Current News and Commentary. 2008: May, April, March, February, January, 2007: January, February, March, April, May, June, July, August, September, October, November, December. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest as of 8/9/07. Book bites. Investor Suffrage Movement, Proxy Democracy.

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The Institute of Internal Auditors ( IIA) will hold its International Conference July 6 - 9, 2008 at the Moscone Center in San Francisco. Register here. It will be the largest gathering of internal auditors anywhere in the world covering topics related to business, governance, risk, control, auditing, accounting, and more. CorpGov.net publisher, James McRitchie is looking to share expenses for a room on at least the night of July 7th. Please let me know if you have space available.

June 2008

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2008 Yale Corporate Governance Forum

This June 9-10, 2008 gathering of leading thinkers from the business, investment, academic communities - practitioners, and policy makers - demonstrated the Millstein Center's unique power to facilitate discussion of key issues in corporate governance. Many of the sessions were held in the Yale Law School's Levinson Auditorium. The picture at the right and all those that follow in this article are courtesy of Julie Brown Photography and the Millstein Center. What follows are a few impressions from the forum.

Technology for Boards & Shareowners

The “Pre-Forum Workshop: Technology for Boards & Shareowners” was divided between the needs of boards and shareowners. Bob Thomas, George Marcotte and Michael Schrage stepped through the Accenture's tools to provide boards the financial, operational, and strategic information needed to advise and monitor management's performance.

The software they demonstrated facilitated visualization through a dashboard, a balanced scorecard allowing data queries and drill down, alerts to highlight exceptional situations, as well as comparisons with outside information, such as financial disclosures from competitors. Another development was the ability to visualize “what if” scenarios. They provided an example where they compared a variety critical market factors and assumptions to find an optimal return on invested capital in various companies.

It was quite impressive and elicited much discussion about the quality of data and the importance of judgment factors. Other topics of discussion were wikipedia databases of scanned, taggable documents and the need to develop systems that help shareowners better evaluate the “black hole” of board behavior… mechanisms to help determine which board members are making a substantial contribution and which are not.

The second part of the workshop was a discussion by Andy Eggers about how technology, by decreasing the cost of monitoring and implementing change, is also increasing the value of monitoring by shareowners. He discussed free rider issues and the benefits of collective action, using two developments to illustrate his points:

1. Eric Jackson's use of YouTube and breakoutperformance.blogspot.com
2. ProxyDemocracy.org, the system he has developed to enable retail shareowners to see how leading mutual and pension funds have voted and/or are voting in current corporate elections. The site also profiles funds on governance, environment, and other based on their historical voting patterns and allows users to create public or private focus lists based on a huge database of resolutions and votes. The system also allows users to enter a list of stocks to generate automatic emails about upcoming meetings and announced votes by the four funds announcing votes in advance whose data the system is currently capturing. From discussions with fund representatives at the Forum, we can expect the number of funds included in the database to increase substantially.

As I have noted elsewhere, with the implementation of e-proxy and participation falling from about 20% to about 5%, mechanisms such as ProxyDemocracy, which facilitate voting based on reputational “brands” of institutional investors take on increased importance.

Should boards and shareowners talk to each other?

During plenary 1, moderator Stephen Davis noted that January 24, 2009 marks the anniversary of history's first known recorded dissident shareowner petition. The first instance of anyone advocating shareowner rights occurred when minority investor Isaac Le Maire filed a bill of complaints regarding the Dutch East India company on that date in 1609. The Center will be commemorating the anniversary with events focusing on shareholder rights in partnership with Dutch institutional investors.

Stephen Alogna presented highlights from a working draft policy briefing entitled, “Talking Governance: Board-Shareowner Communications on Executive Compensation.” After six months of interviewing research, Alogna concludes that advantages stemming from board-shareholder communications on governance outweigh the potential risks and costs.

Current communications are primarily between corporate managers and buy-side portfolio managers. Resistance between directors and investors is typically attributed to the SEC's Reg FD, but the rule should be seen “as a caution, not a barricade.” Alogna concludes the cost of custom legal guidance for each company could be substantially reduced if the SEC would issue guidance affirming safe harbor circumstances.

Mandatory “say on pay” for several years in the UK has resulted in dramatically increased dialogue there between boards and shareowners. However, foreign investors, which comprise an increasing proportion, haven't routinely been included. “Compulsion, through crisis or other acute events,” provides the impetus for most US corporate initiatives.

When they do engage, shareholders want to meet with the appropriate board directors, rather than management. From the company's standpoint, they are too frequently hearing an inconsistent message from fund managers and governance professionals from the same fund. Investors need to better integrate money management and governance functions.

Most US companies are meeting only with their largest shareowners, and then only when threatened with resolutions or proxy contests. However, some are recognizing that powerful voices can arise now from social networking tools. Alogna cites Eric Jackson's campaign at Yahoo, where he owned less than 100 shares, but was able to trigger eventual resignation of the CEO. Jeffrey Immelt, CEO/Chair at GE may have gotten at least part the message when he took part in a webcast answering questions from retail shareowners.

Again, there was plenty of excellent discussion from panelists and the audience. Kay Koplovitz noted that directors heading various committee need to be versed in how to discuss their issues. Claude Lamoureux said that communication can avoid expensive battles. “The time to talk is when you don't have to.” Mike Lubrano pointed to one of the differences in emerging markets where there is lots of dialogue but only with controlling shareholders.

Should short-term owners have a say on a company's strategy?

This was one of several breakout sessions with excellent discussants from industry, hedge funds and the Aspen Institute. One point was that shareowners aren't monolithic; they all have different time-frames, so it is difficult to agree on what maximizes shareowner value, assuming that is an agreed upon goal. Similarly, even among hedge funds there is a great deal of variety. David Nierenberg said his funds holds positions for an average seven years. Interestingly, he described hedge funds as “personal enrichment tools for the general partner.”

Nierenberg said he focuses on the allocation of resources… mostly time of employees and cash flow. How are these being used to build long-term value? There was discussion of activists as thuggery or long-term partners. Andrew Shapiro of Lawndale Capital Management brought up an excellent point in response to those advocating that only long-term partners should have a say. When there is a loss of confidence in the leader and the stock is priced with the expectation of further deterioration, “how much longer should the punishment go on?” (before such intervention is sanctioned)

The friction is between those who want to extract value from the company and those who want to facilitate future corporate growth. Bright lines were hard to find. Nierenberg concluded that increased disclosure obligations could probably play a better role than bright line prohibitions.

Can independent board leaders change the way mutual funds behave as owners?

This break-out panel began with Louis Lowenstein summarizing his recent book, The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It.. Lowenstein discussed the conflict of interest built into the industry's structure. Management companies are independently owned, separate from the funds themselves, and managers profit by maximizing the funds under management because their fees are based on assets, not performance. He then went on to list a litany of problems, only a few of which I captured here:

• 70 - 90% of their money comes through retail brokerage firms, which, in turn, often enjoy “pay to play” revenue-sharing arrangements. In 2005, for example, the Edward Jones brokerage firm collected $172 million from seven favored mutual fund groups.
• From 1980 to 2004, the assets of stock funds increased 90 times, from $45 billion to $4 trillion. During that same period, fees paid by investors and collected by fund managers via fund management companies soared from $288 million to $37 billion. Fees are not in proportion to the work. Economies of scale are not being passed on to shareholders.
• Franklin Resources earned 100% per year on its capital.
• Directors can sit on literally hundreds of fund boards in the same family… far in excess of the number they can really monitor.
• The plethora of funds is for marketing, not better management.

In his book, Lowenstein praises Wintergreen and Fairholme funds for mirroring the Graham-Dodd philosophy of focusing on a few carefully researched stocks. Where the average mutual fund held 160 stocks, Wintergreen held 41 stocks and Fairholme held just 18 when the book was written. The annual returns of both funds were above 16 percent. At the forum, Lowenstein praised Longleaf Partners where all managers must be substantially invested in their funds. This reduces churning and at least you know fund managers are winning or losing along side of investors. See also Journey Into the Whirlwind: Graham-and-Doddsville Revisited.

John Hill, Chairman of Putnam Investments noted the frequently cited potential conflict of interest in 401(k) administration and investments but said that publication of voting records has made a difference. He cited Putnam's focus on independent directors, votes against dilution, compensation plans, etc. Trends seem to indicate their votes are having an impact. Discussion followed about how much independent analysis funds do of proxy issues.

Lauren Cohen discussed one of his recent studies, Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice, which showed that fund families secure substantial inflows by being named trustee of a 401(k) plan. Fund trustees significantly overweight their 401(k) client firm's stock to the detriment of shareowners who suffer potential losses in comparison to a more diversified portfolio.

