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Corporate governance

What Makes for Effective Investor Relations Sites? Part 32: Governance

boundariesIt’s hard to know where the boundary of investor relations activities ends and that of corporate governance starts up. Many of the things each area is concerned with tend to overlap. It is the investors (shareholders) who vote upon management that runs the company and major decisions such as mergers and changes to a company’s charter documents. If for no other reason than good public relations, corporations wish to appear to be sensitive and responsive to shareholder concerns about how the company is governed.

Yet when you are in the trenches of day-to-day investor relations, it is hard to find analysts that get very concerned about corporate governance. The vast bulk of investor relations activities are concerned with what the company has recently done to impact earnings, cash flow and the balance sheet and what the company plans to do in the future to affect those items. Governance is almost never brought up by institutional analysts unless there is a major vote pending. Even then it is more likely that the company will initiate the conversation about governance, seeking to understand investors thinking on the subject so as to avoid the embarrassment of losing a vote.

What all this means in the context of investor relations web sites is that the information of governance should be readily at hand, but not necessarily cluttering up your main IR site where everyday information is the stock in trade. In the past ten years most companies have created separate governance sections on their websites, covering everything from the composition of the Board to Articles of Association. These sections can be quite extensive and it makes sense to have them in a separate section. But it also makes sense to make them easy for investors to find without wandering all over the main site in search of them. The best way to do this is simply to create a link on the investor relations home page (and other relevant pages within the IR section) back to the governance section.

Vodafone, the telecoms company, does a nice job of executing this strategy. When you first arrive at their investor relations section, scrolling over the top banner causes a drop down menu to appear, as shown below, giving the reader the opportunity to go to the governance section, if that is their need.

Vodafone investor page

Clicking on the link brings investors to Vodafone’s extensive governance section, shown below, and saves them the hassle of trying to figure out whether Governance is listed under sections with different names such as “About Us” “The Company” or some obscure tab. It may be a small thing, but when an investor is interested in your governance issues is not the time you want to annoy them by making the information hard to find.

Vodafone corporate governance

In this series:
Previous post: Annual General Meetings
Next post: Management

The Board’s Role In Strategic Planning Redux

On Sept. 23, 2010 the  NYSE Euronext (NYX)  released the final report (PDF) of the NYSE–sponsored Commission on Corporate Governance.

One of the ten key items is —

Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation. [Almost a year earlier our post The Board’s Role In Corporate Strategy suggested a more active Board role in Business Strategy.]

The Commission believes that sound corporate governance should be a core element of a company’s business strategy, as it includes independent and objective oversight of strategy and management by boards; alignment of interests among shareholders, management and the board; accountability of the board to shareholders and accountability of management to the board; compensation programs that incentivize long-term growth; establishment of criteria that are aligned with the company’s business goals; prudent risk management; a culture of integrity; and consideration of the impact of the corporation’s activities on society overall.

This makes a strong case for the Board’s active involvement in the development and continuing review of the company’s business strategy. Too many companies delegate the formation and execution of the business strategy to management. Further, many Boards review the business strategy once a year.

However there are some companies that are already practicing the NYSE’s recommendations.

One such company is TD Bank Financial Group. In their online Corporate Governance practices they state–

Strategic Planning Process

The board is responsible for overseeing the execution and fulfillment of our strategy and fundamental goals. This responsibility includes adopting a strategic planning process; and continuously considering and approving strategic alternatives and plans that management presents. The board assesses the bank’s major opportunities and risk impact of any strategic decision being contemplated, including considering whether any strategic decision is within the bank’s approved risk appetite established for the bank and its individual business units; oversees the implementation of strategic plans; and monitors performance against such plans.

Continuing Education

…In the past year, the board participated in in-depth sessions (“deep dives”) on particular aspects of our businesses and overall strategy. Each deep dive includes an element of general education as context for the discussions (e.g., the industry; competitors; trends; and risks/opportunities). Directors also have complete access to management to understand and keep up to date with our businesses and for any other purposes that may help them fulfill their responsibilities.

Hill-Rom

This discussion seems to be very much in line withe the NYSE recommendation. The problem is these items are somewhat buried within a lengthy document. TD would do well to highlight their Board actions regarding business strategy, perhaps discussing this in their Leadership Views in the Media Room.

Another example comes from Hill-Rom a medical products company.

The Board’s role in Business Strategy is described in a concise discussion on the (Board) Role and Functioning section within Corporate Governance

In summary:

The Board’s Role In Strategic Planning

The Board of Directors has the legal responsibility for overseeing the affairs of the Company and, thus, an obligation to keep informed about the Company’s business and strategies. This involvement enables the Board to provide guidance to management in formulating and developing plans […] Acting as a full Board and through the Board’s three standing committees, the Board is actively involved in the Company’s strategic planning process.

