Corporate Governance:
Important Trends
John M. Holcomb
Institute for Enterprise Ethics
May 14, 2015
Topics
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Ethics and Compliance
Corporate Political Activities
Shareholder Activism
Executive Succession
Cybersecurity
Reputational Risk Management
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Failures in crisis management
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BP: Wrong leader in Hayward; Lax assessment
of risk; Failure to implement message on safety;
Cozy relationship with regulator; Abuses in
victim compensation plan
News Corp: Failure of internal controls on
hacking and privacy invasion; Cozy relationship
with police and governmental elites
GM: No upward communication of bad news;
tradition of blaming others; Group think; board in
denial
Lufthansa and Germanwings Crash
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Suicidal co-pilot and tragic passenger deaths
Company was aware of co-pilot’s history of
depression and his previous treatment and leave of
absence
Lack of scrutiny in allowing him to return
Current strategy of reliance on low-cost carriers
Supervisory board of 20 members
 10 are employee representatives
 5 are women
 Robert Kimmitt is American representative
Ethics and Supply-Chain
Management
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Major problem for several companies
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Nike in southeast Asia, and Wal-Mart
Apple and Foxconn
Several companies and factory burnings in
Bangladesh
Levi Strauss and control of labor practices by
contractors in China and southeast Asia.
Rainforest Action Network partnership with
Home Depot on old growth forests
Importance of Roles of Board Compliance
and Corporate Responsibility Committees
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Taking Caremark duty seriously to monitor internal controls
Mitigating factor under Sentencing Commission guidelines
Avoiding a charge under the McNulty Memo
Complying with conditions of deferred prosecution
agreements or legal settlements
Adapting to onerous burden placed on audit committees
Realizing the limits of the 3 major committees – audit,
compensation, nominating committees
Prevention of future fraud and legal violations
Why and How to Examine Roles of Board
Compliance/Public Responsibility Committees
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Penetrating any smokescreen or sham
Going beyond the labels
Content analysis of committee charters
Length of committee charters
Frequency of committee meetings
Examining the numbers of women on board
committees
Separating the crucial from the important
Fortune 200 Non-Audit Committees with
Compliance Roles
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Company
Abbott Labs
Johnson & Johnson
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Pfizer (Ironic)
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Amgen
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AIG
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Committee
Public Policy
Regulatory, Compliance,
and Government
Affairs
Regulatory and
Compliance
Corporate
Responsibility and
Compliance
Regulatory, Compliance,
and Public Policy
Non-Traditional Board Committees
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101 of the Fortune top 200 companies have board
committees on: Public responsibility, Sustainability,
Risk management, EHS, or Regulatory compliance
and risk
Public responsibility committees have an external
focus while ethics and compliance committees have
an internal focus.
The former are important, while the latter are crucial
Best Practices: Wells Fargo has three such
committees
Whistleblower Protection
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SEC reports that all but one whistleblower filing a complaint
under Dodd-Frank law had complained internally first and
exhausted internal channels.
Payouts of $50 million so far to 15 whistleblowers
Retaliation and pretaliation (action to prevent whistleblower)
KBR case – SEC cracking down on confidentiality
agreements
Exceptions allowing corporate attorneys to blow the whistle:
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Significant harm to investor
Company has actively impeded the investigation
Internally reported and no action taken within 120 days
N.B.: May also be ethically obligated to then blow the whistle
New Rules
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Disclosure of investments in conflict minerals – Amnesty
International and Global Witness Report that 80 percent of
companies are not in compliance; high expense for limited
benefit
Rule on disclosure of pay and performance
 Comparison to peers
 Total shareholder returns, including dividends, over 5year period
 Compensation actually paid in a given year
 Pay gap rule yet to come
Impact of Citizens United decision
on Corporate Political Involvement
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Business PACs Shun Endorsement Campaigns
Reputational Damage
Shareholder Opposition
Business Shuns Independent Committees
 Morgan Stanley has refused to engage in independent
spending and relies on PAC
 GM used bailout money to fund candidates
Continued Reliance on PACs
Nonprofit Groups, Super PACs, and Wealthy Donors Benefit
over the Political Parties
Roles of the Center for Political
Accountability
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Created a model shareholder resolution
Created corporate rankings and scorecard
Basic emphasis is on disclosure – discussion
of disclosure on later slide
Highest Ranking Companies
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By all measures, IBM is the gold standard. It has a
long-standing policy prohibiting the use of
corporate money for political spending. The
company also has no PAC and received a perfect
score in a comprehensive report by the CPA
published late last year.
Still, its investors then wanted to know how much in
dues the company pays to trade associations and
“other organizations that can hide any
contributions.” And they want a comprehensive
report on lobbying activities.
Highest Ranking Companies in
Political Disclosure
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In the CPA’s latest 2014 survey report, CSX
and Noble Energy rank the highest on
political accountability and disclosure of
political activities.
