, which typically becomes a smaller and smaller proportion of shares over time. The market can understand and process that in the short term, but not really in the long term. We are building in structures that make it difficult to change companies and that can be a real problem ten or twenty years down the road, which markets can’t foresee when a company IPOs.