On Your Behalf - April Report

The Importance of Good Corporate Governance 

Not every shareholder is aware, or concerned, how companies are governed, but a growing number of socially responsible investors have made corporate governance one of the top issues of the 2007 proxy voting season. 

In theory, duly elected company boards of directors provide essential oversight, making sure executives manage companies profitably, efficiently and ethically. If financial performance suffers, shareholders expect these elected directors to intervene and get company management back on track. After all, directors should be in the best position to monitor the actions of the company’s executives…or are they?

A number of recent corporate governance failures (Enron, WorldCom, Adelphia Communications, Tyco International and Qwest Communications to mention a few) suggest that some directors are not providing the objective and independent oversight that shareholders expect of them. Can failures in corporate governance be prevented by a more vigilant and independent board of directors? Many investors increasingly are answering “yes.”

What is “Good” Corporate Governance?

Corporate governance is a wide-ranging concept focusing on the intricate relationships among company management, shareholders, government and other stakeholders. Some of these relationships are the result of state and federal legislation. Others vary from company to company and from place to place. Certain standards or “best practices,” however, have emerged that reflect shareholder concern for the important role the board of directors plays in providing oversight to company management and company operations. Some of these standards include:

• Board composition—A majority of board members should be independent – in other words, not employed by or having a business relationship with the company. In addition, the chairperson of the board should not be the chief executive officer of the company and directors should reflect ethnic, racial and gender diversity.
• Board structure—Every board should have audit, compensation and nominating committees and all members of these committees should be independent (not employed by or having a business relationship with the company.)
• Board elections—Directors should be elected annually by majority vote.
• Board attendance—Directors should attend, at a minimum, 75% of all board meetings.
• Compensation—Executive pay packages should be tied to company financial performance.

These standards for for-profit corporations are widely accepted throughout the investing community and are in harmony with more formal efforts to provide a consistent and internationally recognized framework for corporate governance such as the OECD Principles of Corporate Governance. First released in 1999 by the Organisation for Economic Co-Operation and Development and revised in 2003, the Principles recognize that “the presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy.” A copy of the Principles is available here.

Government Efforts to Ensure Greater Accountability

The Principles are advisory but bear witness to the fact that standards of corporate governance are becoming more regulated throughout the business world. Following the spectacular corporate failures of Enron and WorldCom, Congress passed the Sarbanes-Oxley Act in 2002. This wide-ranging legislation tightens auditing procedures at public companies and expands reporting and certification requirements. It sets new standards for board independence, company accounting and public disclosure.

In 2006, the Securities and Exchange Commission adopted new regulations concerning the disclosure of executive pay. The goal of the new regulations is “to provide investors with a clearer and more complete picture of compensation to principal executive officers, principal financial officers, the other highest paid executive officers and directors.”

Stock exchanges such as the New York Stock Exchange and the National Association of Securities Dealers (NASDAQ) also have adopted corporate governance standards to which corporations wishing to be traded on these exchanges must adhere.

As with other socially responsible investing concerns, good corporate governance practices have been linked to better financial performance. A 2004 study commissioned by the Institutional Shareholders Service (ISS) found that “better-governed firms are relatively more profitable, more valuable, and pay out more cash to their shareholders.” (Corporate Governance and Firm Performance is available here.)

The General Board Works for Better Corporate Governance

The General Board’s interest in good corporate governance is more than just fiduciary. The Social Principles recognize that “corporations are responsible not only to their stockholders, but also to other stakeholders: their workers, suppliers, vendors, customers, the communities in which they do business, and for the earth, which supports them. We support the public’s right to know what impact corporations have in these various arenas…” (¶163I, The Book of Discipline 2004.) Church values teach us that accountability and responsibility are at the heart of good corporate governance.

Like other concerned investors, the General Board uses its voice as a shareholder to advocate for good corporate governance in publicly-traded companies. We send letters, file shareholder resolutions and take part in company dialogues. Currently, we have filed resolutions on corporate governance issues with the following companies:

• Activision—At the September 2006 annual meeting, our resolution seeking greater inclusiveness on the board of directors received more than 16% of the shareholder vote. During subsequent discussion, the company agreed to consult with us on board composition changes.
• General Motors—The General Board co-filed a 2007 resolution calling for greater disclosure of political contributions. During recent discussions, the company shared a draft policy statement for review.
• Monsanto—At the 2007 annual meeting, our resolution calling for the separation of the position of chairperson of the board and chief executive officer received nearly 14% of the shareholder vote.
• Six Flags—The General Board filed a resolution on company diversity for consideration at the 2007 annual meeting.
• TXU—The General Board filed a resolution calling for greater disclosure of political contributions for consideration at the 2007 annual meeting.

Other faith-based investors also are deeply committed to good corporate governance. Members of the Interfaith Center on Corporate Responsibility (ICCR), of which the General Board is a member, have filed resolutions or are in discussions with nearly 70 companies on corporate governance issues this year, focusing on executive compensation, board independence, diversity and transparency.

Good corporate governance is every shareholder’s—and stakeholder’s—concern. The health of our economy depends on it. Please join us and other socially responsible investors in making good corporate governance a priority in 2007. Make sure to cast your proxies in favor of resolutions calling for better corporate governance.