Current News & Commentary. 2009: September, August, July, June, May, April, March, February, January. 2008: December, November, October, September. News Archives back to 1995. Corporate governance defined. Disclaimers, Copyright & potential Conflicts of Interest. Book bites.
Support: Social Investment Forum, Investor Suffrage Movement, FundVotes, Proxy Democracy, Shareowners.org, TransparentDemocracy.org, MoxyVote.com, VoterMedia.org, our Blank Votes petition. Send comments to the SEC with File 4-583 in the subject line.
SVNACD: Directors and Due Care in the Technological Age, 11/19/09.
Stanford Rock Center Lunch with Mark Latham, a major innovator in corporate governance, 11/16/09.

Coverage continues to roll out on our petition to the SEC, which would amend a rule that allows blank proxy votes to go to management. See The SEC and Investor Suffrage, Dollars and Sense, 5/22; You Can Correct an Outrage, Motley Fool, 5/29/09; Don’t Let Companies Change Shareholders’ Blank Votes, Harvard Law School Forum on Corporate Governance and Financial Regulation, 6/2/09; Blank Votes Turn Magically to Management, SVNACD; The Problem of Blank Votes, theRacetotheBottom, 5/26/09. Mentioned by the Council of Institutional Investors in their May 14th Corporate Governance Alert, in Global Proxy Watch and Shareholder Activism: Activists Ask SEC to Eliminate Voting Bias in the July edition of Kennedy's Investor Relations Newsletter. Please read our petition and send your supporting comments to the SEC. (see submitted comments) Latest mention is Voting and Corporate Governance: Having a Say, Oxford University Press Blog (7/16/09). Thanks to Chris Mallin. Voice your opinion by sending an e-mail to rule-comments@sec.gov with File 4-583 in the subject line.

October 2009

Mondragon

A recent weeklong conference in Sonoma, California – The Economics of Peace – featured a day devoted to lectures and workshops on the cooperatives associated with the Mondragon Cooperative Corporation (MCC). This event marks the third occasion in the last six months where representatives from the MCC, located in the Basque region of Spain, appeared in the US. Previously both Cleveland and Detroit hosted discussions with the MCC. While US developers of worker cooperatives have toured the Mondragon complex since the 80’s, these recent visits are noteworthy as first for the $24 billion MCC. (Mondragon Cooperatives: What Relevance for US Cooperative Development?, SolidarityEconomy.Net, 10/27/09)

Too Big to Fail

With the implosion of Lehman Brothers, in September 2008, the realization dawned: Morgan Stanley and Goldman Sachs could be next. In an excerpt from his new book, the author reveals the incredible scramble that took place—desperate phone calls, seat-of-the-pants merger proposals, flaring tempers—as Washington got tough and Wall Street titans Lloyd Blankfein and John Mack fought for survival. (Excerpted from Too Big to Fail, by Andrew Ross Sorkin, to be published this month by Viking. See 9 pages at VantyFair.com)

Morgenson on Texas Industries

Gretchen Morgenson adds her insights to our understanding as to "what happens when shareholders act appropriately — like the company owners that they are." “I cannot remember where a significant corporation of this size got an 80 percent turndown from its own shareholders,” said Stanley Gold, chief executive of Shamrock. “People are beginning to think like owners.”

While public funds have been more willing to take up such fights, Dennis A. Johnson, a managing director at Shamrock, says he’s now seeing an interest among mutual funds that previously shunned the activist route. “There needs to be democratization of the boardroom,” Stanley Gold said. “Boardrooms will say it will be like Congress and everyone will be arguing. But capitalism is based on democracy: it is a bit messy, but it’s the best system we’ve come up with.” (When Shareholders Crack the Whip, NYTimes, 11/1/09)

CtW Calls on Congress to Affirm SEC Authority

Change to Win (CtW) Chair Anna Burger today called on members of the House Committee on Financial Services to reject the U.S. Chamber of Commerce's less than credible rhetoric and to approve the Waters/Peters Amendment to the Investor Protection Act of 2009 in this Wednesday's vote. The Waters/Peters amendment affirms the Securities and Exchange Commission's (SEC) authority to adopt a uniform proxy access rule. Her letter to Committee members highlights U.S. Chamber President Tom Donohue's own record as a director of four scandal-ridden, publicly-traded companies to demonstrate the need for this essential investor reform. (see Tom Donohue: Preaching Principle, Enabling Excess, 10/15/09) We urge reader to take action; see below under heading: Alert! Contact Your Congressional Representative to Support Proxy Access

Virtual Trust Unlikely From Intel Shareowners

Recently Intel announced they were moving to a "virtual" annual shareowner meeting in 2010 and would not hold a physical meeting. In discussions, Timothy Smith, Senior Vice President of Walden Asset Management, raised concerns about the negative precedent that this would create.

"Just imagine," says Smith, "companies that wanted to keep their shareholders at arms length and further using this tool to distance themselves from accountability to their owners. Even if Intel holds a quality electronic meeting, as a governance leader they open the door for other companies to follow suit in what could be a flood of meetings with no place to look Directors in the eye and ask questions about governance, compensation, etc."

Intel says investors are attending their physical meetings in smaller numbers and they feel shareholders don’t feel physical meetings are important.

Smith wrote urging the company to blend the best in electronic communications with a physical meeting. If you share this concern, write Mr. Cary Klafter, Intel's Corporate Secretary, a short letter saying you agree with the concerns raised in the Walden letter and wish your views to be registered as an investor that believes there should be physical annual meetings. Please cc Timothy Smith.

See also, The Return of Virtual-Only Shareholder Meetings? Herman Miller's Third Year in a Row, TheCorporateCounsel.net/Blog, 9/10/09. In 2000, the Council of Institutional Investors wrote letters to all major companies incorporated in Delaware, urging them not to conduct electronic-only meetings. It is time for another round of letters from a broader group. How do we know what questions are being censured? Intel and other companies going this route risk much greater attendance with more questions asked compared to a physical meeting and negative publicity if shareowners feel their concerns were ignored. Let's hope it backfires on them.

CorpGov Bites

According to the 8th Annual "What Directors Think" survey by Bridgewater and Corporate Board Member magazine, directors are very focused on risk: 69% believe their risk as a director has increased during the prior 12 months -- a substantial jump from the 38% who answered so in 2008. 75% of directors surveyed also state that responsibility for risk management rests with the full board. 59% cite unknown risks in response to the question of what keeps them up at night. (Directors Say Their Risk Has Increased Since Last Year, According to PricewaterhouseCoopers & Corporate Board Member Survey, Reuters, 10/29/09) With many adopting what amounts to a policy of "don't ask, don't tell," it is no wonder they worry about risk. Isn't it about time the SEC and FASB followed the principled decision-making framework used in the courts, in which the potential for prejudice is balanced against the usefulness of information to the use? Categories of information that are “more probative than prejudicial” are appropriate targets for disclosure. (see Step Right Up! Part 3: Will SEC and FASB regulators leave improved liability accounting to the courts?, Corporate Disclosure Alert, 10/15/09)

The Investor Suffrage Movement has been sending individual investors to shareholder meetings and engaging them in a variety of shareholder-related volunteer activities. Now they are expanding their educational opportunities with the first of what we hope will be an annual course on submitting shareholder resolutions. If all goes well, the course offering will eventually be part of a distance-learning school named for a prominent shareholder activist. Details to be announced in months to come.

The October 30 edition of TheAltmanGroup's Governance & Proxy Review carries an interview with one of my favorite mainstream attorneys, Holly J. Gregory of Weil, Gotshal & Manges, LLP – Part I. She identifies "proxy access" as the upcoming governance reform and hopes directors elected through that process will take a long-term approach, citing the Aspen Institute's Overcoming Short-termism. She also suggests that "greater shareholder power to be accompanied with requirements for great transparency about the motives and interests of the shareholders who seek to exert the power." Well worth the brief read and subscribing. See similar concerns expressed in the Atlantic article, Shareholders: Part of the Solution or Part of the Problem?, 10/28/09, which I briefly commented on.

Recent Areas Of Focus In Sec Examinations Of Hedge Fund Advisers, Schulte Roth & Zabel LLP, identifies and discusses recent areas of focus in SEC examinations of hedge fund advisers and recommends possible steps hedge fund advisers can take to prepare for and manage an SEC examination.

No Deal: Chamber Chief Battles Obama (WSJ, 10/30/09) getting a lot of attention as showdown continues. See also Chamber faces dissent from big U.S. firms on climate, Reuters, 10/29/09.

Search on to fill CalPERS’ chief operating investment post, P&I, 10/29/09.

Foundations Project That Mission Investing Will Have Increased in 2009, Sustainability Investment News, 10/30/09. "While More for Mission considers shareowner advocacy to be an important part of mission investing, 70% of respondents reported that they neither file shareowner resolutions nor take part in proxy voting. The foundations that did report exercising their responsibilities as shareowners focused on such issues as environmental, social, and governance (ESG) initiatives, Darfur divestment, educational initiatives, sustainability reporting, and executive compensation." Do they see no correlation between their mission and how they vote as owners?

The Corporate Library has been doing some outstanding work lately in the area of pay. Follow developments at their Blog. The Corporate Library's company profiles are 50% off until November 2nd. To purchase, search their profile database of over 3,200 U.S. and Canadian public companies and enter code GOV50 at check out. These are extremely useful to anyone developing shareowner resolutions.

Fiduciary College coming up at Stanford near the end of March 2010.