Cohen concludes that “one possible (but rather radical) remedy for the costs we bring forth in the paper is to require the trustee to be independent of the mutual fund providers in the plan. This could ostensibly rid the relationship of its embedded, and unneeded, conflict of interest.”

Tracy Stewart of the Florida State Board of Administration pointed out that mutual fund proxies offer few choices and few vote. Discussion followed as to what shareholders were looking for… good performance and, perhaps more importantly, good service… not opportunities to participate in governance. There was also some discussion of ProxyDemocracy and the rewards and difficulties of announcing votes in advance.

There were several other sessions, including the final one with Ira Millstein, Hal Scott and William Donaldson, who took on the daunting task of trying to determine the implications for capital markets regulation in light of the recent U.S. financial crisis (bottom-left photo). And, of course, there were many opportunities to network (CorpGov.net publisher Jim McRitchie, center in bottom-right photo). If you can only attend one corporate governance conference next year, the annual Yale Corporate Governance Forum should be high on your list. Many thanks to Millstein Center staff and to Julie Brown Photography.

BoardVantage and RMG Team

BoardVantage, a leading provider of board portals, is teaming with RiskMetrics Group to facilitate dialogue between board directors, company management and investors. RiskMetrics' Governance Exchange will be embedded in the BoardVantage. The exchange breaks down participants' U.S. policies into six issue areas and more than 100 sub-categories, allowing users to uniformly compare and contrast the views of participants.

In addition to the discussion forums which are the foundation for Governance Exchange, members will have access to a wide range of rich content, including webcasts, white papers, surveys, and analysis provided by both RiskMetrics Group experts and by third parties. Currently, topics being discussed in Governance Exchange include executive compensation disclosure, proxy season trends, board and succession planning, and shareholder activism and performance metrics. (BoardVantage Partners With RiskMetrics Group on Governance Exchange(TM) Community)

This is a very positive development, especially if it leads to RMG filling in more of the data gaps in their ambitious Governance Exchange. There should be real benefits to both parties and to those who use the Exchange.

Pension Envy

Public Pension funds have grown to about $3 trillion in value. All that money is attracting attention. According to Olivia S. Mitchell, Executive Director of the Wharton School’s Pension Research Council and the Boettner Center, public pension plans have attracted so-called “pension envy” as taxpayers often see these benefit programs for teachers, police officers and firefighters as relatively generous, compared to what they themselves have on offer.

"The New Intersection on the Road to Retirement: Public Pensions, Economics, Perceptions, Politics, and Interest Groups," a paper presented at "The Future of Public Employee Retirement Systems," sponsored by the Council/Center, found the following:

• Challenges to public DBs do not appear to stem from well-established economic considerations, nor widespread public dissatisfaction
• Most citizens are uninformed about public pensions and have little interest in changing the system.
• Attempts to change public pensions has coincided with Republican political control, but partisanship is not the whole story
• ideologically driven organizations, such as Americans for Prosperity, that promotes limited government and free markets, are rising up to roll back benefits
• Alaska and West Virginia, which had moved toward defined contribution plans, now have "buyer's remorse" and are taking steps back toward traditional defined-benefit plans for public employees

Brad Barber, presented a paper titled "Pension Fund Activism: The Double-Edged Sword," found indications that shareholder activism enhances the value of portfolios. Regarding disclosure of a firm's carbon footprint to guide investment. Barber said that might be justified because research on disclosure policies indicates firms can lower their cost of capital if they have high-quality disclosure policies.

Mitchell worries that money managers may be exerting use of funds for political or social issues which "might not be consistent with either the risk the pension plan should bear, or with the views of the participants who may have to kick in more money or have their benefits cut if the performance is not satisfactory." (Public pension funds undergo more scrutiny, Delawareonline, 6/23/08) Agreed, more pension funds should survey both their members and the general public to determine what issues they support and what they don't. Make at least some effort.

Career Opportunities

The Calvert Foundation is looking for an Executive Associate and a part-time Donor Development Manager. Great opportunities at an industry leader. See Careers at Calvert.

CalSTRS is searching for a Director of Global Equities to oversee a portfolio valued at more than $100 billion. The director reports to the Chief Investment Officer, provides leadership to investment staff and investment expertise to the Board on U.S. and non-U.S. equity investments.

"This position requires a strategic thinker who can be both visionary and adroit at navigating a sophisticated global investment environment," said CalSTRS CIO Christopher J. Ailman. "The person holding this position will exercise a high level of independence and discretionary judgment over nearly two-thirds of the $170 billion CalSTRS investment portfolio."

Block Reforms

Tax-preparation company H&R Block made several changes to its corporate governance policies, including allowing its shareholder rights plan to expire. They let their "poison pill" expired in March. Other reforms include:

• non-binding "say on pay" vote
• reduced board size to 7-12, instead of 9-15 directors
• 12 year term limit for directors
• mandatory resignation for independent directors with "material changes" in their careers
• Independent directors limited to no more than four directorships at publicly traded companies
• reduced annual cash retainer from $50,000 to $40,000 for independent directors

"These changes are intended to give our shareowners a greater voice in decision making at H&R Block without weakening the role of the board in setting overall policies, or management in making operational decisions," Chairman Richard C. Breeden said. (H&R Block Reduces Board Size, Limits Terms of Directors, WSJ, 6/17/08) It seems like only troubled companies willingly make such reforms. Will the market reward them? Disclosure: The publisher of CorpGov.net is a limited partner in a Lawndale Capital affiliate.

CEO Pay

Two excellent articles have recently appeared in the mainstream press on CEO pay. The first was by Rachel Beck and Matthew Fordahl. Beck was recently honored as one of the “Rising Stars of Corporate Governance” by Yale School of Management’s Millstein Center for Corporate Governance and Performance. CEO pay rose higher in '07 despite economic woes (SFChronicle, 6/15/08) reports on an AP study of CEO pay among the S&P 500, which found the median pay package was nearly $8.4 million in 2007. "That's a comfortable gain of about $280,000 from 2006... even as the landscape for both workers and shareholders darkened considerably and the economy was choked by a housing market in free fall, layoffs and soaring prices for fuel and food.

Beck and Fordahl present a table of the top 10 earners, who collectively made half a billion dollars, led by John Thain at Merrill Lynch, which suffered its worst ever losses. "AP analysis found that CEO pay rose and fell regardless of the direction of a company's stock price or profits." Citing oil companies, even companies that racked up huge profits didn't often pay based on real performance. "Pay consultants say that illustrates a weakness in executive pay programs. When outside factors help the bottom line, CEOs tend to benefit personally as well. But the opposite is not generally true, said Bill Coleman, chief compensation officer for Salary.com, which provides corporate pay information." "How convenient," he said. "I take credit for everything good and I blame external factors for anything bad, but say that shouldn't affect my pay."

Gretchen Morgenson authored the other interesting article, How Big a Payday for the Pay Consultants? (NYTimes, 6/22/08) "Even as the stock market flags and credit losses mount, executive pay marches higher. Ousted chief executives also continue to reap rich going-away gifts. Martin Sullivan, lately deposed as chief executive of A.I.G., may receive $68 million in severance as he makes his way out the door, according to the Corporate Library, a governance research firm. Never mind that his shareholders lost 41 percent of their market value since he took over the company in March 2005."

Morgenson notes that although both Obama and McCain are both making out-sized compensation a campaign issue, and 100 “say on pay” proposals made it into proxy statements, shareowners have only won about 10% of the contests. She suggests "a more modest approach to runaway pay is in order — like attacking potential conflicts of interest among compensation consultants who design the lucrative packages."

"Because the fees earned by consultants for compensation work are far less than what they make on other business, there is a risk that compensation gurus will put together cushy pay packages in order to snare more lucrative gigs elsewhere in the corporate empire." Morgenson advocates what she calls an "easy fix." "Require companies to detail in proxy statements all fees paid to consultants they hire, for compensation design and all other services." Such disclosures "would mirror the tabular disclosure forced upon companies’ auditing firms via the Sarbanes-Oxley Act," as recommended by CFA Institute’s Centre for Financial Market Integrity.

Consulting firms interested in billable hours would probably advocate "say on pay" because they would not only devise pay packages, they would also design campaigns to sell them to shareowners. Disclosure of consultant fees would be a simpler remedy, but would it work? Let's find out. We can always try both.

Executive Pay and “Independent” Compensation Consultants, by Kevin J. Murphy and Tatiana Sandino found that executive and director pay is higher in companies retaining consultants for pay advice than in companies not seeking advice, even after controlling for size, industry, and the mix of pay. However, they find no evidence that the higher pay is related to conflicts of interest: CEO pay is higher (and not lower) in companies where the consultant works exclusively for the compensation committee rather than management, and CEO pay does not increase when the consultant provides actuarial or other services to their client firms. Pay is higher when the companies retain more than two consultants, suggesting perhaps that companies “shop around” until they get the answer they like!

