Archives: May 1997

Binding resolutions are a significant trend, according to Patrick McGurn, director of corporate programs at ISS in an article for Investor Business Relations. In January a federal judge ordered Fleming Companies to include a poison pill proposal, sponsored by the International Brotherhood of Teamsters on its ballot. If the ruling stands up in court it will set a huge precedent. The next target may be super majority requirements contained in company bylaws.

In negotiations with SWIB, Scios Inc. agreed to oppose nonbinding shareholder resolutions in return for a commitment to add two new independent directors to its board over the next year. Apparently Scios Chairman and CEO Richard Casey had indicated he would name former CalPERSexecutive Richard Koppes as chairman but then balked. Dissidents apparently believe SWIB’s deal – trading one board seat per million votes is a good one. Many would love to trade enough votes to change the compensation committee which they believe has made Casey rich and shareholders poorer. (seeISS)

FASB has published a proposed Technical Bulletin providing guidance on accounting for certain employee stock purchase plans under FASB statement 123, “Accounting for Stock-Based Compensation.” Comments are requested by 7/21. A free copy is available by calling FASB at (203) 847-0700, ext 555. (from Investor Relations Business)

The SEC’s Web site now contains over a billion pages of text and data.

The TIAA Securities Division of TIAA-CREF has established a new Emerging Markets Team and expects to be investing a minimum of $200 million to $300 million a year initially, and ultimately upwards of $750 million a year, in intermediate long-term purchases in emerging markets, including investments in structured finance and project finance deals in those markets.

The latest issue of Corporate Agenda carries an article about education in the boardroom. It seems that directors organizations, pension funds, shareholder activists, and universities think it’s important for directors to get a few days of training concerning their responsibilities and current corporate governance issues. “But companies themselves seem less than enthusiastic about the idea of educating their boards.” Their unscientific sample found that “none of the ten randomly chosen S&ampP 500 companies send their board members on director education courses.” Author Lucy Alexander concludes that for some, “director education will probably only begin to be taken seriously when things start to go wrong, by which time, it may be too late.”

Layoff leaders had average compensation increases of about 67% in 1996 in comparison with 54% for the typical CEO at the top 365 U.S. firms and 3% for workers, according to the report by the Institute for Policy Studies in Washington and United for a Fair Economy in Boston. A Business Week-Harris poll shows that half of top executives think executive pay is out of control. 71% said large companies reward good results but don’t penalize laggards.

Back to the topPublic pension funds are facing growing pressure to kick the tabacco habit. Proponents of divestment are gaining ground in Maine, Vermont, Massachusetts, Texas, Floridia and Oregon according to P&ampI.

The vast majority of U.S. corporations have used one or more ADR procedures in the last three years. 88% reported using mediation, 79% have used arbitration. Over 84% indicated they would use mediation in the future whereas 69% indicate they will use arbitration in the future. The survey was a joint initiative of Cornell University, The Foundation for the Prevention and Early Resolution of Conflict (PERC) and Price Waterhouse LLP. The findings were culled from over 530 corporations in the Fortune 1,000 category. The smallest respondent had sales of over $1 billion. Contact Christopher Colosi at [email protected].

NIRI announced its headline speakers for their annual conference to be held June 2-4 in Indian Wells, California. SeePRNEWSWIRE or the National Investor Relations Institute.

We have added links to Pensions Investment Research Consultants (the UK’s “leading source of independent advice on proxy voting”) and The Conference Board (“the world’s leading business membership and research organization”). You’ll find them on our Links page under Investor Communications/Relations Services and Public Interest Groups and Research Centers. We count on readers for identifying about 20% of all links and articles, so please let us know when you find something which may be of interest. Contact [email protected]

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Archives: April 1997

Average stockholder runs for board of BellSouth with backing of the Communications Workers of America. (seeAtlanta Business Chronicle)

The Boston-based Coalition for Environmentally Responsible Economies (CERES) in 1996 filed a record of 43 shareholder resolutions with U.S. companies, including five in Massachusetts. That’s up from 16 resolutions filed nationwide in 1995. But shareholders shouldn’t expect to see CERES resolutions on proxies. Instead, executives are going to the negotiating table. According to Mark Tulay, a spokesman for CERES, that’s exactly what the coalition wants. Of the 43 resolutions filed in 1996, all but 13 were withdrawn in favor of negotiations. The resolutions, filed by institutions which support CERES, ask companies to adopt the 10 CERES principles governing environmental business standards. This year the group expects additional progress. (see Boston Business Journal)

Pennsylvania’s Supreme Court ruled that shareholders who want to sue management or directors on behalf of a Pennsylvania corporation must first submit all claims to the board, which can then decide to pursue the claims or drop them. The board’s decision can’t be challenged unless plaintiffs show the directors failed to act in good faith. For more, seeWSJ 4/28/97, B3.

The National Association of Corporate Directors (NACD) will convene a panel of business and academic leaders beginning in 1997 to study governance issues affecting entrepreneurial public companies such as new regulations and laws designed to protect shareholders against fraud and illegal acts. The panel, which will be sponsored annually by Grant Thornton LLP, a major accounting and management consulting firm, will be called the NACD/Grant Thornton Best Practices Council. (see announcement)

Corporate Board Governance and Director Compensation in Canada, a survey conducted by Patrick O’Callaghan & Associates and The Caldwell Partners Amrop International covered 2,284 directors in 290 Canadian corporations. The average Canadian board has 11 people who have served eight, one-year terms. Average age is 59 years, they are male (93%), receive an annual retainer of $12,000 and are paid $900/meeting eight times a year. Nearly half have a stock component as part of their compensation, yet 15% don’t own any stock in the company.

