CalPERS muzzles critics


CalPERS Ballot rules protect board, keep others in the dark

“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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Archives: April 1999

CalPERS approved a $200 million investment in theHermes UK Focus Fund which will acquire large stakes in a small number of undervalued publicly traded companies in the UK, using its influence as a large and active investor to affect financial and operational restructuring to increase value for all shareowners. (see CalPERS press releases)

UK survey shows institutions ignored the Government’s calls to improve their voting record. If anything, there appears to have been a slight decline at small companies. (Governance[email protected], 3-4/99, reported by Sarah Wilson[email protected]) Continue Reading →

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Archives: March 1999

ISS backs TIAA-CREF’s shareholder proposal to strike down Lubrizol Corp.’s (LZ) dead-hand poison pill. (Dow Jones newswires)

Ed Durkin, director of special programs for the United Brotherhood of Carpenters and Joiners of America, says labor might sponsor proposals to link executive pay to worker safety, job creation and the number of employees with health benefits. He also expects labor to vie for board seats. (Labor groups push change at local firms, Cincinnati Business Courier) Durkin has been a long time activist and played acritical role in the fight at ADM. Isn’t it about time the Carpenters got an internet site? Durkin sure helped me when he gave me a copy of IRRC’s excellent 1987 publication, “Conflicts of Interest in the Proxy Voting System.” I’m sure union members would like to learn more about Ed’s activities. Continue Reading →

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Archives: February 1999

Jerry Adams is sure to stir controversy with his recent statement: “I personally do not think that the corporate governance movement and particularly the PERS program has had any positive impact on the retirement benefits of active and retired members of California retirement systems.”

Mr. Adams recently retired from the California Legislative Counsel’s Office and was chief counsel at CalPERS when they took up the corporate governance banner. Adams was the first CalPERS representative to publicly address corporate governance and its relationship to the interests of public retirement systems. In May 1984 he delivered a statement at the annual meeting of the Texaco Corporation in Dallas, Texas. Later, Adams prepared the bylaws for the Council of Institutional Investors. In an interview which appears in the January edition of The Public Retirement Journal, Adams expressed his opinion that:

A decade of record investment returns and low inflation has resulted in dramatically reduced employer contribution rates in most retirement systems, including PERS?but I have not seen or heard of comparable improvements in the retirement benefits of active or retired members of California public retirement systems during that period?I’m particularly dissatisfied with the PERS program. In my opinion, the PERS Board’s micro management of the investment program and its emphasis on corporate governance issues diverted Board, staff, public and even legislative attention, from the basic needs of the PERS membership. (For a copy of the article, call 916-455-7322 or 916-456-5282) Continue Reading →

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Archives: January 1999

Mark Latham, author of the “The Corporate Monitoring Firm” in Corporate Governance An International Review (UK, January 1999), and founder of the Corporate Monitoring Project; has developed a newsletter and is working toward shareholder resolutions to be introduced in the year 2000. His articles on this innovative system were published in five countries and four languages last year. Robert Monks has written that Latham’s system proposes a “solution to two core problems – free riding and genuinely independent nomination of directors – that are rarely addressed effectively.” Planning a conference of institutional investors? Inviting Mr. Latham to speak would be a sure way to create a little excitement. To subscribe to the Project’s free newsletter MailTo:[email protected]

The Supreme Court rejected a bid from Hughes Aircraft employees who contributed to the plan to share in the firm’s $1.2-billion pension fund surplus. The employees argued that money diverted to the underfunded pension plan of General Motors was Continue Reading →

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Archives: December 1998

OECD Corporate Governance Guidelines have been released in draft. They will not give detailed prescriptions for national legislation but rather delineate basic principles to serve as reference points for efforts to evaluate and improve each country’s regulatory framework. The guidelines cover five broad headings:

  • the rights and responsibilities of shareholders;
  • the role of stakeholders in corporate governance;
  • the equitable treatment of shareholders;
  • disclosure and transparency and
  • the duties and responsibilities of boards.

While primarily aimed at governments, the guidelines will also provide guidance for stock exchanges, investors, private corporations and national commissions on corporate governance as they elaborate best practices, listing requirements and codes of Continue Reading →

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Archives: November 1998

Barbara Hackman Franklin reviews 3 proactive processes to help audit committees prevent problems. Identify areas of potential risk with key players, hold regular executive sessions at each meeting with each of the key players separately, and report to the full board each meeting. (see Tone at the Top, 9/98)

NACD’s “Report of the Blue Ribbon Commission on CEO Succession” was released last July and is reviewed by John F. Olson (senior partner at Gibson, Dunn & Crutcher LLP) in the Corporate Governance Advisor (11-12/98). The Commission arrived at 5 Continue Reading →

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Archives: October 1998

G7 leaders to urge greater co-ordination in cross-border regulation of capital flows and to recommend a new code of conduct for open economies on financial disclosures and corporate governance, according to the the Financial Times. “It is likely to include support for a code of conduct for all open economies, requiring rules for disclosure of financial information and statistics on fiscal and monetary policy, with an agreed approach to corporate governance.” (10/30, Reuters)

John C. Bogle assailed the mutual fund industry at the Investor Responsibility Research Center’s annual conference for its failure to act on corporate governance issues and for failing to ensure that funds are managed in the interest of the shareholder. He noted the short term outlook of funds may change as more turn to indexing, which now represent 17% of institutional investments, since, in effect, they will be holding stocks forever. “It is hard to imagine that the trend toward indexing will not mean that all institutions — including mutual funds — will become far more assiduous, not only in their voting policies and in making proxy proposals where necessary, but in expressing their informed opinions to corporate directors and managers.” (CBS Marketwatch, 10/27)(Reuters) Continue Reading →

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Archives: September 1998

IRRC released a new report, Executive Pay 1997, which shows that every element of CEO pay is on the rise, especially rewards due to optoin grants. The report provides a comprehensive study of compensation paid to the chief executives of S&P Super 1,500 companies as reported in 1997Executive pay is sure to be one of the hotly debated topics presented at IRRC’s Investor Responsibility and Shareholder Value conference, October 25-27 at the Renaissance Mayflower Hotel in Washington, DC. Contact Charine Adams at 202-833-0700.

Japanese firms considering U.S. style accountability to shareholders. Foreign investors now hold up to 40% of companies such as Sony and Orix. Pressure is growing for Japanese firms to increase public information. Proposals to improve corporate governance Continue Reading →

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Archives: August 1998

Patrick S. McGurn, with ISS, continues his excellent coverage of the options issue in the 8/21 edition of the ISS Friday Report. He points out that the proposed treatment of option repricings (see FASB below) is consistent with a 1972 accounting rule (APB Opinion 25) that distinguished between “fixed” option plans and “variable” plans. While fixed option plans were not considered a business expense, variable plans were…repricing makes it a variable plan. If all goes according to plan, they might have the new policy in place around January 2000. We expect to see a lot of pressure on FASB to back off and hope our readers will help them hold firm.

Writing about the Board’s 1993 proposal that options be charged to earnings as an expense Edmund Jenkins, Chairman of the Financial Accounting Standards Board, notes “the Board was wrong to back away from what some are belatedly recognizing was a Continue Reading →

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Archives: July 1998

Pensions&Investments, 7/27, editorial calls on the New York State Common Retirement Fund to drop out of the lead in the class action suit against Cedant. H. Carl McCall, sole trustee, as elected comptroller of New York state, apparently got a $40,000 political contribution from Bernstein Litowitz Berger & Grossman, the same firm handling the case. The editorial is especially timely given the recently released American Bar Association task force report on lawyers’ political contributions and pay to play.

The same issue of P&I also notes the growing influence of the internet in linking shareholders, citing CIILENSAFL-CIO’s Executive PaywatchCalPERSMotly Fool and our own “huge website on corporate governance.” Yes, and we’re just getting started.

Risk of being sued down but 37% of corporate directors report being sued at least once, according to a 1998 Louis Harris report.

Nell Minow took the NYSE to task for appointingDavid Smith, head of the American Society of Corporate Secretaries, to represent shareholders in reviewing its proposal to exempt certain broad-based stock option plans. ISS reports that while Minow has high regard for Smith, she believes it is “unimaginable” that he could be considered a representative of the very group that files resolutions often opposed by the members of ASCS. Minow also called on the SEC to hold a hearing on the proposed policy. (ISS Friday Report , 7/24) We suggest you may want to join her by e-mailing your objections to Ms. Catherine Kinney, NYSE Group Executive Vice President. We couldn’t locate her address but we used theNYSE form and asked them to forward our note to Ms. Kinney.