The 2009 Moskowitz Prize for Socially Responsible Investing, announced at this week's SRI in the Rockies conference, has been awarded to David P. Baron, Professor of Political Economy and Strategy at Stanford, in part for a paper co-authored by Maretno A. Harjoto and Hoje Jo, entitled The Economics and Politics of Corporate Social Performance. (Stanford Professor Receives 2009 Moskowitz Prize, Sustainability Investment News, 10/28/09)

RiskMetrics Group Opens Comment Period for 2010 Proxy Voting Policies. Here's your chance to influence the firm that influences all those proxy votes.

ICCR posts Trucost rankings of greenhouse gas emmissions for companies ranked by sector. Also has links to proxy resolutions for 2009. Very nice.

Soundboard Review Services led by former Glass, Lewis & Co. CEO Greg Taxin, offers to audit pay plans and the process used to develop them with the prospect that such an assessment will lead shareowners to give them a pass when they have their "say on pay." "By reviewing board processes and actions in private – examining board minutes and materials considered by the board, among other things – and not simply reviewing the published outcomes, Soundboard is in a position to assure shareholders and other interested parties (e.g., proxy advisors, insurers, media and regulators) that the board has indeed reached decisions through the exercise of sound and informed business judgment." Looks like an impressive group offering a much needed service. Good beginning set of links to reasearch on compensation.

HBS "Perspectives from the Boardroom 2009" analyzes views of 45 public co directors on current hot topics. "Boards need to maintain a delicate balance in their relationship with management. They must be challenging and critical on the one hand and supportive on the other. They have to sustain an open and candid flow of communication in both directions. And they must seek sources of understanding their company beyond just management without offending management."

Directors Forum 2010: “Directors, Management & Shareholders in Dialogue”
Directors Forum 2010 uniquely brings together institutional investors, companies and regulatory organizations to talk about today’s unprecedented challenges and emerging corporate governance issues.

Alert! Contact Your Congressional Representative to Support Proxy Access

The current economic meltdown destroyed $11 trillion in family wealth, pushed unemployment above 10% and threatens millions more with home foreclosure. Part of the solution is to hold corporate directors accountable for the risky decisions they make and the executive pay schemes they approve that promote risk and greed. Help us take action to give shareowners like our pension funds the power to replace these directors by allowing "proxy access" for their own nominees.

On Wednesday November 4, the House Financial Services Committee will be voting on a Proxy access amendment sponsored by Rep. Maxine Waters. The Chamber of Commerce is mobilizing to defeat this amendment. We need our voice to heard. Please contact you Congressional representative now to let them know that proxy access is need to hold corporate directors accountable to help prevent another financial crisis. Sample Message:

Robust, effective oversight requires that investors have the necessary tools to hold management and boards accountable. "Proxy access" is necessary for shareowners to have a meaningful choice in exercising their right to vote for board members and to hold boards accountable. My financial and retirement security is jeopardized when my pension fund has no ability to influence the nomination of quality candidates to boards to represent shareholder interests, like that of my pension fund.

I urge your support Rep. Waters' proxy access amendment to the Investor Protection Act. The amendment along with the other SEC authorities addressed in the financial regulatory reform bill, confirms the SEC’s authority to issue guidance in the proxy access area.

Thank you very much. Your yes vote is important to the retirement security of people like me who saw their pension fund returns and 401(k) earnings crash because many corporate directors were not doing their jobs.

Congress.org provides a quick, easy to use tool, that will allow you to e-mail your representatives. Please let me know if their are better free tools available. For more background, see Proxy Access: Alive & Well and Moving in the House, TheCorporateCounsel.net Blog, 10/30/09)

Anglo-American Model Blasted

A Critique of the Anglo-American Model of Corporate Governance by Thomas Clarke of the University of Technology, Sydney, holds no punches. He examines how different varieties of capitalism produce different levels of inequality. Specifically how the Anglo-American variant of corporate governance in its US manifestation afforded CEOs of large corporations inordinate power and wealth, and the consequences of this for inequality in wider society. Arrogation of an increasing share of corporate wealth by CEOs impacts upon relationships with other stakeholders and displaces CEOs objectives. The significance is that this is precisely the model of capitalism that is being propagated vigorously throughout the world.

According to the author, this dynamic induced the present international financial crisis, in which investment bank executives were massively incentivised to pursue vast securitization and leverage which hugely enriched themselves, but caused the collapse of financial institutions worldwide, the violent instability of financial markets, substantial damage to the real economy, and impacted severely on the employment security and living standards of working people. You may want to have in your reference library just for the fact and figures, many of which came from The State of Working America 2008/2009.

Learning the Importance of Corporate Governance

Thirty Years of Corporate Governance: Firm Valuation & Stock Returns by Martijn Cremers and Allen Ferrell track 1000 firms’ corporate governance over a thirty year period. Most governance changes occurred during the 1980s (with relative stability thereafter). They find negative firm valuation effects of classified boards and poison pills. They also found a robust positive association between “good” corporate governance and abnormal returns for the 1978-2006 period. The abnormal returns association with governance was strongest in the 1978-2006 time period and generally declined thereafter, consistent with an explanation of these returns based on the market learning the importance of good governance.

Victory at SEC But Problems at FASB

Sanford Lewis reports that shareowners scored a major victory on October 27th when the SEC reversed a Bush administration policy that allowed companies to exclude shareholder resolutions requesting information on the financial risks associated with environmental, human rights and other social issues facing companies. In Staff Legal Bulletin 14E, the Division of Corporation Finance announced that shareowner resolutions will be evaluated based on whether they raise a major social policy issue, not whether they inquire as to financial risks associated with such issues.

The SEC noted, "A proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote." (Share Owners Win Public Policy Victory at SEC! Financial and environmental risks to be allowed in Resolutions, Corporate Disclosure Alert, 10/27/09; Corp Fin Issues New Guidance On Shareholder Proposals, ComplianceWeek, 10/27/09; and Activists Welcome the SEC’s New Guidance on Risk Proposals, RMG, 10/27/09)

The change came after a concerted effort, including a December 2008 letter from a group of 60 investing organizations who wrote to then President-Elect Obama. James McRitchie, publisher of CorpGov.net, participated in the group led by Lewis of the Investor Environmental Health Network, the Social Investment Forum, the Interfaith Center on Corporate Responsibility and Shareowners.org.

Still very troublesome is FASB's policies which encourage a practice of "don't ask, don't tell" among corporate directors, leading corporations to ignore environmental and other liability risks. (see Step Right Up! Will voluntary disclosure of corporate liabilities meet investors' needs?, Corporate Disclosure Alert, 10/27/09)

A clash is emerging between the needs of directors and investors to manage risks and attorneys who advise “don’t ask, don’t tell” to minimize corporate liability in any possible future litigation. (see Corporate Environmental Disclosure Policy, C. Gregory Rogers, 9/23/09)

When the Financial Accounting Standards Board took up the issue of contingent liability disclosures on behalf of investors, it appeared progress would be made. However, under pressure from the corporate legal community, the FASB may now be about to take a step backward, unless directors and investors can be mobilized. See announcement of their August 19 decision that "Disclosures about litigation contingencies should focus on the contentions of the parties, rather than predictions about the future outcome." (Disclosure of Certain Loss Contingencies, Decisions Reached at the Last Meeting, last updated October 14, 2009)

Do we wait for a flood of lawsuits or do we act to establish a reporting system that encourages better management of disclosed risks?  Sanford Lewis seems to be blazing a trail (see his 10/22/09 letter to FASB) but his voice appears rather lonely. Where are members of the Council of Institutional Investors, the International Corporate Governance Network and the National Association of Corporate Directors? Do members of these organizations really believe disclosure of litigation contingencies should focus on contentions, not predictions? Don't ask, don't tell is nothing more than systematic plausible deniability. Adequate risk management by both directors and investors requires more. Have we learned nothing from the current meltdown?

Reimbursement of Expenses

HealthSouth announced plans to adopt a bylaw allowing reimbursement of shareowner nomination expenses where the candidate gets at least 40% of the votes cast. (First Company Adopts "Proxy Access Reimbursement" Bylaw, The CorporateCounsel.net Blog, 10/27/09)

Roth Conversion

Recent tax law changes create an opportunity to consider converting a traditional retirement account to a Roth account for many who have been unable to do so previously due to the significant income limitations imposed on such a conversion. Beginning in 2010, the existing income limitations will be eliminated so anyone with a traditional IRA, 403(b) or 401(k) plan will now be able to make a Roth conversion. While the decision to convert to a Roth account can provide tax savings for some, it is not a wise move for all. Typically the most important consideration is a comparison between the marginal income tax rate in the conversion year and the marginal income tax rate in the withdrawal year if not converted, where this latter tax rate is usually a tax rate from a retirement year. If the future income tax rate is anticipated to be higher, converting to a Roth may be appealing, but if the future income tax rate is expected to be lower, converting may be unwise. A recent paper by the TIAA-CREF Institute may help you decide if and how to do it. New Roth Conversion Opportunities: Is Converting A Traditional Ira, 403(B) Or 401(K) A Smart Move, Unwise Or Much Ado About Nothing?

Prosperity Index

The Legatum "Prosperity Index" makes a case for the long-term benefits of democracy, free speech and the rule of law. The top nine in the rankings are Finland, Switzerland, Sweden, Denmark and Norway, Australia, Canada, the Netherlands, and the U.S.. (Let Freedom Ring, Forbes, 10/27/09) Are democracy and prosperity inextricably linked? This seems to cite evidence in that direction. It is good to see measures beyond GDP gaining traction.

