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.