The author’s believe the TSE guidelines are having an impact. Over 50% of boards have a corporate governance committee compared to 2% 2 years ago. More than 60% have a process for assessing board effectiveness, 41% for committee effectiveness and 45% for judging individual director performance. Almost 2/3 have separated the roles of CEO and Chair. For a copy, contact Patrick O’Callaghan, 604-685-5880 or Anne Fawcett, 416-920-7702. (Canadian Corporate NewsNet)

Back to the topEntrenched CEOs get higher pay and their companies have lower returns and weaker stock performance, according to a study by Wharton Professors John Core, Robert Holthausen and David Larker. Six characteristics were correlated with higher CEO Pay and weak performance: dual CEO/chairman; large boards, outside directors directly appointed by the CEO; outside directors who receive income from an association with the company; outside directors who sit on 3 or more other boards (six for retirees); and outside directors aged 70 or older. The study also found that better performance was linked to someone other that the CEO owning more than 5% of the stock. WSJ, 4/25/97, C2

Ira Millstein is termed “The Gruru of Good Governance” in aBusiness Week article focusing on his ability to prod companies into transforming their boards. The story provides a broad glimpse of this statesman of the field from selling hot dogs while working his way through Columbia University to GM to current efforts at Dow Jones & Co.

The April 28 issue of Time Magazine has gotten into the news glut on CEO pay. “The CEO-pay issue is beginning to feel like the start of a class war.” “One solution embraced by the likes of DuPont and BankAmerica is to grant CEO stock options that can be cashed only after the stock has risen a specified amount. That way a CEO doesn’t make a killing unless the stock really zooms. An even better answer is to devise stock options that are indexed to the market or some peer group. They would remain worthless unless the stock outperforms its competitors.” The second option is one endorsed by ISS in a recent editorial.

Theresa Welbourne and Alice Andrews have studied the initial public offerings (IPOs) of stock by 136 non-financial companies in 1986. Half of the firms had fewer than 110 employees at the time of the IPO, while a fifth had more than 700. They evaluated the company’s offering prospectus for evidence that the firm (1) placed a high value on its employees as a distinct asset, and (2) rewarded employees for organizational performance through such devices as profit sharing. The researchers find that the companies that value employees and use performance compensation at the time of the IPO are significantly more likely to survive for at least five years.

The researchers also interviewed the most senior executive who had been with each company since the IPO five years earlier. When they asked the executive to rate a set of factors that best explain the company’s performance since the IPO, the factor deemed most important is the quality of the top management team.

Implication: Build employee capacity and top leadership for growth and survival.

Source: Theresa M. Welbourne and Alice O. Andrews, “Predicting The Performance of Initial Public Offerings: Should Human Resource Management be in the Equation?” Academy of Management Journal 39 (August, 1996), 891-919.

The above is taken directly from the WHARTON LEADERSHIP DIGEST, April, 1997, Volume 1, Number 7. Michael Useem, Professor of Management, serves as editor, and suggestions for items or topics for inclusion in future digests can be sent to him at [email protected]. The same address can be used to subscribe to the digest. Back issues.

Back to the topA new publication from Deloitte & Touche LLP, “Questions at Stockholders’ Meetings 1997,” can help you prepare by anticipating critical issues of concern. Mergers and acquisitions could be high on the list this year. Copies of are available by calling Natalie Saviano at 203-761-3065.

CalPERS is using the Internet to seek out active domestic equity managers to manage more than $6 billion of the Fund’s assets. The RFP is online athttp://www.calpers.ca.gov/invest/rfp/index.html. Release of The RFP is the latest step in CalPERS approach to reorganize management of its domestic equity portfolio. Last month, the Board approved changes to the Fund’s domestic equity portfolio that included the development of an internal active management capability, and an increase in the active management portion of the portfolio up to 20%. Currently, 13% of domestic equities are managed actively by external fund managers.

From Directorship. CEOs of multi-billion dollar American companies were paid, on average $4.85M in 1996 up 11% form last year according to a survey by Pearl Meyer & Partners. In an unrelated story, Campbell Soup last year offered no gifts or refreshments at its annual meeting. Attendence was down from 1,500 to 200.

Back to the topA new report worth getting is “Twenty Best Practices To Improve Board Performance,” by Korn/Ferry in conjunction with the University of Southern California.

Some of the recommendations include: Tie the compensation of board members to changes in shareholder value. Formally evaluate the performance of the board and the individual board members every year. Provide independent board members the opportunity to meet without company executives present. Set board member compensation based on what directors of other comparable corporations receive. Make sure to have a sufficient number of independent directors. To obtain a copy, call Stephanie Rosenfelt at Korn/Ferry International at 212/984-9316.

An interesting story covered by ISS on excessive executive compensation (primarily in the form of options) points out that, to keep dilution under control, companies are repurchasing their own shares at a record rate (up 70% in 1996 from 1995). These outlays are eating into cash flow and profits. Dividend payouts are at an all time low. In the current downturn the pressure will be on to reprice “underwater” options. In addition, the broad adoption of increased equity shares for insiders may lead to insider control.

From P&ampI. Vermont may pull their pension funds out of tobacco stocks. The following joined CII: Compaq, Marriott, Morgan Guaranty Trust; Navistar; Indiana Public Employees Retirement Fund; Hartford City Municipal Employees Retirement Fund; Massachusetts Pension Reserves Investment Management Board; Milwaukee City Employees’ Retirement System; Montana State Board of Investments; Virginia Retirement System; CWA/ITU Negotiated Pension Plan, IAM National Pension Fund and United Association Local Union Officers and Employees Pension Fund. Two funds dropped out: Consolidated Freightways Inc. and Detroit City General Retirement System.

CEO pay jumped 20% last year while corporate profits grew 11% and workers’ wages rose just 3.3%, is now 212 times greater than the average worker’s pay, up from 44 times greater in 1965, according to the AFL-CIOExecutive Paywatch, will provide salary and other compensation information for the CEOs of Fortune 500 companies and allow workers to compare their pay with that of the boss. The site will also carry proxy information. It was getting 4,000 hits an hour the first day. For more on executive pay see San Jose Mercury News.

Back to the topCEOs will see more challlenges to their pay with 112 proxy resolutions, up from 63 in 1996, according to IRRC. The share of stockholders voting against new executive pay plans jumped to 19% last year, up from 3.5% in 1988. Lawrence Coss, of Green Tree Financial brought home $102.4 million last year. The average salary and bonus for a CEO rose a phenomenal 39%, to $2.3 million. Add in retirement benefits, incentive plans, and gains from stock options, and total compensation jumped 54% to $5,781,300. That largesse came on top of a 30% rise in total pay in 1995. CEOs earned 209 times that of factory employees, who garnered a 3% raise in 1996. White-collar workers eked out just 3.2%, though many now get options too. (Business Week related stories and tables).

