As a director of corporate governance for one of the country’s largest institutional investors, Stephen L. Brown and his colleagues sit in judgment of governing practices at more than 8,000 portfolio companies around the globe. The corporate and associate general counsel for TIAA-CREF, which has some $434 billion under management, started his career as a financial analyst at Goldman Sachs, then entered private practice as a securities attorney at Skadden and Wilmer- Hale, where he represented corporate boards of directors and hedge funds. As Brown points out, “I’ve walked in the shoes of issuers.” In an interview with NACD Directorship’s Jeff Cunningham, Brown spoke about the implications for boards resulting from the Dodd-Frank Act and the need to raise their governance IQ.
Stephen L. Brown
What do you like most about the changing boardroom landscape?
The passage of the corporate governance reforms included within Dodd-Frank was a watershed event that affects boards, management and shareholders alike. Boards and management will now have to take more interest in investors’ viewpoints. And shareholders must take on greater responsibility in monitoring boards with the tools provided to them by Congress.
Are the new requirements being embraced or resisted?
Both. The best practitioners—issuers who have always addressed governance into their road shows, for example—are continuing to do the right thing, and I don’t think Dodd-Frank has raised their blood pressure much. You have another category of issuers who are new to engaging with shareholders and they’ve embraced the challenge and are sincerely attempting to understand how to be more responsive to shareholders. And then there is this third category of what I like to call “the governance cavemen and cavewomen.” These are folks who are still in the Stone Age about the need for regular dialogue with their key shareholders.
Why did it come to the necessity of enacting a law?
Many would have preferred private ordering to achieve reform. However, when market participants can’t find consensus, regulation follows. With respect to say on pay, a few years ago we approached some of our largest portfolio holdings and asked them to voluntarily adopt an advisory vote with hopes that the rest of the market would follow. Many responded that they preferred to wait for legislation; not wanting to be a first mover. The lack of widespread voluntary adoption mixed with public angst over executive compensation, and the onset of a financial crisis, yielded an inevitable response by public policymakers. So, here we are.
Click here to view the full Director’s Guide to Compensation
More stories in the Director’s Guide to Compensation:
New Risks and Rewards
Executive Pay and the Boardroom After Dodd-Frank
New Rules Give Power To The Compensation Committee
Do governance practices differ among companies according to market capitalization?
The fact is that over the last decade the larger-cap companies have been the focus of large institutional investor activism; so those companies have responded to the various viewpoints of shareholders with respect to governance best practices. However, most of the mid- and small-cap companies have had the cover of the large caps. It’s likely to be different now. No more cover. The mid and small caps will have to raise their governance IQs and address governance more proactively.
How often do problems in corporate governance relate to CEO compensation?
It’s often a red flag rather than a cause. We define problems not by the absolute amount of compensation, but focus on whether or not the compensation program is aligned with our interest in creating long-term sustainable shareholder value. Compensation issues can be indicative of misaligned risk/reward incentives, lack of long-term focus, or simply show that there’s not enough counter balance in the boardroom.
Directors could take the outcome of a say-on-pay vote and bring it in with them to a meeting with the CEO saying, “Listen, this is what shareholders are thinking.”
You might have read that Rob Feckner [president of the California Public Employees Retirement System] said CalPERS would no longer publish its watch list and that they would approach companies privately because they thought it would be more effective. Do you agree with this kinder, gentler activism?
We absolutely agree that it’s more effective. Quiet diplomacy has always been TIAA-CREF’s style of issuer engagement. In our experience, you can achieve optimal outcomes when you can get a company to focus solely on key governance issues and avoid public embarrassment over being targeted. A sense of partnership and respect are elements that should exist when engaging with issuers to bring about changes aimed at long-term value creation. More aggressive approaches may be warranted at times, but it is certainly not the starting point for long-term focused institutional shareholders.
What are the means or methods that you’ve seen in which directors are effectively communicating with TIAA-CREF?
We appreciate clear and meaningful proxy disclosures. Disclosure should not simply be viewed as regulatory mandates, but rather as an opportunity for directors and management to make their case to shareholders. TIAA-CREF takes care to intelligently execute our proxy-voting duties and we can do so effectively and efficiently when we are able to understand with confidence how directors exercised their duties on our behalf. Providing clear, concise and meaningful disclosure in the [Compensation Disclosure & Analysis] section of the proxy is one such opportunity with respect to compensation. The newly required enhanced disclosure related to board leadership, director qualifications, risk oversight and other related corporate governance issues is another opportunity to tell your story. The arrival of mandatory say-on-pay votes this proxy season heightens the importance of providing good disclosure.
Direct dialogues should complement good disclosure. While we do speak with companies during proxy season, the most constructive dialogues occur at governance “road shows” outside of proxy season when there is more time.
How can a company prepare for a governance road show?
It’s common for issuers to create an agenda with us prior to the meeting. That way both sides can manage expectations and ensure that the issuer has the right people in the room. The right people include those senior executives who can speak knowledgeably about issues on the agenda—we are starting to see more heads of executive compensation in these meetings in order to address detailed compensation questions. Although we know it is not always feasible all the time, having independent directors as part of these meetings is an invaluable emerging best practice. Finally, prior to embarking on a road show, it can be helpful for issuers to host their own mock dialogue with their outside advisors such as compensation consultants.
That’s an excellent idea. Tell me, what do you think of say on pay?
We think a shareholder vote on executive compensation policies empowers both investors and boards. It allows board members to use investor sentiment as expressed through its advisory votes in their conversations with the C-suite. It arms the compensation committee chairs with real feedback. Directors could take the outcome of a say-on-pay vote and bring it in with them to a meeting with the CEO saying, “Listen, this is what shareholders are thinking.” And by the way, these shareholders have the power to vote directors off the compensation committee and out of office, particularly if directors are elected by a majority of votes in uncontested elections.
Are there areas of frustration for you that were not addressed in Dodd-Frank?
I think many people are unhappy that majority voting was taken out of the corporate governance provisions of Dodd-Frank. But the vast majority of your large-cap companies have already adopted this best practice. And the rest of the issuers who have yet to adopt will likely see significant shareholder pressure to do so this year.