Last August General Electric, stung by criticism of its financial disclosure, undertook a three-month board review of its corporate governance practices. Good timing. The study came on the heels of the Sarbanes-Oxley Act and new governance rules proposed by the NYSE and Nasdaq.
The result of GE’s efforts, which CEO Jeff Immelt announced in a November press release, are significant in terms of structural changes such as board composition. Equally notable, however, is how the company set about making its new corporate governance practices transparent to the public.
According to Toronto IR consulting firm Blunn & Co, 84 percent of companies, including foreign issuers, did not have corporate governance sections on their web sites at the time GE launched its study last year. And only 14 percent then published their corporate governance policies prominently. That number has surely increased since, with GE only the most visible example of the trend.
GE has created a dedicated corporate governance web site, which incorporates key details as directed by the NYSE’s new listing requirements for corporate governance disclosure. According to the new standards, a listed company must disclose on its web site its corporate governance guidelines, the charters of its most important committees (including at least the audit, compensation and nominating committees), and the company’s code of business conduct and ethics. In addition, the annual report must mention that this information is available on the company’s web site or in print format, if requested.
While the NYSE’s requirements are still awaiting SEC approval, no hitches are expected. In the meantime, companies are realizing that it’s better to take action now rather than stand out as laggards at a time when disclosure is receiving front-page attention. GE for its part has caught up with what a very small number of companies have been doing for years.
‘I’ve been here 23 years, and the high visibility of corporate governance at the company precedes me,’ says Kris Wenker, vice president of investor relations at General Mills in Minneapolis. ‘There’s been detailed information in our proxy, including the composition of our board in terms of independence, committee information, and an outline of our fundamental corporate governance philosophy, for more than five years. A couple of years ago, we started pulling all of that information together under a special section for corporate governance in the proxy.’
General Mills’ corporate governance has served it well, earning it a high score from GovernanceMetrics International, one of a new breed of firms offering corporate governance ratings (see Ratings Game, February 2003). But firms like GMI don’t necessarily grade companies on how they present their information to investors, which means a company with a high score might not even have any information about corporate governance on its web site.
‘We measure companies based on their policies, practices, procedures and records,’ explains Gavin Anderson, CEO of GMI. ‘We look for public disclosure, and it doesn’t have to be on a web site. But putting it there makes it easier for the average investor. Then investors don’t have to go through the annual reports and proxy.’
General Mills, for example, provides access to its proxy and the related corporate governance disclosure via links on its investor relations web page. ‘We proactively take you to those disclosures,’ explains Wenker. ‘We also mail the proxy and annual report together so they reach investors at the same time. The letter in this year’s annual, which was written in August 2002, overtly points investors to the proxy and to the corporate governance information. So we’re leveraging our communications more directly.’
Web disclosure
The corporate web site is the tool of choice for companies trying to reach a wide audience quickly and cheaply. MBIA, an Armonk, New York financial services firm, displays its corporate governance information front and center under an ‘inside MBIA’ tab on its home page. The company provides links to corporate governance practices, committee charters and MBIA’s standard of conduct. And no wonder MBIA is showing off. It was the only ‘financial guarantor’ to rate amongst the top five for corporate governance practices in both GovernanceMetrics’ scores and Institutional Shareholder Services’ Corporate Governance Quotient (CGQ).
‘We’ve had our corporate governance principles on the web site for many years,’ says Ethel Geisinger, government relations officer at MBIA. ‘Once the NYSE issued its revised listing standards in August 2002, we adjusted our principles, standard of conduct and committee charters to reflect the changes. We also looked at our annual report and included more information on the company’s board of directors from our proxy so it’s readily accessible for investors.’
Geisinger is responsible for the company’s corporate governance disclosure. She is now planning disclosure enhancements including providing the corporate governance links from the IR section of the web site. She will also list the committees for each director on the web site as part of her overall plan to expand what investors can find online.
Global standards
Without the stinging aftermath from US corporate scandals, many of the current reforms would not have happened, including more disclosure and transparency. Elsewhere, the shift toward greater disclosure of corporate governance is happening with less fanfare.
In the UK, the Financial Reporting Council undertook two reports: the Higgs report on non-executive directors and the Smith report on audit committees. Both were published in January 2003 and may be adopted by the summer, though the Higgs proposals are meeting fierce opposition. The aims of the reports’ proposals are to improve corporate governance by enhancing the role and effectiveness of the non-executive director and to switch the audit relationship from executive directors to an independent audit committee.
‘Although the spectacles of WorldCom and Enron didn’t occur here, we did decide to review our regulations and practices with the Higgs and Smith reports,’ says Sir Bryan Nicholson, chairman of the Financial Reporting Council, which recently got bumped up in importance by the UK trade secretary. It now has under its umbrella five other bodies – the Auditing Practices Board, the Accounting Standards Board, the Financial Reporting and Review Panel, the Investigation and Discipline Board and the Professional Oversight Board. ‘I have a general responsibility for corporate governance at the national level,’ says Nicholson.
