Archives: May 2000

GE Workers Demand More Control of Pension
General Electric’s pension fund now has $2 for every $1 it expects to pay out. Who should benefit?

BusinessWeek (6/5) carries an article entitled, “GE’s Pension Fund Runneth Over. So Do Tempers: Refusing to share more of the riches with workers sparks revolt.” GE’s pension fund has grown to the point that it now has $2 for every $1 it expects to pay out. Workers want a share of the growing profits. They’re demanding regular cost of living increases and a seat on the pension board.

GE tried to neutralize the issue with its workers and unions by increasing some retiree benefits just nine days before its annual meeting but workers weren’t satisfied. Excess pension income adds directly to GE’s bottom line and allows it to buy other companies whose own pensions are underfunded, but GE can’t invest the surplus or the income generated in other businesses.

Who should benefit from excess pension income? Under ERISA, the primary responsibility of fiduciaries is to run pension plans “solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.” Keeping profits up or to making it easier to buyout companies with underfunded pensions isn’t a legally acceptable purpose of the fund by law.

I agree with the Coalition for Retirement Security, current and future retirees need pensions that are portable, insured, adjusted for inflation whenever possible. They also deserve plans that give them a say in how their pension money is invested. Giving workers representation on corporate boards could substantially increase corporate monitoring and efficiency.

Pension funds own about 25% of the market. Since 1988 the Department of Labor has held that corporate governance and, specifically proxy voting can add value. Therefore, voting rights are subject to the same fiduciary standards as other plan assets and must be voted solely in the interests of participants and beneficiaries. However, although DOL has done three studies demonstrating that many funds cannot document how they voted in corporate elections, DOL has never taken disciplinary action against a fund for failing to act in the interest of beneficiaries.

If more workers were represented on pension fund boards it seems likely that pensions would be more active players in corporate governance…maybe not to the extent of eRaider or CalPERS but at least there would be more open debate about how votes in corporate elections may impact plan participants. That would be a great start.

Daniel Szente Named CalPERS CIO
Daniel M. Szente, 52, will manage the nation’s largest public pension fund. He comes from Pennsylvania-based McGlinn Capital Management, where he was Executive Vice President and Director of Research. He has more than 16 years’ investment policy and management experience in the public sector, serving as Assistant Director of Investments of the State Teachers Retirement System of Ohio. Szente holds a Bachelors of Science degree, a Masters in Business Administration from Ohio State University. see press release

Gary Cooper of Governance?
That’s what BusinessWeek calls governance activist investor Andrew Shapiro in their 5/29 edition. I didn’t quite get the connection. Maybe its that Shapiro charisma or that frontier mystique with a worldly polish. Regardless of his relation to the film star, the article pointed out Shapiro’sbylaws, which he put in place at Quality Systems, are “fast becoming a template for other investors looking to create change. Early this year, Palo Alto Investors, a $200 million hedge fund, used a proposal modeled on Shapiro’s to get the board to make changes at Embrex Inc., a Durham (N.C.) biotech company.” (see The Gary Cooper of Governance, requires subscription)

Japanese Court Sides With Shareholder
Nara district court nullified a routine vote to award retirement bonuses to directors because Nanto Bank failed to adequately answer a question posed from the floor of the annual meeting seeking disclosure of the amounts. Nanto Bank is appealing the court’s decision. If upheld, Japanese shareholders would win a dramatic victory. IRRC’s Corporate Governance Highlights, 5/12

Results in for First International Proxy Campaign
A union led contest to change the board composition and labor practices at Rio Tinto PLC won about 20% of the vote as reported by Businesswire.Results of Voting At 2000 Annual General Meetings of Rio Tinto plc and Rio Tinto Limited

Takeover Defenses Up
IRRC reports that almost 59% of 1,900 firms studied have classified boards (directors elected on a staggered basis, usually for three-year terms). Poison pills (which increase the cost of takeover typically via redemption rights or new issues) are maintained by 56% of the companies, compared with 52% in 1997. To order a copy of Corporate Takeover Defenses contact Heidi Salkeld at IRRC at 202-833-3555 or email [email protected].

Labor’s Money
A Newsletter for the Taft-Hartley proxy Voter produced by IRRC is now available for free online. The May-June issue discusses the AFL-CIO’s Key Votes Survey, AFSCME’S New Activism, Building Trades Initiatives, Mueller/USWIA Lawsuit, and more. Jointly-trusteed funds won more shareholder proposals in 1999 (15) than any other group of investors. IRRC’s newsletter is a welcome addition to news sources on the cutting edge of corporate governance. Register for Labor’s Money.

Korn/Ferry Finds e-businesses at Stage 1 of Corporate Governance
Korn/Ferry International researched the proxies of the Fortune e-50 found smaller boards with fewer women and minority directors, dominated by insiders. More than half are paid solely with stock or stock options. see Businesswire, It’s a Look Back to the Early 1980’s for New Economy Boards, According to Korn/Ferry International Study

Proportion of Investing Public Drops
A May 5-7 Gallup poll found that about half of all households (54%) have money invested in the stock market right now, a drop of seven percent from a similar survey conducted at the beginning of March. Among these investors, 28% have heard of “socially responsible” investing. Only 11% of all investors have consciously made such social investments. see One in Nine Investor Households Have “Socially Responsible” Investments

eRaider Invents Unproxy
eRAider, the activist fund for the rest of us, invented the “unproxy” to get its point across in its current battle against a poison pill at Employee Solutions. see Send In Your UnProxies

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CalPERS: Heritage Foundation v Freedom House
Will largely public union-based CalPERS take its international investment advice from the anti-union conservative Heritage House over liberal think tank Freedom House? CalPERS staff cited several studies showing “linkages between political and electoral freedom and future growth are weak or do not exist at all.” Therefore, CalPERS should favor dictatorships over democracies? I don’t think so. Maybe a long term investor such as CalPERS ought to be looking toward something like the Global Reporting Initiative when they take up this issue again in August. See San Francisco Chronicle, 5/16, CalPERS Postpones Decision on Investments in Developing Nations: Board wants staff to revise plan to add human rights criteria.

coverImproving Corporate Boards : The Boardroom Insider Guidebook
One of the most frequent requests from readers of CorpGov.Net is for a book on how to improve their board. Finally I can recommend a book that doesn’t read like a dry academic text and is built on real life examples. Ward presents a clear guide to solving the most common problems facing boards. Each chapter provides a concise overview of a problem or focus area, several real life examples, internet resources, advice from various experts and a checklist summary. CalPERS should consider sending Mr. Ward’s book to each board member of the companies on its focus list.

The Internet Will Drive Corporate Monitoring
Mark Latham’s paper on the clickable voting revolution will appear in the June edition of Corporate Governance International. When online brokers or others offer individual investors an automated voting function on the same websites where they now trade or track their stocks, the corporate governance revolution will get another large boost. Latham has also put forward a draft paper entitled Internet-based Stock Voting Advice Systemswhich goes into greater detail about the mechanics of such a system. The system makes so much sense and could probably be made so profitable that I can’t understand why you’re still reading this instead of building it. I hope someone keeps me posted of their progress; I want to be one of the first users.

Asian Shareholder Revolution Held Back By US Practice
The Asian Wall Street Journal argues companies aren’t living up to the shareholder value mantra. A contributing factor is US Broker voting.

A May 19th Asian Wall Street Journal commentary, “A Corporate Governance Revolution,” argues Asian companies had to bend to the demands of new investors in order to get the fresh capital needed to survive. “Now they repeat the shareholder value mantra, even if they don’t quite live up to it.”

I was recently on a speaking tour of Korea and Japan, sponsored by the State Department, to discuss foreign direct investment. My focus was on the impact of the Internet on shareholder activism. I found many businesses hoping to follow the example of Indian software company Infosys in raising funds on the Nasdaq. However, the shareholder activists I met with, particularly Hasung Jang with the People’s Solidarity for Participatory Democracy (PSPD), are increasingly frustrated with the poor voting record of individual investors from the United States.

Broker voting rules in the US make it extremely difficult for US investors whose shares are held in “street name” to vote with shareholder activists. If they haven’t voted within ten days of the meeting, their broker exercises “discretionary” voting rights in support of management’s proposals. This practice unfairly stacks the deck against shareholders everywhere, but is particularly egregious in Korea and Japan where proxies are typically sent out only 14 days prior to the annual meeting.

It’s ironic that a significant barrier to good corporate governance in Asia is an undemocratic practice that originates in the US.

AutoZone Dispute Goes Public
Board member Edward Lampert has taken his criticism of the company’s shareholder rights plan public. Lampert, who represents the automotive parts retailer’s largest investor, threatened to solicit support of shareholders to have the board removed. (Investor Relations Business, 5/15/2000)

New rules, effective 5/30/2000, will allow corporate filings, such 10-Ks and 10-Qs, to be made in HTML (PDF is so far unacceptable). The SEC expects HTML filings, which will allow limited graphics (no animation) and hyperlinks within documents and to filings already in the database, to constitute the vast majority of filings within a short time. (Investor Relations Business, 5/15/2000)

Hermes Lens to Launch in Europe
Hermes Lens is set to launch a continental European version of its $683M Hermes Lens UK Focus Fund which attempts to make money by investing in and turning around poorly performing firms through corporate governance activism. The 5/15 edition of Pensions & Investments indicates the 18 month old fund is so successful it may soon close to new investment to “pause for breath.” Hermes Chief Executive Peter Butler expects their first investments to be in Germany and France. Butler described their strategy as taking 18 months to 2 years to turn a company around.

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Global Governance Partners and Napalm
Forbes Magazine picked right up on Guy Wyser-Pratte’s message to sleepy managers in Europe who resist change: “Wake up and smell the napalm.” Wyser-Pratte’s recent successes in Europe have led him to launch a $200 million fund, Global Governance Partners. With a staff of just 12 in New York, the new fund will limit itself to ten positions in underperforming companies around the world. “Helping out will be a network of analysts, versed in the arts of arbitrage and shareholder activism, that Wyser-Pratte has built in 22 cities around the world, including Tokyo, Milan and Johannesburg.” (see also, Business Week, The Raiders are Coming! The Raiders and Coming!, 4/24, p. 138.)

A survey of institutional investors by Russell Reynolds Associates found them moving away from small, venture capital dominated boards. In the other direction, 2/3 said every board should have a formal internet committee and almost as many believe every board should have at least 1 technology expert. A majority steered away from companies with unsatisfactory corporate governance. (The Economy Is New, but Not the Standards, NYTimes, 5/14/2000)

Jumping in With Both Feet
New York Times article notes that “most mutual funds keep their distance from companies on matters of corporate governance, but the $3 million Allied Owners Action fund, introduced on March 10, jumps in with both feet.” They are already having an impact on their first investment, Employee Solutions. For example, Employee Solutions recently announced that Quentin Smith, its president, chief executive and chairman, would relinquish the chairman’s position. (A 2-Month-Old Fund, Carrying a Big Stick, NYTimes, 5/14/2000)

Pay Disclosures Spreading
Johannesburg Stock Exchange (JSE) has proposed that listed companies be compelled to disclose each individual director’s salary, bonuses and other forms of remuneration each year. The King code currently requires disclosure of overall remuneration for executive and nonexecutive directors, rather than individuals’ packages. See Controversy Is Likely Over Fat Packages For Directors, Africa News Online, 5/15/200.

CalPERS Changing Directions?
Recently the Los Angeles Times ran an article about State Treasurer Phil Angelides’ proposal to direct more CalPERS money to “narrow California’s wealth gap.” Will he succeed?

California Treasurer Phil Angelides unveiled a plan to narrow California’s wealth gap by investing more than $8 billion in low-income communities. The plan calls for 2% of the state’s pension fund portfolios to be directed toward impoverished communities in California rather than risky overseas markets. CalPERS already has $150-million invested in “Magic” Johnson’s theater developments much more in affordable housing. The system suffered steep losses in Indonesia and Malaysia.

Will Angelides succeed? Chances may be good investments that can pass fiduciary standards. The recent board appointments of San Francisco’s mayor Willie Brown Jr. and Sean Harrigan, a United Food & Commercial Workers official have strengthened CalPERS’ pro-labor voice. Like politicians on the Board, many of the labor based members will be looking for the double benefit of good returns for future beneficiaries and economic benefits to California’s economy today.

