Board Members and Conflicts of Interest

News that Peter Brabeck, Chairman of Nestle and member of the board of Credit Suisse has borrowed a total of Sfr 14 million from the bank that paid him a total of Sfr 500,000 last year highlights the potential for conflicts of interests when a board member has senior positions in companies that are doing business together. In the days of the 'Old Boy Network' it was easy and convenient to invite people to sit on one's board as one knew them already and could be confident that they would see their role more as friendly advisor rather than as objective controller. Pro-Governance repeatedly warns that the practice of board members being selected by exactly the people they are supposed to supervise is deeply incestuous. When a board member is connected to a financial institution and a company that is in business contact (as client or investor) the possibilities for abuse multiply.
(25/03/2011)

Pension Risk transfers - who monitors the Risk?

A report by Hymans Robertsons documents the trend in the United Kingdom towards shifting the risk borne by companies offering final salary pensions to insurance companies and banks. One can only hope that these companies are ready to survive the next financial tsunami. While they may be more stable in the long run than the companies that originally stood behind the pension obligations one has to wonder who really has the interest of the pensioners at heart. The companies on both sides of these transactions will above all be interested in the short-term boost to their profits, the managements will focus on the boost to their bonuses and will long be gone if ever one of these transfers runs into trouble. And the regulators? I think we all know the answer.
(23/03/2011)

Kick-back Fraud in M+A transactions

News that German authorities investigate up to 30 employees of Bayerische Landesbank in connection with the takeover of Hypo Alpe Adria raises an important but often neglected point with regard to Merger and Takeover transactions. We do not even want to delve into the fact that many are value-destroying at least half the time. This has been proven in many academic studies and any experienced investor will have watched in disbelief when supposedly smart managements engage in deals that make no sense for one of the two involved parties. While better corporate governance will help to alleviate many weaknesses of the merger process little attention has been paid to a darker side of this process. As the abuse is incredibly difficult to prove not many instances of outright fraud have come to light over the years. Of course, situations where incumbent management of the takeover target or one of the merged companies is promised attractive new terms in the combined business do not pass the smell test. The practice that option and share awards to management are 'crystallised' and can be cashed in before their nominal due date can also be considered to be a questionable inducement to go ahead with a business combination. Passing on explicit bribes such as hard cash is even more difficult to detect but can never be excluded as long as decisions about major transactions are often made by a small circle behind closed doors. Only the restriction of all decision making to the full body of shareholders - and even then in a process subject to strict regulation - will prevent Merger and Takeover deals from being influenced by corrupt practices.
(28/02/2011)

'Rip Off' referendum in Switzerland shows danger of inaction

The long-delayed Swiss referendum about limiting the pay of senior managers in listed companies demonstrates the danger that politicians and politics take over the debate about senior executive compensation. The public's fiduciaries in the fund management business in most countries would be well advised to heed this warning and speed up discussions about how to effectively curb excessive pay that a small group of executives awards to its members year in year out with not change in trend in sight despite growing public opposition and anger.
(26/02/2011) 

Merger Rules - Do not leave initiative to Politicians and Courts!

A decision by a Delaware Court appears to entrench a company's board to issue 'poison pills' when faced with a takeover bid. Pro-Governance argues for a long time that reforms of the corporate governance system in the US - and most other countries - cannot be left to politicians and courts.  We have repeatedly proposed that the rules regulating any takeover or merger proposal should be made subject to changed regulations. The top 100 fund managers in the world effectively control all listed companies as their combined holdings are the largest bloc of ownership. Unfortunately their managements are neglecting their fiduciary duties to the real owners of the shares, the individuals who are ultimately the true owners of all assets managed by banks, fund managers, insurance companies and pension funds. These owners are left without any voice in shaping corporate governance policies which leaves fund managers in a situation where they are only paying lip service to the demands for change in their behavior.