CEO pay was up 5.2% in 1996 according to a William M. Mercer study for the Wall Street Journal. Stanford Weill ofTravelers Group took $93.9 million to head the list. Median total compensation rose from $2M in 1995 to $2.4M in 1996. More people are beginning to ask the question, how much is to much?

Bank of America’s Journal of Applied Corporate Finance focuses leading academic theorists on corporate governance systems in the U.S., Canada, Japan and Europe.

Mark J. Roe kicks off the special issue with his proposition that politics restricting the activities of financial intermediaries played a role in the evolution of U.S. corporate governance.

Frank Easterbrook argues that differences corporate governance reflect differences in the efficiency of capital markets. Unlike nations in Asia and most of Europe, the U.S. and the U.K. have large, efficient capital markets with no restrictions on cross-border capital flows.

Julian Franks and Colin Mayer characterize corporate governance systems in the U.K. and the U.S. as “outsider” systems with large numbers of widely held public corporations and well-developed takeover markets. By contrast, German and French corporations are governed by “insider” systems — where founding families, banks or other companies maintain controlling interests, and outside shareholders are not able to exert significant control.

F.H. Buckley suggests we look to our northern neighbor where most large firms are members of a keiretsu — an interlocking group of corporate clients, investment dealers, trust companies and professional advisors that is designed to “facilitate information-sharing and monitoring among group members.”

Jonathan R. Macey and Geoffrey P. Miller believe German and Japanese governance systems fail to produce well- developed capital markets along with active takeover markets. The problem with U.S. corporate governance stem from “regulatory restrictions and misguided legal policies” which make takeovers more difficult.

William S. Haraf argues that instead of eliminating remaining entry barriers, Congress should promote genuine financial integration with a much simpler and more streamlined system of regulation. Manuscripts for the Journal and letters to the editor are welcome. For more information about the Journal, contact Bank of America editors Stephen Scheetz, 312-974-1930, or Kelly Chambers, 312-828-7130.

Back to the topThe Corporate Board, The Journal of Corporate Governance, is hosting its 3rd Annual Corporate Board Symposium on September 14-16, 1997 at Lansdowne Conference Resort in Lansdowne, Virginia. CEOs and directors interested in attending the 3rd Annual Corporate Board Symposium may obtain more information and register for the conference by calling The Corporate Board at (800) 757-0667. For more information see conferences.

The April 14th edition of Business Week rates annual reports on the Internet.

The Washington Post reports that “in an unscientific sample of proxy statements of a dozen companies whose stock prices have declined, it appears that while some chief executives shared in the pain of their shareholders, just as many others did not.” Graef Crystal points out that one reason is that nearly all companies aim to pay their chief executive at least what the “average” CEO makes at comparable companies, if not more. But as every company moves to put its CEO at or above the average, the average is continually moved upward. “If you read these reports from the directors, when things are going well it’s always because of the brilliance of the CEO,” Crystal said. “But on the downside, it’s those damn politicians in Washington or it’s Wall Street or it’s the drop in oil prices; somehow it’s always someone else’s fault.”

The Wall Street Journal picked up on a study by Grundfest and Perino on the results of the Private Secutities Litigation Reform Act. We linked to their Securities Class Action Clearinghouse, about a month ago. According to the authors, “the level of class action securities fraud litigation has declined by about a third in federal courts, but that there has been an almost equal increase in the level of state court activity, largely as a result of a “substitution effect” whereby plaintiffs resort to state court to avoid the new, more stringent requirements of federal cases. There has also been an increase in parallel litigation between state and federal courts in an apparent effort to avoid the federal discovery stay or other provisions of the Act.” WSJ reports that Rep. Joseph Kennedy may carry a bill to stop the law from being so easily circumvented.

The Washington Post reports that “three prominent Washington insiders have the dubious distinction of topping the Teamsters pension fund’s second annual list of America’s ‘least valuable’ corporate directors. Former House Democratic whip Tony Coelho leads the lineup, followed by former secretary of defense Frank C. Carlucci and former secretary of state Lawrence Eagleburger. Directors get named to the list by serving on too many boards, collecting consulting or other fees from the company, poor attendance at board meetings and being on a board that overpays a chief executive even when the company is performing poorly.”

Back to the topMoney management is going global. P&ampI reports on a survey by Investment Counseling; “the 50 largest money managers handled 43% of the total invested assets in the US in 1996, compared with 50% in 1989.” In other news from P&ampI, “CalPERS and the New York City Employees’ Retirement System will support a shareholder proposal asking RJR Nabisco at its April 16 annual meeting to stop using the Joe Camel advertising campaign by 1998, unless research shows the ads do not promote underage smoking.” A Federal Reserve study found that funds with an average of $85 billion under management had average annual expense ratios of 0.7%. Small companies, with an average of about $33 million, had expense ratios of 2.8%. P&ampI also reports on a study byRandal S. Thomas, University of Iowa and Kenneth J. Martin, New Mexico State University, which found that labor-sponsored proxy proposals receive higher votes than those sponsored by private institutions and individuals. An editorial in the 3/31 edition advised pension funds not to prohibit tobacco-related investments. “Such a policy would lead to pension funds hiring nutritional consultants to add to the coterie of consultants they now employ to analyze investment decisions. Ultimately, investments would have to be subjected to moral or health scrutiny on almost every aspect of our lives…the system would go up in smoke.” The guest editorial points out that 159 individuals control $762 billion in public funds and applauds Michigans’s shift to defined contibution plans.

The Washington Post carried an interesting article on executive compensation. Use their searcher to locate Green Tree CEO Paid $102 Million Bonus.

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Archives: March 1997

A recent survey by KPMG and the Australian Institute of Company Directors showed fewer than one in six directors had a total understanding of corporate governance. Less than a third of the directors were implementing corporate governance initiatives, although another 21% said they already had initiatives in place. 58% said they would be looking at increasing shareholder value, while only 34% would be examining the fairness of remuneration of directors and upper management.