Each year, typically in the spring, summer and fall, senior management sets aside specific periods to develop, discuss and refine the Company’s long-range operating plan and overall corporate strategy. Specific operating priorities are developed to effectuate the Company’s long-range plan. […] These meetings are focused on corporate strategy and involve both management presentations and input from the Board regarding the assumptions, priorities and objectives that will form the basis for management’s strategies and operating plans […]

At most Board meetings, the Board substantively reviews the Company’s progress against its strategic plans and exercises oversight and decision-making authority regarding strategic areas of importance and associated funding authorizations.

In addition, Board meetings held throughout the year target specific strategies and critical areas for extended, focused Board input and discussion.

The Board’s role is inextricably linked to the development and review of the Company’s strategic plan.

From this one can see that the Board is actively involved. The Board does not simply delegate the plan to management. Nor do they let a year elapse before they receive well orchestrated presentations for management. They appear to be following a process suggested by John Rehfeld in his article The Company Director’s Role In Company Growth —

 GoalsDevelopApproveExecuteReview/Changes
BoardPrimaryActively ParticipatePrimaryStay informedPrimary
ManagementProvide inputPrimary PrimaryProvide input

Adapted from The  Director’s Role In Company Growth

While the NYSE’s recommendations are relatively new, these companies provide examples for other companies to follow.

A Vision of Tomorrow, Where Money Isn’t Everything

mallen-bakerA fascinating blog article from CSR maven Mallen Baker caught my eye last week.  I’ve been chewing away on it ever since.

In Time To Redefine Ethical Investment he strikes directly at the root of what’s widely seen as the flaw in today’s business operations: responsibility.

Not the responsibility of managers and executives: the responsibility of investors.  Not socially responsible investment, but responsible company ownership.

In among everything else we’ve lost the fact companies are owned by their shareholders.  It’s not just an issue of finance; it’s an issue of management and governance as well.  Investors are owners.

. [Read more…] about A Vision of Tomorrow, Where Money Isn’t Everything

Goldman Sachs–Here We Go Again?

The announcement came during stock market trading hours–GOLDMAN SACHS SUED BY SEC.

Some complained that the SEC should have waited until the markets closed. But the damage to Goldman Sachs shareowners and the markets was already done.

A week later more news came out on the weekend–

NEW YORK (MarketWatch) — Emails at Goldman Sachs Group Inc. released by a Senate subcommittee show just how much financial reform is needed, two leading senators said on Sunday.

The emails, released Saturday, show executives and other employees at Goldman Sachs knew that the firm was making money on the collapse of the housing market, largely by betting on the failure of mortgage securitizations and derivatives like the ones it bundled and sold to investors, whose failure led to the financial crisis.

“There is something terribly wrong about a country like ours where you make billions of dollars by making nothing and producing nothing but taking advantage of an economic situation, Sen. Christopher Dodd, D-Conn., said Sunday on Meet the Press.

What makes this emerging story even more interesting is that Goldman Sachs appeared on Barron’s February 15th cover story on The World’s Most Respected Companies; it was rated 30 out of 100 companies. Barron’s noted —

Barron's Most Respected

I am not faulting Barron’s (this is a good publication and I am a subscriber). Rather, this highlights the continuing problem we have with Corporate Ethics.

This story has another interesting and promising aspect: when considering a similar deal, Bear Stearns turned it down because of its Ethics conflict. As reported in the Guardian—

Bear Stearns, the Wall Street bank now part of JP Morgan Chase, turned down a similarly structured deal to the one under scrutiny between Paulson & Co and Goldman Sachs because it “didn’t pass the ethics standards”.

The bank, which collapsed during the credit crisis, “smelled trouble” when John Paulson, the hedge fund’s founder, approached it with the idea of creating an investment that the fund could bet against, according to author Gregory Zuckerman in his book on Paulson, The Greatest Trade Ever.

As noted in the MarketWatch item above, the Goldman Sachs incident is once again motivating a hair trigger demand for more regulation. When will there be a realization that you cannot regulate ethics?

This is not an academic or esoteric issue. When people are no longer restrained by objective notions of right and wrong, nothing is safe—not your investments, not your house, not your neighborhood, not you! What we’re talking about, ultimately, is the moral consensus upon which the rule of law rests—that’s the very foundation block of Western governments and societies.

When ethics fail in the commercial markets, more and more stringent regulations are certain to follow. It’s the only way to assure the integrity of financial and commercial transactions. But we lose freedom in the process.

The problem is that regulation, however well intended, can’t solve the ethical problem. The best regulation can do is to define what people can get away with by drawing a line they can’t cross. It does not answer the question, “What is the honest way to do business?” Crosswalk.com Commentary

In one of my recent posts, I mentioned that Ethics, to be effective, must be well integrated within the organization’s Culture; so much so that it guides daily decisions of all employees-

Perhaps the key reason is that most companies don’t realize that ethics must start with “the tone at the top”. Board and C-Suite members must be visible in promoting ethical behavior and putting in place an ethics program that promotes an ethics culture. This takes considerable effort and time since it must be embedded in the existing corporate culture.

