UK seeks views on corporate governance, audit

The clock is ticking. It doesn't stop just because the economy has and because nothing very much has changed. But it's time to revisit corporate governance again. The UK Financial Reporting Council adopted its latest provisions two years ago, so it's time to crank up the consultation machinery to fine tune them. But the consultation follows several other initiatives that have not yet become policy, so this paper concerns in part what the consultation itself will not address. It won't look at board diversity – it has done that last year. It's also not seeking views on remuneration, subject of a different government inquiry. The FRC is seeking views on two interrelated themes:

• Corporations and boards: The 2010 UK Corporate Governance Code narrowed the scope of this iteration to concentrate on what boards do and how they are built. Some small issues have arisen in the implementation of it, and the FRC will take another look. More fundamentally, it wants to make a big revision to the notion of compliance. "The FRC also proposes to set out in the Preface to the Code the features that it regards as the characteristics of an informative explanation," it said. That means incorporating the themes of a paper it published in late February entitled: "What Constitutes an Explanation under 'Comply or Explain'?" It wants the code itself to help companies understand "what was expected of them when they choose to deviate from the provisions of the Code, and to provide shareholders with a benchmark against which to judge explanations".
• Audit: Boards will need to state in the annual report the reasons why they consider the report to be fair, balanced and understandable. The remit of the audit committee will be extended expressly to advise the board on this issue. More informative reporting by audit committees, including on the process for appointing the external auditor, will be encouraged. And the 350 largest companies will be expected to put the audit contract out to tender at least every 10 years.

In addition, the FRC is consulting separately about the Stewardship Code, which concerns the actions of shareholders and in particular institutional investors.

Source document: The overview page has links to the consultation paper and two appendices.

What is stewardship? The FRC wants to know

The UK watchdog for accounting and corporate governance plans to take a fresh look at how shareholders related to the companies whose shares they own, and it would like your views. Just two years after the launch of its Stewardship Code, the Financial Reporting Council thinks it's time to "to build on a promising start by reinforcing it where necessary, but not fundamentally changing it". It notes that a similar view was expressed in the interim report of the Kay Review, published in February. "For that reason the FRC does not propose to change or add to the Code's seven principles," the FRC said, but neither that nor the prospect that John Kay's final review, due in July, might rethink the nature of stewardship gives the FRC reason to pause in its revision. Its draft revised Code "does look rather different" from the one launched in 2010, when these themes were removed from the old Combined Code so they could achieve greater attention. The reasons for the proposed new introductory sections include:

:
• Definition: The FRC said: "it has become clear that there is no common understanding of what is meant by the term 'stewardship', or of the respective roles and responsibilities of asset owners and managers". It attempts to provide greater clarity.
• Lending: The first iteration of the Stewardship Code deliberately left out consideration of the practice of stock lending, wanting its other provisions to become bedded into practice first. It's time now to take a look at whether investors who have lent shares – often to support short-sellers – should be allowed to recall them for voting purposes.
• Bug fixes: The FRC also wants to take into account various lessons learned in implementation of the code, including those highlighted in its "Developments in Corporate Governance" report, published in December.

Among its specific measures, the FRC wants to encourage the practice of companies discussing major strategic moves with their key investors before those plans are fully developed. It follows a case where a planned merger involving one of the UK's largest 100 companies faltered, owing to investor displeasure over the terms. It suggests investors provide named individuals who would become "off market", that is, would not trade shares for a time, who could then become insiders in advance of deals being disclosed.

The new draft also seeks to incorporate a change in the discourse, one viewed skeptically in parts of the investment landscape but promoted by the powerful lobbying force of insurers and pension funds: the concept of "asset owner" as a way of focusing attention on the beneficial owner often lost in the investment supply chain. The consultation paper puts it this way: "Where a statement in the Code refers only to one type of firm the words 'institutional investor' have been replaced with either 'asset manager' or 'asset owner'. Where a statement refers to both managers and owners, the term 'institutional investor' is used. Lastly, the word 'shareholder' has been replaced with 'investor', to avoid debate and confusion over whether the asset manager or owner is considered the shareholder."

It also wants views about the use of proxy voting agencies, another hotly contested theme that the first version of the Stewardship Code set aside for attention later.

Source document: The consultation paper is a 13-page pdf file.

UK seeks tougher sanctions on auditors

The UK's Accountancy and Actuarial Discipline Board thinks it's time to get tough with misbehaving auditors. In a consultation paper, the ASDB, an operating body of the Financial Reporting Council, revealed plans to give guidance on possible sanctions that the tribunals hearing abuse cases could follow. "There is considerable precedent for such guidance," it said. "Sentencing guidelines are widely used and provide a structured approach to determining the appropriate sentence while still allowing for judicial discretion. Sanctions guidance has been adopted by a number of other disciplinary regulators, including the General Medical Council and several of the AADB's Participants."

Source document: The consultation paper is a 47-page pdf file.

ICSA guidance on voting at annual meetings

First the good news: participation at company annual meeting in the UK is on the rise, with voting at annual meetings of the top 100 companies now above two-thirds of the shares in issue. The Institute of Chartered Secretaries and Administrators takes heart in that, especially in view of the rise in share ownership by foreign investors, who have traditional been less likely to vote. But then there's the bad news: Criticisms of UK processes persist. Cross-border voting still seems to result in lost ballots. ICSA's Registrars Group blames a lack of clarity and loss of control within the intermediated forms of shareholding. Miscommunication of voting instructions and entitlements results in votes failing to be lodged. Into the breach comes new guidance, concerning the amount of notice needed, setting the proxy deadline and record date, how long voting should be open, what happens after the proxy deadline, and more.

Source document: The registrars' guidance note is a nine-page pdf file.

FSB details progress on G20 regulatory agenda

The Financial Stability Board has provided an update on the progress made in the three years since it came to live as a creature of the Group of 20 nations. It comes in the form of four separate reports. First is a letter providing an overview of the work on making financial institutions more resilient and dealing with shadowing banking and derivatives. Second is a progress report on ways of dealing with banks that are too big to fail, while the third deals with strengthening the regulatory and supervisory infrastructure. The fourth, a joint report of the US-based Financial Accounting Standards Board and the International Accounting Standards Board, discusses the issues in seeking convergence between their respective systems and the governance of the IASB.

Source document: The FSB news release, a two-page pdf file, has links to the specific documents.

