Use the Executive Pay Issue to Build Support for Proxy Access

Phyllis Plitch and Kaja Whitehouse write that "Executives' Pay Faces New Tactics." (WSJ, 2/27/06) Recent resolutions are less prescriptive, seeking to more closely align executive pay with corporate performance, provide more disclosure, and tighten restrictions on extras, such as "golden parachutes."

The number of pay proposals is down dramatically from last year (140 so far, compared to 276 for all of last year), because new accounting rules for stock options eliminated proposals on that issue.

AFSCME's resolutions to give shareholders a precatory vote on pay policies and Connecticut's effort to seek full disclosure of targets for performance-based pay are steps in the right direction. Although requiring more effort, shareholders should also take advantage of a relatively obscure SEC rule that took effect on January 1, 2004. 

Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. 

Shareholders should recommend replacement directors for compensation committees that fail to keep executive pay in line with performance. If nominees are accepted, they can work on pay realignment. If shareholder nominees are continuously rejected, this will provide additional support for an SEC rule that would provide access to the corporate proxy. 

Target companies could be those where a compensation consultant reports to management, instead of exclusively to the committee (practice should conform with Conference Board recommendations presented in The Evolving Relationship Between Compensation Committees and Consultants); talley sheets fail to disclose all components of compensation; hurdles that must be met are not fully disclosed; or a significant portion of compensation, over 50%, is not based on performance. Compensation policies should also encourage "acquire and hold" practices by key executives and directors.

Directors must not only be independent of management, they must be dependent on shareholders. When directors can be held accountable by shareholders, we won't need a mountain of paperwork and an army of government regulators. 

My hope is that the next proposed rule to provide access will be relatively simple, with the ability to be tailored to specific corporate circumstances like the petition on proxy access Les Greenberg and I filed in 2002, rather than being overly prescriptive and complex, such as the failed SEC rulemaking. Shareholders should be gathering evidence now that can be used to support the next rulemaking on proxy access. 

Global Conference on Social Responsibility

The World Council for Corporate Governance issued a press release on their recent successful conference in partnership with the International Chamber of Commerce, UK’s Business in the Community, Transparency International, Canadian Business for Social Responsibility, RSE Portugal and Centre for Social Responsibility of India’s Institute of Directors. I serve as a member of WCCG's advisory board because I endorse their focus on the needs of developing and transition economies.

The World Council For Corporate Governance, especially President Madhav Mehra, has drawn corporate attention to the widening gap between rich and poor and the governance strategies required to bridge it. "We have repeatedly argued that the socio-economic disparities are a serious threat to the security and sustainability of business, Mehra argues in his presentation, Tackling Poverty Makes Business Prosperous.

"We cannot democratise the commerce if we leave out 5 billion people. Therefore the bottom of the pyramid must become a market. Let us build inclusive capitalism,” said Professor C K Prahalad, of the University of Michigan, in his keynote address at the recently concluded Global Conference on Social Responsibility.

I also appreciate Tatyana Boikova's focus on the question of "how to ensure the effective participation of the emerging national economies in the global production under the conditions of global competition." She concludes "the rate of integration of a developing economy into the global system through the markets of products and capital shall depend on the activity of the technological partners, their interest in the reinvestment of production."

Other speakers emphasized the need for investments in human capital and participatory economics. For a list of papers presented, scroll down to Global Conference on Social Responsibility. See also their list of Conferences & Events.

I hope to participate in the 7th International Conference on Corporate Governance in London 13-14 May 2004. If you plan to attend and would like to discuss issues presented on the pages of the Corporate Governance site, please let me know in advance so that we can get together.

Diversity Mindset - Corporate Governance: The complexity of global ethics

Friday, 28 April 2006, London, 10am – 4pm. A company's success or failure depends much on the performance of its board - an ancient Chinese saying is that "the fish rots from the head." Yet the majority of directors admit they have had no training for their role and are not sure what it entails. As boards' activities are made increasingly transparent under national and international law - particularly following recent corporate scandals - there is an urgent need for directors' competencies to be developed. Abundant Sun invites Directors, Corporate Governance, HR & LD professionals to attend this one day seminar with:

Professor Bob Garratt, author of The Fish Rots from the Head from the Head and Professor Eve Mitleton-Kelly, an expert on complexity theory, whose work on complexity "holds a key to how to develop enlightened leaders and how leaders can create organisational cultures which are dynamic, ethical and sustainable."

Disturbing Wealth Trends

Net household worth averaged $448,200 in 2004, up from $421,500 three years earlier. However it reminds me of Robert Reich's joke that he and basketball player Shaquille O'Neal have an average height of 6'1". That average looks high because it is skewed by very wealthy households. Median net worth -- the point at which half of the nation's households are richer and half poorer -- rose just 1.5% to $93,100. The net worth of the wealthiest 10% of U.S. families rose to a median $924,100 in 2004 from $887,900 three years earlier. Net worth for the poorest 20% of the population fell 11%, to $7,500.