The recent replacement of Charles Valdes with Michael Flaherman, as chairman of the powerful investment committee may further this shift, even though Mr. Valdes’ roots are in labor, whereas Mr. Flaherman’s are not. Flaherman appears more open to considering social issues, such as divesting tobacco stocks. Valdes has been a strong voice against social screens.

While I expect a shift, CalPERS won’t suddenly switch to a strategy of selecting investments based on politics, which then searches for investment theories to justify them. The six Board members elected by CalPERS members are unlikely to favor any Angelides plan that narrows California’s wealth gap at the expense of those who elect them. However, there is no reason why CalPERS can’t move further in serving its members, not just when they retire, but on a day-to-day basis while they live and work in California.

After three hours of debate, the Board approved a motion that would allow the CalPERS investment staff and the treasurer’s office to work together to try to come up with a compromise agreement by August. (see also Rough reception given Angelides’ CalPERS vision, Sacramento Bee, 5/16/2000)

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eRaider Becomes Gathering Place
The Allied Owners Action Fund is still working out what action to take to increase the value of its first target investment, Employee Solutions. Discussions on its affiliated internet site, e-Raider, are now getting more sophisticated as discussants move to specialist eRaider boards such asAccounting to delve more deeply into the issues being raised. In addition, although suggestions by posters to go after Homebase (HBI) next has apparently been rejected, shareholders have been encouraged to gather on the site to organize and plan action.

NACD Viewpoints
Jon Masters notes that while the McKinsey study indicates institutional investors say they would pay a premium for stock of companies with good corporate governance, a recent Columbia Business School study based in detailed interviews concluded: “Except in highly publicized cases involving allegations of excessive executive compensation, dysfunctional boards, or fraud, it is generally only after firms are identified as troubled or long-term underperformers that governance practices are given more than routine scrutiny.” Masters argues that if we truly believe good governance enhances value, it needs to be factored into the investment process. To do so, we’ll need more meaningful public information.

In the same Viewpoints section of April Director’s Monthly, attorney Lewis Black Jr. discusses the escalating tug of war between directors and shareholders. Binding bylaw resolutions have upped the ante. Directors view them as an effort to micromanage. Black appears to sees a backlash building against vote no campaigns. “An increasing number of corporations are issuing shares to the public with reduced voting rights.”

Infosys CEO Interviewed on Corporate Governance
The Hindu carried an interview with Naryana Murthy who heads software firm, Infosys. Murthy speaks of values: “public good ahead of private good; of not using the corporation’s resources for personal benefit.” He voices the need to align the Indian Generally Accepted Accounting Principles (GAAP) much more with international standards and improve disclosure standards for financial statements. “Critical shareholder resolutions need to be debated by as many shareholders as possible…we have to create trust among our shareholders, especially the minority shareholders. That comes from disclosure, transparency and fairness.”

Murthy speaks favorably of ESOPs but warns, “first of all there has to be a mechanism to reward those who are wholly meritorious. ESOPs cannot become a mechanism of patronage. Second, they cannot be used to reward the cronies of promoters and enhance the shareholding of promoters.” SeeCorporate governance a question of value systems.

How Important is Your Internet Site?
First Federal Savings & Loan Association of East Hartford didn’t make its corporate filings available online. In a recent Wall Street Journal article, Richard Lashley says it’s a “little thing,” but it’s indicative of how First Federal views shareholder relations. It also appears to be at least one important reason why he supported a dissident slate headed by Josiah Austin of Pearce, Arizona. Austin will push for First Federal to hire a new investment banker to review how the S&L might achieve higher profits under more-aggressive management. Mr. Austin may have won control two of 10 board seats — not a majority, but enough to begin exerting pressure. (WSJ, Heard in New England: Dissident Says He Won Fight For S&L Seats, 5/10/00)

ECGN Update
The European Corporate Governance Network, which does about the best job of keeping corporate governance codes online updated, reports the following have been added to their codes page:

  • the EASD Corporate Governance Principles and Recommendations released last week;
  • a local download option for the Preda code from Italy;
  • the “Urgent Recommendations Concerning Corporate Governance” from Japan (in draft form since 1997);
  • Guidelines of the Swedish Shareholders’ Association;
  • Guidelines of the European Shareholders’ Association;
  • the Turnbull Report from the U.K.;

Shapiro Touts QSI Template
The Corporate Board (5-6/00) carries a conversation with Andrew Shapiro, “Making Governance a Proxy Issue,” where Shapiro discusses mandating corporate governance reform at target companies. “The Lawndale proxy sought to impose one of the toughest definitions for outside director independence ever seen, including strict director tests for company employment or consulting income, and board interlocks. Wholly independent audit nominating and compensation committees were also demanded.”

Shapiro’s tactic seems to be working. He launched his campaign at Quality Systems (QSI) in the spring of 1999 when Quality Systems was around $4/share. By March of 2000 it was $15/share. Although with the recent sell-off in dot.coms, the price has slipped to around $10/share. Recently, Shapiro won a similar agreement at ELot which has been selling at about $3/share. “We plan on using this proposition and more advanced versions at other companies to force positive changes.” (see disclaimer)

CalPERS Honors Contributions
CalPERS will honor Apple Computer for improved corporate governance, the Texas Instruments’ board for its dedication to shareowner interests, and Time Warner CEO Gerald M. Levin for his commitment to the principle that CEOs are responsible to shareowners and accountable to the Board of Directors. Award recipients will be honored at a dinner on May 15, 2000 at CalPERS headquarters in Sacramento, California. (see press release)

Corporate Governance Week
I’d never heard of it, but then I’d never heard of the Leading Corporate Governance IndicatorsTM until I started getting e-mail from Stephen Davis, editor of Global Proxy Watch. Davis is certainly prolific and on target. The April 29th edition of The Economist features his rankings in a comparison of 1996 and 1999. Britannia still rules the Indicators but Germany is picking up while the US and France stand idle. However, Michelle Edkins of Hermes recently noted the information contained in many UK reports appears to come from one template…actual disclosure may lacking. Perhaps further refinements in the Indicators is warranted. Back to “corporate governance week.” Here are two main events.

On 10-11 July the World Bank, Commonwealth Association for Corporate Governance, Asian Corporate Governance Association, Davis Global Advisors and others are sponsoring “The Shareholders Role in Corporate Governance in Emerging Markets and Transition Economies.” The conference is being held in New Haven, Connecticut USA. For an e-program, please contact[email protected].

Later that same week is the sixth annual conference of theInternational Corporate Governance Network, scheduled for 12-14 July in New York City. The event is the largest global corporate governance event of the year. Sponsors for the 2000 conference include the New York Stock Exchange, Nasdaq, and host TIAA-CREF, the world’s largest pension fund system. Program information and registration materials may be found on their conference page.

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Delaware Premium
Research by Robert Daines, an associate professor of law at the New York University, finds that Delaware law appears to improve firm value. “On average and over time, investors pay more for the assets of publicly held firms governance by Delaware corporate law.” He offers two explanations. First, Delaware takeover law is relatively less entrenching, reducing the cost of acquiring (selling) the company. Second, because companies typically lack operations in Delaware, managers and employees are prevented from gaining political influence and cannot defeat takeover efforts through political influence. In addition, Daines argues that Delaware’s specialized judicial system “may effectively deter managerial or control shareholder opportunism.” He speculates the premium for incorporation “might be even bigger if Delaware law were less protective of incumbent managers intent on resisting an uninvited bid.” (The Corporate Board, 5-6/200, pp. 22-25)

Whitworth Urges Investors to Step Up to the Plate
Speaking at the spring meeting of the Council of Institutional Investors, Ralph Whitworth said his first order of business as a new member of Matell’s board would be to have the company come out with a new bald “Ken” doll. After telling the story of how he got asked to serve on the board, he pointed out that 1 member on a 10 member board can make a difference, particularly if they have the focused interest of a large shareholder. “As issues come up, the heads turn down to look at the major shareholder,” he indicated. Whitworth urged council members to step up to the next level of activism and present names of board candidates to nominating committees. (IRRC, CG Highlights, 3/31/00)

Strengthening Shareholder Relations in the Privately Held Company
Recognizing that private companies need to address many of the same fundamental issues of governance, ownership and control as public companies, consultant Thomas Bakewell offers advice to family businesses and others. Bakewell sets out various considerations for developing private company boards, pointing out that empirical evidence has shown a significant positive correlation between the boards contribution to strategic planning and growth of the firm, with outside members being more critical to growth. Another focus of the article is shareholder agreements and the need to address ownership and control issues upfront. The article also provide a useful case study of a closely held businesses which was able to maintain its goals by addressing such issues before it was acquired by a larger firm. see NACD’s Director’s Monthly where you can download the article (4/2000)

The issue also contained a helpful analysis of the new SEC audit committee regulations which was compiled by KPMG’s Audit Committee Institute. The Institute site has a wealth of information and links to serve and educate committee members. We’ve added a permanent link to their site from our Links page under Audit Committees.

Coalition for Retirement Security Pushing COLAs
Faced with demonstrations, publicity campaigns, the backing of institutional investors, and use of the Internet to rally employees with the possibility increasing the purchasing power of their pensions by pressuring pension funds with huge surpluses. (More activist retirees put squeeze on companies, The Christian Science Monitor, 5/1/00)

CalSTRS Board Hopes to Up Benefits
California teachers scored a victory when their pension fund endorsed a record $15.3 billion in new retirement benefits for K-12 and community college educators in California. Now, it’s on to the Legislature. (seeSacramento Bee, 5/5/00)

India to Curb Fraud
Dr. P.L. Sanjeev Reddy, Secretary, Department of Company Affairs, announced that his Department is working out a caution list of defaulting companies, with the idea of putting it on their website. He also announced that his Department and the Reserve Bank of India are working out measures to deal with Non-Banking Financial Companies which have siphoned off money from stock exchanges and individual investors. (Northerlight)

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Rio Tinto Resolutions Gain Support
Institutional investors with more than $44 billion in assets are supporting two union-backed resolutions demanding changes at Rio Tinto Plc. The resolutions demand that Rio Tinto adopt International Labour Organisation conventions on human rights at work and appoint a single, independent non-executive deputy chairman to make the board more accountable to shareholders. (Investors back union call for changes at Rio Tinto, Reuters, 5/4/00)

Internet Boards Lacking
Internet company board are under-experienced, underpaid, and understaffed, according to a survey of 100 leading Internet companies just released by Manhattan-based Spencer Stuart. Nearly 1/3 of members are insiders, compared to 1/5 of the Standard & Poors (S&P) 500 companies and many outside members are probably venture capitalists with a financial stake in the company who may have a short-term perspective. The boards are younger too and may not have the experience necessary to “successfully guide companies through difficult times.” They are also 97% male, about 1/2 the size of S&P 500 counterparts and rely heavily on options. Spencer Stuart believes survivors will begin to look more like their S&P 500 counterparts. (Internet Boards Of Directors Not Top-Notch, Newsbytes, 5/5/00)

Calvert Social Index to Post Votes
Following the lead of Domini Social InvestmentsCalvert’s new fund has announced it will post its proxy votes starting in 2001. We applaud this most important step in keeping investors informed. How can we ever hold our fiduciaries accountable if we don’t know how they vote? When will we see Fidelity posting their votes? They say, “we help you invest responsibly” but how do we know they’re voting responsibly? I’d like to report Fidelity will be next but I’d place bets on Citizens Funds to start posting long before Fidelity. Is voting only a concern for “socially responsible investors?” I’ve never liked that label but I do believe that socially responsible investing begins with good governance. If your fund hasn’t announced they will report their votes, I suggest you request that they do so.

