Summary:This discussion focused on corporate governance and the role of large institutional investors in providing oversight to the actions of corporate management and boards. Where were regulators at the time of WorldCom, Enron and Adelphia? What more needs to be done? What should investors, particularly institutional investors, be doing?
Often corporate governance actions can be seen in a fashion similar to investing: trying to predict future outcomes and assess value of actions. It is easy to look back and see missed opportunities. Another issues cited as problematic was that large institutional investors are often uneasy about confronting management, especially when a company is performing well, a prevalent trend in booms and asset bubbles. The paradox in equity investment is that investors tend to pay less attention to them as they increase in value — victims of their own success.
A question arose in light of all that has happened recently about falsified information and company mismanagement. Shelley Smith opined, "I don′t think that corporate America is missing a moral compass." There are a few "bad apples" but in general they do not represent the majority. The key solution is governmental regulation, especially since often, investors cannot micromanage individual stock positions and purchase the index. However, at the same time, institutional investors do need to be more vigilant.
On that point, it was noted that it is hard for investors to make an impact on company decisions. There was general agreement that the entire system of nominating independent company boards of directors needs to be revisited, along with the shareholder voting process in general. Oftentimes, shareholder votes are not effectively counted in management decisions as the SEC views these as inappropriate shareholder involvement.
In terms of pension funds providing corporate governance it was noted that as a fiduciary, pension funds do not want to be in the role of taking a stand publicly on electing management, especially should it prove later that management did not fulfill its fiduciary responsibility.
The panel also discussed what the "right" composition of a corporate board might be. Mutual fund boards were not a good model, they said, because though they are independent, they are often not effective. The best combination would be one of board members who are independent and not independent, including some with personal financial interest in the company, the key being that an independent director should not mean a disinterested director. It was felt that the private equity market provides a model for where the public equity market should be, but without the same liquidity and investment restrictions that private markets face.
The issue of corporate governance and the actions of senior management brings to light the classic "agency problem," an issue since the 1930s. Making management owners along with investors was thought to be one solution. A major point of contention along these lines was executive compensation and stock option plans for senior managers. Stock options are used to align company owners′ interests with those of CEOs. However, there are those who feel that stock options cause CEO′s to focus on short term profits and EPS, rather than aligning their interests with those of long-term investors. One way to deal with this is to expense options. On the other hand, the investor class is paying for earnings management and it is the board′s responsibility to ensure that senior managers are rewarded for good company performance.
Another suggested solution was to ensure that the shareholder voting process is more effective and efficient. In particular, shareholders should have a say in decisions regarding CEO compensation such as "golden parachutes." Cumulative voting was another recommendation.
