The New Era of Corporate Governance

Carl Icahn

On November 30, thought leaders and industry veterans convened at the Third Annual Corporate Governance Conference, co-hosted by NYSSA and CFA Centre for Financial Market Integrity, to examine how shareholder activism and the increasing costs of Sarbanes-Oxley compliance have ushered in a new era of corporate governance. Preeminent investors Carl Icahn and Ralph Whitworth, former SEC chairman Richard C. Breeden, and congressman Christopher Shays were among the speakers. Panel discussions centered on the impact of SOX 404 on small firms, the state of corporate governance, and governance as an investment strategy.

In his luncheon address, Breeden noted that the numerous components of corporate governance—state law and judicial decisions, SEC disclosure requirements, PCAOB rules, standards of the auditing profession, and listing requirements of stock exchanges, among others—have created a complex system, but one that leads to fairly clear and simple goals. These goals include strong value generation for shareholders, highly transparent financial results, and accountability for performance and fairness-with the ultimate goal being a balance among the competing interests of management, directors, and shareholders.

Richard Breeden

“Beyond preventing fraud and promoting accounting disclosure,” Breeden stated, “when we speak of corporate governance and its adequacy, we’re referring to the ability of shareholders to have a meaningful voice in the direction and operation of the company. I chose the word ‘meaningful’ carefully-not necessarily predominant, certainly not sole.

“More than any time in my experience, directors today are willing to enforce change when necessary. The forces of greed and incompetence are alive and well and present in too many companies. However, the system is better today than it was five years ago, and I believe it will be still better five years from now. We’re moving away from a sterile and often totally meaningless exercise in checklists and process, and thinking about what governance is. The value-oriented, strategic-block investors-the term I prefer to ‘activists’-are changing the sterile exercises of form within board rooms and forcing greater attention to the substance of value creation.”

Icahn was less optimistic in his afternoon keynote address: “Looking back at our period in history today, economic historians are going to really wonder why we as shareholders have put up with what we are putting up with. I really find it hard to understand why we don’t do anything as shareholders.” He described his own experiences as an investor with bloated bureaucracies, inefficient management, lack of accountability, and misleading public relations.

Congressman Christopher Shays provided a regulatory overview.

“I think that corporate America is crying out for change,” he remarked. “Some of our stocks are going up, but we cannot compete with foreign powers. Our economy is doing well and companies are making money. But they’re making money for the wrong reasons. We’ve pumped money in and have made money so loose that it’s almost impossible not to make money. We have consumerism out there because consumers don’t understand that they won’t be able to pay back the debt that they’ve been putting on. I think that they believe that real estate is going to keep going up, just as they believed that Internet stocks were going to go up.”

Icahn echoed Breeden’s comments concerning the positive effect that hedge funds can have on governance: “Hedge funds are willing to take large positions and are very concerned with performance. There could be a secular change in the wind. If we can have this change, then we’re suddenly going to have accountability. And if we have accountability, we’re going to have productivity. We talk about productivity in our companies, but I think a lot of it is simply related to very cheap money. I hope that you all join with me in this crusade and that there will be a change tomorrow.”

Stuart Grant of Grant & Eisenhofer, Ralph Whitworth of Relational Investors, and Barry Rosenstein of Jana Partners explored corporate governance as an investment strategy.		Robert Robotti of Robotti & Co., David Marberger of Tasty Baking Co., Raymond Bromark of PricewaterhouseCoopers LLC, and Michael Corasaniti of Pequot Capital Management discussed whether SOX 404 is worth the price for small firms.

 

 

 

 

 

 

 

 

The panel on the state of corporate governance:

Kenneth Bertsch of Moody’s Investors Service		Patrick McGurn of Institutional Shareholder Services		Ken Sylvester of New York City Funds		Greg Taxin, of Glass, Lewis & Co., LLC		John Wilcox of TIAA-CREF

 

 

 

 

 

 

From NYSSA News, January, 2006