Corporate Governance in an era of Clawbacks, ESG, Mega-Managers, and Zombie Investors

Two expert panels came together at the Conference Center at UBS Tower on November 29th to provide insights to various aspects of board related corporate governance. The first panel, moderated by Eileen Kamerick, focused on Management and Directors. Kamerick is a current and previous board member of several financial and industrial companies and is an adjunct professor. The panel included Thames Fulton, managing director at RSR Partners (executive recruiting); Frank Jaehnert, member of the board of directors of Briggs & Stratton, Itron, Inc., and Nordson Corporation; and Todd Henderson, professor of law at the University of Chicago Law School.

Kamerick started with a question about board diversity – should investors care about diversity? Henderson believes board diversity is a top issue and gave the following example of why boards lack diversity. When adding board members it is typical to get one or two women and / or a minority on a board, and then the board stops diversifying. Boards go through a ‘we are diversified enough’ type of thinking. Boards also suffer from a bias by what traits they look for in a new board member, which is usually for a former CEO or an operating exec type skill set. The pool of women or minorities coming from this group is already small, so the odds of getting a diverse board pick is reduced. The lack of diversity in the C-suite carries forward to the board. To combat the small pool of current/former women CEO’s corporate boards should look for a skill set other than a CEO, looking at other non-corporate entities such as universities, foundation/endowments or the private equity world. While the panel was in favor of board diversification, they were against legislation for mandatory board seats for women – legislation of behavior is not usually effective.

The panel then considered the topic of executive compensation, which is under the prevue of a corporate board. How should the board determine reasonable compensation? Jaehnert advised that the alignment of executive compensation with that of the shareholders is crucial, and that compensation should not be mandated but it should be provided in a defined and appropriate manner. Henderson considered that boards and investors spend too much time on CEO pay, because CEO’s are underpaid relative to revenues.

Kamerick asked the panelists to elaborate on how to set executive compensation. The panel advised that even if peer compensation or quasi government mandated compensation is used as a guide, the compensation committee is still responsible for setting executive compensation. However, most of these committees lack the training or background that is typically required. To obtain the appropriate skill set a board should have a current or former head of HR as a board member. In practice a board is more likely to rely on the job training, gathering executive compensation skills in a disjointed manner. One area that should be considered to obtain expertise on management compensation is the private equity world, which is better suited to choose compensation packages.

Kamerick brought up claw back policies – should they be used, are they effective. The panel as a whole was in favor of claw backs for a variety of instances including fraud, and for reputational damage as a result of executive actions. The panel advised a downside of claw backs; provisions of this sort would increase CEO pay. If a CEO understands that he/she will continue to be responsible for claims against them, the CEO will mitigate that by asking for more compensation. To combat this behavior the panel suggested using disgorgement of earnings, which would work better than claw backs.

The last topic the panel discussed was that of board services. An example why board services make sense was provided; when a corporation needs financial or legal help, the corporation hires a CPA or law firm to get the needed expertise. However, when a corporation needs governance (via a board) they hire individuals who do not have the collective depth of governance knowledge required. Hiring for board services should be allowed, but is illegal in Delaware (which exclude corporations) as well as in the Investment Company Act of 1940 (which exclude investment companies). An area in which there examples of professional boards could be found in the LLC space.

The panel provided some final thoughts based on audience questions;

  • If you have been on a board for a lengthy period of time, you are probably no longer independent.
  • Search firms are not favored by boards when looking for new board members. The board will seek out people they know or have had a history with.


The second panel focused on topics related to investors and asset managers. The moderator was Bob Browne, CFA, executive vice president and CIO at Northern Trust. The members of this panel included Gillian Glasspoole, CFA, senior associate of Thematic Investing for the Canada Pension Plan Investment Board; James Hamilton, CFA, director at BlackRock; and Kevin Ranney, director of product strategy and development at Sustainalytics.

Browne started with a question about analysis of a corporate board governance – is good or bad governance worthy of investor analysis? Hamilton advised that as an investor engagement of a board is process oriented, meeting with the board as well as senior management. It is through these meetings where one can get a sense of if the board is adding value. Depending on the size of the corporation, some education of the board regarding governance can occur. Larger cap companies have ESG processes in place, whereas the middle and small cap corporations are more open to having institutional investors provide guidance on ESG good practices.