Members Pressure TIAA-CREF and CalPERS

On October 14, the 1.4 million strong American Federation of Teachers (AFT) passed a resolution regarding TIAA-CREF investment and policy on issues of human/labor/civil rights. Through a collaboration between the Make TIAA-CREF Ethical Coalition* and the CUNY Professional Staff Congress union, the latter drafted a resolution that was passed in 2007 by its umbrella group, AFT. AFT has now passed a tougher and more specific resolution that again singles out the three companies that have long been Coalition targets.

Apparently, TIAA-CREF essentially told the groups they are already doing what they can. Members are urged to call TIAA-CREF at 800-842-2733 (212-490-9000) and ask for CEO Roger Ferguson. Leave this basic message, in your own words: “We urge you to implement the resolution recently passed by the American Federation of Teachers concerning human, labor, and civil rights. It is time for TIAA-CREF to get tougher with companies in its portfolio to bring about the changes that the AFT seeks.”

In September, the 150,000 members of California State Employees Association, loosely affiliated with SEIU, passed two reform resolutions regarding CalPERS, which the Publisher of CorpGov.net, James McRitchie, authored. Neither have been formally presented to CalPERS yet.

1. Resolution 1 (download in Word) seeks to increase the availability of information on CalPERS proxy votes and encourage CalPERS involvement in organizations like Investor Suffrage Movement & Proxy Democracy, Shareowners.org and TransparentDemocracy.
2. Resolution 2 (download in Word) seeks to increase the availability of information during internal elections at CalPERS so that members have a better understanding of where their own board candidates stand on the issues.

If you know of governance resolutions being introduced at other unions, please let us know so that we can share them with readers.

Funds Need to Practice What They Preach

Knut Kjaer, president of RiskMetrics and former head of the Norwegian state oil fund, told institutional investors at a recent corporate governance conference that the best way to “clear up the mess” left by the financial crisis was to improve “the way we operate as owners." "We must humbly acknowledge our failure as owners.”

The Institutional Shareholders’ Committee, which represents UK investors, drew up a list of principles, urging institutions to use their votes more aggressively. They include a code of “best practice” for institutional investors that is to be enforced on a “comply or explain” basis and based on principles of mandatory disclosure on issues such as voting. (see Improving Institutional Investors' Role in Governance)

According to FT, Lord Myners compares the guidelines with a warning for customers about leaving goods unattended at their own risk and that points to weakness in the chain of ownership. (A question of ownership, FT, 10/23/09)

Lord Myners’ own list of ideas includes rewarding long-term investors with more voting rights and allowing shareholders to trade votes. He said shareowners who never use their right to vote should be given a chance to sell the rights to more active investors. He offered the ideas in the interest of "stimulating debate in the investment industry" on how to encourage and facilitate better stewardship by institutional investors, he said. (Myners proposes non-voting shares to boost activism, Reuters, 8/13/09)

Guaranteed Savings

401(k)s were originally designed as a perk for highly paid executives, not a pension replacement. Lower-paid employees couldn't afford to defer a portion of their paychecks. Now that many companies have repealed their pension systems, employees no longer have a choice if they ever want to retire. The Great Recession is waking many to the fact that, once again, the average worker got screwed.

With people living longer and markets being volatile, corporations don't want to go back to defined benefit plans. According to Time, "the ERISA Industry Committee (ERIC), a group that represents the nation's largest employers, has proposed a system of exchanges that would allow individuals the ability to buy a guaranteed retirement account on their own. Some government regulation would be needed, but it would be a private plan."

Opinion polls show that people would be willing to give up the flexibility of a 401(k) for a guaranteed return. (Why It's Time to Retire the 401(k), Time, 10/9/09) But who will backup the insurance providers? The idea will need something like the Pension Benefit Guaranty Corporation to get off the ground.

Shamrock Win at TXI

Texas Industries shareowners elected all three Shamrock Activist Value Fund, L.P. nominees to the company`s board of directors and approved all three of the fund's corporate governance shareholder proposals. If adopted, TXI will have annual elections for all directors, majority voting in uncontested director elections and will submit the company's 'poison pill' to a vote by shareowners. (All Shamrock Activist Value Fund, L.P. Nominees Decisively Elected to Texas Industries Board of Directors, Reuters, 10/23/09) CalPERS and CalSTRS both supported Sharmrock's efforts. Is this a sign of the growing shareowner clout we will see in the 2010 season?

Friends in High Places Leading to Troubled Public Funds

The October edition of Institutional Investor contains an excellent article outlining recent scandals surrounding public pension funds and suggested reforms. "Pension Pay To Play Casts Shadow Nationwide" highlights many cases involving bribes for allocating investment business and the too cozy relationships some have developed with consultants, money managers and placement agents.

The article goes on to discuss proposed SEC rules to ban placement agents and bar most campaign donations to officials who have influence over public fund investment decisions. See File Number S7-18-09: Proposed Rules related to Political Contributions to Certain Advisors.

According to the article, two developments exacerbated the potential for corruption:

• the move by public funds into alternative investments where their own staff lacked expertise, experience and contacts, and
• the rising cost of campaigning for public office.

Most importantly, Institutional Investor goes on to make several specific recommendations:

• Reform and Police Placement Agents. They like the more moderate disclosure provisions of California's AB 1584, rather than an outright ban.
• Restrict Political Contributions. The Supreme Court's decision to examine the Constitutionality of limits on campaign contributions by corporations could soon negate this possibility. (see Shareholders Should Hear About Political Spending, BusinessWeek, 10/22/09 and the Center for Political Accountability)
• Eliminate Sole Fiduciaries and Reform Governance. Getting whole boards that mostly meet in public to allocate money based on campaign contributions or political favors has got to be much more difficult than corrupting a single individual.
• Empower Public Fund Investment Staff. Pension fund boards should act a little more like corporate boards; their primary involvement should be in strategic planning and policy development, not day-to-day operations.
• Clamp Down on Conflicts. If board or staff members have a conflict of interest, they should disclose the information and recuse themselves.
• Create a National Disclosure Database. The challenge will be funding such a project.
• Criminalize Ethics Violations. There is too little teeth in some existing laws to make enforcement worth the effort.
• Grant Greater Federal Oversight through the SEC's Financial Industry Regulatory Authority, which already regulates brokers, or the Department of Labor, which now monitors corporate defined benefit funds.

They quote former SEC Chair Arthur Levitt at the end of the article. "These scandals open up opportunities to correct the system. If we don’t take advantage of this, we deserve the system we get." Agreed. However, we should also ensure any rules adopted are enforceable. Too often, I've seen pensions adopt policies that appear strong but don't carry the weight of law, because they aren't adopted through the rulemaking process. As soon as the press and public outrage die down the policies are repealed and we are back to normal. Let's not let that happen this time. (Thanks to Les Greenberg for bringing the article to my attention.)

SEC Investor Education

The SEC announced "its first-ever Web site devoted exclusively to investor education, providing investors with in-depth information and 'top tips' on how to invest wisely, plan for the future, and avoid being scammed."

Investor.gov provides easy links to check the registration status of broker advisors, felony charges & convictions, as well as links to some basic tools and calculators.

However, I was disappointed to see virtually nothing on corporate governance. Shouldn't the SEC be stressing the responsibilities of ownership, not just consumer protection? Investors aren't buying aspirin; they're buying into businesses and should think of themselves as something more like partners than customers.

Readers should let the SEC know that investor education should also cover the shareowner's responsibilities and where to find resources to help them vote in corporate elections.

D100 Omission Explained

The third edition of the Directorship 100, the who’s who of the corporate governance community, is out. This year’s D100 puts President Barack Obama and many of his appointees at the front of the pack. (The D100 Boardroom Leaders for 2009, Directorship, 10/14/09)

My comment: Good job on a tough assignment. Of course no two people will ever agree on everyone who should or shouldn’t be on the list but the one person who immediately comes to my mind, and the minds of many in any discussion of corporate governance, is Robert A. J. Monks.

Bob was instrumental in creating a fiduciary duty for pension a mutual funds to vote in corporate elections. He founded Institutional Shareholder Services (now part of the Risk Metrics Group), which many believe has almost monopoly power in advising institutional investors how to vote. He and Nell Minow (who you did include) then set up the LENS Fund, which paved the way for Relational Investors, GO and others on your list. Along with Nell, he then set up The Corporate Library, which you also include. You include several academics, all worthy, but it was Bob and Nell’s book, Corporate Governance, along with another earlier book by R.I. (Bob) Tricker, that virtually created the academic discipline. I can’t understand how you missed this giant of the field… or maybe he’s on your list and I missed it?

The editors posted a nice response: We appreciate Jim McRitchie’s comment of Robert A.G Monks, and his achievements in the context of US corporate governance. In fact, Bob Monks was recognized by Directorship in our 2008 Corporate Governance Hall of Fame, and deservedly so (along with Bill Donaldson, Mike Oxley, Paul Sarbanes, and Ira Millstein). In addition to Bob’s many accomplishments, he also happens to be a first rate fellow and a delightful individual whom we admire and enjoy immensely.

Luby's Back in the News

"Share the work, share the risk, share the profits." Those were the guiding principles of Harry Luby, founder of the restaurant chain, Luby's Cafeteria, which announced it will close 25 restaurants that collectively lost $5.5 million in fiscal year 2009. Systemwide, Luby's lost $23.3 million in its latest quarter, which was seven times greater than its losses for the same time period last year.

Since well-known restauranteurs Chris and Harris Pappas took over leadership of the Luby's chain in 2001, they have been criticized for management conflicts of interest with their Pappas restaurants, and their leadership team has been in proxy fights with shareholders.