Turner on the 'inherent danger' in shadow banking

Shadow banking is the term commonly given to activities of certain type of investors and intermediaries that take on the substance – if not quite the appearance – of lending. The growth of securities markets trading in obligations assembled from banking lending instruments like mortgages had quite a lot to do with creating the financial crisis. Lord Turner, chairman of the UK Financial Services Authority, thinks that securitisation itself has brought from benefits. But in a thoughtful lecture at Johns Hopkins University in Maryland, he argues that the resulting developments in shadow banking were "inherently dangerous". Moreover and more generally, financial innovation has brought benefits, but he concludes: "there are fundamental reasons why innovation and finance tends to be less likely to produce beneficial social impact and more likely to produce rent extraction, than innovation in other sectors."

Source document: The Turner speech is a 54-page pdf file.

ESMA provides technical advice on short selling

We all know what short selling is, right? It's when you sell something you don't own. Except the practice is something rather different, involves repurchase agreements, implicit interest charges, delayed settlement dates and a lot of technicalities of market trading. The European Securities and Markets Authority has produced its final report, providing technical advice about short selling to support a new Regulation of the European Union on short selling. A Regulation, in the language of the EU, is a law binding in all member states and not subject to local interpretation. ESMA tries to define what is and is not a short sale, looking separately at practices in a variety of instruments: shares, sovereign debt, credit default swaps.

The concept of ownership in the Member States concerning securities is not harmonized," it said. "This issue may be considered by the Commission in its future proposal on the Securities Law Directive. This Delegated Act should not anticipate that proposal. For the meantime, it seems appropriate to define legal and beneficial ownership according to the respective civil law or securities law applicable for the relevant sale."

Source document: The ESMA final report is a 92-page pdf file.

Group of 30 looks to behaviour more than regulation in governance of finance

The governance of banks and other financial institutions pretty clearly contributed to the economic distress we continue to endure, four years after the main events. Much reflection and some action has followed it. While knowing the something needs to be done is easy, knowing what to do is harder.

That sentiment is in evidence in a reflection published by a loose group of financiers, academics and financial regulators. They call themselves the Group of 30, and they've been around, in a shifting constellation of actors, for more than 30 years. Policy takes the forefront, with Jacob Frenkel, a retired governor of the Israeli central bank, acting as chairman of its board of trustees of the non-profit group. Jean-Claude Trichet, the retired governor of the European Central Bank and the Banque de France, is chairman of the G30 itself. The group commissioned research into the corporate governance of banks and concluded that, well, good governance is more easily said than done. Let's listen into its thinking:

Nature of governance: Good corporate governance requires checks and balances on the power and rights accorded to shareholders, stakeholders, and society overall. Without checks, we see the behaviors that lead to disaster. But governance is not a fixed set of guidelines and procedures; rather, it is an ongoing process by which the choices and decisions of FIs [financial institutions] are scrutinized, management and oversight are strengthened and streamlined, appropriate cultures are established and reinforced, and FI leaders are supported and assessed.

Bank boards: Boards control the three key factors that ultimately determine the success of an FI: the choice of business model (strategy), the risk profile, and the choice of CEO – and by extension the quality of the top-management team. Boards that permit their time and attention to be diverted disproportionately into compliance and advisory activities at the expense of strategy, risk, and talent issues are making a critical mistake.

To those convinced that more regulation is required, this report will disappoint in its lack of a clear game-plan of action. To those willing to be persuaded, the report urges thoughtfulness on the part of the governing and governed. To those who don't consider it at all, the prominence of the backers suggests the report may still end up as part of the discourse in which they operate.

Source document: The Group of 30 report, "Toward effective governance of financial institutions," is a 96-page pdf file.

EU eyes regulating proxy advisory industry

Calls for greater stewardship by institutional investors are almost certain to lead to demand for wider use of corporate governance ratings and advisory services. The field of proxy voting agencies has had its share of controversy over the years. While their presence in the marketplace has certainly caused many corporations to pay attention to codes and best practice, there's a downside as well. What we hear frequently – from corporate directors, in the main – are complaints that the scrutiny of these agencies is driven by a tick-box mentality and that the voting decisions they lead to bear little resemblance to the conversations that take place between senior management and the fund managers who buy and sell the shares. Into this controversy steps the European Union.

The European Securities and Markets Authority has published a discussion paper which seeks to provide an overview of the industry, its role in the market and the possible policy options available to regulators. It looks in particular at:

• Internal issues: Factors influencing the accuracy, independence and reliability of the proxy advice such as such as the potential for conflicts of interest to play a role, proxy advisors’ methodology and their dialogue with issuers; and
• Transparency and disclosure: Degree of transparency on management of conflicts of interest, dialogue with issuers, the voting policies and guidelines, the voting recommendations, and the procedures for elaborating a voting recommendation report.

The paper makes clear the policy options are open, ranging from taking no action, to letting member states deal with, adopting quasi-regulation or even binding legislative action. The consultations closed in June and a feedback report will come sometime before the end of the year.

Source document: The ESMA discussion paper is a 40-page pdf file.

What constitutes materiality?

One of the problems faced by any public company is knowing when it has to make public significant news. In the US, the law gives management a fair amount of latitude, in large part because quarterly reporting means it's never too long before companies are obliged to tell the world what has happened in the last three months. In most of the rest of the world, however, a different standard apply. In the European Union it's knows as ad hoc disclosure, and it kicks in as soon as practical after a "material" development. The difficulty comes in recognising when a development is indeed material. Last year, the European Securities and Markets Authority set a consultation about it, and then extended its duration to gather as many views as possible. The views are now in and published for all to see. Among them:

• Mazars: The Paris-based international accountancy firm argues that a principles- rather than rules-based approach is appropriate because the circumstances of each company are different. An example arises in its response to question 10, concerning whether failing to include a note to the accounts constitutes a misstatement. Mazars argues no, because materiality is a matter of judgement. Automatic qualification of results by the auditors would lead to a checklist mentality among issuers.
• SIX Regulation: Concerning the view of materiality in interim reports, the regulatory arm of the Swiss stock exchange argues that half-yearly reports are more often based on estimates than are the final set of accounts. Nonetheless, the principles of materiality are the same.
• SAP: The German listed company, whose software envelopes the accounting systems of many large corporations, said that practice suggests that companies apply rather different standards of materiality in reporting their affairs. "While one might argue that this diversity in practice indicates that the concept of materiality is not clearly and consistently understood," it wrote, "we believe that the different application of the concepts is due to the management judgment necessarily involved in the evaluation of the question when a misstatement or omission could be material enough to influence the economic decisions of users of financial statements."
• CRUF: The Corporate Reporting Users' Forum, an umbrella body of analysts in fund management, didn't think ESMA needed to get involved. It welcomed the opportunity to debate, of course, but it felt the accountancy boards, like the International Accounting Standards Board and the auditors' equivalent were a better venue for conducting it.