Nicholas Benes, president of Japan Transaction Partners, advocates breaking the power of managers by requiring the boards of all listed corporations to have a majority of outside directors–not insiders nor from cross-shareholding companies. “The bridge-bank scheme as it is now conceived looks to be just a clever way of continuing the old practice of keeping deadbeat borrowers on life support. Nobody should believe the Japanese government is serious about reform until it takes power away from managers and puts it in the hands of shareholders, where it belongs.” (WSJ, 7/27)

Delaware court rules against “dead-hand” poison-pill, saying it strips shareholders of their rights. The court found that continuing-director provisions make a proxy contest realistically unattainable. “Absent express language in the charter, nothing in Delaware law suggests that some directors of a public corporation may be created less equal than other directors, and certainly not by unilateral board action,” wrote Delaware Chancery Court Vice Chancellor Judge Jack Jacobs. (WSJ, 7/27)

Who should be entitled to a voice in running a corporation? Carlin Meyer asks the question in the context of SEC’s reversal of Cracker Barrel. “It is time to reassert greater public control over these entities — to collectively establish policies, guidelines and even rules for everything from employment policies (including officer salaries) to product decisions to political and charitable giving to advertising campaigns.” Ms. Meyer calls for international treaties that subject corporations to democratic control. (San Francisco Chronicle,7/24, A25)

Drawing on data for 258 large U.S. companies in 1992, Gerard Sanders and Mason Carpenter found that multinational firms with more international operations have higher:

1) levels of CEO pay;

2) fraction of the CEO’s compensation that is long-term (largely stock based);

3) size of the top management team and its governing board.

Source: W. Gerard Sanders and Mason A. Carpenter, “Internationalization
and Firm Governance: The Roles of CEO Compensation, Top Team Composition,
and Board Structure,” Academy of Management Journal, 1998, Vol. 41, No. 2,
pp. 158-178. From Wharton Leadership Digest, July.

James Kristie won the Philadelphia Prize, awarded by the Financial Analysts of Philadelphia, for his article “Timeline: The Evolution of 20th Century Corporate Boards” which appeared in the Fall 1997 edition of Directors & Boards. If we gave a prize for the best article of 1997, we’d give it to Kristie as well.

Mutual funds, in theory owned by its shareholders; in practice owned by one fund company. At even the fund families, directors “can range in background from experienced corporate managers and directors to the friends or college buddies of the top executives of the fund management company.” This fall, the SEC will host a round table intended “to air the issues and to work toward a consensus on whether changes are needed in the current system,” accoding to SEC Chairman Arthur Levitt Jr. (NYTimes, 7/7) Also in the same issue, “directors with a lot of money tied up in the stock of the company they oversee are more likely to dismiss a poor-performing chief executive than directors who don’t have much money at stake, according to a new study.

As little as 1/3-1/2 of most companies’ stock-market value is accounted for by hard assets such as property, plant and equipment. This has led to a search for elaborate computer models to measure the links between employee satisfaction, customer satisfaction and revenue. Sears, for example found that if employee attitudes improve by 5%, customer satisfaction will jump 1.3%, resulting in a 1/2% rise in revenue. (WSJ, 7/22, B1)

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NACD’s Blue Ribbon Commission on CEO Succession recommends assessment take place regularly by independent directors and that boards have a contingency plan in place at all times. Core principles include: finding the right leader at the right time, board driven collaborative process, continuous, ensure CEO builds talent-rich firm by attracting and developing right people, driven by corporate strategy. For a copy of the report call 202.775.0509 or 202.467.8076.(IRRC, 7/13)

Fortune magazine compiled a list of the top 50 companies for Asians, Blacks and Hispanics. Pacific Enterprises, a $2.8-billion-a-year Southern California utility holding company comes in first. Companies that do good things for minorities also do well by shareholders. “The average return to investors for the publicly traded companies on our list walloped the S&P 500 over the past three- and five-year periods: 125.4% to 112.2% and 200.8% to 171.2%, respectively.”

Gag Rule. William Crist, president of the CalPERS board, asked Charles Valdes, chairman of the investment committee, to rule State Controller Kathleen Connell’s representative out of order for questioning money management executives about political contributions. Pensions&Investments, 7/13 The majority of the board appears to continue to support a recently enacted policy which cuts off political contributions to the controller and treasurer but leaves intact such contributions to the governor and legislative leaders who appoint four board members.

In other news at CalPERS, Governor Wilson signed a bill appropropriating $332.8 million in court-ordered back-interest payments resulting from a raid on the fund (missed contribution payments) repaid last year. President Crist said the payment shows employers can’t “shortchange” employees. However, Jake Petrosino, a board candidate for the public agency seat, points out the state paid only 8.75% compound annual interest, instead of the annualized system return of 19%. Petrosino says the plan “got screwed” by the state.Pensions&Investments, 7/13

We’ve posted a conversation with Margaret Blair, author of the classic Ownership and Control. Please let us know others in the field you would like to hear from.

Telxon Corp. sued Guy Wyser-Pratte to stop him from making “false and misleading statements” and to prevent him from soliciting proxies for proposals the company believes are “illegal and unenforceable.” Wyser-Pratte who holds about 730,000 shares, or 4.95% of Telxon’s outstanding stock, proposed amendments to Telxon’s bylaws to allow shareholders to vote directly on proposals to buy the company and to defuse Telxon’s “poison pill.” See Akron Beacon Journal, 7/14Wyser-Pratte responds.

Highlights from the International Corporate Governance Network conference held in San Francisco are reported by CalPERS on its press release page.

report by NACD’s Blue Ribbon Commission on CEO Succession “seems sure to intensify many boards’ involvement in power transfers at the top, according to a report in the Wall Street Journal (B6, 7/13). Prior commissions, “sparked extensive boardroom changes in such touchy areas as excess board seats, CEO report cards and stock pay for directors.”

July 10th is the last day to get comments in to the New York Stock Exchange regarding their Shareholder Approval Requirements for Broadly-Based Stock Option Plans. (see letter of comment by Jamie Heard, Chairman and CEO Proxy Monitor) (see also comments by Thomas E. Flanagan on ourbulletin board or on the IRAA site or the CNNfn articleExecutive ‘gravy train?’)

Ousted Sunbeam CEO, Chainsaw Al, seeks to clear his “good name.”

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California Controller Kathleen Connell’s re-election committee sued CalPERS over a new rule prohibiting those doing business with the system from making campaign contributions to its directors. (See Sacramento Bee, 7/6) The rule was put into place only after board actions were heavily criticized in the press, came under the scrutiny of the FBI and were subjected to a Senate hearing. Each focused on possible conflicts of interest such as deals involving relatives and former board members, gifts, allegations of high living, extensive travel, and campaign contributions funded by those doing business with CalPERS.

In total denial, CalPERS President William D. Crist then issued a press release stating “There has been no evidence or even suspicion of corruption by any CalPERS fiduciaries because of political contributions or gifts. Nevertheless, we have taken the extreme measure of banning political contributions and requiring the fullest disclosure possible (of gifts).”

Some speculate the campaign policy was payback for Connell’s aggressive stance on board members accepting free travel. The action may have also been motivated by a desire to focus the spotlight on campaign contributions, largely raised by the Controller and Treasurer, instead of gifts received by most of the 13 member board…gifts which under the new policy, they can continue to receive.

The writ of mandate was filed by Connell’s re-election committee on July 2nd. The committee alleges a violation of First and Fourteenth Amendment rights, discrimination (only incumbents are fully subject to the policies, not other candidates for the same office), lack of statutory authority to enact the regulation, and failure to comply with the Administrative Procedure Act (notice, comment, consistency, clarity, necessity and other requirements). They appear to have an excellent case.

This time CalPERS President Crist said in a July 4 statement, the “board evaluated this issue over an eight-month period, considering very carefully the potential impact on the political process. Ultimately, the board determined that the protection of the system’s one million members from the taint of “pay-to-play” was absolutely necessary to comply with our fiduciary duties.”

However, this editor attended the committee meeting where the rule was introduced. While the board may have contemplated the issue carefully for months, the wording of the policies was not made available to interested parties prior to being publicly discussed and major portions were crafted by Crist on the spot. Because of these improprieties, I petitioned CalPERS to go through the rulemaking process for its conflict of interest policies and, when that was rejected, requested a determination from the Office of Administrative Law (OAL) on 4/30. Unfortunately, because of staffing cutbacks, OAL is not expected to get to my case until next year; we can expect action on the Connell writ much sooner.

The irony is that CalPERS is viewed an effective leader in the area of corporate governance… seeking independent boards with high moral standards. Yet, the ethical policies it chose to adopt for its own board consisted largely of unenforceable window dressing in violation of several laws. Had the policies gone through the legally required rulemaking process, CalPERS would likely have adopted more modest conflict of interest regulations with regard to political contributions and stronger regulations with regard to gifts. As it is, the court will likely throw out the rules regarding political campaign contributions but will probably leave the weaker gift policy standing, since Connell’s campaign committee did not ask the court to address that issue.

Stanford University Law School has announced that it is planning to establish a Fiduciary College for trustees and senior management officials of public and corporate pension funds, Taft-Hartley pension funds and endowment funds. Curriculum of the initial Fiduciary College would focus on the fundamentals of modern finance and portfolio theory and their implications, fiduciary duties and responsibilities, governance issues for the funds, risk-adjusted performance assessment, roles in corporate governance, trading issues, and international investing. Teaching faculty would include appropriate practitioners, as well as faculty from the Law School, including Professor Joe Grundfest. Fiduciary College will be directed by Richard Koppes. For more information, seeNAPPA.

NACD will hold its 16th Annual Corporate Governance Review Meeting in Washington DC, 11/1-3, and will present its Blue Ribbon Commission Report on CEO Sucession as well as its Director of the Year Award. Call 202/775-0509.

Richard Ayers, one of the more interesting characters I’ve met through Corpgov.Net, has finally gotten his way with Nevada Power. As IRRC (5/1) put it, “Third Time is the Charm.” Mr. Ayers used the unususal tactic of phrasing his proposals agaomst the director retirement plan so that a yes vote was a vote against terminating such benefits. He withdrew it this year when he learned the board had finally caved. Congratulations! One relatively small investor can make a difference.

