The Math on Corporate Boards

Institutional Investors' Attention
To Governance Wins Approval
April 15, 2006
Wednesday's Business column, on a study showing that institutional investors plan to increase their attention to corporate governance over the next three years, brought plaudits from most readers who wrote in. Letters, as usual, are edited.

Here's a typical response, from Hal Gaffin:

"Corporate governance should continue to be a top priority of institutional investors until corporate management and boards get their greed under control and accept responsibility and accountability for the financial statements they churn out quarterly. They need to remember that it's my money they're managing, not theirs!"

And here's what Susan Shultz, of The Board Institute Inc., which helps companies assess the effectiveness of their boards, has to say about boards of directors in general:

"It is astonishing that this group, the board, responsible for corporate success, has often been secretive, randomly assembled and rarely held accountable. We don't need more regulation. We do need transparency and accountability -- we do get what we measure. Great boards = great companies."

Les Greenberg, of the Committee of Concerned Shareholders, wants institutions to take an even more activist role:

"Institutional investors should become more focused on the ultimate goal: equal access to the corporate ballot. One of the most revealing questions dealing with institutional investors and lack of better corporate governance is why institutional investors are wasting time with non-binding shareholder resolutions when they could, under current SEC rules, nominate slates of director-candidates by running low-cost, effective proxy contests."

But there were some naysayers. J. George Pikas, a frequent correspondent from Seattle, doubts that mutual funds, in particular, will ever pay much attention to the corporate governance of the companies they invest in.

"Mutual funds are compensated for accumulating assets under the premise that they can put those assets to work and get a favorable return for their customers. The voting power they have is wasted since their focus historically -- and currently, for the most part -- is their wallet, not the customer's wallet. They'll stay dormant until someone can draw a straight line from corporate governance to their asset-management fees."

Another reader, a former corporate executive, raised questions about the organization that conducted the study -- Institutional Shareholder Services. That's the firm that advises institutional investors on how to vote their corporate proxies. Many CEOs believe ISS is part of the problem. It has adopted, they say, a rigid, one-size-fits-all methodology for measuring corporate governance that suggests ISS's analysts know better than the people who run big companies.

One point of controversy in all of this is the focus on the independence of members of the boards of directors. Some great companies, like Warren Buffett's Berkshire Hathaway, take hits in the corporate-governance debate because they have too many directors who aren't viewed as sufficiently "independent" from management. But critics say an excess focus on independence may devalue the experience and personal investment that can make for better directors.

Michael Johnson, a private investor, has particular criticism for CalPERS's guidelines that disqualify some people who have significant ownership stakes. He writes:

"I can think of no better corporate-governance control for shareholders than having someone who has a significant amount of his personal net worth invested in the enterprise. Those are the kinds of directors that will ensure the best interest of shareholders are served."

Finally, Bob Nagel suggests that rather than focusing on complicated measures of corporate governance, investors should be focusing on a simpler standard:

"Why don't you check with Wall Street firms to see just how important the character trait of 'simple honesty' rates with the corporate-governance executives? From my experience, simple honesty seems to be a detriment to getting higher in a company's hierarchy and cheating everywhere seems out of control particularly in high schools and colleges from whence honest leaders grow from. It is scary as heck."

Write to Alan Murray at business@wsj.com