Monthly Archives: September 2010

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NYSE Commission: Boards’ Focus Should be Long-term

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Following the financial crisis, the New York Stock Exchange’s Commission on Corporate Governance has found that corporate boards should focus more on long-term growth, instead of short-term gains.

The year-long examination also found that managers should be more involved in corporate governance and boards should not rely too heavily on legislation and agency rule-making in establishing corporate governance strategies.

“We think this is really important today because, more than ever before, boards are confronted with pressure to act to increase shareholder prices in the short-term — including facing pressure to take actions that may lead to a short-term increase in shareholder value at the expense of long-term, sustainable growth.”

The panel, chaired by Larry Sonsini, chairman of law firm Wilson Sonsini Goodrich & Rosati, recommended the following 10 core principles to improve corporate governance and the proxy voting process:

  1. The board’s fundamental objective should be to build long­-term sustainable growth in shareholder value for the corporation, and the board is accountable to shareholders for its performance in achieving this objective.
  2. While the board’s responsibility for corporate governance has long been established, the critical role of management in establishing proper corporate governance has not been sufficiently recognized. The Commission believes that a key aspect of successful governance depends upon successful management of the company, as management has primary responsibility for creating an environment in which a culture of performance with integrity can flourish.
  3. Shareholders have the right, a responsibility and a long-­term economic interest to vote their shares in a thoughtful manner, in recognition of the fact that voting decisions influence director behavior, corporate governance and conduct, and that voting decisions are one of the primary means of communicating with companies on issues of concern.
  4. Good corporate governance should be integrated with the company’s business strategy and objectives and should not be viewed simply as a compliance obligation separate from the company’s long-­term business prospects.
  5. Legislation and agency rule­-making are important to establish the basic tenets of corporate governance and ensure the efficiency of our markets. Beyond these fundamental principles, however, the Commission has a preference for market­-based governance solutions whenever possible.
  6. Good corporate governance includes transparency for corporations and investors, sound disclosure policies and communication beyond disclosure through dialogue and engagement as necessary and appropriate.
  7. While independence and objectivity are necessary attributes of board members, companies must also strike the right balance between the appointment of independent and non­independent directors to ensure that there is an appropriate range and mix of expertise, diversity and knowledge on the board.
  8. The Commission recognizes the influence that proxy advisory firms have on the market, and believes that such firms should be held to appropriate standards of transparency and accountability. The Commission commends the SEC for its issuance of the Concept Release on the U.S. Proxy System, which includes inviting comments on how such firms should be regulated.
  9. The SEC should work with the NYSE and other exchanges to ease the burden of proxy voting and communication while encouraging greater participation by individual investors in the proxy voting process.
  10. The SEC and/or the NYSE should consider a wide range of views to determine the impact of major corporate governance reforms on corporate performance over the last decade. The SEC and/or the NYSE should also periodically assess the impact of major corporate governance reforms on the promotion of sustainable, long-­term corporate growth and sustained profitability.

Sonsini stressed that the commission can only recommend these principles. The success of them depends on a company’s willingness to implement and maintain such initiatives.

The Risks of Social Media: Decreased Worker Productivity

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To me, the biggest concerns companies should have about social media revolve around reputation damage, legal liability and workplace issues (cyber-stalking, sexual harassment, etc.). These are the issues that can hurt the most, with some other things to watch for being improper disclosure of confidential/financial information, data breaches, viruses/malware and any other general network security concerns.

We have been covering such concerns throughout the year in our Risks of Social Media series (something we will be bringing to print in Risk Management magazine in our October issue. Look for that next week. And see the pretty cover our designer created for the story here.)

Another issue that comes up constantly whenever I discuss social media risks with executives is decreased worker productivity.

To many, this seems to be the largest drawback to social media. In their eyes, workers who previously toiled away for the duration of their eight-hour shift are now so enthralled by Facebook and Twitter that they simply cannot help but peruse the sites constantly throughout the day. While they are doing that, of course, they aren’t getting any work done. Less work equals less production, which equals lower profits.

The way they see it, that is the grand downside of Facebook: it compels people to not work while they are at work.

The way I see it … that’s a crock.

Sure. It happens. Some people do spend a lot of time on social networks. They chat with friends, they look at family vacation photos and play Farmville. They waste a lot of time.

But this is really nothing new.

The internet is full of distractions, and if someone doesn’t want to work, they will find a way to not work. Facebook and Twitter did not create a new wave of malaise and boredom among those with dull jobs. People trapped in boring jobs — or just poor workers employed in good jobs — have been finding ways to be unproductive at work since well before the internet was even used at most companies.

Cigarette breaks and the water cooler have existed for a long time. Watch Mad Men and you will see how even the high-powered execs of the 1950s and 60s wasted time boozing and socializing at the office. The Super Bowl, March Madness, fantasy football, Survivor, American Idol, the Oscars and a seemingly limitless amount of other distractions may take up a substantial part of any given employee’s attention while at work.

Or take this fictional exchange between “efficiency expert” Bob Porter and data processor Peter Gibbons in Office Space, a cinematic lampoon of the modern workplace:

Bob Porter: We’re trying to get a feel for how people spend their day at work … So, if you would, would you walk us through a typical day, for you?

Peter Gibbons: Yeah. I generally come in at least fifteen minutes late, ah, I use the side door – that way Lumbergh can’t see me, heh heh – and, uh, after that I just sorta space out for about an hour.

