Category Archives for Corporate Governance

Mark Zuckerberg performance challenged in Business Insider article

Source Business Insider UK.

  • 83% of independent Facebook investors believe Mark Zuckerberg should be fired as chairman of the board.
  • It is extremely rare for a majority of common stockholders to vote against their own CEO with such a massive majority.
  • The shareholders’ problem is that Zuckerberg has a history of making mistakes.
  • The cost of Zuckerberg’s errors in judgment run into the billions. In one morning back in March, $30 billion was wiped from the value of the stock over an incident that Zuckerberg later took responsibility for.
  • Texts between Zuckerberg and board member Marc Andreessen show that at least one other Facebook director thinks Zuckerberg’s control of the stock is “the straw that breaks the camel’s back on the optics of good governance.”
  • It’s weird that a company that is systemically important to the internet is so dependent on a single point of failure: Zuckerberg.

Mark Zuckerberg is the founder, CEO, and chairman of the board at Facebook. He also controls a majority of the company’s voting stock. His power at the company is complete. He cannot be fired or disciplined. If the directors on his board attempted to remove him, he could simply vote with his stock to replace them with friendlier ones. It is unlikely the current directors would do that because they are each paid at least $350,000 a year, except for the ones who are also Zuckerberg’s company employees — they are paid many millions more.

Zuckerberg has much more power than ordinary CEOs at publicly traded companies, many of whom are held accountable by independent board chairmen and directors appointed at the behest of investors. On paper, everything ought to be going his way.

And yet Zuckerberg is at war with his own shareholders. As Business Insider’s Jake Kanter reported last week, 83% of independent investors — those stockholders who are not Zuckerberg himself or his managing executives — believe he should be fired as chairman of the board.

That’s an astonishing majority against him, given the stock’s performance. By any measure, Zuckerberg has delivered as CEO. His product is used by 2 billion people. The stock has risen from an IPO price of  $38 in 2012 to $195 today — a staggering return.

Yet his own investors think he needs to be reined in.

Zuckerberg’s critics should be taken seriously

It is extremely rare for a majority of common stockholders to vote against their own CEO with such a massive majority. Even in the fiercest of proxy fights, activist investors find it difficult to muster more than 20% or 30% of a company’s stock. (Shareholders suffer from extreme inertia — it’s easier to sell the stock than it is to wage war against a board.) If, at an annual general meeting, the company wins a vote by a margin of less than 90%, it is generally regarded as a sign of significant unrest.

So Zuck’s critics should be taken seriously.

The shareholders’ problem is that Zuckerberg has a history of making mistakes, which he himself admits.

He initially did not think that Russian interference in Western elections via Facebook was a big deal. He also took responsibility for not following up quickly enough on the Cambridge Analytica crisis. “We didn’t take a broad enough view of what our responsibility is, and that was a huge mistake. It was my mistake,” he said.

Way back in the beginning, Zuckerberg made the mistake of being cavalier about his users’ privacy. As a 19-year-old Harvard freshman who founded Facebook in his dorm room — an origin story Zuckerberg still references when he speaks in public today — he sent a string of texts to a friend describing how much data he had access to. “People just submitted it,” Zuckerberg told his friend. “I don’t know why. They ‘trust me’. Dumb fucks.”

Facebook, with Google, has a duopoly over the internet

Who among us has not said something stupid as a teenage student? We can forgive him for that.

Zuckerberg is a different person today. He is a corporate titan whose firm vacuums up half of all new advertising dollars being spent on the web. Facebook, with Google, is a de facto duopoly over the internet. The pair capture 71% of all digital ad spending in Europe, according to analyst Brian Weiser at Pivotal Research.

And that is precisely why Zuckerberg’s unchecked power is so dangerous. In March, Facebook stock slipped 6%, wiping $30 billion off the value of the company, on the Cambridge Analytica news. That was just one morning’s trading.

The cost of Zuckerberg’s errors in judgment thus run into the billions.

Yet Facebook, which is systemically important to the internet, remains tightly attached to a single point of failure: Mark Zuckerberg.

At other companies, the founder, ceo and chairman are three different people. If one gets something wrong, there are two others to act as backup.

Leaked texts from the board say: “He’s worried that it’s the straw that breaks the camel’s back on the optics of good governance”

Even Zuckerberg’s own board members are aware that this is a problem. In December 2016, some texts between Zuckerberg and Marc Andreessen, the Netscape cofounder turned Silicon Valley investor who runs the venture-capital fund Andreessen Horowitz, surfaced in a shareholder lawsuit.

The suit alleged that Erskine Bowles, one of Facebook’s board members, was “worried that one of the concessions Zuckerberg wanted — to allow the billionaire to serve two years in government without losing control of Facebook — would look particularly irresponsible.” (Zuckerberg wanted the option to leave the company and go into politics without giving up control.) Andreessen texted Zuckerberg that the “biggest issue” was “how to define the gov’t service thing without freaking out shareholders that you are losing commitment.”