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The LA Times reports on sokaiya gangsters who threaten to disrupt shareholder meetings or threaten to expose corporate scandals. The Shareholder Ombudsman group, formed last year to increase corporate disclosure and accountability, now has its court calendar full of organized crime cases as they try to muscle the mob off the corporate payroll. Takashimaya execs pleaded guilty to paying $1.3M, Nomura may have paid $4000,000.

A survey by Grant Thornton LLP finds the boards of directors for many Minnesota midsize manufacturing companies do not meet frequently enough to be effectively involved in a number of critical areas.

In a mail survey of 125 Minnesota manufacturing companies, local board members report they are most involved in reviewing/approving corporate acquisitions (51%), monitoring their company’s financial status (34%) and reviewing strategic plans (33%). On the national level, board members are significantly more involved in monitoring their company’s financial status (56%), and in reviewing strategic plans (48%). The study reveals local boards are far less likely to be involved in reviewing/approving capital projects (19%) than are their national counterparts (42%).

More than a third (41%) of the Minnesota boards comprise five members or less while another 49% have between 6 and 10 members. Only 10% have more than 10 members. This compares to the national results which report nearly three-fourths (71%) of the company boards have five or fewer members, 24% have between 6 and 10 members and only 5% have more than 10 members.

More than half of Minnesota manufacturers (56%) compensate their boards with meeting fees compared to 32% nationally. Significantly more local manufacturers (40%) grant stock ownership to their board members than reported on the national level which is at only 22%. The number who pay an annual retainer fee (37%) is more than double the number (18%) indicated by the results of the national survey.

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CalPERS announced corporate governance principles for the United Kingdom and France building on six basic concepts that CalPERS has identified as fundamental to free and fair markets throughout the world. The six “global” principles include director accountability to shareholders, transparent markets, equitable treatment for all shareholders, easy and efficient voting methods, codes of best practices that clearly define the director-shareholder relationship, and long-term corporate vision which at its core emphasizes sustained shareholder value.

CalPERS principles are designed to complement the Cadbury Code and Greenbury Report in Britain, and the Vienot Report in France. In Britain this means regular elections of all directors, confidential voting, and improved access for shareholders to present resolutions through the company proxy. In France, CalPERS recommends an accountable and independent board and identifies ways to strengthen the director-shareholder relationship. The recommendations include a one-share, one-vote capital structure, an end to cross shareholding, the regular elections of all directors, and a greater disclosure of executive compensation.

Currently, CalPERS international equities comprise more than $20 billion of the System’s total investment portfolio. The System is expected to develop and consider governance principles for Germany and Japan by the end of the year.

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On March 19th Investor Relations Magazine announced the winners of its U.S. awards for excellence in the profession. The highlight was the presentation of the National Investor Relations Institute Grand Prix for Best Overall Investor Relations by a U.S. Company to General Electric, in the large-cap category, and to Morton International, in the smaller-cap category. Award winners and runners-up in 18 categories were determined by a survey of over 1,450 portfolio managers and buy and sell-side analysts. General Electric also won for best corporate governance.

TIAA-CREF is starting six no-load mutual funds.

Fortune carries an interesting article, CEO PAY: MOM WOULDN’T APPROVE by Thomas A. Stewart. He cites Pearl Meyer, an executive pay consultant in New York. The typical CEO pay package is now “21% salary, 27% short-term (annual) incentives,16% long-term incentives, and 36% stock-based pay (mostly options, which usually cannot be exercised for three years).” But he adds that “we’re still a long way from pay heaven. In the first place, the usual way to add risk to CEO pay has been simply to stack goodies on top of existing pay. Result: The CEO runs only the risk of making tons more money. Getting stock options, for example, is nothing like buying shares, since options have no downside.” Stewart’s main gripe, however, is that “shareholders don’t act like owners.” “hard numbers on the value of investor loyalty are hard to come by, but all the anecdotal evidence shows that superior long-term performance and a loyal shareholder base go hand in hand.”

CalPERS announced they will begin managing more of their domestic equity portfolio in-house. Currently, about 83% of that portfolio is passively managed. The move will bring the actively managed proportion up to about 20%. (see press release) A March 17th editorial in Pensions & Investments says the plan “deserves tough scrutiny and skepticism” and goes on to raise doubts concerning probable success.

We have added a link to the Securities Class Action Clearinghouse, under LinksLaw. I expect it will become an important site to any of you who are taking advantage of provisions of Private Securities Litigation Reform Act of 1995. We also want to point out an important new article “Does Coordinated Institutional Activism Work? An Analysis of the Activities of the Council of Institutional Investors.”

Institutional investors are calling for more information on individual directors, including their business track records and their specific contributions. They want boards to be evaluated by outside observers and they want boards to be more aggressive in weeding out underperforming members, according to the 1997 U.S. Survey of Institutional investors, released by Russell Reynolds Associates.

The survey, entitled “Setting New Standards for Corporate Governance,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, and is based on interviews with 231 portfolio managers and institutional shareholders. 62% of investors opposed limits on CEO compensation. In the past year alone, 77% of the investors surveyed have communicated their opinions directly to a board either verbally or by letter, sought more direct involvement in board oversight, sponsored a shareholder resolution or voted in favor of one. CONTACT: Russell Reynolds Associates, Sally Laroche, 212/351-2000 Fax: 212/286-8518.

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The LENS site recently posted an excerpted version of“Putting a Value on Corporate Governance” which appeared in The McKinsey Quarterly. In a survey of investors and CEOs, the authors found that investors would pay more for good corporate governance. Those more likely to do so were investors with low turnover in their portfolio, “value” investors, and those with high net worth.

February’s Corporate Secretary carried an article by Olena Berg, of the PWBA. She discusses the findings of PWBA’s third proxy practices project, pointing out that a significant number of plans did not routinely monitor their managers’ voting to ensure that proxies were voted in accordance with the plans’ stated policies…many did not even provide investment managers with voting guidelines. In addition, few of the plans surveyed engaged in any form of corporate governance activism.