Financial Women’s Association of New York (212) 553-2141, with 1,100 members, has launched a campaign to encourage more women on corporate boards. IRRC (5/1)

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10 year limit on board tenure, as initially proposed by CalPERS staff for their corporate governance principles, would apply to 45.8% of directors at companies analysed byIRRC, according their 4/2 report. As I recall, only about 38% of the CalPERS board itself would fall into that category.

Employees, through their ESOP, sought to send a message toAvondale Industries by sponsoring proposals to redeem poison pill, declassify the board, and implement confidential voting. (ISS, 6/5)

Direct Report announced it can provide their on-line investors with over fourteen separate news, research, and communications functions — all customized and seamlessly integrated with their existing corporate web site.

Meredith Miller, who has served as PWBA’s Deputy Assistant Secretary for Policy for the last 5 years, will carry out the duties of Assistant Secretary until a permanent candidate is appointed to fill the post. She will be responsible for administration, policy making and enforcement of the Employee Retirement Income Security Act (ERISA). (PWBA, 7/2)

Contrasting shareholder meetings. Dell Computer will useADP’s internet voting facility and will conduct an audio broadcast through their internet site, while the Green Bay Football Corporation will hold its shareholders meeting at Lambeau Field, expecting 20,000. (ISS, 7/2)

Apria Healthcare (AHG) has created a model corporate governance board (exceptional talent, independent and strong shareholder orientation) but can they turn the company around? Patrick McGurn, of ISS, reports that “some commentators view this mix of talent and ownership as a prototype for boards in the next millennium. Given the stakes in this game, however, there are some defenders of the status quo who would love to see the grand experiment fail.” If it does fail, it will be hard to know if failure is due to reduced Medicare rates, past billing practices or the new board. I’m betting they’ll succeed. (ISS, 7/2)

Ralph Ward’s Boardroom INSIDER… 7/98, reminds us that Al Dunlap will be remembered for making his boards a real tool of shareholder value. “He frowned on ‘professional’ directors who serve on too many boards (and eased one such member off the board at Sunbeam), favored term limits, and cut the number of Sunbeam insiders at the table. Perhaps Dunlap’s biggest contribution was to make director stock pay and stock holdings a religious conviction.” “So before you cheer too loudly over Chainsaw Al getting the chop, bear in mind that it was his own board reforms that assured he’d receive no slack. Those who live by shareholder value die by shareholder value.”

SB 1879 (Hayden) passed out of the California Assembly Committee on Public Employees, Retirement and Social Security on July 1st. The bill is intended to provide greater clarity with regard to potential conflicts of interest by CalPERSboard members. One provision, for example, requires that any gifts, including the reimbursement of travel expenses by parties financially interested in investment transactions are to be disclosed. Failure to do so would carry a financial penalty of $10,000. SB 1753 (Schiff), dealing with potential conflicts of interest at CalPERS and CalSTRS, is also moving through the Assembly. SB 1753 would bar the boards from considering matters in closed session involving a vendor without prior disclosure of the vendor’s gifts and campaign contributions. Requires investment decisions made in closed session to be made by roll call vote and disclosed within 12 months. Prohibits specified communications by the governing board members with financially interested persons during the contract awarding process. Prohibits specified communications by a financially interested person with board members on matters relating to the transaction or evaluation, without disclosing the communication to the executive officer and the board. Requires elected members of the PERS governing board to file semiannual campaign statements.

The $38 billion New York City Employees’ Retirement System spent four years and as much as $150,000 on 4 studies before deciding to freeze tobacco holdings in their passive portfolios. According to a report in the June 29th edition ofPensions&Investments, their tobacco holdings lost an estimated $50 million in value while they deliberated.

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Archives: June 1998

Chainsaw Al gets sliced. He taught many to think like owners but his tactics crushed morale and his accounting practices reflected an emphasis on salesmanship rather than creating wealth. Press coverage has been widespread, including Time(6/29) and the St. Petersburg Times, (6/21).

Efficient-market theory and a science-based investment strategy has provided the fundamental basis for the investment strategy of Dimensional Fund Advisors. Fortune’s 7/6 issue covers the history of the firm in How the Really Smart Money Invests. Investment in small stocks that also trade at low price-to-book ratios provided the best results of all in Fama and French’s studies, returning an annual 20.2% over 70 years, 8% more than big growth stocks.

Corporate-accountability campaigns, a new tool for the Sierra Club.

Privatization in Bulgaria: Pushing Forward.

Both IRRC and ISS have provided extensive coverage (since April 24th) of a controversial policy adopted by the NYSE on April 8th which allows companies to adopt “broad-based” plans without shareholder approval if at least 20% (the majority of whom cannot be officers or directors) are eligible to participate. Although the rule went through a public notice process, most in the industry failed to take note. Some have expressed concerns since the rule outlines requirements only in terms of eligibility, rather than participation. ISS reports thatCII is “rolling out the troops” in opposition. NYSE agreed to reopen its comment period until July 10th. Contact Stephen Walsh at (212) 656-6240.

Stock options allow top execs to cash in on bull market. (seeSan Francisco Business Times).

The Internet is increasingly popular for launching shareholders actions against publicly traded companies, according to a 6/17 WSJ article, which described message boards and chat rooms as fertile recruiting grounds for potential shareholder plaintiffs. Web sites mentioned included the Motley FoolYahoo!Finance and Silicon Investor. For information on suits filed, see the Securities Class Action Clearinghouse which we have listed under law.

Global Corporate Governance Research Center, released its Institutional Investment Report showing that U.S. institutions topped $14.3 trillion in total assets last year (up from $12 trillion at end of 1996). Pension funds dominate with 47.3% of all assets and 25.8% of total outstanding equity. Public pension fund growth outpaced private funds. Institutional investor’s % of total equities declined to 48% (from 48.8% in 1996). Mutual funds showed the strongest growth (28.7% increase between 1996 and 1997). Total assets of pension funds grew from $5.7 trillion to $6.8 trillion from 1996 to 1997. Mutual funds climbed from $2.4 trillion to $3.1 trillion. To order, call 212-339-0345.

California Public Employees’ Retirement System (CalPERS), the New York State Common Retirement Fund and several New York City pension funds filed suits against Cendant Corp., alleging the business and consumer services company misled investors about its financial results. (cnnfn)

Pensions&Investments reports that pension assets are up 8.7% last quarter (Jan-March, 1998) to $7.5 trillion. CalSTRS staff have been given authority to commit up to $400 million to alternative investment deals without seeking prior trustee approval. San Fransico City & County Retirment System divest $30 million in tobacco stocks held in its S&P 500 index fund. Phil Angelides, candidate for California Treasurer, indicates he would invest a larger portion of CalPERS and CalSTRS funds in California.

Jamie Heard, former Chief Executive Officer of Institutional Shareholder Services (ISS), has agreed to become Chairman and Chief Executive Officer of The Proxy Monitor, Inc. Richard L. Cohen, former Chief Operating Officer of ISS will also join president Arthur Rosenzweig in a senior position. Heard and Cohen are principals of an investor group formed by Breakwater Holdings, LLC, which has acquired an 80% interest in The Proxy Monitor, Inc. After leaving ISS in early 1997, Heard and Cohen, together with Robert Monks and Dwight Allison III, founded Breakwater Holdings, LLC. Breakwater and its affiliates invest in businesses that provide value-added information and services to financial institutions. With offices in New York and Chicago, Proxy Monitor provides proxy research and voting services to pension funds, investment firms, banks, foundations, labor unions, religious organizations and other institutional investors. (contact: Susan Assadi, at 602-860-8792)

Minnesota, the beneficiary of a $6.1 billion settlement of its tobacco lawsuit, will stop investing pension money in companies that get more than 15% of their revenue from tobacco. The decision affects only a fraction of the $43.7 billion in pension funds the state has invested. Secretary of State Joan Growe said tobacco stocks “have consistently lagged. They have consistently under-performed.”

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The Corporate Board’s May/June issue included two provocative articles which deal directly with the question of democratic corporate governance. Both provide arguments which lead in the same direction but both are flawed from the perspective of this editor.

John Vogelstein, president of Warbug Pencus & Company, outlines some of the lessons he has learned in the firm’s “investment banker” role. The firm consistently takes a long term view in these companies, which range from startups to NYSE giants. In most cases they are represented on the boards and Vogelstein believes their presence helps boards face up to problems, such as the need to replace a faltering CEO. With a great deal of capital at risk, their representatives “really do care” and they tend to “pull the nonowner directors along.” One recommendation, stemming from this experience, is that members of the board’s audit committee be paid double fees because these committees tend to uncover the most problems.

Surprisingly, after pointing out how value is added by having a large shareholder on the board, having board members with substantial sums at risk, and after embracing reforms such as the use of nonexecutive chairman or lead director, Vogelstein ends by writing that he would not want to “promote greater democracy in business governance or to empower stockholders further. I do not believe that democracy is an appropriate way to manage a business,” fearing that “increased bureaucracy would be the inevitable result of greater shareholder rights.”

