The annual meeting of the International Corporate Governance Network (ICGN) is one of the few must-attend events for corporate governance buffs. The theme this year was “Promoting long-term thinking and behaviour for sustainable capital markets”. So environmental, social and governance; sustainability and integrated reporting; non-GAAP (generally accepted accounting procedures) disclosures; engagement in Asia; stewardship codes, etc were all on the agenda. But as in most such events, a few topics dominated the conversation. At this event, there were two: “one share, one vote” and “gender diversity on boards”.
A few days before the conference, Peter Clapman and Richard Koppes, both of whom had served on the board of ICGN, wrote an op-ed for The Wall Street Journal, urging investors to rethink the “one share, one vote” agenda. In that piece (wsj.com/articles/time-to-rethink-one-share-one-vote-1466722 733) they argue that today’s corporate landscape is very different from that in the 1980s. Today, 90 per cent of directors are elected by majority vote, shareholders increasingly propose directors on boards and only three per cent of them have poison pills in place. The writers go on to argue that “we see aggressive pushes for stock buybacks and calls to spin off or break up businesses and cut costs, including spending on research and development. Activists increasingly demand board representation to implement their agenda, often meaning that short-term investors take and quickly relinquish boards’ seats. Boards frequently settle with activists out of fear of losing a proxy battle — or worse, winning a pyrrhic victory”. They then argue for change, including tenure voting, that is, shareholders with long holding periods have greater voting rights.
Given the immediacy of Facebook’s announcement introducing a third class of shares (read my piece in the Business Standard, “Prepare to ‘unfriend’ promoters”, May 10) — to say nothing of the fact that the conference was being held in San Francisco, a city that favours innovative thinking across all domains, including governance structures — this was clearly a hot-button issue. But investors, including long-term investors, overwhelmingly weighed in for “one share, one vote”. While companies, lawyers and academics will continue to press for change, do not expect this to change anytime soon.
Another issue that cropped up in session after session was the absence of women directors on (American) boards. Mary Jo White, chairperson of the Securities and Exchange Commission (SEC), while delivering her key note address — through video conferencing, as the Brexit vote required her to stay back in Washington — remarked that “in 2009, women held only 15.2 per cent of board seats at Fortune 500 companies and that number has only risen to 19.9 per cent in the past six years; 73 per cent of new directorships in 2015 at S&P 500 companies went to men. At this rate, the US Government Accountability Office has estimated that it could take more than 40 years for women’s representation on boards to be on par with men’s. The low level of board diversity in the United States is unacceptable”.
In the absence of any authority to mandate board diversity, the SEC has focused on disclosures. The SEC ruled way back in 2009 that companies need to disclose if they had a policy on diversity as well as how they defined it. It then required the nominating committee to comment on its effectiveness.
What has been the impact of this rule? White said: “Companies’ disclosures on board diversity in reporting under our current requirements have generally been vague and have changed little since the rule was adopted. Very few companies have disclosed a formal diversity policy and, as a result, there is very little disclosure on how companies are assessing the effectiveness of their policies. Companies’ definitions of diversity differ greatly, bringing in life and work experience, living abroad, relevant expertise and sometimes race, gender, ethnicity, and sexual orientation. But these more specific disclosures are rare.” Clearly the SEC is not satisfied.
Clearly, gender diversity is an area where Indian boards have rapidly moved ahead. The Companies Act, 2013, legislated that all listed companies and companies above a threshold needed to have a women director on their boards. With some nudging and cajoling, Indian firms have embraced this change.
Figures from the PRIME database showed that of the 1,457 relevant firms listed on the National Stock Exchange of India, 1,268 had appointed women by April 1. It would have been ideal if all of them were also independent (even though there is no such regulatory requirement), but contrary to popular misconception, a study my firm carried out last December found that only one-fifth of women directors belong to promoter families.
This difference in outcomes in a sense reflects on “regulating through disclosures”. While it is understood that different stakeholders will have different objectives, it is now increasingly clear that investors, too, are a varied bunch, with different objectives and goals: the short-term investor’s perspective is very different from that of his long-term counterpart; others may focus on environment and sustainability. Regulators have the difficult task of balancing these demands, while ensuring they do not burden companies with additional disclosures that quickly become meaningless.
Using disclosures as an enforcement tool is a signal — a strong one, no doubt — but it is not a diktat. Forward-looking companies will get the message and comply. But both in India and elsewhere, it is clear that companies prefer to wait for regulations to implement change. Given such corporate behaviour, regulators need to do a balancing act here as well: mandate the basic requirements of good governance (for example, enforcing diversity), yet remain directional about others.
The author is the founder and managing director of Institutional Investor Advisory Services of India Limited. The views are personal.
Twitter: @amittandon_in
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
