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Exclusive Q&A on Corporate Governance with Robert Mundheim

Posted: 13th May 2016 09:57
What are the main regulators and legislations that apply to corporate governance in your jurisdiction?
The internal affairs of the corporation (the role of the board, the powers of shareholders) are governed by the corporate law of the state of incorporation.  Most of the major U.S. corporations are incorporated in Delaware even though they carry on almost all of their business outside Delaware.  Federal law (Sarbanes-Oxley and Dodd-Frank) spells out some important governance provisions (that large public corporations must have a majority of independent directors, their Audit Committees are required to be composed solely of independent directors).  The stock exchanges and NASDAQ also have governance requirements for listed companies (e.g., Compensation and Nominating Committees must be composed solely of independent directors).  The SEC, either through disclosure requirements (which can change behavior that must be disclosed) or through its oversight of the stockholder voting process which can have a significant impact on some aspects of corporate governance.  In the wake of the financial crisis, bank regulators have imposed governance requirements on many banks.

Can you summarise the notable trends relating to strategy formulation, risk oversight, performance evaluation, succession planning and shareholder engagement?
The emphasis on the risk management function has increased significantly since the financial crisis of 2007, to a greater degree in the case of financial institutions than in the case of operating companies.  For example, the London Whale incident which cost JP Morgan roughly $6 billion in trading losses focused attention on the need for financial institutions to have a risk management function which is independent in spirit, knows that it must escalate problems, and has a clear reporting line to the board or committee of the board.  The risk management function should also report to the business so that its head remains accountable for risk management failures.

Given the strength of shareholder activism during 2015, how can companies ensure they are better prepared to overcome this challenge?

The most effective preparation for potential attack from an activist shareholder (other than excellent performance) is to talk on a regular basis with your largest shareholders so that they know what the company is doing and why.  The board should also not dismiss out of hand activist analyses and suggestions.  Although some activists are very focused on short-term results, often their analysis of a company’s problems make sense and the persons they suggest for the board prove to be helpful.  That appears to have been the experience of BONY Mellon with Ed Garden, a nominee of the Trian group.  Even when activists focus on short-term results, it is often because management has delivered poor results over a fairly long term.

Can you outline the advantages and disadvantages of separating audit and risk committees?
The decision whether to create a separate risk management committee of the board of directors, assign risk management responsibilities to the Audit Committee, or simply leave responsibility for risk management to the entire board depends on the size and complexity of the company, the risks which the company faces, and the composition of the board.  I serve on the board of a $1 billion company.  We do not have a separate risk management committee.  One of our principal risks is retention of the senior management team.  The Compensation Committee has that risk very much in mind.  Multi-national banks typically have a separate board level risk management committee.  It tends to monitor closely the trading activity of the bank.  However, the Audit Committee monitors many of the internal controls as reviewed by Internal Audit.  The Compensation Committee tries to make sure that the compensation structure incentivizes appropriate conduct and does not encourage behavior at odds with the risk appetite of the bank.

How has the composition of skill set and representation of a diversity of interest altered in the board room in recent years?

Corporate failures such as Enron and Worldcom, and the need to bail out financial institutions in the recent financial crisis have highlighted weaknesses of boards in discharging their monitoring responsibilities.  Recent attention has been focused on populating boards with directors who understand the corporation’s business or certain aspects of it and have the time and willingness to attend to board responsibilities.  The recent elections to the JP Morgan board of Tim Flynn, Linda Bamman and Michael Neal are good examples of this development.  There have also been significant voluntary efforts by U.S. boards to appoint women and minorities.  The results (roughly 22% of directors on Fortune 100 company boards are women) leave much room for improvement.  This effort is impeded to some extent by slow turnover on boards.  Adoption of term limits and enforcement of age limits are part of the process for opening up board seats.

What are the most common governance mistakes that firms make and how can they be avoided?
Senior management and boards should be setting an appropriate culture for the corporation.  That includes making their expectations clear to all employees.  Employees should have relatively easy and safe channels (e.g., anonymous channels) to make departures from expected behaviors known to more senior management and if necessary boards.  That appears not to have happened at GM, Volkswagen or Toyota.  It did not appear to have happened at many financial institutions.  In part in response to heavy regulatory pressure, boards and senior management of financial institutions are expending significant effort to create an appropriate culture and to establish reporting lines (and other opportunities) to encourage behavior consistent with such culture.

Robert Mundheim is of Counsel at Shearman & Sterling and Professor of Law & Finance at the University of Arizona College of Law.  He has been Special Counsel at the SEC, General Counsel of the U.S. Treasury, and Executive Vice President and General Counsel at Salomon, Inc.  Mr. Mundheim was the University Professor of Law & Finance at the University of Pennsylvania Law School and its Dean.

He has been a member of the board of directors of 8 public companies, a Member of the Council of the American Law Institute for about 30 years and an Adviser on its Principles of Corporate Governance.  He is a founding Trustee of the American College of Corporate Governance Counsel.

Robert can be contacted on +1 212 848 7738 or by email at

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