Ira Millstein's Speech to the Washington State Investment Board
July 16, 2013 - Seattle, WA
This is our opportunity to address a key element of the private sector: a highly reputable and important pension fund, singularly dedicated to its beneficiaries.
Today, we will urge you to expressly use your voice, your proxy voting rights, and your asset allocations, to support portfolio companies which demonstrate Innovation, Growth, and Job creation.
Growth and job creation should be front and center in government policy planning according to the G-20; some individual major governments have been, and are, responding. It is, however, time for the private sector – corporations – to respond by innovating, growing, and providing jobs, rather than hoarding cash and responding to short term pressures. Major long-term shareholders, such as your type of pension fund, can be the impetus and support for corporations who do.
This potential virtuous circle (government/private) is not academic theory. It is based on our respective experiences with multiple managements and boards dealing with governance and asset allocation issues. We believe that the corporate sector will welcome your voice and its implementation through corporate governance and asset allocation initiatives, especially if, as we hope, it becomes a model for other long-term shareholders.
It is not necessary to emphasize the need for private-sector initiatives. The US/UK, and much of the world, remains basically stagnant. Perhaps the downslide of the recession crisis has been halted. Last night, General Petraeus said that he saw a bright future, but to me it is still quite distant. Too many dysfunctional governments are mired in irrelevant partisn disputes, while policy suffers, employment remains weak, income disparities grow and lobbying floods government and regulators torpedoing legislated reforms, or starving them.
Government alone, cannot mandate innovation, growth and jobs. No law or regulation can compel the private sector to shoulder the changes necessary to recharge the batteries of capitalism. To do so, requires convincing corporations, and their long-term shareholders, that it is in their respective interests to wake-up to the need.
Why is it in your interest to take on the responsibility of playing this role in ending stagnation? If there are fewer jobs, greater disparities, and no growth generally, taxes drop, you have fewer or weaker funders (state, private or whatever), and your responsibility to your beneficiaries is imperiled. We think it is that simple. Economic stagnation is not in your long term interest.
Why do we pick specifically on your type of pension fund to lead this shareholder effort? Of all the intermediaries standing between “the people” who are the taxpayers, investors and beneficiaries and the ultimate investee corporations who must act, you stand out as unconflicted. There is no personal gain, you have no shareholders of your own, you have only one goal – efficiently providing for and protecting your beneficiaries, with as little burden on your funders as possible.
Just look quickly at the other intermediaries in the investment chain. There is, as I have called it, a “zoo”. At least one of everything! Mutuals (of infinite variety), hedgefunds , banks, insurance companies, advisors (good, bad, indifferent), and on and on. Every one of them, however, serves more than one master, let alone personal gain.
At Columbia Law School, David Nierenberg and I co-chair a Center, dedicated to describe in some detail the vast world of intermediaries. What are they? What incentivizes them? What do they perceive as their fiduciary duties to multiple masters? And more. Regulations may one day define and control their responsibilities a bit better, but given the embedded state of the capital markets, will never eliminate many of them as also “shareholders.” Which of them would act on the proposal we are here making? Decide for yourselves, but we doubt many, if any. Personal gain, and multiple masters, will cloud their vision, and make murky their fiduciary duties.
That is why we are picking you as potential leaders of an important shareholder role: with clear responsibilities to your beneficiaries, encourage and promote innovation, growth and job creation.
What do we suggest as an action agenda, assuming you see some wisdom in why we see it necessary and desirable?
First, in the area of corporate governance which I will deal with, and second, in asset allocation which Lord Myners will deal with.
To begin with, adopt a stated corporate governance policy based on the foregoing. Make it simple, don’t overpromise, just state in a few paragraphs what it is, and how you will attempt to implement it. Make it public. Be a thought leader using your significant voice.
