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Short-termism is often lamented for a time and then the issue fades to be revived again in fits of passion.

It is a subject I have written about for years and put into practice in the design of performance criteria for compensation plans.

The Corporate Governance Alliance Digest discussed the CFA (chartered financial analyst) community and the Business Roundtable coming together to plea to “Break the Short Term Cycle” in 2006. http://www.thevaluealliance.com/PDF/CGADigest072406.pdf

With the financial crisis, calls were renewed to address the issue in the banking community. Regulators, including the Federal Reserve and FDIC, have sought to describe in guidelines for the banking community the importance of longer term thinking in setting performance criteria. See http://www.thevaluealliance.com/PDF/arkansas_banker_feb2010.pdf  or listen to http://www.compensationstandards.com/nonMember/InsideTrack/2010/01_05_Bloxham.htm for discussions of the Federal Reserve’s recommendations.

Despite the discussions, issues exist. Fast forward to yesterday when the the Wall Street Journal’s “Best on the Street” survey for 2010 was published. The “Best on the Street” singles out analysts who have performed better than their peers.

So what is the performance criteria for analysts to be considered best on the street? I checked with Factset to get my facts straight. Performance returns used in determining the best on the street are based on one year or less of performance. Specifically, the returns attributed to an analyst are calculated as of the date of a recommendation (sometime in 2009) and last through the time of change of that recommendation (sometime in 2009) — or the end of year (2009), whichever comes sooner.

The awards of best on the street are therefore based on the ability to call short-term movements in stock price. The performance criteria are constrained within the  prior year i.e. an ancient astonomical measurement of the time it takes for the earth to revolve around the sun.

I think a different and longer time horizon is warranted, one suited to the long term investor.

It may seem a minor thing but performance criteria and time horizons matter even for non-cash payoffs. I have known people who go to what I consider extreme lengths to win awards.

With say on pay coming as a result of the recent financial reform measures passed by the House and Senate last week, performance critieria — and pay for performance will come into the spotlight even more.  Here’s an article I wrote for Fortune on that yesterday.  http://money.cnn.com/2010/05/25/news/companies/say_on_pay_law.fortune/index.htm

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) 

Preliminary results in the Massey election show the director election was very close.

According to a Wall Street Journal report by Kris Maher and Joann Lublin this afternoon: ”Michael Garland, a representative of CtW, cited preliminary results from a proxy voting agent and said Massey President Baxter Philips won reelection with 49.6% of votes withheld by shareholders, while outside directors Dan Moore and Richard Gabrys won reelection with 49.8% and 48.5% of votes withheld, respectively.”

In a press release today, Massey said that this was a “show of confidence” from shareholders. Final results will be available in Massey’s 8k filing in the next few days. 

Facing a criminal probe of its directors and officers, there is still much work to be done by the Massey board with respect to safety oversight as I explain in this article I wrote for Fortune which you can read here.

http://money.cnn.com/2010/05/17/news/companies/massey.shareholder.meeting.fortune/

Beyond the issues I cover in that article, there seem to be other issues with oversight.

For example, the proxy shows that Massey has a management risk analysis committee.

From the proxy: “A management risk analysis committee holds regular meetings to identify, discuss and assess enterprise risk from current macro-economic, industry and company-specific perspectives. The management risk analysis committee is comprised of the Chief Financial Officer, Chief Compliance Officer, Corporate Counsel, Sales Companies CFO and a Special Assistant to the Office of the Chairman.”  

Of note, no one wearing a safety or environmental hat sits on this committee.

Further, the interaction the board seems to have with this committee according to the proxy relates to financial risks only. “On a quarterly basis, the Finance Committee receives a report from the management risk analysis committee on our most significant financial risks, including a summary of the risks assessed and risk mitigation strategies.”

No where in the “Board’s Role of Risk Oversight” or elsewhere in the proxy does it state that the Safety, Environmental and Public Policy committee receives a similar report for the risks it oversees. 

Beyond these issues, shareholder relations at the firm need a boost. As an example of what not to do provided in this case, when shareholders are expressing concerns, boards, in their response, should take a deep breath and try to avoid antagonistic phrases such as:

• As I am sure you are aware
• You claim
• This is patently false
• I fundamentally disagree with the substance of your argument and do not subscribe to the formulaic approach you have outlined
• You go on to mention a list of generic corporate governance issues without acknowledging
• Narrow interests

Shareholder “relations” require a “relationship”. Polite discussion and even disagreement are possible but having a relationship is incongruous with a high level of antagonism.

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) 

According to Reuters and the Wall Street Journal today, the FDIC is proposing that forty of the largest depository institutions under its jurisdiction write living wills.

One thing I haven’t seen mentioned in those articles is the origin of the living wills concept. In November, the Financial Stability Board identified 30 institutions world-wide which it asked to prepare living wills by this summer.

I think the living wills concept has a great deal of merit as a risk managment and communications tool not just for banks but for other corporate boards as well.

Our world needs active leadership in the boardroom. For more on the living wills concept and other boardroom leadership issues, please see this article which was published in January. http://www.thevaluealliance.com/PDF/leadership_boardroom.pdf 

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) 

When I was interviewed by Morgen Witzel on “The Future of Capitalism” for the March/April 2010 Corporate Finance Review, one of the issues I discussed was the recent history of capitalism which has included changes to the standards that firms on Wall Street employ. 

As an example, I pointed to a conversation I had with John Whitehead, retired co-Chairman of Goldman Sachs. In that conversation, he and I discussed how he viewed underwriting standards at Goldman and how, as a result, Goldman turned down business that it thought would hurt capital market participants.

Here is a link to take you to that conversation. (It may load a bit slowly so please be patient.)

http://www.thevaluealliance.com/bloxham_whitehead_video.htm

It demonstrates the degree to which players like Goldman Sachs can shape the nature of capital markets by the decisions they make. It provides a standard for all current participants on Wall Street to live up to.The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com