For Vogelstein, much of pension fund activism has been “poorly thought out.” Although he is not explicit in what constitutes increased democracy in corporate governance, he appears to see it primarily as increased government regulation, such as the adoption of tax penalties when executive pay is not linked to pay for performance. However, at the heart of democracy is a system which facilitates representation, not one which necessitates stepping out of its own domain to enforce the opinions of its citizens. I would argue that increasing democracy in corporate governance, by allowing shareholders to more easily nominate and elect board members to represent their interests, would result in less government intervention and fewer poorly framed shareholder resolutions. Greater democracy in corporate governance might lead to a situation where all boards have a majority of directors who behave as responsibly as those of Warbug Pencus. Wouldn’t that be novel? One step in that direction might be to repeal SEC provisions which preclude use of Rule 14a-8 provisions for nominating directors. (see editor’s comments to SEC)

The other article which questions the value of shareholder involvement is by D. Gordon Smith, an associate professor at Lewis & Clark in Portland, Oregon. Smith briefly takes us through changes at Kmart, largely brought about through intervention by the State of Wisconsin Investment Board (SWIB). The main question centers around SWIB’s ability to evaluate the CEO’s competency. Smith argues that Joseph Antonini, Kmart’s CEO, may not have been incompetent and his ouster may have been in error. Placing policy decisions, such as firing the CEO, in the hands of shareholders would likely decrease the value of corporations because “if shareholders can override the discretion of the board, the value of centralized decision making (the primary value of the board) is destroyed.” “Corporate governance reform should strive to construct a system in which shareholders participate actively in director elections but refrain from participating in policy matters.”

Here, I believe, Smith moves toward the right conclusion, but for the wrong reasons. Directors are likely to have more relevant and more timely information concerning the firm than are shareholders. Therefore, board members, not shareholders, are more likely to know what measures should be taken to add value. However, the primary value of the board is not, as Smith claims, its own “centralized decision making” but its function in overseeing that of the CEO by bringing additional information and perspective to bear.

Smith gets it right when he suggests the nomination process be improved to encourage shareholder participation in director elections. However, he fails to provide any evidence or even logic when he asserts that director elections need to be less frequent. He undermines the value of his primary recommendation that less direct involvement by shareholders would probably yield better results.

To this editor, much of shareholder involvement should be seen as a sign of frustration. Even resolutions passed by substantial majorities are often ignored. Shareholders have escalated to binding bylaw resolutions (see “Shareholder Bylaws: A Threat to the Board” in the same issue). However, if shareholders participated in the nomination process and believed they could hold directors accountable each year, there would be little need for most shareholder resolutions and less need for government intervention.

Directorship (May) includes an interview with Ned Regan, former Controller of New York State. Regan reviews the proxy season and compares resolutions as canaries in the mineshaft, a forewarning of shareholder concerns. The current “flashing red light” is SWIB’s opposition to option repricing. Another sign is the growing number of resolutions calling for companies to consider sales, mergers or spin-offs which Regan believes come from newcomers to the proxy process with little interest in board governance matters. Managers can take solice in the fact that both TIAA-CREF and CalPERS seem to have moved to strategy of meeting with boards more privately and from the fact that owners of American businesses “operate only as a modest check on corporate activities. Overall, it appears to be a balance that has worked to the benefit of businesses, the US economy and shareholders.?”

The same issue also includes an article drawn from Ram Charan’s new book, “Boards at Work: How Corporate Boards Create Competitive Advantage.” The article presents solid, but not unusual, observations such as, “boards can do management an invaluable service by viewing the broader business landscape and helping management recognize major opportunities and discontinuities.” The publisher, Josey-Bass Inc., can be reached at 800-956-7739.
Across the Board (June) notes the findings of a survey by the Dentsu Institute on Human Studies. The percent of Japanese who say they live for work has dropped to 28%. This compares with rates of 74% in China, 70 in Thailand, 49% in Indonesia, and 48% in India.

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Ithe Corporate Governance Advisor (May/June) Richard Wagner and Louis Kersten are concerned that in a slower economy 20-25% or more of future value may be siphoned off through dilution from option exercises or through market repurchases. Kurt Schacht, of SWIB, takes on the much lauded State on Corporate Governance by the Business Roundtable (BRT)…”fancy cover, nice presentation but not much there.” Here are a few quotables. “Good corporate governance is not one size fits all…it’s apparently whatever size you want.” “A hint of conflict in the area of cumulative voting quickly relates it to a non-recommended status.” “An outside director, according to the BRT, is essentially anyone the management/board believes can represent the interests of shareholders with appropriate independence.” Their broadest criticism is that “it continues to be the management group being monitored that is setting the terms of its own oversight.”

In the same issue Patrick McGurn, of ISS, discusses SWB’s battle with the SEC over their declaration that option repricing is “ordinary business.” McGurn also describes CII’s new Shareholder Bill of Rights, adopted on March 31st. The definition of boardroom independence has been tightened to include an examination of ties between directors and the CEO, as well as calling for full disclosure of payments and other data necessary, to directors and their families, for shareholders to determine independence, whether or not such disclosures are required by law. The new guidelines recommend a 2/3 majority of independent directors and indexed options. Although it has been a decade since its last revision, CII plans to form a standing committee to update the policies each year.

We received the 3rd issue (Winter 1998) of a new publication by the National Investor Relations Institute, IRQ, which contained several articles which I expect would be of significant interest to our readers. In “Don’t Wag That Dog!” Shelley Taylor reviews a 1996 study which ranked the importance of 95 types of information institutional investors used making investment decisions. In the governance arena, investors want to know management has a significant stake in the company but the don’t particularly care if the firm has adopted a set of corporate governance policies. In “Does Shareholder Activism Make a Difference?” Marilyn Johnson reviews the literature and finds no widespread evidence that activism has made an impact on CEO turnover. Proposals are likely to be triggered by poor firm performance and negative press. They are more often by institutional rather than individual investors and the evidence supports the efficacy of institutional actions; they are successful in getting companies to adopt recommended governance changes. Firms that successfully negotiated settlements with CalPERS experienced a 1% increase in market value. In “Technology and IR” Hank D’Amrosio describes Bell & Howell’s experience with broadcasting its annual meetings over the internet starting in 1996 and allowing on-line proxy voting starting in 1997. “IR on the Net” provides a valuable guide to corporate governance sites on the internet; we thank IRQ for listing CorpGov.Netfirst as a “great starting place” and for noting our current news section.

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May”s “Corporate Governance Today” conference at Columbia Law School’s Sloan Project on Corporate Governance brought together a broad diversity of academics. In his summary introduction, Mark Roe divides the papers presented into the following eight categories: venture capital, hierarchies and boundaries, the boardroom, employees and the firm, abstractions of the American academic view, whether corporate governance systems world-wide are converging, comparisons and differences in national systems; and the corporation in its social and political context. Copies of papers are available from Lisette Lavergne.

Many interesting findings and theories were put forth, continuing to build a strong base of academic scholarship. Arnoud Boot and Jonathan Macey, for example, argue that transparent firms will tend to get diffuse ownership because distant shareholders would get the advantage of objectivity but not need closeness to get good information. Opaque firms would attract block ownership because diffuse owners couldn’t do much without good information. Margaret Blair and Lynn Stout argue the board’s job is to divide the pie up fairly, not to maximize shareholder return. Sanjai Bhagat and Bernard Black find little correlation between independent directors and enhanced value but theorize that independent boards might be better in some settings, such as responding to a hostile tender offer. Roe adds that maybe independent directors need more of a personal or institutional financial stake or stronger ties to shareholders to be effective.

Katharina Pistor finds that managers are the principal beneficiaries of codetermination because they play off labor against capital. Jeffery Gordon looks at United Air Lines and theorizes that employee ownership may be unstable in the long run as employees see the need for diversification. However, it may have critical advantages in managing an economic transition, including facilitating cuts in wages by trading for equity. If a culture of commitment can be built, long-time employee ownership may enhance a firm’s ability to compete and adapt. In looking at Italy, Jonathon Macey notes that derivative suits are not permitted, takeovers don’t happen and institutions don’t hold large blocks leading them to monitor. As a consequence, firms that are large enough to go public in the U.S. stay private where monitoring is easier. In examining pension funds, Jeffrey Gordon finds that employees haven’t benefited much from the run-up in stocks. If they are in a defined benefit plan, the sponsoring firm wins; if they are in a defined contribution plan they tend to lose again because many tend to invest less heavily in equities.

The latest edition of Ralph Ward’s Boardroom INSIDERrecommends the Management Assistance program for Nonprofits. “The Nonprofit Manager’s Library offers solid board links on agendas, job descriptions, and legal issues, plus a helpful discussion board.” He also summarizes a May 25 article by Geoffrey Colvin in Fortune who points to research findings that independent boards exert LESS power over CEOs. Companies whose directors own a lot of stock are often POOR performers. Boards actually DO pay CEOs for performance. Boards are NOT under increasing pressure from shareholders. These anomalies often stem from friends, families, poor performance measures and the fact that “a rising stock tide lifts all boats.”

CEO’s average tenure in the US is about 3 years, says Edward Ryan, managing director of Executive Interim Management, based in New York. (see CEOs need speedy success).

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Europe II’s Programs for Reform in Strategic Markets (IFC-PRISM), has recently been approved to implement a Corporate Governance project in Armenia, in partnership with the Netherlands. They are currently looking for a Dutch expert in Corporate Governance to serve in the capacity of Project Manager in Yerevan, Armenia. Contact: Lynne Soukup, Assistant Privatization Officer, Room F-10P:206, 2121 Pennsylvania Ave, NW, Washington, DC 20433 Fax: (202) 974-4321.