What happens next will be a considered response from ESMA, which could mean no action, some, or much.

Source document: The list of responses has links to the individual documents submitted.

ESMA updates guidance in transparency directive

The European Securities and Markets Authority has published a new version of its questions and answers concerning the 2004 Transparency Directive. New in this edition are two points:

• Where's "home": Determination of the home member state for third country issuers in case of delisting and admission to trading in another member state – the home state of the issuer remains the jurisdiction even if the issuer delists at home and lists in another member state.
• Agents and rights: Designation of an agent for the exercise of financial rights – issuers have to provide a service for home-country securities holders to exercise their financial rights even if the company is listed abroad. But the agent providing such a service needn't be resident in the home country.

In all, the document deals with 18 questions.

Source document: The ESMA update is a 13-page pdf file.

Risk governance moves up the FSB agenda

The Financial Stability Board, tasked with coming up with means of preventing future financial failures in the Group of 20 nations, has issued a call for ideas that put the governance of risk higher up the list of priorities at financial institutions. "The global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities," it said. It is conducting a thematic review of risk governance, using its "peer review" process, in which experts from one (or several) states examine the practices underway in others. The review will look specifically at board responsibilities and practices, how the risk management function works, and the role of audit and assurance in risk governance. It's a short consultation. Responses, please, by May 12.

Source document: The FSB statement is a 26-page pdf file.

SEC targets Ponzi schemers preying on the prayerful

Sometimes having faith isn't enough. A vengeful and less distant authority helps. The US Securities and Exchange Commission has been active in the two-and-a-bit years since the Madoff scandal broke and reacquainted us all with the term Ponzi scheme. The SEC was caught asleep at the wheel when the $65 billion fraud was building. But having been stung by the criticism of its failures, the SEC has been working with a vengeance at hooking the small fish that swim in similar waters.

Madoff targeted many investors, among them Jewish individuals and charities supporting Jewish causes. In its latest sweep, the SEC closed down two other Ponzi schemes that preyed on other faith-groups. It sought an emergency court order to close down a scheme in which, it alleges, that for the past two years, a fraudster raised more than $7.5 million from investors by claiming to be a hedge fund manager. His aim was to extract funds from Persian-Jewish families in California. In a separate action, the SEC charged a self-described "social capitalist" with bilking socially-conscious investors in Christian church congregations across the country, raising about $11 million.

Such actions, and the resulting disgorgements, may not make up for the billions lost through the SEC's Madoff mistakes. But they may go some way to reviving faith in Washington.

Source document: The SEC's actions are detailed in a news release for one and then the other.

Goldman charged with not policing the 'huddles'

The US Securities and Exchange Commission wants investment banks to take action to prevent sensitive information from flowing where it shouldn't be. To make the point it has attacked Goldman Sachs – the firm most resembling American football's legendary Green Bay Packers – and its use of a pre-game huddle to share ideas around the trading floor. "Goldman, Sachs & Co. lacked adequate policies and procedures to address the risk that during weekly 'huddles,' the firm's analysts could share material, nonpublic information about upcoming research changes," it said. "Huddles were a practice where Goldman's stock research analysts met to provide their best trading ideas to firm traders and later passed them on to a select group of top clients." The investment bank agreed to pay a fine of $22 million and alter its practices. It also reached a settlement with FINRA, the industry regulatory body, for other issues with the way it conducts the huddles.

Goldman and its senior managers have been on something of a losing streak recently, not unlike the Green Bay Packers. But it's too early to count them out of the contest.

Source document: The SEC news release gives further details.

A new model of ownership?

Is the short-term focus of business a result of a "default model" of ownership? That's the conclusion of a report of an independent commission looking into how different approaches to ownership might alter the economic landscape in Britain. The Ownership Commission, a panel of business people and pundits set up in 2010 in the final months of the Labour government's long term in office, has reported on its findings. While it said that the limit liability model of listed companies with widely dispersed shareholders, known as PLCs, has virtues, it has come to be seen as the "default corporate organisational form". Investors, financiers, regulators and even government treat it as the normal way, "to an extent that reduces opportunities for other ownership forms to grow and prosper. Plurality of ownership forms should be viewed as an economic good in its own right," it added. The short-term focus was making it difficult for companies to operate with a long-term business model. "The ease with which British PLCs are open to hostile and foreign takeover is a further concern," it said. The focus given to this form hides the fact that other types of ownership are present and functioning in the economy: private equity, partnerships, families, state-owned businesses, sovereign wealth, employee ownership, and mutuals. The commission, therefore, urges markets and regulators to think more widely about three points:

• Plurality: Recognise the diverse range of ownership available, which gives investors and savers more avenues consumers more choice.
• Stewardship: It is a somewhat woolly term, one that relates to the need for a long-term perspective about the purpose of the business. "Shareholders, trustees, investment management companies and directors should have the definition of their fiduciary obligations widened to include better stewardship, and for this to be better enforced by closer links between the ultimate owners and managers," it said.
• Engagement: Management needs to interact with employees, shareholders and other business stakeholders to increase performance and accountability.

Whether there's any steam behind this report is a little difficult to judge. It was a creation of a different government, after all. But its recommendations are broadly in the direction of travel of other bits of private as well as public policy-making. The 2010 Stewardship Code endorsed by some major investors has changed the vocabulary of investment in similar ways. The commission wants institutional investors to be "required to sign, comply with and implement the Stewardship Code". But the practice of investment is different from the discourse that surrounds it. Much depends upon who is doing the talking.

Source document: The Ownership Commission report "Plurality, Stewardship and Engagement" is a 110-page pdf file. http://www.ownershipcomm.org/files/ownership_commission_2012.pdf

Having women on bank top teams leads to riskier decisions – study

That's the counter-intuitive finding – one of several interesting insights – that arises from a study of the performance of banks during the financial crisis. The Bundesbank may have lost some of its allure once the European Central Bank took over making the country's monetary policy. But Germany's own central bank is still an intellectual powerhouse. It commissioned and published a study of supervisory boards of banks that reaches rather intriguing conclusion. The authors – academics based in the US, Germany and the UK – looked at how the age, gender and education of executive teams affect risk-taking. Younger executive teams increase risk taking. So do board changes that result in a higher proportion of female executives. "In contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines," they conclude. Given that banking it, by definition, a risk-taking business, perhaps the study should be interpreted as saying that academics – rather than women – should steer clear of banking.

