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Nicklaus: Centene board embraces accountability, but only reluctantly

Nicklaus: Centene board embraces accountability, but only reluctantly

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Centene planned expansion brings concern

Nearby buildings are reflected in the windows of the Centene Building in Clayton on Monday, June 6, 2016. The Centene Corporation, which has bought land north of Ritz, wants to expand its complex and would surround the hotel grounds. Photo by Christian Gooden, cgooden@post-dispatch.co

Big institutional investors and 89% of large U.S. companies agree: Board members should have to be re-approved by shareholders every year.

Centene, the St. Louis area’s biggest public company, is embracing this widely accepted principle of corporate governance, but belatedly and reluctantly.

The health-care company has always elected its directors to staggered three-year terms. This was a common practice in the 1980s and ‘90s as a defense against corporate raiders; it meant any dissident group would need at least two years to gain a board majority.

Governance experts and large investors such as Vanguard, however, have come to view three-year terms as a way for board members to entrench themselves and avoid accountability. Last year, just 11% of companies in the Standard & Poor’s 500 elected directors this way, down from 41% a decade ago.

Centene had to face the issue this year because John Chevedden, an activist investor in Redondo Beach, California, filed a resolution urging that all directors stand for election annually. Shareholders will vote on his resolution April 27.

In Centene’s proxy statement, filed last week, the board recommends that shareholders approve the change, but also offers what it calls “a strong argument to the contrary.”

The board argues that the staggered-terms structure “encourages its directors to make decisions in the long-term interest of the company and its stockholders.” It also “believes three-year terms enhance the independence of the non-employee directors … insulating them against pressures from management or from special interest groups.”

Nonsense, said Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance: “The continuity argument never really flew because boards routinely get re-elected anyway.”

In other words, a director who serves one three-year term doesn’t provide any more stability than someone who serves three one-year terms, but he or she is less accountable.

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Centene isn’t the only St. Louis area company to face this issue. Last year, shareholders at Caleres and Emerson voted in favor of one-year terms, although Emerson hasn’t completed the switch because a related bylaw change didn’t receive the necessary 85% approval. Reinsurance Group of America made the same change in 2018.

The results of such shareholder votes usually aren’t close. “Of all the proposals submitted in the past few years, the great majority have passed, many with support of 95% or higher,” said Matteo Tonello, a managing director at the Conference Board. “The general view these days is that directors should be held accountable and face a shareholder vote on an annual basis.”

Three-year board terms are much more common at smaller companies. At 41% of companies in the Russell 3000, an index that includes small and large firms, directors don’t face a vote every year.

In St. Louis, Commerce Bancshares and Spire are among the companies with staggered three-year terms.

Elson predicts that activists like Chevedden will eventually target smaller companies too. “They are not on the radar screen yet, but they will be,” he said.

Despite their unusual “yes, but” response, Centene’s directors aren’t clinging to other anti-democratic traditions. The board is proposing, on its own, to adopt other governance best practices, including elimination of a 75% supermajority requirement for removing directors or amending the bylaws.

For Centene investors, the bottom line is that their shares have soared 690% over the past decade, more than twice the gain in the overall market. If directors can keep delivering those kinds of returns, they shouldn’t be afraid of a little more accountability.

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