The Corp Gov Camel Tramples Investors
It’s one thing for principals (investors) to guide (or force) agents (management) to do certain things, like put shareholder interests ahead of executive interests. When we read the Commonsense Corporate Governance Principles, we rather expected all manner of specific ideas about how, exactly, shareholders and executives should do that. So, as we noted last week, we saw a little of that, and not nearly enough.
We did not quite expect agents to guide principals, for management to advise shareholders about how to be and what to do. It seems odd for the employees to admonish the bosses how to act.
Yet that’s exactly what we saw. We wonder why six institutional investors, a pension fund that promotes good corp gov, and especially a leading activist hedge fund allowed five corporate executives designing the corp gov camel to do it.
From Vapid to Compromising
For corporations, we conclude the overlong and overwrought list “wanders aimlessly through a range of shopworn platitudes, hitting a few minor priorities and missing all the big ones.” For investors, the committee has a much shorter, yet similarly vapid catalogue of platitudes. That is, when it doesn’t compromise any PM that decides to follow the principles.
Corporations have seven long and random sections of principles. For investors, the principles packs its ideas into just one (Sec. VIII). It begins innocently:
Asset managers, on behalf of their clients, are significant owners of public companies, and, therefore, often are in a position to influence the corporate governance practices of those companies. Asset managers should exercise their voting rights thoughtfully and act in what they believe to be the long-term economic interests of their clients.
Note the “long-term” thinking. Much like the principles for corporations, this group also wants investors to think this way:
❖Shareholders should “evaluate matters...in the context of long-term value creation.”
❖“[L]ong-term investment success” merits “appropriate senior-level oversight.”
❖“Asset managers...should evaluate [BoD] focus on...a long-term strategic plan.”
❖When asset managers vote on proxy items, they should emphasize those “important to long-term value creation.”
Of course, long-term lacks a rigorous definition and basically is meaningless to portfolio strategy. Time horizon necessarily varies among PMs, with short-term (whatever it means) no worse or better than long-term (whatever it means).
Further, the committee wants PMs to “actively engage” with the company. Passive managers that merely want to read reports need not apply.
No leveraging analysts or advisors, either:
❖“[P]roxy voting and corp gov should receive appropriate senior-level oversight”
❖Consult a proxy advisor, but vote “based on independent application of [your] own voting guidelines and policies.”
Companies Want Access, But Why?
From there, it just gets unrealistic and absurd:
An asset manager...should have access to the company, its management and, in some circumstances, the company’s board. Similarly, a company, its management and board should have access to an asset manager’s ultimate decision makers... (our emphasis)
Why does company access to a PM matter? To what end?
Asset managers should make public their proxy voting process and voting guidelines and have clear engagement protocols and procedures.
Why? So corporations can try to co-opt them? And, we want to know why on earth would a PM make these public, any more than he or she would make public models and algorithms for picking stocks. Perhaps an asset manager could share this information with investors and LPs, but without obligation to the companies he or she follows.
Think Hard About This Camel
We can guess why the principles include this nonsense. What’s good for companies is good for investors, right? It’s only fair?
We’re talking about the basic principal-agent problem. We fail to see how these restrictions on principals lowers agency costs.
What troubles us more is, why the group of investors on the committee allowed this to happen, and worse yet, endorsed it. We suspect it has to do with maintaining a traditional corporate mindset. Big institutions and pension funds continue to supportexecutives, even given the chance such as this to take a stand for a strong investor viewpoint.
Worse, why ValueAct? A leading activist hedge fund, we don’t understand how it benefits from these principles, why it would it subject itself to these investor rules. What does it think of all this “long-term” thinking? Will it disclose its proxy voting process and guidelines? Will it grant portfolio company CEOs access to Jeff Ubben for anything more than insight into the most recent quarterly results?
It’s kind of insulting, actually. Big asset managers want to look cooperative and constructive, to companies. They end up looking weak and compromised to the folks who really matter, their investors.