Source document: The Bundesbank report "Executive board composition and bank risk taking," by Allen Berger of the University of South Carolina, Thomas Kick of the Bundesbank and Klaus Schaeck of Bangor University, is an 80-page pdf file, in English.

What constitutes compliance?

The Financial Reporting Council in the UK thinks it has the answer. And who should know better? It is, after all, the custodian of the UK Corporate Governance Code and has orchestrated the revisions of its predecessors for the past decade. Under its "comply-or-explain" regime, the UK code leaves room for listed companies to vary their practice. Indeed, "Through the concept of 'comply or explain' the UK has successfully promoted high standards of corporate governance over many years. This has led to widespread improvements in practice," the FRC stated. But what it means to comply has always been open to interpretation. And what constitutes a good explanation in absence of compliance it even murkier. So the FRC has issued a document to add some definition to what code states.

Although compliance is in general rather good, "a very few egregious or notorious deviations can undermine support for the whole concept of 'comply or explain'," the FRC said. "For that reason and, particularly given the debate in Europe about the future of 'comply or explain', the FRC felt it was timely to bring together those who make explanations and those to whom they are addressed in order to compare notes about what each side understands by the word explanation."

It wants companies that choose to explain to do so in a way that is "as full as is necessary to meet the expectations of shareholders". Even aiming for such a standard should help companies, since stronger explanations will discourage shareholders from adopting a box-ticking approach. The FRC's document is, in effect, a bit of preventative medicine. It wants to reinforce the argument it makes in Brussels that the "right way to address current corporate governance challenges is to make the existing system work better rather than to introduce new prescriptive regulation. As indicated in its recent report on the impact of its two codes, the FRC is considering whether to reflect the outcomes of these discussions in the revised UK Corporate Governance Code on which it will consult later in the year."

Source document: The FRC document "What constitutes compliance under 'Comply or Explain'" is a 10-page pdf file.

Investor groups push fiduciary duties for stewardship

The answer to "crony capitalism" lies in changing the duties of shareholders in law, according to a group of activist investors and advisers in the UK. In an open letter, published in The Times and made publicly available online, governance officials at Aviva Investors, Hermes Fund Managers, Jupiter Asset Management and others said that legal duties on institutional investors to protect the interests of savers have become distorted and misunderstood. The result is that often investors do exactly the opposite of what the law intended. "Company directors have duties designed to encourage the pursuit of 'enlightened shareholder value'," they write. "But this is undermined by a widespread perception that fiduciary shareholders are legally obliged to be unenlightened. Their duty to act in the best interests of savers is widely seen as a duty to focus solely on the maximisation of short-term returns, ignoring anything that cannot immediately be monetised. The folly of such an approach has been amply demonstrated by the banking crisis."

Timed just after the interim Kay Review and just ahead of the annual government budget statement, the letter seeks to exploit a window of opportunity to influence policy

Source document: The investors' letter is a two-page pdf file.

EU moves towards gender quotas on boards

The boardroom in this picture is empty. That's because the men haven't arrived. All the women have. The European Commissioner for Justice, Viviane Reding, thinks that needs to end, and so she has launched a consultation which could lead to legislation requiring corporate board to reach a certain quota of female directors. In conjunction with the consultation, the European Union has produced a progress report giving the arguments for and some data suggesting the scale of the hurdle. It lists, for example, the percentage men and women directors set against the percentage of each in employment and among university graduates. It then argues that a better gender balance is good for you:

• Improved corporate governance and ethics: "Studies have shown," it says, "that the quality of corporate governance and ethical behaviour is high in companies with high shares of women on boards.
• Better use of the talent pool: More than half the students graduating from Europe's universities are women. "By not including them in decision-making positions, female talent would be underutilized and the quality of appointments may be compromised," it continues. "Systematically including suitable candidates of both sexes ensures that board members are selected among the best distribution of both men and women."

While there has been a increase in the number of women on boards, the progress it details has been rather patchy. For example, in Romania, Slovakia and Hungary, the percentage of women on boards fell since October 2010 by more than eight per cent.

Source document: The EU consultation website has links to the documents and background. The consultation closes on May 28.

'Avoiding Forgetfulness' – in financial regulation, too

In Britain, this year is the diamond jubilee of Queen Elizabeth's ascension to the throne. In America, it's the 200th anniversary of the start of the War of 1812, when a beaten Britain sought to regain control of the rebel colonies that called themselves the United States of America. Such occasions give us pause to reflect and remember, to "avoid forgetfulness". The poem "Recessional", written by Rudyard Kipling to mark yet another anniversary, Queen Victoria's diamond jubilee in 1897, put it this way: Judge of the Nations, spare us yet / Lest we forget – lest we forget!

We're also 10 years on from the enactment of the Sarbanes-Oxley Act in the US and 20 years since the Cadbury Report in the UK. It's almost three years since the chaos that would result from when the authorities would let Lehman Brothers pursue the path they managed to prevent happening six months earlier in the near-collapse Bear Stearns. In Britain Lord Turner wasn't quite so historically reflective, he was concerned we risked overlooking unresolved issues now that the heat is off. In America, meanwhile, Mary Schapiro, chairman of the Securities and Exchange Commission, was in a similar frame of mind, warning that the signs of recovery in the economies might tempt tired regulators to take a mental pause. "I recognize that there remains much more to do – because the job of a regulator is constantly evolving, she said a speech to the Society of Business Editors and Writers, entitled "Avoiding Forgetfulness". She continued:

Many of the initiatives currently on the SEC's plate are there because of critical events – damaging to investors and to markets – that spurred calls for change. But as those events recede into history, the embrace of those reforms is becoming less sure.

We must not let the passage of time fog our memories, cloud our judgment, or diminish our resolve.

So today I would like to discuss a few areas where we cannot afford to lapse into forgetfulness – in particular, I’d like to talk about some of the lessons from three episodes: the Internet bubble, the financial crisis, and the Flash Crash.

The internet bubble – and let's remember, WorldCom's failure and part of Enron's were involved in this – came about in part because of the practices of investment analysts who ramped stocks they then dumped. Conflicts of interest were rampant. But now, Schapiro warned, there was a bill before Congress that "would begin chipping away at that wall" of regulation that sought to block them.

The financial crisis in 2008 saw a near meltdown in money market mutual funds, prevented only by swift government intervention in effect to give an implicit guarantee for $3 trillion. Reforms came in 2010, leading some to declare victory. Not Schapiro. She reckons these products still suffer structural flaws.

