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Shareholders Should Be More Active in Governance

Melissa Klein Aguilar | February 12, 2010

Amid calls for companies to improve their governance practices, pension fund giant TIAA-CREF is calling on institutional shareholders to play a more active role in corporate governance in the post-crisis environment.

In a new policy brief published this month, TIAA-CREF calls on all market participants to "undertake a comprehensive review of their behaviors, processes, and practices to do their part in restoring public trust and confidence in the governance of our public corporations and to maintain it thereafter."

Citing legislative efforts by Congress and the Administration to push through governance reforms aimed at increasing shareholder rights as "necessary, but just the first step," said Hye-Won Choi, TIAA-CREF senior vice president and head of corporate governance, adding that the new rules "will bring about meaningful reforms only if shareholders use them responsibly to hold companies accountable for increasing long-term value."

The policy brief, which TIAA-CREF says should be read in the context of its Policy Statement on Corporate Governance, includes a number of recommendations for long-term institutional shareholders. Among them:

Exercise Rights Responsibly. Investors should vote shares diligently, should not "blindly" support management, and should dedicate appropriate resources, including senior management, to proxy decisions.

Hold Boards Accountable. Calling the election of directors "the most fundamental right that shareholders have," TIAA-CREF says shareholders should be "willing and able" to remove directors when they have performed badly or have been unresponsive to less-aggressive overtures such as high votes against compensation programs or other management initiatives.

Monitor Performance. Monitoring includes discussions with the board and management. Dialogue with directors may include management, but in certain cases could also include unfiltered communication with the board without management. Factors to consider in monitoring companies include long-term performance, board performance, governance and other policies, strategic direction, and leadership. Shareholders also should consider factors of risk, both whether appropriate risks are encouraged, and monitoring performance in the context of risk taken to achieve desired returns.

Ensure Compensation Is Based on Performance. Close monitoring by investors in this area is "crucial," according to the brief. In many respects, TIAA-CREF says the "most significant flaws" in executive compensation reside in the methodologies used for measuring performance, the types of metrics utilized, and the failure to recognize that risk-adjusted returns are ultimately the most important.

"Shareholders have a significant role to play in setting broad compensation policies and should strive to provide thoughtful feedback to companies through engagement, proxy votes, investor policy statements, and advisory votes on compensation," according to the policy brief.

Defend Integrity of Accounting Standards. Shareholders should take a more active position in defending the integrity of accounting standards, since the quality of reported information is "effectively the life blood of financial markets," according to TIAA-CREF.

Increase Communication. Shareholders and boards should work together to develop constructive solutions to the risks posed by governance problems.

Encourage More Long-Term Orientation. Investors should encourage incentives that reflect a "sufficiently long-term period to incorporate an appropriate capital and investment horizon."

Strengthen Investors' Own Governance. Large mutual funds and pension funds, which hold significant stakes in corporate America and therefore have the greatest potential ability to influence corporate policies, should examine fund governance practices to ensure that any potential conflicts of interests are properly managed and that fiduciary obligations are met.

Examine Investment Practices. Investors should examine their own organization and investment strategies in light of market conditions and determine whether any material alterations are appropriate.

The full text of the policy brief is available here.