Over the course of the past 40 years as one of the world’s largest class action law firm that focuses on securities fraud litigation and asset protection, Milberg has developed sound and rigorous corporate governance principles that address the concerns and priorities of private and public institutional investors across different industrial sectors and various financial markets.  With our primary focus on the protection of our clients’ investments in public companies, we have seen time and again how ineffective governance practices fall short of providing early notice of—let alone preventing—egregious corporate conduct.  At the same time, we have secured the value-enhancing and fraud-deterring effects of corporate governance measures we have designed.

Through representation of private, municipal, state and labor union pension funds, among others, we have developed a methodical understanding of governance practices that are likely to achieve the closest alignment between the otherwise-diverging interests of management and the company’s shareholders, individual and institutional alike.  The Milberg Principles of Corporate Governance provide institutional investors with a systematic and rigorous framework against which to evaluate, design and advocate corporate governance reforms that improve upon the governance of public companies in which they invest.  In fact, we believe that adoption of effective corporate governance policies through zealous representation of shareholders in derivative and securities class actions and through institutional advocacy and participation in policy and regulatory circles may provide the following benefits:

• Adequate shareholder control of the corporation
• Effective monitoring of management’s performance
• Effective oversight of board’s resolutions
• Close alignment of management’s and shareholders’ interests
• Increased productivity and enhanced firm value; and
• Effective deterrence of fraud and other forms of non-compliance

Successful governance reforms—encompassing the litigation, regulatory, and policy-making arenas—will make corporate directors and executives more accountable to shareholders; instill confidence among investors, retail and institutional alike, in the integrity of financial markets; and protect employees, bond-holders, and other corporate constituents from fraud and egregious corporate conduct.  Importantly, a successful reform will also ensure the competence and professional integrity of professionals that serve issuers and investors, including, among others, accountants, lawyers, investment bankers, and analysts.  Combined, governance reforms will create an environment in which earnings can grow, productivity can increase, and long-term shareholder value is maximized.

Our Philosophy on the Role of Institutional Investors In Leading Corporate Governance Reforms

We believe that by virtue of their large holdings and the significant influence they can exert over management of public companies, private and public institutional investors—including pension funds and employee stock ownership plans—are the dominant driver of governance reform within the institutional shareholder community.  Owing to their vast economic power and financial sophistication, we believe that institutional investors are best-situated to lead the national—and, indeed, the global—effort to improve upon corporate governance of public companies listed on various American exchanges.

Increasingly, institutional investors have come to recognize their power to effect change and set the desirable course for corporate governance reform, and the substantial benefits that are bound to accrue.  In pursuing such reforms, institutions not only fulfill their fiduciary responsibilities to individual investors—employees, retirees, and other retail investors—who have entrusted their assets to them but also bring to bear their role as leading participants in modern financial markets.  The degree to which institutional investors use their power and influence to pursue value-enhancing corporate governance reforms is bound to have a tremendous impact in coming years.

Corporate Powers We Believe Shareholders Ought to Have

As owners of public corporations, shareholders should have the ability to actively participate in governing the corporation.  To that end, shareholders should be able to play a leading role in corporate decision-making where fundamental, long-term corporate changes are at issue.  Precisely for this reason, establishing and maintaining proper balance between the ability of the management to run the operations and take business risks, on the one hand, and the ability of shareholders to govern the corporation at a more general level, protect against abuses, and monitor management’s performance, on the other, requires that shareholders possess basic participatory and decisional powers.

In large measure, the capacity of shareholders to have an impact on the corporation and participate in its governance flows from specific governance powers that every institution should work to have adopted by public companies in its portfolio.  Ensuring that shareholders possess such powers will situate them in a strong monitoring position so as to effectively oversee management’s performance and, through their vote, screen-out proposed resolutions that do not well serve their interests.  Transparency of corporate information is also crucial to effectuating the oversight role of institutional investors over the board and the performance of management.

Our View on Corporate Elections and The Composition of the Board of Directors

The board of directors, as part of its general oversight, must supervise management’s performance and fairly represent the interests of the company’s shareholders.  As such, we believe that the structure and composition of the board along with the procedures used to nominate and elect its members are key areas of concern that provide important opportunities to improve the governance of public companies and, consequently, to enhance their value and increase their productivity.

Indeed, there can be no doubt that the election process—including the nomination of candidates to the board, the applicable voting rules, and the length of directorship positions—is an important dimension of shareholders’ ability to meaningfully participate in governing the corporation and, consequently, an important determinant of the quality and efficacy of the board.  Too often, however, relevant bylaws and policies undermine shareholders’ ability to participate in a meaningful way.  In particular, bylaws of many public companies provide for a “classified” (or “staggered”) board, which, in turn, shields incumbent directors from facing meaningful risk of being removed and replaced via the ballot box.  A coherent set of governance reforms that are aimed at reforming the nomination and election processes can correct such problems, facilitate shareholders’ influence over the board’s composition, and induce incumbent directors to dutifully discharge their fiduciary duties.