Boardroom INSIDER Features Adaptive Broadband
Ralph Ward’s Boardroom Insider caused us to take another look at Adaptive Broadband’s corporate governance guidelines which appear to be a good baseline any high tech firm. With 21 key points. I particularly like the pledge not to reprice stock options even if they are significantly “under water” and the requirement that all execs (42 persons) must buy and hold outright stock of the Company valued at one-half to two times base salary, depending on their positions. One minor criticism, put the full text up on the Internet in a more readable format. I also see Ward’s new book,Improving Corporate Boards: The Boardroom INSIDER Guide, is now available. I’ve only got an unbound preprint but highly recommend it! It contains the kind of practical advice most boardmembers only accumulate from years of experience…by the time you get that, it may be too late.

Shareholders Vote for Choice
Preliminary results reported by IRRC (4/21) indicate that 12.7% of First Union shareholders voted to require the nominating committee to nominate two candidates for each board position. The resolution also called for statements by candidates on why they believe they should be elected were also to be included with future proxies. We understand opposition to the resolution which would certainly put the board in an awkward position. How do you tell a candidate you’ve requested to run that the board has listed them as their second choice. However, the vote shows a growing uneasiness with the current system which locks shareholders out of the nominating process unless they are prepared to do an expensive proxy solicitation. Although I personally don’t see Richard Dee’s proposal as a realistic solution to the problem, I certainly voted my First Union shares in favor. At least it’s a start in nibbling away at SEC rule 14a-8(c)(8) which prohibits proposals relating to “an election to office.”

Canadian Business Corporations Act to be Amended
Changes may allow shareholders to communicate more easily with regard to voting intentions but also proposed is that corporations can refuse resolutions which are for the “primary purpose” of promoting general economic, political, racial, religious, social or similar causes. Relaxation of residency requirements is called for as is a prohibition against loans to directors which are likely to put the firm on the road to insolvency. Also reported in the 2-3/00 edition of Corporate Governance Review, several Canadian firms are seeking to lower their quorum requirements. Two firms have proposed reducing to levels at or near those held by a single shareholder. Author, Bess Joffe argues corporations should seek levels that balance “the conflicting interests of maintaining sufficient shareholder representation while not putting the company in a position where it is unable to carry on business.”

Virtual Recruitment for Boards
Another landmark for corporate governance via the internet was achieved in March when UK’S Net Resource Services Ltd. launched a site designed to help companies find suitable candidates for non-executive directorships. According to Managing Director, Peter Coppard, the site is ideal for those with management experience embarking on a second career and will open up opportunities for companies to easily sort through candidates and qualifications at minimum cost. See Non-Executive Director.

Non-Financial Issues to Play Larger Role
An editorial in the 2/00 edition of Governance predicts that with institutional holdings peaking (see Institutional Investor Stakes in Largest 1,000 Corporations have Peaked), social activism will be on the rise because individual investors have “shown a tendency to use their power as consumers to support their social or ethical concerns,” such as human rights, employee relations, community responsibility and pay inequity. “A second stage of governance development is underway that will see corporations becoming more sensitive to the concerns of society as a whole, and make institutions more accountable to their beneficiaries. We heartily agree and believe the Internet will be the main venue for coordinating shareholder issues. Included in the same issue is an interview with South Africa’s Mervyn King (link to older interview), who reiterates that the key role of non-exec directors is to help the board make correct business judgment decisions, and a discussion of TIAA-CREF’s global governance standards.

Contradictions at TIAA-CREF?
Governance also acknowledges the Social Choice for Social Changecampaign to get TIAA-CREF to use 5-10% of the Social Choice Account’s assets for “positive investments” in companies that are models of responsibility. I understand from Neil Wollman and Abby Fuller they have started an every Monday call-in to CEO John Biggs. So far, no change from media-relations director, Tom Pinto’s position that we “can’t just introduce a fund at the whim” of some of its two million investors. We applaud TIAA-CREF for its effective work executive pay disclosure, its campaign against dead hand poisson pills and its new global guidelines. However, we do think they should also pay attention to the wishes of their own shareholders.

Railroads & Clearcuts Campaign Wins Resolutions
According to the April 28th ISS Friday Report, the group scored majority votes in calling for annual director elections at Weyerhaeuser and Boise Cascade. On the Railroads & Clearcuts Campaign site Rachael Paschal, president of the Western Land Exchange Project, is quoted saying “Improving accountability of corporate management to investors will improve the ‘double bottom line’: profits and environmental quality.” Social activists are getting the message that their long term social goals can best be achieved by first winning good corporate governance. Also published on the site is Bart Naylor’s excellent guide, Change Corporate America For 33 Cents: A Self-Help Guide to Shareholder Activism.

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Archives: April 2000

Advisors to Disclose Vote Policies
See my “Comments on SEC Proposed Rule: File No. S7-10-00.
In 1988 the Department of Labor (DOL) set forth the opinion that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets. I have argued for many years that the same standards of trust law should also hold for mutual funds and other institutional investors. The SEC is now proposing rules which would take an important step in that direction by requiring that registered investment advisers disclose proxy voting practices on Form ADV. The form would keep clients and the public informed about who is responsible for voting proxies and how their interests are protected. Advisers that vote client proxies would be required to disclose their voting policies, practices and procedures.

The proposal is contained in Item 16 of “Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV.” Comments must be received on or before June 13, 2000. The proposal was released on April 5, 2000. [Release No. IA-1862; 34-42620; File No. S7-10-00] (File name: 34-42620.htm) See SEC Proposed Rules for comment instructions. The filling changes are part of an effort to create an internet based system for advisers similar to the EDGAR database for companies. I urge all readers to review this most significant proposal and to submit comments. In addition, I would welcome comments to [email protected]so that we can discuss the proposal further. (IRRC CG Highlights, 4/14/00)

Equity Shifts to Individual Investors
Individual investor ownership in the largest 1,000 U.S. corporations is increasing, according to a report released by the Conference Board. Institutions have substantially increased their holdings of the largest 1,000 U.S. corporations — from 46.6% of total stock in 1987 to an average of 59.9% by year-end 1997. But for the first time since 1987, the upward trend of average institutional holdings for the Top 1000 turned downward to 57.6% at the end of the third quarter of 1999.

“Online trading, direct stockholding, employee stock ownership, and the general proliferation in information availability and individual awareness are all contributing to the increasing importance of the individual shareholder,” says Dr. Carolyn Kay Brancato, Director of the Conference Board’s Global Corporate Governance Research Center. “Historically, companies have focused their investor relations efforts on institutional investors, money managers, and sell-side analysts working for big brokerage houses. But the growing significance of the individual investor has induced some leading U.S. corporations to explicitly devise approaches to attract the long-term and stable individual shareholder.”

NYSE turnover in 1998 climbed to 76% — beating the 1997 record level of 69%. The number of block trades, most of which are done by investors, increased during the last year as well. Institutional investors experienced average annual turnover of 44.3% in 1998, up from 42.5% in 1997. See press release “Institutional Investor Stakes in Largest 1,000 Corporations have Peaked

CalPERS May Be Changing Course
The Sacramento Bee said the rulemaking would “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” However, this week we saw a new willingness of the Board to listen to members and take a more even handed attitude toward their own elections. A Board policy committee modified proposed rules which would have encouraged candidates for the Board to use deceptive tactics. Instead, committee members voted for a policy which comes closer to safeguarding full disclosure. More importantly, the committee also agreed to hold a workshop on the election process which currently leans heavily in favor of incumbents. Reforms are desperately needed if CalPERS is to live up to the high governance standards it sets for others.

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CalPERS Continues Fight at Maxxam
CalPERS continues supporting a coalition of environmentalists and unions in the push for independent directors, former U.S. Sen. Paul Simon of Illinois and Abner Mikva, a former Congressman from Illinois. Maxxam announced in March that it has nominated Michael J. Rosenthal and J. Kent Friedman, Maxxam’s general counsel, to serve on the board. Josh Reiss, a Maxxam spokesman, said that the company never agreed that two independent directors are needed. However, my sources indicate CalPERS had delayed continued work with the coalition, given statements from Maxxam that they would nominate two independent directors on their own. See California Pension System Backs Dissident Directors for Holding Company

Proxy Monitor Backs Resolution at Advanced Micro Devices
Proxy Monitor, a leading proxy voting advisor, announced recommended to clients that they vote in favor of a shareholder resolution to name an independent director as chairman of Advanced Micro Devices (ADM-NYSE). The proposal, sponsored by CalPERS, is scheduled to come to a vote at ADM’s April 27, 2000 annual meeting.

“It’s time to loosen the grip that ADM’s Chairman and CEO W.J. Sanders has on the board,” said James E. Heard, Proxy Monitor’s CEO, in announcing support for the proposal. “Naming an independent director to chair the board is a necessary first step.”

“We also think Mr. Sanders should resign from the nominating committee, which he chairs.” Heard added. “It’s a poor reflection on the board’s independence to permit the CEO to be a member of the nominating committee, much less serve as its chairman. This is a key board committee, and it should be composed only of independent directors.”

CalPERS to Withhold at Bank of America
CalPERS will withhold its proxy votes from four Bank of America directors to protest a $76 million compensation package awarded to CEO Hugh McColl last year when the bank suffered a 16% earnings shortfall and laid off 19,000 employees. see, 4/13

CalPERS Election Rules to be Heard
CalPERS directors last year proposed that future candidates for the Board be barred from mentioning their opponents in material sent out with the ballots in member elections. The rules also would have banned any statements on issues of general concern to the membership but would have lifted a prohibition against misleading statements. A Sacramento Bee editorial, “CalPERS muzzles critics,” said the measure would “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.”

Although the Board has now shelved that plan, current proposed election rules would allow each candidate to review the statements of their opponent and would then have a minimum of 10 days to rewrite their statements. This would obviously encourage candidates to submit poorly crafted and/or deceptive arguments to throw off their opponents.

In addition, the proposed rules fail to address obvious conflicts of interest, such as having election appeals decided by staff whose reimbursement is determined by incumbent board members. Currently, election rules can be violated with impunity unless challengers can prove the violations would have changed the outcome of the elections. In the last contested election, the incumbent was allowed to review his opponent’s statement and change his own in an apparent violation of the rules but the challenger could not substantiate the number of votes that were changed as a result.

Unfortunately, CalPERS is better at giving governance advice than in accepting it. Many other agencies in California hold workshops with their constituents before proceeding with controversial regulations but CalPERS has argued their Constitutional authority exempts them from normal rulemaking procedures. The court has disagreed. This time CalPERS is going through proper procedures but the rules would still lead to voter obvious deception. The proposal will be heard on 4/18 at 1:30.

Pfizer’s Gallagher to Retire
Pfizer’s corporate governance executive, Terence Gallagher, to retire in June. Peggy Foran, who is already sharing Pfizer’s top governance title, joined the office three years ago, after spending most of her career at J.P. Morgan as a corporate lawyer. Although Pfizer’s governance practices could be improved, most active shareholders agree that at Pfizer they’ll at least get a hearing. (WSJ, 4/12)

Elson to Head New Corporate Governance Center
We’ve mentioned Charles Elson’s move before but it is worth repeating in greater detail. The center, at the University of Delaware, will be a clearinghouse for information on corporate organization. It is expected to offer symposiums, workshops, research opportunities and publications for scholars, students, business leaders, economists, judges and lawyers. Two symposium topics under consideration for the first year: Delaware corporate law in the aftermath of Smith v. Van Gorkom (directors must be informed when they make decisions), differences between and Fortune 500 board views on corporate governance. (Deleware Law Weekly, 4/12)

Comments Due to OECD
The Organization for Economic Co-operation and Development is undertaking a major review of its Guidelines for Multinational Enterprises. Second round comments are due 4/12.

Billionaire Boys Club Grows
Compensation packages for Yahoo! CEO Timothy Koogle and America Online’s Steve Case both wnet over the billion dollar mark in 1999 due to soaring stock prices. “Koogle’s compensation works out to a staggering $4.7 million a day, compared with median annual household income of about $40,000, or $110 a day.” Seven of 1999’s 10 most highly compensated CEOs run technology companies, according to USA Today,New economy rockets CEO pay, 4/5/00. Median compensation for 200 CEOs jumped to $17.6 million last year, up 111% from1998. Among the growing trends, retention packages to get CEOs to stay put for a few years. Part of the problem, outside compensation consultants. ”No compensation consultant is going to recommend a CEO take a pay cut. They’ll lose their job,” says compensation expert Graef Crystal. ”It’s part of the reason that CEO pay is a never-ending spiral that always goes up.”

