The CMC-ON-GTA Chapter recently hosted a session on advising corporate investors on governance in their investee companies. These investors are becoming more vocal and active in terms of the expectations of governance. The old model of “if you’re not happy with the company’s governance – sell” has been replaced by “if you’re not happy with the company’s governance – change it!”
Below you can read some key highlights that I took from the discussion, which included Bryan Pilsworth (President, Foyston, Gordon & Payne Inc – one of Canada’s largest investment funds) and Catherine Jackson, formerly of Ontario Teachers’ Pension Plan and PGGM in the Netherlands (206 billion Euros of assets). These are my own learnings and not intended to reflect Catherine or Bryan’s perspective.
Key Takeways - How to Advise Corporate Investors on Governance
1. The scope of corporate investors and investee companies is very broad.
a) There are many different types of corporate investors.
b) There are many different types of investee companies.
c) There is variation by geography and legal domicile.
2. The focus of this discussion was on institutional investors (investment funds, pension funds) investing in public companies.
3. Governance is driven by the stakeholders, which vary by country.
a) In the US, investee companies are driven by shareholders, with many activist shareholders.
b) In Europe, there are more stakeholders in governance, thus far fewer activist shareholders.
4. Corporate investors focus on people: who is are on the board (what are the right and wrong types of people), who is the CEO.
a) What are the actions, behaviours and words of the individuals?
b) Corporate investors put less focus on written governance policies and processes e.g. some of the worst governance is carried by companies with the best governance policies.
c) This struck me as a core difference with much of the governance points of view advocated by lawyers, consultants etc. which is to have the right written processes and policies. I call this the “McDonalds Governance Model” i.e. good governance results when anyone(of any skills, character and experience) follows the process
5. Pensions funds, sovereign wealth funds etc. are actively pushing environmental and social governance. Why? They have 50 year time horizons. If global warming destroys both the global economy and population, it’s hard to have good investment returns.
a) These funds have well over $10 trillion of investments, totalling major holdings in almost all publicly listed companies around the world.
6. Investment funds with 10 year horizons focus on how the board manages CEO transitions. In 10 years there are often 1,2 or 3 CEO transitions. How these transitions are handled can have a major impact on company performance, company value and company stock price.
7. Private equity funds are focused on a 5 year exit.
a) Their primary focus is on driving grow in free cash flow to maximize exit value.
8. There was lots of discussion around executive compensation.
a) Executive compensation plans are too complex. They should be simple e.g. for large financial services firms, growth in book value.
b) The focus should be on what the executives can control i.e. do NOT consider stock prices.
c) Often executives are paid too much and feel “entitled” to yearly bonuses, regardless of company profits.
d) Too many Boards have given up control of executive compensation to external consultants.
9. When poor governance results in low stock price, this can be an opportunity to buy the stock.
10. Dual class shares can be OK for the founder(s) but they should expire upon the founder leaving the company. Dual class shares should not be passed onto the children – who knows if they are the right people to control a public company.
11. Diversity is important – to utilize all the knowledge, skills, experience and perspectives from everyone. But the needle is barely moving on public companies. There was some discussion that the needle is moving on crown corporations, non-profits etc.
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Thank you to all those who attended this event. Learn more / Register for the next Governance session on How Management and Boards should prepare and respond to cybersecurity threats.