Even those figures aren't so solid when you consider that average home values rose 28.1%, producing a dollar gain of $54,200. Average homeowners saw their net worth rise about 1%, whereas the net worth of renters fell 22%. Without the gains in the value of our homes, most of would be slipping backwards. The share of Americans' financial assets invested in stocks dipped to 17.6% in 2004, down from 21.7% in 2001. When you consider that between March 2000 and March 2003 the market lost $8 trillion you can understand why the share of families that held stocks directly or through a retirement plan slipped from 52% to 49%.

In contrast, average net worth rose 28.7% between 1998 and 2001 and 25.6% from 1995 to 1998. While net worth barely grew, average household income before tax actually fell 2.3% to $70,700 after adjusting for inflation, the first decline since the 1989-1992 period. Median incomes were up 1.6 percent to $43,200.

"Three key shifts in the 2001-04 period underlie the changes in net worth," said the Fed researchers involved in the study. "First, the strong appreciation of house values and a rise in the rate of homeownership produced a substantial gain in the value of holdings of residential real estate."

Second, the rate of ownership of stocks in direct and indirect forms (such as through mutual funds) declined, as did the typical amount held.

Third, the amount of debt relative to assets surged, notably debt secured by real estate. The upshot: "Families devoted more of their income to servicing debts, despite a general decline in interest rates," the researchers said. (based on a Google news search of "Federal Reserve family wealth" Federal Reserve says average real income of American families fell 2.3% in 2001-2004; Median income at $43,200; Why consumer pocketbooks had a rough start this millennium; Families made less in 2001-04: Fed survey, Reuters, 2/23/2006)

If this pace keeps up, how long will it be until we see class warfare? Can democracy endure without a solid middle class base?

Peekaboo, the Constitution Doesn't See You

Stephen Bainbridge's article had such a clever title, I couldn't resist posting it directly. Regarding the complaint filled by the Free Enterprise Fund that the Public Company Accounting Oversight Board (PCAOB, nicknamed "Peekaboo") is unconstitutional, Bainbridge appears to make good points despite the fact that the Board serves an important function and should continue to do so. Interesting post by Broc Romanek and a rebuttal by Bainbridge.

P&I Editorial Leaps to Illogical Conclusion

In an editorial entitled Reform Tenacity, Pensions & Investments (2/26/2006) properly credits major public and union pension funds with reforms in executive compensation disclosure, majority-vote election for directors, and expensing of executive stock options. However, the editorial leaps to an illogical conclusion, when it announces that "if the proposal for enhanced disclosure is adopted, shareholders will have only themselves to blame if executive compensation at any company continues to be excessive and out of alignment with shareholder interests and corporate performance."

Most institional investors are under no illusion that better disclosure of executive compensation will automatically lead to better alignment of pay and performance. They support disclosure so they won't have to search every footnote to find out how much executives are being paid. However, disclosures will not onlly make it easier for investors to make comparisions between companies, it will also make it easier for executives and compensation committees to do so. The result may be an accelerated surge in pay if compensation committees continue to believe their firm's executives are above average, even if that assessment is not supported by the facts.

If executive compensation continues to be excesive, shareholders won't be blaming themselves, they will be blaming compensation committees whose members may quickly become targets under newly instituted majority vote provisions.

GAO Studies Pension Conflicts of Interest

The GAO will study potential conflicts of interests in pension fund management and how such conflicts may affect their solvency, especially those taken over by the PBGC. (GAO to study pension conflicts, Pensions & Investments, 2/26/2006)

401(k) Participation Down

Employee participation in 401(k) plans continued to decrease in 2005, to a participation rate of 70%, down 12.5% from 80% in 1999, and the percentage of salary contributed has fallen 20% in that time, from 8.6% to 6.9%, according to the Spectrem Group study "2005 Defined Contribution Market Needs."

Employers might want to consider adopting a Quick Enrollment program, which gives employees the option of enrolling in the savings plan by opting into a default contribution rate and asset allocation pre-selected by the employer - as compared to the typical opting out procedure common in auto enrollment.
 
When Quick Enrollment was made available to previously hired employees who were not participating in their 401(k) plan, 10% to 20% of these non-participants enrolled in the plan. (401(k) ‘Quick Enrollment’ Could Boost Participation, plansponsor.com, 2/22/2006)

Hedge Fund Democracy?

Alan Murray writes in the WSJ that hedge funds control more than a trillion dollars, and they are desperately searching for good ideas to make big returns. If the idea is right, the money will be there. Companies can't sit on cash without risking a hedge-fund attack.

The Time Warner episode shows that the funds won't attack en masse unless they have very good reason. And if they have good reason, we should all cheer them on. "Shareholder democracy" has never proven itself to be very potent at holding corporate leaders accountable. Maybe hedge-fund democracy has more promise.

I like this response from Les Greenberg, Chairman of the Committee of Concerned Shareholders.

The gratuitous comment, “’Shareholder democracy’ has never proven itself to be very potent at holding corporate leaders accountable. Maybe hedge-fund democracy has more promise.” is most disconcerting.  (“Hedge-Fund Lessons From the Icahn Affair, 2/22/06)  It belittles the efforts of everyone from individual investors to the Council of Institutional Investors, whose members have fiduciary responsibility for more than $3 trillion.

Shareholder democracy hasn't proven effective because it hasn't been tried in anything other than a vocabulary which promises "elections" and "independent" directors. Unlike hedge-funds, we are owners for the long-term who want to improve our companies as problems arise, not by cashing out. 