One of the big lessons of the Great Recession is that there is no such thing as a recession-proof business. Rather, there are businesses that are rendered crisis-proof by stable management teams with strong values and solid customer and employee relationships. Cash reserves help too. But even a big pile of money can't hide mismanagement forever. So says Barbara Farfan (U.S. Retail Industry Numbers: 829 Store Closings, 1486 Store Openings, Chapter 11 Updates, and 3 Restaurant Chains in 3 Different Business Cycle Stages, about.com, 10/19/09)

In 2000, the Committee of Concerned (Luby’s) Shareholders launched a proxy fight with Luby’s. Our major concerns (then) are the same problematic issues (now) facing Luby’s, says Les Greenberg. Additionally, we have written extensively about what we perceived to be conflicts-of-interest represented by the Pappas’s ownership/management of Luby’s. Someday, the investing public and our government will recognize the enormous economic costs of denying all Shareholders “equal access” to the corporate ballot.

WayBack Machine

Five years ago in October CorpGov.net reported:

• CalPERS fails disclose the management and advisory fees it pays to private equity and hedge funds. They're being sued by the California First Amendment Coalition (a group of news organizations).
• CalPERS, CalSTRS, many pension fund members of the Investor Network on Climate Risk, and others are beginning to screen at least portions of their portfolios for environmental risks, such as global warming.
• Average pay for top American CEOs and board chairmen has soared from $479,000 to $8.1 million in the last quarter century, as measured in annual surveys by Business Week magazine.
• A survey by Moody's Investors Service of more than 160 of the largest US and Canadian corporations finds that one out of four companies still offer executive compensation based on formulas that promote a short-term focus or an unhealthy appetite for risk from a creditor perspective.
• Stephen Davis, of Davis Global Advisors, recently called on shareowners to form “an investor-class version of MoveOn.org, the powerful, web-based mobilize of grassroots political activism. Without it, director election reform is jammed at the SEC.”

Ten years ago in October CorpGov.net reported:

• Union pension funds will shift their focus in the next proxy season in an attempt to focus on the long term. One proposal seeks to increase the voting rights of shares held for an extended period of time.
• CalPERS took action to reduce gift reporting requirements for fund fiduciaries and contractors to the more minimum requirements of state law after the Office of Administrative Law, at my request, concluded the regulations were invalid because they should have been, but were not, adopted pursuant to the Administrative Procedure Act.
• CII named Linda Wachner as CEO pay anti-hero for her 1998 pay package worth $74 million in direct compensation, in addition to almost $76 million in exercised options at a time when the company's stock suffered a decline of nearly 25% and losses of $32 million.
• Posted review of Jonathan Charkham and Anne Simpson's book, Fair Shares: The Future of Shareholder Power and Responsibility.
• Ralph Ward's Boardroom Insider moves into its second year of publication.
• The Corporate Library, recently founded by Nell Minow and Robert AG Monks, is "intended to serve as a central repository for research, study and critical thinking about the nature of the modern global corporation, with a special emphasis on best practices and standards." I predicted, "The Corporate Library will quickly become the primary internet portal for those searching for answers concerning the direction of corporate governance."

Pressure on Chamber of Commerce Heats Up

Reuters, Fox Business Network, CNBC and others were tricked on 10/19/09 into falsely reporting that the U.S. Chamber of Commerce had shifted its position and was now supporting the climate change legislation being debated in Congress. The Yes Men, who pulled off the stunt, say their goal is "impersonating big-time criminals in order to publicly humiliate them." (Media Duped by False Chamber of Commerce Release, CBSNews, 10/19/09)

As mentioned previously, CorpGov.net joined with others in the investment community pressuring companies to take steps to address the misalignment between their publicly stated policies and those of the U.S. Chamber of Commerce on the issue of climate change. Letters to 14 companies can be found here.

The White House is reportedly cutting the Chamber out of its traditional Washington role as the chief representative for big business. Instead, Obama has reached out directly to CEOs, meeting repeatedly with small groups of executives in his private White House dining room. (White House looks to bypass powerful Chamber of Commerce, Washington Post, 10/19/09)

According to Eliot Spitzer, the U.S. Chamber of Commerce—the self-proclaimed voice of business in Washington—has been wrong on virtually every major public-policy issue of the past decade: financial deregulation, tax and fiscal policy, global warming and environmental enforcement, consumer protection, health care reform… (Chamber of Horrors, Slate, 10/15/09)

Washington’s single biggest lobbying group has grown a whole lot bigger. The U.S. Chamber of Commerce spent a record a record $34.7 million to lobby the government in July, August and September, according to a hefty lobbying disclosure report filed today. That’s more than $300,000 a day. (U.S. Chamber Spent a Record $34.7 Million on Lobbying in Past 3 Months, WSJ, 10/19/09)

I urge reader to take action. Through the phone company, Credo, you can quickly send an e-mail to every CEO on the Chamber's board.

Then send an e-mail yourself to the Chamber's top leaders directly:

• Chamber President Tom Donohue
• Executive Vice President David C. Chavern
• Executive Vice President Bruce Josten

Use tools like http://proxydemocracy.org, http://isuffrage.org, http://www.fundvotes.com, http://www.corpgov.net, & http://www.shareowners.org, to help determine which funds are voting your values and to find out how you can get involved in shareowner issues. If you're a money management professional, join the Social Investment Forum.

Corporations largely determine what we buy, what we read, the quality of the air we breathe and the water we drink. Isn't it about time they were accountable to at least shareowners? I don't want the companies I own lobbying against what I consider reasonable legislation to address global climate change.

Strine's Call for "Sustainable" Profits

Vice Chancellor of the Delaware Court of Chancery, Leo E. Strine Jr.'s article, Why Excessive Risk-Taking Is Not Unexpected (DealBook, NYTimes, 10/5/09) deserves more attention. He asserts that during the last 30 years, it is "indisputable" that:

1. regulatory standards have been greatly relaxed, giving the financial industry free rein to leverage itself to the hilt and to engage in a wide range of speculative and increasingly opaque, complex activities, often without rigorous safeguards;
2. the power of stockholders to influence the composition of corporate boards and the direction of corporate strategy has been markedly enhanced;
3. institutional investors who hold stocks, on average, for a very brief period of time and are highly focused on short-term movements in stock prices have become far more influential and prevalent; and
4. “pay for performance” compensation systems were implemented to align the interests of managers with stockholders by giving managers incentives to pump up corporate profits in a manner that will increase the corporation’s profits and stock price immediately, rather then durably.

Strine therefore calls on policy makers to be guided by two key objectives:

1. re-instituting sound prudential regulation over financial institutions critical to the overall well-being of our capital markets and economy, and
2. implementing policies that focus stockholders and boards on the objective of having corporations produce wealth in both sound, durable fashion.

Strine's characterization of increased shareowner power deserves additional examination. While it is true that shareowners have increased "influence," they haven't obtained much in the way of real rights. Their real influence has been in the ability to exert backroom pressure. Shareowners still have relatively little real power over the overt transparent mechanisms of corporate governance. Yes, if a 5% owner recommends a board nominee, the company has to disclose the disposition of that request. Yes, more and more resolutions are passing and more and more directors are required to get 50%+ of the vote to get elected. And next year, broker votes won't remain on the scales.

However, corporations are far from democratic... even on a one share, one vote basis. Shareowners who recommend board members or who pass resolutions are essentially begging their boards. Sure, one could argue that after the Magna Carta, the power of the people was "markedly enhanced." Yet, even the "proxy access" proposal being contemplated by the SEC would only give shareowners a voice limited to one nominating one quarter of the board. 75% could remain entrenched, under the domination of management.

In addition, if the SEC does adopt proxy access, who does that limited increase in power to to? Not to the average investor, who, as Strine points out, invests "with a rational time horizon consistent with sound corporate planning... with the hope of putting a child through college or providing for themselves in retirement." Instead, the SEC would give that power primarily to large institutional investors who, as Strine notes, "hold stocks, on average, for a very brief period of time and are highly focused on short-term movements in stock prices."

Strine is right when he calls for "prudential regulation" and "policies that focus stockholders and boards on the objective of having corporations produce wealth in both sound, durable fashion." The trouble is, he provides no real advice on either. Is he advocating that government policies favor SRI funds? Probably not, although that would seem to fulfill both general recommendations.The problem certainly isn't too much shareowner power. Readers of his article who left comments provide better and more specific advice:

• Assess a high tax on short-term returns (90 days) at 60-75% and longer-term returns (up to a year) at 50%. (Gary)
• Unfortunately, the combination of CEO and Chairman produces a compliant culture in which oversight disappears until a bubble of some sort bursts. (moonwell23)
• Put a crimp on the road show IPO that are put on only for these IS by making the Dutch auction system mandatory so there really are long term stakeholders not some intermediary for the public acting in their own interest without any fiduciary responsibility ultimately to the public. (JV)
• transparency, oversight, accountability... read Bartlett and Steele’s expose in October 2009 “Vanity Fair” (nonclassical)
• Boards directors are paid well to be fiduciaries. They obviously failed miserably at many financial firms. Where is the accountability? (Vegemite)

Corporations owe their existence to government issued charters. Unfortunately, Delaware continues to lead the way in the race to the bottom, with regard to transparency, oversight and accountability. The problem isn't too much democracy in corporate governance but too little. Government policies need to strengthen that ability of long-term shareowners to police their companies to ensure they operate in a sustainable manner.

