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There is a sea change happening in the way in which pension funds are re-examining fiduciary duty. I wrote about the changes on the IPO front here. http://thevaluealliance.com/Blog/?p=60

But there are larger changes happening that provide hope as well.

Over the course of 2012, it’s become evident that social policies are receiving increasing attention by boards and by investors who care about responsible investing.

Tragedies seem to be driving some of the change. Newtown represents the most recent in this scrutiny of corporate social issues but the momentum this year was already growing. Think Apple/Foxconn, Hershey — and more recently, the Wal-Mart supply chain disaster responsible for the deaths of 112 people trapped in a Bangledesh factory fire last month.

In the wake of the Newtown massacre, CalSTRS received some press for its Cerebus’ investments in a gun manufacturer.

Chief Investment Officer, Chris Ailman, through his press office wrote me that “CalSTRS has been screening investments through its ESG [environmental social governance]standards and the 21 Risk Factors since their passage in 2008. CalSTRS has also developed an ESG committee with representatives from all the asset classes. They vet all our investments for compliance with CalSTRS’ ESG standards.  Since 1978, CalSTRS has used a written policy, the Statement of Investment Responsibility (SIR), to navigate the complex landscape of ESG issues. The long history of this document is testimony to the national leadership of CalSTRS among pension funds in addressing ESG matters through a written policy.”

Many pension funds, like CalSTRS, are still in the race in clearly defining what the S means (as well as the E and G in some cases) and in establishing strong monitoring systems. But today there are many more pension funds working toward that goal than in the past.  (See also http://thevaluealliance.com/Blog/?p=56) Members of ICCR are among those leading the pack.

In 2010, Geoffrey Mazullo, Principal at Emerging Markets ESG, and I attempted to conduct research on pension fund monitoring of socially responsible investing for the Journal of Environmental Investing. We came away with the distinct impression that there was more emphasis and discipline needed.

Both boards and investors of other peoples’ money need to recognize the standards to which they should be holding companies.

The second pillar of the UN guidance on human rights addresses “corporate responsibility to respect human rights, which means that business enterprises should act with due diligence to avoid infringing on the rights of others and to address adverse impacts with which they are involved.”

How many boards and investors make a standard practice of holding companies accountable to addressing the adverse impacts with which they are involved? For example, layoffs in a town or pollution in a corner of it?  Or other adverse effects that they haven’t caused but are involved with?

More on what is being done is here: http://management.fortune.cnn.com/2012/12/19/newtown-business-leadership/?section=magazines_fortune

I welcome your comments at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

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Board members should be combing through their books for insider trades — and re-examining their stock and option awards programs — after the Columbus Dispatch’s reports on the Big Lots case and the WSJ report on that case and four other companies where executives are under investigation for insider trading.  The WSJ report that at least 4,185 executives may have engaged in suspicious trades since 2004 should be giving board members and shareholders pause.

The use and spread of insider information damages our capital markets – and hurts the reputations of firms that do not comply with rules to keep our markets fair. Morgan Stanley paid $5 million for the part they played in providing information to favored analysts in the Facebook IPO. Netflix has also come under scrutiny for potential leaking of material information to a select group.

Regulation FD (fair disclosure) has been important to our capital markets and was designed to stop insider trading in its tracks so that there is a (more) level playing field for all investors. It’s important that companies comply.

Please read the article here.  (I welcome your comments at ebloxham@thevaluealliance.com)

http://management.fortune.cnn.com/2012/12/17/why-netflix-got-into-hot-water/

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

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Who heads the Treasury and SEC going forward will matter. The decisions on “who” will impact not only our economy and the capital markets but also public perception of government’s value.

Here is an article with my criteria and some possible picks. I would welcome your thoughts at ebloxham@thevaluealliance.com

http://management.fortune.cnn.com/2012/12/04/treasury-sec-leadership-choices/

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ESG stands for Environmental, Social, Governance. It’s a catchy way in three letters to sum up some of the issues that concern responsible owners and overseers (i.e. board members).

Today, the number of long term investors that care about all three letters (ESG) is growing. The U.N. Principles for Responsible Investment outline some of the ways long term investors use ESG. http://www.unpri.org/principles/  Today, the signatories to the principles represent nearly 1000 asset owners and investment managers across the globe.  See the list here. http://www.unpri.org/signatories/

(1) From time to time, I like to take the temperature of board members on these topics.  My latest article suggests that while many board members today are savvy on environmental concerns – and more aware on governance, directors’ awareness around social concerns is highly variable. The lack of awareness on S (as it does on E and G) pushes the locus of ethical leadership outside the organization.