Nell Minow Earns ICGN Award

I was delighted to learn that Nell Minow, co-founder of ISS and The Corporate Library, was given the International Corporate Governance Network's 2008 Award for Achievement. Minow. Previous recipients of the coveted award include Sir Adrian Cadbury, Ira MillsteinIn Robert A. G. Monks, past André Baladi, and the late Alastair Ross Goobey. Monks praised Minow. “Her recent Congressional testimony concerning CEO pay is one of the finest expressions of the great potential for improved corporate governance to reconcile corporate energies with the public good.”

Minow is the third individual from The Corporate Library in two weeks to be singled out for contributions to the field of corporate governance. On June 9, 2008, Senior Research Associate Annalisa Barrett and Research Associate Alexandra Higgins each were honored as “Rising Stars of Corporate Governance” by Yale School of Management’s Millstein Center for Corporate Governance and Performance. (press release, 6/20/0)

Nell has always impressed with her sharp mind and her depth of knowledge. Only a handful of people have accomplished so much in the field. However, she may be most famous for her ability to turn a phrase. Below are just a few examples:

• Boards of directors are like subatomic particles--they behave differently when they are observed.
• There is really no justification to pay for any living or traveling expenses at that level, particularly now that he is in retirement.
• You cannot be on the board of directors and also be doing investment banking work for the company. I don't care if he steps out of the room or not. You cannot be the umpire and the pitcher in the same game.
• I'd dreamed of rating boards from Triple A to junk, like bonds, because boards are a risk factor that no one was paying attention to.
• Right now, executive pay is like a scavenger hunt. You have to get little pieces of data here and little pieces of data there.

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Open Sesame

Speaking of the Corporate Library, they have opened up a treasure trove of reports to honor their commitment to the United Nations’ Principles of Responsible Investment (UNPRI). All research reports and analysis published for sale by the firm prior to June 30, 2007, are now are available at no charge at their online store.

“We take seriously our commitment to the principles set forth in the UNPRI. For almost a decade we have built The Corporate Library into the leading independent research organization focused on governance risk and extra-financial analysis. Our recent global service expansions have brought increased international focus on our research services. We believe that this effort will be of value to furthering the institution of responsible investment principles in the global market,” said Richard A. Bennett, CEO of The Corporate Library.

Unfortunately, many of the issues in corporate governance haven't changed much and The Corporate Library has been doing fantastic work, so these reports are still timely.

Proxy Access Rules This Year

“We will take it up this year,” Chairman Christopher Cox told reporters after a June 12 speech to the CFA Institute.  

All three nominees for commission seats--Elisse Walter, Luis Aguilar, and Troy Paredes--told a recent Senate panel they would be open to re-examining the issue of proxy access, a right which the SEC overturned through a November rulemaking on a 3-1 vote, split on pary lines.

During a recent forum, Harvey Pitt, who led the SEC from 2001 to 2003, warned that “trying to open up access to the proxy process . . . leads to enormous complications.” Noting that the cost of a proxy contests will be “less and less an issue” as e-proxy procedures spread, Pitt said that allowing shareholder groups to require companies to pay proxy solicitation costs is “tyranny, potentially, of the minority over the majority.”
 
Richard Breeden, chairman of the SEC from 1989 to 1993, said, disagreed. “The worst tyrannies . . . are self-perpetuating boards of directors who spend endless amounts of shareholder money on their own self-perpetuation.” (Cox Says SEC Will Consider Proxy Access This Year, Risk & Governance Weekly, 6/19/08)

Like AFSCME, we think this issue is too important to rush through this year. We would rather wait until next year and an SEC chair appointed by a new administration.

Ichan Blog

Investor Carl Icahn’s blog - the Icahn Report - is finally live. All of the posts revolve around corporate governance issues, such as poison pills, staggered boards, unfit CEOs, the absurdity of corporate board elections, the myth of corporate democracy.

Poor corporate governance now threatens more than just potential shareholder value; it threatens this country’s very economic survival... Our boards and CEOs exist in a symbiotic relationship where the boards nourish the CEO with massive stock options that are re-priced downward if the companies stock declines - making them forever valuable. They reward the CEO with pay packages and bonuses when the stock is floundering or the CEO is leaving the company. Corporate performance and the shareholders welfare seldom enter the picture. What kind of democracy is this? There is no accountability.

Ichan is wealthy enough that he could easily fund start-up of another United Shareholders of America for individual investors who are concerned with their rights as owners. This would be a smart move if he seeks legitimacy as a proponent of good corporate governance, rather than a corporate raider. However, this time any such organization should be organized within a framework that is consistent with the democratic values it espouses.

The need for such an organization is urgent. The SEC says it will once again take up proxy access this year. CIA will be there fighting for institutional investors and a 3% threshold to place shareowner nominees on the corporate proxy for short slates. However, no large organization will be representing individual investors and advocating for the option of a 100 shareowner threshold, like they have in the UK and elsewhere.

Many of the companies that have the poorest boards and corporate governance are small firms with few if any institutional investors. Ichan could do a world of good by helping to fund an association of individual investors.

Under e-proxy, voting by individual shareowners has dropped to about 5%. Most think there is no point in voting because it takes too much time to research the issues. Ichan could help put an end to this "free rider" problem by facilitating voting by "brand." One way to jump-start such an organization would be to start with a loose confederation of existing organizations like Proxy Democracy, VoterMedia, Investor Suffrage Movement, Committee of Concerned Shareholders, and VotePal. Ichan's leadership could even result in organizations like the American Association of Individual Investors and the National Association of Investors getting interested in viewing investors as owners, rather than as simply buyers and sellers. I've add Ichan blog to our growing list of Blogs and Blog-Like Links.

McCain Blasts Greedy CEOs

“Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road.” Presidential hopeful John McCain takes aim at rewards for failure American-style. (PIRC Alert, 6/17/08. The same issue carried a nice description of Proxy Democracy.) McCain said that under his proposed reforms, "all aspects of a CEO's pay, including any severance agreements, must be approved by shareholders." (McCain Seeks Shareholders' Say on Pay, BusinessWeek, 6/10/08) Of course, Obama is already sponsoring a "say on pay" measure, but it is good to see corporate governance as a topic of presidential debate.

CalPERS Seeks to Exempt Itself From Good Governance Requirement

AB 2940 (De Leon) is a very innovative measure to facilitate the ability of millions of Californians to save for retirement through low cost IRAs administered by CalPERS under a newly authorized California Employee Savings Program (Program). The Program will reduce future dependency on taxpayers, increase California's tax base through responsible investments, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate its corporate governance activism and defined benefit plans for public employees. Unfortunately, the bill was recently amended, at the request of CalPERS, to exempt the Board from the Administrative Procedure Act (APA).

It is ironic that CalPERS is famous for championing shareowner rights, corporate compliance and transparency but seeks to exempt itself from good governance. For many years, CalPERS claimed the Constitution exempted the agency from the laws of California, including the APA. That claim was thoroughly rejected by the Office of Administrative Law (OAL) and by the courts (see 1999 OAL Determination No. 18). CalPERS now seeks to obtain in part, through AB 2940, what it was denied in the courts.

OAL's authority to review proposed regulations does not allow it to interfere with the substance of proposed regulations, but, along with the APA's provisions, does afford CalPERS members, Program participants, taxpayers, and other interested parties several benefits, including:

• Public notice, disclosure of studies relied upon, opportunity for comment and public response to comments for initially proposed regulations and subsequent amendments.
• Consideration and disclosure of fiscal and economic impacts.
• Review for necessity, authority, clarity, consistency, reference and nonduplication.

Exempting the Board from the APA disenfranchises potentially millions of Californians - ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program. Shouldn't Program participants, current CalPERS members, and California taxpayers and other interested parties be able to have some say over how the program is shaped over time? The bill is scheduled for a hearing before the Senate Public Employment and Retirement Committee on Monday, June 23, 2008. The proposed exemption should be removed. (Download PERSWatch letter in Word format to the Committee suggesting amendments.)

Chevedden Reports (updated)

John Chevedden & associates continue their relentless quest. Every vote in favor of these resolutions was a vote for important shareowner rights. As part of my continuing exploration, I've also noted those listed at Proxy Democracy as resolutions supported by various funds before the meetings. As time progresses, Proxy Democracy will collect more intended votes and expand what is already a very useful tool. *indicates "Shareholder right to call special meeting" where text should have been worded better, like the wording in the Staples proposal which received a 67%-vote.

