Inside Track with Broc: Nell Minow on Status of Governance Reform (9/12/03)

Nell Minow is Founder and Editor of The Corporate Library.

Broc: Do you believe that Sarbanes-Oxley has changed corporate governance practices?

Nell: To quote Dickens, it’s the best of times and the worst of times. There definitely has been a sea change at some companies - but unfortunately too many companies see the SOX standards as a ceiling rather than a floor.

There is too much emphasis on box-checking and compliance, and not enough creativity and commitment to the spirit of what lay behind the legislation.

Broc: Generally, what do you think of the corporate governance recommendations from Richard Breeden at MCI?

Nell: Breeden’s report is a thoughtful presentation of innovative but practical governance reforms that may become a sort of Magna Charta for shareholders.

Its provisions will at least provoke some very serious conversations between shareholders, directors, and management about which of its proposals should be adopted elsewhere.

Broc: What are your thoughts on director independence?

Nell: Clearly, it’s becoming harder for companies to find good directors. The problem with the proposed independence standards at the SROs – and the companies that intend to rely on those standards – is that they are driven by “resume” independence. Resume independence is not the same thing as genuine independence.

At The Corporate Library, we look at the decisions that the board makes to evaluate true independence. One of the best indicators of true independence is the executive compensation arrangements that the company has.

Broc: As is typical in a down economy, a lot of attention is being paid to executive compensation. What are your wishes in this area?

Nell: Better disclosure about how pay packages are put together would help a lot. The ideal would be for a company to clearly disclose what its strategic goals are and then explain how its executive compensation arrangements are linked to achieving those goals. Then, investors could judge for themselves whether the board has negotiated the appropriate pay packages.

In too many cases today, CEO compensation doesn’t have any clear relationship to corporate performance or indeed any clearly disclosed description of what the board and the CEO think performance means.

Broc: What do you think of the SEC staff’s recommendation on shareholder access that should be the subject of SEC rulemaking in the coming weeks?

Nell: The SEC staff’s very modest recommendation should not be controversial. It merely lays out trigger events that are indicate that management is ignoring the views of many shareholders. Then, if that happens and a shareholder-nominated candidate gets on the company’s proxy, it would still take quite an effort to gather a critical mass of many shareholders across a wide spectrum of investment horizons and inclination to activism to elect that nominee. So, if someone gets elected that way, it is likely to be justified.

The bottom line is that there is no such thing as an independent director who is selected by the CEO. The SEC’s proposal is partially aimed at these types of governance issues that still exist.

Broc: Can you explain how the rating system of The Corporate Library differs from others who offer this service?

Nell: There are two important differences. First, we are the only ones who do not accept money for any specialized services or for the rating itself from the companies we cover, because we think it would create a real or perceived conflict of interests. Of course we make available to each company its own data and rating free of charge, and we welcome any corrections and post any comments they care to make.

Second, while the other services grade governance based on structural indicators like the adoption of governance policies, our assessment is based on the decisions made by the board on the issues of greatest importance to shareholders, like executive compensation. We believe our ratings, which go from A-F, help investors to evaluate “governance risk”

One example is our ratings of Fannie Mae and Freddie Mac. Fannie Mae received an “A” and Freddie Mac received a “D.” If Freddie Mac had had better governance, they would have been less likely to get into an accounting mess.

Broc: Our community includes thousands of in-house lawyers and their outside counsel. What advice do you have for them?

Nell: Two things. First, we have a crisis of management credibility; not a crisis of investor confidence. So Corporate America needs to be more proactive addressing credibility issues.

Second, companies have failed to act in their roles as investors. Corporate pension plans continue to be enablers of bad governance – poor executive compensation, over-committed directors, and conflicts of interest. As fiduciaries, they should make sure that their pension fund managers vote proxies more aggressively, oppose excessive executive compensation, and take advantage of the increased disclosures and rights that the reforms have made available.

Broc: Since you are also well known as the “Movie Mom,” I can’t resist asking for your opinion on Arnold.

Nell: Thanks! You can read my recent column from the Chicago Tribune with my take on his election campaign.