Bob Porter: Da-uh? Space out?

Peter Gibbons: Yeah, I just stare at my desk; but it looks like I’m working. I do that for probably another hour after lunch, too. I’d say in a given week I probably only do about fifteen minutes of real, actual work.

The point here is that if your workers don’t like their jobs, they can find many ways to not get any work done. And if they do like there jobs, the allure of Facebook — despite all the buzz you hear about its unprecedented ability to connect millions — is not nearly great enough to force quality employees to ignore their responsibilities.

Facebook Productivity

(The comical part about this whole post is that I myself was on Facebook prior to writing it — and then Facebook had a major, extended service interruption, which prompted me to actually do some work and write down my thoughts on the matter after seeing the satirical tweet above from @OPB. Yes, I’m a hypocrite. I know.)

This isn’t to say that companies should not explain to employees in a social media policy that they are not to waste time on Facebook all day. They should do exactly that.

But it’s not some new-age problem. Workers should not be wasting time doing anything. That’s the message. Rolling out some draconian policy that applies to the employee’s social media usage, however, is more likely to be alienating and de-motivational than it is to make employees want to do more work. At least that’s how I see it.

Besides, most people today who use Facebook and Twitter extensively can do it on their smartphone anyway. So if you implement controls on their desktop computer, they can just sit in their cubical and twiddle away on their iPhones and Blackberrys. Or, ya know, just sorta space out for about an hour after lunch.

For more on the topic, Gini Dietrich of the excellent blog Spin Sucks seems to share my view, calling worker productivity a “management issue” not a social media issue.

Does Obama’s 3rd Year Mean Lower D&O Prices?

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Yesterday, Aon released its quarterly D&O pricing index, finding that the average price for $1 million in coverage limits increased 4.9% from the first quarter of 2010 and, more importantly, that D&O pricing decreased 16.4% in the second quarter as compared with the same quarter in 2009. According to the report, this is the largest decrease since the fourth quarter of 2007 and the second consecutive double-digit decrease.

As for D&O securities class action claims activity, Aon found that, for the second quarter of 2010, the average D&O securities class action settlement was $39.87 million (excluding settlements of $1 billion or greater). This is an increase of almost 28% from the preceding three-year average settlement value of $31.18 million.

The report makes an interesting point in terms of mitigating factors for D&O pricing.

We all know that D&O pricing and the stock market are inversely correlated. Meaning, when the stock market goes up, securities class action litigation tends to decrease, and D&O prices go down.

But have you heard of the presidential election year cycle and its effect on the stock market (and thus, D&O pricing)?

The report cites Mark Hulbert, founder of the Hulbert Financial Digest, as saying that, on average, the third year of a presidency is the most bullish of a president’s term. Hulbert researched yearly returns for the Dow back to 1896 (the year the Dow Jones Industrial Average for founded).

Here’s a snapshot of his findings:

Screen shot 2010-09-23 at 1.21.16 PM
Clearly, there is a big spike in the third year versus the others. If this theory holds true, then there may very well be continued downward pressure on D&O rates for at least the next 12 to 24 months, the report states.

In addition, Aon’s D&O Peer Benchmarking report, which was conducted jointly with NASDAQ, outlined six best practices for organizations to follow when looking to purchase or analyze their coverage:

  1. Examine the D&O policy to determine corporate executive indemnification provisions
  2. Question any generic worldwide coverage language in the D&O policy; it may be inadequate
  3. Recognize what triggers a claim under the D&O policy
  4. Scrutinize the limits of the excess policies
  5. Understand how coverage under the D&O policy is affected by the wrongful acts of others
  6. Know how the organization and the directors and officers are protected during a financial crisis

All in all, the information in the report bodes well for buyers of D&O insurance through the remainder of 2010, as the current soft cycle for D&O underwriting is expected to continue.

Nike Has Bedbugs — And Is Telling Everyone About It

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The above video features an AP news report about how the Niketown store in chic SoHo New York has become infested with bedbugs. Just like a lot of other places in New York. But rather than try to duck the issue, the store let everyone exactly why it is closed, simply by posting a note on the door.

The note reads as follows: “Nike has proactively closed 21 Mercer because of a discovery of bedbugs at the store. Our primary concern is the well being of our consumers and sales associates. We are taking all proper steps to eradicate the problem and we expect the store to reopen shortly. We apologize for any inconvenience and for more information please call 1-888-224-6453.”

According to New York magazine’s Amy Odell, this openness stands in stark contrast to the way other retailers have handled the same issue.

Now this is the proper, good way to handle a bedbug attack on a retail establishment. Unlike Abercrombie and Hollister, who never used signage to inform shoppers of their bedbug problems, and just thrust the half-naked people back into the doorway as soon as they could as though to flaunt their bite-free flesh. Of course Nike’s sign still fails to answer the Big Questions here, such as where their bugs came from. If the vermin are holding court in a Nike warehouse somewhere, that would be a terrifying prospect.

Good on, Nike. But … hmmm … terrifying indeed.

I am actually currently in the market for a new pair of basketball sneakers, too. Maybe I’ll wait another month — just in case it was the source of bedbugs that Mars Blackmon was talking about when he told Michael Jordan that “it’s GOTTA be the shoes.”

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