Do the Right Thing

More companies are doing well for themselves by doing what’s best for shareholders.

After the well-publicized excesses of the 1990s, corporate governance has become a key factor in boosting investor confidence and building shareholder value. And publicly traded companies are responding by reviewing and revising their governance policies to increase transparency and accountability. In fact, most companies now publish corporate governance standards that investors can use to assess the integrity of their management.

Independent corporate governance metrics are also available. Rockville, Md.-based Institutional Shareholder Services (ISS), which provides proxy voting and other governance services to corporations around the world, ranks public companies for their governance practices using a proprietary corporate governance quotient (CGQ). This highly regarded measure lets investors compare the quality of a company’s governance with its peers.

Corporate governance is rapidly evolving from a compliance obligation to a business imperative, according to a global investor study published by ISS in 2006. The study found that 94 percent of global investors said corporate governance is important to their firms. Moreover, it says, “Investors are now seeing corporate governance in a new light, recognizing it not only as an externally imposed obligation, but as an ownership responsibility, or ‘the right thing to do’ in their words.” And 63 percent of the investors surveyed believe corporate governance will become an even more important issue over the next three years.

Sabanes-Oxley

Corporate governance became a hot-button issue with the general public after the accounting scandals at Enron, WorldCom, Tyco and others. As Pat McGurn, executive vice president and special counsel of ISS, notes, “Nearly all of the companies that melted down over the past several years waved governance red flags in investors’ faces. Sadly, shareholders often elected to ignore these glaring problems due to the firms’ apparent stellar performance.” In the wake of these debacles, Congress passed the Sarbanes-Oxley Act (SOX) in 2002, which mandates a higher level of accountability in corporate governance. But some well-managed companies were already well ahead of this legislation.

Campbell Soup Company, which scored a 99.8 percent CGQ from ISS, first published its standards for corporate governance in 1992, according to Leonard Griehs, vice president of investor relations. “We’ve been involved with corporate governance since the early ’90s because we thought it was the right thing to do,” he says. Griehs notes that big institutional investors were pushing for better corporate governance long before it hit the headlines.

Colonial Properties Trust, a NYSE-listed REIT that owns residential and commercial real estate across the Sunbelt, reviewed its corporate governance practices in light of SOX. “Sarbanes-Oxley has been a factor in looking at everything we do,” says Barbara Pooley, senior vice president of investor relations. “It makes companies, including ours, make sure that what we’re doing is the right answer for the shareholder.”

Good governance is a top priority at Colonial Properties, Pooley explains. “We’ve always been focused on corporate governance. Our lead trustee, and indeed our entire board, is keenly aware of the importance of solid corporate governance practices. We’ve really made an effort to structure our governance so it is shareholder friendly,” she adds. Evidently these efforts are paying off, since Colonial Properties received a 97.7 percent CGQ from ISS, ranking it in the top tier of its industry group.

SOX is not without its downside. Complying with the act is costly and time consuming — especially for smaller companies. “It takes longer to do the things that you think are the right things to do,” Pooley says. “There’s more paperwork and it’s certainly more costly — from both the accounting and legal standpoint.”

This burden is somewhat less onerous for big corporations, according to Griehs: “For us, it’s not as big an issue when you’re a larger company and you have those controls in place. But it certainly is costly.”

On balance, however, ISS’s McGurn sees significant improvement in corporate governance in the post-SOX era: “Since 2002, there’s been a quantum leap in the quality of corporate governance structures at U.S. firms.”

Enhanced Oversight

Board independence is a critical imperative in improving corporate governance. According to McGurn, “Boards of directors have begun to exercise heretofore unseen levels of oversight of governance practices. At most U.S. firms, strong-willed chief executives can no longer handpick directors who will rubber-stamp their decisions.”

Independent governance involves many factors, including the annual election of board members, majority voting in the election of directors, and limits on the number of boards that director can sit on. Colonial Properties, for example, doesn’t allow its directors to serve on more than four other boards, while Campbell reviews the other board commitments of its directors on a case-by-case basis to ensure that they have sufficient time and attention to fulfill their duties.

Both companies have separate CEOs and chairmen and require board members to stand for election annually. And both make their corporate governance standards available on their websites.

As Griehs notes, “David Johnson, our former CEO, used to say that we expect our directors to be performing assets of the company. We want them to be a partner, not a rubber stamp.” Pooley agrees, “Independence is something we look at very carefully. I believe 9 of our 11 directors are considered independent under the ISS guidelines.”

This independent perspective is critically important on key board committees, such as the audit and compensation committees. “Our audit and compensation committees are only independent directors,” says Pooley.

SOX requires that audit committees be led by financial experts who are qualified to ensure the integrity of the company’s financial statements. Campbell current audit head is a financial expert, according to Griehs. “And we just appointed a new director who’s a CFO who will become the next head of our audit committee.”

Pay-for-Performance