The Social Investment Forum released its second edition of “Tobacco’s Changing Context.” The guide contains new information about tobacco settlements, updated lists of responses by institutional investors, new performance information and more. Call 202-872-5304.

The shot heard round the world? That’s how Sarah Teslik ofCII characterized TIAA-CREF’s victory in ousting the entire board of Furr’s/Bishop’s Inc. (a struggling cafeteria company). “Once one pension fund does it,” others are likely to follow, she is quoted as saying in the 5/29, WSJ. However, the article goes on to describe relatively unique circumstances. TIA-CREF holds almost 18% of Furr’s/Bishop’s. Seven other shareholders own another 66%. It could be the start of a revolution, but the original “shot heard round the world” was soon followed by many more. So far, this appears more like target practice on a sitting duck. In the same issue several had harsh words for Providence Capital president Herbert Denton. Is he a real reformer or just a blackmailer? (see also Be not a wimp, Forbes, 6/2)

Fortune’s Anne Fisher, asked readers if CEOs in the U.S., who now earn 185 times their employees’ average pay (up from a ratio of 142 to 1 in 1992) are worth it. 70% of the 718 respondents said CEOs make too much money at the expense of shareholders and the employees who do the real work. Middle managers seem especially embittered. Others pointed out that entertainers and athletes are the real overpaid Americans, (see “Readers on CEO Pay,” 6/8).

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Archives: May 1998

Company Secretary: The Official Publication of the Hong Kong Institute of Company Secretaries (May 1999) is largely devoted to the question of offshore incorporation. Should Hong Kong be worried? We might also add, should the U.S. or other jurisdictions be worried? Probably.

Mark Sharp begins his article by noting a 43% increase in the number of companies listed on the Hong Kong Stock Exchange (SEHK) over the past 5 years but the number of companies listed in Hong Kong has practically remained unchanged. Over the past 10-15 years almost half of all locally listed companies were incorporated in Bermuda. For years, it was assumed the political uncertainty of Hong Kong’s political future was the driver but the move offshore continues to accelerate, attracted by reduced cost and less burdensome regulations.

“Bermuda will bend over backwards to ensure its company law is user-friendly.” The British Virgin Islands (BVI) has become the country of choice for private businesses. Lack of disclosure requirements mean that SEHK does not approve BVI companies for listing but the BVI has now registered about 300,000 so-called international companies during the past 10 years. Minority interests are not well protected in the BVI where even who owns the company cannot be learned at the registrar.

David Holloway, an investigator, points out that international offshore financial centers (IOFCs) lack transparency and allow easy concealment of assets. The Bahamas, for example, require little in the way of credentials screening, no screening of company assets, no regulation of trusts – “virtually no regulation whatsoever – and banking secrecy.” In Liechtenstein you can incorporate, through your banker or attorney, without even disclosing your identity. There are an estimated 1 million anonymous companies incorporated in IOFCs with assets around $5 trillion. Search the internet for “offshore incorporation” and you’ll come up with over 4,000 “hits,” usually someone offering to help you hide assets from someone else.

Nisson plans to cut its board from 37 to 10 with three of those directors coming from Renault, which recently bought a 37% stake in the company. The new board will be in their 40s and 50s instead of the current Japanese board average of 60. Several other Japanese boards are sliming down to provide “sharper oversight and more accountability to shareholder,” according to a 5/1/99 report in The Economist (No Country for old men, pp. 60-61). Firms are beginning to bring in outside directors but more change is needed.

Pensions&Investments editorial warns pension executives to ask their consultants to report how much revenue they have recieved in the previous 12 months from each of the money managers they recommend…an area missed by the SEC in proposing “pay-to-play” rules at public pension funds. The same issue includes an article on the interesting Social Choice for Social Change campaign being conducted by Neil Wollman and Abby Fuller in order to get TIAA-CREF to invest 5-10% of social choice account assets ($150-300 million) in companies that are models of social and environmental responsibility. (P&I, 5/17/99)

The Corporate Board 5-6/99 includes an article entitled “CEO Pay: Facts and Fallacies” by Jay W. Lorsch which attempts to demonstrate, through comparisons with the pay of sports players and other arguments, that CEOs are really not overpaid. “No mater how you look at it, CEO’s get less than one-half of one percent of pretax corporate earnings.”

Lorsch steps through several criticisms and often addresses them on the basis of a survey he recently completed of compensation committee chairs at 72 large public companies. For example, addressing dilution because of options he notes that use of options for broader groups are likely to cause the greatest dilution and that buying back stock to match the options being granted avoids dilution. True, however, broad based options are more likely to provide motivation to those who will make the most difference. It is absurd to believe that piling options on highly compensated CEOs will increase company performance as well as more broadly based options. In addition, many, including Gene Epstein of Barron’s, believe that “most options exercises involve the issuance of Treasury stock.” (see Little Big Men, Barron’s, 5/3/99)

Lorsch also indicates that “almost all of those he surveyed said they had not reset option prices and would not do so in the future.” While Lorsch does include good suggestions on how to reduce the “Lake Wobegone” effect (all CEOs are above average) it would be interesting if The Corporate Board ran a follow-up article by Graef Crystal to do a little fact checking counterpoint.

The same issue of The Corporate Board includes an article onDemocratic Governance by James McRitchie and a look ahead at “Your Next Generation of Directors” by Linda Wilson of Holland & Davis.

Australian study finds proxy vote averaged only 32% of voting capital. Very few institutions bother to vote. When they do they tend to vote in favor of the board position. (see It’s time for institutions to stand up and be counted, by Stephen Bartholomeusz in The Age, 5/14/99)

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John Chevedden, one of our forum contributors, achieved an 18% vote at Ford for a resolution to appoint independent directors to key board committees. As noted by the Wall Street Journal, “an 18% vote against management where the Ford family controls 40% of the voting rights is a signal to Ford that holders are looking for a more independent voice on the board.” In a personal note, Chevedden pointed out that at least Ford has welcomed attendance and has, in fact broadcast the meeting in Times Square and on the internet. In contrast, GM has held recent meetings in Wilmington, Delaware. The highlights of the Delaware meetings have been metal detectors for all shareholders, a hotel basement location, attendance of about 99 shareholders and timing to coincide with the eve of the 3-day Memorial Day weekend.

John tells us of a real victory at Northrop Grumman, with 3 shareholder resolutions winning: Restore simple majority vote 66% (authored by Jerome McLuaghlin), restore annual election of all directors 52% (Larry Anduha) and enable stockholders to vote on poison pills 69% (John Chevedden) Chevedden said these votes send the message that shareholders want greater management accountability for company performance. He has posted the text of the shareholder resolutions at Warning: you’ll have to search on that board for messages 1343, 1384 and 1387, but it is a simple task.

Update on the above. According to a May 20 1:57 PM ET wire service report, Northrop said one of three proposals narrowly missed victory by a margin of 50.16% vs. 48.7% of votes cast. Preliminary tallies had shown the measure passing, but those did not include a large block of shares voted at the company’s annual meeting Wednesday.

Northrop’s last-minute acceptance of ballots (to its own advantage) is in contrast to Boeing that announced that it was closing its telephone and internet voting 1-day before the annual meeting. Boeing later admitted it actually closed voting 3-days before the meeting. One shareholder proposal on the Boeing ballot received a 49.9% yes vote.

Chevedden notes, “This raises the question of who establishes and monitors the rules on closing the polls. This is particularly important because according to the Investor Responsibility Research Center, Washington, DC, Northrop does not have confidential voting. Hence, management can track how large blocks of stock are voting and could contact large blocks of stock to submit a vote or change a vote. Did Northrop allow extra time past a previously established deadline to enable lobbied votes to arrive?”

IRRC reports on a recent meeting of the ABA. Among many issues discussed, it was noted that because the SEC rule requiring disclosure of repricing activities in a proxy statement generally applies only to the 4 most highly paid employees and the CEO and because repricing outside director’s stock options might not be considered significant under FASB rules, “many companies may not disclose information about the repricing of outside director’ stock options.” (see Corporate Governance Highlights, 5/7/99)

Center for International Private Enterprise (CIPE), an affiliate of the U.S. Chamber of Commerce, has posted an excellent international review of corporate governance by Stephen M. Davis, president of Davis Global Advisors, entitled “The Race for Global Corporate Governance.” Davis contends G7 leaders last year identified corporate governance reform as the “newest pillar of the post-Cold War economic architecture” and view it as “key to spurring prosperity and jobs by strengthening corporations’ ability to compete for global capital.” Davis reviews how countries around the world are performing on five Leading Corporate Governance Indicators™ tracked by DGA which include:

1. presence of national best practice codes for corporate boards;

2. relative participation of non-executives on corporate boards;

3. tendency to split the roles of chairman and CEO;

4. presence of key board committees; and

5. degree of disclosure of executive compensation information.