Berg cites a study by the Competitiveness Policy Council saying that institutions should acquire larger stakes in fewer companies. This would encourage them to act as long-term owners. Since corporate managers complain of pressures for short-term results from impatient investors, such a shift would meet their needs as well. However, the Council also recommended that PWBA allay unfounded fiduciary concerns with respect to prudent investing by clarifying that ERISA’s diversification standard does not require investment in hundreds or thousands of stocks. Although Berg’s remarks implied agreement, we still haven’t seen formal clarification through administrative guidance. In addition, although she is obviously concerned, Berg’s agency has never taken action against a plan sponsor for failure to monitor the voting decisions of outside managers tainted by conflict of interest. Perhaps she will have more to say about these issues when she addresses the Society of Corporate Secretaries at their conference this July in Boston.

The WSJ featured an article about the growing trend by mutual fund managers to have a substantial investment in the funds they run. Among those so mentioned were Neuberger & Berman; Tweedy, Browne Co.; Franklin Resources (Michael Price); Baron Asset Fund; Delafield Fund; Yacktman Fund; Davis Selected Advisers (Davis New York Venture); Friess Associates (the two Brandwine funds); Southeastern Asset Management (the three Longleaf Partners funds); Harris Associates (the Oakmark funds) and the Crabbe Huson Special Fund.

CalPERS continues to shake Apple. According to CalPERStwo of Apple’s directors sit on four or more boards. They question if Apple’s directors have the time and dedication to turn around Apple when they sit on other boards and are also concerned that three board members don’t even own stock.

Apple’s 1996 compensation plan was to provide senior executives bonuses correlated with performance. However, when losses continued to drain the company, Apple changed the plan so that senior managers would get a bonus if Apple reported a profit in the fourth quarter. They did it by taking a one-time gain from inventory adjustments. In the tree quarters that didn’t count last year (for executive pay) Apple lost $841 million. Shareholder’s might well wonder if Gilbert Amelio really earned his bonus of $2,334,000.

TIAA-CREF increases its investments in Project Finance, according to PRNewswire. Their portfolio of loans for large capital projects is now crossing the billion dollar mark.

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Archives: February 1997

The increasing value of “human capital” is acknowledged inFortune magazine article by Thomas Stewart.

The Conference Board released the first issue of their Institutional Investment Report. At the end of the second quarter of 1996, U.S. institutions held more than $11.1 trillion in total assets, up from $10.5 trillion at the end of 1995 and $6.3 trillion in 1990. In the past five-and-a-half years, institutional assets have increased by slightly more than 75 percent, rising 15.1 percent from 1994 to 1995 alone, and another 6.2 percent during the first six months of 1996.

“These data are important because they indicate changes in the balance of power between corporate managements and institutional shareholders,” says Dr. Carolyn Kay Brancato, the report’s principal author and director of the Board’s Global Corporate Governance Research Center. Pension funds continue to control the largest block of U.S. institutional assets, although their share of total assets has been giving way to open-ended mutual funds. Open-end mutual funds have enjoyed staggering growth during the past few years, rising 14% during the first six months of 1996 alone. Investment companies increased their share of total U.S. equity markets from 6.4% in 1990 to 11.7% in 1996. Continue Reading →

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Archives: January 1997

Investor Relations Business [email protected]reports that representatives of the Council of Institutional Investors,American Society of Corporate Secretaries, National Association of Individual Investors and the Interfaith Center on Corporate Responsibility have “tentatively agreed to tentatively agree” to proxy reforms outline by Commissioner Steve Wallman of the SEC in a speech before CII last October. Proposals from those holding 3% or more of company’s outstanding stock would be automatically included in a company’s proxy along with mainstays such as proposals for staggered boards, director compensation and takeover policies. The “Cracker Barrel” decision eliminating all employment-related proxy proposals under the ordinary business exclusion would be overturned. A draft is currently being hashed out by attorneys.

In other news from IRB, the number of companies with Internet sites has increased from 35% in 1995 to 80% in 1996 with only 1% not planning a site according to a recent survey by Straightline International (compare with last year’s findings). 57% of money managers surveyed use the Internet for company research. Continue Reading →

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Archives: December 1996

Spencer Stuart survey of Midwestern companies confirms trend towards alignment of corporate boards and shareholders.

The annual study of board practices at 95 leading Midwestern companies with sales of $500 million or more found the number offering retirement plans to board members fell from 54% in 1995 to 34% due to mounting pressure from shareholder activist groups to eliminate benefits that may compromise director independence.

Compensation is increasingly in stock. Stock options were offered at 38%, 35% offered stock grants, and 21% offered directors the option to receive their annual retainer in cash, stock or a combination of the two. Baxter International, Brunswick Corporation, Chrysler Corporation, McDonnell Douglas, Sears, and the Tribune Company provide 100% director compensation in stock. Last year 13% of companies surveyed required directors to hold stock; this year its 21%. Continue Reading →

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Archives: 1995 – November 1996

Nasdaq will seek public and industry comment on a series of changes to its asdaq will seek public and industry comment on a series of changes to its listing qualification standards. Among the governance standards are: a minimum of two independent directors; an audit committee with a majority of independent directors; an annual shareholders meeting; and shareholder approval for large, below-market issuances. The comment period runs through Dec. 20, 1996.

A survey of 203 company officers responsible for relationswith investor asked which factors have greatest impact on their company’s stockprice. Topping the list: the quality of senior management. (See National Investor Relations Institute.) We learned of the survey through the “Wharton Leadership Digest.” If you would like to receive it via e-mail, send a message to [email protected] . In the subjectline, enter the word subscribe. Continue Reading →

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Review – Investor Capitalism: How Money Managers Are Rewriting The Rules Of Corporate America

Investor Capitalism: How Money Managers Are Changing the Face of Corporate America. Managerial capitalism ascended during the century’s middle decades. “The decisions they made often affected the lives of thousands of people, yet they were seemingly accountable to no one.” The large holdings of institutional investors and the growth of indexing as a major investment strategy have  prevented the ready selling of underperforming companies; investors are now more likely to “speak out than to cash out.” Whereas managerial capitalism tolerated a host of company objectives, Useem argues that under investor capitalism enhancing shareholder value has become paramount. Continue Reading →

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Ending the Wall Street Walk: Why Corporate Governance Now?