The article posted on Friday is here. http://management.fortune.cnn.com/2012/11/16/hershey-child-labor-suit/

(2) On the governance front, special deals between management and companies should be avoided (think Enron and Chesapeake) and if undertaken, deserve full transparency. This article discusses the lack of disclosure of such a deal at Citi.  http://management.fortune.cnn.com/2012/10/29/citigroup-pandit/

(3) Bloomberg news last week had a story on Morgan Stanley hiring a Goldman trader accused in a US suit.  http://www.bloomberg.com/news/2012-11-09/morgan-stanley-hired-goldman-trader-accused-of-hiding-position.html

Vetting executives and key personnel is imperative.

This article discusses Goldman’s decision to promote to CFO a sales person who was involved in Timberwolf, passing up two women who by all accounts were well qualified for the job.  http://management.fortune.cnn.com/2012/09/25/goldman-sachs-cfo-board/

(4) Board effectiveness can, in part, be evaluated based on compensation practices. Here’s a link to a panel discussion at the Brookings last month discussing compensation governance. http://www.brookings.edu/events/2012/09/27-executive-compensation

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

Please note: We now have a mechanism to provide you with email alerts of posts. To receive email notifications of posts, simply click here.http://www.thevaluealliance.com/bloxham_voice_email_alerts.htm.

The JP Morgan trading issues reflected a lapse in governance. But beyond risk oversight, they also called into question the way in which top executives at the largest banks are paid. Here’s a link to my article on Fortune.com.

http://management.fortune.cnn.com/2012/06/14/j-p-morgans-debacle-its-time-to-talk-exec-pay/

I had the opportunity to design incentive programs using risk based measures in the mid-90s. Implemented properly, these kinds of pay programs can work very effectively to focus executives and managers on the right measures of success. I have written on this topic over the last 15 years, including further information on the regulatory requirements of the sound compensation guidance.  (See http://www.thevaluealliance.com/publications.htm.)

Related to the New York Fed Staff report, the issues raised in the article today include issues on pay I have elaborated on in more detail in these recent articles.

http://management.fortune.cnn.com/2012/04/16/the-terrible-cost-the-u-s-pays-for-derivatives/

http://management.fortune.cnn.com/2012/01/30/ceo-pay-us-economy/

The implications for our economy are clear. The solutions may not come easily, but it is important that we work together to find them.

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

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It is time, as a nation of business leaders, to roll up our sleeves and get to work on the very real economic problems the U.S. is facing – to finally move the needle on the economy, wages for our workers and jobs for the un- and under-employed.

We need to address our issues as a nation of business leaders and stop what has been termed “economic development”, a zero sum game of regions pulling jobs from each other with expensive, unproductive tax incentives, instead of working to maximize the U.S. economy as a whole.

As a nation of business leaders, we need an approach to our problems that involves real expertise, where success can be measured, cross-fertilized and replicated from one location to another.  And we need an approach that is agile, productive and cost effective. In short, we need a solution that makes sense.

A new plan, right in front of us, will roll out soon. An “enterprise development and market competitiveness project” is being launched with specific goals in mind.

“The project is designed to raise incomes and employment…. Focusing on the role of small and medium-sized enterprises … the [project] will facilitate the development of competitive enterprises … by stimulating innovation, enhancing workforce skills, accelerating new enterprise formation, improving access to finance, and addressing shortcomings in the business environment. The [project] will provide technical assistance, training, and grants to … [expand] sales in new and existing markets. The [project manager] and [the U.S. government] will mobilize additional resources from other sources to accelerate growth.”

The manager for this project has been chosen. And work will begin soon.
In Armenia.

Armenia (in rough figures) has a population one-hundredth the size of the U.S. (3.2 million people versus approximately 311 million here). The workforce is roughly 7.1% unemployed versus our July figure of 9.1%.

As all experienced leaders know, one way to solve big problems is to break them down into smaller ones. Another way to solve problems is to copy concepts that work in one arena and apply them, with some adjustments, to other situations.
If we can define a project like this for Armenia with a population one hundredth the size of ours, why not define 100 regional projects of this type for the U.S.?

Of course, to move on such an undertaking requires agility, expertise, funding and a minimum of bureaucracy. The projected cost for those running the project in Armenia is $17 million. The U.S. would need 100 Armenia-type projects; $17 million times 100 is $1.7 billion.

