The Dark Arts Of Corporate Governance

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During his recent interview with Tobias, Mike Puangmalai, owner of The NonGaap Newsletter discussed The Dark Arts Of Corporate Governance. Here’s an excerpt from the interview:

Tobias: You’ve got this great series, which we’re going to go through in a moment, on your blog about corporate governance and the dark arts of corporate governance. Is that the basis for that series? Is that where you learned about the dark arts of corporate governance?

Mike: It’s an interesting question. When I started at Relational back in 2006, I would say the first– at the time, I didn’t really enjoy it. I don’t think anyone enjoys reading a proxy. If they tell you they enjoy reading a proxy, they’re either lying to you or I haven’t met you, which is weird because I’m probably the only person that likes reading proxies at this point.

Tobias: There are a handful of folks. Once you read them and you start finding little tricks and traps, they start getting a little bit more interesting. But they’re hard to read cold, but that’s why I think your series is so good.

Mike: The first four years at Relational, I would probably say 80 plus percent of my time was reading proxies, going through governance, trying to understand incentive structures and doing comps, and doing all that. Now, in hindsight, that was a blessing. It was one of those things where it actually helped me as an investor longer term, but at the time when you’re 20 something years old, you’re starting your investing career, you want to build financial models, you want to value stuff. I want to build the Excel breakup model in this company, why am I looking at proxies?

To keep myself entertained– at some point, you’re going to go crazy reading a proxy. You’re right, if you’re reading a proxy just for the dryness, you’re going to go crazy. So eventually, you start to realize there’s a whole narrative behind what’s going on and what’s is expressed in those filings and in those governance documents, and it really doesn’t get hammered into until you actually go on to these boards.

At Relational when we go on a board, we have board representation but someone like me would be completely in charge of going through every board document that would be given to the director. To break down and do an analysis and to understand, from a board levels perspective, what are the priorities going on at these companies. As you understand organizationally how companies operate, and how they govern, you start to realize the intersection and the relationship between what you’re trying to prioritize as a business and how you want to allocate capital, and how that gets expressed in the incentive structures and governance. At least after four years of doing that, you begin to realize, “Oh, there’s a story to be told here.” There are subtle adjustments that people make when good news is on the way. There’s subtle adjustments you can make when bad news is on the way. There are subtle adjustments you can make to retain talent. There’s all sorts of different tips and tricks you can do.

What you learn is, as a board member, you can’t really do much to drive change in the organization. So, there are only so many levers you can use. But those levers are very powerful. They’re really powerful because you change an incentive structure on a management team, you’d be surprised how much change occurs within an organization. It just cascades down. It leaves me speechless sometimes, like, “Wait, you’re telling me if I just changed the compensation hurdle from, say, revenue growth to a blend of revenue growth and ROIC, that this is actually going to change your priorities in an organization?” The answer is, yes, it does. It’s remarkable.

Using those experiences and realizing that proxies are probably one of the last few places where your boards express their intent and management teams express who they are, it becomes a very interesting source of reading, but also a source of understanding what is the true story of this company.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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