Rounding out the top ten are Becton
Dickinson, Capital One, Exelon, Qualcomm,
UPS, AFLAC, and Biogen
Model Resolution of the Center for
Political Accountability
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Report soft money contributions, independent
expenditures, and payments to trade associations and
other tax exempt organizations that are used for
political purposes;
Identify the titles of the individuals involved in the
expenditure decisions;
Disclose their political spending guidelines; and
Require the board of directors to conduct oversight
of the company's political spending.
Critique of CPA Criteria
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Ignore key elements of corruption
Inclusion of items unimportant to investors
Using PAC as exclusive avenue is not even
scored
Danger in check-the-box test
CPA enjoys a monopoly on setting the
standard; comparison to governance
ratings
Key Elements of Corruption
Ignored
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Direct lobbying – ten times the amount
contributed to candidates
Contributing to political party conventions
Contributing to 501c-3 nonprofits and
foundations tied to candidates
Giving specifically to judicial elections and to
candidates for state attorney general
Bundling
New Scoring and Ranking
Results
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Questions added and method – top 2 tiers
Every company’s score is lowered
Some in upper tier move to lower tier, and
vice versa
Lots of changes in rank orders
Some make dramatic moves upward
Questions Added to List of Criteria
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Does the company have a policy restricting bundling of political
contributions by executives? Or:
Does the company disclose the money raised through bundling and then
contributed to political candidates?
6 Points
Does the company restrict and/or disclose contributions to political party
conventions? 2 points
Does the company restrict contributions to public policy think tanks or
foundations that have been established by or affiliated with political
candidates? 2 points
Does the company disclose the amount it spends on direct lobbying of
Congress or other branches of the federal government? 2 points
Does the company disclose the amount of money it spends on direct
lobbying of state legislatures and/or foreign governments? 2 points
Questions Added to List of Criteria
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Does the company disclose the amount of money it pays to law firms or
political consultants to represent its political interests in the national or
state capitols? 2 points
Does the company prohibit contributions to super PACs or c-4s? 4 points
Does the company disclose amounts spent on super PACs or c-4
Committees? 4 points
As to question 11 in the CPA list, it should not simply be a yes/no
question but should be allocated 6 points, with full credit given to those
companies that restrict political contributions through the PAC, the legally
authorized component. Companies that also ban PAC contributions
should not be given more credit for political responsibility, but should be
penalized.
Lower Scores with New Criteria
Old Scores
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90-100
80-89
70-79
60-69
0-59
A
B
C
D
F
New Scores
20
32
35
17
0
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90-100
80-89
70-79
60-69
50-59
A
B
C
D
F
0
0
20
51
33
Tier 2 to 1
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Anadarko Petroleum
Applied Materials
Reynolds American
Boston Scientific
Eli Lilly
Lockheed Martin
Tier 1 to 2
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Air Products &
Chemicals
Costco
Illinois Tool Works
Dow Chemical
eBay
CVS Caremark
Dramatic Move Upward for Some
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Pfizer
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In rank 11 by CPA score
In rank 6 by new score
Applied Materials
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In rank 17 by CPA score
In rank 12 by new score
Shareholder Activism and Proxy
Fights
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Tempur Sealy case – CEO, Chairman, and head of
governance committee all resign under investor
pressure from H Partners hedge fund (10% owner);
Four proxy advisory firms supported negative votes
DuPont/Trian case – “white hat” activist wanted seat
on the board for Peltz; ISS backed all four Trian
candidates while Glass Lewis only supported Peltz;
DuPont not a broken company; Lipton
acknowledged Peltz would bring value to the board
Reactions to Activist Shareholders
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Success rate of activists is declining
More push-back from company boards
Targets are now smaller companies of less
than $10 billion in assets
Former activists will now settle more easily
and are focusing on other issues
New players are emerging
Reactions by Opponents
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Fink of BlackRock
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Advises firms not to pander to investors and
decries short-termism
Opposes higher dividends and buybacks
Advocates shifting tax policy to favor long-term
holdings
Marty Lipton: “Activism has caused companies to cut
R.& D., capital investment and, most significantly,
employment. It forces companies to lay off employees to
meet quarterly earnings. It is a disaster for the country.”
Reputational Risk Management: Failures in
Leadership and Succession Planning
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Hewlett-Packard: multiple chapters – from
Fiorina to Hurd to Apotheker to Whitman
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Invading privacy of board members and reporters
( by board chair Patricia Dunn)
Questionable personal relationship and expense
account fraud (Hurd)
Strategic missteps (Apotheker)
Board in disarray (due to privacy scandal and
disagreements over leadership and strategy)
Failures in Leadership and
Succession Planning cont.
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Pfizer: from McKinnell to Kindler
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Preoccupation with Washington and status
(McKinnell)
CEO Compensation scandal (McKinnell)
Autocratic micro-management (Kindler)
Reliance on the misjudgments of an HR officer
(Kindler)
Cyber security and Cyber attack Risks
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Target case
 Has not yet recovered
 Board was targeted by investors
Concern over supply chain
Prevention versus detection
Private sector and public sector responsibilities
Board skill set
 Difficult to find board candidates
 Tech expertise does not necessarily coincide with
business expertise
 Committee domain – risk, audit, regulatory compliance