Innovative Corporate Governance Votes Set for AT&T, Chase and Ford
Carl Olson, Chairman of Fund for Stockowners Rights, a research and education group headquartered in Washington, D. C. recently announced three novel proposals:

  • Resident Analysts, AT&T: Individual directors face the problems of part-time duties and reliance on information provided by management. These constraints inhibit the ability of directors to represent the interests of the stockowners fully. The resolution would allow each director to retain an analyst who would have access to all the corporation’s records and would report only to the director. Directors would receive an additional $100,000 per year to retain and pay expenses of the analysts.
  • Permanent Secret Ballots, Chase Manhattan Bank: Only confidential voting policies that can only be changed by stockowners offer real protection. Despite an overwhelmingly favorable advisory vote at the1986 annual meeting on a resolution sponsored by John and Lewis Gilbert to establish full confidential voting, the board never adopted the policy. The proxy statement has only a vague mention of a limited confidential voting policy, and the board can amend or repeal it without a vote of the stockowners. The resolution at Chase calls for a detailed confidential voting policy that only the stockowners can change.
  • Abolish “Tissue Paper” By-Laws, Ford Motor Company: If the board can amend or repeal by-laws that the stockowners adopted, then the by-laws are made of “tissue paper” that can easily be torn up. Ford, like other companies incorporated in Delaware, has “tissue paper” by-laws. Stockowners are prevented from directly changing this policy because it requires an amendment to the certificate of incorporation. The resolution requests the board to initiate an amendment to the certificate of incorporation that will ensure the stockowners the ability to adopt by-laws that only they can amend.

Contact: Carl Olson, at 818-223-8080. Fund for Stockowners Rights,West Coast Office, P.O. Box 6102,Woodland Hills, CA 91365

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Shann Turnbull Speaks out on AMP Limited
On 4/3 the chairman and four other directors resigned from Australia’s largest financial institution the AMP Limited. Shareholder activist Shann Turnbull met with the newly appointed company secretary, Christine McLoughlin and called on AMP and other Australian companies to establish Corporate Governance Boards (CGBs) as proposed in Parliament by Democrat Senator Andrew Murray. The following are excerpts from Turnbull’s op ed piece which appeared in the Australian Financial Review, 4/6/00 on page 21.

The constitution of AMP Limited, like most publicly traded companies in Australia gives the Chair power to determine the conduct and procedures of General Meetings, including the processes of electing directors. This can makes the position, influence and perks of Directors subject to the Chairman’s favour.

The solution is a division of power such as introducing a CGB, which would take over some of the roles delegated to Board Audit, Remuneration and Nomination sub-committees. This would also provide a process to ethically manage any related party transactions with their dominant shareholder as occurs with Coles-Myer, Qantas, Axa and many other companies.

Without a CGB directors are placed in the unethical situation of setting and marking their own exam papers…Without a member of the CGB chairing shareholder meetings it can become impossible for shareholders to make directors accountable…As the largest shareholder in many other companies the AMP Limited should be both a role model and agent for raising standards.

However, last year the AMP Chairman not only entered into the debate on motions before the Chair but those in which he had a financial interest to double the level of director’s fees!…its time Parliament ensured that our public corporations cannot register constitutions, which allow unethical and uncompetitive practices. This would also remove the nervous energy and deliberating turmoil required at present to change a company Chair.

AFL-CIO Announces Key Votes
The list of 34 resolutions are intended to “represent a worker-owner view of value that emphasizes creating value for the long term through management accountability, partnerships with workers, and the protection of brand integrity.” See Key Votes.

Dot-Com Directors Involved
Karen Jacobs, of the Wall Street Journal, argues that dot-com directors must be “active participants in creating and shaping strategy, defining markets and building senior-management teams. They have to hit the ground running, and sometimes help build a business from the roots up. And they have months, not years, to make an impact.” How do cash poor startups attract the talent? New York-based, which auctions travel packages, landed seasoned experts in compensation, auditing, cable TV, and a former head of state by offering them options worth $1M each. Jacobs says companies are also looking passed CEOs to division directors and others. (see Running Boards, WSJ, 4/6)

Japanese Trusts to Exercise Voting Rights
A survey conducted by Jiji Press found 83% would consider abstaining or voting against items presented at annual meetings.  Only 5 said they would rubber-stamp all decisions.  The firms cited illegal practices, poor earnings results, and poor information disclosure as reasons for voting against management. The Corporate Library News Briefs, 3/28

Preparing for the Annual Meeting
Brian Machburn and Robert Obray offer an excellent checklist in the March issue of Directorship. The checklist, based on “Questions at Stockholders’ Meetings 2000” published by Deloitttee & Touche LLP, is broken into 4 broad categories: board composition and activities, board practices, audit committee, and executive compensation and benefits. For example, be prepared for “what perquisites–such as club memberships, professional services, apartments, automobiles or use of company airplanes –does the company provide for executives and their families?” ….elsewhere in the same issue, Directorship reports the percent of women on Fortune 1000 firms grew from 6% in 1993 to 8.3% in 1996 to 9.3% in 1999.

Wendt Speaks in La Jolla on Issues Facing Corporate Boards
The Corporate Directors Forum will present a session on “Contemporary Issues Facing Boards Today,” during its April 27th meeting at the Radisson Hotel La Jolla from 5:30-7:30 p.m. Henry Wendt, the former CEO pharmaceutical giant SmithKline Beecham, will offer his perspective on issues facing emerging companies to Fortune 500 companies. Wendt has been an active board member for companies such as Allergan, Atlantic Richfield Company, Computerized Medical Systems, and West Marine Products. Recently he was selected as a Harvard Business Review article panelist on board issues surrounding CEO succession. Contact: Larry Stambaugh, Chairman of the Board of Corporate Directors Forum, 858-455-7930. (Excite News, 4/4)

Governance Changes at Cendant
Cendant, the franchiser of Century 21 real estate offices, Howard Johnson hotels and Avis car rentals, is restructuring its board of directors from 15 to 13 to comply with terms of a class action settlement that arose out of accounting irregularities. Robert Kunisch and John Snodgrass, former employee directors, resigned effective March 31. Myra Biblowit, vice dean for cultural affairs at New York University, and Sheli Rosenberg, vice chairman of Equity Group Investments, were elected to replace Kunisch and Snodgrass, effective 4/3. This brings the number of employee directors to 3 from 4. Additionally, Michael Monaco, a former employee director, and Carole Hankin resigned effective with the annual meeting on 5/25. Cendant agreed to pay shareholders about $3 billion and make significant changes in corporate governance to settle a massive class-action lawsuit brought on by several large pension funds.

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SEC Proposes Major Update of EDGAR
Programming for the next stage of modernization is expected to be implemented in late May 2000. EDGAR will include the following new features according to the current proposal:

  • the ability to include graphic and image files in HTML filings;
  • the ability to use hyperlinks in HTML filings, including links between documents within a submission and to previously filed documents on our public web site EDGAR database at; and
  • the addition of the Internet, and removal of diskettes, as an available means of transmitting filings to the EDGAR system.

Comment Period Extended on Selective Disclosure Regulation
The SEC extended the comment period for its controversial selective disclosure proposal until April 28th due to pressure from several industry groups on the fair disclosure (FD) provisions, according to a report in the 4/3 issue of Investor Relations Business. The SEC has received about 1,000 comments with retail investors in overwhelming support. However, the Securities Industry Association wants more time to rally opposition to the proposal which it sees as having potential to damage the communication process. The American Bar Association is also concerned the rule will have a chilling effect on communications. Others concerned are reported to include the National Investor Relations Institute.

Shareholders Listen In
83% of companies conduct conference calls and 82% of those allow individual investors to listen in, up from 29% two years ago and 48% webcast the calls, according to a study by the Rivel Research Group for the National Investor Relations Institute. see Executive Alerts

No Action on Dividend Request
SEC held that a shareholder proposal to provide dividends in stock, rather than cash because of more favorable tax treatment, may be excluded from AT&T’s proxy because rule 14a8(I)(13) allows companies to omit proposals related to specific amounts of cash or stock dividends. (reported in 3/20 issue of Investor Relations Business.

Aquisition of Fairvest to Further Level Playing Field
VERSUS Technologies Inc., a leading Canadian provider of electronic, securities trading services to the institutional and retail marketplace, signed a letter of intent to acquire Fairvest Securities Corporation, the leading provider of Canadian corporate governance research. VERSUS intends to continue leveling the playing field for retail investors by distributing Fairvest products and services to its E*TRADE Canada clients in the future.

Fairvest analyzes proxies and provides voting recommendations on corporate governance issues of approximately 1000 corporate issuers and provides institutional investors with a proxy voting department capable of voting all proxies according to specific guidelines while maintaining complete proxy voting records. Fairvest also publishes the Corporate Governance Review six times per year, which has a paid subscription base of over 180 organizations, including law firms, consulting firms, investment dealers and corporate issuers. We’ve enjoyed reading it for years and appreciate its insights into Canadian trends.

Domini Publishes Voting Guidelines for 5th Year
Last year, the firm became the first mutual fund manager to publish their actual votes cast for each company in its portfolio. This year, Domini Social Investments entered its second year as a fully transparent voter, and reissued its challenge to the mutual fund industry to follow suit. During the past 5 years assets in mutual funds have grown from $2.81 to $6.77 trillion. Each has a fiduciary duty to their shareholders to examine each resolution and votes proxies in their shareholders interests.

While few will agree with every one of the Fund’s policies or votes, Domini has undeniably taken the lead in this area of disclosure. I sincerely hope they are soon joined by others. Visitors to Domini Social Investments’ website can choose any of the 400 companies in the Domini Social Equity Fund’s portfolio, see a brief description of the issue being voted on, andview Domini’s vote.

The site also provides another valuable resource which allows users to search for shareholder resolutions by company or social issue and to send email concerning the resolutions directly to the company. The database was created by the Interfaith Center on Corporate Responsibility (ICCR),

Next, someone needs to create a portfolio tracker which contains all corporate proxy resolutions, links these to the applicable policies of TIAA-CREF, CalPERS, Domini and others and then allows shareholders to vote their own shares.

Family Struggle at Hyundai
Corporate governance reforms appear to have taken a back seat to traditional family control of Korea’s most conservative chaebol. According to a report in the Sydney Morning Herald, the Government is incensed that a top executive in the firm was sacked and then reinstated without reference to the company’s board or shareholders. See Coup at Hyundai takes a family to war, 04/01/00.

Online Voting Up
15% of investors who vote on measures that affect companies in which they own stock will do so via the internet this year, up from 6% in 1999, according to Automatic Data Processing, Inc. ADP processes 90 percent of proxy statements. See Shareholders’ proxy voting online expected to grow,The Arizona Republic, 4/2/00.

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Archives: March 2000

Exec Pay Tied to Luck
Study for the National Bureau of Economic Research by economists Marianne Bertrand of Princeton University and Sendhil Mullainathan of the MIT found three “luck” factors correlated with higher pay: The price of oil, the foreign-exchange rate, and the average performance in specific industries. Representation of large shareholders on a company board reduces the extent of CEO pay arising from luck by as much as a third. (The CEO makes what? The Christian Science Monitor, 3/27/00)

India to Set Up Corporate Governance Center
Dr. P.L. Sanjeev Reddy, Secretary, Department of Company Affairs, sought the cooperation of corporate tyccon Shri Birla in setting up the center. Dr. Reddy also sought cooperation in assisting the Government to work out a provision for adequate representation of women on the Board of Directors of Companies as a measure to remove gender bias and better corporate governance. (M2 PressWIRE via Northern Light)

Peter Brown on Board Trends
Julia Bright interviewed Peter Brown, of Top Pay Research Group, in the 3/2000 edition of Governance. Top Pay advises on all aspects of board nominations and conducts and annual survey of directors. Based on the survey, Brown opines that the volume of regulations governing boards has become burdensome in the UK, especially for small companies. In small firms directors have an important role to play to ensure options are considered, whereas large firms have staff to generate strategic options and the board takes on more of a monitoring role. However, Brown appears to believe the monitoring role of directors has been overemphasized because of failures by auditors. He cites the use of directors as ambassadors as a positive approach and favors moving to a system, like that in many US firms, where directors are paid, in part, with shares or options. Options make it much easier for small firms to attract directors with specified qualifications. With execs retiring earlier, it should be easier to attract those interested in “semi-retirement” on boards; the key is to make sure they don’t expect to serve more than a few years while their ideas and enthusiasm are still fresh.