Bravo to Bear Stearns for showing that Corporate Ethics can work, sometimes.

Corporate Ethics and the Corporate Website

integrity-compass

In my post on Ethics, I mentioned that I would provide more posts on Corporate Ethics.

One company that understands the importance of Corporate Ethics is an energy-based holding company — Pacific Gas and Electric.

First they follow one of our guidelines for reporting ethics on corporate websites: ethics is prominently displayed in their About Us section (see image, below)

In PC&E’s online Code Of Conduct, the company displays their Core Values, and the first is —

We act with integrity and communicate honestly and openly:

  • Act ethically and with integrity
  • Deal with people and issues openly, directly and respectfully
  • Take actions that are consistent with words
  • Do the right thing even if unpopular or risky

Placing Ethics at the top of Core Values is a subtle but telling indicator that PG&E is serious about Ethics. There is also a note from the CEO to employees that reinforces ethical behavior.

Yet another item that distinguishes  PG&E from other companies is this checklist offered to employees —

Compliance and Ethics Decision-Making Checklist

When faced with a business decision for which there’s no set policy or clear course of action, use the Core Values … and your own good judgment to determine the best approach. In addition, ask yourself the following questions:

  • Will I feel comfortable with my decision?
  • Could I explain it to my parents or children?
  • How would it look in a newspaper?
  • Have I made a decision that is fair and just?
  • Have I verified the significant facts?
  • If I’m not sure, have I asked?
  • Have I determined if it’s legal and within policy?

Brilliant: this straight forward, easily understood checklist captures the essence of ethical decision-making.

PGE Ethics

In addition to Core Values and the Checklist, the company offers a comprehensive menu of references to guide ethical practices —

Finally, the company recognizes that the Board of Directors face more complex decisions so it offers a Code of Business Conduct and Ethics for Directors.

Kudos to PG&G for going well beyond a Code of Ethics and guiding its decision making via a well thought out Ethics Compliance Program – and for demonstrating this via the website.

Boards Are Focusing On Risk Management

Top on the list of many surveys of issues that concern Boards of Directors is Risk Management. According to The Institute of Risk Management Standard publication —

Risk can be defined as the combination of the probability of an event and its consequences. In all types of undertaking, there is the potential for events and consequences that constitute opportunities for benefit (upside) or threats to success (downside). …

Risk management is a central part of any organisation’s strategic management. It is the process whereby organizations methodically address the risks attaching to their activities with the goal of achieving sustained benefit within each activity and across the portfolio of all activities.

The current economic/financial crisis is supplying ample risks to corporate boards. For example, in AON’s 2009 Global Risk Management Survey

Respondents told us clearly that the crisis impacting the global economy was the number one most important risk to their organizations. Other key risks cited include staying ahead of regulatory compliance; managing business interruption; meeting the challenges of increased competition; commodity price risk; protecting reputation; managing risks associated with cash flow, supply chains, and third party liability; and hiring and retaining top talent. Every one of these risks has increased in scale and complexity given the state of the current economic environment.

If companies are overwhelmed by these risks, imagine how they impact companies’ stakeholders. Effective communications of how companies identify and deal with these risks is now an overarching issue. Therefore let us take a look at what is out there.

First one of the most comprehensive displays of risks is by Tokyo Electric Power Company —

Click on one of the Challenges and you obtain a thorough explanation of it and what the company is doing to manage it. This technique works so well that the company should use it to display other risks.

For a comprehensive description of a risk management process look no further than UK based Friends Provident an insurance and pension company. Their Internal controls and risk management process displays an extensive explanation of their risk management process and the roles of senior management.

Another UK based company ROK plc uses a very effective visual to describe how it identifies risks —

This is a great example of the power visualization has in business functions. Notice how lots of information is clearly communicated. Suggestions for ROK plc, display this on your website, not only in the PDF of the Annual Report, and explain company efforts to deal with the risks.

One of the best communication of risks and how the company addresses them is on the website of The Bank of China.

This is an example of Credit Risk. Note how they describe, monitor and manage the risk. Visit their site to see how other risks are addressed.

Many companies are slow to embrace the need to clearly communicate risk management issues via their websites. The prevalent practice is to provide PDF links to their annual report. In a number of cases companies have good risk management practices but they bury them in the Annual Report. Better to take the content and enhance it to —

  • Clearly describe risks by category
  • Explain how the company is managing the risks
  • Explain the impact on the company and quantify as much as possible
  • Use visuals (see my post Business Visualization)

The companies mentioned here are good examples to use as benchmarks.