Company	Ticker	Proposal	Proponent
3M	MMM	Shareholders may call special meetings	Nick Rossi
American Express	AXP	Simple Majority Vote	Kenneth Steiner
American International Group	AIG	Majority Vote to Elect Directors	William Steiner
Bristol-Myers	BMY	Simple Majority Vote	Charles Miller
Chevron	CVX	Shareholders may call special meetings	Nick Rossi
Honeywell	HON	Shareholders may call special meetings	June Kreutzer
IMS Health	RX	Declassify Board	Nick Rossi
International Paper	IP	Simple Majority Vote	William Steiner
Johnson & Johnson	JNJ	Shareholders may call special meetings	Mark Filiberto
Kimberly-Clark	KMB	Simple Majority Vote	Nick Rossi
Lowe's	LOW	Declassify Board	John Chevedden
MeadWestvaco	MWV	Redeem Poison Pill	William Steiner
NiSource	NI	Simple Majority Vote	Ray T. Chevedden
PPL Corporation	PPL	Simple Majority Vote	Emil Rossi
Pep Boys	PBY	Majority Vote to Elect Directors	John Chevedden
Pinnacle West Capital	PNW	Simple Majority Vote	Emil Rossi
R.H. Donnelley Corp.	RHD	Declassify Board	Nick Rossi
Sempra Energy	SRE	Simple Majority Vote	Ray T. Chevedden
Time Warner	TWX	Simple Majority Vote	William Steiner
Time Warner	TWX	Shareholders may call special meetings	Kenneth Steiner

CorpGov Bits

The June Directors & Boards e-Briefing includes an article (Goose Eggs) by Jim Kristie. Apparently, some directors still don't own stock. He doesn't identify this one by name but says its "a major industrial products manufacturer. It’s profitable on revenues last year of over $3 billion. It employs 16,000 people worldwide. It’s been around since the 1960s. It’s in a business — infrastructure — that is in the growth sweet spot." Kristie suggests directors "get an appropriate number of shares;;; before sending the proxy out."

Cross Border's Corporate Secretary include a brief article on isuffrage.org. "One solution that is being promoted to increase turnout and improve the representation of shares held by mutual funds is a ‘proxy exchange’. Glyn Holton, founder of Contingency Analysis, proposed the idea two years ago in a paper entitled ‘Investor Suffrage Movement’ that appeared in the Financial Analysts Journal." (Investors testing proxy transfer trials, 6/3/08) I don't think the idea is limited to mutual funds... certainly the proxy trials I was involved in weren't mutual funds, but any publicity of this movement is welcome.

InvestmentNews reported that divestment can have positive or negative consequences on portfolio performance, at least in the short run. "But clients should be advised that negative consequences are possible from a policy of divesting such stocks. If the clients wish to divest for moral reasons and accept the possibility of lower returns, so be it." (The delicate issue of divestiture, 6/14/08) Generally, I believe many companies welcome divestment; they prefer compliant shareowners.

Gretchen Morgenson questions why Washington Mutual shareowners weren't told JPMorgan was interested? Now their stuck with a deal with the TPG group. “We’ve been given a set of choices where you are damned if you do and damned if you don’t,” said Steve Abrecht, executive director of the S.E.I.U. Master Trust. Says Morgenson, "stockholders will vote on the deal on June 24, but the more closely that some holders examine its terms, the angrier they get." (Approve This Deal, or Else, NYTimes, 6/15/08)

The Center for the Study of Islam and Democracy has now made available the final set of papers that were presented at the CSID 9th Annual Conference, which was held on May 14, 2008, in Washington DC, on "Political Islam and Democracy - What do Islamists and Islamic Movements Want?"  The thought-provoking papers are all available from their website. Download all 301 pages.

Paul Krugman compares the Bush administration's tax cuts to a fiscal poison pill aimed at future administrations. (Fiscal Poison Pill, NYTimes, 6/16/08) Agree or disagree with Krugman's analysis, the lingo of politics and corporate governance are merging.

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Access Speculation

J. Robert Brown argues the non-access amendment adopted by the SEC contained language far broader than what was required to overturn the Second Circuit and undermined the goal of improving disclosure. "What does the future hold?  The pressure from institutional investors will continue.  The Commission's absolutist approach and the weak underlying reasoning will do nothing to abate the pressure.  Moreover, the pressure will build not for attenuated access to the proxy statement but direct access, without having to first force shareholders to adopt an access bylaw.  This issue will be revisited and will be at the top of the agenda after the November 2008 elections." (Shareholder Access Redux (Part 7), theRacetotheBottom, 6/10/08) Maybe it can even be part of the election agenda.

Shareholder Advocacy Trust

We've discussed Richard Macary's shareholder advocacy trust previously but now Forbes has summarized activity to date.

Facing long odds, shareholder Richard Macary managed to oust the leaders of AVI BioPharma, a struggling biotech firm in Portland, Ore., and replace them with a new slate. Macary's crusade began in 2005 after the New York City investment adviser told wealthy clients, friends and relatives to buy shares of tiny AVI (market cap: $94 million). The company has spent 18 years and $241 million of investor money trying to commercialize "antisense" molecules, bits of RNA that prevent cancer cells, viruses and bacteria from expressing certain genes. The technology holds promise, says Macary, but was set back after a long-delayed hepatitis C trial showed no health benefits. As the stock lurched from $2 to $8 back to $2, Macary stepped in...

At the end of the article, Patrick McGurn, of the RiskMetrics Group, opines the model has limited applicability to small companies. "Larger companies could demand disclosure filings to smoke out intentions and find legal means to protect themselves." Forbes then ends with a list of small caps with large holders crying out for revolution. (Shareholder Sedition, 6/30/08)

Icahn Finds Little Change

Carl Icahn says corporate governance hasn’t changed much since he first became an activist investor in the early 1980s. “You go to a board meeting and there are people reading the papers, eating doughnuts and getting their checks for being board members,” he said. “Then the CFO comes out and no matter how badly the company is doing, he can always find some graph with a line pointing straight up and other graphs with red, green and yellow lines that nobody knows anything about. Then everybody packs up and goes to the airport.”

Icahn added that he’s aware of board members who make $10,000 a week just for showing up to board meetings, while the average worker in the U.S. makes just over $20,000 per year. (Icahn Down On U.S. Economy, Corporate Governance, FINalternatives, 6/11/08) While I'm sure that's true at some companies, I have to believe there have been many important changes during this period.

At least the entrenchment devices are changing. Yahoo's plan calls for severance benefits for employees who are terminated or leave under certain other circumstances after a change of control. Icahn has estimated that the plan could cost $2.4 billion. Yahoo estimates ranged from $514 million to $845 million. (Yahoo Says an Icahn Win Triggers Plan, WSJ, 6/11/08)

Grounded Advice

The new downloadable OECD publication, “Applying the OECD Principles of Corporate Governance – A Boardroom Perspective,” was publicly launched at the 2008 Yale Corporate Governance Forum. This very interesting volume is the result of interviews conducted by Ira M. Millstein and Anne Simpson with directors around the world, capturing their real-life comments on Chapter VI of the OECD Principles, based on the thought that "If we gather experiences from those who are on the ground and living inside the ideas that others only write about, then corporate governance reform will continue to generate real traction." (Millstein) Here are a few choice quotes:

"...compensation disclosure can have the unintended consequence of increasing compensation levels – no CEO wants to be at the median or in the lower quartile and a company may be required to meet those compensation demands if it wants to attract the best talent.” Niall FitzGerald

"A practical method of counteracting a specific issue may be to form a coalition with other companies, shareholders, non-governmental organisations and governments – including the government of the host country, where possible – to exchange experiences and develop potential longterm solutions to the issue...Governments are usually more likely to view coalition efforts at reform more favourably than those of an individual corporation, which may be viewed as seeking reform to further its own particular interests." Sir Mark Moody-Stuart

“To be prudent, directors can no longer rely entirely on management to determine what issues the board considers and what information is presented for board attention. Directors should assure that systems are in place for flagging relevant and material issues. This key capability should be integrated into a company's risk assessment and internal control systems.” Ira M. Millstein

"...good corporate governance can be likened to sex during the teenage years – everyone seems to be talking about it, but few people are actually doing it!" Leonardo Peklar (CorpGov.net: I suspect more are doing both these days than they did a few decades ago.)

"Boards should consider appointing a corporate secretary who reports solely to the chair to ensure that directors receive information in a timely way without reliance on management. A board with its own secretariat will generally be in a stronger position to demand information than a board whose corporate secretary is part of/reports to the executive who may find him- or herself conflicted between the chair and the CEO.” Alison Dillon

Judgment, integrity, diplomacy, courage, board leadership... the book contains practical advice on a wide range of director responsibilities.