Raiders Are Back
Kirk Kerkorian, Carl Icahn, leveraged buyouts, and hostile takeovers are back. WSJ’s “Raiders of the Lost Decade: 1980s-Style Mergers Return,” documents the sharp rise in words and graphs. “Jumped” deals (challenged by another company) and hostile takeovers have never been higher. LBOs are climbing back to rates unseen since the late 1980s. “Old economy” companies are cheap. With antitakeover measures in place and the junk-bond market nearly shut, buyers have to be more creative. Steven Lipin [email protected], Nikhil Deogun[email protected] and Kara Scannell kara.scannell discuss the current phenomenon and where it is most likely to hit next.

Investor Activist Sees Hope in Japan
Yoshiaki Murakami lost his bid to gain a board seat and raise dividend payments at Shoei Co. but believes he was supported by holders of about 3 million of 14 million Shoei shares. “Corporate governance has begun to flower in this country,” he said. (WSJ, 3/29/00, [email protected])

Deutsche Bank Merging to Growth
Michael Useem and John Ross, president and CEO of Deutsche Bank’s American operations, discuss the challenges organizations face in making mega-mergers work across cultural boundaries in [email protected] Newsletter, 3/29-4/11/00.

Worldwide Internet Use to Climb
The number of active users worldwide is predicted to climb to 361.9 million by 2003, a 178% increase from the 130.6 million people who were actively using the net at year-end 1999. By year-end 2000, only 42% of active users will come from the U.S. Content and language will become more diverse but there is likely to be a convergence of styles, tastes, and products with a more homogenous global marketplace. e-commerce revenues will increase from $233 billion at year-end 2000 to $1.4 trillion in 2003. (eGlobal March 2000 Report)

Stock Options for Hourly Workers
Labor Secretary Alexis Herman joined in advocating legislation to encourage companies to grant stock options to hourly workers. A recent study by the Employment Policy Foundation estimated that as many as 26 million hourly workers are now covered. The move could increase that number and the amount of grants. (WSJ, 3/29/00, p. A4)

Funds Resist Urge to Divest Tobacco
Six states, 10 major municipalities and 15 universities have set policies to restrict or divest tobacco stocks but most funds and endowments are still holding tobacco stocks, despite their mounting legal problems and poor showing on Wall Street, according to a new study by IRRC. Institutions are reluctant because tobacco stocks were very profitable before the 1990s, they’re still found in all of the major indexes, funds wan to avoid the ‘slippery slope’ where social concerns come before their duty to maximize returns for beneficiaries. For a copy of Tobacco Divestment and Fiduciary Responsibility contact Heidi Salkeld at 202-833-0700 (phone) or email[email protected].

Missing Link Down Under
Research in the U.S. has found that executive pay is higher and corporate performance is better where boards are independent. However, Geof Stapledon reports his own study, with Jeffrey Lawrence, in Australia found no evidence in support of the CEO influence hypothesis. One possible explanation is the common practice in Australia of using external consultants to provide advice on pay. (Governance, 3/2000)

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NYTimes Profiles Charles Elson
The leader who built his reputation on director compensation and engineering Al Dunlap’s ouster from Sunbeam explains how he got interested in corporate governance. “If every director was like Charles, I could go into another line of work,” says Nell Minow. Elson will soon be heading a new center in Deleware which will provide a forum for debate on exactly what the laws on corporate governance should be. (A Scholarly Shareholder Activist, NYTimes, 3/28/00)

IBM Employees Win CalPERS Support
CalPERs will vote its 9.2 million IBM shares in favor of a resolution which allows employees to stay with IBM’s defined benefit plan. “Withdrawing promised benefits for any employee is not only morally reprehensible, but bad business,” said board president William Crist. (Calpers To Vote 9.2M IBM Shares For Employee Resolution, WSJ, 3/28/00)

Audit of Corporate Governance Practices
Sempra Energy has quietly reached agreement with John Chevedden of Redondo Beach. Sempra has agreed to an outside audit of its corporate governance practices by Batchelder & Partners, in exchange for withdrawal of Mr. Chevedden’s proposal that would have allowed shareholders to vote for all directors each year, instead of 1/3. Another Chevedden proposal remains to be taken up. It would allow approval of key changes by a simple majority vote by shareholders, instead of the currently required two-thirds, which Chevedden says puts excessive control in the hands of the board. The company is expected to face stiff questioning and criticism at its annual meeting because of a stagnant stock price and recently cut dividend. (Shareholder proposals for Sempra on hold for now, San Diego Union-Tribune, 3/24/00)

New Disclosure Rules
Ontario Securities Commission is proposing new disclosure rules. “Clearly defined and effective corporate governance principles can make Canadian companies more accountable and more competitive,” OSC chairman David Brown said. “In fact, the quality of corporate governance is becoming a valuable asset in global competition for capital.” The new rules would require companies to:

  • include in interim financial statements an income statement and a cash flow statement for the quarter and the year to date;
  • Provide an interim balance sheet and explanatory notes to quarterly statements;
  • Provide a quarterly discussion and analysis.
  • Board review of interim financial statements before they are released.

According to David Brown, “Continuous trading demands continuous disclosure.” “The next big step is a national system of integrated disclosure…Essentially, integrated disclosure will permit issuers to do public offerings of securities merely by issuing a term sheet to prospective investors. To qualify, an issuer will have to commit to maintaining a continuous flow of prospectus-quality disclosure to the marketplace.” SeeCredibility and Confidence of the Investment Community: A topical update on new reporting and financial market requirements.

Director Pay Inches Up to $1,000/Hour
InvestmentNews survey of the 50 largest fund firms found average pay rose about 2.5% over 1999 to $234,420. Since most directors log about 200 hours a year of work, according to Management Practice Inc., that equates to about $1,000/hour. Dreyfus Funds director Joseph DiMartino led with a rise of 7.5% to $642,177. Investor returns were in single digits at all but one of the companies on the list. Dreyfus domestic equity funds, for example, were up an average of 2.62% in the three years ended Feb. 29, while Franklin Templeton’s gained 8.84%, far below the 21.76% average annual gain of Standard & Poor’s 500 stock index. The article points out that “the nifty 50 aren’t just overpaid compared to the average Joe. It seems that they’re are raking it in compared to corporate directors. Microsoft Corp., for example, paid its typical director $134,094 in 1998 while Intel Corp. paid out $168,333. Philip Morris Cos. Inc. paid an average of $118,928.” see Fund pay: $1,000 an hour

Friends-and-Family Stock
IPO prospectus must disclosure the total number of shares set aside, but not who get them. CEOs are free to quietly hand out directed shares to whomever they choose, including companies they have business dealings with who will then sing their praises. Fortune writer Melanie Warner tells how Sycamore Networks had one of those astounding Internet IPOs. The optical networking firm, with just $11 million in annual revenue and one customer, was worth $15 billion due to the hype generated. See Misadventures in the Me-first Economy, Part 2, Fortune, 3/20/00.

In the same issue see The New Role of Directors. Small insider boards help dot-coms move fast but don’t provide much oversight. “These companies are breaking the rules, remember–such as how to handle emerging revenue-recognition issues like barter transacti ons, and whether a fast-growing Internet company is diluting shareholders excessively by issuing too many options. A dot-com that makes a misstep on one of these fronts–and subsequently stumbles in the market–will soon be facing both SEC questions and a very old-fashioned slew of shareholder lawsuits.”

Trustees Responsible for Making Boards Accountable
The message is just as strong “down under” where Joe Hockey, Australia’s Minister for Financial Services, said mutual fund managers were “lazy” because they did not agitate enough for boardroom accountability. “If a board or directors are not acting in the best interests of the company or making decisions that they should be held accountable for, it is not good enough for funds managers to run away and not face up to the tough task of holding those directors accountable for their decisions.” Funds trustees hold more than 50% of shares in publicly-listed companies in Australia yet only 30% of votes were exercised at annual meetings – a lower ratio than in the United States and the United Kingdom. The Sydney Morning Herald, Hockey swipes at ‘lazy’ funds bosses, 3/24/00.

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Survey Results
We surveyed readers for a week on the question of including an option to “vote with management’s recommendations” on the internet proxy. Does this discourage independent analysis and voting by shareholders? We used a cheap survey vehicle (free) and it showed. 27 readers said yes, the option discouraged; 31 said no it didn’t; and 5 said it makes no difference. However, 30 of the 31 votes came in within a few minutes of each other. I guess someone thought is was important enough to vote 30 times.

Broker Votes
While we’re on the topic of stuffing the ballot box, Patrick McGurn’s editorial in the February ISSue Alert is worthy of note. McGurn traces the practice of letting member brokers vote proxies on certain uncontroversial matters for their clients if they fail to vote (the “ten-day rule”). It originated because many investors “considered the corporate franchise to be a joke.” So many, in fact, threw away their ballots that companies couldn’t get a quorum.

McGurn writes that CII called repeatedly for the elimination of broker voting for all purposes other than making a quorum but the SEC, NYSE and AMEX didn’t budge. Now the NASDR, the self-regulatory arm of NASDAQ, has asked the SEC to extend discretionary voting to its members who aren’t already covered by the NYSE or AMEX. According to the editorial, “by allowing brokers to legally stuff the ballot box, management can inflate their margin of victory or even swing the outcome of close elections.”

“Just vote no” campaigns to protest poor performance by boards and/or individual directors or to voice displeasure for failure adopt shareholder proposals with majority votes are distorted by broker votes. Under stock exchange definitions “dissidents must foot the bill for delivering their proxy materials to all shareholders if they want to remove broker votes from the process” in contested elections. Yet, election of directors “pales in comparison to the widespread use of broker votes to fix votes on stock option plans.” Broker votes can be used on proposals that seek to add 5% or less of outstanding shares to existing or new stock option plans. It isn’t a coincidence that most plans come under that limit.

McGurn calls on exchanges to repair the broker vote process. “Adding more issues to the list of matters on which brokers can’t vote isn’t enough.” He points out that even selection of the audit firm can cross the line, given recent revelations of independence violations. Broker voting “threatens to undermine investor’s confidence in the entire voting system.” It appears it may be too late to have an impact on this rulemaking since comments on Release No. 34-42238; File No. SR-NASD-99-63 were due to the SEC Secretary Jonathan G. Katz by January 12, 2000. (see Federal Register: December 22, 1999 (Volume 64, Number 245) [Page 71836-71839]).

I obtained a copy of CII’s comments, dated 1/3/2000, urging rejection of NASD’s proposal. CII represents funds with more than $1 trillion invested. Yet the battle they have waged in this area makes them look like a powerless worm. The issue was brought up in 1989 by one of their members, CalPERS. In 1994, CII reiterated the request and on 5/20/99 they again advised against allowing brokers to vote shareholder proxies without instructions.

Amazingly, the 5/20/99 letter from CII indicates that they have been told, but could not verify that “the service provider that transmits over 99% of NYSE company proxies routinely votes uninstructed proxies, even without broker direction. More staggeringly, we are told these votes are, in all cases, cast for management.”

The comment period for the NASD rulemaking may be officially closed but that shouldn’t stop readers from protesting to SEC Chairman Arthur Levitt. If enough of us raise a hell, maybe the SEC will finally put a stop to a system which is riddled with conflicts of interest and which results in ballot stuffing in favor of management at the expense of shareholders.

Bottom Line
ASCS plans annual conference for San Francisco on “Taking Corporate Governance to the Bottom Line.” Mayor Willie Brown, Jr., who recently joined the CalPERS board, will open the conference to be held 6/28-7/2. Other featured speakers include Frank McCourtPaul CareyJoseph Grundfest andRichard Koppes.