Wall Street BullWhat would you do if the company in which you’ve invested your hard earned dollars throws it away on fat retirement benefits to outside members of its board of directors? One individual investor, Richard Ayers, conducted a proxy battle this year with Nevada Power Company over the issue. Although he won more than 30% of the vote, individual investors and “ethical” funds face a Sisyphisian task in bringing change to today’s corporations.

The reality is that if you don’t like the way the management handles your business, you have traditionally had two choices: hold your nose or sell out. The message is usually the same whether it is being dispensed by Barron’s, Merrill Lynch or the manager of a so-called “socially responsible” investment fund. It’s called the “Wall Street Walk.”

But dumping stocks is an easy short term solution that only compounds the short term investment horizon that plagues Wall Street. In many cases, this conventional wisdom may not only be wrong for the investor, the cumulative effect of such acts may also profoundly impact the quality of our products and environment, the treatment of employees, our balance of payments, and the well being of society-at-large. The real issue is often not last quarter’s balance sheet but the strategic direction of a company and the integrity of its management.

Corporate Governance

Corporate governance, the nuts-and-bolts of how a public company fulfills its responsibilities to investors and other stakeholders, is oddly frequently overlooked in debates over corporate social responsibility. Despite its still relatively low profile, it’s where much of the real action is going on when it comes to positively changing corporate behavior.

In 1932, Lewis Gilbert owned 10 shares in New York’s Consolidated Gas Company and found that his questions were ignored at the annual meeting. Lewis and his brother pushed for reform. Finally, in 1942, the Securities and Exchange Commission adopted a requirement that companies put shareholder resolutions to a vote under specified circumstances. In 1967 organizer Saul Alinsky, a Rochester based community organization, and several national churches turned to shareholder activism to target Kodak’s poor record of minority hiring.

More recently, the social investment community has focused on high profile, public campaigns aimed at divestment of corporations involved in perceived social injustices such as involvement in apartheid South Africa, Dow Chemical, GM, or companies that operate in Burma. Although such shareholder actions have certainly had an impact, most won only a small fraction of votes. Progress has been made largely because targeted corporations wanted to minimize adverse publicity.

Corporate governance actions spearheaded by huge, multi-billion dollar pension funds such as CalPERS, the California Public Employees’ Retirement System, and other large funds, changes the balance when such social concerns are seen as affecting share value. Their entry provides the foundation for the beginnings of a much larger degree of meaningful self regulation of businesses by owners.

Robber Baron Accountability

At the turn of the century, corporations were dominated by “captains of industry.” Carnegie, du Pont, Mellon, Morgan, Rockefeller, and others owned large blocks of stock and exercised direct control over their investments. “Agency costs” were not much of a problem because ownership and control were embodied in the same individuals. Corporations were accountable to their owners.

By 1932, however, Adolph Berle and Gardiner Means documented a significant shift in their book The Modern Corporation and Private Property. Ownership had become so dispersed that control had shifted from owners to managers. Owners essentially traded their ability to monitor management for increased diversification and liquidity. Being an active shareholder no longer paid because, despite potential gains to shareholders as a group, it was no longer rational for any one shareholder to act. Why shoulder the entire expense of corporate activism for only a small portion of the gains while other shareholders get a “free ride?”

Mark Roe, a professor of law at Columbia University, recently reexamined the historical evidence and concludes that our corporate system based on strong managers and weak owners is not the inevitable result of large scale production as Berle and Means assumed. Instead, it is the unintended consequence of political decisions which reflect the public’s dislike of concentrated financial power. The framework of corporate democracy, much of which developed in reaction to the stock market crash of 1929, restored public confidence by subordinating finance to commerce and providing legitimacy for the otherwise uncontrollable growth of power in the hands of a few private individuals.

The New Deal’s Glass-Steagall Act separated investment and commercial banking. Similar laws limited control of stock by insurance companies and mutual funds. Together, they insured that financial institutions could not easily control industry, but they also restricted collective action. Although these reforms may have saved us from the real evils of concentrated wealth and power in the finance sector, they had the unintended result of ensuring that management of America’s corporations would soon be accountable to no one. The framework of corporate governance set up in the aftermath of the 1929 crash has the appearance of being democratic (one share, one vote) but lacks basic mechanisms to carry out more than an illusion.

Since the 1930s, corporate governance consisted primarily of attorneys engaged in theoretical debates about reducing “agency costs” – essentially inefficiencies which arise when the “principles” (stockholders) hire an “agent” (chief executive officer, CEO) whose interests differ from their own. Stockholders want their shares to increase in value and pay higher dividends; the CEO wants status, a high salary, bonuses and perks. The Holy Grail for those in the field of corporate governance has been to develop a variety of rewards and punishments to better align the CEO’s interests with those of the shareholders. Instead of actively participating in corporate governance issues, shareholders became passive. With few options left to them, dissatisfied owners were told by the system to love it or leave. That strategy became known as the “Wall Street Walk” or the “Wall Street Rule.”

The Politics of Corporate Governing

This rather dry history has been overtaken by a series of high-profile, hot button debates swirling around the role of the corporation in society. Issues of corporate governance — junk bonds, corporate takeovers, downsizing, executive pay, the rise of pension funds– are discussed daily in the press. So what has changed and how can it lead to more effective and responsible, corporate leadership?

In the 1960s, empire building by CEOs led to a kind of merger madness, as conglomerates gobbled up unrelated companies. When many of these conglomerates lagged in price in the 1970s, it heightened the realization that CEOs needed oversight. Accountability, of a sort, came in the 1980s when corporate raiders using “junk bonds” took many companies private, disassembled them and sold them back to the public in parts. The results to employees and communities were often devastating in the form of plant shutdowns and lost jobs. While workers and communities struggled with massive layoffs, CEOs invented golden parachute severance packages and designed poison pills which made takeovers less attractive through stock dilution mechanisms which hit new shareholders.

By the late 1980s, a backlash set in. The “junk bond” market imploded, and an irate public and corporate boards began to demand a more active role in corporate governance. They recognized that their intervention could soften the impact of corporate restructuring on workers, communities, operations, and profits.