In August 2002, James McRitchie, Editor of CorpGov.Net, and the Committee of Concerned Shareholders filed a formal Petition for Rulemaking with the SEC, which sought to require corporations to place the names of Shareholder nominated Director-candidates on corporate ballots.  The result would have been meaningful elections and directors dependent on shareholders. Opposition lobbying by the Business Roundtable and Chamber of Commerce and a gutless SEC placed corporate “democracy” on hold.

Under the current administration, it appears winning the right to require a majority vote for elections of corporate Directors is the most we can hope for, but we are doing it one company, and perhaps one state, at a time.   

ISS Blog

ISS launched a new Corporate Governance Blog.  As ISS says the ISS Corporate Governance Blog is expected to be the Web’s most comprehensive compilation of institutional level corporate governance content, including information on emerging corporate governance trends, proxy voting, social and environmental issues, shareholder meeting commentary, compliance considerations and other areas of interest to both global institutional investors, corporate issuers and industry constituents. Along with TheCorporateCounsel.net Blog, those interested in corporate governance have a growing number of important sources for news and commentary.

Better Governance Yields Greater Market Value

From the ISS blog. A recent study of 5,300 U.S. companies has found that there is a strong positive correlation between improved governance and greater market value. The value of a company increased by 4% for each attribute of better governance that the firm implemented, according to a working paper, "Did New Regulations Target the Relevant Corporate Governance Attributes?" by Reena Aggarwal and Rohan Williamson, who are both professors at the McDonough School of Business at Georgetown University.

"The bottom line is we came to the conclusion that there is a very strong positive relationship between firm value and corporate governance," Aggarwal told a Feb. 15 webcast hosted by the ISS Center for Corporate Governance.

Director's Compensation Survey

Pearl Meyer's 2005 Director Compensation report of thew top 200 largest US industrial and service companies had some interesting observations, among them are the following:

• 61% of the reported ownership requirements
• 64% (up from 51% a year before) of companies pay varying committee fees
• 8% and 16% separate the CEO and Board Chair by having an exec or non-exec chair respectively
• 36% appoint a Lead Director annually; an additional 28% rotate the responsibilities of a presiding director
• The typical board has 10 members, 9 of whom are independent (according to company standards)
• 58% of companies have 1 year terms; 41.5% have 3 year terms; 1 has 2 year terms
• 108 report a mandatory retirement age (most commonly 72 [27%])
• The average board has 8 meetings per year and 5 standing committees

Social Security Option

There has been no recent movement on Social Security but a proposal from the National Conference on Public Employee Retirement Systems (NCPERS) is worth consideration. They recommend:

• Invest15% of the Social Security trust fund in equity market index funds where average return would be 8% a year over the long-term.
• Invest 25% of the Social Security trust fund in state and local government bonds that are specifically designed to rebuild the infrastructure of our cities, counties and states for an average return of 5% a year that would help rebuild America, create jobs and generate revenue.
• Establish an independent Social Security investment board to ensure the funds are professionally managed with the lowest possible administrative costs.
• Create a new retiree Social Security COLA to reflect inflation costs affecting retirees. The current cost of living adjustment (COLA) is based on wage growth but should, instead, be based on a Consumer Price Index-Retired (CPI-R) that would preserve purchasing power.
• Set the total wage base taxed by Social Security to 90% of nationwide earnings, instead of the current maximum based on $90,000 a year, which represents approximately 85% of nationwide earnings. It would increase the tax on approximately six percent of highly compensated employees paying more.

NCPERS offers a proposal that provides solvency for the Social Security system, retains current benefits, does not increase payroll taxes on middle and lower income workers, and does not place workers' benefits at risk.

Fifth Third Bancorp Ahead of the Curve?

From 2003 to 2005, a time when Fifth Third's stock price dropped by about 30%, CEO George Schaefer Jr. collected $6.5 million in salary, bonuses, a restricted-stock award and other perks. Facing pressure from investors, Fifth Third's board last week recommended that shareholders approve a proposal at the annual meeting in March that would require the entire board to face re-election every year.

The board also is recommending that investors approve a proposal that would allow shareholders to remove a director "without cause" with a simple majority vote instead of a two-thirds "super majority." The Paul Hodgson, senior research associate for the Corporate Library say about 55% of the 2,080 corporate boards it studies have staggered terms, so from that standpoint Fifth Third Bancorp may be getting "ahead of the curve." However, as Daniel Lee's article implies, the compensation committee has to learn to be more than "a cuddly poodle." (Investors ask: What have you done for me lately?, Indianapolis Star, 2/20/2006)

Wanted: More Women on Nominating Committees

The key to getting more women on corporate boards is getting more women on board-nominating committees, according to a study released Thursday on diversity in corporate governance. Success depends on "who makes the lists," said Vicki Kramer, a Philadelphia management consultant who is chairwoman of the InterOrganization Network.

