Boards "Are Doing Better, But They Still Have a Long Way to Go"
from January/February 2008
by Peter Galuszka
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For five years Roel C. Campos was an outspoken pro-investor advocate on the deeply divided U.S. Securities and Exchange Commission. A Democrat, he consistently pushed for greater shareholder say in the nomination and election of directors, often siding with commissioner Annette L. Nazareth against Paul S. Atkins and Kathleen L. Casey, who typically backed the views of top managers. The first Hispanic to serve on the SEC, he also led efforts to help deal with the growing globalization of world stock exchanges.
Campos, 58, the oldest of five children, grew up in Texas and attended the U.S. Air Force Academy. After military service, he graduated from Harvard Law School. As a federal prosecutor in Los Angeles, he handled high-profile drug cases, some so dangerous that he required police protection. He worked in private practice, and before joining the SEC he was CEO of El Dorado Communications Inc., a Houston company that operates Spanish-language radio stations.
Campos left the SEC in September (Nazareth will be leaving too) and has joined the Washington, D.C., law office of Cooley Godward Kronish LLP. He spoke with Corporate Board Member ’s Peter Galuszka a few days before he left the commission. Excerpts:
What is the state of corporate governance in general right now?
I think it has improved substantially, from the investor’s standpoint, since Sarbanes-Oxley was implemented. I also think it still has a long way to go. For one thing, Sarbanes-Oxley requires that the audit committees be made up of independent directors, and I don’t think “revolutionary” is too strong a word for that reform. But the issue now is, what does independent mean? It means not having a business relationship. Yet top managers can still have close friends on the board who aren’t likely to hold them accountable.
How well are boards addressing abuses in CEO pay?
Same answer. They are doing better than at almost any other time, but they still have a long way to go. But there are some good practices developing. Boards are now hiring their own consultants, people who specialize in giving advice to directors as opposed to the CEO or management. That dynamic will help create reasonable pay. Also, [under the new SEC proxy transparency requirements] the board has to provide the rationale behind the compensation that is being provided. So far that’s not being done terribly well overall, but it will improve over time as the SEC’s rules are implemented and enforced.
How do the commissioners work among themselves?
There seems to be a distinct ideological split. Normally, when a group of people has to make a decision they get into a room, hash things out, maybe throw pies at each other, but don’t leave until they all agree with each other. That’s the way most Americans would view making a decision. But we can’t do that because of the so-called Sunshine Act. It says if there are more than two of us meeting together, we have to do it in public. The act has a good purpose, but at a very human and practical level it keeps us from working very efficiently. Our decision-making and interaction is very cumbersome. You have to meet with the others, always just two of you, and go down the line. And each says, “I’ll agree if you do this.” Then you have to go back to the first guy you thought you had an agreement with. Then you go to the next commissioner, and if that commissioner wants to add something else…
It becomes particularly acute when you have a situation with the divisiveness that is apparent with this commission. On the idea of shareholder access, we have commissioners who happen to be Republican who do not find anything positive in having shareholders holding large influence over directors. Part of it is their ideology and principles. Part of it is that they haven’t heard an argument they like. They believe that companies should be left alone. They can’t allow special interests to hold the day.
What are investors really concerned about? Overall returns and performance. If there is a whiff of special interest with a proposed director, that person will not have a chance of getting elected. No member of labor has been elected to a major board in the U.S. The shareholder base is too divided. So there is a tendency, all things being equal, to support the management view.
Two commissioners subscribe to those views. The two other commissioners, including me, believe that if you are an owner, which shareholders are, then you should have some say about which directors are chosen. The owners don’t have the right to run the company—that’s not in our laws. But they have the right to influence who’s elected.
Are you pretty much done with adjusting Sarbanes-Oxley?
Yes.
Some groups claim that foreign companies avoid U.S. stock markets because of Sarbanes-Oxley.
If this is such a bad law, why are so many countries around the world copying it? All the changes Sarbanes-Oxley mandated have been absolutely huge in attracting capital to the U.S. Foreign investors tell me every day that they are investing in U.S. equities because they believe that their capital is the best protected, thanks to Sarbanes-Oxley.
How is the SEC going to help make global stock markets more interconnected?
We have proposed a road map that will eliminate the requirement that foreign companies need to reconcile their financial results with U.S. GAAP [generally accepted accounting principles]. That will be done possibly as soon as the end of 2008 or in 2009. It’s huge. If foreign companies are listed in the U.S. but don’t have much activity, we’ve made it easier for them to leave. We support the convergence of the standards set by U.S. GAAP and the IASB [International Accounting Standards Board]. We’ll make it easier for brokers to sell foreign stock in the U.S. And we are considering mutual-recognition mechanisms where if a home regulator passes on an IPO abroad, that IPO could be sold in the U.S. with that same prospectus. We already do this with Canada.
How could boards improve themselves?
I think boards should have a lead director. You don’t always have to have a separate, independent chair, although that’s what Europe does, but you need a lead director to remind the management team that the board is there to promote the very best performance of the corporation. The board has duties to the investors as well as the management team. They are going to be collaborative but also ask hard questions. This shouldn’t be looked upon as being adversarial. They’re certainly not a rubber stamp.
Also, there should be a regular and robust dialogue with investors. I think the good boards and companies already do this. They are cognizant of the need to talk to very large investors in particular, and there must be a mechanism to do so that doesn’t overwhelm individual managers. That way discussions regarding the need for change become much more moderate. I don’t think any investor wants to run the company.
Then I think there should be some very clear-eyed discussion with responsible investor groups about how they possibly can nominate directors to the board. This can be done without antagonism.
How about majority voting to elect directors?
Well, it seems to have traction with both investors and management. Most companies now have adopted either formal bylaws or policies that provide that if a director doesn’t obtain a majority vote, he or she will be asked for their resignation. The SEC has not made this happen. It resulted from shareholder activism.
What will the hot topics be in 2008?
Shareholders are very concerned about two proposals made by the SEC last summer. One, the “short” proposal, would forbid shareholders from making formal proposals regarding elections of directors. Shareholders are completely up in arms about it.
Shareholders don’t like the other proposal either. That one says a group of investors that owns 5% of the company would be permitted to make proposals that change the bylaws about how directors are elected. Shareholders say the 5% level is simply too high and that it would be impossible to reach that level in many large companies.
How did you vote on these proposals?
I voted no for the first and yes for the second. Our chairman [Christopher Cox] was the split vote on both. He voted yes for both proposals. He wanted to cover the waterfront, essentially, by providing himself and the agency the full range of options as the SEC goes into a final resolution of the matter. You had two commissioners voting no and two, me included, voting yes. So he put off the decision for a final day. Remember, both are still only proposals. The SEC still has to make a final resolution.
How do you rate Chairman Cox?
In my view, he has been an outstanding chairman. He’s seen as an evenhanded, highly independent leader. He will be largely judged by how he handles the shareholder proxy situation I just talked about.
What about regulating hedge funds?
There is no momentum at the SEC to further regulate hedge funds.
