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You may have seen the headlines last week. CalPers, one
of the nation’s largest institutional investors, is
becoming more actively involved in corporate governance
issues. Companies’ boards of directors, always the point
of balance between management and investors, are coming
under intense scrutiny and pressure.
The $167 billion pension fund said that it would oppose
the election of directors at nine companies. It has
vowed to oppose decisions by companies to permit
auditors to perform consulting services and approve
executive compensation not linked to performance. A year
ago, Calpers also told its portfolio companies it would
withhold proxy votes from directors if auditors
conducted other work that might create a conflict of
interest.
As a large shareholder, withholding proxy votes is
tantamount to declaring a lack of faith in the corporate
governance of the companies. Sarbanes-Oxley has already
set new standards for governance and objectivity on the
part of the directors, and the moves by Calpers are
adding more muscle from a stakeholder perspective.
The main problem being confronted is the schism between
corporate and investor objectives. It would seem at
first glance that management and shareholder objectives
would be the same: increase the value of the company and
therefore the value of the stock. However, with
management coming under increasing pressure to show
short-term gains at the expense of long-term strategy,
something had to give.
Making today’s balance sheet stronger to meet forecasts
can have a devastating effect on the company’s long-term
performance. It is no longer acceptable for a management
team to sacrifice strategic objectives for tactical
performance. The board of directors will be held
increasingly accountable to make sure that the long-term
interests of the firm and its shareholders are
protected.
This means that there can be zero conflict of interest
in auditing. The corporate scandals that led to a huge
decrease in investor confidence were a wake up call to
investors, regulators and directors everywhere. The
bottom line – make sure that while you are attempting to
meet forecasts and goals that you are doing “good
business.” It always pays in the long run. |