BusinessWeek senior writer John A. Byrne says challenges to poison pills are long overdue. “Shareholders should have the right to vote on whether a pill–which could affect the stock’s value–should be nenewed and under what circumstances.” Addressing Lubrizol’s reluctance to accept TIAA-CREF’s winning initiative to dump their dead-hand pill, Byrne writes, “perhaps the ultimate irony is that it was exactly this kind of self-serving management that helped fuel many of the raiders that these pills were designed to ward off in the first place.” (see Poison Pills: Let Shareholders Decide, 5/17, p. 104)

European CEO pay may be catching up with those in the US but it’s a trend that doesn’t go over too well among many, according to Forbes writer Deborah Orr. Her 5/17 article, entitled Damn Yankees, includes a brief recount of findings by Korn/Ferry, news reports and opinions. One anecdote involved a change in Dutch law after 4 board members at Dutch insurer Aegon made $50 million off stock options. The new law adds a tax formula to factor in the implied future value of options.

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Call for papers. GOUVERNANCE, aims to be a forum for the dissemination of knowledge, innovative developments, best practices and new approaches in the field of corporate, organizational and institutional governance for French speakers around the world. The first issue, to be launched in winter Y2000, will be focused on the theme of Corporate governance: theories, challenges and paradigms. For more information contact: Valérie Lehmann, MBA, coordinator, or Editor: Ameur Boujenoui, Ph.D.

Peter Eigen, chairman of Transparency International, argues NGOs must fight for freedom of the press, an independent judiciary, effective auditing of government and protection for whistle-blowers, and the environment as part of an international corporate governance strategy. (see Can we count on industry to ensure good corporate governance becomes reality? By Frank Vogl, Earth Times News Service)

Shareholder Communications to acquire Georgeson to create Georgeson Shareholder Communications, the largest global proxy solicitor with combined revenues of $100 million.

Sacking season: CEO purges abound, according to CBS MarketWatch. “Technology companies were among the biggest contributors to growth in the first quarter, corporate America’s best yet in terms of profit growth since the fall of 1997.” Patrick McGurn, of ISS indicates the higher turnover in that industry is probably due to short product cycles. “These guys keep their resumes up to date because they know they are only as good as their last quarter,” said Ralph Ward, publisher of the Boardroom Insider newsletter.

Binding proposals are up this year with 39 submissions thusfar compared with 23 last year, according to IRRC. Shareholders won major victories to eliminate Bergen Brunswig’s dead hand poison pill (74% in favor), do the same at Lubrizol (68% in favor), and allow shareholders to redeem or vote on renewal of Chubb’s poison pill (69% in favor). Chubb has made it clear they will not implement the bylaw. John C. Wilcox, Chairman of Georgeson argues Binding Shareholder Proposals are Un-American, arguing in part, that to the extent shareholders disagree with their representatives’ actions, they should “elect new ones in their place.”

Boeing internet voting glitch or fraud? A shareholder proposal calling for annual election of all directors won 49.9% of votes cast; 47.8% opposed it and the remaining shares abstained. Some shareholders complained they were shut out because they couldn’t cast their vote on the Internet starting on the Friday pior to the meeting. (see 1st Boeing e-mail proxy vote called success, South County Journal, 5/5/99)

Maxxam shareholders activists are urging election of outside directors and cumulative voting. (see PR Newswire, 5/5/99)

Nell Minow spoke about shareholder activism to the 36th annual conference of the Society of American Business Editors and Journalists. (see Shareholder Activist Nell Minow Addresses SABEW Convention)

Pension funds in the US increased equity allocations from 39% in 1993 to 61% in 1997. Watson Wyatt analysts expect to see increased pension equity allocations by 2002 in Hong Kong, Canada, Ireland, Australia and most major European markets with declines only in the UK which is already at 72%. Passive management strategies, such as indexing, is expected to increase from 26% in US to 35% of equity asset investments. In the UK it is expected to grow from 20% to 30%. Foreign equity exposure is also predicted to rise around the globe. (see Foreign pension markets growing faster than U.S., Watson Wyatt survey says, P&I, 5/3/99)

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Daily inflow of investments to index funds contributes to performance of S&P 500. As reported in 5/10/99 edition of Business Week, researcher William N. Goetzmann notes the data “suggest that the performance of the S&P 500 has gotten a permanent lift from the popularity of index investing.” (seeIndex Funds and Stock Market Growth, William N. Goetzmann, Massimo Massa) Implications for corporate governance? We touched on this subject in a conversation withRichard Koppes in 1996.

Caisse, Ontario Teachers, the Ontario Municipal Employees Retirement System, Burgundy Asset Management Inc. in Toronto and Montreal’s Jarislowsky Fraser & Co. Ltd. identified as activist investors in Canada. Others prefer to apply pressure through surrogates like Fairvest Securities, a Toronto brokerage that specializes in shareholder-rights advocacy. (Montreal Gazette, 4/30/99, When the head of Ontario teachers’ fund blasts management greedheads, shareholders benefit.)

If any CEO deserves to be highly paid, Gap’s Millard Drexler has to be the man. But, asks consultant Graef Crystal, “is it appropriate to give someone restricted stock and stock options that, using contemporary values, would be worth some $1.4 billion?” Crystal suggests that Drexler take $200 million of his after-tax option profits and make a $2,000 gift to each of his “front-line” employees. “And that $2,000 would be tax-free to the employees, because Drexler is permitted to give small gifts tax-free to any number of people in a given year. Even after doing this, he would still be left with his hundreds of millions in stock as well as lots and lots of remaining option profits.” (San Francisco Business Times, 5/3/99, Gap CEO’s bounty could be perfect perk for clerks)

Ira Millstein to highlight ASCS annual conference to be held at the Greenbriar on June 23-27. Participants will also hear from SEC Commissioner Laura Unger. ASCS survey finds May is still the most popular month for annual meetings and 10 a.m. is the most popular starting time. More than 80% continue to serve lunch or refreshments, 13% provide sample products. The Society’s “Job Bank,” which encourages companies to turn first to society membership when filling vacancies, is reportedly off to a good start (“members only” part of their site). The ASCS site has one of the better summary listings of SEC proposals and a discussion about the comprehensive “Aircraft Carrier” release.

Ralph D. Ward takes a look at the recent sacking of Compaq Computer’s CEO, Eckhard Pfeiffer, and reaches an interesting conclusion. See his guest commentary, “COMPAQ: Management Failure or Boardroom Success?” in our Forumssection.

More evidence of a paradigm shift from “managed” corporations to “governed” corporations can be seen in April’sDirectorship which reports the number of CEOs sitting on their own nominating committees has decreased by 116 since 1994 among those firms in their databank. Further, Richard Koppes discusses his experience on Apria Healthcare Group’sboard. The board includes a mix of talent and ownership which some see as a prototype for the next millennium. (In the interest of full disclosure, the editor made an an investment in Apria when Koppes was appointed; its value has more than doubled.)

Foundation for Enterprise Development has developed a “virtual interactive consultant,” VIC, designed specifically to help entrepreneurs who are considering using equity sharing (employee ownership) as a means to recruit, motivate, and retain their workforce. Also of interest is their online Ezine,Leading Companies. Each issue contains case studies, tips, trends and articles on employee ownership and open book management.

Mutual funds, the fiduciary obligation of directors is to hold down costs for investor/owners. Yet, Nikolaj Siggelkow, of the University of Pennsylvania’s Wharton School, finds that fund sponsors do everything they can to increase their own profits. The dubious theory is that fund holders pay 12b-1 fees so the fund can run ads. As more money flows economies of scale are created and total costs will fall. It doesn’t happen. Business Week advises, “although 6,722 of the 10,614 funds in Morningstar’s database charge 12b-1 fees — and more than a third take the maximum — that still leaves 3,892 that don’t. Look to those first.” (Business Week, 4/30/99, “Who Do You Think Those Mutual-Fund Fees Fatten?“) Visit their Fund Fee Hall of Shame.

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Book Review – Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value

Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value by Carolyn Kay Brancato. Viewing your stock as you would the products you sell, and trying to woo shareholders as you would potential customers offers the ultimate offers “win-win” situation, but only if the shareholders so selected continue as passive consumers. Continue Reading →

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Archives: April 1998

April’s Director’s Monthly focuses on Mergers & Acquisitionsincluding Vice Chair Joseph G. Sponholz of Chase Manhattan reviewing their merger with Chemical Bank. Eileen Birge and Nicholas Vitalari of the Concours Group write on integrating information technology in M?. Also included is an extensive listing of upcoming NACD seminars around the country.

AFL-CIO “10 Key Votes Survey” found 45 money managers of union funds cast an average of 44% of their votes against the unions’ position. Votes apparently will be watched more closely this year. The report was reportedly a “real wakeup call” for some officials but also demonstrates there’s room for labor to increase its impact. (see 4/20 P?)

Thomas A. Stewart, author of Intellectual Capital: The New Wealth of Organizations, has written a provocative series of two articles in Fortune. The first appeared on April 13th and posits that is useful to think of employees not as assets but as investors since, increasingly, we are all expected to be knowledge workers. He points out that “overall, U.S. companies today need 20% less in tangible assets to produce a dollar’s worth of sales than they did a quarter-century ago.” Companies provide a place where the individual can do things they can’t do alone and they can also do them at lower cost. Today’s companies are magnets for intellectual capital; they provide a stimulating community of practice, a learning environment. In addition, they provide brand and reputation; Stewart notes that because he works for Fortune, people return his phone calls and presume he is talented. Third, the company “limits our liability, annualizes our income, tides us over during unproductive patches, collects money owed by our customers, borrows on out behalf. But if the intelligence of employees is contributing an increasing proportion of return, compared to the capital invested by stockholders, it may be time to reexamine how the returns from such different forms of equity are divided.