Our Demanding Approach to Audit, Financial Controls, And Oversight of Financial Management

Effective corporate governance requires strong internal controls over public companies’ financial management, an area that has proven to have enormous potential for abuse and incompetence.  Governance reforms should therefore be aimed at ensuring the accuracy of corporate financial statements and the integrity of the internal audit function; regulatory compliance; prompt disclosure and correction of accounting irregularities; and the independence of the Independent Auditor.

Improving internal audit procedures, enhancing the effectiveness of audit controls over the company’s financial management, and strengthening the function of fraud detection are measures, which, taken together, are expected to achieve financial integrity and deliver to shareholders and financial markets more generally valuable financial transparency.  It goes without saying that financial transparency will expose public companies to the value-enhancing forces of competition in product, capital, and labor markets and is therefore the hallmark of shareholder value maximization.

Accomplishing these goals requires reform on two fronts—the Audit Committee, its composition, member qualifications and education, and scope of responsibilities; and the Independent Auditor, especially as related to its independence, composition of audit team personnel, and terms of engagement.

Properly-Designed Executive Compensation Plans Provide a Critical Tool to Align the Interests of Management and Shareholders

We believe that executive compensation provides a critical tool in influencing corporate performance and maximizing shareholder value.  By linking pay and performance, executive compensation can shape the incentives of senior management and alleviate the fundamental divergence between management’s interests and shareholders’ preferences.  In particular, linking senior management’s pay to financial performance and other metrics that drive long-term return on investment should be of considerable interest to the company’s shareholders.  Thus, executive compensation plans should be designed to align management’s incentives with maximizing shareholder value and, through careful fine-tuning, to address concerns that are uniquely related to the company or to individual executive officers.  Close attention should be given to the exercising, re-pricing, and expensing of stock options and to measures taken upon removal of executives for cause.

Of particular concern is the role of the board and its Compensation Committee and the process by which they design and oversee compensation guidelines and executive compensation plans in particular cases.  Clearly, a Compensation Committee that consists entirely of independent directors will help ensure that compensation plans closely link pay with performance and thereby best serve the interests of shareholders.  Similarly effective is maintaining the transparency of the terms and conditions of executive compensation plans—transparency provides shareholders with information necessary to make informed decisions as to whether or not to give a seal of approval to board’s resolutions on executive compensation.

We Believe that Optimal Corporate Governance Policies Should be Tailored to Address Company-Specific Attributes

The Milberg Principles of Corporate Governance provide a systematic and rigorous framework against which institutional investors can evaluate, design, and advocate corporate governance reforms that are likely to improve upon the governance of companies in which they invest.  In the field of corporate governance, as in many other contexts of economic activity, however, “one-size-fits-all” measures are bound to produce sub-optimal results.

Optimal corporate governance—and, consequently, enhancement of corporate performance and maximization of shareholder value—requires, therefore, that the design of specific governance policies take due account of company-specific attributes and concerns.  Specifically, publicly-traded companies must develop and adopt a set of governance policies that are tailored and fine-tuned to address issues which are uniquely related to the company’s core business strategy, its capital and ownership structure, its asset portfolio, and the various markets in which the company operates.

Equally important, every public company ought to recognize that the adoption of effective corporate governance policies is a “breathing” and, to a large extent, a dynamic process.  This process should be carried out by the board’s Corporate Governance Committee.  Public companies ought to periodically reexamine their policies and assess their suitability and efficacy in light of the changing conditions of the economic and regulatory environment.  Continuous and institutionalized attention to governance concerns, and adoption or revision of new or existing policies will ensure that the corporate entity increases in value and best serves the interests of its owners.

We Believe that Institutional Advocacy in Regulatory and Policy Circles is Critical to Effectuating Governance Reform

We believe that institutional investors can maximize their impact by pursuing reform activities on two different, yet not mutually-exclusive fronts.  The institutional role in prompting effective corporate governance reforms encompasses both internal activism with respect to the companies whose securities they hold and external activism with respect to the regulatory and policy environment in which issuers, securities exchanges, and members of the securities and financial services industry operate.

First, institutional investors should take steps to establish an ongoing dialogue with the board and management over reform of governance policies that they consider to be substandard.  Second, institutional investors should reach out to third-party organizations—including securities exchanges, legislative bodies, regulatory agencies, and securities industry and trade associations—that influence, propagate or enforce regulations and standards that are relevant to instilling effective corporate governance and corporate accountability.  To that end, institutions should offer their sophisticated insight and input to enhance the quality, quantity, and voice of institutional advocacy in regulatory and policy circles, especially in rule-making and standard-setting processes.