An ocean’s difference on board structure …

July 20, 2010

As complex and controversial as corporate governance issues can be, the conventional wisdom seems to have coalesced around certain topics in “good governance” circles: Separating the chairmanship from the chief executive’s job is generally seen as a good thing. Eliminating supermajority voting requirements is usually cheered.

And board members should be elected annually, without the staggered three-year terms that makes it tougher for unhappy investors to clean house. MasterCard is among the latest companies to propose declassification, as it lays out in the amended pre-proxy it filed yesterday.

But that’s the view from this side of the Atlantic. On at least this last point, investors in the United Kingdom don’t necessarily see things the same way, according to a Financial Times article that caught our eye yesterday. Here’s the lede:

Three of the UK’s biggest investors have written to 700 companies to encourage them to ignore new guidelines that require the annual re-election of board members.

The companies could in fact choose to ignore the new guidelines because, in the FT’s words, firms have “the choice to ‘comply or explain'”; the big investors are recommending explanation in lieu of compliance.

Their argument is pretty simple: Blanket annual terms could foster “short-termism,” short-sighted planning and harm to investors with a more distant investment horizon. That contrasts sharply with the view from supporters of declassification in the U.S. that it promotes greater responsiveness to shareholders. In a blog post last fall, the folks at the Corporate Library summed up the argument well:

“Classified board structures tend to lengthen the process of a changing control of the board or replacing the majority. As such, this type of structure reduces accountability to shareholders.”

Of course, the two views aren’t mutually exclusive: Different shareholders have different aims, for one thing. And for another, big shareholders in particular have levers of influence that smaller ones don’t, and so may not mind an entrenched board that’s at least somewhat responsive to them.

Image source: bsabarnowl via Flickr

————

Want to see more of what’s hidden in corporate filings? Check out FootnotedPro, where we highlight unusual opportunities and potential problems well in advance of the market. For more information or to inquire about a trial subscription, email us at pro@footnoted.com.

Leave a Reply

You must be logged in to post a comment.