AFSCME Steps Up Governance Efforts
AFSCME has begun a new, multifaceted program to increase public employee influence in the shareholder arena. Funds maintained for the retirement benefits of AFSCME members total over $1 trillion in assets. Activities will be coordinated by the union’s newly formed Office of Corporate Affairs. Shareholder resolutions at the Bank of New York (redeem or vote poison pill), Baxter International (declassify board), Conseco (declassify board), Great Lakes Chemical (declassify board) and Mattel (redeem or vote poison pill) are the first-ever from AFSCME’s $500 million staff retirement fund. The Office also plans to intensify efforts to gain trustee seats for employees at key funds where currently there is no employee representation. Currently 48 of the top 100 public employee pensions have no worker-elected trustees. (see February 14, 2000 press release)

Stock Swaps Up
In 1988 less than 2% of M&A deals were paid for entirely in stock; by 1998 the figure was 50% and it has continued to grow. While a cash offer places risks and rewards with the acquirer, the acquirer shares more risk in a stock swaps. The authors offer advice on how to choose a payment method. (Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions, by Alfred Rappaport and Mark L. Sirower, Harvard Business Review, 11-12/99)

Clueless? I Disagree
Pensions & Investments (3/20/00), which usually runs insightful editorials, ran one entitled “Clueless in California” railing against legislation which calls on CalPERS and CalSTRS to divest of tobacco stocks. They even included a clever cartoon with 3 investment rating services: Moody’s alphabetical system, Monrningstar’s stars and the California Legislature’s weather vane (a chicken) to determine which way the political winds are blowing.

The editorial makes good points: investment decisions should be left to investment professionals; the funds are largely indexed and divesting tobacco stocks would reduce the benefits of indexing; the market has already discounted tobacco stocks (“selling the stocks now could simply lock in all of the losses”); it would set a bad precedent.

The news this morning on National Public Radio noted that tobacco companies are now starting to retain bankruptcy attorneys. That should make both the fund fiduciaries and the Legislature take notice. However, more important is the fact that with over a million members, the CalPERS health benefits program is the second largest purchaser of health care in the nation. While other health care providers a fraction the size of CalPERS are suing tobacco companies to recover the cost of damages, I doubt this is much of an option for CalPERS, as long as they own so much tobacco stock.

Yes, legislation requiring divestment would set a bad precedent. Unfortunately the CalPERS Board has had years to take action on its own but has failed to do so. Common sense dictates that a fund which is spending millions on tobacco related illnesses and smoking prevention programs shouldn’t also be investing in the same companies they might want to sue.

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Online Class Offered
ICMA Retirement offers “Making Sense of Investment Choices,” as the 1st of an 8 part course for public sector employees. Users register their e-mail address and take a test on investments. Then, based on their incorrect answers, they are led to the portion of a digitized instructional video. The program remembers where the user left off if they log off. (Pensions & Investments, 3/6/00, p. 8)

Securities and Exchange Board of India
IRRC CG Highlights (3/10/00) reports the SEBI announced it will tie governance measures to exchange listing rules. Measures, to be drawn from Report of the Kumar Mangalam Birla Committee on Corporate Governance, mandate all elements of a director’s renumeration, including salary, benefits, bonuses, stock options, pension contributions, severance pay and the price of stock options. Companies seeking a new listing must comply right away. For those already listed, adoption will be spread out over 3 years.

NACD Director Compensation Survey
1999-2000 Director Compensation Survey released. NACDsurveyed 1,200 companies and found the vast majority use annual retainers but separate attendance fees are also common with about 80%. There is also a strong shift toward NACD’s own recommendation that companies pay at least 50% in equity. The survey offers a comprehensive picture of compensation practices in public companies ranging in revenues from $200 million to $6.6 billion.

Rio Tinto, Broadest International Proxy Contest to Date
According to ISS Friday Report, this is the first joint shareholder initiative sponsored by unions in several countries. The coalition has a web site with the complete text of resolutions and supporting statements at (3/10/00)

Big Changes at CalPERS
Michael Flaherman, a pricing economist for the Bay Area Rapid Transit and graduate of Harvard and MIT, was elected to replace Charles Valdes, a CalTrans attorney, as chairman of the powerful investment committee at CalPERS. Sean Harrigan, a member of the State Personnel Board and International Vice President of the Food and Commercial Workers International Union, replaces board president William Crist as vice chair of the committee. Rob Feckner, elected by school members and who is also a board member of the California School Employees Association, was elected to chair the board’s policy making Benefits and Program Administration Committee, replacing Michael Flaherman.

In a further effort to disperse power among more board members, Flaherman announced he would resign as board vice president, a position he was elected to just last month. San Francisco Mayor Willie Brown took part in the power shift during his first meetings as part of the governing board of the $170 billion pension fund which has been a leader in corporate governance since 1984. (Sacramento Bee, 3/14/2000)

TIAA-CREF‘s Corporate Governance Policy Goes Global
New policy states that every company should: provide a clear explanation of its compensation program in its proxy statement; provide compensation that is linked to performance, and is reasonable based on prevailing industry standards; seek shareholder approval for all stock-based compensation; clearly disclose “soft” elements of executive compensation, such as pension plans; and place its program under the direction and oversight of a board committee completely independent of management and knowledgeable about executive compensation. Global standards are “are important to encourage investments in countries and companies in a global economy where gaining access to capital markets is increasingly seen as very much in each nation’s self-interest.” (full text)

AFL-CIO Weighs in Against Petro China IPO
Letter sent to 100 investment managers arguing that risk factors include lack of transparency and inability to exit through liquid market, engage in shareholder activism or litigate. Of course, there is also the issue of alleged human rights abuses in Sudan and tibet by PetroChina‘s parent company and the expected layoffs of 1 million workers in China. (see also, ISS Friday Report, 3/3/00; IRRC CG Highlights, 3/10/00)

Indexed Options
Despite support Alan Greenspan and a few institutional investors, only one major company, Level 3 Communications currently uses them. Since indexed options only pay off when the company outperforms its peers, they will always be unpopular with CEOs. BusinessWeek notes “the Financial Accounting Standards Board (FASB) allows traditional options to avoid any charge to earnings–a free ride that has contributed mightily to the popularity of options over cash. Why the difference? Because the exercise price of indexed options fluctuates depending on the value of the index it’s tied to. The FASB has ruled that indexed options must be charged to earnings every quarter so that investors can see the current option- related liabilities.” However, as I recall, this accounting problem arose out of pressure placed on the FASB to give options a free ride — not because it made sense. Some, such as Ira Millstein, argue that a downturn is likely to bring indexed options because if the stock heads south CEOs will still get a payoff if they can beat their peers. (Commentary: An Options Plan Your CEO Hates, BusinessWeek, 2/28/00) The article speculates on how much various CEOs would earn under indexing.

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Executive Pay Trends
SCA Consulting says executive pay will break records this year; less linkage with operating performance but more with stock; greater use of stock options. Trends in part driven by dot-com economy. (ISS Friday Report, 2/25/2000)

MEDEF Slams Governance Legislation
Ernest-Antoine Seilliere, chairman of the French business leaders’ group spoke at a press conference opposing legislation aimed at improving corporate governance by separating the functions of chairman and CEO, and requiring further disclosures on issues such as shareholder pacts and takeover bids. (WSJ, 3/14/2000)

Barbariams at the Gate, Again
Carl Icahn is locked in his 4th proxy battle in 5 years to take control of Nabisco Group Holdings. SEC filing says his group aims to elect a slate of directors who will “better enhance stockholders value.” Nabisco responded with a poison pill. Icahn built his reputation, in part, as a corporate raider in the 1980s by proposing to divide RJR Nabisco’s food and tobacco operations. (WSJ, 3/14/2000)

Coming in April
Ralph D. Ward’s Improving Corporate Boards: The Boardroom Insider Guidebook will be published by John Wiley & Sons. Finally, a clear guide to solving the most common problems facing boards. Each chapter provides a concise overview of a problem or focus area, several real life examples, internet resources, advice from various experts and a checklist summary. Perhaps CalPERS should be sending Mr. Ward’s book to each board member of the companies on its focus list.

Allied Owners Action Fund
Years ago, I wrote of a mutual fund that would derive value from encouraging good corporate governance. Unlike theLENS fund, it wouldn’t cost $10 million to join. It’s finally here, a corporate governance fund for the rest of us! The Fund will buy up to 5% in companies with lax management, under-used assets, passive boards or other problems. Then it will attempt to “open deaf mangement’s ear.” The basic idea is that active, knowledgeable shareholders can add value. The Fund will have its own investment staff and analysts but will also look to a separate company, eRaider, for ideas. eRaider operates as an internet confederation where paid moderators help to keep bulletin board discussions concerning potential investments and ownership strategies on track. Take a look. Join the discussions. I moderate a board on corporate governance; I’m also an investor.

Internet Voting, A Revolution?
Not. I’ve had several reporters calling to get my opinion on internet voting. Far from being a democratizing revolution, internet and telephone voting appear likely to increase the hold management has over shareholders. Go to to vote your shares and the first choice you have is to “vote my shares per directors’ recommendations.” It’s even worse by telephone where the “vote with management’s recommendations” option has long been the first choice offered to telephonic voters. Industry insiders tell me that about 9 out of 10 take this first option and hang up. Who can blame them? We’ve all been stuck in menu-driven voice mail Hell. The internet option is more benign but why should either electronic proxy offer an option that is not on the paper proxy? Tell me what you think about the issue through the survey above or by e-mailing [email protected].

It’s not internet voting that will make a difference, it’s internet information, conversation, and communities that will dramatically increase shareholder democracy over time. Some important landmarks: SEC filings through EDGAR beginning around 1994; Corporate Governance puts up the proxy voting guidelines of TIAA-CREF, CalPERS and others in 1995; Bell & Howell broadcast its 1996 annual meeting; CalPERS solicits support for shareholder proposals at Archer Daniels Midland Company in 1996; LENS and others explain their strategies and seek support for their positions; CII and CalPERS start forums; various proxy fights arise out of chatrooms and bulletin boards; AFL-CIO’s Executive Paywatch; disclosure of votes by Domini and CalPERS; World Bank and OECD forums; FOE’s online “Confronting Companies Using Shareholder Power: A Handbook on Socially-Oriented Shareholder Activism”; Mark Latham’s corporate monitoring project, Nell Minow’s effort at the Corporate Library re CEO contracts; eRaider and Allied Owners Action Fund.

For many stock speculators, the internet simply represents “TV with a buy button” for low fee transactions. However, for those of us who view our shares as ownership investments the internet will make a huge difference. In recent decades corporations learned that employee ownership and involvement adds value. Tomorrow, they will learn that active participation by shareholders can add value as well.

Those who seek to extend their control through “shareholder mix” campaigns will find that it is like trying to control a conversation; it can’t be done and still be genuine. The corporations that are successful in the internet age will engage with and learn from their employees, customers, competition and especially their shareholders.

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CalPERS Pressures Maxxam
Pension system prods company to add two independent directors to its five-member board now dominated by chairman and CEO Charles Hurwitz. Maxxam has been widely criticized for its poorly performing, redwood harvesting and labor disputes. (WSJ, 3/8/2000)

Harmonizing Global Standards
Top-level corporate executives, the Big Five, and institutional investors met in London to harmonize global accounting and financial standards. Among topics of discussion: warnings on audited financial statements, ethical standards and independence among auditors. (Executives, Investors Address Global Rift In Reporting Rules, WSJ, 3/8/2000)

Poison-Pill Duels In New Jersey and Deleware 
The battle is over who has the power to prescribe a pill, the board or shareholders. In New Jersey it’s between the Chubb Corp. and its shareholders. In Delaware, the SEC issued a “no action” letter to Novell Inc., allowing the company to deny a call for shareholder input into its pill. The Chubb move could end up as an important test case in court. In the Novell case, the proponent may be appealing to the chat rooms. Commentary: are chat rooms the new people’s court? (see Cases in Two States Illustrate Debate Over Poison Pill Laws,WSJ, 3/2/2000)

Bye Bye Bylaw
A landmark decision, in the case of Chesapeake v Shorewood Packaging, found Shorewood’s supermajority bylaw to be an “unjustified impairment of the Shorewood stockholders’ right to influence their company’s policies through the ballot box.” The opinion also argued against Shorewood’s claim that its stockholders are prohibited from voting to eliminate the company’s classified board structure and subsequently seating a new board, invoking the “plain language” of Delaware law and policy that “stockholders have the authority to determine the governance structure of their corporations in the bylaws.” The decision marks only the 3rd time since 1989 that the Delaware Court of Chancery has found that directors of a Delaware corporation breached their fiduciary duties in responding to a takeover threat. (see “Chesapeake Corp. v. Shore: An Example Of Meaningful Proportionality Review” by J. Travis Laster)

California to Divest Tobacco Stocks?
State Senator Tom Hayden and Assemblyman Wally Knox amended AB 107 to require CalPERS and CalSTRS to divest $900 million in tobacco stocks over an 18-month period. Similar measures have failed in the past but tobacco stock lost 51.5% last year bolstering arguments that investing in such stocks is imprudent. As of Dec. 31, CalPERS had $589 million in tobacco stocks, while CalSTRS had $319 million.

