Bob Lamm is an Independent Senior Advisor to Deloitte’s Center for Corporate Governance. He also co-chairs the Securities and Corporate Governance Practice at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, Florida, and is a Senior Advisor to Argyle. Lamm is a leading member of the Society for Corporate Governance and has served as Chair of its Securities Law Committee, among other positions. He is also a Senior Fellow of The Governance Center of The Conference Board. Lamm previously held senior legal positions at several large companies, most recently as Assistant General Counsel and Assistant Secretary at Pfizer Inc. He also has extensive experience with small- and mid-cap companies as well as non-profit entities. He received a Bachelor of Arts from Brandeis University and a Juris Doctor from the University of Pennsylvania School of Law. He frequently speaks and writes on securities law, corporate governance and related topics. Lamm also serves on the Board of Directors of Junior Achievement of South Florida and is a member of the National Association of Corporate Directors. The views he expresses below are his personal views and do not necessarily reflect those of any organization with which he is associated.
Christopher P. Skroupa: How do you assess the state of governance in the post-crisis, post-Dodd-Frank context?
Bob Lamm: With apologies to Charles Dickens, I think it’s the best of times and the worst of times from the perspectives of both investors and issuers.
Many companies have adopted enlightened (at least in my view) governance practices, and shareholder engagement is increasingly becoming the norm—including engagement by board members. Additionally, many boards are taking steps to enhance their effectiveness, such as focusing on board skills and diversity as well as paying more attention to serious board and committee evaluations. At the same time, some companies are philistines; they resist adopting enlightened practices and seemingly refuse to take or even consider steps that would enhance board effectiveness. They seem to think that the way they’ve done business must continue to be the way they do business, and in my view, that is not advisable.
The investor community has also demonstrated positives and negatives. Some investors focus on long-term performance and substance, rather than form. Then there are others (in my view, too many) who concentrate on box-ticking and applying identical solutions to all companies. If there is one thing I’ve learned in my career, it’s that one size rarely fits all—different companies in different industries have different needs, and corporate cultures differ across the board as well. One example of the “check-the-box” mentality that troubles me is director tenure. To say that a director ceases to be independent or should simply get off the board after X years does not make sense to me. Proxy advisory firm policies tend to reinforce this mentality, because their business model prevents them from taking the necessary time to analyze each company carefully.
Another troublesome issue is the increasing level of second-guessing that goes on within the institutional community, particularly when it’s driven by short-termism. Boards are not guarantors of corporate performance, yet whenever something goes wrong—and on occasion when a board merely decides to take certain actions—some investors feel compelled to question the board’s action, even when it’s an area where the board is likely to know better than the investors. Our corporate system is far from perfect, but it has benefited from the separation of ownership and management, and I wonder if that’s being eroded to a dangerous degree.
So the bottom line is that it’s a mixed bag, but hopefully we’re moving in the right direction.
Skroupa: As a pioneer of shareholder engagement and as a supporter of public companies do you believe that engagement is productive? Are there negatives about engagement that require further efforts/improvements to the effort?
Lamm: I certainly support engagement and never understand why some companies refuse to engage. It’s the best way I know to establish credibility and educate your owners about what you’re up to.
For example, a few years ago, I met with a company that had to farm out a large portion of its manufacturing operations. Management was concerned about its lack of control over processes and labor issues at its contract manufacturers—if a contract manufacturer ended up making defective products, the company could be subjected to an activist “attack.” This risk factor was discussed in the company’s SEC filings. I suggested the company reach out to its major investors to let them know that it was aware of the potential problems associated with contract manufacturing, and lay out what the company was doing in order to avoid these problems while forewarning investors that problems could still arise. This made it clear to investors that management was taking the risk seriously and was doing everything in its capacity to avoid problems. To my knowledge, problems have not arisen, but I’m confident that the investors respected this level of candor and that it helped establish a level of credibility, so if a problem were to occur, investors would be more inclined to support management than an activist.
Of course, engagement is a two-way street, and companies need to listen as well as talk and take investor input seriously. Some companies seem to fear that if an investor says “you should do this,” then they’ll be forced to do something they don’t want to do, but that’s often not the case. If an investor makes a suggestion that you think is good, consider implementing it (and giving credit to the investors for suggesting it); however, if a suggestion is not good, explain why. I’ve seen this happen many times, and investors appreciate it.
Skroupa: Is there wisdom in having non-employee directors participate in discussions with investors? Or are there specific instances where they might help?
Lamm: Over the years, I’ve gotten into trouble by adamantly supporting director engagement, so I’m glad to see that it’s becoming the norm. If a company trusts its directors to act as such, how can it not trust them to speak to investors? Of course, management should speak on most issues, and directors should not supplant management. Also, directors’ time is limited, and directors should not be expected to speak to any investor who asks for face time. However, the bugaboo that directors shouldn’t speak to investors due to SEC Regulation FD is (and always was) nonsense, in part because directors are rarely asked the kinds of questions that would raise FD concerns.