“Erskine is just massively uncomfortable with you getting to low economic ownership and then going off on leave with no involvement by the board and retaining control,” Andreessen, who is also a board member, said.

“We rediscuss it on every call … I’m going to try to drag it over the line one more time. ☺ … He’s worried that it’s the straw that breaks the camel’s back on the optics of good governance.”

Facebook’s independent investors — a majority of all investors — believe the company’s corporate governance is wrong. And at least one of Zuckerberg’s own board members thinks Zuckerberg has gone too far, in the past, in his desire for control.

It is not clear what the independent shareholders can do to force more accountability inside Facebook’s corporate governance structure.

But it is clear that it is needed.

Wates Corporate Governance Principles

The Financial Reporting Council (FRC) has published a consultation on corporate governance for large private companies.

Chaired by James Wates, chairman of The Wates Group, the Wates Corporate Governance Principles consultation document encourages large private companies to follow six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis:

  • Purpose – An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
  • Composition – Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
  • Responsibilities – A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.
  • Opportunity and Risk – A board should promote the long-term success of the company by identifying opportunities to create and preserve value and establish oversight for the identification and mitigation of risk.
  • Remuneration – A board should promote executive remuneration structures aligned to sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
  • Stakeholders – A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good relationships based on the company’s purpose.

James Wates commented, “These principles will provide a flexible tool for companies of all sizes, not just those captured by the new legislative reporting requirement, to understand good practice in corporate governance and, crucially, adopt that good practice widely. The principles are about fundamental aspects of business leadership and performance.

The consultation is open until 7 September 2018.

 

New QCA Corporate Governance Code provides the answer for AIM companies adjusting to new rules

TheQuoted Companies Alliance has revised their QCA Corporate Governance Code for small and mid-size quoted companies in the UK.

The QCA Code includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to apply these principles effectively. It has been put together by the QCA’s Corporate Governance Expert Group and a standalone Working Group comprising leading individuals from across the small & mid-size quoted company ecosystem.

The revision of the QCA Code is especially timely and relevant. London Stock Exchange has recently announced a change in the AIM rules so that all AIM companies will be required to apply a recognised corporate governance code and explain how they do so from September 2018.

QCA research indicates that currently over half of the 900+ companies on AIM refer to the QCA Code. There is also a significant minority of AIM companies that currently do not apply any code.

[MORE]

Why workers’ votes promote good corporate governance

A consensus is emerging that votes at work promote good corporate governance, argues Ewan McGaughey. Here he outlines behavioural, qualitative and quantitative evidence, and explains that votes at work in Britain have among the longest, richest histories in the world.

The UK is about to stop shareholders monopolising votes for company boards, with worker voice. Currently, asset managers control most shareholder votes in public companies. They have systemic conflicts of interest, because shareholder votes can influence companies to buy asset managers’ financial products (e.g. defined contribution pensions). But now this is changing. One small step, following government consultation, is that the Financial Reporting Council will write new ‘comply or explain’ rules in the UK Corporate Governance Code, so that listed companies introduce: (1) ‘a designated non-executive director’ responsible for employee engagement, (2) ‘a formal employee advisory council’ or (3) ‘a director from the workforce’.

[MORE]

Directors: A warning from the CMA – Competition Law Compliance Matters

On 10 April 2018, the UK’s Competition and Markets Authority (CMA) announced the disqualification of two directors in connection with a company’s involvement in a cartel.

This is the second occasion in the last 18 months in which the CMA has secured director disqualifications in respect of companies’ infringements of UK and/or EU competition law.

This most recent case highlights the CMA’s policy of holding directors personally responsible for competition law compliance, and confirms that company directors risk disqualification when the law is breached.

[MORE]

The CEO/Chairman debate continues

Corporate France is bucking the global trend of splitting the roles of chairman and CEO, with Thomson Reuters data showing a steady growth in the number of French companies that have merged the posts in the past 15 years.

Almost three quarters of listed French companies tracked by Thomson Reuters now have or have had one person holding both positions, compared to 60 percent in the United States and fewer than 20 percent in Britain, Germany and Japan, according to an analysis of more than 6,500 companies. [MORE]

Corporate governance depends on shareholder oversight

The concept of corporate governance accountability unravels if shareholders sacrifice control. Read this article from the Financial Times.

Manage relations with stakeholders

In the last article we considered the increasing need to take account of the interests of stakeholders.

In many cases this requires a relationship, and relationships require communication.

The first stage is to establish processes to ensure that the organisation and the board are able to monitor relations with shareholders and other interested parties.

The second is to ensure that communications with shareholders and other interested parties are effective.