As a benchmark, similar projects have been done in the U.S. for $10 – $15 million in the past. One such example is the Oklahoma City miracle which noted economic development expert Ed Morrison, now Economic Policy Advisor at the Purdue Center for Regional Development, spearheaded with the involvement of business leadership — in particular, Charles Van Rysselberge, who headed the Oklahoma City Chamber at that time.

Where could we get $1.7 billion?

Just as Van Rysselberge did in Oklahoma City, the initial cash could come from business leaders. If CEOs of the Fortune 500 each pledged $1 million per year over the next five years, that would amount to $2.5 billion , more than enough to take on the task. Then, any infrastructure spending could come, just as it did by the efforts of Van Rysselberge in Oklahoma City, from passing local sales taxes to fund those programs. (If you think sales taxes can’t be raised for the right efforts, think again. Van Rysselberge, who moved to Charleston to head up the Chamber there, says that Charleston just this last November passed a one cent sales tax to build new schools and create jobs there.)

Before Oklahoma City, Van Rysselberge had used Morrison to help turn around Shreveport, La, when he was CEO of the Chamber there, and the plan Morrison built was “recognized as the most creative economic development plan in the U.S., for which Morrison won a national award” says Van Rysselberge.

Following his experience at Oklahoma City, Morrison, a Yale graduate and former strategy consultant for Telesis, a spinoff from the Boston Consulting Group, sat down to figure out what had made Oklahoma City and his other successes possible.

He recognized that there was a methodology and, if he could teach it to others, his work could be replicated. (His approach is called “Strategic Doing”.) Strategic Doing is a “lean and agile approach to strategy development”, Morrison says. The process is “open source” and Morrison has established a certification program in “strategic doing” at Purdue University. The idea is to have a way to guide complex adaptive systems, like open networks of people, to take action along the lines of the rules that guide software development in open source environments.

Morrison recognizes that what makes real progress possible in the knowledge economy is not hierarchies nor specific institutions. What makes it possible are networks of passionate individuals supported by passionate leaders. “In a knowledge based economy, networks are the curators of wealth, not hierarchal systems,” he says. “We need collaborative investments, horizontal networks. Entrepreneurs get it,” he says. “Strategic doing” helps these collaborations of individuals “quickly move to co-create value and measurable outcomes” he says.

Strategic doing has now been adopted by an entire network of universities interested in economic development. The initial brainchild for meetings between the universities came from Tim Franklin, director of the Office of Public Partnerships and Engagement at Pennsylvania State University and his wife Nancy, director of Outreach sustainability initiatives and assistant director of Penn State Institutes of Energy and the Environment (PSIEE). They set out to create a national model and make it replicable. Tim Franklin, who is passionate about regional economic development and whose own work in Virginia has won recognition, worked with Morrison to “not just focus on policy” but build a network of universities focused on economic development called TRE Networks, “a system with capacities”, Franklin says. “Now the network provides a neutral space where collaboration can occur and a set of resources for anyone wishing to tap into it”, Morrison says. “The Presidents of the Universities participating have been key. They are the passionate leaders supporting these efforts.”

Several weeks ago a solar summit was held in the football stadium at Arizona State University using the strategic doing approach under the leadership of Todd Hardy, Arizona State’s Associate VP of Economic Affairs in the Office of Knowledge Enterprise Development. “Using the approach, facilitated by Morrison, a group of 120 people met and 40 have signed on to help move forward an agenda to develop Arizona’s leadership and expand its business opportunities in solar energy development”, Hardy says. Hardy was impressed that so much could be accomplished in such a short time. It provided Morrison “a reaffirmation of his approach” Hardy says. “We made a great deal of progress in just a day and a half”.

While the capability exists, funding remains an issue. And that’s where business leaders need to step up, as they did in Oklahoma City.

In 1927, the Shreveport Chamber of Commerce set out a plan for renavigation of the Red River. They held firm to that goal. 68 years later, persistence paid off and it was accomplished, Van Ryssellberge says.

Holding fast and being nimble. As a nation of business leaders, we need both to confidently meet our future and contribute to our future prosperity. Some university leaders have stepped forward. Where will the next crop of Van Rysselberges, from the business community, come from to support these important efforts?

