A high powered investor group led by Warren Buffett and Jamie Dimon revealed their recommendations for improving corporate governance last week. The announcement was flawless – a show to rival any Broadway opening – but the dazzling cast couldn’t make up for a weak report.
But while their show closed early, the authors’ clout is undiminished – and that could bring real governance reform.
The release of the report (“Commonsense Principles of Corporate Governance”) was a great opening performance with an all-star lineup of top finance executives. It followed a tried-and-true communication checklist: Embargoed distribution to the press? Check. All-purpose frontman Warren Buffett on call for television interviews? Check. A spiffy website and links to media coverage? Check and check.
But skillful communications couldn’t make up for the report’s weaknesses. Aside from calling for majority election of directors and an end to dual-class share structures, the committee’s recommendations were little more than hopeful appeals and a timid mush of warmed-over ideas from past governance reform efforts.
Ending the practice of earnings guidance – a recommendation that led many news reports – is hardly a new idea. Mr. Buffett has railed against the practice for years, once famously saying that a company ‘focused on making the numbers will be tempted to make up the numbers.’ (Its persistence in the face of such opposition says something about its usefulness to investors, but that’s a topic for another time.)
Coaxing, cajoling and appeals to common sense are vintage Buffett. He’s long been a proponent of gently persuading boards to do the right thing rather than aggressively wielding his voting clout or mounting activist campaigns. (Playing nice has been a big part of Mr. Buffett’s success, too. It’s one way he gets a first look when a company wants to find a friendly buyer.)
But does the Buffett approach benefit shareholders? Not always. It didn’t stop The Coca-Cola Company from proposing an excessive executive pay plan in 2014. Coke CEO Muhtar Kent put the plan on the proxy ballot for a shareholder vote even after Mr. Buffett told him privately that it was too dilutive. It was only when another Coke shareholder – David Winters of Wintergreen Advisers – brought public attention to the plan’s flaws that Coke decided to modify it. (Disclosure: I was an advisor to Wintergreen at that time.)
The Buffett-Dimon committee’s call for ending the use of non-GAAP reporting isn’t new either, and in fact there has been some progress in this area. Companies have been recording stock-based compensation as an expense for about ten years now, one lesson from the technology crash early in the new century.
The group waffled on tough issues. On separating the chairman and CEO roles, they leave it to the board’s independent directors to determine if such an arrangement is appropriate. That conclusion surely comforted Mr. Dimon, who has faced criticism for holding both titles at a time when many investors and governance advocates are demanding they be separated.
The panel also failed to endorse meaningful proxy access for investors, which prompted a terse response from the Council of Institutional Investors.
Many of the recommendations are merely platitudes (“Transparency around quarterly financial results is important.”). Others are vague (“Boards should have a robust process to evaluate themselves on a regular basis…”) or head-smackingly obvious (“Companies should explain when and why they are undertaking material mergers or acquisitions or major capital commitments.“). In all, the proposals are too bland to elicit more than a shrug.
Perhaps the toughest guidance the panel made concerned the role of asset managers in proxy voting, urging them to exercise independent judgment and not blindly rely on the recommendation of proxy advisory firms.
But here too the group could have gone farther. How about a requirement that asset managers prepare an annual disclosure of their proxy voting record, including its votes against management? Each fund – and a large asset manager has hundreds of them – now discloses its votes to the SEC, but the firm’s aggregate data are not available to the public. By one estimate, Blackrock, one of the largest asset managers, voted against management proposals on executive pay less than four percent of the time.
Maybe the biggest accomplishment by the communication team was ensuring the report would disappear quickly, since it was timed for release just as things were getting hot at the Republican National Convention. Indeed, after a day or two, the press coverage subsided.
But that also means the report is unlikely to spark the dialogue its authors want.
Meeting in secret wasn’t the best way to conduct a campaign for good governance and improved transparency in corporate America, either. It would have been far more interesting (but a lot more work) for the group to go on, say, a listening tour to hear directly from investors, workers, pension fund officials, corporate managers others. They all have a lot to say about corporate governance. Such an event also would have made it impossible for the group to be described as a secret cabal – the most damaging criticism seen in press coverage.
Jamie Dimon, Warren Buffet and the other investors do not need to meet in secret or take a year to write a bland treatise if they really want better governance. All they need to do is start casting their votes.
For guidance Mr. Dimon need only have looked to his own firm’s history. When J. Pierpont Morgan was concerned about his rights as a shareholder, he didn’t wring his hands or write a report. He took swift action.
A similar approach today might be as successful as the biggest Broadway hit.