If your company faces possible insolvency, what does that mean for you as a director? That was a question on the minds of many on October 15, 2009, as the Silicon Valley Chapter of the National Association of Corporate Directors met at Wilson Sonsini Goodrich & Rosati, 950 Page Mill Road, Palo Alto. I'd been through that experience myself about 20 years ago when I was on the board of Associated Cooperatives Inc., once a wholesale in Richmond, California, for member retail co-ops. The program was well attended and from the many questions, it was easy to tell that at least a few of those attending weren't there out of idle curiosity. Read full coverage.

CorpGov News Bites

RiskMetrics Group is in discussions to buy KLD Research & Analytics. An announcement on a deal is expected shortly. A report by Global Proxy Watch predicted a deal within the next couple of weeks. Responsible Investor discusses the deal and consolidation in the SRI research area. (RiskMetrics primed to buy KLD, 10/13/09)

CalPERS is launching a "special review" of fees paid by some of its money managers to an investment advisory firm run. "The review was sparked by the recent receipt of information provided to Calpers by investment funds that reported their payment of more than $50 million in fees over a five-year period to Arvco Financial Ventures, a placement agent firm headed by former Calpers board member Al Villalobos," according to a press release. (Calpers Probes Fees Paid to Adviser, WSJ, 10/14/09) In May CalPERS adopted what I consider an "underground regulation" to ask funds to disclose details about their use of placement agents. Gov. Arnold Schwarzenegger has now signed AB 1584, which requires placement agents to disclose any campaign contributions they've made to elected board members of public pension funds. It also requires disclosure of whether a money manager has hired placement agents to make a pitch to the pension funds. (New law regulates pension fund agents, SacBee, 10/12/09). Interestingly, Villalobos enlisted another former CalPERS board member, Kurato Shimada to act as a placement agent on a $250 million proposal in 2000. Shimada was recently reelected to the Board.

CorpGov.net joined with others in the investment community pressuring companies to take steps to address the misalignment between their publicly stated policies and those of the U.S. Chamber of Commerce/National Association of Manufacturers on the issue of climate change. Letters to 14 companies can be found here. Apple, PNM Resources, Exelon and PG&E recently quit the Chamber and Duke Energy withdrew from NAM. Members of the Chamber and NAM should do the same, get the organizations to change or ask the associations to refund the portion of their dues used to lobby on the issue. This “misalignment of positions” poses serious business and reputational risks to the companies. Companies that received the letter include: Air Products & Chemicals, Alcoa, American Electric Power, Boeing Company, Caterpillar, Cummins, Deere & Co., DTE Energy, Entergy, Ford Motor Co., General Motors Corporation, Lockheed Martin, Whirlpool and Xerox Corporation. Investors are invited to join the call by contacting investor relations departments at each company.

Newsweek's rankings of 500 leading companies' environmental policies and performance has prompted action by some shareowners who are urging calls to TIAA-CREF at 800-842-2733 (212-490-9000). They suggest asking for CEO Roger Ferguson. "Leave this basic message, in your own words: 'TIAA-CREF is invested in some of the very worst companies rated on environmental concerns. You need to tell those companies that they have a year to significantly change their ways or face divestment.'... If you are in the TIAA-CREF system, do note that."

Inside the Black Box

The Modern Firm, Corporate Governance and Investment (New Perspectives on the Modern Corporation), edited by Per-Olof Bjuggren and Dennis C. Mueller, explores developments in the theory of the firm, as well as how ownership structure and institutional frameworks impact performance. Below, I look at a small sample of the contributions contained in this stimulating reader.

As a demonstration of the book's timeliness, the author of chapter 2, Oliver Williamson, was awarded the Nobel prize in economics while I was reading the book... always nice when that happens. In the essay included in this volume, Williamson argues that contract/governance is an instructive way of opening the black box of the firm, especially with regard to antitrust matters. He examines the application of a contractual approach to various forms, such as lateral integration, pricing, scaling, horizontal mergers, and conglomerates.

Dennis Mueller reviews the development of the firm, focusing on constraints (or their lack) on managerial discretion, finding constraints weak but developing. I a 1993 study with Elizabeth Reardon he found agency costs high. "Cumulative over the 19-year period, the 699 companies have collectively destroyed roughly $1 trillion by investing in projects with returns less than their costs of capital." General Motors alone contributed $150 billion of the total. It would be interesting to see an update. The merger wave, growing competitive markets and the increased proportion of institutional investors increased constrains but the later weren't as effective as some think, since institutional investors also got swept up in the euphoria of the bull market.

Kristen Foss examines managerial authority in the knowledge economy and finds changes are likely to be as dramatic as many suppose. "Although knowledge workers may have more bargaining power... they too will be subject to authority, as long as productive activities are characterized by uncertainty and measurement costs which make complete contracting prohibitively costly."

Johan Eklund examines ownership concentration and dual-class equity structures in Scandinavia. He finds that dual-class shares drive a wedge between cash-flow rights and control rights. "Firms with only on equity class are, on average, investing efficiently, whereas firms with dual-class equity structure are over-investing... Vote-differentiation creates massive entrenchment and destroys large values." "On average, 'entrenched' firms have returns on investments that are approximately 30 percent below the cost of capital." "Separation of cash-flow rights from control appears to distort the incentive of the controlling owner by significantly reducing the incentive effect."

Deakin and Singh look at the market for corporate control and conclude that takeovers are a very expensive way of changing management because of huge transaction costs. Lack of a market for corporate control in Japan, Germany and France avoids these costs but has not imposed hardship on their economies because of other mechanisms to discipline managers. Additionally, many acquiring firms do not impose discipline, since they are motivated by empire-building or asset-stripping.

Daniel Wiberg examines the relationship between institutional ownership and dividends. He finds that institutional ownership has a positive effect on dividend payout policies and disciplines free cash flow to management. Control instruments, such as vote-differentiated share, "induce investors to demand higher levels of dividends as compensation for increased agency costs."

Does Corporate Governance Matter to Economic Development?

The editors of Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks, Thankom Gopinath Arun and John Turner answer with a resounding yes. As they indicate in their introduction, "If finance matters for economic development, then corporate governance must also affect economic development for at least two reasons. First, corporate governance affects how and at what cost firms finance their real investments... Secondly, the quality and nature of corporate governance can affect the structure of the financial system." If shareowners are poorly protected, finance through bank loans will be more expensive.

This collection of essays provides a broad outline of recent scholarship around the world. Chisari and Ferro suggest that unintended consequences of reforms in Argentina could impinge on consumers. Based on experience in Botswana, Gustavson, Kimani and Ouma also argue reforms originating in Anglo-American models must tailored better when imported to other cultures. Goyer and Rocio also find that corporate governance is mediated by the larger institutional framework in their study of electricity sectors in Britain and Spain.

Other authors focus on corporate governance relative to the banking sector, finding a correlation between debt and poor performance, the need for prudent regulatory reforms for divestiture of government ownership and good governance practices, while two chapters on Bangladesh also argue for strong legal and regulatory institutions to protect minority shareholders, creditors and depositors.

Three additional chapters focus on legal frameworks in Ireland, UK and the EU, as well as more broadly. It is that broader focus of developing a "shareholder protection index," which I found most interesting. Building on prior work by La Porta and others, Priya P. Lele and Mathias M. Siems construct a much more elaborate index of shareowner rights based on a "leximetric" (quantative measurement of law), rather than econometric approach.

They endeavored to include the variables which best reflect shareowner protections developed in the UK, US, German, France and India over the last 35 years. Aggregate scales for each of these countries trend upward. Shareowner protections have increase, especially in the last five years. On a number of scales, the US comes out at or near the bottom but that doesn't mean the authors recommend redirecting capital from the US to France, for example. Other aspects, such as financial disclosure, the rule of law and socio-economic attitudes have not bee considered. Neither have factors such as blockholder control and other variables. They didn't examine whether a better score leads to better governance or economic development but will be examining these questions in the future.

Overall, the volume offers a good cross-section of essays reflecting current scholarship in field of growing importance.

Islamic Governance

An Islamic Perspective on Governance (New Horizons in Money and Finance) by Zafar Iqbal and Mervyn K. Lewis reads like a carefully constructed dissertation setting forth a theory of justice, taxation, government finance and accountability, governance and corruption grounded in Islam. Indeed, it originated as an academic piece and is unlikely to find the wide audience it deserves in this format.

The authors cover their topic frequently with comparisons to the Western perspective, so readers from either culture will not fail to broaden their horizons. Because of its grounding in theories of justice, the book should find appeal among those in the SRI community, since both focus on "human needs," rather than "wants," "what ought to be" rather than "what is."

I found interesting the observation that Christianity initially flourished among the politically disinherited. Jesus was a revolutionary but not primarily political, as in "give to Caesar what belongs to Caesar and to God what belongs to God." In contrast, Islam was born outside the two empires of its time and created its own. Islam was the blueprint and basis for legitimization. Thus there is no separation of religion and politics in the Islamic perspective.

These origins may help to explain why Western economics takes the market as the norm, with government intervention to regulate market failure and competitive equilibrium. Since there is no fundamental spit between government and religion in Islamic cultures, they may be less likely to address problems by creating new property rights (carbon emissions trading, water entitlements, etc.), instead, taking a more direct approach.

Much of the book lays out a program of economic reforms for Islamic countries, based on a blending of classical, Keynesian and Islamic views. For example:

• Fiscal austerity in state financial management.
• Tax system based on principles of equity with all current expenditures finance through taxes. (Islamic position is that governments cannot borrow on fixed interest, which shifts the burden to future taxpayers and generations.)
• Government must institute preconditions for private investment (rule of law and clear property rights)and promote private savings.
• Deficit spending for capital improvements must be restricted by "rules of fiscal responsibility."
• Profit and loss sharing models are preferred over debt financing and internal debt preferred over external debt.
• Deficit finance proposals ought to be accompanies by repayment schedules.
• Infrastructure projects are best financed through profit and loss sharing models and zero rate loans.
• Monetary scarcity ought not to be an excuse for inaction on infrastructure in developing countries.

