Comment Letter
To COSO/NACD Re Proposed New Corporate Governance Framework
Every so often, some ad hoc committee or previously organized entity will produce the latest Corporate Governance Framework or Principles or something or other that usually just adds more complexity to an already too complex public company governance model.
The most recent of these is the new Corporate Governance Framework developed and proposed by COSO (Committee of Sponsoring Organizations) and NACD (National Association of Corporate Directors). Currently, they have offered a time for public comment in regard to this new framework. The following is a copy of the letter with my comments. As was the case with a previous letter copied into Substack, some parts of the letter here have spaces between lines that are too large and not existent in the original version on my letterhead.
DaVega & Wolfe Industries Holdings L.L.C.
June 28, 2025
Committee of Sponsoring Organizations
c/o AICPA
220 Leigh Farm Road
Durham, N.C. 27707
Re: Corporate Governance Framework Comments
To Whom It May Concern:
First, I would like to introduce myself so as to provide clarity and context for my comments. My career has been as a takeover entrepreneur, activist investor and non-executive chairman. My focus has been on undergoverned and undermanaged companies with improvements to same brought about via board and management replacement. In addition, I am the author of the book Governance Arbitrage: Blowing Up The Public Company Governance Model To Maximize Long-Term Shareholder Value. This book has as its core thesis that public company boards are an undervalued and underperforming asset, provides analysis to substantiate this thesis and finally, offers an alternative governance model designed to develop the full potential of the board.
The following are my thoughts regarding the proposed Corporate Governance Framework:
1. No Focused Governing Objective – for too long public company governance has been plagued with a lack of real focus. Consider for a moment the impact of a governing objective such as “Optimization of Capital Allocation and Maximization of Longer-Term Operating Performance & Shareholder Value.” Although as a part of the proposed Corporate Governance Framework (CFG) there is reference to long term shareholder value there remains an absence of the focused approach on business performance that the top private equity firms have at their portfolio companies. A focused governing objective as suggested above provides the context
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for everything else including the qualities needed in and responsibilities of the non-executive chairman, criteria for director selection, broad agenda (which would include a deep dive due diligence process out of which a value maximization plan could be developed), ongoing focuses and activities, etc. Just as an example re director selection criteria much of the current criteria would fall by the wayside in favor of directors selected strictly and solely based on their experience and track records relative to the value creation requirements of the company. In thinking about this consider the material reduction in the number of public companies since the late 1990’s and the simultaneous flow of capital into the private markets.
2. No Investor Involvement - sophisticated and engaged investors such as activist investors, private equity senior partners and takeover entrepreneurs bring a different mindset and skill set to the boardroom especially as it relates to capital allocation and value creation. Yet, from what I can tell, no investors of this type were involved in the development of this framework. Related, other than as a result of activist campaigns, it is rare that this type of investor is found as a member of a public company board. Yet, these individuals understand capital allocation and value creation better than most of the individuals who are selected to public company boards.
3. No Incorporation of Private Equity Governance Model Attributes – I have yet to see a study that concludes that the public company governance model is superior to the PE model. Yet there have been numerous studies that show the superiority of the governance model implemented by the top PE firms at their portfolio companies. As one McKinsey study concluded, “More important still is the source their success. Top performance does not, as many imagine, come from unusual financial acumen. In our observation of private sector deals worth more than $100 million, very few of the successes came about because firms paid less than the prevailing market prices for similar assets. Markets are reasonably efficient, and most important assets sold to private equity firms undergo a relatively wide auction.
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Nor do private equity firms obtain the bulk of their returns by profiting from a rising market or even a more quickly rising sector within the market. Their real --- and often overlooked --- source of success is the governance model (emphasis added) they apply to the companies they own. The best private equity firms can find and successfully realign businesses whose governing structures (owners and managers) are misaligned. So big is this opportunity for this type of transaction (emphasis added), we believe that private equity is likely to maintain, and perhaps expand, its presence as a parallel system to established public markets. It (private equity) would revert to marginal status only if the governance of public companies improved dramatically. The people who run public companies will need to raise their game if they want to better what the best private equity firms can offer.”
4. Too Complex – the framework proposed is too complex with too many moving parts. As an example, the framework includes 24 principles. There is an inverse relationship between complexity and effectiveness and as such, with so many moving parts, it is hard to grasp how a board of directors can effectively represent shareholders.
Before the days of Sarbanes-Oxley, Teledyne, from the early 1960’s to 1990, produced the best long term investment performance in history returning an annualized compounded return of 20.4% over that period. This was twelve times the return of the S&P 500 during the same period. Consider the following regarding the governance of Teledyne:
· The board of this giant, complex conglomerate had only 6 members.
· Of the 6 members, 3 were insiders: Singleton [chairman & CEO], co-founder George Kozmetzky and president George Roberts. Of the three outsiders, none fit the profile of many directors currently. There was Arthur Rock, the legendary venture capitalist; Claude Shannon, Henry Singleton’s MIT classmate and the
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father of information theory and Fayez Sarofim, the billionaire Houston fund manager.
· Rather than CEO heavy like so many public company boards today, this board was investor and investor mindset dominated. Among many things, a major shortcoming of today’s public company boards is the lack of active investors who deeply understand capital allocation and value creation (private equity partners, certain types of hedge fund managers and takeover entrepreneurs as examples)
· All members of this board had significant ownership, i.e. “skin in the game.” And important in conjunction with this “skin in the game” as William Thorndike, the author of The Outsiders notes, this was an extremely talented group. I emphasize the talent part as “skin in the game” adds value only when those who have it are also highly competent. This is a critical point. In more than one situation in which I have been involved, management and/or board members had a large economic interest but did not have the abilities needed to run/govern the companies successfully. As such, these companies covered the spectrum from underperforming to troubled.
· There were no board committees.
· And while I have no information to substantiate it, I think that the odds are greatly in favor of this board rejecting formalities and thus they functioned in a very intense, very focused but informal manner much like the boards of the portfolio companies of the top private equity firms.
In summary, I suggest that there is a better governance model that is more robust, entrepreneurial and simpler. This model, in my view, would have much greater impact on the development of the full potential of boards and thus the public companies they govern.
Yours very truly,
Henry D. Wolfe
Chairman