Monday, June 21, 2010

Prepare to Be Tortured

The French government announced last week that it will soon introduce a bill to raise the minimum retirement age to 62 from 60. Predictably, howls of outrage issued from certain French quarters.

The announcement came out about the same time that Robert (Bob) Kelly, chairman and CEO of BNY Mellon, was talking about the need to get retirement spending under control at the 14th Annual Wharton Leadership Conference, held on June 16. With a wry touch, Kelly reminded the crowd that when the retirement age was set in this country at 65 in 1935, the average life expectancy was . . . 61.7 years. Basically, that meant you could retire after you died. (Today, life expectancy is more like 79.)

This was one topic in Kelly's sweeping and generally upbeat analysis of the state of the economy and banking. "The banking system is healthy again," he said, noting that all the big banks are in good shape, with TARP monies repaid, although there are still "lots of writeoffs" to come. He did admit that during the financial crisis the banking system "came to the edge of the abyss . . . our toes were over the edge." But "really bad things" were avoided, and the economy is now expanding.

He made one comment that, while not directly about corporate governance, in my mind should serve as a warning to all board members and top management. It came while addressing something that did worry him on the world scene — Europe.

Greece's dire economic situation was top of headline news during his Wharton appearance. He took to task the "Club Med" countries for their "ugly high-debt-to-GDP" spending. Watching the European government and banking communities trying to rein in Greece's economy, the important lesson for all economic leaders, said Kelly, is clear: "If you don't do the right thing, markets will torture you."

I say that is sound advice for boards, too. The torturers will be displeased investors. We saw in 2009 several companies get tortured by emboldened shareholders — think of the successful campaign that Finger Interests waged against Bank of America to change its board composition and culture (a campaign that Jonathan Finger provides the back story on in the Governance Year in Review special issue of Directors & Boards due out in early July).

Say on pay and proxy access are just two potential tools that will give shareholders heightened opportunities to challenge board decisions. But even without those new abilities, shareholders are primed to apply the screws. They see boards as having failed during the financial crisis to exert proper oversight. This anger-fueled resentment will result in a readiness to push back on what managements want to do and what boards are willing to approve.

Case in dramatic point, which has all the makings of being a harbinger of the future: the shareholder revolt when Prudential PLC attempted to buy AIG's Asian units. Neither company was prepared for the punishing torture that this spending decision prompted.

As we look ahead to the post-crisis era in board-shareholders relations, it would be wise to heed Bob Kelly's warning.