In the area of corporate governance, the authors seek to outline an Islamic variant that is even more consultative than SRI, that incorporates more of an ethical dimension than simple stakeholder theory and that advocates something like a rigorous triple bottom line accountability that includes religious supervision by auditors not beholden to management. Of course, the author's recognize that any claims by an Islamic corporate governance to moral high ground "must be tempered by the practical reality of the poor record of many Muslim countries in terms of corruption and economic and public governance."

In contrast to Western researchers who view corruption at its core as a problem of bad governance requiring institutional reforms, Islamic scholars see it as fundamentally a moral problem. The basic need is a commitment to social justice and public interest. "What is then needed is to rediscover the faith, values, egalitarianism and transparency of the early Islamic state and the early Caliphate." Westerners look to restraining influences from outside. Islamic traditions find the source of such influences from within. The authors seek to blend both approaches.

Islam is the world's second largest religion after Christianity with 1.3-1.8 billion adherents, comprising 20-25% of the world population. With current clashes around the world between Christian/Jewish/secular countries and Islam, it is clear that increasing dialogue on the central issues of politics, economics and corporate governance is one of the critical tasks of our times. Zafar Iqbal and Mervyn Lewis have made an important and timely contribution to that effort.

Governance Counts in India

A study by Standard & Poor's finds corporate governance scores on the S&P ESG India Index is positively correlated to performance. For every 1 point increase in the governance score beyond 45 (out of 100), a company's market value rises by 3%. Well governed firms are also less leveraged, have higher interest coverage ratios, provide a higher return on net worth and capital employed, their profit margins are relatively more stable, and their price-to-earnings ratios and dividend yields are also higher.

he S&P ESG India Index, launched in January 2008, is a measure of environmental, social and corporate governance at Indian companies. Let's hope S&P expands the concept and creates similar indexes for other countries. (Good corporate governance boosts Indian stocks: S&P, dnaIndia.com, 10/9/09)

"While ICICI Bank, Bharti Airtel, HUL, 3M India, Eli Lilly India, Infosys and a few more from India Inc. provide the upside, a wide spectrum of companies refuse to come into the radar. “The lack of compliance arises largely in promoter-driven groups because they are averse to spending money on such issues,” points out Dumasia of KPMG, maintaining that in a scale of 1-10 , he would rank India at six in terms of compliance. Clearly, the country still has a long way to go as regulation needs more teeth." (Most companies take regulation for granted, EconomicTimes, 10/9/09)

The ministry of corporate affairs soon is expected to require unlisted firms to have independent directors on their boards, bring in compliance and proper disclosures regarding accounting policies, and may ask professional institutes of chartered accountants and company secretaries to rate unlisted firms based on their evaluation. (Governance code for unlisted cos in the works, EconomicTimes, 10/4/09)

Foolish Review of Rights

The Motley Fool reviews the Shareholder Bill of Rights, providing "a rundown of each proposal, the pros and cons, and how reform will affect you and your portfolio." They've issued an open call for comments on what should (or should not) be included in bill. Many comments are posted directly on their site. Alternatively, you can email at ShareholderRights@fool.com. (It's Time for a Shareholder Revolution, 10/2/09) They seem more likely to galvanize public opinion than most.

Global Corporate Governance Forum

This World Bank forum continues its good work. At their website you can now download a Practical Guide to Corporate Governance: Experiences from the Latin American Companies Circle.

The Forum, in cooperation with the Securities and Exchange Board of India’s National Institute of Securities Markets and the Confederation of Indian Industry recently held media training workshops in Delhi and Mumbai to focus on raising corporate governance awareness. Almost 40 journalists from India’s general and business print, electronic, and online media attended this workshop. Sessions on governance best practices, accounting and reporting principles, successful examples of investigative business journalism and writing exercises helped senior journalists deepen understanding and sharpen reporting on stories behind the numbers. For more details on the Forum’s program in India, please contact Gene Spiro at espiro@ifc.org.

Moving Beyond Cycles of Regulation, Deregulation & Reregulation

The endless cycle of government regulation is explored in a new book, Regulation, Deregulation and Reregulation: Institutional Perspectives (Advances in New Institutional Analysis Series) by Michel Ghertman and Claude Menard. Contributors bring an international perspective, touching on a myriad of industries. While not directly focused on developing a post-subprime regulatory framework in the financial industry, the book does reflect the latest thinking by a respected group of scholars for understanding theory and practice in regulatory approaches.

For example, the research of Andres, Guasch and Azumendi develops indexes of regulatory governance from cross-country data and shows that regulatory involvement improves results in utility performance. Another study by Delmas, Russo, Montes-Sancho and Tokat finds that deregulation has a negative impact on efficiency and a positive impact on the provision of renewable energy. ne way to create willingness to pay for public goods is to bundle them with private goods. Consumers are willing to pay a premium for non-toxic cleaners because they see the likelihood of direct impacts on their own health.

More on target for those concerned with reform of the financial industry, Romano discusses how SOX's use of a "one-size-fits-all" approach is oblivious to the microanalytic approach of firms matching governance structures and processes to specific organizational developments and requirements. Rulemaking expansions often occur after business crises galvanize public opinion and action by legislators around sometimes ill-conceived compromise solutions supported by powerful and vocal interest groups. In contrast, refinement of poorly conceived regulatory schemes generally takes many years and requires substantial research.

If nothing else, be sure to read the essay by Ghertman who outlines Stigler's 1971 article, the "Economic Theory of Regulation," which recognized that many rules are advocated by incumbent firms as barriers to entry. Stigler generally favored market-oriented deregulation... the road we took for decades. Ghertman goes on to discuss refinements offered by subsequent scholars that discuss variables such as group cohesion, political balance, and unintended incentives and transaction costs.

Explanations of movements away from and back toward a dominating policy paradigm (regulation or deregulation) benefit from the dynamic properties of political science for third order changes (the paradigm), the dynamic properties of transaction cost theory for second order changes (regulatory instruments), and the behavioral theory of the firm and the contractual design view for first-order changes (regulatory mechanisms).

Transaction cost economies are better grounded than a simple Stigler-based assertion that "regulation (or government) IS the problem" would warrant. Finding appropriate proxies to measure transaction attributes is problematic, especially across industries and jurisdictions, but is essential. We need to focus more on ex ante choices and less on ex post empirical tests if we are to move beyond the cycle of regulation, deregulation and reregulation.

SEC Proposal on Pay-to-Play

Comments are due 10/7/09 on a proposed SEC rule to curtail pay-to-play practices by investment advisers who manage money for state and local governments. Among other provisions, the rule would ban use of placement agents and would prohibit investment advisers who make political contribution to elected officials who influence the selection of plan advisers from providing advisory services for compensation for two years.

One of the best comment letters we've read came from Mercer Bullard, Founder and President Fund Democracy, and Barbara Roper Director of Investor Protection Consumer Federation of America on October 6, 2009. Voice your opinion by sending an e-mail to rule-comments@sec.gov with File No. S7-18-09 in the subject line. Once again, we also urge public pension funds to take a good look at regulations in this area adopted by CalSTRS. They were attached in the October 6th comment letter to the SEC from Jack Ehnes, Chief Executive Officer.

Proxy Access

Broc Romanek provides his educated guesses regarding the rulemaking delay on proxy access. "In addition to analyzing the comment letters, the SEC may be waiting for Congress to pass a bill that gives the SEC clearer authority to conduct this rulemaking - in anticipation of a likely lawsuit - and that the SEC still needs to figure out how to handle the mechanics of proposed Rule 14a-11 since there are numerous open issues on how access would work in practice... My guess is that the SEC will not act on this proposal separate from the 14a-11 proposal for fear of enraging those in favor of a-11 since that might look like that is all the SEC is willing to do in the access area... the January/February timeframe may be too soon for the SEC to act - there are a lot of open issues and the pressure of an upcoming proxy season no longer bears down on this rulemaking.

A Reprieve from the Guv'ner! No Proxy Access for '10 Proxy Season (10/5/09, TheCorporateCounsel.net) provides further insight and links. Finalization of Proxy Access Rules Will Be 'As Soon As Practicable,' Gillan Tells Investor Advisory Committee (financialexecutives.blogspot.com, 10/5/09) provides even more comprehensive coverage.

CalPERS Fights Back

CalPERS believes that the cost of not fixing the national health care system will be worse than leaving it alone.

CalPERS 20-year investment return remains positive. We are on track with the long-term investment performance target to fund retirement benefits for our members.

CalPERS administers retirement benefits for 1.6 million active and retired State, school and local public agency employees and their families. Benefits for our members and retirees remain secure. (CalPERS Responds) (see also, CalPERS Creates Website to Rebut Critics, Pensions&Investments, 10/5/09)

The huge pension system may have to do much more than launching a website to dispel myths related to defined benefit plans and health insurance. Powerful forces are still being rallied fed by a desire to disarm shareowner activists and public resentment that public sector workers still have benefits that are increasingly rare in the private sector. For excellent coverage of articles spreading hysteria surrounding public pension funds, see PensionWatch, whose avowed purpose is "to provide an overview of the multiple pension crises that are about to drown America's taxpayers."

Defection From the Chamber

The United States Chamber of Commerce’s Web site says the group supports “a comprehensive legislative solution” to global warming. Yet no organization in this country has done more to undermine such legislation.