As Nicholson explains, the difference between the US and the European approach to reform is one of rules-based reform versus a principle-based approach. In the UK, for example, the Combined Code provides a set of ‘voluntary’ guidelines on corporate governance issues. Unlike the US rules, companies can choose whether to follow the guidelines or not.
‘We have specific requirements for all listed companies; it’s not a law, but if you don’t comply, you must explain why you haven’t,’ explains Nicholson. ‘From the shareholders’ point of view, it’s transparent as to why a company hasn’t met the requirements and they can draw their own conclusions about the company’s policies. All of this information is disclosed in the company’s report and accounts, because in the report and accounts, if you don’t comply, you must explain.’
In addition to his duties as a regulator, Nicholson is chairman of Cookson Group, and its finance and nominations committees. While some European companies, from France Telecom to British Airways, have specific corporate governance links on their web sites, Cookson does not, although it does have a ‘corporate responsibility’ section with its code of conduct. The company’s annual and interim reports are posted front and center on its home page and, like MBIA, Cookson’s corporate governance practices, including detailed information on directors’ independence, are detailed within the reports.
Rebuilding reputations
For many US companies, improving their credibility with investors is a matter of survival in the currently dismal stock markets and in light of the recent scandals that have tainted many a former blue-chip reputation. Meeting the NYSE listing requirements is a must, but companies whose practices were lagging in the past have had to go further in their disclosure than companies like General Mills, MBIA and Cookson.
Computer Associates, for example, has suffered from a terrible perception problem when it comes to accounting practices and overall disclosure. Like GE, the company has launched its own campaign, including an entire corporate governance web page, to improve its corporate governance transparency.
‘Computer Associates is trying to build a more positive image, so we’re being more aggressive with disclosure,’ says Jay Lorsch, a Computer Associates director and the faculty chairman of the Harvard Business School’s Global Corporate Governance Initiative. ‘Such information should really be on the web sites of all companies. I think everyone has made mistakes – CEOs, accountants, everyone. But the consequence is investors have lost confidence. At Computer Associates, we’re trying to do everything we can to show the competence of the board. But for us, as with any company, it’s not just writing the principles, it’s living up to them.’
Given that most companies are only now considering posting corporate governance information on the web, it’s unclear which is the best model to follow. Should companies aim to create GE-style ‘mega’ corporate governance sites, or is the leaner model of an MBIA or General Mills more appropriate? Lou Thompson, president and CEO of Niri, suggests that more may not necessarily mean better. ‘What companies should strive for is clarity in providing the disclosure,’ he says.
The flip side, as many in the governance world are quick to point out, is the reaction of investors. Will the disclosures prod them to pay more attention to corporate governance? Or will the information be ignored?
‘The sad thing about this, in my opinion, is that in the US and the UK, investors remain surprisingly passive,’ laments Nicholson. ‘I’m really talking about the large institutional investors. Although there has been a great deal of information provided to them, and the investor response hasn’t been negative, activism remains low.’
As for investors who do have a tradition of activism – still only a small slice of the institutional pie – the mood is one of cautious encouragement. ‘We do look at governance,’ confirms Colin Melvin, director of corporate governance at Hermes Pensions Management in London. ‘In Japan and Spain, for example, some of the disclosure is poor. In Spain, the annual report isn’t disseminated until you get to the meeting. In the UK, some of the disclosure is boiler-plate, including disclosure of board composition. I think things are improving generally, but there’s a long way to go in terms of providing relevant information to investors.’
Disclosure collaboration
At many companies, just who is responsible for corporate governance disclosure remains undefined. Tom Gibbons, vice president of IR at World Wrestling Entertainment, is in the process of redesigning his company’s corporate web site. Indeed the IR department is leading the whole effort.
‘Our goal is to increase the functionality of our web site for analysts and investors and to broaden the content that we currently have on the site,’ Gibbons explains. ‘As part of this undertaking, we plan to include a corporate governance section. We are currently working with our in-house counsel to determine what we will present in this section.’
In most cases, however, corporate governance issues including disclosure tend to fall to the corporate secretary or a professional in the corporate secretary’s office, who then works with other departments. At MBIA and General Mills, the disclosure of corporate governance practices falls to the corporate secretary’s office, which in turn works with investor relations to implement that disclosure.
‘At General Mills, investor relations, corporate communications and the corporate secretary work together in a matrix fashion on a regular basis, talking about how to improve the visibility of key drivers of our shareholder value creation, and one of those is corporate governance,’ explains IR head Kris Wenker. ‘I may have key message points, and the corporate secretary may have a perspective on how we want to clarify our board annual election process, for example, but we all come together to leverage one another’s messaging for all of our audiences.’
