A Perfect Match: McCormick Takes Helm at Storied CII

When the Council of Institutional Investors (CII) search committee sought a successor for the role of executive director, they needed to look no further than Robert (Bob) McCormick. His deep governance experience—law school grad, director of investment proxy research at Fidelity Investments, chief policy officer at Glass Lewis, and, most recently, managing director at the shareholder consultancy PJT Camberview—made him an ideal candidate.

What first drew him to corporate governance was the ability to work on big-picture issues, such as the role of the corporation in society, and the fine print required to understand individual company performance, McCormick said In a recent interview with Farient Briefings. CII provides McCormick a new opportunity to align those views with a bedrock commitment to advance corporate governance, shareholder rights, and fair financial regulations. CII’s members span pension funds and global asset managers with combined assets under management (AUM) of $60 trillion.

 

How global is governance and stewardship when CII seeks to establish policies—are you focused primarily on U.S. companies and markets?

Yes. We are primarily driven by what we see in the U.S. Our membership is mainly U.S.-based, and our policies are high-level, which makes them more applicable across various markets. Some issues have greater resonance. For example, we generally favor boards having an independent chair. If you look at companies in the UK and Australia, these roles are typically separated, so it’s not an issue though the role can be quite different compared to an independent chair in the U.S.

 

Do governance trends travel a predictable path, or is there a way to anticipate who influences the creation or the adaptation of governance policies from where you sit?

The U.S. has imported Say on Pay and the ability to nominate directors through proxy access. We’ve exported more private ordering through shareholder proposals and more vigorous engagement, ultimately through proxy contests and activism. No single market has figured it all out but learning how markets approach the same issues differently is healthy and instructive. CII policies are created and voted on by our members, who primarily operate and invest their assets in U.S. companies.

 

What pending corporate governance developments should boards be aware of?

We’re on well-trodden ground at this point regarding governance, so there isn’t a lot of virgin territory for newer developments. There’s still an opportunity for more effective engagement between companies and investors. I’ve always felt there’s an unhealthy tension between companies and shareholders driven by subsets from each. Some shareholders may be overly aggressive from an activist viewpoint or make what seem like unreasonable asks. Conversely, some companies are reluctant to talk, even to their biggest shareholders. For most investors and companies, there’s an opportunity for greater dialogue that leads to a better understanding and better results for both sides.

One obvious example is the ESG backlash. Many ESG-related issues are fundamentally enterprise risks from the point of view of most investors. These topics are at the top of investors’ minds, and boards should continue to expect discussions around them, even if there’s less support for some shareholder proposals. If you are on the board of a company that insures property in Florida, you need to be focused on the impact of climate regardless of politics and the semantics of how we define the issues.

 

How do we bring along new generations of investors—is that an area that CII thinks about?

Our mandate is to educate, advocate, and engage. Education is primarily for our members, but that also allows us to think of the investing public at large. Living through the internet bubble, the global financial crisis, and a global pandemic scared off a generation of investors who think investing is a game rigged against them. There’s an unfortunate distrust of the investing world by some retail investors with limited understanding of the protective regulations and benefits of long-term investing.

 

How should companies think about their AI policies and what they communicate to shareholders?

We have no official position on AI. My thinking is that this is another tool available to all. Like anything, it’s a matter of how AI is used. I think it’s going to be beneficial. An AI tool can synthesize hundreds of pages of proxies and CD&As in minutes. A human overlay is needed to confirm that information and data are accurate. AI could free up people for higher-level analysis in terms of voting decisions and engaging with companies.

I see it as another risk factor. When cybersecurity was this new shiny thing, the audit committee was given one more risk factor to oversee. From the shareholder’s perspective, it’s understanding how the board identifies and manages the risk, which raises questions about whether the board has the necessary understanding and expertise. Maybe they should engage an external advisor or have an internal team report these issues to the board. That’s what shareholders are looking for: Is there board oversight? Does the board have direct access to some of the individuals who are managing this risk? Not all this information can be funneled through the CEO, so the board needs to have a broad view of the risk factors from different perspectives.

 

Two ongoing concerns related to compensation for investors—and, therefore, compensation committees—are defining incentive plan measures and time horizons. Are these areas where CII would have a position?

We must be open-minded about alternative approaches that could be more appropriate for a particular company given its industry, maturity, size, etc. The default for at least 10 years is that long-term equity comp should be performance-based, and the performance period should be at least three years. Shareholders of various types question the appropriateness of defined time horizons. Is three years right for every company? Of course not. Policies should be more reflective of that. If you’re in oil and gas, maybe it takes 10 years for projects to yield results so measuring returns over three years is too short, but if you’re in a rapidly growing field like AI, six months is probably a lifetime. Sometimes, a time-based award may make more sense for the company, or options may be appropriate in a fast-growing company where cash flows are much lower. No one says that performance-based equity is terrible, but it doesn’t have to be the only way to motivate and incentivize executives. That’s an area I’m getting more questions about.