What happens when gadflies become mainstream?

Over the past 20 years, corporate governance has evolved from a noisy, often dismissible, gadfly movement into a mainstream corporate activity. Market players now recognize it as an enabler of value creation, and regulators see it as a pillar of business integrity. As investors, we’re all in favor of that. But compliance officers now have to bear the brunt of unintended, and possibly unwanted, consequences of governance gone mainstream.

Some, like mindless tick-the-box compliance masquerading as corporate governance, have been analyzed deeply in the pages of Compliance Week and elsewhere. But another trend, though far less examined, is setting the context for many of the specific factors affecting today’s corporate environment: The increasing institutionalization of the corporate governance “industry.” Whether that institutionalization will, ultimately have a positive or negative impact is uncertain. What is certain, however, is that the corporate governance movement, for good or ill, is no longer driven merely by missionary zeal and intellectual force. Rather, it is grounded increasingly in the commercial or bureaucratic imperatives—okay, call it “institutional politics” if you want—of the field’s new structures. Like it or not, your senior management and advisors will have to react to that institutionalization.

So, here are a few of the recent changes in the corporate governance industry, together with suggestions on how to meet the challenges.

Consolidation

As was covered in Compliance Week on July 19, Institutional Shareholder Services recently agreed to take over arch-rival Investor Responsibility Research Center (see box below, right). The purchase solidifies ISS’s position as the 800-pound gorilla advising your investors about how to vote their proxies at your annual general meeting.

Given the sensitivity of the issues on which ISS opines, few investors or corporations are likely happy about that. But it’s a fact of life. And despite some European complaints— ISS estimates it will have revenues of more than $100 million following the integration of IRRC, and we doubt any other proxy voting advisor will have even $10 million in revenues—no government is about to block the sale on anti-trust grounds.

However, we believe the result of this power consolidation is likely to be somewhat contradictory. Over the near term, ISS is basically the only game in town, so companies will at least need to consider remaining on-sides of its recommendations.

Over time, however, there is likely to emerge a strong “number two” player. Ironically, IRRC’s role as number two—albeit one that did not issue recommendations and that was organized as a non-profit—may have actually blocked the development of a competitor to ISS. Look for Glass Lewis & Co., Proxy Governance, or Egan-Jones Proxy Services to develop into stronger competitors within a very few years—individually or perhaps in combination.

In the meantime, you might want to become familiar with those three services at your leisure now, rather than in a hurried rush, later (see the guide to proxy firms in box at right).

Global Influence

The International Corporate Governance Network has hired its first ever executive director. Anne Simpson, named to the position late last year, was previously Head of the Secretariat at the Global Corporate Governance Forum, an organization founded by the World Bank and the Organization for Economic Co-operation and Development to support governance reform in developing and emerging markets.

Why should corporate compliance executives care about the ICGN appointment? Well, for two reasons.

First the ICGN has developed into a global entity with more than $10 trillion (yes, with a “t”) of institutional investor capital represented amongst its membership. The group has established executives compensation standards and governance principles, and has involved major global institutional players like Fidelity, Barclays, TIAA-CREF, Hermes, CalPERS, and, well, probably most of your large investors.

And it’s done so by relying on little more than an idea and a volunteer board.

Think of what it can do with dedicated full-time staff.

Second, while many of the major players at the ICGN are American, much of the ICGN’s recent focus has been on Europe. But there’s evidence that the organization is intent on increasing its visibility in the United States.

Last year, for example, the ICGN held a special meeting in Delaware that which jump-started the movement for majority voting for directors. And next July, its annual conference returns to the U.S. for the first time since 2000. Look for the ICGN to focus on U.S. issues this year, including a continuation of its majority voting support.

Clearly, the ICGN is an institution worth getting to know. Corporate financial, legal and compliance officers might even consider membership; at just £205.63—of which £30.63 is a refundable value-added tax—it’s an inexpensive pass onto what’s likely to be the key corporate governance playing field next year.

Small World Factor

Institutions survive personnel change. And a number of key institutions have just appointed new corporate governance leaders. John Wilcox replaced Peter Clapman at TIAA-CREF, Linda Selbach is taking over at Wellington, and Ann Yerger replaced long-time executive director Sarah Teslik at the Council of Institutional Investors.

All three were previously players in other positions; Wilcox at proxy solicitor Georgeson Shareholder, Selbach at Barclay’s Global Advisors, and Yerger at IRRC prior to joining CII in 1996.

The implication is clear: Corporate governance is now a robust enough field that people spend their entire careers in it, rather than viewing it as a stepping stone to a non-governance position at a particular company or organization.

So corporate executives need to pay attention to industry leaders, no matter where they are right now. Indeed, it’s sometimes easier to establish those relationships when there isn’t a front-burner issue on the table.

Not convinced? Consider this: Someone new will shortly become the new corporate governance czar at CalPERS. Pity the poor corporate CFO or general counsel who dismissed that influential power-advocate at his or her previous positions.

This column solely reflects the views of its authors, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

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