Nell Minow: Four issues that test board responsiveness

GMI Ratings founder Nell Minow discusses four areas she expects investors to pressure corporate boards for change through the end of this year.

What are the biggest issues that will test how responsive a board is to its shareholders? At GMI Ratings’ conference, ‘New frontiers in risk modeling: ESG and forensic accounting’, held Tuesday in New York, GMI founder Nell Minow outlined four areas where she expects investors to pressure corporate boards for change through the end of this year and into 2014.

Supply chain issues

The recent factory collapse in Bangladesh that killed more than 1,000 people has sensitized many investors to working conditions around the world. The response to the tragedy has been swift, with petitions to have retailers move their operations out of Bangladesh garnering huge support. Companies that continue to manufacture products in factories similar to the one in Bangladesh may find themselves accused of using slave labor and subject to boycotts.

‘These supply chain issues are going to be more and more important,’ says Minow. ‘Any company that is using a troubling factory [like the one in Bangladesh] is going to have massive branding issues.’

Majority vote

Minow says companies that receive shareholder proposals asking for directors to be elected by majority vote should agree right away. Under Delaware law, directors don’t need to win a majority vote to serve on the board; in fact, if they get one vote – their own vote – they can serve, even if 99 percent of the shareholders vote against them.

Directors do have a fiduciary responsibility to shareholders, however, so Minow sees allowing a director who doesn’t win a majority vote to still serve on the board as a liability risk for the company.

‘I can’t think of a worse indicator of a board that is completely unresponsive to shareholders than keeping someone on the board who did not win a majority vote,’ she says. ‘I am strongly in favor of shareholder proposals requiring that directors get a majority vote in order to be able to serve.’

Political spending

Minow says ‘it is disgraceful’ for companies not to disclose their political spending, including campaign contributions and lobbying. She says investors are very interested in this information, as evidenced by the reaction Target received in 2010 when it contributed to Republican Tom Emmer’s gubernatorial campaign only to find out that he was extremely anti-gay, which went against Target’s specific decision to brand itself as a gay-friendly company.

‘Target got itself in a world of pain [with] picketers and boycotts and other kinds of misery behind that decision,’ Minow recalls. ‘It is tremendously important that we get more transparency around the issue of political spending.’

Executive compensation

As most things come down to money, it’s no surprise that executive compensation remains a hot-button issue for investors. In Minow’s view, ‘[executive compensation] should tell you something about the company’s priorities and its prospects.’

If the board is willing to allow executives to walk away with outsized compensation without leaving the company positioned for long-term growth, the company will falter. Shareholders are paying more attention to compensation, Minow says, as evidenced by their vote against Citigroup CEO Vikram Pandit’s compensation package in 2012.

Boards should understand that if they see shareholder proposals involving these issues, they would be well advised to try to reach a compromise with shareholders quickly. These issues aren’t likely to go away any time soon, and trends suggest investors are increasingly willing to support shareholder proposals on such matters when they come up for a vote.

 

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