Just more than a quarter of the 536 companies studied have women on the nominating committees. Women head the nominating committees in about 5% of those companies. Minority women continue to hold few board seats, from 0.1% to 1.9% in companies studied. (Study: More women needed to name women to boards, Ledger-Enquirer.com, 2/20/2006)

Call Their Bluff and Put a Face on Activism

Let’s put a human face on shareholder activism. Instead of precatory shareholder resolutions on specific individual reforms, from reports on global warming to repealing classified boards, why not attempt to run candidates who can articulate a vision, not only those issues but on corporate business plans and other value-enhancing issues?

A little more than a year after Les Greenberg and I petitioned the SEC for shareholder access to the proxy to nominate directors, the SEC came out with a complex rulemaking that ran into a brick wall known as the Business Roundtable and the Chamber of Commerce. It was no surprise to many of us; CEOs didn’t want to lose power. Unfortunately, the last thing many of them want are directors who are independent of them and dependent on the vote of shareholders. Many activist funds, such as CalPERS, make no political contributions and have little clout with federal lawmakers compared with organizations of CEOs.

Once it appeared the proxy access proposal was dead, the attention of shareholder activists turned to the election of directors by majority vote. That is as it should be. However, shareholder activists should also attempt to make use of a relatively obscure SEC rule that took effect on Jaunary 1, 2004. That rule, Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, enhanced the transparency of nominating committees. Specifically, it requires disclosure of:

• If the nominating committee has a policy with regard to the consideration of any director candidates recommended by shareholders, a description of that policy;
• If the nominating committee will consider candidates recommended by shareholders, a description of the procedures to be followed in submitting such recommendations
• A description of any specific, minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee for a position on the company's board of directors, and a description of any specific qualities or skills that the nominating committee believes are necessary for one or more of the company's directors to possess;
• A description of the nominating committee's process for identifying and evaluating nominees for director, including nominees recommended by shareholders, and any differences in the manner in which the nominating committee evaluates nominees for director based on whether the nominee is recommended by a shareholders;
• With regard to each nominee approved by the nominating committee for inclusion on the company's proxy card (other than nominees who are executive officers or who are directors standing for re-election), a statement as to which one or more of the following categories of persons or entities recommended that nominee: shareholders, non-management director, chief executive officer, other executive officer, third-party search firm, or other, specified source;
• If the company pays a fee to any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees, disclosure of the function performed by each such third party; and
• If the company's nominating committee received a recommended nominee from a 5% shareholder or group, identification of the candidate and the shareholder or group that recommended the candidate and disclosure as to whether the nominating committee chose to nominate the candidate.

CalPERS, CalSTRS, SRI funds, and others that supported the SEC’s proxy access proposal should attempt to make use of the adopted disclosure provisions to put forth shareholder nominees. Activists should exhaust every avenue available to improve the accountability of corporate directors. The current attempt of shareholders to govern based on precatory resolutions is like trying to govern a state by proposition, instead of focusing on electing good representatives. Nomination campaigns could generate substantial publicity, build important alliances and, could lay the foundation for a future rulemaking that would provide shareholder access.

theCorporateCounsel.net has a "Sample Policy on Security Holder Recommendation of Candidates for Election as Directors," as well as dozens of examples of corporate policies in their practice area under nominating committees. Examples are also relatively easy to find on the Internet, such as for Aetna, Duke Energy, Trinity Capital, and Johnson & Johnson. What is much more difficult is finding examples where shareholders have proposed nominees to a board's nomination committee and the committee has accepted or even seriously considered them. Yes, Carl Icahn may have gotten KT&G to put three candidates to a vote but that happened in Korea and Carl Icahn is not your typical shareholder. (KT&G accepts Icahn nominees for board, MSNBC, 2/14/2006)

$ Left on Table

Two Duke law professors, Francis McGovern and James Cox, documented in separate studies that big institutional investors do not claim money due them in litigation settlement pools of cash.  Professor Cox, for example found that 72% do not claim money due them from the proceeds of successful class action lawsuits.  Making claims is technically complex but does not excuse leaving money on the table. (Institutional Investors Do Not Make Claims, Business Law Prof Blog, 2/17/2006)

Back to the top

Ethics Alert

Business Ethics: The Magazine of Corporate Social Responsibility, reports the number of cases brought under the 1977 Foreign Corrupt Practices Act have more than doubled from 7 in 2002 to 18 in 2004. Titan paid penalties more than 8 times the $28.5 million they used to bribe an agent in Benin.

In the same issue, Business Ethics reports more American's are observing ethical misconduct in the workplace, but fewer are reporting it. 52% of employees observed at least one incident of misconduct. Of those, only 55% reported to management, versus 65% in 2003. The National Business Ethics Survey found that 70% of employees in organizations with weak ethics cultures observed misconduct, versus 30% in those with a strong ethics culture.

The Winter 2005 edition also includes a guide to SRI retirement planning, review of top SRI funds and an interview with Jacqueline Brevard, Merck's ethics officer, and other features.

Noisy Exits on Rise

Pierce Roberts Jr. said his warnings about a "significant chance of a crisis on the horizon" at XM Satellite Radio Holdings had been ignored by the board and senior management. Roberts thinks the company should rein in spending rather than focus on the faster subscriber growth favored by the board.

Revenue more than doubled to $177 million, and the company signed up more than 2.7 million new subscribers, bringing its total to more than 6 million. But the average cost of acquiring those customers rose to $141 - up from $104 in the same period last year. That increased XM's loss to $268.3 million, or $1.22 a share, up from $188 million, or 93 cents, last year.