Executive Pay - consultative vote not enough

There is disappointment among corporate governance activists in Switzerland who hoped that (purely 'consultative') shareholder votes about (top) executive pay would lead managements to moderate their greed. Novartis Chairman and CEO shows no shame when accepting a 'compensation' package calculated to be worth Sfr 25.3 million in 2010. Apart from the fact that combining the two top offices is already a dubious corporate practice the fact that he gets 'compensated' for accepting a no-compete clause is another slap in the face for shareholders - but also for other employees who generally do not get separate compensation if they have to submit to a no-compete clause in their employment. One should think that someone who certainly has a high degree of intelligence like Vasella would be perfectly able to make a decision whether or not to accept such a clause when accepting his basic pay package. That he gets substantial pay for 'retirement benefits' that are not necessarily aligned with the pension benefits of ordinary  employees is another contravention to fair play. Summing up we can say that these 'consultative' votes are a waste of time. We call for binding votes on top executive compensation and demand that all perks (health, pension, share options etc) are made available to all employees on a pro-rata basis related to basic salary. Even better, if top management is prevented from receiving discretionary bonus awards the whole discussion about annual votes on compensation would become superfluous.
(23/02/2011) 

Ban Narrow Profit-Share Plans

Some corporate governance activists may applaud the decision by Citigroup to set up a profit-sharing plan for a few dozen top executives, giving them a small share of the company's profits over the next two years. (Wall Street Journal). But Pro-Gov opposes this sort of narrow plan that is set up by top executives for the benefit of their own members. It is highly arbitrary and smells of the urge to enrich themselves under the guise of creating 'shareholder value' while discriminating against the overwhelming part of the workforce whose contribution is as critical as the contribution made by top management. In simple words: where would a company be without its workforce? When clever management gurus and their intellectual relatives in the business schools argue that the CEO and a few close associates are the main factor behind the success or failure of a business they may make a valid point. But it is only ONE of several factors and to assume that the remaining employees are just automatons - replaceable at will and as relevant as peasants during feudal times - is not only wrong in fact, it is also a sign of moral bankruptcy. Shareholders - and in particular their fiduciaries in the fund management industry - are called upon to stop these crass and inequitable schemes of enrichment.
(22/02/2011) 

Lobbies, Socially Responsible Investing and Democracy

News that the Swiss insurance group Zurich Financial Services spent Sfr 35 million on political lobbying during the past decade raises a few important points: where should the limit on such lobbying be? Are the shareholders able (and willing) to control such interference with the democratic process? In an age where socially responsible investing has become a significant factor influencing investment decisions this kind of activity must certainly receive priority attention from  investors - many if not the majority are only fiduciaries for the real investors, i.e. private savers in mutual funds, insurance companies, pension funds and the fund management units looking after investment portfolios in private banking departments.
(22/02/2011) 

Stock Exchanges - do they still have a role to play in Corporate Governance?

Looking at the listings for several major stock exchanges on Allison Garrett's governance blog one has to ask whether stock exchanges do still have a role to play in creating and administering effective corporate governance safeguards. The big boys among them seem to have as their main aim in life the maximising of their profit (and the compensation of the select few at the top of the management pyramid). The rest is a motley collection of sleepy bureaucracies that are not even accountable to their shareholders, much less to the wider community of shareholders.
(18/02/2011) 

Merger deals must come out into the open

When a US judge harshly criticises a leading investment bank (or should it be commissioned merger broker?) saying the bank "secretly and selfishly manipulated the sale process" to boost its fees (Wall Street Journal) it sheds a rare light on the fact that these significant transactions are usually handled behind closed doors. As we have argued on previous occasions, in the interests of both the selling and the acquiring companies these transactions must be handled in a much more measured and transparent process. Advisory fees are significant - for both parties - and have to be paid whether a proposed transaction is eventually consumed or not. It can also be questioned why a company that is the object of (of often unwanted) attention by a 'suitor' or 'predator' should feel obliged to hire banking, legal and public relations advisers when it is the shareholders who should have the ultimate say over the deal in any case. Certainly it must be in the realm of the possible for management to explain the pros and cons of a merger proposal? One can only hope that this case is seen as a warning by all investment banks many of whom have used similar questionable practices in the past.
(17/02/2011)