Another version of this article is published here. http://management.fortune.cnn.com/2011/08/23/what-would-real-economic-stimulus-look-like/

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

(We now have a mechanism to provide you with email alerts of posts. To receive email notifications of posts, simply click here. http://www.thevaluealliance.com/bloxham_voice_email_alerts.htm)
 
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Time to eliminate stock based compensation?
FT (Diane Coyle): A couple of remedies for pay excess
 ”I would … like to see investors call time on share incentive schemes altogether.” http://www.ft.com/intl/cms/s/0/18c572e6-b973-11e0-89ee-00144feabdc0.html#axzz1TV6Z7nO5

NYT (Floyd Norris): Usual Growth Leaders Absent From Recovery
“WHY has the job picture been so bleak in the current recovery? A large part of the problem can be traced to unusual weakness in two categories: construction jobs and government jobs.”

NYT (Paul Krugman): The Centrist Cop-Out
“I joked long ago that if one party declared that the earth was flat, the headlines would read ‘Views Differ on Shape of Planet.’”
http://www.nytimes.com/2011/07/29/opinion/krugman-the-centrist-cop-out.html?src=ISMR_AP_LO_MST_FB

Krugman’s commentary is a commentary on the practice of journalism. Of course, what should happen is for the reporter, whenever possible, to go the extra step — get a picture of the earth taken from above the earth and use it in the article too or put it in front of the leaders of the flat earth party and ask the flat earth party to explain why in the face of the picture they say the earth is flat.                Of course many reporters do this – analyze the statements of respondents not just take them down. This takes time and requires the reporter to eschew the short-sightedness and/or pressures of his/her “bosses” (i.e. whoever they are trying to please or follow).

Psych Today (Nassir Ghaemi): Where are the new ideas?
“One of my Harvard teachers …Leston Havens… used to say: ‘Be careful about institutions. Between your boss’s needs and your eagerness to please, you can create a prison stronger than Alcatraz.’”
http://www.psychologytoday.com/blog/mood-swings/201011/where-are-the-new-ideas

When the focus is on satisfing one institution or one person rather than a larger purpose and higher values, neither ethics nor true innovation will flourish.

The “Where are the new ideas?” article discusses the weaknesses in the current state of academic research.  So does Paul Smalera’s article which focuses on economists.

Reuters (Paul Smalera) Krugman says Thoma’s right, except when he’s wrong
“Thoma rightly argues that too many of their academic colleagues don’t risk engaging at all — they are the ones that need to be coaxed out into the conversation, to shed some light on the dark corners of the economy before some other solid-seeming sector (technology, anyone?) implodes and nearly sinks the ship, yet again.”
http://blogs.reuters.com/paulsmalera/2011/07/26/krugman-says-thomas-right-except-when-hes-wrong/

I was invited early last decade as the only non-academic and non-FDIC executive to an FDIC conference to speak on market signals that might provide warnings of a run up in default at banking institutions. In my speech, I offered/encouraged the pure academics to reach out to practioners (like me) to select their research topics and make them relevant. (After all, that was part of the reason I was invited to speak.) No one called.

Regarding techology – technology is one of the only sectors looking to create jobs http://thevaluealliance.com/Blog/?p=47 which makes technology an even more important sector to watch.

Reuters (Felix Salmon): Chart of the day:Techs vs Industrials, Why Tech Stocks Deserve to be Cheaper than Industrials     “in an area where change is unlikely to massively disrupt your business, income streams are more predictable and therefore more valuable.”            http://blogs.reuters.com/felix-salmon/2011/07/22/chart-of-the-day-techs-vs-industrials/ http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/

Besides the obvious difference in business models between industrials and tech companies, another explanation of lower P/Es at tech firms may be the governance at tech vs industrial firms. Good governance can act as a buffer and prevent issues spiraling out of control. The market places a premium on this stability. (The issue of governance which Buffett doesn’t mention is something he faced earlier this year.) http://management.fortune.cnn.com/tag/warren-buffett/ http://finance.yahoo.com/echarts?s=BRK-A+Interactive#chart1:symbol=brk-a;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

WSJ (Nassir Ghaemi):Depression in Command
“the sanest of CEOs may be just right during prosperous times, allowing the past to predict the future. But during a period of change, a different kind of leader—quirky, odd, even mentally ill—is more likely to see business opportunities that others cannot imagine.”                “As for Churchill, during his severely depressed years in the political wilderness, he saw the Nazi menace long before others did.”              “Depression … has been found to correlate with high degrees of empathy, a greater concern for how others think and feel.”
http://online.wsj.com/article/SB10001424053111904800304576474451102761640.html?mod=djemITP_h#articleTabs%3Dcomments

I highly recommend this novel in which Churchill (and the black dog of depression) are featured protoganists. Mr. Chartwell : a novel by Rebecca Hunt. http://www.amazon.com/Mr-Chartwell-Novel-Rebecca-Hunt/dp/140006940

 
The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.