Reporter Anna Driver points out the noisy exit by Roberts may be part of a growing trend. His departure follows the loud exit by Barbara Kaczynski, the audit committee chairwoman at Take-Two Interactive Software in January who accused management of failing to keep the board informed on key issues related to the discovery of sex scenes in its "Grand Theft Auto" video game series.

While noisy exits may demonstrate a degree of director independence, "directors have a fiduciary obligation to stick around in good times and in bad times," said Roger Raber, head of the National Association of Corporate Directors. Charles Elson, who has personal experience as a director facing a difficult situation agrees, "frankly, once you commit to a job, you should stick with it unless you have an extraordinary reason." "You can dissent, but you are not helping by taking yourself out of the equation." (XM bombshell signals new boardroom attitude, reuters.com, 2/17/2006) (New setbacks rock XM satellite radio, Sacbee.com, 2/17/2006)

Maybe directors who aren't being heard should be talking with shareholders about the need for new directors in extraordinary circumstances. I'm not sure these rise to that level, but I can think of circumstances where it might.

Stock Picking Tip

What's the secret of picking stocks with superior returns? According to Tim Hanson, writing for The Motley Fool, 57 of the 100 best-performing small caps of the last decade have greater than 5% insider stakes. Fully 66 of the best had founders or a CEO who had more than five years of experience at the helm of the company 10 years ago, and who had stayed ever since. An additional 18 had the same CEO at the helm throughout the company's years of incredible performance.

Bottom line: "While today's average CEO tenure has dropped to less than five years, 84 of the 100 top-performing small caps of the last decade had either a founder or experienced and devoted CEO leading it to market-trouncing results." (The Secret of Superior Stocks, Fool.com, 2/15/2006)

Convergence

In Proxy Votes and the Power of Transparency, (Stratfor.com, 2/16/2006) Bart Mongoven discusses a 'perfect storm,' which "appears to be brewing on the corporate horizon, with several elements coming together to create new challenges for CEOs and senior managers of public companies. If this storm actually develops, the standard relationship between shareholders and corporations could undergo fundamental changes in the next few years." Reproduced below are select paragraphs.

One of the elements of this storm is a movement toward "majority rule" -- the election of corporate directors by shareholders. This movement, which is gaining momentum, is led by large unions. A second movement is strengthening among "social shareholder activists," meaning those seeking to press a social agenda through corporations on issues such as climate change, executive compensation or diversity among board members.

Among the most important of the issues in play this year is an SEC ruling that forces mutual funds and pension funds to publish their proxy votes. The ruling actually dates back to January 2003, but shareholder activists have only belatedly noticed that the voting records are available and that they have strategic value.

It is only this year that social shareholder activists appear to have realized that this regulation gives them a new way to place pressure on target corporations. Organized labor, as is so often the case, was the vanguard, and in 2005 the AFL-CIO organized demonstrations at the retail storefronts of Fidelity Investments in New York and Boston to protest the company's vote on a corporate proxy.

Currently, shareholders in mutual funds generally seem not to recognize their own power, and they certainly do not hold their mutual fund managers accountable for their proxy votes. However, if activists on social issues can actually succeed in politicizing mutual funds -- "Do you want your mutual fund company to support resolutions on climate change or the Universal Declaration on Human Rights?" -- the shareholder activist game would change markedly.

Classified Boards

I got a call the other day from Daniel Lee, a business columnist for the Indianapolis Star. He was writing an article on a local bank that is initiating declassification of its board. He asked if I knew what proportion of boards are staggered. After a little looking, I found a report from Glass Lewis that approximately 50% of companies have classified boards, down from approximately 90% a few years ago.

This does seem to be one area where shareholders have made progress. Activists like John Chevedden have introduced so many resolutions with so much success that companies have started eliminated them to avoid having to deal with shareholder proposals. ISS reported last year that for the first time, "the number of management proposals (49) on board declassification has exceeded those (42) filed by shareholders. This represents almost twice the number of total proposals on this issue filed only three years ago; almost all of the increase was accounted for by management proposals, which increased seven-fold in this time period."

ISS then went on to cite a 2002 study covering hostile bids between 1996 and 2000. It showed that "classified boards nearly doubled the odds of a target remaining independent. However, the findings revealed that a staggered board structure did not provide any countervailing benefits in terms of higher acquisition premiums. In fact, for the period covered, it resulted in the loss of $8.3 billion for target shareholders by impeding value-creating transactions without any offsetting increases in alternative transactions or stand-alone target returns." (Anti-Entrenchment Efforts Bring Changes in U.S.)

In the current issue of Governance Weekly (2/17/2006), ISS updates previously reported numbers. Companies filed about 60 such proposals at meetings during the first half of the 2005, compared to roughly 50 shareholder resolutions calling for annual board elections. This year activists have again taken the lead. "As of Feb. 15, ISS was tracking 78 such proposal filings, compared with just 44 over the same period last year and 45 in 2004." "Support for board declassification has generally been broad, so activist shareholders may sense an easy victory in light of last year's trend, observers say." With so many setbacks, it is good to see shareholder winning in at least one area.