Then, put no, or at least less, emphasis on rote voting for so-called “best practices”, increasingly becoming more finite at the urging of proxy advisors and some academics. Think much more, to the extent you are equipped to do so (and if not so equipped, become so), about individual companies which are not performing well by any measure you choose (no one can cover with analysis the entire corporate community). Communicate directly with them; their boards where warranted. Note that “communication” is now “best practice” amongst most observers. Express your strong views on innovation, growth and job creation and your willingness to support corporations if they demonstrate credibility for longer range planning. Follow-up and “exit”, whenever possible where responses are inadequate; and as to indexes, urge a corporation’s exclusion, if there is no adequate response.
Here are a few “hot button” issues currently on the proxy advisor lists, for which some analysis might eliminate, or at least moderate, rote voting.
My favorite is splitting the Chair/CEO role. (There are other issues such as, for example, staggered boards, compensation, unequal shareholder rights, political contributions, options and access – a few of which I will deal with later.) Although, splitting should be the default position, it can be more nuanced. In the recent Jamie Dimon “dust up”, my blog suggested that the resolution to split was wrong timing. The split should rarely be used to unseat an incumbent; more appropriate at succession. Mr. Dimon’s track record did not warrant “stripping” at that point. The situation was more complex.
As to staggered boards, and unequal shareholder voting rights: the default rule might be annual elections and equal rights. But again, the situation can be more nuanced, but not for absolute universal mandates.
Before voting on such issues, see them through the lens of innovation; growth and job action, as we are suggesting. If a company is performing well by your measure, why shake it up with a “best practice” mandate if its board and management think the practice is necessary? Defer to good management – it is not a “sin”. What might be important to management? Continuity of a board, for example. Take a start-up, or dominant investor. In either case the start-up might not start, or the investment made, if there was a chance of a quick board turnover, at least for some period of time. When these issues come up in a proxy proposal, study the company’s response. If it is lawyerly double talk, you might ignore it; on the other hand, if it is rational business talk, you might think twice about it. The point is “not rote”. Continuity may well be needed to support innovation and growth, if seen through that lens.
As to compensation and options, here the lens becomes even more important. Are they structured to promote innovation and growth? If so, support the disclosed plan. On the other hand, if they appear to be following the herd, or structured for self-enriching and entrenching management, oppose. This requires nuanced knowledge. Note that current research seems to demonstrate that the desire of many companies not to incur the disapproval of proxy advisors, has led to a growing standardization of compensation measures! Hardly a desirable outcome.
Finally, a word about the increasingly finite definitions of “independence” in board membership. More boards are rethinking their profiles. Do literal headings of “independence” prohibit potential board members who might know something about the corporation’s business? Persons who might more intelligently question management about strategies and tactics because they are familiar with the business, and thereby lessen the board’s complete reliance on management for information about the marketplace for the corporation’s goods and services. Thought should be given to how to properly populate boards within, or without, definitions of “independence”. Communication between you and a board can be immensely helpful to its thinking. Especially with companies you are urging to innovate and grow. Again, however, you can only be selective, communicating with boards of companies which are important, but not meeting your standards of performance. You cannot cover the waterfront, but the fact that you are doing something will be an important message to the rest of the corporate world and its shareholders.
Just a word about allocations before Lord Myners takes over. Listening to yesterday’s discussion by your excellent officers was a little discouraging to me. WSIB is doing quite well with its investment allocations – performance ranks high in its peer group. The question might well be “if it ain’t broke, why fix it?” You could dismiss allocation charge on this ground.
I urge you not to do this. I believe Lord Myners will tell you that you can do better. Without his greater expertise, I nevertheless believe that if you look at investment strategy and allocations, thru the lens of improving the corporate sector’s innovation, growth and job creation activities, you might do better. The corporate sector will respond to respected long-term shareholders if this becomes a more universal mantra.
Boards have huge discretion under the law to adopt long-term strategies, even at the expense of “hits” they may take for missing quarterlies to assure more long-term gains.
To close, please think hard about the messages we are trying to deliver. To complete the virtuous circle which may get us out of this stagnation (no real growth, disparities in income, and continued too high levels of unemployment and underemployment) the private sector must participate in an affirmative manner. For us, long term unconflicted shareholders with determination and articulation, are the key to getting the ball rolling.