Stewart’s second article, which appeared in the May 11th edition, begins to address that issue. For example, if we are now to consider employees as investors, that has implications for the duty of directors, since it’s their responsibility to maximize investors’ rewards. The board becomes a “mediator of rents,” according to Ira Millstein. Millstein proposes that compensation committees ought to be replaced with “remuneration committees,” responsible for the entire reward system, setting the mix of wages and equity compensation appropriate given the nature of employees’ human-capital investment. “The more important human capital is to a business, the more those investors should stand to gain – or lose – and the greater voice they should have in governing it.”

In law, accounting, and consulting partnerships human capital is already king. Contrast these partnerships with a company relying primarily on large capital intensive factories, such as Alcoa, and we’ll find that most firms lie somewhere in the middle. Seeking a solution, Stewart points to Macquarie Bank, Australia’s premier investment bank. At Maquarie the entire first 10% goes to shareholders but additional profits are divided according to a formula whereby, as return on equity rises, the staff takes an increasing % of the pot.

Boards should use stock to compensate people for company specific knowledge investments for two reasons, according to Stewart. First, equity provides the knowledge employee (investor) with greater incentive to invest and a way to keep at least a portion of the returns even if they lose their job. Second, the voting power of stock offers a means of protecting their investment. Stewart eschews the use of options as a free ride using phony accounting.

Government should keep its hands out of regulating charity giving by corporations, according to an editorial in Directors & Boards. HR 944 would require disclosure of each gift in the annual proxy statement and HR 945 would require polling of shareholders to determine their wishes. Both measures are by Paul Gillmore. In another item, editor James Kristie notes the day Campaq was named to have the board of the year its stock went down 3 and 1/2 points, so we’re still looking for evidence to support the McKinsey & Company study.

Companies with at least 20% employee ownership were found to be more organizationally stable than non-employee ownership companies, in a recent study by Margaret Blair of Brookings and Douglas Kruse and Joseph Blasi of Rutgers. None of the employee ownership companies disappeared due to bankruptcy, liquidation, or private buyouts, while 25% of the matched sample did. Return on assets was also higher at 20.4% vs 16.7%.

Data compiled by London-based Capital Strategies shows an index of companies with at least 10% employee ownership continued to grow faster; up 26% in 1997 compared to 21% for FTSE. 100 pounds invested in the index in 1992 would be worth 341 pounds, compared to 196 pounds if invested in the FTSE.

The same issue of the Employee Ownership Report, (May/June) includes a case study on R.R. Donnelly & Sons. This Fortune 500 firm uses a broad option grant pland and open-book management, and focus groups to foster its participation in decision-making by its employee ownership community.

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Royal Dutch/Shell published its first social responsibility report, detailing failings and successes on issues from bribery to global warming and community projects. (

Making CEOs whole is the subject of an article in 4/22 WSJ. Highlighted is Ronald T. LeMay’s movement to Waste Management and back to Sprint.

Tracking shares, which don’t represent legal ownership of corporate assets and carry practically vote-less rights, have reached about $100 billion in issues, according to a report in the WSJ (4/20).

McKinsey & Co. reviewed 115 acquisitions in the U.K. and the U.S. done in the early 1990s; 60% failed to earn returns greater than the annual cost of the capital. Keefe Bruyette & Woods found that 6 out of 8 of the largest bank mergers announced in 1995 underperformed Keefe’s bank-stock index from the day before the mergers were announced to last July 16th. First Union’s purchase of CoreStates, for example, was for more than five times CoreStates’ book value. “First Union has talked about wringing out $250 million in annual cost savings, and, if in place last year, that would have brought the annual take to $1.1 billion and increased the return — to 6.8%.” Hardly stellar. A study by, Steven Kaplan at the University of Chicago and Michael Weisbach at the University of Arizona done in 1992 found that 44% of acquired companies were later sold off — often at a loss. (Barron’s, 4/20) (see also BusinessWeek, 4/27 and The Hindu, 4/20)) For help in avoiding these problems see The Art of M? and The Art of M? Integration by Lajoux.

Apple bars the press from their shareholders meeting which is scheduled for April 22 at 10 a.m. Pacific time at Apple headquarters in Cupertino, Calif. (

Study finds small-to-midsize companies grant more than four times the median current-year stock option grant than large companies. Directors at small-to-midsize companies own a median of 51,080 shares — at large companies, the median is 15,674. The median number of board members at large companies is 16; of these 11 (69%) are outside directors. At small-to-midsize companies, the median is nine with only four (44%) independent directors. For a copy of the complete survey report, fax a request to Mary L. Feldman, Senior Vice President, Public Affairs, The Segal Company, One Park Avenue, New York, NY, 10016, 212-251-5490. (PRNewswire)

Y.R.K.Reddy invites submission of articles for a book to promote Corporate Governance in India. Papers on specific country models (American, German, East European); country comparisons; Corporate Controls & Market Structures; debates on specific codes (like the Cadbury Committee’s); and theories on handling dilemmas, carrying out fiduciary responsibility under hostile conditions are welcome. Contact[email protected]

Control of the internet to be given over to an independent global board to reduce the government’s legal liability. “What we are looking to do is to turn over all the authorities we have to a neutral, private, non-profit organization that would have a fully international board of directors which would be constructed in a way so that it could withstand legal challenges and not have to depend on the authority of the U.S. government or any other government,” said Ira Magaziner, Clinton’s information technology policy adviser. (WSJ, 4/17)

Use of the internet is up. Ameritech reports 10 times as many voting on the internet for this year’s annual meeting as last year’s. ADP says it offers to log votes via the internet for about 1,000 companies and plans to extend this option to all by next year. (WSJ, 4/16)

The current Ivey Business Quarterly contains a facinating article entitled “Beyond Carrot and Stick” which attempts to build from the work of Alfie Kohn. Authors Paul Britton and Terrence Walker indicate the first step is to get base pay right. This is the amount the market is willing to pay for the level of talent required. The danger is in losing sight of the value of the employee’s contribution to the organization. Although the author’s don’t note it, this might be what Blair terms firm specific human capital. “Designing a plan without stretch will get you entitlement, and designing an incentive plan with no hope of payout will demoralize.” One of the case studies cited is that of Springfield Remanufacturing Corporation (SRC) and open-book management which Jack Stack documented in The Great Game of Business. “When you appeal to the highest level of thinking, you get the highest level of perfomance.” Britton and Walker, following Stack, point out that employees must have access to information and the ability to understand how to translate business objectives into action locally. (reprint BQ97205; call 800-6496355 to order)

The Board of CalPERS adopted revised corporate governance principles. The draft released last June probably served as something of an embarrassment to the Board. The most aggressive standards, such as recommending that directors who sit on a board for more than 10 years be considered company insiders and that boards limit those over age 70, have been dropped. One of CalPERS’ own board members has served for more than 27 years. The head of the Investment Committee and the President of the Board have both served more than ten years. Those over 70? I won’t go there. Under the standards adopted, boards should “consider the issue of continuing director tenure” and take steps to ensure the board “maintains an openness to new ideas and a willingness to critically reexamine the status quo.” (see press release)

The Public Employment and Retirement Committee of the California Senate approved SB 1753 (Schiff) and SB 1879 (Hayden), both measures intended to prevent conflict abuses at CalPERS and CalSTRS. For more information contact David Felderstein or Nancy Shipley at 916-445-8958.

Nuevo Energy Co. will name shareholder activist Charles Elson to its board, according to a report in the 4/14 WSJ. Elson’s may come at the behest of Relational Shareholders LLC, a La Jolla firm that invests in companies with undervalued stock which tries to turn companies around by seeking to change the board, either through proxy battles or through the appointment of new board members. Relational Shareholders bought 5% of Nuevo Energy last year. Nuevo’s largest investor is CalPERS.

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Pactrick McGurn continues his coverage of options issues in the 4/10 ISS Friday Report. He reports that SWIB has asked the full SEC commission to reverse a staff decision that may allow Shiva Corp to exclude an anti-repricing bylaw from its ballot because staff considered the subject “ordinary business” excluded under Rule 14a-8(c-7). SEC staff believes that since SWIB’s proposal covers all corporate employees, it relates to general compensation policies. According to McGurn, they left the door open for SWIB, CII and other interested parties to raise concerns over “changing capital structure” and the cost of repricings to shareholders via dilution.

McGurn notes several reasons why the SEC should “graduate” option repricing from the ranks of “ordinary business.” These include the fact that repricing is becoming commonplace (14% of the Technology 250 repriced last year), and they are a matter of growing public concern. An ISS survey of 118 large institutional investors found 71% in favor of prohibiting repricings without shareholder approval. Additionally, the use of board-based option programs has exploded, the cost of repricing such plans is likely to be large, and broad-based plans are rarely put to shareholders for a vote.

Management Fads and Fashions by Richard Petty, provides a handy one paragraph synopsis of four major areas, such as performance measurement, as well as over a dozen fashions, such as customer profitability analysis. (see Company Secretary, April 1998) In the same issue, Bob Garratt, Chairman of Organisation Development Limited, calls for tougher regulation of boards and directors in his “Targeting Complacency in the Boardroom.” He warns readers, primarily in Hong Kong, that Singapore is looking to establish its own institute of directors, codes of conduct, and accreditation. Hong Kong could be left behind unless complacency is reduced. Garratt points to the accredited diploma program run by the Hong Kong Institute of Directors and foresees a time “when all directors will be accredited and registered.”