Stastics

From the 1-2/2006 NYSE Magazine, 56% of Fortune 1,000 senior executives indicated in a study commissioned by Liz Clairborne that they are aware of employees who are affected by violence against women. The National Association of Corporate Directors reported last year that 5.1% of surveyed public company directors say their boards have separate ethics or compliance committees.

From the Economic Apartheid In America: A Primer on Economic Inequality & Insecurity, Revised and Updated Edition (The New Press, 2005, reviewed by by Bill Baue). There is a growing disparity in real family income growth by quintiles (or 20% segments of the population) from 1979 to 2003. The lowest quintile (those earning under $24,100 a year) decreased 2% and the highest (earning $98,200 and up) gained more than 50%, according to US Census Bureau statistics.

NASDAQ to Have Highest Listing Standards

The Nasdaq announced plans to create a new market tier for public companies that will have the "highest initial listing standards in the world." “NASDAQ’s view is that the best companies globally will migrate to the markets with the best standards. We believe that the best, most intelligent standards come about when markets and companies recognize what is good for investors and initiate improvements from within, ”said Bob Greifeld, NASDAQ President and Chief Executive Officer.

"This is the latest in a series of moves by NASDAQ to achieve our mission of being the premier market in the world. It is an outgrowth not only of governance rule changes and enforcement, but improved technology and transparency in the trading day. In addition, we have recently achieved exchange status, which will allow NASDAQ to separate from its regulator, removing any perception of conflict of interest,” commented Greifeld.

Governance rule changes and improved transparency? It sounded as if the NASDAQ might be requiring that to be listed on the new market tier with the "highest" standards in the world, shareholders would have a greater voice in corporate governance...maybe no staggered boards, supermajority requirements or requiring election of directors by majority vote. Maybe their adopting some of the features of Kathleen Keenan's H.716. No such luck; Vermont hasn't come to Wall Street.

The new tier will require average market value of at least $825m and three-year aggregate pre-tax earnings in excess of $11m. Float requirements will include a minimum of 1.25m shares outstanding, with a market value of at least $100m. The minimum bid price will be $5. How's that for increased transparency and accountability? They certainly aren't vying for the highest standards in the corporate governance world.

(NASDAQ Creates New Market Tier with Highest Listing Standards In the World, 2/15/2006 and Nasdaq hopes top tier will attract listings, MSNBC, 2/15/2006)

Be Mine

From Bruce Carton's Securities Litigation Blog:
via Broc Romanek's TheCorporateCounsel.net Blog
"Subject: Be my valentine
From: auntbetty1234

Happy Valentine’s Day to my Nephew Smitmie. He’ll be 12.5 on thursday. When I take him shopping, he just wants to buy-out everything in the store. He’s so cute and much smarter than most.
Love,
Aunt Betty"

You'd never guess it from its face, but the bizarre message above actually was the basis for the SEC"s insider trading case filed and settled recently against one William A. Day, a.k.a. "auntbetty1234."

The SEC's litigation release explains that on February 14, 2002, London, England-based Smith & Nephew, plc. and Oratec Interventions, Inc. publicly announced that they had entered into an agreement for Smith & Nephew to acquire all outstanding shares of Oratec through a tender offer of $12.50 per share. The SEC says that on February 13, 2002, approximately twenty-four hours before the acquisition was publicly announced, Day made the anonymous posting above using the online alias “auntbetty1234” on an internet message board dedicated to Oratec, the contents of which revealed that he possessed material, nonpublic information regarding the tender offer, including:

- the name of the acquiring company ("Nephew Smitmie");
- the price per share ("He’ll be 12.5");
- the tender offer structure ("buy-out ");
- and the offer announcement date ("Happy Valentine’s Day").

"Much smarter than most?" I don't think so.

Day agreed to pay disgorgement in the amount of $42,631.90, prejudgment interest thereon of $9,200.69, and a civil penalty of $42,631.90, for a total payment of $94,464.49. The settlement is subject to the court's review and approval.

See Securities and Exchange Commission v. William A. Day, United States District Court for the District of Massachusetts, Civil Action No. 06-CV-10202-RWZ (D. Mass.)

Clark Kent to Keep Reigns at CalPERS

CalPERS board president Rob Feckner is likely to be reelected this week and will continue to lead the fight against runaway executive pay, promote investments in fledgling clean technology companies and China, as well as tackling rising health care costs - all with minimal fanfare. (CalPERS planning quieter battles, Sacramento, Bee, 2/14/2006)

Shareholder-Friendly

Institutional Investor magazine identified America's Most Shareholder-Friendly Companies. The results for 62 industry sectors, published in the February issue of Institutional Investor is based on a survey of more than a thousand portfolio managers and analysts in the U.S. and abroad who were asked to name the companies in their areas of expertise that are the most attentive to shareholders. The survey instructed respondents to consider the quality of the companies’ governance and investor relations practices when voting. (Institutional Investor Identifies America's Most Shareholder Friendly Companies in its First-Ever Survey, 2/15/2006)

Below is a sampling of top companies in specific industry sectors.

BASIC MATERIALS
Chemicals/Commodity - Dow Chemical Co.
Chemicals/Specialty - Praxair
Metals & Mining - Nucor Corp.
Paper & Forest Products - Georgia-Pacific Corp.