Companies should have some form of formal or informal market and competitive intelligence system by which they collect, collate and interpet information. Directors should ensure that this includes information about their key stakeholders.

The purpose of collecting information about stakeholders is to improve decision-making and to evaluate problems and opportunities to allow early action. It should also be capable of evaluating the cost and benefit of managing or mismanaging such relations.

Since stakeholders are mainly closely involved with the organisation some information can be collected through good personal relations, though it is also desirable to obtain information from independent third parties, including by monitoring the media.

As with all information collection, the board needs to monitor both its effectiveness and its cost-effectiveness.

Communication from the organisation to shareholders and stakehloders can be more formal, with particular emphasis on the content of the annual report and statements to the press and stock market. In some cases this needs to be carefully managed to ensure that some shareholders are not given privileged information; directors should make sure they are familiar with Stock Exchange rules on such matters.

It is in the interest of an organisation to maintain a pro-active and positive public relations strategy. In addition to the specific needs of shareholders and stakeholders, it should promote its vision, mission, values and policies, together with good (and bad) news about new investments, best practice, significant orders, corporate social responsibility, etc.

The chairman and chief executive will play a significant role here, but it is a responsibility of all directors to act as ambassadors for their organisation.

  • Shareholders will mainly want to know if the company is making a profit in order to be confident that they can get returns on their investment.
  • Customers will wish to know when what they want is available, what the price will be, whether the quality of the good or service meets their expectations and what they can do if it does not.
  • Suppliers will wish to know when their supplies are required and where, and in what format, they should be delivered. They may also want to know that their contracts are being honoured and that they will be paid on time.
  • Employees will want information on things like what they must do and how they are performing; any changes and how they may be implemented; human resource issues such as contracts, health and safety, grievance and discipline; meetings and actions from these meetings.
  • The local community may also wish to know how they will be affected by actions that the organisation and its managers may take.

Although much of this information relates to organisation and management matters and the detail is of no direct interest to the board, the board should ensure that communications, and thus relations with stakeholders, are adequate.

Corporate governance

Does the board monitor relations with shareholders and other interested parties and ensure that communications are effective?

  • Relations are reliable, efficient and ethical?
  • Relations are relevant for decision-making?
  • Communications are relevant, consistent, accurate and cost-effective?
  • Communications are likely to meet legitimate expectations in terms of their quantity, quality and timing?
  • Communications are unbiased with regard to particular parties and in accordance with the the needs of commercial security and Stock Exchange compliance requirements, where appropriate?

Richard Winfield is the independent authority on director development. He helps directors and boards become more effective by clarifying goals, improving communication and applying good corporate governance.

This article is part of a free e-course for directors at http://www.brefigroup.co.uk/directors/director_development_and_training_e-course.html

The Ford Pinto and corporate culture

At the turn of the 1970s, the top brass at Ford set out to come up with a car that weighed less than 2,000 pounds and cost less than $2,000. Their answer turned out to be the Pinto, a sporty little thing with just one problem: in rear-end collisions, its gas tank had an unfortunate habit of exploding.

That fault would eventually make the Pinto one of the most notorious cars in history but no-one at the time dared report it to the company’s formidable CEO. “Hell, no” claimed one Ford engineer. “That person would have been fired.” As the cigar chomping boss Lee Iacocca was fond of declaring: “Safety doesn’t sell.”

Rather than repair the flaw, at the likely cost of about $11 a vehicle and probable heap of damning publicity, executives reportedly decided it would be cheaper simply to pay off any lawsuits. But in time, 27 people died in Pinto fires and by 1978 Ford had recalled 1.5m cars.

Think of the ingredients that went into the Pinto debacle. Fearsome management. A workforce who, it is claimed, understood that safety took lower priority. Among Ford’s managers, lawyers, designers and engineers there might have been some rotten people. But for this completely avoidable disaster to have reached such huge dimensions, there had to be more: a blinkered corporate culture that apparently encouraged staff to behave unethically and to turn a blind eye to the tragic consequences.

The cases involving the explosion of Ford Pintos due to a defective fuel system design led to the debate of many issues, most centring around the use by Ford of a cost-benefit analysis and the ethics surrounding its decision not to upgrade the fuel system based on this analysis.

Should a risk/benefit analysis be used in situations where a defect in design or manufacturing could lead to death or seriously bodily harm, such as in the Ford Pinto situation?

Although Ford had access to a new design which would decrease the possibility of the Ford Pinto from exploding, the company chose not to implement the design, at a cost of $11 per car, even though it had done an analysis showing that the new design would result in 180 less deaths. The company defended itself on the grounds that it used the accepted risk/benefit analysis to determine if the monetary costs of making the change were greater than the societal benefit.

Based on the numbers Ford used, the cost would have been $137 million versus the $49.5million price tag put on the deaths, injuries, and car damages, and thus Ford felt justified not implementing the design change.