Boardroom Diversity 
May depend on organized pressure, according toBusinessWeek (3/6/00), which reports the number of black directors has increased 57% in six years, in part due to groups like Jesse Jackson’s Operation Rainbow Push. Without such organized pressure, Hispanics have only gained 10%. The number of Fortune 500 companies with at least one woman on their board is up 21% since 1993 when Catalyst Inc. initiated their 1st survey on the subject. The 1999 Catalyst Census of Women Board Directors of the Fortune 1000 found that women hold 11.2% of board seats at the 500 largest publicly traded U.S. companies, compared with 11.1% last year. 96 of the Fortune 100 have at least one woman director, whereas only 54 of the Fortune 1000’s smallest companies do. (Corporate boards still male, CNN, 12/15/99)

Goldman Sachs Advises Japan, Copy Germany
Japan should consider scrapping capital gains tax on the sale of cross-holding shares, says Kathy Matsui, of Goldman Sachs. Although cross-held shares have declined to 39% vs 52% in 1991, adoption of the tax exemption would further encourage liquidation of low-yielding investments and the reinvestment of proceeds in higher-yielding areas. She also noted that Japanese firms with independent external directors had outperformed the market by about 40% during the last year and called for making the appointment of independent directors a stock exchange listing requirement. (Reuters, 3/1/2000)

Barbie’s Software Into Hard Drive?
Ralph Whitworth, of Relational Investors, which holds 4.2 million Mattel shares, has been elected a member of the board of directors of Mattel. (Dow Jones Newswires, 3/1/200)

Canadian Best-of-Sector Fund
Jantzi Social Index becomes Canada’s first index of “socially responsible” firms. Unlike most US SRI funds, they will accept firms with gaming and alcohol interests. (Do Canadian SRI types have more fun or what?) The fund uses a “best-of-sector” approach in order to reach a fairly broad base of 60 firms, given the need to include natural resource companies, which are often “environmental challenged.” The Economist notes that socially responsible indexes have “outperformed their ethically neutral counterparts…Virtue, in other words, can bring more than its own reward.” (The Economist, 2/5/2000)

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Archives: February 2000

Nell Minow, “CEO slayer,” is at it again. The Corporate Library began publishing the employment contracts of top corporate CEOs. “In theory, these documents have always been public, because they are filed with the SEC. But in reality, they are hard to track down. We wanted to make them easily accessible so that anyone who is interested can evaluate them.” “It does not surprise us that General Electric’s CEO, Jack Welch, has one of the best. It is not about perks or parachutes, but about securing his assistance as he leaves the company.” The worst contract reviewed to date belongs to another CEO with outstanding performance: Robert Annunziata of Global Crossing. Minow said, “Clearly, the company’s performance has been spectacular, and Mr. Annunziata has created tremendous shareholder value. But the contract’s pay/performance link is weak.”

Mr. Annunziata gets a $10 million signing bonus and two million stock options at $10 a share below market. The make and model of the Mercedes the company will buy for him and his wife is also spelled. To keep him from getting homesick, his mother gets first class airfare to come see him once a month. “The amount involved may be small in relation to the value he has created,” said Minow. “But it seems to us that anyone who gets the equivalent of $30 million just for showing up can pay for his own airfare and Mercedes. More important, the fact that these were the details he and the board were thinking about during that busy weekend is an indication that the new CEO is not as willing to bet on himself — and put his money where his mouth is — as shareholders might wish.”

Minow says the “CEO employment contract can provide some useful insight into the board’s performance and some insight into the board’s relationship with the CEO.” CEO pay is one of those “swimsuit issues” – so popular and so revealing.  Minow’s preliminary report is highly entertaining and very informative…an A+.  The Corporate Library has quickly become the most important source for information on corporate governance on the internet, outside of the SEC. We look forward to more.

Limits of shareholder activism, a perspective from London. (US shareholder activists bid for a bigger say, London Evening Standard, 2/24/2000).

Governance, 2/2000, reports on “Germany’s quiet revolution.” In late 1999 the German government proposed to abolish the 50% capital gains tax. Sales may lead to a drastic reduction in cross-holdings which have been a fundamental feature of German corporate governance. While providing stability and protection against takeover, cross-holdings have also reduced flexibility and liquidity. Once the reform is enacted, many expect a merger mania. The Portuguese Securities Markets Commission has endorsed 17 corporate governance principles. As Governance points out, few global institutions are likely to embrace recommendation 15 which calls for inclusion of 1 or more independent directors, but it does represent a step toward wider acceptance of international standards.

Sarah Teslik, executive director of CII, argues that directors should just say no to large payouts to poorly performing executives. (Governance, 2/2000) We agree, but we also embrace an editorial criticizing both CII and the SEC which appears on Pensions & Investments, 2/21/2000. Both organizations will hold a closed-door, members-only meeting in late March. SEC chairman, Arthur Levitt, has repeatedly called on corporations to open up their conference calls so as to not disadvantage those not allowed to participate. CII should just say no to a setting which P&I says serves to create the impression of “special deals, or at least the suspicion of favoritism.”

Boardroom, 1-2/2000, reports on a ground-breaking study in South Africa under the sponsorship of the Institute of Directors that surveyed directors on what type of person made the best chairman. About 38% favored statesman, 29% entrepreneur profile, an 18% the driver style. A smaller study in the UK had found the top pick to be facilitator, then thinker and driver. Boardroom points out the least favored type of chairman, the pioneer, appears to possess the qualities to fulfill the most significant roles recommended by the King and Cadbury reports. For more on the study, contact theWoodburn Mann Graduate School of Business Administration at the University of Witwatersrand.

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eLOT takes advice from Andrew Shapiro, president of Lawndale Capital Management and agrees to proactive reforms which may attract institutional and socially responsible investors. The news was presaged by an article in the 1/24/2000 edition of Barron’s where Stanley Kabala, eLot’s chairman and CEO, said the company’s board was in “unanimous agreement” about adopting Shapiro’s proposal if the details are worked out. On 2/122/2000, eLOT announced adoption of the following principles:

  • The Board of Directors shall at all times be composed of a majority of independent Directors, using the NASDAQ definition of independence. The Board will appoint the following committees:
    – Audit Committee
    – Corporate Governance and Succession Committee
    – Nominating Committee
    – Compensation Committee
  • Before each annual meeting the Nominating Committee shall solicit recommendations for candidates to fill Board vacancies from each holder of more than 5% of the Company’s fully diluted shares.
  • The majority of the Board members’ compensation should be equity-based.

The Company also announced that the Board of Directors has established a goal that not less than 10% of the Company’s purchases be from Minority and Women’s Business Enterprises (MWBE) qualified under the applicable federal and state definitions, and instructed eLOT management to develop a plan to further that goal. eLOT invites qualified MWBE companies to submit proposals and qualifications via e-mail to [email protected]Business Wire, 2/22/2000

CalPERS released “focus list” of Advanced Micro Devices; Bob Evans Farms; Crown Cork and Seal; A.G. Edwards; First Union Corporation; Intergraph Corporation; Lone Star Steakhouse & Saloon; J.C. Penney Company; Phycor; and Rite Aid. Many have agreed to a number of corporate governance changes. (Reuters, 2/23/2000)

Barron’s, 2/21/2000, carried an article titled, “NEUTRAL GROUND? A Boardroom Battle May Land In the Conference Room,” which discussed Mark Latham’s upcoming presentation at a Pfizer sponsored conference on International Corporate Governance. Mr. Latham will be presenting our proposal which seeks to have shareholders select a firm to advise them on future proxy issues. Patrick McGurn, of ISS, is quoted as saying that although Latham “diagnosed the problem correctly, he hasn’t necessarily come up with the solution.” Understandable, since ISS might possibly lose business if the proposal catches fire at Pfizer and elsewhere.

However, the Barron’s editor then writes, “McGurn notes that there are plenty of chat rooms where investors can talk to each other on these issues.” Surely, Mr. McGurn does not believe ISS and chat rooms offer investors equivalent advice. I’ve been reading McGurn’s analysis for years and it’s much better than anything I’ve found in chat rooms. In fact, his article in January’s ISSue Alert, “The 2000 Proxy Season: From A to Z,” is a great example of the good humor and thorough analysis that is typical of Mr. McGurn. Yes, he’s even got X covered. “X is for Xenophobia” and he goes on to discuss recent concerns of the Corporate Governance Network, OECD and the World Band in two brief paragraphs.

Management Practice Inc. bulletin for 2/2000 assesses trends in the compensation of mutual fund trustees. Compensation is growing a little slower than at comparable sized corporations (9% v 11%). Trustees appear to devote a comparable amount of time to their duties (200 hours a year). The greatest difference appears to be in the form of compensation. Both are moving toward payment in real or deferred shares but funds are lagging. The MPI Compensation survey concludes by noting that both corporations and funds tend to draw from the same pool of candidates. “By this measure independent trustees of mutual funds are comparatively inexpensive.” However, my personal impression is that most trustees aren’t acting as independently as they should, so maybe their lower compensation is warranted.

Whole Foods Market did not ask for an SEC no-action letter and has agreed to include our slightly revised “Shareholder Power Proposal” resolution in their proxy package. Despite the SEC’s puzzling 6/15/98 no-action letter in the case of theTempleton Dragon Fund, Whole Foods did not object to inclusion of internet site addresses in the resolution. We applaud their progressive attitude and trust that forward looking shareholders of the company will vote in favor of hiring a proxy advisor to analyze future proxy issues.

Brazilian corporate governance reforms expected to address lack of corporate transparency and the diminishing rights of minority shareholders, if a bill authored by lower house deputy Emerson Kapaz passes. Kapaz, who belonged to President Fernando Henrique Cardoso’s Social Democrat Party (PSDB) when he started drafting the bill in mid-1999, but shifted to the Progressive Socialist Party (PPS), which isn’t a part of the government alliance. (Mara Lemos; Dow Jones Newswires; 5511-813-1988; [email protected])

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Willie Brown Jr., the current mayor of San Francisco and former Speaker of the California Assembly, was apparently sent a letter in error notifying him that he was Governor Gray Davis’ choice for a seat on the CalPERS board, as was earlier reported by the Sacramento Bee, 1/22/2000. Apparently, someone in the Governor’s office goofed. However, the day after that announcement comes news that he is to be appointed after all. (see Willie Brown gets seat yanked from under him, Sacramento Bee, 2/16/2000; A state post for Brown –really: Davis confirms CalPERS offer, Sacramento Bee, 2/17/2000;Dan Walters: Davis’ gaffe — how bad is it?Brown appointed to CalPERS – againGray Grants Willie a Job — One He Already HasGray Comes Out of Brown Funk Appointment mix-up a comedy of errors, San Francisco Examiner, 2/17-24/2000; Davis Flipflops on Willie Brown Appointment , Los Angeles Times, 2/17/2000, The times they are a-changin’ at CalPERS, Sacramento Bee, 2/19/2000). As I’ve indicated previously, Brown’s appointment will raise press coverage of CalPERS.