CAPITAL GOODS/INDUSTRIALS
Aerospace & Defense Electronics - United Technologies Corp.
Airfreight & SurfaceTransportation - United Parcel Service
Business & Professional Services - Manpower
Electrical Equipment & Multi-Industry - General Electric Co.

ENVIRONMENTAL SERVICES - Republic Services
Machinery - Eaton Corp.
Packaging - Ball Corp.

CONSUMER
Airlines - Southwest Airlines Co.
Apparel, Footwear & Textiles - Coach
Autos & Auto Parts - Johnson Controls
Beverage - PepsiCo
Cosmetics, Household & Personal Care Products - Procter & Gamble Co.
Food - Hershey Co.
Gaming & Lodging - Harrah’s Entertainment
Homebuilders & Building Products - Ryland Group
Leisure - Carnival Corp.
Restaurants - Applebee’s International
Retailing/Broadlines & Department Stores - Nordstrom
Retailing/Food & Drug Chains - CVS Corp.
Retailing/Hardlines - Home Depot
Retailing/Specialty Stores - Chico’s FAS
Tobacco - Altria Group

ENERGY
Electric Utilities - TXU Corp.
Integrated Oil - ConocoPhillips
Natural Gas - Kinder Morgan
Oil & Gas Exploration & Production - EOG Resources
Oil Services & Equipment - Noble Corp.

FINANCIAL INSTITUTIONS
Banks/Large-Cap - Wells Fargo & Co.
Banks/Midcap - M&T Bank Corp.
Brokers & Asset Managers - Lehman Brothers Holdings
Insurance/Life - Aflac
Insurance/Nonlife - Allstate Corp.
Mortgage Finance - Countrywide Financial Corp.

REITs -AMB Property Corp.
Specialty Finance - American Express Co.

HEALTH CARE
Biotechnology - Genentech
Health Care Facilities - HCA
Health Care Technology & Distribution - AmerisourceBergen Corp.
Managed Care - UnitedHealth Group
Medical Supplies & Devices - Medtronic
Pharmaceuticals/Major - Eli Lilly and Co.
Pharmaceuticals/Specialty - Allergan

MEDIA
Cable & Satellite - Comcast Corp.
Entertainment - Time Warner
Publishing & Advertising Agencies - Gannett Co.
Radio & TV Broadcasting - Clear Channel Communications

TECHNOLOGY
Computer Services & IT Consulting - Accenture
Electronics Manufacturing Services - Jabil Circuit
Imaging Technology - Adobe Systems
Internet - Yahoo!
IT Hardware - Dell
Semiconductor Capital Equipment - KLA-Tencor Corp.
Semiconductors - Texas Instruments
Software - Symantec Corp.

TELECOMMUNICATIONS
Data Networking & Wireline Equipment - Cisco Systems
Telecom Equipment/Wireless - Motorola - Qualcomm *
Telecom Services/Wireless - Sprint Nextel Corp.
Telecom Services/Wireline - Verizon Communications

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ValueAct

TheStreet.com runs an interview with Jeffrey Ubben, former manager of the $5 billion Fidelity Value Fund and who started ValueAct Capital in 2000. "By making large bets and working with management and boards to increase shareholder value, ValueAct has returned an annual 18.1% net of fees over the past five years, vs. 6.3% for the Russell 2000."

He describes the development of a current fight at Acxiom. He approached the board in the spring of 2005 with concerns and made a case for having a shareholder in the board room. They came back and said they didn't think it was right ever to have a large shareholder on the board. That told him it was a founder's board that was not going to make the transition necessary to avoid being a structural underperformer. Now both sides are lined up for a proxy fight. He then goes on to describe his developing position at ADP. (Q&A: Activist Interview, 2/12/2006)

SRI That Pays Gets Endorsement

Pensions & Investments runs a current editorial which opines "SRI-type activity that helps advance and sustain the corporate mission to make profit for shareholders deserves pursuit." The editorial lists adaptations by companies, pension funds, global money managers and consultants, including the Enhanced Analytics Initiative. "Concern about the high price of oil is driving innovation of alternative energy sources" and the push for greater disclosure empowers academics and consultants to conduct research that will feed back, "bringing further accountability of their value to the market. (Mainstreaming of SRI, 2/6/2006)

Board Minutes

Companies can look to the recent high-profile corporate scandals for guidelines in keeping minutes, according to Thomas B. Chandler, a partner in the law firm of Hawley Troxell Ennis & Hawley LLP. Chandler believe that minutes should have the following components:

1. A preamble documenting the setting, the attendees, the date and time that the meeting began and was adjourned, where the meeting was held, the purpose of the meeting, whether the meeting was a general or executive setting, and how notice of the meeting was given. Minutes also should document when directors or managers enter or leave the room.
2. Information in the amount of detail that is appropriate to the topic. There should be a regular program of reports, as well as reports on special topics.
3. Reasons that each director found the presenter of the information to be credible, as well as why each director found the information itself to be credible.
4. A summary of alternatives considered by the directors, including different opinions.
5. Reason(s) that the board selected one of many alternatives.
6. Reason(s) that the decision is in the best interest of the corporation and its shareholders.
7. Facts showing that each director is independent and objective. Document any recusals.
8. Confirmation that each director acted in good faith, which can be as simple as a statement that each director after considering the facts acted in good faith and without ulterior motives.
9. Confirmation that each director acted in the best interest of the corporation and shareholders, which can be as simple as a statement that the directors, after considering the facts, voted in the best interests of the shareholders and the corporation and not from personal intentions.
10. Facts showing that each director did not receive any unfair personal benefit.
11. Confirmation that each director was informed to the extent that he believed was appropriate.
12. Facts showing that each director has a history of being informed and overseeing the corporation, and that no "red flags" would alert a reasonably attentive director to inquire.