Browne then asked the panel to consider difference between corporate governance in Europe versus the United States. Europe is more tuned in to ESG and looks to meet or exceed international standards. In Europe board diversity and executive compensation are linked to ESG targets. From the asset owner perspective Europeans are more inclined to think about ESG and have specific goals to address them. However, Europeans do not try to link alpha to ESG as much as it is done in the United States and Europe considers ESG value unto itself, without the need to have a positive correlation to alpha.

Another cultural board difference between Europe and the United States is the holding of CEO and chairman role by the same person (common in the United States, frowned upon in Europe). Hamilton considered that holding the CEO and chairman position is an acceptable practice, but other strong independent voices are needed in the boardroom to offset that dynamic.

The panel closed the program with a discussion regarding board transparency. How does an investor know if a board is doing the job they were hired for, and they are acting in the best interest of stakeholders? The panel noted in practice it is hard to determine if a board is engaged, but there are ways to get an overall idea. Do all the board members go to all committee meetings, do they have onsite visits to offices other than the headquarters? Learn to ask the correct questions and then you will uncover issues that will impact the value of the company.

Volunteer of the Month: December 2017


Amir Moaiery, CFA

CFA Society Chicago would like to recognize Amir Moaiery, CFA, for his contributions with the Society’s Industry Roundtables event and the Job Seekers Forum. Today, Amir Moaiery is the Professional Development Advisory Group’s Volunteer of the Month.

Amir has been a CFA Society Chicago member for more than two years and joined the advisory group in July 2017. He worked with a small group of volunteers that planned the Society’s Industry Roundtablesa member-only event where table hosts discuss their respective sectors in the investment industry. Amir has also been involved in ensuring facilitators of the Job Seekers Forum are prepared to lead discussions by updating the Job Seekers Facilitator Guide with current tips and best practices.

Thank you Amir! We’re lucky to have you as a part of our society!


Distinguished Speaker Series: Myron Scholes, Ph. D., Janus Henderson Investors

Nobel Laureate and co-originator of the Black-Scholes options pricing model Myron Scholes, Ph. D., gave a crash course to a sold-out crowd on utilizing risk management over stock selection at the Palmer House Hilton on November 17th. Over 250 CFA Society Chicago members and finance professionals braved a dreary day to learn how options might be used as a predictor of market prices.

Scholes maintains that as investors pursue compound returns, tracking error and portfolio mandates constrain managers to stay close to the benchmark. Management of portfolios is left to asset allocators and active managers will hug the benchmark in times of risk. Relative performance constraints or not deviating from the benchmark is an implicit cost. The take away is that average returns produce average performance.

When looking at bell curve distributions, Scholes suggests focusing on the gains and losses in the tails to manage risk and not paying attention to the averages or the “stuff in the middle”. Every performance period matters and as time compresses, risk increases with compound returns being asymmetric. Letting risk fluctuate around an average can reduce returns. He also opined that with time diversification and cross-sectional diversification being free, time diversification is more important.

So, given all of this, how do we get measures of risk?  This is where options markets come in to provide risk prices. Per Scholes, people ignore valuable options information when they are constrained. As Scholes expanded on this theme, the audience learned about the fallacies of some of our industry’s well-known and highly utilized risk measures. For example, our much loved and used Sharpe ratio does not fit in with this thought process because it is a mean variance measure. The closely watched Chicago Board Options Exchange Volatility Index (VIX) gives correlations that are in the center of the distribution. Knowing the limitations of traditional risk measures, how can investors use option information? Back tested options information should be used to see the risk distribution allowing reallocation and management of risk in a portfolio.

The presentation concluded with a question and answer session. Attendees were clearly thirsty for information about this methodology from this industry icon and were interested in comparing it to momentum investing and other popular valuation methodologies.

CFA Society Chicago 31st Annual Dinner

The Chicago Cubs didn’t win the World Series like they did during last year’s Annual Dinner but the 31st CFA Society Chicago Annual Dinner was yet another terrific evening honoring 163 new CFA charterholders and two recipients for the Hortense Friedman, CFA, Award for Excellence. We also had fantastic keynote speaker, David Rubenstein, founder of The Carlyle Group.