McCain as Corporate Reformer

"Americans are right to be offended when the extravagant salaries and severance deals of CEOs ... bear no relation to the success of the company or the wishes of shareholders," says McCain, adding that some of those chief executives helped bring on the country's housing crisis and market troubles. "If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders." (McCain wants low corporate taxes, regulated CEO pay, 6/10/08)

The proposals that both Senator Obama and McCain support would not only give shareholders a once a year vote on executive pay, it would mandate a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.  This provision is designed to counteract the inherent conflict of interest that exists when senior managers simultaneously negotiate buy or sell agreements and personal compensation packages. (Say on Pay Prospects Brighten, Pomtalk, 6/10/08)

Senator John McCain, criticized Senator Obama for having James A. Johnson on his vice-presidential selection committee. Johnson, the former chairman of Fannie Mae, and has business ties that may make Obama's ties to the Rev. Jeremiah Wright look mild. (Vetting a Vetter: Obama’s Pick Fuels G.O.P. Criticism, NYTimes, 6/11/08)

Update: Former Fannie Mae Chief Jim Johnson stepped down from his role vetting potential running mates for Senator Barack Obama, as new details about loans received from struggling mortgage giant Countrywide Financial were learned. Obama announced that Johnson was resigning from the volunteer position to avoid distracting from the vetting process. (WSJ, 6/11/08)

Bring it on. I would love to see corporate governance take center stage in presidential debates.

Dollar Tree Stores

CalPERS picked up endorsements from three proxy advisors for the proposal for annual director elections. “The company currently has three classes of directors, with members of each class serving three-year terms,” Egan-Jones said. “Classified boards of directors also may be viewed as reducing the accountability of directors to shareholders because they limit the ability of shareholders to evaluate and elect each director annually.”

“Given the empirical evidence suggesting that classified boards reduce a firm’s value, and shareholders’ increasing opposition to such a structure, Glass Lewis believes that classified boards are not in the best interest of shareholders,” the proxy advisor said.

RiskMetrics said: “The ability to elect directors is the single most important use of the shareholder franchise, and all directors should be accountable on an annual basis. A classified board can entrench management and effectively preclude most takeover bids or proxy contests. Board classification forces dissidents and would-be acquirers to negotiate with the incumbent board, which has the authority to decide on offers without a shareholder vote.”

See how others are voting in the Dollar Tree election at ProxyDemocracy.org.

Modified DB Plans

Jessica Marquez, writing for Workforce Management (The New Old Benefit, 6/08) thinks DB plans, or at least modified DB plans, may be coming back. In the last 10 years, 40% of employers replaced their defined-benefit plans with defined-contribution plans for new hires, according to a survey of 300 large employers by Watson Wyatt Worldwide. However, 59% of surveyed employers say they are committed to their defined-benefit plans.

The pace of companies freezing their defined-benefit plans has slowed from 11% between 2004 and 2005 to 5% in 2006 and 4% in 2007. After freezing its DB plan in 1993 amid cost pressures, Aerospace Corp. found it more difficult to bring in and retain talent. In 2005, they introduced a mixed plan; two-thirds of benefit accrual is variable, while one-third is fixed. One-third of a DB plan is better than none.

How Green is Your Pension?

CalPERS adopted corporate governance standards in April requiring companies they invest in to disclose their financial exposure to global warming -- as well as what they are doing to remediate those risks and how they might capitalize on opportunities created by global warming. That includes measuring and reporting greenhouse gas emissions and making plans to reduce those emissions, as well as developing clean technologies like hybrid and electric vehicles that will aid in an overall reduction of emissions. CalSTRS will consider similar corporate governance measures on July 10.

"We wouldn't divest shares of companies because of their carbon footprint, since we're a long-term investor that doesn't use divestment as a weapon," said CalPERS spokesman Clark McKinley. "We find it more effective to keep our seat at the table and vote our shares. But we will take it into account in advocating or supporting resolutions at annual shareowners' meetings and in voting for or withholding votes for corporate board directors."

Pension funds throw green weight around, by Lindsay Riddell for the San Francisco Business Times (6/6/08) cites several examples of reports, a petition to the SEC to require disclosures, shareowner resolutions and other efforts by the two funds with assets exceeding $400 billion. Help spread the movement.

Back to the top

Rising Stars of Corporate Governance

The Millstein Center for Corporate Governance and Performance at the Yale School of Management has named 56 young professionals, under 40 years old, as “Rising Stars of Corporate Governance, ” who are making their mark as outstanding analysts, experts, activists, and managers. The honorees were nominated by their peers and selected by a committee of leaders from the Millstein Center, the Open Compliance and Ethics Group, and the International Corporate Governance Network based on criteria such as past accomplishments and thought leadership, future projects and endeavors, reputation among existing industry leaders, and potential to influence the industry in the future.

“This is the first year we are recognizing the next generation of corporate governance leaders,” said Ira M. Millstein, senior associate dean for corporate governance at the Yale School of Management. “Every one of this year’s 56 recipients is a Rising Star in his or her own right.  I’m honored to be able to recognize them in this way.” The Rising Stars of Corporate Governance are:

• Sanaa Abouzaid, Corporate Governance Officer, International Finance Corporation (IFC)
• Tagbo Agbazue, Project Coordinator for African Institute of Corporate Citizenship
• Steve Alogna, Senior Manager, Corporate Governance Services, Deloitte & Touche
• Annalisa Barrett, Senior Research Associate, The Corporate Library   
• Rachel Beck, Business Columnist, Associated Press
• Sagarika Chatterjee, Senior Analyst in Governance and Sustainable Investment Team, F&C Investments (London)
• Warren Chen, Managing Director, M&A and Quantitative Analyst, Glass, Lewis & Co.   
• Patrick Daniels, Partner, Coughlin Stoia Geller Rudman & Robbins        
• Andy Eggers, President, Proxy Democracy        
• Maureen Errity, Firm Director, Center for Corporate Governance, Deloitte & Touche
• Todd Fernandez, Senior Research Analyst (Accounting/the Monitor), Glass, Lewis & Co.
• Jun Frank, Senior Research Analyst (Asia), Glass, Lewis & Co. 
• Nichol Garzon-Mitchell, Esq., Vice President and Deputy General Counsel, Glass, Lewis & Co.   
• Rebecca Grapsas, Associate, Corporate Department, Weil, Gotshal & Manges
• Dan Heitger, Associate Professor of Accounting & Co-Director of the Center for Business    Excellence, Miami University        
• Alexandra Higgins, Research Associate, The Corporate Library
• Quinton Huckeby, Analyst, PROXY Governance
• Catherine Jackson, Manager, Corporate Governance and Proxy Voting, Ontario Teachers’ Pension Plan    
• Fianna Jesover, Senior Policy Manager, Corporate Governance, Organisation for Economic Co-    operation and Development (OECD)  
• Bess Joffe, Associate Director, Corporate Governance, Hermes Equity Ownership Services Ltd.
• Jan-Friedrich Kallmorgen, Director, Europaische Investorenshutzvereinigung
• John Keenan, Senior Analyst, Pension and Benefits Policy, AFSCME     
• Matt Kelly, Editor-in-Chief, Compliance Week  
• Dan Konigsburg, Director of Corporate Governance, Standard & Poor’s Equity Research
• Claudia Kruse, Vice President European Environmental, Social and Governance Research, JPMorgan (London)     
• Rakhi Kumar, Corporate Governance Policy Analyst, The Institute of International Finance, Inc. 
• Laura Lonsdale, Ombudsman, Tyco International
• Allie Monaco, Vice President of Research, PROXY Governance
• Michael McCauley, Senior Corporate Governance Officer, Florida State Board of Administration
• Mary Jane McQuillen, Director, Socially Aware Investment, ClearBridge Advisors          
• Jason Mefford, Vice President, Business Process Assurance, Ventura Foods, LLC          
• Jeffrey B. Miller, Chief Compliance Officer and Counsel, Synthes, Inc.   
• Matt Orsagh, CFA, CIPM, Senior Policy Analyst, CFA Institute Centre for Financial Market Integrity      
• Rajesh Parthasarathy, President & CEO, MENTISoftware         
• Dan Pedrotty, Director of the Office of Investment, AFL-CIO    
• Christian Plath, Assistant Vice President, Corporate Governance, Moody’s Investor Services       
• Michael Pryce-Jones, Senior Analyst, PROXY Governance        
• Naheeda Rashid, Corporate Governance and Engagement, Hermes Equity Ownership Services    
• Tracey Rembert, Senior Governance Analyst, Service Employees International Union (SEIU)      
• Joel Rogers, Director of Consulting Services, RedHawk Communications, Inc.     
• Nicole Sandford, Partner, Board Advisory Services Practice & NE Corporate Governance Leader, Deloitte & Touche
• Hege Sjo, European Governance and Engagement, Hermes Equity Ownership Services   
• Phillip Spathis, Executive Officer, Governance and Engagement, Australian Council of Superannuation Investors (ACSI)
• Alan Srulowitz, Vice President, Internal Controls, CA, Inc.         
• Tracy Stewart , Corporate Governance Manager, Florida State Board of Administration   
• Scott Stokes, Deputy Research Director, GovernanceMetrics International          
• Daniel Summerfield, Co-Head of Responsible Investment, Universities Superannuation Scheme (USS) Ltd.
• José Tabuena, Vice President Integrity and Compliance/Corporate Secretary, MedicalEdge Healthcare Group, Inc  
• Peter Taylor, Head of Corporate Governance, Aberdeen Asset Management
• Meagan Thompson-Mann, President, MCTM Governance LLC
• Carla Topino, Senior Research Analyst (Europe), Glass, Lewis & Co.     
• Dan Wadsworth, Senior Director of Corporate Client Group, NASDAQ Board Tools       
• Kerrie Waring, Chief Operating Officer, International Corporate Governance Network
• Mark Watson, Partner, Tapestry Networks, Inc.
• Brittany Wedereit, Vice President, Proxy Research, Glass, Lewis & Co. 
• Clarence Yang, Associate, Barclays Global Investors
  