An editorial in the New York Times, Way Behind the Curve (9/30/09) denounces the Chamber declared war on the Environmental Protection Agency’s plan to use regulatory means to control emissions, questioning the science behind the agency’s preliminary finding that greenhouse gas emissions endanger human health.

They point out the companies are "so fed up that they are quitting." Amobng them are Pacific Gas & Electric, PNM Resources and Exelon.

See also, Chamber of overstated horrors, Boston Globe, October 3, 2009; U.S. chamber is a dinosaur on climate change, San Jose Mercury News, October 2, 2009; Chamber Of Commerce Rewrites History: ‘We’ve Never Questioned The Science Behind Global Warming,' ThinkProgress.org, 9/29/09; A Chamber Divided: Companies Balk at the U.S. Chamber's Climate Policy, NRDC, 5/5/09; Climate Change Schizophrenia, The Big Money, 5/21/09; Nike Resigns From Chamber Board, NYTimes, 9/30/09) Thanks to many members of the Social Investment Forum for informing us of these developments.

Apple has become the latest company to resign from the United States Chamber of Commerce over climate policy. "We strongly object to the chamber’s recent comments opposing the E.P.A.’s effort to limit greenhouse gases," wrote Catherine A. Novelli, the vice-president of worldwide government affairs at Apple, in a letter dated today and addressed to Thomas J. Donohue, president and chief executive of the chamber. Click here to read the letter. (Apple Resigns From Chamber Over Climate, NYTimes, 10/5/09)

Procter & Gamble Shareowners Support Resolutions

According to ProxyDemocracy.org, several funds are supporting resolutions by Evelyn Y. Davis and Walden Asset Management at P&G. The proposal for cumulative voting by Davis is supported by AFSCME, Trillium Asset Management, Calvert Funds, and MMA Praxis Funds. The say on pay proposal from Walden is being supported by the same funds plus CBIS and Domini. (CorpGov.net publisher, James McRitchie, is a P&G shareowner. I'll be voting for both resolutions.)

Splitting Roles

Norges Bank Investment Management, the $432bn manager of the Norwegian Government Pension Fund, announced it will challenge Harris Corporation, Clorox Company, Parker Hannifin, and Cardinal Health to split their chairman and chief executive roles. (Norway’s SWF manager gets tough on governance with US and UK companies, Responsible Investor, 10/2/09)

Despite the obvious problems with power-sharing, a number of companies have made it work. Aéropostale (ARO), California Pizza Kitchen (CPKI), Chipotle Mexican Grill (CMG), P.F. Chang's China Bistro (PFCB), Motorola (MOT), Research In Motion (RIMM) (RIM), Twitter; J.M. Smucker (SJM) and Wipro (WIT) are cited by BusinessWeek. If leaders have complementary skills and a proven track record of subsuming their egos to work together, notes senior partner David Bliss of consultancy Oliver Wyman Delta (MMC), "it can work, but it's difficult." (When the CEO Job Is Split in Two, 10/1/09)

TK Kerstetter argues such splits will satisfy the interested parties who feel that this is a big issue that will improve board governance. "There are governance issues… and then there are meaningful governance issues. Mandating the split of the roles of CEO and board chair is just a governance issue." (The Board Blog: Will Mandating an Outside Chairman Solve Anything?, BoardMember.com, 9/28/09)

My sense is that splitting chair and CEO will be one of the most popular resolutions in 2010. Walden Assets sent a letter to about 35 companies. It picks up on the important study by the Millstein Center and urges companies to study the issue of Separation of CEO and Chair in detail. (see also Walden Asks Companies to Consider an Independent Board Chair, 9/1/09)

Proxy Access: The Letters Are In

The deadline was August 17th, so the comment letters on proxy access have all been filed and posted. Many are well worth reading. If you don't see yours posted, you might want to resubmit it.

TIAA-CREF, one of the more conservative shareowner activists, calls on the Commission to raise the threshold to 5% for shareowners at all companies, regardless of size. Additionally, they want to require a two year holding period and recommend instead of the "first in" approach, nominations should go to the largest owner or and (here they get creative) to the shareowner or group that has held their shares the longest. They voiced opposition to reimbursement: "Reimbursement of expenses could be used to facilitate the election of special interest directors. Reimbursement also encourages fighting and proxy contests to achieve representation at the distraction of directors rather than dialogue and productive change." Instead, they favored "incentives for a meeting between shareholders and the board in order to identify director candidates who are acceptable to both parties... Ultimately, the best possible outcome is to avoid a proxy contest altogether... We believe that the nominee should receive at least 20% of the vote in order to be re-nominated in subsequent years."

Cornish Hitchcock, writing on behalf of the LongView Funds warns against a state-law carve-out, praising the merits of a uniform system. Like TIAA-CREF, the LongView Funds would like to see the required holding period extended to two years and nominations going to the largest nominator.

J. Robert Brown, of theRacetotheBottom.org, offers a spirited rebuttal to comments by the Delaware Bar Association regarding their argument in favor of private ordering. "The evidence in fact suggests that in the absence of a federal requirement, companies will opt for a categorical rule denying access." "Evidence suggests that management’s control over the drafting process and its ability to rely on the corporate treasury eliminate any real prospect of private ordering. Instead, when matters are made discretionary, they result in a categorical rule that favors management." "The only way to ensure meaningful access to the proxy statement is to adopt a federal rule that institutes the requirement."

Lucian Bebchuk's letter, signed by 80 professors, favors the rulemaking and notes, "no matter how moderate eligibility or procedural requirements may be, shareholder nominees must still meet the demanding test of getting elected before they can join the board. A shareholder nominee will join the board only if the nominee obtains more votes than the incumbents’ candidate in an election in which incumbents, but not the shareholder nominee or the nominator, may spend significant amounts of the company’s resources on campaign expenses."

As expected, the Shareholder Communications Coalition, comprised of the Business Roundtable, the National Association of Corporate Directors, the National Investor Relations Institute, the Securities Transfer Association, and the Society of Corporate Secretaries & Governance Professionals sent a letter opposing the rulemaking "until the Commission: (1) completes its intended examination of the proxy system; and (2) promulgates new regulations to modernize and reform this cumbersome and expensive system." "A shareholder nomination process that operates in a proxy voting system that cannot produce an accurate and verifiable vote count will do little to improve the overall corporate governance system." I just can't help making a snarky comment. So we should just go with the current system that elects incumbents based on inaccurate and unverifiable voting results until we can ensure the system works properly

Broadridge submitted a letter discussing various technical issues. Great for those who want to get into the weeds.

Writing on behalf of Sodali, a global corporate governance consultancy, John Wilcox asks: "Is Rule 14a-11 is sufficiently deferential to the traditional role of the states in regulating corporate governance?; and (2) Does the proposal achieve the Commission's goal of removing burdens that the federal proxy process currently places on the ability of shareholders to exercise their basic rights to nominate and elect directors?" His analysis answers with a resounding yes.  

As I have previously mentioned, I signed on to a letter from the United States Proxy Exchange (USPX), endorsed by members of the Investor Suffrage Movement, Robert Monks, John Harrington and John Chevedden. Glyn Holton did a great job of putting together sixty-nine pages of comments. I urge everyone to read our common sense approach outlining the democratic option, the need for deliberation and the reasons for our recommendations, which include:

• Mandating a federal standard that take precedence over state laws.
• Placing all bona fide candidates on a single management distributed proxy card.
• Not encouraging a system where corporations are willing to reimburse expenses shareowners incur in conducting a proxy contest, since this will only escalate costs paid by shareowners.
• Don't place an overt limit the number of candidates shareowners are able to nominate. If limits are need to keep the pool manageable:
  • limit individuals to five for-profit corporate boards
  • charge a modest fee
  • require a system of endorsements
  • require all candidates to file pre and post election estimates and accounting of all campaign expenditures
• Reduce the focus on control by establishing a system that will encourage diversity. "Corporate democracy will allow shareowners to take 'control' away from an entrenched board and not give it to any one faction."
• Eliminate the arbitrary and elitist proposed thresholds, opting instead for the time-tested $2,000 of stock held for a year. "The challenge should reside in winning the election, not in making the nomination."
• Increase candidate statements to 750 words and specified space for graphics that can address any issue related to the election, including short-comings of the current board.
• Measures to ensure board members nominated by shareowners are not marginalized.
• Implementation of a broad safe harbor for individual director communications with shareowners.

After we had already sent the USPX comment letter, I recalled a few additional issues and sent in my own letter as an addendum, recommending the following:

• Amendments to Rule 14a-8 also clarify that shareowner resolutions can seek to collectively hire a proxy advisor, paid by for with company funds, that isn't precluded from offering advice on board elections.
• Require that companies must allow shareowner resolutions to be presented during the business portion of the annual meeting.
• An override mechanism on Rule 14a-8(i)(5) (Relevance) and (i)(7) (Management Functions).

Dozens of studies in communications and organizational behavior find current corporate structures to be inefficient. Most decision-making structures, including those now governing corporations, are designed around status needs related to dominance and control over others. They are not designed to maximize the creation of wealth for shareowners or for society at large. In order to gain higher status, individuals seek to dominate more and more people. This dynamic moves the locus of control inappropriately upward. In order to generate more wealth, we need to take advantage of all the brains in our companies, as well those of concerned shareowners. We can do so by making corporations more democratic, top to bottom.

Now, we eagerly await the Commission's action. If they are slow in finalizing the proposed rules, I hope it is because they carefully read our letters and are rewording them to require more, not less, democracy. (permanent link address: http://www.corpgov.net/news/2009/august.html#proxyaccess)

Support Proxy Access

It is time to get those e-mails and letters into the Securities and Exchange Commission (SEC), since the deadline for comments is Monday, August 17th.

