This year’s top stories focused on the negative impact of weak corporate governance, especially when executives wield too much power over boards, as witnessed with the Facebook crisis.
Readers were also interested in all things ESG, aka environmental, social and governance issues; and the growing benefit corporation movement.
Here’s a rundown of the top 5 stories of 2018:
1. The Pros & Cons of the Dual-Class Stock Structure: Two corporate governance experts battle it out
This summer, Snap Inc., the parent company of mobile-messaging app SnapChat, held a three-minute annual shareholder meeting via a webcast.
Atul Porwal, Snap’s associate general counsel adjourned the meeting saying, “we did not receive any questions from our stockholders so this concludes today’s meeting.
Holding a virtual shareholder meeting isn’t new, but the brief nature of the gathering that was also short on any strategic plans, despite the SnapChat’s decline in users in the most recent quarter, may have something to do with Snap’s dual-class stock structure.
When Snap went public it did so using the first-ever solely non-voting stock model. The founders hold the voting power with each share worth ten votes, as opposed to zero votes for those shares bought by outside investors.
It’s a stock ownership structure that either undercuts shareholder influence and corporate governance or bolsters growth among innovative companies that don’t want to be burdened by the short-term demands of investors.
To flesh it all out, two governance experts share their views on the pros and cons of the dual-class stock structure.
Taking on the “con” side is Charles Elson, the Edgar S. Woolard, Jr., Chair in Corporate Governance and the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and a consultant to the law firm of Holland & Knight.
And addressing the “pro” side is David J. Berger, a litigation partner with Wilson Sonsini Goodrich & Rosati and a leader in the firm's corporate governance and shareholder activism practices.
2. American Water CEO Susan Story’s ESG Mission
The head of the largest U.S. water utility, and Raymond James’ lead director, is focused on environmental, social and governance issues.
Susan Story, the CEO of American Water and a board member for Raymond James and Dominion Energy, doesn’t just give environmental, social and governance (ESG) issues lip service.
American Water, the largest publicly traded U.S. water and wastewater utility company, was named one of the “100 Most Sustainable Companies” by Barron’s magazine this year with a 26% drop in greenhouse gas emissions. And under Story’s leadership, the company reached gender equity in the boardroom and relocated its headquarters to the waterfront of Camden, N.J., a city trying to revitalize.
An ESG focus, she stresses, is not only good for society but it’s also good for the bottom-line.
"It's the best thing long term for our company and for our investors," she epxlains. "Corporations can have a heart."
Encouraging corporations to consider the greater good is nothing new. It has had many iterations and names, i.e. corporate responsibility, socially responsible investing and “the triple bottom line.” ESG is the latest salvo, broadening the concept to include everything from gender inequality to bribery to climate change; and it’s gaining momentum in Corporate America, partly because large investors are demanding it.
Directors & Boards recently sat down with Story at the company’s new headquarters to find out more about her ESG mission.
3. THE B ECONOMY: How benefit corporations benefit society, not just the bottom line
Proposed legislation from Elizabeth Warren, and new laws backed by Republicans, look to reform corporate governance and bolster movement to support the environment, social issues.
This week, U.S. Senator Elizabeth Warren dropped a bombshell piece of legislation that would require every company with more than $1 billion in revenue or 5,000 employees to become a “benefit corporation.” Some called the legislation brilliant; others labeled it Marxist.
It is remarkable how closely the benefit corporation idea in her bill tracks legislation supported by Republicans around the country. Thirty of the 34 legislatures that adopted a benefit corporation option did so unanimously. The laws were signed by 16 Republican governors including Mike Pence, Nikki Haley, Sam Brownback, Scott Walker and Jan Brewer. Libertarian Senator Rand Paul endorsed the benefit corporation in 2014.
Why has corporate law reform become a bipartisan issue? The answer lies in the importance of the corporate firm to a successful capitalist society; and as that society evolves, corporate laws must adapt.
Our material success depends on capitalism, a self-organizing, bottom-up system, not a controlled top-down one (those tend to fail). But this success has created an increasingly interdependent globe, and critical social and environmental systems are at risk as the world’s carrying capacity for social instability, environmental pollutants and economic risk are approached.
4. The Pros and Cons of Good Governance
Despite the costs, there are notable advantages.
Are best practices in corporate governance worth it? Why should boards struggle to implement policies and procedures that may be uncomfortable, expensive and inefficient?
Pundits often suggest that strong governance can boost stockholder returns and studies periodically seek to support to this idea with pronouncements such as “companies with strong governance outperform those with weak governance by 7.4% per annum,” states a report titled Internal Governance Characteristics, Time-Varying Agency Costs and Stock Prices.)
The SEC, stock exchanges and many institutional investors also appear to have bought into good governance as a pathway to stronger shareholder returns. But some have sharply criticized such analyses, and at least for the moment, there doesn’t seem to be strong empirical support for the claim that good governance produces increased shareholder returns. Despite the lack of quantifiable benefits, there are some notable advantages of good governance, including promoting efficient and effective responses to corporate misfortune.
The current governance regime includes state and federal laws and regulations, the various requirements of the stock exchanges, and recommendations and policies of institutional investors and their advisors. These prescriptions are extensive, intrusive and expensive.
To start, the median annual compensation of a director at a Fortune 500 company is now more than $250,000. Governance imposes other financial costs, including the expense of engaging outside experts and consultants, and non-financial costs such as the time and other resources spent in the name of “good governance.” At many companies, management now spends days to prepare for board meetings, time that might have been devoted to operations or sales growth.
5. Facebook Confronts Its Biggest Challenge: But where’s the “high-powered” board?
Facebook is arguably facing one of the toughest challenges the company has ever faced. But the slow and tepid response from leadership, including the boards of directors, concerns governance experts.
The scandal involving data-mining firm Cambridge Analytica allegedly led to 50 million Facebook users’ private information being compromised but a public accounting from Facebook’s CEO and chairman Mark Zuckerberg has been slow coming.
Could this be a governance breakdown?
“This high-powered board needs to engage more strongly,” says Steve Odland, CEO of the Committee for Economic Development and a board member for General Mills, Inc. and Analogic Corporation. Facebook’s board includes Netflix’s CEO Reed Hastings; Susan D. Desmond-Hellmann, CEO of The Gates Foundation; the former chairman of American Express Kenneth I. Chenault; and PayPal cofounder Peter A. Thiel, among others.
Odland points out that Facebook has two powerful and well-known executives, Zuckerberg and Facebook COO Sheryl Sandberg, who have been publicly out there on every subject, but largely absent on this one.
While Zuckerberg released a written statement late today on his Facebook page, he didn't talk directly to the public, or take media questions. He is reportedly planning to appear on CNN tonight.