The Rising Stars will be recognized during a reception at the 2008 Yale Governance Forum hosted by the Millstein Center. The selection committee has chosen ten exceptional honorees to be highlighted at the event:  Sanaa Abouzaid of the International Finance Corporation; Rachel Beck of the Associated Press; Alexandra Higgins of The Corporate Library; Bess Joffe of Hermes Equity Ownership Services Ltd.; Jan-Friedrich Kallmorgen of Europaische Investorenschutzvereinigung; Laura Lonsdale of Tyco International; Michael McCauley of the Florida State Board of Administration; Phillip Spathis of the Australian Council of Superannuation Investors; Daniel Summerfield of Universities Superannuation Scheme Ltd.; and Peter Taylor of Aberdeen Asset Management.

Clawback Provisions Up

During this proxy season, almost 300 companies adopted provisions allowing them to recover executive pay that they find to have been based on incorrect financial statements. Four years ago, such clawback policies were found at only 14 companies. The Corporate Library surveyed 2,121 companies and found that 295 of them, or 14 percent, had clawback provisions. The most common — in 131 cases — were those that kick in when fraud is uncovered. But a good number — 115 — are related to performance pay that was later found to have been improperly awarded because it was based on incorrect figures rather than malfeasance. Gretchen Morgenson goes on the provide several examples in Pay It Back if You Didn’t Earn It, NYTimes, 6/8/08.

More Dream Jobs

Corporate Accountability International (formerly Infact) has two exciting and new positions: 1. Associate Development Director for Major Gifts - a good organizer with solid fundraising experience, especially in face-to-face fundraising. 2. Membership Director - experience especially with direct mail programs who can lead an organization-wide effort to dramatically grow their membership base. Both need to have strong staff and program management skills, or the capacity to develop them, and at least 4 years non-profit experience.

Corporate Research Intern, CorpWatch, 20 hours a week/part-time, unpaid position (OK, so not ideal... but may lead to that ideal job), school credit possible. The candidate should be passionate about digging up dirt on companies.  Knowledge and familiarity with web-based technologies and computers is essential. Mayber you too, can be a rising star.

Investment Officer I, CalPERS, Salary: $3,185.00 - $5,874.00. Analyze proxy issues and provide voting justifications by interpreting and applying CalPERS' voting policies and guidelines. Prepare agenda material regarding proxy voting and other governance issues for the CalPERS' Board of Administration and Investment Committee. This position will be required to make recommendations to management regarding proxy-voting policies. Assist with the maintenance of the Corporate Governance Forum on the CalPERS' web-site. Provide justifications and post proxy votes for selected companies. Analyze proposed legislation affecting proxy voting for the Governance Unit.

Executive Director, Center for Responsible Business, Haas School of Business at UC Berkeley. Charged with: managing and orchestrating a broad array of activities within the Haas School; fostering relationships with other UC Berkeley departments, other academic institutions and, most importantly, the corporate world; increasing public awareness of CSR and the issues it addresses; and generating external support sufficient to sustain the Center’s growth.

Politics & Business

More than 200 former members of Congress have crowded through the revolving door to lobby in recent years. The capital lobbying industry ballooned almost 8% to $2.79 billion last year, according to the Center for Responsive Politics. That’s an outlay of $17 million for each day Congress was in session. Former Republican House speaker, Dennis Hastert, joined a blue-chip lobbying firm this week as a “strategic counsellor” at an annual salary estimated at $500,000-plus (It’s So Much Nicer on K Street, NYTimes, 6/6/08)

A week after the 2000 presidential election, companies with directors connected to the Republican Party experienced an increase of nearly 3% in their share prices, according to a study from the European School of Management and Technology in Berlin. When companies were weighted based on market cap, those with directors linked to the Democratic Party experienced a negative cumulative abnormal return of 3%. Companies were defined as leaning Democrat or Republican if they had at least one board member with a former affiliation to a party and no members with ties to the opposition. (Board connections pay, InvestmentNews, 6/9/08)

Best of the Web

We got one of these awards in 2002 from Forbes. Nice to know the "capitalist tool" still finds the site useful. This time, their review said the following:

Don't be fooled by this site's off-the-shelf design and navigational challenges. It is a treasure trove of news, resources and links on all matters concerning corporate governance and shareholder activism. The site reads like a Web log of streaming news and observations, only it was created by shareholder activist James McRitchie in 1995, long before blogs existed. You will find PDFs of research reports on governance, editorials, links to relevant news, upcoming conferences and forums (such as an upcoming Webcast on the proxy contest being waged between CSX and dissident shareholders), and a network of consultants, auditors and software firms that can help you with things like handling governance and succession in family businesses.

BEST: Unbridled linkfest. News archives go back to 1996.
WORST: Be careful: some of the hotlinks will have you downloading multi-page PDFs.

CSX Forum, June 9

On June 9, at 11 a.m. Eastern Daylight Time, RiskMetrics Group will webcast a forum on the proxy contest being waged between railroad firm CSX and dissident shareholders The Children's Investment Fund (TCI) and 3G Capital Partners. The webcast will be moderated by Christopher Young, head of M&A research for RiskMetrics. The forum will last two hours to give each side an opportunity to present its views and answer questions from investors. Register. See also paper from The Children’s Investment Fund Management. Maybe they've done these workshops before. I'm only familiar with those put on by The Shareholder Forum. New or continuing, such forums are a welcome addition to investor education and debate of the issues. I'm delighted it is being webcast.

Relevance of Healh-Care Questioned

"It's corporate proxy season, and as usual the shareholder activists are out to make a splash. But this year there's an important twist: The Securities and Exchange Commission is helping them. Unions have been trying for years to force businesses to put their health-care policies on the shareholder ballot. In the past, the SEC has objected by citing its "ordinary business" rule, which says that shareholder votes are not the place for establishing or changing a company's business strategy or compensation. So this year the labor activists changed tack: They asked for proxy space on the "principle" of universal health care."

The WSJ says "these proposals are not about investment returns. They are about browbeating corporate America into endorsing the union health-care agenda." The the SEC should "throw the proposals out." "Commissioners will have to exercise some adult supervision to prevent further politicization of shareholder proxies." (Politics by Proxy, 6/4/08)

I strongly disagree. Health-care costs are driving American companies into the ground as they try to compete internationally with companies based in countries with universal health-care. Why are so many of our auto plants located in Canada? It certainly isn't because they have weaker unions.

Lack of health-care leads to distraction, increased sick days and higher social costs from postponned care. Inclusion of such resolutions does not represent rogue action by SEC staff as the WSJ implies. "The Division has noted many times that the presence of widespread public debate regarding an issue is among the factors to be considered in determining whether proposals concerning that issue "transcend the day-to-day business matters." (Division of Corporation Finance: Staff Legal Bulletin No. 14A, Shareholder Proposals, 7/12/02) The WSJ is unreservedly wrong on this one.

Say on Pay

As most Americans see their paychecks stretched tighter by rising costs, the huge paychecks and special perks given to the people running publicly traded companies are under closer scrutiny than ever by shareholders. Shareholders are voting in growing numbers for an advisory vote on compensation--a "say on pay"--this proxy season. With more than 90 "say on pay" resolutions this year, shareholders continue to push for advisory votes on executive compensation.

RiskMetrics Group reports in it Midseason Review of the proxy season that executive pay vote proposals have averaged 43.1% support over 35 meetings where preliminary or final results are known. This compares to 42.5% support of these proposals in 2007. (Executive Pay Weighs Heavy with Shareholders, Anne Moore Odell, SocialFunds, 6/4/08)

Back to the top

Proxy Exchange Gets More Attention

The AP ran an item, which I have so far only seen at AOL Money and Finance (Proxy exchange could help shareholders join forces, 6/3/08). Glyn Holton, founder of the Investor Suffrage Movement, describes a system that would let people who own shares of a company transfer the voting rights of their stock to other shareholders so investors with similar goals could establish a bloc of votes.