These developments led to the modern field of corporate governance which examines the legal, cultural and institutional arrangements that determine the direction and performance of corporations. Practitioners include: (1) the shareholders, who usually hold one vote per share of common stock owned, (2) the board members, whom shareholders elect, and (3) the management of the firm, which is usually headed by a CEO appointed by the board. Other participants include advisors, creditors, employees, customers, suppliers, government and its citizens. Each party can influence the firm’s direction.

Pension Fund Power

Between 1955 and 1980, the institutional investor share of outstanding stock rose from 23% to 33%. In 1990, it had risen to 53% and now stands at more than 60%. Pension funds, as a subset, experienced even more rapid relative growth. Their share of the market rose from 0.8% in 1950 to 9.4% (1970), to 18.5% (1980), to 28% (1990) and stands above 30% today. This shift has set the stage for the rise of a subtler form of corporate governance which has yet to be fully realized. Instead of waiting for corporate raiders to impose dramatic changes through hostile takeovers, pension funds have the opportunity to become long term “relational” investors, working with boards and CEOs to make needed adjustments earlier and less painfully. Corporate governance would then move from revolutions and palace coups to the smoother transitions characteristic of democratic governments.

While legal impediments largely preclude mutual funds, insurance companies, and banks from holding large blocks of stocks, fewer such prohibitions apply to pension funds. Most pension funds are free to hold blocks of stock large enough to make monitoring of management feasible, from a cost-benefit standpoint. In addition, the Department of Labor, which governs most pension funds under the Employment Retirement Securities Act (ERISA), has clarified that voting rights are plan assets. It is, therefore, the duty of pension fiduciaries (trustees) to ensure such assets are voted solely in the interest of plan participants and beneficiaries. Unlike individual investors who can just throw their proxies away, pension funds are legally required to follow the issues of corporate politics and to vote.

Ideally, pension funds, who have predictable payouts, should be taking a long term investment time horizon and should be urging the firms they invest in the to do the same. The growth of pension funds dramatically increases the capacity of the financial community to identify and redress agency costs, since they bring the possibility of sophisticated monitoring by professional analysts. Unlike other institutional investors, pension funds have nothing to sell their portfolio companies and no intrinsic interest in acquiring operating control.

CalPERS: Leading the Pack

The California Public Employees’ Retirement System involvement with corporate governance issues can be traced back to a morning in 1984. Jesse Unruh, then treasurer of California and a CalPERS board member, read that Texaco had repurchased almost 10% of its own stock from the Bass brothers at a $137 million premium. Essentially, Texaco’s management paid “greenmail” to avoid loss of their jobs in a takeover. CalPERS was also a large shareholder but, of course, was not given the same option of selling its stock back to the company at a premium. Unruh quickly organized a powerful shareholder’s rights movement with the creation of the Council of Institutional Investors (CII — composed mostly of pension funds) to fight for equal and fair treatment of shareholders, shareholder approval of certain corporate decisions, and needed regulatory reforms.

CalPERS has $100 billion in assets, serves 1 million members and is administered by a 13 member board. Six are elected by various membership groups; the others are either appointed by elected officials or serve by virtue of their elected office. In contrast to the short time frame of most institutional investors, CalPERS takes along-term perspective. Their average holding period ranges from 6 to 10 years.

CalPERS equity strategy consists of making long-term investments so it can be in a position to influence corporate governance. Many pension fund managers, subject to the “star” system on Wall Street, actively manage their funds with hopes of beating the market. But recent studies have shown that active management is not cost effective. After factoring in fees and turnover expenses, “indexing” – owning a representative share of a particular market – is the best strategy for most pension funds (as well as for most individuals through low-cost index funds such as those offered by Vanguard).

CalPERS targets poor corporate performers in its portfolio and pushes for reforms. These range from firm specific advise, such as arguing a few years ago that Sears and Westinghouse should divest poorly performing divisions and redefine their strategic core businesses, to more general advice. For example, CalPERS believes most firms need to expand employee training and shared managerial authority with lower level employees. Although CalPERS must often bear the full cost of monitoring, and other shareholders get a “free ride,” the sheer size of its investments makes such monitoring worthwhile.

A 1995 study by Steven Nesbitt, Senior Vice President of the consulting firm of Wilshire Associates which was under contract with CalPERS, examined the performance of 42 companies targeted by CalPERS. It found the stock price of these companies trailed the S&P 500 Index by 66% in the five year period before CalPERS acted to achieve reforms. The same firms outperformed the Index by 52.5% in the following five years. A similar independent study by Michael P. Smith (with Economic Analysis Corporation, Los Angeles) concludes that corporate governance activism has increased the value of CalPERS’ holdings in 34 firms over the 1987-93 period by $19 million at a monitoring cost of $3.5 million.

Unfulfilled Promise

CalPERS’ investment strategy is hardly typical. Most institutional stock owners are adopting shorter and shorter time horizons, evaluating companies on a 1-3 year time frame, rather than the longer term outlook of CalPERS. The average holding period has declined from more than 7 years in 1960 to about 2 years today. The result has been an increase in transaction costs. In 1987, for example, $25 billion was spent on stock trading in the U.S. That is an amount equal to one-sixth of corporate profits or 40% of dividends that year. Money managers have shifted the emphasis of capital from long-term investments to making a quick buck.

Although CalPERS has been active in corporate governance, most pension funds are not. While some progress is being made, the Department of Labor reports that only 35% of plans which delegated voting authority could provide evidence that they performed substantive monitoring of how their investment managers carried out proxy voting. But its no wonder plans don’t monitor; the Department has never taken an enforcement action against a fund for their failure to properly monitor voting decisions.

Most pension funds exist in a culture of “blame avoidance” built around the legal concept of “prudence.” Although portfolio theorists generally agree that 99% of the risk management value of diversification can be achieved with a portfolio of only 100 stocks, pension plans continue to over diversify. While the aggregate holdings of institutional investors now stand at more than 60%, the holdings of individual institutional investors in individual companies rarely exceeds 2% and tends to be in the 0.1% to 1% range. Since the holdings of most pension funds are not nearly as large as those of CalPERS, they would derive similar benefits from active corporate governance only if they consolidated their holdings into larger blocks to make monitoring cost effective.

