The age of the activist investor: Do corporate boards need to be more independent?

The age of the activist investor: Do corporate boards need to be more independent? Joan McGuire

The first of a two-part series on how the rise of activist shareholders could pressure Oregon public companies to reevaluate who sits on their boards.


In February, activist investor Lion Point Capital took a little over a six percent stake in Lattice Semiconductor, a Portland tech company. In an SEC filing, the investment manager said it believes the stock is undervalued and that its investment will allow it to push through “operational changes” that can help the company make more money.

Lattice’s board is one of the areas where Lion Point is angling for change. The investor said in the filing it has been “in constructive discussions” with Lattice about the composition of its board of directors.

The financial markets are awash in capital, and investors, who are finding it harder to make a profit in the low interest rate environment, are buying up equity in undervalued public companies as a way to wring out profits. Their aim is to accumulate enough of a stake to allow them to influence corporate strategy.

Gaining influence over company’s corporate governance is one way of going about it.     

“Activist investors are flexing their muscle and they know they can,” said Jeffrey Bird, an attorney at law firm Lane Powell. “They demand access to the board. They want dialogue.”



Activist shareholders are targeting larger companies than in the past, said Peter Gleason, president and CEO of the National Association of Corporate Directors. “There has been an increase over the last few years. In the 1990s, activists were focused on small companies. They were not as heavy handed. This is at a different level.”   

Several Oregon’s public companies have quirky board structures that could come under possible attack from the investing community. One area of scrutiny is the possible perception that boards are not as independent as they could be.

The role that family members play on Oregon corporate boards is an unmistakable characteristic at a handful of high-profile public companies, and one that could be perceived as lacking independence. Having the same person in both the CEO and chair of the board roles is also under scrutiny for undermining independence. 

Nike Inc., the iconic sportswear company, has family connections on its board. Travis Knight, a Nike board member, is the son of Nike’s co-founder and former chair Phil Knight. While Phil Knight no longer sits on the board (he serves as chairman emeritus), his son holds considerable clout over the company’s strategy. Travis Knight is one of the few Nike board members to hold Class A shares, which give him more voting rights than the other board members.   

Nike spokesman Greg Rossiter said its corporate governance guidelines state board members represent the interests of all shareholders. “These standards for board members also include independence, character, ethics, diversity and an ability to devote substantial time to board responsibilities.”


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Other public companies that have family connections include Lithia Motors, the Medford-based car dealership. Sidney DeBoer, the chair and founder, is related to president and CEO, Bryan DeBoer.   

Family members hold sway at Columbia Sportswear, the maker of outdoor apparel. Gertrude Boyle, 93, has been the chair of the board at Columbia Sportswear for 48 years. She is the mother of CEO Timothy Boyle.  

Sarah Bany also sits on the Columbia Sportswear board. She is Gertrude Boyle’s daughter and the CEO’s sister.

Columbia Sportswear’s family heritage is an integral part of the company’s culture.  Gertrude Boyle’s parents founded the company, then called Columbia Hat Company, in 1938. She took over as president in 1970 after her husband, who held the position of president, died of a heart attack. Gertrude Boyle was president until 1988 and is a well-known fixture of the Portland business community.  

But her family connection to the CEO and another board member could be seen as risky bet for a company in the highly competitive outdoor apparel sector. Her independence and impartiality to the CEO’s decisions can certainly be questioned.

Christian Buss, director of investor relations at Columbia Sportswear, declined to comment for this story.  


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Often family members will own a majority of stock in the company, and it therefore makes sense to have family members on the board. This is the case for Columbia Sportswear where Gertrude Boyle, Timothy Boyle and Sarah Bany are large shareholders.  

But if a company is struggling, having strong family connections can be a liability because of the perceived lack of independent oversight of management. “Research suggests it does more harm than good. It doesn’t add value as a director. They will presumably back the family position,” said Ryan Krause, associate professor at MJ Neeley School of Business, Texas Christian University.



Most Oregon public companies have a separate CEO and board chair, a trend that is becoming the norm at public companies nationally.  

But the largest and most high-profile public company in Oregon, Nike, has the CEO and board chair held by the same person, Mark Parker, a move that bucks the trend of best practices in corporate governance.

“The CEO should not be the chair,” said Marcus Williams, partner at Davis Wright Tremaine. “Removing the CEO from the chair provides for more supervisory role of the CEO. If you have a CEO in that position you lose out on the supervisory position.”


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Krause said there are pros and cons to having the same person as CEO and chair. On the plus side, having the same person hold both positions can provide more clarity of leadership. “There is a unified communication. Everyone knows who is accountable if performance goes down.

“But it is a higher risk approach. There is greater risk of the CEO controlling the board. It is a risk trade off,” he said.



To get around the argument that having the same person hold both CEO and chair contravenes board independence, public companies have in the past few years created a lead independent director position. This director serves as liaison between the chair and independent directors.

Oregon bank Umpqua Holdings has used the lead director position to solidify board independence despite having a separate CEO and chair. In 2017, Peggy Fowler, the former CEO of Portland General Electric, became lead director in 2017.   The chair of Umpqua is held by Raymond Davis, former CEO of the bank. Cort O’Haver is CEO and president.

“We added the lead director position in 2017 to continue to maintain a strong independent director in a board leadership role at times when we have determined it is appropriate to have a board chair that is not independent,” said Umpqua in an SEC filing on its board composition.

Investor-owned utility Portland General Electric makes a big to-do about how having a separate CEO and chair because it said it shows its commitment to “good corporate governance.”

Maria Pope is president and CEO of Portland General Electric, while Jack Davis, retired CEO of Arizona Public Service Company, is chair. “While our bylaws and corporate governance guidelines do not require that our chairman and chief executive officer positions be separate, the board believes that having separate positions and having an independent outside director serve as chairman is the appropriate leadership structure at this time,” it said in an SEC filing.   



Nike created an independent director position in 2016 when CEO Mark Parker became chair of Nike’s board of directors after Phil Knight retired from that role. Before Knight’s retirement the role of CEO and chair were separate.

Tim Cook, CEO of Apple, Inc. was appointed lead independent director of Nike in June 2016. Among his duties are directly communicating with shareholders and advising the CEO on the sufficiency and quality of information provided to the board.


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“Evidence shows it is a compromise a lot of companies have come to,” said Krause of the lead director phenomenon.

The jury is out on whether this new position enhances corporate governance.

“If the CEO is really powerful but the lead director isn’t, then it isn’t that effective,” said Krause.



The rise of activist investors has driven the National Association of Corporate Directors, which advises its members on leading board practices, to recommend boards put themselves in the shoes of activists, said the association’s president Gleason.

“We coach boards to think like activists,” said Gleason. “What are your procedures, what is the best strategy to improve your bottom line.”

Increased scrutiny from regulators also means boards have to be more aware of their responsibilities for oversight, and how a lack of independence could compromise best practices.


SEE RELATED STORY: FEW WOMEN SIT ON PUBLIC COMPANIES' BOARDS


 

The action taken by the Federal Reserve to improve corporate governance at Wells Fargo is a case in point. In an unusual step, the banking regulator said in February it would restrict the growth of the bank until it improved oversight by its board of directors. This action followed revelations Wells Fargo had created fake accounts to boost revenue.

Although the action against Wells Fargo is an isolated case, it does serve as a warning to directors of public companies that their corporate governance responsibilities will not be taken lightly.

“Board composition is a big issue. Being a board member is no longer a lifetime exercise,” said Bird.


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Kim Moore

Kim Moore is the research editor for Oregon Business magazine.

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