During the evening, our newest charterholders were acknowledged for making substantial investments in their careers by passing all three levels of the CFA exam as well as completing the four years of relevant work experience required.  Earning the CFA designation requires a significant investment of time, energy, and tenacity demanding for most nearly 1,000 hours of study.  The new charterholders are joining an exclusive club of investment professionals that possess both a high level of investment aptitude and a commitment to uphold the highest ethical standards.

Congratulations to all the new charterholders!

CFA Society Chicago Chairman Marie Winters, CFA

On behalf of the Society, congratulations to all those who met the rigorous requirements to become a CFA charterholder. After acknowledging the new charterholders, two individuals were honored for the Hortense Friedman, CFA, Award for Excellence.  This award is presented annually to individuals who have demonstrated initiative, leadership, and a commitment to professional excellence.

Larry Lonis, CFA, and Marie Winters, CFA

Larry Lonis, CFA

The first award recipient was Larry Lonis, CFA, who has worked in the industry since 1989, first for JP Morgan and more recently for Bank of America’s US Trust wealth management group where he served as the lead portfolio manager for a REIT equity strategy. Currently, he serves as the COO for the specialty asset management unit specializing in direct investments in oil and gas, farm, commercial real estate, timber, and private business assets.  In Larry’s speech, he was most thankful for being able to have a career where he is paid to learn every day as well as work alongside the incredibly bright people that he has had the opportunity to work.  As his father would always remind him, the most valuable asset each of us own is our name, which we must uphold to the highest standard along with the industry and the CFA designation.

Robert Harper’s son, Blake Harper, accepts the award on his behalf.

The second award went to Robert Harper, CFA, (posthumous) who grew up on the north side of Chicago, attended the University of Illinois where he studied Finance, and earned his MBA from Northwestern University.  He started his career at Stein Roe & Farnham where he became a senior analyst and Partner.  He later spent 22 years at Harris Associates, where he was the first director of research and the first institutional portfolio manager.  Mr. Harper was known for his contrarian views and was actively involved with the Investment Analysts Society of Chicago, known today as the CFA Society Chicago.

As the Friedman awards concluded, David Rubenstein took the stage and captivated the audience with a collection of videos of himself, including commercials, one in which he was running a young girls lemonade stand in which he suggesting bringing in LP’s and taking the company public or an outright sale through an LBO, in another video he was out-lifting bodybuilders in the weight room and another, showcasing his rapping ability while promoting his firm, The Carlyle Group.  After several laughs, Mr. Rubenstein talked about how he started his private equity firm, The Carlyle Group, which led to a review of how his success at Carlyle lead him to contribute philanthropically to our society, and finally a list of predictions for the economy over the next 12-18 months.

Rubenstein grew up in Baltimore, the son of a blue collar Jewish family whose father worked at the post office and never made more than $7,000/year.  In hindsight, it was a great advantage to have the unconditional love of two parents that didn’t have a lot of wealth – you know you’re going to have to do something on your own to create your own success.  Rubenstein attended Duke, where his initial calling was into politics after being captivated by John F. Kennedy’s first inaugural address given on January 20th, 1961.  This is the speech when JFK famously said, “Ask not what your country can do for you, but what you can do for your country.”  Continuing with his passion for politics, Rubenstein subsequently pursued law school at the University of Chicago where he graduated from in 1973.  After law school, he went to work for the man who wrote JFK’s speech, Ted Sorensen, who saw Rubenstein was interested in politics, but that he didn’t have the skills to be a terrific lawyer.  From there, he worked as chief council for Birch Bayh, a former US Senator from Indiana, who dropped out of a political race 30 days after David joined leaving him without a job.  Rubenstein then found a job working for Jimmy Carter at a time when Carter was a 33 point favorite to beat our Gerald Ford.  President Carter later won by only one point.  One of Rubenstein’s jobs while working for President Carter was to fight inflation, and if you remember back to this time inflation rose as high as 19%!  Quite the contrast from several economists today more worried about about deflation in today’s environment.  President Carter later ran against a much older Ronald Reagan and lost, putting Rubenstein yet again out of a job.  Without your party in power in Washington, it’s safe to say it’s very hard to find a job.  “If you want a friend in Washington, go buy a dog.”