If more pension funds would follow CalPERS’ lead, accountability might finally make its way into the boardroom. That would be a healthy development for investors, companies, employees and the environment. For example, it is widely accepted that employees in “knowledge” industries, such as computer software, hold the key to additional wealth generating capacity in their training, skills and information networks. Margaret Blair, a Senior Fellow at Brookings Institution,points to evidence that this is true not only in Silicon Valley but for most industries in the United States. Blair calculates that tangibles, such as property, plant and equipment, accounted for 62% of the total value of mining and manufacturing firms in 1982 but only for 38% in 1991. The value of intellectual property has risen dramatically as workers have become more educated.

More democratic and flexible workplaces make fuller use of employee capacities and yield tangible economic benefits. Yet managers faced with a potential loss of status and power have been slow to change. A 1986 study by the National Center for Employee Ownership found firms with significant employee ownership and participation in decision making grew 8 to 11% faster than their counterparts. A year later the General Accounting Office found that such firms experienced a 52% higher annual productivity growth rate. Findings, such as these, led CalPERS to advocate employee training and shared managerial authority. Similar findings linking “social responsibility” to the bottom line have led TIAA-CREF (a cooperative pension fund for educators) to push for more women and minorities on boards.

Corporations have a profound effect on the quality of our environment and our lives. If they were governed and operated more democratically the influence they have on other social institutions such as government, education and even the family could be expected to change in a positive direction.

Ending Corporate Demockery

What measures can be taken to bring about more genuine democratic corporate governance? Perhaps the most important are in the area of corporate elections. Corporate board elections are about as democratic as old-style communist regimes: they talk the talk but don’t walk the walk. A 1991 study found that over 80% of board candidates were filled by CEO recommendations. Until 1992, when the SEC revised its proxy rules under pressure from CalPERS, CII, and others, shareholders could not even communicate with each other without going through elaborate and expensive filing procedures. Serious obstacles to communication remain. Filing is still required whenever a voting group owning 5% or more, in total, agree to vote together. In addition, most votes are only advisory and access to shareholder lists is limited.

Management controls the proxy machinery. Since proxies are normally voted well in advance of the annual meeting, they can find out how shareholders vote. Many money managers, who act as investment and voting agents for fiduciaries, have business relations with the management of firms holding elections. They are not required by law to maintain written records of how they voted on behalf of their clients, so they are likely to change their vote, if requested by management. In addition, unvoted proxies are often counted in favor of management.

To realize the potential of more democratic corporate governance we need to encourage monitoring and active participation in corporate governance by investors, especially pension funds. Among the many reforms needed, Congress and/or the Securities and Exchange Commission could:

  • Institute proxy reform measures, especially for confidentiality in collection, independence in tabulation and uniform treatment of votes and abstentions.
  • Change the definition of a “voting group” so that shareholders who are not seeking to control a corporation can freely communicate with each other.
  • Allow groups of investors holding at least 10% of outstanding shares access to proxy statements to nominate at least one independent director and to present other non-control related proposals to shareholders.
  • Require investment companies, banks and insurance companies to meet the same fiduciary standards for the voting of proxies as pension funds under ERISA.

Congress and/or the Department of Labor could:

  • Require ERISA trustees to keep records to demonstrate they have acted for the exclusive benefit of plan participants in their voting and governance actions.
  • Ensure pension funds are voted solely in the interest of plan participants and beneficiaries through enforcement efforts.
  • Clarify, through administrative guidance, that diversification standards under ERISA do not require investment in hundreds or thousands of stocks; prudence is to be evaluated on a portfolio-wide, rather than individual investment, basis.
  • Require trustees of employee stock ownership plans to vote unallocated shares in the same proportion as employees vote.

Further Reading

Blair, Margaret M., Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, The Brookings Institution, 1995.

Denham, Robert and Michael Porter, “Lifting All Boats: Increasing the Payoff From Private Investment in the US Economy,” Report of the Capital Allocation Subcouncil to the Competitiveness Policy Council, Washington, DC, 1995.

Hawley, James P. and Andrew T. Williams, “Corporate Governance in the United States: The Rise of Fiduciary Capitalism a Review of the Literature,” Saint Mary’s College of California, Moraga, 1/31/96.

Monks, Robert A.G. and Nell Minow, Watching the Watchers; Corporate Governance for the 21st Century, Blackwell Publishers Inc., Cambridge, MA, 1996.

Roe, Mark J., Strong Managers, Weak Owners: The Political Roots of American Corporate Finance, Princeton University Press, Princeton, NJ, 1994.

U.S. Department of Labor, Pension Welfare Benefits Administration, “Proxy
Project Report,” Washington, DC, 2/23/96.

Organizations of Interest

Council of Institutional Investors
1730 Road Island Avenue, NW #512, Washington, DC 20036
Telephone: (202) 822-0800.

National Center for Employee Ownership
1201 Martin Luther King Jr. Way Oakland, CA 94612-1217
Telephone: (510) 272-9461

National Council of Individual Investors
803 East Street Frederick, MD 21701
Telephone: (800) 663-8516

Thanks, to Jon Entine for several suggestions to the above article. For an example of Jon’s work see, The Messy Reality of Socially Responsible Business. An edited version of “Ending The Wall Street Walk: Why Corporate Governance Now?” appeared in the September/October 1996 edition of At Work [email protected], by Berrett-Koehler Publishers. The issue also carried several articles on ethical investing and corporate accountability/responsibility. For more current news and commentary, see corpgov.net/news.

 

Contact: [email protected]

All material on the Corporate Governance site is copyright ©1995-1997 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.

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Fiduciary Responsibilities for Proxy Voting

PWBAO’Barr, Conley and Brancato trace the common thread in the culture of pension funds in their book, Fortune and Folly: The Wealth and Power of Institutional Investing, to “an overriding concern with managing personal relationships” and an all pervasive “need to manage responsibility and blame.” Involvement by fund trustees in corporate governance issues is not yet the norm. Perhaps many fiduciaries are caught in a culture which makes it difficult to do anything but follow the herd. Continue Reading →

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