After the flash crash – that sudden collapse of share prices on May 6, 2010 – it took the SEC and the Commodities Futures Trading Commission four months to work out what had happened that day, and that was just getting details of the activities, not even all the causes. The SEC then proposed a new rule to create a comprehensive audit trail just to speed up the next diagnosis, not to prevent the problem. "But again, just because we have done much to help prevent another Flash Crash, does not mean we have done enough," she said.

Regulators being reflective is a good thing, yes, even if they haven't found the solution to stop a recurrence of what happened. And because they can't find the fix the Judge of Nations may need to "spare us yet, lest we forget, lest we forget".

Source document: The Schapiro speech elaborates.

Politics tops the proxy season in US election year

Political spending proposals continue to increase in both number and focus, now making up nearly a third of the 349 social and environmental proposals filed so far in this year's US proxy season. It's not too surprising that the proportion has risen from just a quarter of the 360 proposals filed at this time last year. This is an election year, and the effect of the Citizens United decision of the US Supreme Court is now being felt in the election campaign for the presidency, as well as all the Congressional races at stake. The proxy voting service called As You Sow, which specialises in social and environmental issues, reckons that concern about the more mainstream part of that agenda have been sidelined this year. "But it is not for lack of success, since votes in 2011 were higher than they have ever been, crossing the 20% average support threshold for the first time and logging five majority wins," it reported. Highlights of the ESG items it found on the annual meeting agendas of US companies include:

• Sustainability reports: A wide variety of environmental issues and requests for broad sustainability reports still are the most common category, making up a little more than a third of the total. Requests for action and disclosure on climate change are being expressed more in terms of energy efficiency, while the natural resource management focus is still mainly but not exclusively on coal and hydraulic fracturing.
• Human and labour rights: Considerably fewer such proposals have been file, just seven per cent of the total, down from 12 per cent last year and 18 per cent in 2010.
• Diversity: Both on boards and for employee non-discrimination policies, has held steady with 11 per cent of the total.

Source document: The As You Sow proxy preview is an 84-page pdf file.

Looking for ways to measure ESG factors

Investors seem to want more information about corporate environmental, social, and governance issues but find that traditional accounting metrics fall short. According to the IRRC Institute, a research firm on responsible investment issues, investors find it difficult to gather let alone analyse corporate ESG data. Companies, meanwhile, suffer from "survey fatigue". The IRRC therefore commissioned a study to provide a comprehensive analysis of which corporate ESG information is tracked by companies and how it is or is not consistent with analogous information sought by investors, research companies and others. It found that:

• Agreement on issues, not metrics: There is agreement on key corporate sustainability issues, but not on the metrics used to measure the management of them, nor on the purposes served by examining corporate ESG information.
• Lack of reporting: Few companies report all the ESG information they collect internally.
• Focus on risk mitigation: ESG researchers, investors, and corporate representatives approach ESG issues from a risk mitigation perspective, not a value creation perspective.

Source document: The IRRC report "Finding Common Ground on the Metrics that Matter," by consultants Peter Soyka and Mark Bateman, is a 79-page pdf file.

The downside to investors of a short-term focus

Complaints about the short-term orientation of investors have been legion more many years, but that hasn't stopped investors themselves from shortening their time horizons, turning over their portfolios with increasing velocity, and then demanding that corporate managers listen to their demands for constant outperformance. The litany of malpractice now includes the interim Kay Review published by the UK government, added to the volume that went before it. But what if taking a short-term approach was actually bad for the investors themselves? Might that lead to a greater notion of stewardship in action?

A study by three Harvard scholars suggests that companies with short-term horizon suffer from higher levels of investment risk. "Using conference call transcripts, we measure the time horizon that senior executives emphasize when they communicate with investors," they write. "We show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors." The study also shows that short-term oriented firms have higher equity betas and as a result higher cost of capital, a result which the presence of long-term investors does not mitigate. They conclude: "our evidence suggests that corporate short-termism is associated with greater risk and thus affects resource allocation."

Source document: The working paper "Short-Termism, Investor Clientele, and Firm Risk," by François Brochet, Maria Loumioti and George Serafeim, is a 54-page pdf file.

The 'dirty dozen' on the activists' agenda

During the run-up to the proxy voting season in the US, everybody emerges from the winter hibernation will tales of dangers ahead. The National Association of Corporate Directors is one such organisation, and it sees what it calls a "dirty dozen" of questions that directors need to confront before they confront shareholders at the annual meeting. We won't spoil your reading by spilling the beans, but the first one on the list is this: Are your owners optimistic or pessimistic heading into the season? Before you all shout for the latter, the NACD notes: "In fact, the key survey data show a sharp divergence in attitudes between institutional owners, who appear to be optimistic, and individual investors, who are nearly as downbeat as they were at the depths of 2009's market meltdown." But don't take too much heart from that. The question about executive pay is not very far down the list.

Source document: The NACD briefing is a 10-page pdf file.

Kay Review interim report pushes against short-term pressures

How do we wean companies and markets off the notion of short-term performance to focus on the long-term needs of the economy and society? Is a tough question, especially when experience shows that the lack of discipline from deliverables can lead to lazy management. After all, the long term is, by definition, the sum of successive short terms. The UK government is having a go at it, in a long, three-stage process of consultations and reports, the second of which has now been published. The iconoclast and economist John Kay is fronting the process, a person with a subtle mind for complexity who is nonetheless an advocate of order. "The proposals for reform we have received bear on many different areas of policy – such as the governance of companies, the ways in which economic activities are measured, the functioning of markets and the structure of the savings market," Kay writes in the introduction.

The report has at its centre the theme of ownership, a difficult concept in equity markets, and particularly one with the complexity that has developed in mature ones like the UK. "There are at least three relevant aspects of ownership," the interim report states: "Who makes the decision to buy or sell a particular holding? Who decides how the voting rights attached to the shares should be exercised? Who enjoys the economic interest in the shares?" They may not be the same, which is what makes this review difficult. Rather than detailing recommendations, it summarises concerns, among them:

• Companies and boards: The report states, for example, "the concept of stewardship implied a group of people committed to the long term success of the company, rather than a rotating panel of temporary appointees. Perhaps there is no set of rules that can define the composition of an effective board."
• Measurement and reporting: On accounts and accounting standards: "They must present a true and fair view of the affairs of the company and also contain information about the past, present and future. Not only will elements always be volatile, but subjectivity is also inevitable. It is not realistic to imagine that any prescribed body of quantitative data can fully meet all these purposes."
• Market practice: The large number of large foreign companies listed in the UK attracted a lot of comment. The review notes that the undue weighting these have in investment portfolio is often a choice the funds themselves have adopted. Could they not change their own rules?
• Asset managers: Kay likes the distinction drawn by the Investment Management Association between "investors" and "traders", calling it "helpful and important. It is investors who directly serve the purposes of equity markets in improving the performance of companies and generating returns to beneficiaries, and it is investors who obtain the information which is needed if share prices are to reflect the fundamental value of companies."
• Intermediaries: "There are many intermediaries, and many levels of intermediation," the interim review states. The unstated implication is that there are too many. "Does the interposition of many intermediaries, with business objectives which are not necessarily aligned with the interests of companies and beneficiaries, conflict with the underling objectives of promoting these interests?"

