Are Boards Over Governed?

Increasingly Directors are engaging more and more with their largest shareholders. Often, it’s about 12-15 shareholders that make up 70% of a companies’ ownership. Many of these big owners are passive investors as opposed to active ones.

Many of the passive investors are becoming increasingly detailed in their requests for information from companies’ and boards relating to oversight and disclosure.

In speaking with one of the deeply knowledgeable governance advisory groups, I have learned about some very specific areas that investors are starting to inquire about.

Some of the surprisingly detailed areas investors are now asking for info on include:

–        A breakdown of the expenditures of every association they join—not just their dues, but what each association spends on.

–        A suggestion that Directors should check with investors before negotiating CEO pay.

–        The proposals asking for shareholder votes on every single “senior manager” severance package that is more than 2.99X salary.

–        Even a shareholder vote on having more plant-based entrees in company cafeterias.

It starts to feel that the balance of power has over indexed and tipped to the governance organizations (ISS and Glass Lewis) and to the index funds governance groups. For example, now we are seeing the in-house governance groups from large passive investors eager to add value by requesting a very broad range of new reporting.

Perhaps we would all be better served if in fact the investor side of the house in these big index funds would speak up and try to balance the governance side.

It would be really valuable if the governance side understood what drives a business and understood the downstream impact of the cost and burden all the new disclosures cause companies both in terms of over disclosing competitive information as well as creating bureaucracy and overhead which is not additive to the core business performance.

Perhaps the governance groups could emphasize that measuring performance metrics of efficiency, capital, profitability and growth, based on the principles of performance outcomes, innovation and culture would be a better way to assess a company’s value for stockholders.

I suggest a growing and competitive business needs to be the foundational focus for both the investor and governance groups within the big passive investors.

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