Editor: Please describe your practice.
Gregory: I’m a partner at Weil Gotshal, where I practice in the area of corporate governance, advising boards of directors and corporate management teams on issues relating to board effectiveness. I advise on all areas of corporate governance, ranging from shareholder relations and proxy contests, to board-management relations, board evaluation and effective board practices generally to counseling the board in times of crisis, when board effectiveness is particularly critical to moving through the events that are impacting a company.
Editor: You and Ira Millstein were recently honored by the NACD. Tell us about the nature of that recognition.
Gregory: The NACD has a publication called Directorship, and every year for the past several years they’ve been naming the 100 people they think have been the most influential in the area of corporate governance in the past year. I’m very proud to say that both Ira and I have been named to the Directorship 100 list since its inception. A couple years ago, they honored Ira by putting him in their Hall of Fame, which was very appropriate given his role as a leading voice in the corporate governance movement here in the United States and around the world.
Editor: Describe your role as chair of the ABA Business Section Corporate Governance Committee Task Force on Delineation of Governance Roles & Responsibilities which issued its Report (65 Bus. Law. 107 (2009)) on August 1, 2009.
Gregory: Carol Hansell, the chair of the ABA’s Corporate Governance Committee, asked me to come up with a project. I was at the time, and continue to be, very concerned about how boards function in a world of ever-increasing pressure from many sources, including from shareholders. I’m a firm believer in board accountability to shareholders, but I also understand that the board is charged with managing and directing the affairs of the corporation and that the shareholders’ role is limited under corporate law. I was – and remain – concerned about the tensions between the ever-increasing efforts by some shareholders to gain decisional power in the corporation and the role of directors as fiduciaries.
I thought it would be a lot of fun to bring together smart lawyers whom I really respect to work on the Task Force. We ended up with a great cross section of backgrounds and viewpoints. We had labor, we had general counsel, we had academics and investors. We held about 15 telephone conferences, none of which lasted longer than an hour. They were very well attended, with active discussions. Sometimes in between the calls I would circulate a list of questions to sort of tease out people's viewpoints.
This was going on at just about the same time the financial crisis was really hitting. We discussed the shape of regulation that might be forthcoming, and out of those discussions came an interest in providing regulators and other people involved in the corporate governance discussion with a grounding in the theory behind the corporation and the value that comes from the current roles as defined in state corporate law.
We agreed that it would be helpful to put out a piece that described the traditional roles of the board and shareholders as contemplated in state corporate law and also highlighted some of the changes that have taken place in the power and influence of both boards and shareholders in the last 25 years.
We all agreed that the regulatory effort to address the financial crisis should consider the value that has come from having very distinct and limited roles for shareholders and deference to a board of directors in managing the affairs of the corporation.
Editor: The ABA Task Force Report recommended that special consideration be given to the long-term nature of corporate wealth-generating activities rather than a short-term focus. Is this taking place?
Gregory: We were certainly not the first to suggest that the short-term focus of investors may hamper the long-term strategic activities of corporations. The Aspen Institute and the Committee for Economic Development and others have been exploring this for some time. It has been estimated that about 70 percent of U.S. share trades are held for mere seconds. Average stock holding periods have fallen from more than five years in the 1970s to well less than one year today. Yet, corporations were created to be continuing organizations that bring assets together to invest in uncertain and complex endeavors that often require a long time horizon to bear fruit.
The challenge is to do this while a company’s stock is being actively traded. Minute by minute, the company’s stock is being valued, and at the same time, a company’s directors and management team must focus on its long-term future, taking actions and making investments that may not have an immediate, clear payoff.
How can we expect directors to make long-term decisions and managers to implement long-term strategies if the shareholders are not able to factor into the price of the stock the value of these long-term strategies?
Editor: Do you see any sign that perhaps in the future more emphasis will be put on the long-term outlook?
Gregory: The movement by some companies away from providing some kinds of quarterly guidance is hopeful. Managements and directors need to try to articulate long-range strategies so that the market can value them. Perhaps long-term shareholders should have more say. You saw a little bit of that in the SEC’s proxy access rule that was revoked by the DC Circuit. It provided that a shareholder had to hold a certain percentage of shares for three years in order to have proxy access.
Another strategy would be to provide for the election of corporate directors to serve for terms longer than a year. There have been interesting proposals to have the whole board elected every three or five years. This would require changes in corporate law and stock exchange rules.
Editor: Do you see shareholders acting on a more informed basis with respect to their governance-related rights?
Gregory: The challenge for shareholders is to absorb the amount of information now provided. If you’re a large institutional investor and you have a portfolio that includes a significant proportion of publicly traded companies, how do you take in all of this information and make informed voting decisions? And it gets further complicated because often the portfolio managers – the people making buy, hold, sell decisions – are not the people making the corporate governance voting decisions. This is unfortunate because it disconnects from the vote the knowledge acquired in making investment decisions.
Investors who bought shares in the company because they have faith in the board, the management and the direction they’re taking the company could decide to vote with the board and management. It is a logical approach, but we are in an era when it would be politically incorrect if an institutional investor were to say: "I vote with management and the board." Also, many institutional investors are now so large that they are in the index and not making the kind of active buy, sell and hold decisions that reinforce the ability to vote as an informed investor.