The Commission proposed giving shareowners access to the proxy to nominate directors in 1942 but sloppy language and World War II got in the way. In 1976 the nation was rocked by business scandals (see Corporate Morality -- Whose Business Is It? – Address by Roderick M. Hills, SEC Chairman, April 13, 1976).

In response, the Business Roundtable (BRT) in 1977 recommended "amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors." Their memo noted that such amendments "would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law."

More recently, the BRT has opposed proxy access. So far this year, they have tried to get the rule postponed. They've also met with Chairman Schapiro at least twice on the subject. They and other opponents are starting to flood the SEC with complaints about a one-size-fits-all approach, preemption of states rights and claims that access will lead to election of special interest directors.

Yes, the Commission voted on June 10 along party lines, three to two, to propose rule amendments aimed at giving shareholders the right to nominate directors to corporate boards. However, it will make it difficult for them to proceed if the comments are mostly opposed. Here's the basics:

• The proposed rule is open for public comment until Monday, Aug. 17, 2009.
• A press release describing the 250 page rule can be found at http://sec.gov/news/press/2009/2009-116.htm
• The full text of the proposed rule can be found at: http://www.sec.gov/rules/proposed/2009/33-9046.pdf.
• Previously submitted comments are posted to the SEC's website.
• Submit comments via e-mail to rule-comments@sec.gov. Be sure to put File No. S7-10-09 in the subject line.
• Alternatively, you can submit comments via the SEC's web form. On this webpage, you will be asked to fill in a form with you or your organization's information. You can either type your comments in the box provided or type "Comments attached." Click on continue and then upload your letter.

I'll be signing onto a letter from the United States Proxy Exchange (USPX), endorsed by members of the Investor Suffrage Movement, Robert Monks, John Harrington and John Chevedden, among others. I may also send an individual addendum. Here's a link to the current draft, still in progress. If you would like to sign on as well, send a pdf of your signature, as well as your typed signature block (Name, Title, Organization (if applicable), Address, including zip code) to Glyn Holton. If you don't have a pdf of your signature, send him a picture of your signature from your cell phone by 8/14/09, Friday noon.

The expressed intent of the access rules is to provide an alternative that “functions, as nearly as possible, as a replacement for an actual in-person meeting of shareowners." As you put together your own comments, please consider the following:

• Thresholds. The proposed thresholds of 1%, 3% and 5% held for a year, which have no real basis in research or history, will severely limit the number of companies where alternative candidates are proposed. A shareowner doesn't need 1% of the stock to propose a candidate at a meeting. (The problem is not that shareowners can't nominate candidates. It is that nominations must be presented for a vote at a the shareowners meeting and very few find it convenient to attend. Since most votes are made in advance by proxy, it does no good to nominate a candidate at the meeting that isn't on the proxy.) Only large, active funds with a strong legal staff are likely to engage. Most don't have investments in small companies where governance is often the worst. To ensure the threshold is on a sound legal footing and that it can be widely applied, I recommend the SEC use the same standard that has long been in place at Rule 14a-8 for making a shareowner proposal, $2,000 worth of stock held for a year. Hundreds of shareowner proposals, and some of the most innovative ones, come from individual investors. Institutional investors own shares in thousands of companies and typically aren't willing to put in the time necessary to draft proposal, come up with a "Plan B" for a company or nominate directors. We need the involvement of retail shareowner activists.
• If you think the SEC won't tolerate a threshold of $2,000 an add on could be something drawn from the comments of Kenneth Squire, Founder and CEO, 13D Monitor. "Require the nominating shareholder to get the 'endorsement' of a minimum of 1% of the shareholders (including its own holdings), regardless of the market capitalization of the company. This would just be an endorsement and not subject the endorsing shareholders to any liability or additional burdens. The nominating shareholder who gets the largest percentage of 'endorsements' will be the one who will be awarded access and will be allowed to nominate a full slate of directors to the Company's board in the Company's proxy statement. Under this framework, the one year holding period can be eliminated because the endorsing shareholders will make their own judgment on the nominating shareholder, taking into account the amount and length of ownership."
• Who gets access. The proposal is to have shareowners rush the door with their nominations. The first one there gets their candidates on the proxy. Many are commenting that this isn't fair, plus many could come in at the same time when the clock starts. Most of those commenting on this point suggest the largest shareowner or group should have their candidates listed. I like Squire's idea of the nominating shareowner with the largest percentage of "endorsements." Better still, would be to not overtly limit the number of candidates. Wouldn't we have better boards if shareowners could choose from several candidates for each position? To ensure we aren't overwhelmed with gadfly candidates who just want to see their name on the proxy, require some more paperwork in the form of anticipated and actual campaign expenses. Once imposed on CalPERS, their board elections had far fewer gadfly candidates. Additionally, we would then be able to see who is spending $1,000 vs who is spending $1,000,000. This might be especially important to shareowners when they know one side (the board endorsed candidate) is spending what is essentially shareowner money from corporate coffers. For the provisions imposed on CalPERS Board candidates, see California Government Code, section 20096.5.
• Nomination Limits. The proposal would limit the percentage of board members that can be on the proxy as a result of shareowner nomination to 25%, to ensure there is nothing close to a change in control. Therefore, if it is year two, all directors are on the proxy every year and shareowners already nominated 25% of the board, they can't nominate any additional board members. The whole idea of proxy access is to be able to change control. The 25% limit guarantees that entrenched boards will continue but with the infusion of up to 25% new members, the hope is that they will be able to convince the current board to change its position. CII advocates shareowners be able to nominate up to less than half the board but at least two candidates in all cases, to avoid a single board members being frozen out. I would do away with any limit on shareowner nominees. (see their comments of August 4th) If the board needs replaced and no one is putting up the money for a proxy solicitation, why shouldn't shareowners be denied the right of electing candidates of their own choice? The threshold is contrary to the Commission’s stated intent of facilitating the ability of shareowners to “exercise their state law rights.” Most states do not impose any requirement other than ownership of a single share a precondition for nominating directors. The USPE draft contains a good discussion on why the focus on "control" is misplaced. July 16th comments by Phillip Goldstein of Bulldog Investors discuss why having more than one proxy card (ballot) is confusing, and maybe even illegal. Goldstein says, "the Commission can craft a simple common sense rule to require that any proxy card that that excludes the name of any bona fide nominee known to the soliciting party is materially misleading and hence a violation of rule 14a-9(a)."
• Nominee Eligibility. Nominating shareowners should be required to represent that no relationships or agreements between the nominee or the nominating shareowner or group and the company and its management exist. However, there should be no requirement that shareowner-suggested nominees be independent of the nominating shareowner or group. Shareowners should be able to nominate people they have worked with and trust.
• Rule 14a-8(i)(8). If the SEC takes my recommended amendments to the proposed Rule 14a-11 they will render the current prohibition for proxy access shareowner proposal largely moot. However, if the SEC goes ahead with a closer approximation to what they have proposed, amending 14a-8(i)(8) to allow such proposals is critical. As indicated above, the proposed thresholds, especially 5% at small companies, will mandate a company by company movement by shareowners to open up access, similar to the current movement to require that directors be elected by majority vote.

Don't let this opportunity for a real shift in power to pass us by. As Monks and Minow have noted, with the slight exaggeration suitable for book covers, "Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone." Isn't it time corporations were at least accountable to shareowners?

Support Petition to Keep Blank Votes Blank

This morning, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners.

While waiting to see the actual language of the rule proposal, please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden. See petition File 4-583 http://www.sec.gov/rules/petitions.shtml. Send comments to rule-comments@sec.gov with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company's soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as "broker voting," which has already been repealed on "non-routine" matters and, we hope, will soon be repealed for so-called "routine" matters, such as the election of directors. For example, even though "broker voting" has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company's soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can see ProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to "broker voting."

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVote platform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don't want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that it may fall short of what the SEC requires. Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority "provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case." (my emphasis)

Broadridge says that shareowners using ProxyVote are communicating "voting instructions" to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to "forms of proxy," not the "voting instruction form," there is no violation. However, subdivision (1) refers to the "person solicited" and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope they move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions. While the petition is being considered for action, we hope Broadridge will modify its system to clearly indicate in red bold-face type how votes will be cast for each item where a blank vote will be changed.

A few months ago, The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox... Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of CorpGov.net, are:

• John Chevedden, Rule 14a-8 proposal proponent since 1996
• Glyn Holton, Executive Director, United States Proxy Exchange
• Mark Latham, Ph.D., VoterMedia.org
• Eric M. Jackson, Ph.D., Managing Member, Ironfire Capital LLC
• James P. Hawley, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary's College of California
• Andrew Williams, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary's College of California
• Andrew Eggers, President, Proxy Democracy
• Bradley Coleman and Erez Maharshak, Proxy Democracy

Again, please submit comments on the petition to rule-comments@sec.gov with File 4-583 in the subject line. (posted 5/20/09; link http://www.corpgov.net/news/news.html#BlankVotes)

News from 2009: July, June, May, April, March, February, January,

News from 2008: December, November, October, September, August, July, June, May, April, March, February, January

There's plenty of news stored in Archives. The news may be slightly older but, frankly, many of the issues covered are still current... going back to 1995. Thankfully, we have made progress on many issues and 2009 should yield a victory for proxy access.

with the Corporate Governance NETwork

Contact: James McRitchie, Editor (916) 869-2402. All material on the Corporate Governance site is copyright © since 1995 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved. Feel free to use any of these publicity shots without seeking permission.