There is no consensus on whether directors should keep their personal notes from board meetings, says Chandler. The argument in favor of retaining notes is that they validate the director's care and accountability. The opposing argument is that any gaps or open issues in notes may evidence lack of care. (Hawley Troxell Ennis & Hawley LLP, press release, 2/13/2006)

Lawsuit Challenges SOX

The Free Enterprise Fund and Beckstead and Watts LLP filed the suit in the U.S. District Court for the District of Columbia claiming creation the PCAOB under SOX violates the Constitution's separation of powers principles as well as the Appointments Clause.

Institutional Investors Take Center Stage in Korea

In Korea, the People’s Solidarity for Participatory Democracy has declared they will not attend general stockholders’ meetings this year. Instead, questions will come from institutional investors and their demands for more stockholder value.

The number of listed companies with more than 5% of their stakes in the hands of institutional investors increased 61.1% compared to last year. In particular, the number of asset management companies that own more than five percent of the stake in a company is up by 172.1% in the stock market.

Korea Investment Trust Management recently sent inquiries to 120 investment companies asking them whether they will implement policies to strengthen stockholder value, and about the current state of their businesses, this year’s business plan, dividend policies, and buy-backs. Others are doing likewise. (Stockholders’ Meetings Focus on Value, BBCWorld, 2/14/2006)

Indians Optomistic Due to Corporate Governance Improvements

Among investors in Brazil, Russia, India and China – those in India were the most optimistic about their home investment market. As many as 55% from India said they were “highly optimistic” and 39% “somewhat optimistic.” In China, 16% were “highly optimistic” and 53% “somewhat optimistic,” since investors’ trust and confidence are still not in place.

In Brazil, 15% were “highly optimistic” and 62% “somewhat optimistic.” In Russia, 17% expressed pessimism about their investment market, although 11% were “highly optimistic” and 53% “somewhat optimistic.”

Only in India do any investors consider corporate governance standards among resident listed companies to be “excellent” (4%). Chinese and Russian investors are severely critical of standards among their companies. 46% of India respondents felt their governance standards were "good" or "excellent," whereas in China, 68% of respondents felt governance standards were "poor." (Indians most bullish among growing markets, Business Standard, 2/14/2006)

Protection from Disclosure

The Capital Group recently sought and won an order to seal practically all divorce-trial proceedings of one of its top fund managers, Timothy D. Armour. "To have [Armour's] compensation made public is not only a violation of privacy, but is bad for morale," says Capital Group spokesperson Chuck Freadhoff, adding that it would be "very difficult" and "counterproductive" to try to explain Armour's pay. (Keeping Compensation under the Covers, CFO.com, 2/3/2006)

Exec Entertainment Pay

Even as performing-arts groups struggle, star salaries are soaring -- with music directors making almost $2 million. Can orchestras afford to conduct themselves this way? At the San Francisco Symphony, musicians just ended 10 months of bargaining with a 15% raise over the next three years and a 21% increase in annual pension payments. In the previous five years, conductor Michael Tilson Thomas' salary grew 31%, compared with 22% for the musicians. (Executive Pay Takes the Stage, WSJ, 2/11/2006)

Can we expect growing resentment to lead to a slowdown? Not as long as America worships charismatic CEOs. Allegiance to charismatic leaders is antithetical to an open democratic society. The cult of personality around superstars comes with risks of abuse, misconduct, and incompetence. Lessons still unlearned from Enron.

Pig Through the Python

"The pig may have moved through the python," said Joseph Grundfest, director of the Class Action Clearinghouse at the Stanford Law School, after reporting the number of securities fraud class actions filed in 2005 declined 17% to 176 from the previous year, while the total value of cases settled during 2005 grew to a record $3.5 billion.

"Two factors are likely responsible for the decline. First, lawsuits arising from the dramatic boom and bust of U.S. equities in the late 1990s and early 2000s are now largely behind us. Second, improved governance in the wake of the Enron and WorldCom frauds may have reduced the actual incidence of fraud," said Grundfest. (Shareholders rewarded by companies that practice good governance, San Diego Source, 2/10/2006)

Mutual Assured Destruction

A survey by the Civil Society Institute shows a 79% of US mutual fund investors think companies should analyze the long-term financial impacts that global warming will have on their businesses and on the potential value of their stock to people who either own shares directly or indirectly through a mutual fund. Yet, None of the 100 largest U.S. mutual funds supported any of the 33 global warming resolutions filed with US companies in 2005.

Alisa Gravitz, executive director of Co-op America, said: "Mutual funds, whic