Editor: What about the question of company-specific judgment? I read someplace that the statistics show that many shareholders don’t take ISS as the last word.
Gregory: I have yet to run into an institutional investor who says we do what ISS advises – because that too would not be a politically correct answer. My sense is that the truth lies somewhere between what the survey data says about how investors report they act and following ISS slavishly. We do know that ISS can typically move 20 to 30 percent of the vote.
Editor: Do you see shareholders increasingly giving consideration to the long-term strategy of the corporation in determining the actions to be taken with respect to shareholder proposals?
Gregory: Too many investors do not determine how they’re going to vote on a shareholder proposal based on a performance analysis. If the investor decided to buy shares of a company because they think management is generally doing a good job, it makes some sense to vote as recommended by the board and management on all kinds of shareholder proposals on the theory that they’re closer to the company and they’re doing a good job for the shareholders. In other words, if all is going well, give them the benefit of the doubt.
It is difficult for many large institutional shareholders to do that because it requires performance assessment. Some of these entities, especially the indexed funds, may do their performance assessments around say-on-pay, but for a question about having a separate chairman, they’re much more likely to have already decided in favor of a blanket policy – and not apply any company-specific approach. Of course, there are institutional investors and public pension funds who often introduce shareholder proposals based on some kind of performance screening.
Editor: Are boards increasingly affirmatively engaging with shareholders to seek their views?
Gregory: Absolutely. I just wrote my monthly column in Practical Law for the October issue about preparing for the 2012 proxy season. It suggests ways to get ready for shareholder communication and engagement and what companies need to do differently from what they’ve done in the past.
With the increasing influence of shareholders, it becomes more critical then ever that shareholders really understand what the board is doing and why. This means boards have to spend more time on clearly articulating their rationale for their governance practices. It means that they really need to know what their shareholder base is and what those shareholders care about. They need to gauge how likely it is that someone who is a significant owner of the stock might bring a shareholder proposal so that they can get out in front of it and try to engage with them and find out what is really on their minds and what they really want to achieve.
In the last two years, companies have put greater effort into drafting proxy statements so that they communicate a view from the board and from management and are not simply used as a compliance disclosure tool. For example, the GE proxy has a great summary of important information at the beginning. The Prudential proxy statement for the last two years has included a letter from the board at the start of the proxy. The letter is signed by every director and highlights the board’s work over the past year. Shareholders respond positively to these efforts because they signal to them that the board and management understand accountability and value transparency.
These efforts offset the fact that because of legal requirements, proxy statements are getting very long and complicated. Companies are doing a much better job of using simple things like headings to target areas that some of the proxy advisors and shareholders are particularly interested in, so that when they look at the document they can find what they are looking for.
Editor: Do boards now disclose with greater clarity how incentives support long-term strategies while discouraging risky behavior?
Gregory: There have been new disclosure requirements that encourage that. Compensation committees focus on the risks in compensation structures and practices as well as details about their incentive systems.
Editor: Are regulators becoming more sensitive to the concerns of companies?
Gregory: It’s always a challenge for the regulatory world to understand how things work within a corporation and also for corporations to understand what the regulatory choices are and the tensions that regulators are functioning under. I think the whistleblowing rules in some ways are unfortunate, but I also think that they’re not going to be quite as disastrous as people fear. I’ve asked a number of directors what their companies are doing differently because of the whistleblower rules – thinking they’re going to tell me they’ve done some kind of total scrub of all the compliance systems. They uniformly respond that "we have good compliance systems in place; we think we’ve done what we can to establish a culture where employees understand that it’s very helpful and appreciated when they come forward with concerns to the company, and we’re not suddenly concerned that they may go to the SEC." Many companies have been subjected to qui tam and other processes where employees can go and complain and get big bounties.
Editor: Do in-house lawyers have an important role?
Gregory: Good company lawyers understand that they need to be able to tell it like they see it and have the courage to alert the board when there are concerns that require action. Sarbanes-Oxley’s requirements for up-the-ladder reporting were probably helpful in giving inside counsel both the guidance and the ammunition they needed to perform that role.
Editor: What was the role of the NACD in providing information used in the Task Force Report?
Gregory: We used some data from the NACD as well as from a number of other sources. The NACD Director Professionalism Blue Ribbon Commission Report that Ira Millstein chaired has been very influential in governance practices. Another source is the NACD’s Key Agreed Principles of Corporate Governance that we helped to develop for the NACD, which was an effort to survey the views of investors and company management and directors about best governance practices and to figure out where the areas of common thinking lay. We ended up, after this long analysis, with ten principles that we thought everybody could agree to. I was heartened by how much agreement there really seems to be. That being said, some shareholder activists are trying to continually gain more power. They don’t want to focus on the areas where there is agreement, they want to focus on the areas where there isn’t – like proxy access and other areas where they’re seeking evermore influence.
Editor: What about the Society of Corporate Secretaries and Governance Professionals. Do you see it playing a useful role?
Gregory: They are one of my very favorite organizations, and I rely on them and their resources all the time. They do a great job of educating and sharing information.