Holton's campaign is already in proxy transfer trials (CorpGov.net publisher, James McRitchie is participating). James Post, a professor at the Boston University School of Management, is quoted saying, "this is another step in that process of trying to create a real voice for investors." The difficulty could be in raising public awareness.

Paul Larson, equity strategist at Morningstar Inc., said "It would definitely increase the power of individual shareholders to make a change and to make their voices heard." "Oftentimes shareholders just don't have to the time to read the proxy materials, fill out the forms and drop it in the mail." ...or retrieve them from those thousands of e-mails in their in-box under e-proxy. "Selecting someone and saying 'I agree with your views. Go ahead and vote your shares how you see fit' might actually slightly increase the amount of voting activity that actually gets done," says Larson.

The article ends with a quote from Holton. "At the end of the day what you're going to see is corporations being run more efficiently, more profitably. At the same time issues and agendas which there is broad public support for — those will be advanced." As I have said repeatedly, any system that will facilitate voting by brand will help enormously in moving at least some retail shareowners back into a voting mode.

No Surprises Among SEC Nominees (revised)

Three nominees to the SEC told the Senate Banking Committee they favor revisiting proxy access. (SEC Nominees Weigh In On Proxy Access, WSJ, 6/4/08)

"I would support Chairman Cox reopening that issue," Mr. Aguilar said in response to questioning by Senate Banking Committee Chairman Christopher Dodd (D., Conn.). Mr. Aguilar, a Democrat nominated to serve a term ending in June 2010, said he believes shareholders are entitled to proxy access and that the SEC should facilitate such access.

Ms. Walter, a second Democratic nominee, said she would welcome another look at the issue, and suggested the SEC should revisit it "as soon as possible." Mr. Paredes, the sole Republican nominee, told lawmakers he would address the issue with an open mind and that final resolution of the debate is a step worth taking.

Some in the investment community are a tad upset with Mr. Aguilar, who apparently stated that the SEC had recently supported the "status quo" on proxy access.  Many, if not most in the investment community (especially activists) believe that in fact the SEC changed the 14(a)(8) rule to prevent shareholders from bringing resolutions asking companies to adopt their own rules for access to the proxy for shareholder-nominated board candidates.  

We believe, as confirmed in AFSCME v AIG, that the SEC improperly reinterpreted its own rules to exclude such resolutions after a decade of accepting them. To characterize last year's action as maintaining the "status quo" is to buy into the legitimacy of the SEC's improper action of nullifying its own rules by underground regulation. Our position is that last year's action didn't just clarify an existing rule, it changed the rule, barring rights under state laws that the SEC had previously not interfered with. I think Mr. Aguilar simply gave a short-hand answer to a complex question. Yes, it was the wrong answer he deserves the benefit of the doubt. I think he will end up being a strong advocate on behalf of investor rights.

Even though I favor resolution of proxy access as soon as possible, investors, especially retail investors, are likely to get a better hearing under the next administration. Many small companies don't have significant institutional investors. Widely dispersed retail shareowners will have great difficulty forming 3-5% groups. Don't look to the Council of Institutional Investors on this issue. They won't be fighting for individual shareowners on this one.

If you are a member of a broad-based group representing the interests of retail shareowner, tell them the next proxy access proposal should include provisions that allow groups of small retail shareowners of 50-100 to place their own director nominees on corporate proxies. If more than one nominee is directly put forward by shareowners, companies should either elect directors through an IRV process or allow only the shareholder nominee representing the most shares to be placed on the proxy (along with management's candidate). If you find a group representing retail shareowners interested in lobbying for such a provision, please contact CorpGov.net publisher, James McRitchie.

Dream Jobs

Responsible Investment Analyst with Guardians of New Zealand Superannuation/Pension Fund. "The Fund accumulates and invests Crown contributions to partially provide for the future cost of New Zealand Superannuation. Our Responsible Investment Policy is a key requirement in meeting the Guardians’ mandate.  We have a new role for a Responsible Investment Analyst reporting to our Head of Responsible Investment. The primary role of the Responsible Investment Analyst is to support the Guardians’ Responsible Investment strategy and implementation of our work programme in this area. The role is based in Auckland, New Zealand." email inquiries What could be better than working in New Zealand on ESG investment issues?

Project Manager at CalPERS. The position will assume a lead role across a broad base of issues and projects including the development of the Investment Committee and Investment Policy Subcommittee agendas; coordinates communication across asset classes to insure consistency in policy; serves as a liaison between the Investment Office and the rest of CalPERS, as well as between the Investment Office and external stakeholders. Typical Tasks • Provide executive support and project management to the Interim CIO in addressing externally raised policy issues, such as labor or social issues that may affect CalPERS investments. Serve as liaison with external stakeholders. Oversee the review of investment-related legislation for its impact on CalPERS. Lead/manage special projects as requested by the Interim CIO such as development, implementation and monitoring of the division-wide Diversity Strategic Plan, Women’s Emerging Manager Workshop, Environmental Investment Initiatives, Divestment Strategies, United Nations Principles for Responsible Investments, Corporate Governance Initiatives, the internal Policy Review Project, and Investment Officer Classification Review.

First Forum for Independent Chairmen of North American Corporate Boards

The Millstein Center for Corporate Governance and Performance at the Yale School of Management announced the formation of a first-ever peer organization of independent chairmen of North American corporate boards. The kick-off roundtable for the “Chairmen’s Forum” will take place on October 7 at the Yale Club of New York City. The Millstein Center will serve as secretariat to the Forum.
 
Harry Pearce, chairman of Nortel Networks, is the founding chair of the Forum. The project is co-sponsored by Spencer Stuart, the global director and executive search consulting firm. A pilot meeting convened by the Millstein Center in February laid groundwork for the October event, which is expected to draw independent leaders from large U.S. and Canadian corporations. The Forum is intended for independent chairmen to share peer experiences; test opportunities for collective action on market issues; and form the core of a global network of chairmen organizations. Reports will be issued as appropriate.
 
Advocates contend that an independent chairman can strengthen a board’s leadership in overseeing a company’s CEO and management, and can open a conduit for dialogue with investors. So far, an estimated 35% of S&P 500 corporations have moved to install a separate chairman rather than combining the job with that of the CEO. Some 13% are independent non-executives, according to Spencer Stuart. However, the Millstein Center projects a significant medium-term upward trend in the number of companies taking this option. Separate chairs have become commonplace in most other markets. Recently, high-profile boards of U.S. companies such as Washington Mutual and Citigroup have chosen to divide the chairman and CEO jobs between two individuals. Canadian boards, responding to shareholder requests, have begun converting to independent chairmen. And shareholders at ExxonMobil last week, for the second year in a row, produced a strong vote in favor of moving that company to the independent chair model.
 
Pearce intends the inaugural Chairmen’s Forum to consider endorsing policy guidance on the role of an independent chair in a North American context. The Millstein Center is drafting the statement with oversight from Pearce and Ira M. Millstein, senior associate dean for corporate governance at the Yale School of Management and senior partner at Weil, Gotshal & Manges.
 
As part of its mission to incubate needed market institutions, the Millstein Center also recently announced the creation of the Conference of Fund Leaders, a permanent body dedicated to peer collaboration among independent chairmen and lead directors of mutual funds. (press release, 6/4/08)

The Millstein Center for Corporate Governance and Performance has quickly jumped as a leading global resource for testing, challenging and advancing the premise that corporations should and can serve society. The Center pursues its mission by convening events; sponsoring empirical research; generating policy briefings; building market capacity by developing training, databases and institutions; and teaching and student interaction. This forum for independent chairs is another significant contribution to efforts to make corporations more accountable and efficient. We congratulate and support their efforts.

SEC Chairmen Roundtable

Late in the day before the event, SEC Chairman Christopher Cox announced that six former SEC chairmen will join him for a roundtable discussion on Wednesday, June 4, 2008, at the agency's headquarters in Washington D.C. Roundtable participants will include:

• Richard Breeden (1989-93)
• Bradford Cook (1973)
• William Donaldson (2003-05)
• Roderick Hills (1975-77)
• Harvey Pitt (2001-03)
• David Ruder (1987-89)

The public roundtable is scheduled to begin at 3 p.m. ET. It will be conducted in the Auditorium of the SEC's headquarters building at 100 F Street, NE, in Washington, D.C. and will be webcast live at www.sec.gov. Why such a late announcement? What are the topics for discussion? It isn't like they could have scheduled this even together in a day. I know I'll be tuning it. Thanks to William Michael Cunningham, of Creative Investment Research, Inc., for bringing this meeting to our attention.

