“We Are Looking For Fundamental Changes To The Corporate Governance Playing Field. We Want Much Greater Accountability On The Part Of Directors. And We Want To Be Seated As Adults At The Dinner Table.”
An Interview with Richard C. Ferlauto, Director Corporate Governance and Pension Investment, American Federation of State, County and Municipal Employees, AFL-CIO
Q. Tell us a little bit about yourself, Rich, and exactly what you do at AFSCME.
I’m responsible for representing public employee interests in the public retirement systems where their retirement assets are invested. We have 1.6 million members in 48 states, the District of Columbia and Puerto Rico, and they have over $1 trillion dollars in assets, which are held in over 150 public pension systems. And this is the key to all the Corporate Governance activities we engage in: Our main focus is on creating value and preserving the value of our members’ investments.
I’ve been with ASFCME for seven years. Before that, I spent 15 years at ISS. Prior to that, I was with a mid-sized think tank in DC that focused on State-based economic policies, where I specialized in and consulted on economic development. Prior to that, and kind of interesting, maybe, in today’s environment, I was a housing expert - at a New Jersey think-tank at Rutgers. Currently, I serve as liaison to public pension systems and, aside from working with them on corporate governance issues, I work with many of them on their internal investment policies.
Q. Before we get to the really juicy stuff – your plans for 2009 – tell us a little about what you did, and how you did in the 2008 proxy season.
We’ve been submitting about three dozen proposals a year on average, where we target the poorest performers in our portfolios. Our main effort has been to expand the corporate governance debate - and to bring innovation to the corporate governance space. We try to promote market-based innovations, and specific actions that will improve corporate performance.
Our two “signature proposals” have been Say-On-Pay and Proxy Access. Frankly, we are looking for fundamental changes to the corporate governance playing field. We want much greater accountability on the part of directors. And we want to be seated as adults at the dinner table. So, in addition to two new initiatives we plan for 2009, we plan to continue to push for shareholder access, and we plan to submit 90-100 Say-On-Pay proposals.
Q. Why more Say-On-Pay proposals, when Federal legislation seems so likely now?
We don’t think it will happen before proxy season, and we want to be sure there’s continued momentum here.
Q. And what about the Proxy Access issue? It seems to many observers that what we’ve ended up with - as a result of the big move to majority voting - is a much more powerful weapon than proxy access when it comes to effecting board changes.
Majority voting has given us a powerful hammer, for sure…
Q. Isn’t it more like a wrecking ball, in terms of how easy it is to oust directors that are perceived to have been out-of line in some way?
Maybe so; Majority voting can be used rather easily to punish failed boards. But the goal of Proxy Access is not to punish boards, but to place change agents on weak boards, which is why we feel it’s so important to have.
Q. So let’s hear about the two new initiatives you have up your sleeve for 2009.
The credit crisis caused us to tear up our old game plan. We looked at the executive pay restrictions in TARP, and we realized that there should be restrictions on pay incentives that end up promoting high levels of risk. Companies need much better definitions and discussions of the risks they take, and there needs to be a much better alignment of pay and risk.
Q. So what, exactly, will you be proposing in 2009 that’s new?
The first proposal – it’s kind of like ‘golden handcuffs’ – or a better name, maybe, is ‘Retention Beyond Retirement.’ We’ll be proposing that companies will have to require executives to retain significant portions of their pay for two years after they retire. Exxon Mobil, by the way, has a ten year retention policy for senior executives, and Citi also has a surprisingly good retention policy. We expect to file retention proposals at a dozen or so companies next year, sort of as a test, and we will review and revise them going forward.
We’re calling the second new proposal we’ll be submitting “Bonus Banking”, where short-term bonuses would be escrowed, and paid out over three years. We expect to file a half-dozen or so of these.
We will also file a few proposals addressing ‘golden coffins’. And, while we hate them, they’re more of a nuisance, rather than being something that amounts to the kind of structural change we want most.
Q. How does your status as a union pension fund influence the selection of companies, and of the proposals you submit? Do ‘union issues’ come into play here?
We represent public employees – so there’s no relationship at all with any company that might get a proposal. There probably are other proponents in the pension world that take these kinds of issues into account, but that’s not us. Any companies that get a proposal from us are fully deserving of reform. And, although it’s probably correct that there are ‘other issues’ at many of these companies too, that’s not our focus.
Q. Tell us a little more about how you target companies for proposals. We have had a very big focus on financial firms, where there was extraordinary executive comp, and where, well before the credit crisis, there were many troublesome risk indicators. We will continue a strong focus on this industry.
We also pay particular attention to the poorest performers in our portfolios. But it’s really all about directors. We do a lot of “Director Mapping” where, at our poor performers, we trace relationships at other companies, and often find similar troubles there. We focus a lot on the comp-committee and nominating committee directors, and we have been putting a lot of emphasis on peer assessments of directors by third parties.
Q. Since it sounds like you may give ‘brownie points’ here, do you find companies being more receptive to the idea of peer reviews of individual directors?
No. I spoke to a group of 50 or so directors the other day, and there’s still a strong reluctance to do this – despite the potential ‘hammer’ or ‘wrecking ball’ aspect that comes with having a weak director where there’s majority voting - and even while many directors ask about ‘problem directors’ and what to do. But we are looking for much more disclosure from nominating committees as to the nominating process, and exactly what they do - and exactly what inputs they get, and from where – and much more disclosure as to the qualities they look for in new directors. We would also like to see much more disclosures from new nominees about the evaluation process, and, instead of the usual company drafted bio, a statement from new director nominees themselves.
Q. Are there any other “hot buttons” for you as we look ahead to 2009?
We still aren’t filing proposals yet, but the credit crisis will probably be a very big factor. We’re looking for full disclosure of risks - and for a much better discussion of risks in the MD&A. Climate risks are becoming increasingly important. There is a very big price here at many companies.
Q. Tell us a bit about your process. Do you file first and ask questions later? Is having a dialogue, and maybe looking to negotiate things out with target companies a big thing for you?
It’s a combination - probably about 50- 50, although now we are engaged in dialogues with so many companies… and maybe we have been a little more successful lately in negotiating things out, but mostly we are focused on our core proposals.
Q. Do you have any advice to companies that want to stay in your good books – or simply to fly under your radar screen?
To keep in our good graces, we want to see increasing accountability, increasing transparency and “good governance” - where companies act responsibility, over the long term. We have never been for “check the box” corporate governance. And, as I said earlier, we want to empower share owners…we want them to have a voice with directors… we want the ability to nominate new directors…and we want the ability to fire as well as hire, and to have a bigger voice in strategy.