The review involves as well a further consultation, with responses due by April 27. The final report is expected to be published in July, and is likely to involve recommendations on matters like taxation that lie outside the brief of the Department of Business.

Source document: The interim report of the "Kay review of UK equity markets and long-term decision making" will be followed by a further consultation with final recommendations due in July.

Italy details enforcement of gender balance for boards

The Italian securities regulator Consob is modifying its procedures for monitoring board composition in light of the enactment of gender balance for listed companies. Some women may wonder how successful the exercise will be when the enforcers themselves use the shorthand "quota rosa" or "pink quota" to describe the provision. Still, it promises that sanctions will be applied: "If the composition of the board resulting from the election does not comply with the division criterion, Consob will warn the company to comply with the legislative provisions within the maximum term of four months. In the event of non-compliance, Consob will impose a fine and set a new term of three months within which the company will be obliged to adjust the composition of its boards."

Source document: The Consob newsletter, in English, has gender quotas as the second item.

Code of conduct for UK private equity firms gains adherence

UK private equity firms have begun to embrace the voluntary guidelines promulgated just before the financial crisis pushed then out of the headlines as the bad boys of the financial world. The negative press they had received was probably misinformed, but it led to a move that was probably a good thing: disclosure of the working practices of private equity firms and greater reporting about the companies in which they invest. The findings of the fourth annual review by the Walker Guidelines Monitoring Group identified a higher level of overall compliance than in previous years. "These results are particularly encouraging as the Group has continued to raise the required standard of overall disclosure," it said. Nonetheless, the quality of disclosure varied significantly. The portfolio companies who tested the best report at a level equivalent to, or in advance of, FTSE 350 companies, it concluded.

Source document: The GMG monitoring report is a 36-page pdf file.

What's a CEO worth?

The pay of top executives is hot topic. Are they coddled and overpaid, or do they just get the market rate? How imperfect is the market in which they compete for the top jobs? Perhaps the biggest question of all is how much to they deserve the pay they get? This last question is often answered with appeals to value creation, in particular the rise in the share price under the CEOs tenure. That's a difficult question to answer, but one that nonetheless gets asked in a new instalment of the "Closer Look" series of guides to corporate governance published by the Stanford University Graduate School of Business.

Among the questions it tries to answer are: How much value creation should be attributable to the efforts of the CEO? What percentage of this value should be fairly offered as compensation? Can the board actually perform this calculation? If not, how does it make rational decisions about pay levels?

Source document: The think piece "What is CEO Talent Worth?," by David Larcker and Brian Tayan, is an eight-page pdf.

Which parachute is the most golden?

The "walk-away" package is an increasingly expectation among corporate executives in the US at least. It isn't the gold parachute of old, structures put in place to give a CEO protection in case he was ousted in a hostile takeover bid. Nor is it the payment for failure, a way to pushing the executive less reluctantly out the door, with a payment for silence. The walk-away is something different. It sudden grew in prominence after Jack Welch retired from General Electric and subsequent his divorce settlement forced into public view his perquisites valued at $2.5 million a year. According to a report by the proxy researchers at GMI, since then, multi-million dollar severance and other separation packages have become so commonplace that we scarcely notice them. Recent HP parted company with CEO Leo Apotheker and with $12 million, with hardly a mention. Companies now accelerate equity awards along with substantial pensions and other deferred compensation all but guarantee significant payouts at many of the largest US corporations. GMI has published a report going back to 2000 to examine the largest golden parachutes and other termination packages of the past decade, many of which have never been quantified before. Here are some of the highlights:

• The top 21: Some 21 CEOs received walk-away packages in excess of $100 million since 2000.
• The top awards: Walk-away packages include actual and potential stock option profits, full-value stock awards, continuing salary and bonus payments, health care benefit and continuing perks, additional pension benefit.

Among the cases involved, the tenure of the CEOs ranged from nine months for Viacom's Thomas Freston to 29 years for North Fork Bank's John Kanas, with both extremes raising questions about what justified the additional payments. Perhaps most surprising were the cases of three CEOs who received payouts without ever leaving.

Source document: The GMI report is a 10-page pdf file.

EU rethinks its role in scope of corporate activities

The European Union has a long and ambiguous role in shaping the nature of corporate activities. Member states like to keep control over what is and is not a company, that is, over who is and is not entitled operate as one under their individual laws. A European Company statute came into being some time ago, allowing a company to register in a way that allowed it to operate as one entity without registering subsidiaries, but its scope has been limited. Now the European Commission wants to take another look at the whole area of European involvement, and it's asking a series of questions:

• Objectives and scope: What should be the main objectives of European company law? Are the current rules fit for today's challenges? In which areas is there need for further evolution? What relationship between company law and corporate governance?
• Codification : Should the existing company law Directives be merged in a single instrument in order to make the regulatory framework more accessible and user-friendly?
• Future legal forms: What are the advantages and shortcomings of European company forms? Do existing company forms need to be reviewed? Should alternative instruments be explored?
• Cross-border mobility: What can be done to facilitate the cross-border transfer of a company's seat? What if a company splits into different entities cross border? Should the rules on cross border mergers be reviewed?
• Groups: For a set of companies under a single management or source of control, is there need for EU policy action in this field?
• Capital: Should the existing minimum legal capital requirements and rules on capital maintenance be modified and updated?

These are pretty sweeping questions and ones where member states will probably have quite a bit to say about how much Brussels gets involved. But with the eurozone crisis leading to constraints on the sovereignty of governments in much of fiscal and economic life, this type of inquiry might well seem a natural extension, particularly if it seems to be eliminating roadblocks to economic growth. The consultation closed on May 14.

Source document: The consultation website has further details of the questions.