There are several reasons why such a strictly economic theory should not be used. Simple public relations examples such as Perrier and Toyota have demonstrated the damage of not responding quickly. Eventually, Ford suffered significantly from negative publicity and the judgements and settlements resulting from the lawsuits

More importantly, it seems unethical to determine that people should be allowed to die or be seriously injured because it would cost too much to prevent it. Secondly, such analysis does not take into all the consequences. Also, some things just can’t be measured in terms of dollars, and that includes human life.

In a new book called “Blind Spots”, authors Max Bazerman and Ann Tenbrunsel look at how businesses from Ford to Enron to subprime mortgages can end up in ethical disaster.

They describe a process of “ethical fading” in businesses where maximising returns is encouraged over fairness to fellow employees and customers. The result is that right and wrong go out of the window.

How does this come about and how can it be prevented?

Leadership is a key responsibility of the board of directors, and also senior management. They set the standards by their own behaviour.

First thing is to adopt and promote a set of values; next to interpret them into behaviours and ensure that good behaviours are supported and bad ones are discouraged.

I tell my clients that a values statement is not worthwhile unless it is, or at least could be, used against management.

Values statements should be so ingrained that when an instruction or a decision appears to be inconsistent with the promulgated values, an employee should feel able to challenge it.

Next, is needed a formal and accepted complaints or whistle blowing system. So often, we hear of whistle blowers who are not only hounded out of their organisation but often also blacklisted within their industry.

And yet, they should be the safety valve that protects an organisation from internal rot. In a healthy culture whistle blowing would be welcomed, and would then become unnecessary. A means of ensuring this is to have a formal system by which individuals can contact a senior officer in confidence and independent of their line management structure.

What is the role of a coach in this context?

When coaching directors or senior executives, to challenge them on their attitude to corporate values and individuals who challenge them. When coaching individuals who are concerned about inappropriate behaviour, to coach them in assertiveness and to help them to consider their options and risks; then to develop a strategy.

Corporate rot starts with small actions that are tolerated, and like any other form of rot, clearing it up once it has become established is more expensive than attacking it immediately. It is in everybody’s interests to ensure that organisations have processes for both prevention and early action..

Directors: Delegate authority to managers

You can be a director and a manager in the same organisation.

It is really important to recognise that these are different roles: you must act as two different people.

If you are a director and not a manager in the same organisation, then you have to understand the boundaries between the board and the management.

Directors direct – and managers manage!

Nonetheless, the board is responsible for the management’s actions and performance.

The board remains responsible for overall governance. This includes ensuring senior management establish and maintain adequate systems of risk management and that the level of capital held is consistent with the risk profile of the organisation.

So, the board needs to have a clear strategy of what to delegate to management and how to monitor and evaluate the implementation of policies, strategies and business plans.

The responsibility to act and decide upon matters for action in between meetings of the board may be delegated to an executive committee.

In general the board will delegate the management of the organisation to the Chief Executive Officer (CEO) or Managing Director (MD).

The CEO/MD is responsible for delivering services according to the strategic plan, within the policies and budgets approved by the board. A team of managers oversee the day-to-day operations of the organisation under the general direction of the CEO/MD.

Delegation to the CEO/MD

Here is an example of a board delegating authority to the CEO/MD over the day to day management of the company, its subsidiaries and their respective operations. This delegation of authority includes responsibility for:

  • developing business plans, budgets and company strategies for consideration by the board and, to the extent approved by the board, implementing these plans, budgets and strategies;
  • identifying and managing operational risks on a daily basis and, where those risks could have a material impact on the company’s businesses, formulating strategies for managing these risks for consideration by board;
  • managing the company’s current financial and other reporting mechanisms as well as its control and monitoring systems to ensure that these mechanisms and systems capture all relevant material information on a timely basis and are functioning effectively;
  • ensuring that the board and its various committees are provided with sufficient information on a timely basis in regard to the company’s business and, in particular, with respect to the company’s performance, financial condition, operating results and prospects, to enable the board and those committees to fulfil their governance responsibilities; and
  • implementing the policies, processes and codes of conduct approved by the board.

Corporate governance

Does your organisation have a clear strategy for delegating authority to management, including reports and measurements that enable the board to monitor performance?

  • Measures are complementary to and consistent with management’s planning and control systems and undertaken in a manner likely to engender managers’ commitment and support?
  • Reports and board reviews cover at least profitability, cash flow, investment and risk?
  • Focuses on causes and consequences of important variances between planned and actual performance?
  • Reports are able to provide early warnings of major risks and notice of changes to the external environment?
  • Reports are presented in time for directors to respond and for the board to ensure corrective actions are taken?
  • The board monitors management’s ability and performance in anticipating, identifying and responding to strategic change?
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