Board Candidate Interviews

A FinancialWeek article entitled New idea to empower owners (5/26/08) describes an idea proposed by Stephen Davis and Jon Lukomnik earlier in Compliance Week magazine. FinancialWeek's Nicholas Rummell appears to give it a rather flip dismissal in the subheading... "Opposition by business may not be the only barrier: Imagine the conference calls!"

Davis and Lukomnik argue that when making ballot choices, "funds and proxy services still dig little deeper than disclosures about director candidates in corporate documents. That’s no way to execute a hiring decision, which is what a vote for directors now resembles." They recommend one or more moderated conference calls in which directors would be available for investor questions. Boards could schedule separate calls for each director candidate. Or they could set a single call with the entire board, or just make key panel chairs available. At the same time, investors in each market could devise a common set of job interview queries for director candidates that relate directly to value rather than requirements of national regulators. For instance: What is your philosophy on the relationship between pay and performance? What is your general strategy and practice when you think management has gone astray? What skills or experiences do you bring to this particular board? In the US, the Council of Institutional Investors (CII) and the National Association of Corporate Directors (NACD) could perhaps collaborate to forge such a common questionnaire.

The FinancialWeek article raises the issue of Reg FD. "Fair disclosure laws could be violated if the interview is not done in an open forum." Yet, I'm not sure Reg FD applies to director "candidates." Those who are already directors and who make non-intentional disclosures of material nonpublic information can promptly make the information public.

I think it is a great idea. Until we can have actual contests with intelligent debate between opposing candidates, the Davis and Lukomnik proposal would at least give some additional information on which to base decisions on how to vote. Those subject to extensive "withhold " or "vote no" campaigns should welcome such an opportunity to explain themselves and whey they should be elected.

Shareholder Access Redux

The SEC, Corporate Governance, and Shareholder Access to the Board Room by J. Robert Brown Jr., examines the conflict in the context of the growing importance of independent directors. State law and the SEC have increasingly relied upon independent directors to protect shareholders and ensure the integrity of the financial disclosure process. Yet because of weak definitions and problems of enforcement, these directors are often not truly independent.

One method of addressing these concerns is to allow shareholders to nominate and elect their own candidates. They have the power to nominate under state law but the authority has largely been emasculated by the need to solicit proxies, an expensive and time consuming process.

The SEC has from time to time sought, always unsuccessfully, to amend the rules to allow shareholders some access to the company's proxy statement for their nominees, with the first effort taking place in 1942. The article contains a comprehensive analysis of these efforts, including the most recent iteration in 2007 when the Commission reaffirmed its traditional position that shareholders should not have access to the company's proxy statement for nominees.

The article takes the position that in an era of activist shareholders, pressure on the SEC to reform its rules will continue to grow. Moreover, continued denial of access will make things worse, leading to efforts by activist shareholders that are more intrusive and more likely to result in contests for the board of directors. The denial of access also leaves in place a serious gap in the disclosure regime for proxy contests. Finally, as the SEC becomes increasingly involved in the corporate governance process, a role it has not historically had to consider, the denial of access raises questions about the agency's willingness to protect the interests of shareholders.

TheRacetotheBottom.org is currently carrying a series of posts reviewing the issue of shareholder access. "We have seen from the Director Compensation Project run by students at the University of Denver Sturm College of Law that "independent" directors on public companies make healthy amounts, with at least one company paying directors in the vicinity of $700,000 a year.  We likewise have pointed out often that directors on boards have little chance of being defeated in election contests.  There are few elections contests and when they occur, insurgents usually do not win."

In Part 2 of that series, Brown notes that one of the earliest disclosure problems concerned the failure by management to disclose shareholder proposals that it knew would be made at an upcoming meeting. He explains that the SEC enacted a rule requiring them to do so and later amended that action to require shareholders to provide a description of the proposal for inclusion in the proxy. Part 3 will discuss the SEC's 1942 proxy access proposal.

Call for Papers: Critical Perspectives on Corporate Governance

6th International Critical Management Conference,13-15 July 2009, Warwick Business School, UK. Deadline for submission of abstracts: November 1st, 2008

Corporate governance is critical management studies, since it opens up to scrutiny and challenge, the largely invisible influence of investors, analysts, regulators and governments on senior management conduct and the conduct of the firm. We would particularly welcome theoretically informed papers that include qualitative empirical and process oriented studies of the operation of some element of corporate governance. We would also like to encourage papers that focus on the work of professional service organisations – accountants, lawyers, compensation consultants, investment bankers – in their role as key gatekeepers for corporate executives, as well as qualitative studies that focus on the work of analysts, fund managers, credit rating agencies, investment advisors and trustees as these mediate the relationship between corporate management and boards and their ultimate shareholder beneficiaries.

In relation to all these different contexts, a critical approach involves using empirical work both to more fully describe practice and to challenge the normative rationales that are offered for the work of these different groups. We would welcome papers that explore corporate governance practices in their own institutional, economic and political contexts, not just those focusing on Anglo-American corporate governance as the ideal .
 
Finally, at a theoretical or conceptual level we would welcome papers that question or challenge the economic conception of governance which typically combines assumptions about the property rights of owners and the self interested opportunism of agents to derive a theory of governance based on incentives, disclosure and monitoring.  Alternative ethical, political or post-modern explorations of the process of governance would be very welcome.
 
Please email abstracts to i.alamoudi@reading.ac.uk (maximum 1000 words, A4 paper, single spaced, 12 point font) before 1st November 2008.

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CorpGov Bits

SIF sent a letter to the UN Human Rights Council, calling on the United Nations Human Rights Council to extend the mandate of Professor John Ruggie, the Special Representative to the Secretary General on Business and Human Rights (SRSG) author of "Protect, Respect and Remedy: a Framework for Business and Human Rights."   This report is the culmination of three years of intensive research, consultation and analysis that provides a framework for building a consensus around private sector responsibilities for respecting human rights. A renewed mandate for the SRSG would further the efforts of investors to seek greater transparency and due diligence from companies, and help level the playing field by legitimizing and globalizing certain CSR principles.

“Poison pills” and other takeover defenses will once again dominate the agenda at Japan’s corporate meetings this year... Many of the most significant voting items for Japanese shareholders take the form of amendments to corporate articles. Some of the most notable amendments in 2008 will cover areas such as shareholder rights, takeover defenses, and board structure... A positive feature of the new Corporate Law is that the removal of a director, formerly categorized as a special resolution requiring a two-thirds vote, has been changed to an ordinary resolution requiring only a simple majority. (Proxy Season Preview: Japan, RMG, 6/3/08)

Jeffrey Schwarz and Karen Finerman of Metropolitan Capital Advisors describe some of their strategy in the 5/30/08 edition of Investor Insight, including their experience at Cyberonics where they ran a proxy campaign for three of eight board seats to get the company refocused on its epilepsy business. "Ultimately the CEO resigned, allowing the new board to recruit last year a new CEO from Boston Scientific, who has been terrific. The company reported its first cash-flow positive quarter in three years last quarter."

There's nothing like big losses to focus attention on corporate governance. On July 1, independent director Stephen Frank will become chairman of WaMu's board. The lender also said the board adopted a majority-voting standard and made several changes to the composition and leadership of some of its board committees. (WaMu's Killinger loses chairman role, still is CEO, MarketWatch.com, 6/2/08)

Barry B. Burr and Isabelle Clary, writing for Financial Week (FOCUS: Finance, The smart money, 6/2/08) report that the importance of academic research in money management is growing as investing becomes more complex. They go on to describe ten innovative ideas worth investigating.

The Economist reports on How to get to the top for CEOs. (5/29/08). Marketing used to be the CEO route but now its finance. Staying at the same firm for 22 years (24 in Europe) also affords the quicker route. In 2001 women accounted for 11% of bosses at leading American companies, up from none in the early 1980s. 37% of changes at the top in Europe were more or less firings, compared with only 27% in America and 12% in Japan. Maybe splitting the chair and CEO roles does make a difference.

Melyvn Weiss, who pioneered class action lawsuits on behalf of shareholders, was sentenced in federal court in Los Angeles to 30 months in prison. Weiss pleaded guilty earlier this year to a federal racketeering conspiracy, admitting that he entered into "secret payment arrangements" with individuals who served as lead plaintiffs in class actions. He was also ordered him to pay $10 million in fines and penalties, per his plea agreement. (Weiss Gets 30 Month Sentence, Wall Street Journal, 6/2/08)

RiskMetrics, which owns proxy advisor giant ISS Governance Services, has rejected ISS policy to separate the chairman and CEO roles, at least as applied to the parent company. The refusal of RiskMetrics directors to endorse naming an independent chairman within a yea