A 'biased' guide to behavioural ethics

The problem with ethics is that everybody wants to tell you what to do. That's what scholars like to call the "normative" approach, and it lies at the heart of most of the discussion about ethics in business: what's the right thing to do, and what's the wrong thing. There is another approach, one the sounds more like social science and less like theology, however, and it's deeply unsatisfying to those who long for, or search for, the right answer. Behavioural ethics, like behavioural finance or governance, seeks to examine what people do, rather than what they (or, indeed, others) say they should do. According to two scholars from Harvard Business School, this descriptive approach still teaches lessons, just not of the top-down sort. The names Enron and Madoff have resonance even without a rule by which to judge them.

"As business school professors, we are disappointed with what academics have offered to date in response to these increasingly frequent demands," they write. "More importantly, we believe that there are limitations to the strategies used in our efforts as academics to respond, and believe that there are more effective ways that can help reduce ethical failures in both business and society more broadly in the future." So how, then?

The pair set off to recounts their self-confessed "biased" view of the history of business ethics and the attempts by professional schools to address it in teaching and research. Behavioural ethics "sees an opportunity in helping students and professionals better understand their own behavior in the ethics domain, and compare it to how they would ideally like to behave". Reflecting on the experience is itself the moral education.

Source document: The working paper "Behavioral Ethics: Toward a Deeper Understanding of Moral Judgment and Dishonesty," by Max Bazerman and Francesca Gino of Harvard, is a 43-page pdf file.

UK makes first step towards putting brake of top pay

The government has acted, sort of, to limit the scope for high salaries and bonuses in the boardrooms of British businesses. That sentence is wrong, of course. It hasn't acted; it only said it would. The action isn't worth acting upon, some of its critics contend. A lot of the boardrooms with the highest pay aren't in Britain anyway, so large and varied are the 100 companies we now see in the FTSE-100 index of leading companies. They call Russia, Chile, South Africa, Australia, Kazakhstan and other places home. Still there is a public clamouring for constraints on pay, and yet the notion of wage controls seems to alien, and the ways around constraints so varied that any obvious "solutions" wouldn't work. So what's a government to do?

Vince Cable, secretary of state for business, innovation and skills, decided to propose legislation that would make the current advisory vote on pay policy a mandatory one. Shareholders, not government, should decide on pay. Remuneration reports would come in two sections, one containing the policy, the other the account of how policy has been implemented the previous year. Cable backed away from demanding disclosure of any ratio of director pay to that of ordinary workers. "A company employing thousands of relatively low-paid, low-skilled shop-workers will inevitably have a much wider pay ratio than a firm that outsources most of its unskilled labour," he said. True. He also avoided an idea much admired by opposition leaders and trade unions that would see workers represented on remuneration committees. A step too far. But he wants to stop people currently serving as executives at other companies from sitting on remuneration committees, and so break the cycle of mutual back-scratching and mutual admiration. But that's not a solution, as only five per cent of RemCo members currently have such posts. Getting more outsider will be the bigger problem. Sitting non-executive directors sometimes call the RemCo assignment a "poisoned chalice".

"Responsible business leaders are waking up to that fact and understand the need to respond to the substantial and growing pressure to deal with the culture of excessive rewards. I stand ready to work with them, and with investors, to thrash out what gold-standard company reporting should look like and then act on it," he said. This is one we'll be working on for quite a while to come.

Source document: The Cable speech to the Social Market Foundation elaborates.

UK seeks to close the back door to foreign listings

The UK has become something of a haven for large natural resources companies seeking new capital and access to a liquid equity market. The trend has become so pronounced that using the famous FTSE-100 index as a benchmark of anything to do with Britain is somewhat suspect. Moreover, some of the entities listing have been coming in the back door. They allow themselves to be "acquired" by a company that's already listed – perhaps an inactive shell – through an exchange of shares that leaves the original owners still very much in control even if the companies don't really meet the normal listing standards for free float and open control. The Financial Services Authority has been mulling what to do about it for a while and has now produced a long consultation paper, seeking to set the policy before the FSA itself demerges. Its UK Listing Authority wants to close the back door by tighten the definition of reverse takeovers. "In order to prevent use of the reverse takeover regime as a 'back-door' route to obtaining a listing, we are proposing to narrow this exemption so that only acquisitions by a listed issuer of another listed issuer in the same listing category will not be treated as a reverse takeover." That won't of its own stop foreign listings – that's not the aim of the rule anyway. But it will prevent a foreign company that doesn't quality for premium listing to achieve premium status without premium performance on governance and disclosure.

Sponsors: The UKLA also wants to tighten the rules concerning firms that sponsor listed companies. Usually investment banks or stockbrokers, these firms play the role of advising listed companies on how the market works. The UKLA wants to add a few layers of responsibility to the mandate. One is particularly noteworthy: "we propose to introduce a specific Principle for Sponsors that will require sponsors to act with honesty and integrity in relation to a sponsor service." Who would every have thought of that?

Source document: The FSA consultation paper is a 173-page pdf file.

Short-selling bans don't work – Cass study

Short-sellers have become one of the new public swear-words that have emerged from the financial crisis. Their defenders are often dismissed as more of the same bankers who brought us the crisis in the first place. Why should short-selling be allowed? Isn't there something deeply wrong, at some level, somehow, about wishing share prices to fall. Isn't that like hoping for failure, or seeking to steal?

Most regulators around the world reacted to the 2007-09 crisis by imposing bans or constraints on short-selling. Even in the United States, where the pressure of lobbying from Wall Street was intense, the Securities and Exchange Commission issued curbs on short-selling in the wake of the Lehman Brothers failure in 2008. Briefly. One of the worst decisions of his time in office, said SEC chairman Christopher Cox at the time. Bans and partial bans were imposed and lifted at various times by various countries. Some are still in place. Some were more restrictive than others, giving the basis for a natural experiment of the sort economists love to find. A pair of scholars from London's Cass Business School and the University of Naples looked at the resulting data and concluded:

• Liquidity: Bans were detrimental for liquidity, especially for stocks with small level of market capitalisation and no listed options. Trading just dried up when the market-making element of stock lending and short-selling disappeared.
• Prices: Bans led to slower price discovery, especially in bear markets. Prices simply didn't adjust very quickly to new developments, as would-be sellers had trouble finding buyers, presumably because they feared not being able to get rid of a position later on.
• Price support: Bans didn't do what they were meant to do. They failed to support prices, with the possible exception of US financial stocks, where the bans were lifted after only a short period.

The scholars conclude: "in contrast to the regulators' hopes, the overall evidence indicates that short-selling bans have at best left stock prices unaffected, and at worst may have contributed to their decline."

Source document: The working paper "Short-Selling Bans around the World: Evidence from the 2007-09 Crisis," by Alessandro Beber of Cass Business School Marco Pagano of the University of Naples, is a 64-page pdf file.