Over the last two months South Korea, Thailand and Indonesia have agreed to implement IMF reforms that call for greater governance and accountability from financial and investment institutions and corporations. The driving force is the need to provide investors with transparency — timely, accurate information about company performance. Agreements call for audits of corporations and financial institutions to be conducted according to internationally acceptable standards using teams from internationally recognized audit firms. (seeModel of Compliance: U.S. Corporate Governance Standards Go Global, New York Law Journal, 4/9)

Assets of U.S. pension funds stood at $7.4 trillion at the end of 1997, up from $6.3 trillion a year earlier, dwarfing the $5.6 trillion held by mutual funds and life insurance companies combined. Equity holding were down to 28.1% vs 28.5% at end of 1996. As a share of total wealth by American households (excluding real estate), pension fund assets represented 27.5% (19% if real estate is included). Public pension funds increased 22%; private pension funds grew 17.6%. Defined benefit pension plans exceeded contributions by $2.7 billion, while defined contribution plans netted $85.6 billion. DB plans have been net sellers of equities for more than a decade, whereas DC plans have continued to be net purchasers. (see 4/6 P?)

Long-term corporate investment and the % of institutional ownership were found to be positive correlated in a study entitled “Do Institutional Investors Exacerbate Managerial Myopia?” Contact authors Sunil Wahal, Emory University and John J. McConnell at Indiana University. (see 4/6 P?)

Ronald Machold, director of the New Jersey Division of Investments and one of the first co-chairs of CII, is profiled inP?.

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Three new funds in Europe are aimed at creating shareholder value. As we reported last month, Hermes Pensions Management, the parent company of one of the UK’s largest pension management groups, and Lens Investment Management, the United States-based investment group, are linking up to create the UK’s first institutionally-backed fund manager with the specific aim of assisting in the improvement of shareholder returns on companies with hidden underlying value. The first fund, Hermes UK Focus Fund, will be launched in the Summer and will concentrate on mid- to large-capitalisation companies quoted on the London Stock Exchange, taking stakes of 2-10%. The fund will work with management but confrontation might be necessary at times.

The European Renaissance Fund Ltd., will be an open-end fund with an initial target of $109 million. It’s a joint effort of Arlington Capital Management Ltd and Taube Hodson Stonex Partners Ltd. Arlington will reportedly communicate specific business strategies to boards of portfolio companies and may take seats on boards.

The third new fund is ABF Euro V.A., a combination ofAndre Baladi, co-founder of the International Corporate Governance Network, and Pierre-Henri Leroy, founder of Paris-based Proxinvest. It will use an index-fund strategy (180 stocks) tilted in favor of companies that meet corporate governance criteria. Fees will run 1% of annual asset value plus 20% outperformance relative to the FT Europe index. Criteria include corporate communications, voting rights, board composition, corporate strategy, corporate performance compensation, shareholder returns and stock price. Favorably rated stock will be overweighted and those with a poor rating will be underweighted. (see 4/6 P?)

New service available through First CallInstitutional Shareholder Services (ISS) is making its information available over FIRST CALL Research Direct and FIRST CALL Notes(tm). The Wall Street Transcript, a weekly publication representing the interests of long-term investors, is now available on Research Direct as well. With these agreements,there are now 15 subscription services available on Research Direct.

Arecent survey of leading U.S. banks, insurance companies, pension funds and mutual funds by Broadgate Consultants(212-232-2222) found that although they expect to increase investment substantially over the next twelve months in European equities, over 90% were are concerned that foreign companies do not pay enough attention to shareholder value and governance issues. Nine of 10 said information was less complete than what they are accustomed to receiving, 40% felt that European-based research was not useful in for specific companies. Most felt regular and systematic contact with senior management was very important.

Areport to the OECD chaired by Ira Millstein by titledCorporate Governance: Improving Competitiveness and Access to Capital in Global Markets, recommended that OECD issue voluntary “best practices” guidelines for boards, formulate standards for transparency and accountability, and consider the right to vote and participate in annual meetings an asset that provides opportunity to influence the direction and management companies. These and many other recommendations are listed and discussed in an April 3rd IRRC Corporate Governance Highlights.

The Teamsters lauched their annual attack on the “least valuable” directors with Robert Stone, who sits on the boards of Kirby, Tandem Computer, NovaCare, Core Industries, Russell Reynolds Associates and various funds managed by Scudder, Stevens and Clark, in the number one position. (IRRC)

Expanded thoughts on The Emperor’s Nightingale; Restoring the Integrity of the Corporation in the Age of Shareholder Activism by Robert A. G. Monks, our featured book of the month. (see review. Please share your opinion).

New Shareholders’ Bill of Rights adopted by the Council of Institutional Investors calls for indexing options granted to directors and managers to peer or market groups. In other news covered by ISS, IBM, which doubled the number of employees receiving stock options last year, more than tripled the number this year. The move is intended to keep talent with the firm.

Weil, Gotshal & Manges produced a report for the OECD on best board practices around the world. Contact Holly Gregory at 212-310-8038 for details. (reported in Directorship)

Business philosopher, Charles Handy, and author of The Hungry Spirit: Beyond Capitalism: A Quest for Purpose in the Modern World, calls for voting and nonvoting shares. Voting shares would be confined to and traded among core employees, long-term investors, and others with a long-term relationship with the business, such as large suppliers. This would differentiate among those who are merely betting on the company and those who have a real stake in its future.

Handy notes that much of the wealth of advanced industrial societies is now derived from the knowledge that workers bring to the job. “If anyone buys the business, they are buying a customer list, some product brands, and maybe some research, but, mainly, the hope that the best of the people working there will stay with the new owners for the ride.” Handy believes the influence of shareholders has become too dominate, that individuals will “begin to expect from their work communities the same collection of freedoms, rights, and responsibilities that they have in the wider society. People are property no more.”

As businesses realize their best people are really volunteers, there because they want to be and not because they have to, Handy expects models will be created which will provide them with a more democratic workplace. (see interview and A Better Capitalism, Across the Board. 4/98)

An assessment of the impact of the 1995 Private Securities Litigation Reform Act by Jay Eisenhofer and Abbott Leban leads off the March/April edition of the Corporate Governance Advisor. They find that only 6 public pension funds have participated as lead plaintiffs in the first 124 cases. They point to a recent perspective offered by Wayne Schneider, General Counsel of NYSTRS; a Federal securities law claim is a plan asset, and as such, it must be managed with a view to optimizing the fund’s return. The incremental return from a fund taking a lead plaintiff role is often not worth the costs. The authors review landmark cases and conclude that total volume of securities class litigation hasn’t changed much; traditional firms still dominate; and there has been a shift to state courts. They don’t expect institutional investors in the private sector to seek an activist role because most are “hopelessly conflicted.” On a positive note, increased competition among the qualified firms for the business of activist funds is reducing the attorney-fee portion of expenses.

Vermont enacted legislation banning trustees of the state teachers’ pension fund from accepting gifts and favors from money managers and others conducting business with the fund. (Pensions & Investments) California will consider two bills which attempt to address conflicts of interest at public pension funds at a hearing of the Public Employment and Retirement Committee on April 13th.

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Arecent ISS Friday Report carried more on the previously reported move by Taiwan’s Securities and Futures Commission to require foreign institutions to vote in favor of all management proposals. Apparently, the rationale is to reduce the lack of quorums. ISS notes a better way to resolve the issue is to provide timely disclosure of meetings and greater detail of the items being submitted to a shareholder vote. Investors are invited to comment on the proposed regulation by faxing Philip Ong, Deputy Director of the SFC, International Division at 886-2-8773-4146. We would also suggest e-mailing the SFC, attention: Mr. Ong at[email protected]

Update 4/2/98. Mr. Ong responded to our recent inquiry as follows: “The issue you raised concerning the possibility of requiring institutional investors to vote in favor of all management proposals is still under consideration. The draft proposal was originally intended to require local securities investment trust enterprises to vote in favor of management resolutions. Yet in a preliminary meeting, participants suggested that it be expanded to apply to foreign institutional investors as well. The Commission will hold a public hearing to invite more thoughts on this issue. The public hearing is scheduled on April 4 (9:30am) at my Commission. Your comments are welcome.”

The Council of Institutional Investors adopted recommendations calling for options to be indexed against the performance of the overall stock market or an executive’s peer group. It also called for full disclosure and the unbundling of money that brokers charge investors for trading shares used to pay for other purposes, such as research.

The Essays of Warren Buffett: Lessons for Corporate America (Cardozo Law Review, $14.95) by Lawrence A. Cunningham distills 20 years of Buffett’s annual letters to Berkshire Hathaway shareholders. The author is interviewed in the April 6th edition of Forbes.

French investors want more disclosures by directors. A poll carried out by Ecocom, a communications consuzltancy, in conjunction with accountants Deloitte Touche Tohmatsu, found that 82% wanted directors to disclose the boards on which they sit, 80% wanted disclosure of the number of shares they hold and 73% wanted details of directors’ pay. (Financial Times, p. 17, 3/30)

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