There are certainly some issues where management should not speak and directors should be involved. One such issue is executive compensation, because having an executive justify her own compensation is likely to backfire. Compensation committees generally set executive compensation, and committee chairs and members ought to be able to explain why they’ve done what they’ve done. Another area that calls for director engagement is when a director is challenged for being on the board too long; how better to justify a director’s tenure than by having her speak to investors and thus demonstrate that she’s engaged, aware and passionate about the company?
Of course, not every director is “camera-ready”; some directors may not be suited to engagement. And even the most “camera-ready” directors are likely to require training and education to properly understand and execute their roles. (Incidentally, I think “camera-readiness” may start popping up on director skills matrices.) But an absolute prohibition just makes no sense to me.
Skroupa: The SEC seems to be caught in the middle on its disclosure effectiveness undertaking. Some constituencies think it’s critical, but others—including Senator Warren—think it plays into the hands of corporate America. Is this an appropriate characterization of the debate on disclosure? Should it be reframed?
Lamm: To put it bluntly, I think Senator Warren is not only wrong, but dead wrong. I spent most of my career as an in-house securities attorney, and I can assure you that I and most of my counterparts at other companies big and small took and continue to take their disclosure obligations very seriously. We understand that sunlight is a great disinfectant. However, not every rule on the books is still needed, and others need to be updated to remain relevant. And of course there are matters that should be but are not being disclosed because there is no specific disclosure requirement. My favorite example is a rule that requires explicit disclosure—under a separate heading—that there are no compensation committee “interlocks” (for example, where your company’s CEO serves on the compensation committee of another company whose CEO sits on your compensation committee). In the last 20 years I’ve yet to see any company with that kind of interlock, so you end up disclosing non-events—again, under a separate heading. Surely this is not what our disclosure system should be. At a minimum, disclosure should be called for only when there is such an interlock.
Also, Senator Warren doesn’t seem to have spoken with investors about disclosure overload. I’ve attended dozens of programs where investors have said that they don’t read proxy statements because they simply don’t have the time.
I’ll conclude by noting that the SEC’s program seeks disclosure “effectiveness” rather than “reform” for a specific reason—the SEC and its constituencies (including the private securities bar) did not want to convey the impression that the goal was to kill as many rules as possible. “Effectiveness” means better disclosure, not necessarily less. And it also means using modern technology to make disclosure better. For example, why does a proxy statement have to talk about committee charters at length when those charters must be posted on companies’ websites? Using the web and, possibly, social media to provide “layered” disclosure just makes more sense. SEC Commissioner Stein gave a great speech on this subject earlier this year.
Skroupa: It seems that engagement has been focused on large-cap companies. Is this correct? Or how are mid-cap companies addressing disclosure, engagement, and governance? Is it playing out differently?
Lamm: I spent most of my career with large-cap companies, and I’m glad that I did; large-caps tend to be in the forefront of disclosure and governance developments—as has been the case with engagement. However, I’ve also spent some time with smaller companies, and my legal practice is now focused on middle market companies, and I can tell you that smaller companies are in a different galaxy from large caps.
Years ago, a very good friend of mine who worked for a large company told me that the only difference between large and small companies is that the materiality threshold for smaller companies is much lower. Of course, she was right, but she was also totally wrong. For example, to comply with SEC Regulation FD, her company’s quarterly earnings releases were 40-plus pages and contained Q&As designed to address any and all questions that might come up in the quarterly conference call. At the time I was working for a small company, and the notion of having time to prepare a 40-page press release was literally laughable.
Large companies have the resources, particularly in terms of staff, to review proposed SEC rules, comment on them, anticipate the things that need to be done to implement new rules when they are adopted, and execute. That is not the norm at smaller companies, where the CFO often acts as the treasurer and the head of investor relations, and may well turn off the lights at night. There may be no in-house legal function, and if there is, the lawyer(s) in question are likely putting out fires 24/7 rather than working their way through 350-page SEC releases, much less to analyze and comment on proposed rules and take implementing actions weeks or months in advance.
As a result, many disclosure rules are really directed at large cap companies, and this can put smaller companies at a handicap by increasing outside legal expenses and other costs, as well as management time and effort. The same is true for governance, including dealing with today’s empowered investors through engagement and otherwise. When there is a limited staff that is overburdened with the critical day-to-day tasks that keep the business up and running, there is little time to plan ahead on these arguably less important tasks. And I should point out that this in no way reflects badly upon the intelligence or abilities of the people at small companies; it’s just that they are dealing in a world of limited resources, and those limited resources have to be used very carefully.
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.