'We all have reasons for moving …'

That line in a poem by Mark Strand wasn't intended to bring investment bankers directly to mind, but it does. "In a field," he begins, "I am the absence of field." Of, but not part of. Since the financial crisis, with its early and persisting impact on the economy, the City of London – the ancient code for the financial district – has been worried about how new waves of regulation might play out in practice. Would banks, long attracted to London for its liberal approach to commerce and its many (resulting) cultural attractions, vacate the city and move somewhere with lower taxes and less intrusive regulators? Would Bank Tube station become a ghost town, and the state's finances turn into a black hole?

Foreign banks have been in London for a long time, much longer even than recorded in a study at Cass Business School at City University, which examines bankers' decisions on location from the end of World War Two until 1999. It finds that the many attractions of the City are not, in themselves, determinants of the decision to stay or move. In that period banks made almost 2,800 decisions to stay in London. They also made more than 1,800 decisions to withdraw. They found, unsurprisingly, that banks that internalised operations – that is, the engaged actively in the local market – were more likely to stay that those that used London as an outpost. Moreover, the "liability of being an alien" declines with time and experience. The distance from their home market worked against staying. That is, the further away from home they were, they more like they were to close up shop. But they also tend to stay because the structure of the market gives them greater flexibility and with it the ability to "compete on an equal footing" and local and other international rivals. That is, a good market is a virtuous cycle. There are signs here for the policy decisions that develop from the unfolding financial crisis.

We all have reasons for moving, just not all. Some stay to keep things whole.

Source documents: The working paper "Why do foreign banks stay in London?," by Andrew Clare of Cass Business School, Mohamed Azzim Gulamhussen and Carlos Pinheiro, is a 40-page pdf file. The poem "Reasons for moving" by Mark Strand is a short and bittersweet delight.

Does a big gap lie ahead for equity markets?

Yes, is the answer of the economists working at McKinsey Global Institute. The consulting firm's think-tank thinks several forces are converging to that will reshape global capital markets in the coming decade. As they develop, there could be a trend away from equity investment that will change how businesses finance themselves and view their governance. "The most important of these is the rapid shift of wealth to emerging markets where private investors typically put less than 15 percent of their money into equities," MGI says. In more developed markets, investors put 30 to 40 per cent into equity instruments. Moreover, structural changes in the developed world are conspiring to reduce demand for equity. MGI thinks the ageing population as well as shifts in pension regimes will push the demand side towards income-generating investments. Moreover, the growth of alternative investments is a sign that investors seeking high returns will look further afield than equities to boost risk and reward. Yes, and new financial regulations will probably hurt demand for shares.

All in all MGI see a potential $12 trillion “equity gap” emerging over the next decade. It projects that the share of global financial assets held in listed equities could fall from 28 per cent to 22 per cent by 2020 if these trends continue.

Source document: The MGI summary has links to an executive summary and the full report.

UK boards embrace new code suggestions

Board of UK companies have begun to put in place some of the structural changes proposed in the 2010 version of the UK Corporate Governance Code. The 2011 UK Board Index survey of the headhunters Spencer Stuart looked at the governance practices in the top 150 companies. Some of its findings were:

• Risk committees: These committees were one of the chief recommendations of the Walker Review of governance in the financial services industry in 2009. Spencer Stuart noted that they are becoming more common in that sector. In other companies, risk still tends to be considered by the audit committee or the full board.
• Board evaluation: The number of boards using outside facilitators for their annual evaluations has almost doubled. The new code asked the outsiders be engaged one year in three.
• More sitting CEOs on boards: More CEOs are sitting on outside boards, but fewer CFOs are doing so. This finding is in contrast to the trend in the US version of the firm's survey in 2011.
• Internationalisation: The latest survey showed a 33 per cent increase in the number of foreign non-executive directors during the survey period. It would be worthwhile giving this figure some closer scrutiny, as the changes in the makeup of the top 150 companies has changes markedly, with several large US-focused companies having disappeared from the stock market, replaced by large foreign companies with London listings.
• Women on boards: More female directors have been appointed, although the pipeline of female senior executives still looks thin. For the first time, the UK Board Index examines the numbers of women on executive leadership teams and their roles in the organisation.

Source document: The Spencer Stuart UK Board Index 2011 is a 52-page pdf file.

Succession planning remains weak point of US boards

One feature of the Spencer Stuart Board Index for 2011 may be self-interested, but that takes nothing away from its importance. The executive recruitment firm has noted that US boards are still not doing very well in succession planning. "In the wake of several recent high-profile CEO departures … succession is perhaps of even greater concern. In fact, triple the percentage of respondents named succession as a major issue confronting boards as did four years ago," it said. The 2011 survey results indicate that many boards have "not acted with a diligence reflecting the importance of a smooth transfer of power". Nearly a third of companies surveyed admitting that they have neither an emergency plan nor a long-term succession arrangements in place.

Source document: The Spencer Stuart US Board Index 2011 is a 68-page pdf file.

Greater independence in evidence in US boards

Boards of directors of US corporations have generally been very independent of management, if you judge independence purely on the basis of their formal ties to the company. But that's not always how it works out in practice. According to the latest version of the Spencer Stuart Board Index, however, there are increasing signs that boards are gaining structural power at the expense of the CEO. The headhunter's annual study of the S&P 500, now in its 26th year, shows a number of pointers in that direction:

• Declining board turnover: While transitions for the CEO may be on the rise, the same is not the case for the board of directors. Last year saw the smallest number of newly elected directors in a decade.
• More independent board leadership: Some 41 per cent of boards have now split the roles of chairman and CEO. Over half of boards feature the CEO as the only non-independent director, a figure that has doubled in only ten years.
• Fewer active CEOs as directors: Fewer than half of CEOs serve on the board of another company. That means nominations committees are casting their net more widely.
• Older boards: It follows from the decline in turnover and the selection of fewer sitting CEOs: The average age of all independent directors is now 62.4 years, up from 60.2 years in 2001. Five of every six boards that have a fixed retirement age have set the mark at 72 years of age or older.
• Mixed results in diversity: Nine per cent of S&P500 boards have no women members. Minorities have failed to land a seat on 12 per cent of boards. The number of African-Americans serving on boards has even fallen slightly, though more boards have added directors of Hispanic or Asian origin. Some 10 per cent of the new directors named in 2011 were born outside the United States.

No surprise, though, on pay. The average annual pay for board directors rose eight per cent over last year, exceeding $232,000. The nature of that compensation is changing, too, as cash retainers rose 11 per cent.

Source document: The Spencer Stuart US Board Index 2011 is a 68-page pdf file.