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A vision of value-based governance.

A Vision of Value-Based Governance

Lots of us should be ashamed of ourselves. Through one of the biggest merger waves in history, we've managed to do two things simultaneously: pay huge amounts of "protection money" to takeover defense advisers while getting taken over in unprecedented volume. Even as the takeover era wanes, over 600 companies still pay up to $150,000 a year for so-called "stock watch" services - the Maginot Line of modern corporate life.

Ahead of us, fueled by still-rising institutional ownership of corporate stock and investor activism, appears an ear of bitter investor-management dissension. Investor Access Corp.'s annual tracking of governance shareholder proposals suggests that the number of such proposals may approach 500 in the 1991 proxy season. Many of them will be hotly contested.

It need not be so. Indeed, corporate management and institutional investors are natural allies on our most pressing economic issues. The competitiveness of U.S. industry in increasingly global markets begs that we harmonize this relationship.

To do so, we must express a holistic vision of the public company - one ordered by values that both "clear" the potential conflict on issues as wide-ranging as greenmail, South Africa, the Valdez Principles, and the secret ballot, and also encourage collaboration between the two groups.

We have a remedy. This vision has been staring us in the face for a decade. It can be implemented easily. And, I firmly believe, it is that rare thing in organizational life - a solution that will draw favor to pathfinding early adopters even though it challenges the status quo.

What have events of the last 10 years taught us? The golden rule - he who has the gold rules. Restated: Shareholders come first, other capital contributors thereafter, and other constituencies in the order that they contribute to the long-term profitability of the business. Public companies aren't in business to reward creditors, inspire the devotion of their employees, win the favor of the communities in which they operate, or have the best plants or products. These are all means to an end - making shareholders richer. Putting wealth creation first doesn't eliminate these concerns; it simply orders values in a way that eases corporate conduct.

Executive pay and incredulity

Take executive pay, as an example. Every year the media scan proxy statements and list those CEOs with the highest compensation. This typically inspires incredulity on the part of the public. But, one might argue, the issue isn't the level of executive compensation but the mechanism by which it is sometimes awarded - on bases bearing no relation to shareholder return.

Let's call our proposed remedy "value-based governance." It is grounded in basics, like the shareholder's freedom to vote by secret ballot - a right we enjoy as citizens, but one sometimes denied us as investors. It includes the right to seek board representation on the same basis as incumbents, and a host of other things.

The process of uniting managers and investors starts by acknowledging that they want the same thing - performance - and the logic of their alliance, for both together comprise the marrow of our free market system.

What is needed to spark this predestined affinity are accountability and communications and, to ensure both, a mediator - the independent board. For that board we offer three actionable items. * First, every board should establish a shareholder value committee. Its duties? To review the corporation's performance by the standard of shareholder return - absolute return, return relative to peers and to the objectives established in the (value-based) strategic plan. The committee's brief should specifically include the structure of the compensation mechanism, the proxy process, shareholder proposals, and investor relations appraisal. * The second is an annual governance review, previewed first by the board of directors, as year-end financials are reviewed by the audit committee before their inclusion in the annual report. This review would compare the company's business and stock price performance to that of similar companies. Any disparities would be explained in terms of operating strategies, financial policies and structure, and investor regard. * Third, compensation would be value-based, i.e., a material part of management and board return would be based on shareholders' return.

Reviewed in annual report

Finally, this process should be fully communicated. The approach we favor is a new section in the annual report that synopsizes the governance review mentioned earlier.

Corporate managements and institutional investors share many of the same values and perspectives; both occupy privileged economic ground. Harmony between them is vital to our success. We can encourage a shared vision of corporate conduct with a few simple steps, like those outlined above, that promise good things for the U.S. economy. Rather than contending with each other, let us invest our energy in building value.

Michael Seely is President of New York-based Investor Access Corp., which pioneered the value-based approach to financial communications. A director of various companies and frequent speaker, Seely edited two reference works, Corporate Restructuring and Maximizing Shareholder Value. He has counseled scores of CEOs on value creation and investor relations.
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Title Annotation:Chairman's Agenda: Balancing Shareholder Interests
Author:Seely, Michael
Publication:Directors & Boards
Date:Mar 22, 1991
Previous Article:Take the high ground on director selection.
Next Article:Crafting a shareholder voting rights policy.

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