Reconsidering his path in politics, Rubenstein read a blurb in the newspaper that changed his life.  The article highlighted Bill Simon whom started an investment firm which performed a “leveraged buyout” in which it bought Gibson’s Greeting Cards from RCA for $1 million and made $80mm in two-and a half year period.  He had the ambition and entrepreneurial spirit to start the first private equity firm in Washington DC and recruited the CFO of MCI and an executive from Marriott to be his partners.  They named their firm “The Carlyle Group” after a hotel in New York, for which ironically none of them had ever stayed.  The first four investors in their fund collectively contributed $5 million, or $1.25 million each.  The first deal was Chi Chi’s, a fast food Mexican food company that was looking to go private after being a public company.  The investment turned out successfully and today Carlyle Group has grown to one of the largest private equity firms in the world.  Rubenstein attributes the tremendous success to the creation of numerous styles of funds: a small buyout fund, a growth fund, a mezzanine fund, a debt fund, an institutional fund, and last but not least a family of funds among others.  He and his partners then took this idea of a multi-faceted fund structure and globalized it.

At 54 years old, Rubenstein came across a second newspaper article that also had a significant impact on his life.  This time it was an article of the wealthiest men in the world according to Forbes magazine, where he was featured for creating a very large fortune.  After living two-thirds of his actuarial life, Rubenstein signed a pledge to give away nearly all of his net worth—donating his fortune to educational institutions, medical research firms, and volunteering his time by serving as Chairman of Kennedy Center, Lincoln Center, and The Smithsonian.  A few years later, a THIRD article changed his life, this time coming in the form of an advertisement.  Flying home from London to New York, he read an invitation that an official copy of the Magna Carta was being auctioned off, of which there are currently 17 copies of around the world.  Ross Perot had bought one in 1981 and had since decided to sell it.  Rubenstein prevailed in the auction and has now donated it to the United States National Archives.  He continued purchasing historical documents that had significant to our country’s founding including the Declaration of Independence, the Emancipation Proclamation, the Thirteenth Amendment of the Constitution, rare copies of the constitution, and the first map of the United States.  After acquiring these meaningful documents, he has put them in places where Americans can see them so Americans can be inspired to learn more about the history of our country.

Rubenstein left us with quick yet informative bullets on his forecast for the economy and private equity industry:

  1. We are not going to have a recession anytime soon.  We are likely to have the longest growth cycle in the post WWII era
  2. New Fed Chair Jerome Powell will continue the Federal Reserve’s rate increase trajectory. Expect a 25bps rate increase in December
  3. US unemployment rate will hold steady and we will stay near full employment for the near-medium term
  4. Core inflation will stay below 1.5%
  5. NAFTA will be renegotiated but we will not withdraw
  6. We will have a tax cut bill.  Corp tax rate will go to 20%.  AMT / Estate tax will go away and repatriation will occur.  401k, SALT taxes will be preserved.  Expect tax cuts to pass early next year
  7. US Dollar will strengthen as the US economy continues to strengthen
  8. Europe will grow GDP nearer 2%; China will slow down to 5.5% – 6%
  9. Middle East conflicts won’t get resolved anytime soon.  Expect us to still be in Afghanistan 5-10 years from now
  10. Don’t expect a military confrontation North Korea
  11. Brexit will occur, however it won’t unduly kill the British economy
  12. Global climate change regulation will stay in place and actually will be enhanced
  13. Cyber warfare will continue to be the most important issue, and threat, to our country today
  14. Life expectancy will continue to rise globally as emerging markets catch up to developed world
  15. Private equity returns will drift down, but still beat index returns; United States private equity will outperform globally
  16. Sovereign wealth funds will continue to be increasingly important to the industry
  17. Government will allow retail investors to invest in private equity
  18. The largest private equity firms will continue to increase market share and grow globally

Concluding on Rubenstein’s philanthropic effort, he left us with “If you can make your mother proud, that’s where you’ll find real happiness is in life.”  For all the great deals that Carlyle had done and even after going public, he never received a congratulatory call from his mother.  He did however receive a call every time he donated his money and time to a worthy cause.  Even though many of us in the room won’t have the wealth that Rubenstein has created, you can still dedicate your time and skills to help make the world a better place.  Go out there and “Do something that will make your mother proud!”









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