Crist stays CalPERS president; Flaherman new VP, reportsSacramento Bee, 2/17/2000. Valdes will continue to serve as investment committee chairman until at least next month, when the board will elect committee chairs.

CalPERS Board comes to its senses and refuses to commit political suicide. President William Crist presented a “compromise” option for regulations on board candidate statements. Instead of prohibiting future candidates from criticizing opponents or telling voters why they are running and also removing the current prohibition against misleading remarks, the Board voted to put a new version of the rules out for public notice.

James Morgan, testified that he circulated a petition against the earlier proposal at his workplace, Cal/EPA. “Every single person that I talked to signed it. I have circulated assorted petitions over the years and I have never ever had every single person I talked to sign.” Stephen Brackett, of the Santa Monica Police Officer Association, testified that he also found that “100% of the people I spoke to were opposed to the concepts that are before you today.”

The newly proposed rules would expand candidate statements to 200 words but would also allow candidates to revise their statements after reading those of the other candidates. It was just such an action by Dr. Crist in 1998 which precipitated a protest by this editor. Although the protest panel appointed by the same General Counsel who allowed the action found it was arguably a technical violation of the rules, the election could not be overturned because CalPERS rules require the protester to prove the outcome would have been different. In other words, CalPERS staff is free to assist incumbents as long as their actions cannot be directly tied to the outcome.

The Sacramento Bee said the proposed rules previously approved by a majority of the Board, including Dr. Crist, would risk creation of a permanent board: “unaccountable, untouchable and isolated from its members.” Dr. Crist’s new proposal is certainly better. It would allow candidates to review all the statements and revise their own within 10 days. I question the value of letting candidates take ideas from their opponents without voters knowing where the ideas originated. The rule would encourage candidates to initially file poorly crafted and perhaps deceptive arguments. On refiling they would then reap the benefit of anything of value submitted by their opponents, while letting their opponents appear to address phantom arguments which no longer appear with the ballot. Far better, would be to require submitted statements to remain unedited, but to allow a second round of perhaps 100 words which could be used to rebut opponents or add new information.

On an even more positive note, the Benefits and Program Administration Committee agreed to examine other election issues in the near future. (see McRitchie’s testimony)

CalSTRS scored an 18.3% return last year on its cash, stock, bond, real estate and private equity investments. CalPERS, America’s largest pension fund, logged a return of just under 16%. (Sacramento Bee, 2/12/2000)

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Stephen Viederman (president, Jessie Smith Noyes Foundation) and Peter Camejo (trustee, Contra Cost County Employees Retirement Association) argue that fiduciary duty requires looking at the potential risks and rewards related to tobacco, the environment, treatment of employees, or any other of a range of social concerns in view of the fact that social funds perform as well as if not better than comparable funds. Morningstar has found socially screened mutual funds have, on average, performed better over the last one and three year period, a finding confirmed by other researchers. Isn’t it time, they ask, for “more open discussion of these issues by pension fund executives, following the lead of Contra Costa County.” On the other hand, Pensions & Investments editorial director, Mike Clowes, decries the vanity behind the ‘social’ mantle. He argues that investing in arms-makers, for example, is not socially irresponsible. “Invest as your conscience directs you, but don’t proclaim moral superiority by claiming to be socially responsible.” In our opinion, both are right. Fiduciary duty requires an examination of risk, including legal liability, but socially responsible investing needs a new name. The same issue of Pensions & Investments carries an article about a new startup fund, Eco-Enhanced Index Management, which is betting that corporate environmental are positively correlated with financial performance. (P&I, 2/7/2000)

Leonard Chazen, a partner at Covington & Buling, offers excellent advice to the SEC. He notes 1999 no-action letters have consistently refused to include a position on shareholder proposals raising unsettled questions of state law, such as many issues surrounding poison pills. The “agnostic” position of staff is “not easily reconciled” with Rule 14a-8(g), which gives the company the burden of proving it is entitled to exclude the proposal. The SEC’s failure to apply that burden means companies can exclude a proposal with little risk if they believe the proponent lacks the resources or resolve to litigate. The SEC should return to its earlier position that the improper subject exclusion does not apply to a proposal that raises an unsettled question of state law since, in such instances, companies cannot meet the burden of proving the proposal is improper, as is required under Rule 14a-8(g). (the Corporate Governance advisor, 11-12/99)

Congressman Bernard Sanders authored a letter signed by 46 Members of Congress urging the SEC to allow a stockholder resolution sponsored by 300 employees which seeks to reverse pension and retiree health benefit cuts. A recent release praised IBM workers for their determination and the SEC for their ruling.

Tomorrow the World. Anne Simpson describes the work the World Bank is now doing with the Confederation of Indian Industry to improve corporate governance and the ability of 17 Indian firms to tap international capital markets. As those firms reap anticipated rewards, other firms and necessary government reforms will follow. Sounds like an excellent strategy for the Global Corporate Governance Forum. (Director’s Monthly, 1/2000)

Sheet Metal Workers International Association to run an independent candidate at Paul Mueller and cumulative voting will increase the prospects of their board pick, Joseph ‘Nick’ Bacino. (IRRC Corporate Governance Highlights, 2/11/99)

Patrick McGurn highlights the debate between “do-it-yourself” slates stacked with large investor members of insurgent groups and new school players who prefer “independent” candidates. “Each school’s greatest strength is also its biggest weakness.” The investors have better alignment with shareholders but they also fuel charges of self-interest. McGurn’s excellent analysis goes over several of the recent cases, including Pfizer, and concludes experience will tell which side has growing influence. However, I’d bet there is no one size fits all. The value of either strategy is tied to factors, such stage of development. A recent IPO will usually go the investor route, while established firms will opt for independent directors. (ISS Friday Report, 2/11/2000)

Fairvest annual survey finds general decline in shareholder opposition to management proposals among Canadian firms. Their analysis indicates this may have more to do with the voluntary reporting methodology of their survey than actual practice. However, it appears poison pills were more shareholder friendly. M. Yves Michaud appears to be among the most innovative and successful crusaders. A proposal at the Canadian Imperial Band of Commerce requiring directors to hold shares equal to 6 times fixed remuneration got 88% of the vote. His proposal that BCE nominees be voted individually got 94% of the vote and another proposal at 2 banks to require minutes of the annual meeting to be sent to all shareholders got 58% and 65% of the vote. (for more seeCorporate Governance Review, 12/99-1/2000)

Germany’s first corporate governance code of best practices has been released and attempts to balance a strong commitment to stakeholders and a mandate to maximize shareholder value. The Fairvest analysis notes the cod neglects to require disclosure of executive pay and tolerates directors who can miss half the meetings before their lack of attendance is made public. (for more see Corporate Governance Review, 12/99-1/2000)

Phillip R. Lochner, Jr., writes that lists of the best and worst boards are generally a “trivial pursuit.” Too often companies are ranked by those with little board experience based on stock price, reputation, short-term prospective and luck. He levels a similar criticism at ratings of individual board members. He notes that directors have ample opportunity to “tell shareholders what they are doing and why.” “Just such a dialogue between shareholders on the one hand and boards and management’s on the other is the best way to begin to discover which directors and boards are rally performing well, rather than relying on outsiders whose judgments may be based on nothing but thin air.” I’m in total agreement, but until boards are willing to enter the chat rooms or post to the boards, at least the top 10 lists provide the something to attack or defend. Shareholders aren’t in the meetings; its up to directors to come out of the boardrooms or invite shareholders in. (Directorship, 2/2000)

Executive pay up 24% in 1999 over 1998, according to Pearl Meyer & Partners survey of 55 service and industrial companies with revenues averaging $18.5 billion. Average CEO compensation at such firms stands at $9.4 million. (Directorship, 2/2000)

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Transparency International ranked the US 9th out of 19 countries whose companies are perceived to dole out bribes. China had the highest level of perceived bribery and Sweden the lowest, with Australia and Canada close behind. The index is based on perception, not fact.

Public retirement funds manage about five times as much equity as their private counterparts but also index at about five times the rate of privates. One surprise in the analysis performed by Thomson Financial Investor Relations was that public funds invest more aggressively. Those with active allocation patterns invest 83% of their equity in growth stocks vs only 51% for privates. For more information, contact Richard Wines at 212-510-9350.

SEC’s selective disclosure may mean investor relations officers have to release information they know only a small portion of the investment community will understand, according to Sara Brody of Brobeck, Phleger & Harrison LLP. “If selective disclosure means saying the same thing to everyone, the real question is whether the level of information needs to be degraded,” said Brody at a National Investor Relations Institute Rock Mountain chapter lunch. (Investor Business Relations, 2/7/2000)

TIAA-CREF established a policy “a number of years ago” to absolutely do no soft dollar business, according to Peter Clapman, senior vice president and chief counsel. That means no payments, for what normally takes the form of research services from brokers to investment managers. Sounds like a good policy. Such commissions, often in the form of rebates, take on the appearance of bribes and kickbacks. Joyce Mader, who served on DOL’s ERISA advisory panel on soft dollars is quoted as saying, “abuse of soft dollars can cost a plan tens of hundreds of thousands of dollars, which is bad enough. But if investment professionals steer a plan to inappropriate investments because they’re getting a cut of commission, that can cost a plan millions.”

Union money is beginning to go into direct investments with collateral benefits. Bob Eason discusses the MFS Union Standard Equity Fund, not only its positive labor screens, but also public relations aspects and the enhanced ownership in fewer companies which facilitates active ownership and involvement. Another union focused fund has been set up by the Machinists. IAM Share invests mostly in companies with Machinist contracts, with about a third in a mix of large-cap companies in other industries. According to State Street, a similarly modeled portfolio would have outperformed the S&P 500 over the last ten years.

Proxy professionals often key to winning key proxy campaigns. “When management faces numerous dispersed shareholders, it almost always wins, but if those shareholders can speak with one voice, the playing field is leveled,” according to Rich Ferlauto of ISS’ Proxy Voting Service. At Marriot, “all the proxy voting services did the right thing and supported us,” said Matt Walker who worked on the campaign against management’s dual-class stock proposal for the Hotel Employees & Restaurant Employees. (for more on the above 3 items, contact the Center for Working Capital, 202-637-5179)

Friends of the Earth US, released an online Confronting Companies Using Shareholder Power: A Handbook on Socially-Oriented Shareholder Activism “written for socially-conscious or mission-based investors who recognize their obligation to exercise ownership responsibility in the companies they hold. It is intended to assist investors who have long-term commitment to social issues and who are committed to using shareholder activism tools in a prudent and responsible manner.” This single posting to the internet will generate more and better crafted shareholder resolutions than any prior publication. I know, sounds like hype, but I think it’s true. Shareholder activists will be bringing issues to a boil with this recipe book.

OECD is undertaking a major Review of its Guidelines for Multinational Enterprises and is seeking public comment. The Guidelines haven’t been altered significantly since their adoption in 1976. Also of interest at the OECD site is a recent report, Deciphering Codes of Corporate Conduct: A Review of their Contents (updated version as of December 1999).

CERES 2000 Conference in San Francisco April 13-14th, “Navigating the Networks of Change,” is based on the premise that environmental improvement in the 21st century will require new forms of cooperation and mutual accountability among key sectors of society. The conference will focus on the issues that arise at the crossroads of corporate accountability, environmental protection and stakeholder engagement in an era of globalization and information revolution. I’m going to be there. Contact me at[email protected] prior to the conference if you’d like to get together for a few minutes, lunch or whatever.

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IRRC conference goers discussed the need for independent boards, the use of stock options and other governance concerns at dot-com companies without reaching consensus. TIAA-CREF announced continued focus on eliminating dead hand poison pills. Use of internet voting up but still only represents about 6% of balloting. SEC encouraged use of internet. If shareholders agreed to view documents online, companies could save as much as $700 million industrywide. SEC granted no-action relief from Bart Naylor’s proposal to allow shareholders to place nominees on company ballots. Naylor is now hoping to get firms to nominate two persons for each slot. (IRRC Corporate Governance Highlights, 1/28/2000)

I generally limit my commentary to trends and don’t focus on specific companies. However, its worth noting that Proxy Monitor’s recommendation to Medco Research shareholders was to reject the proposed merger with King Pharmaceuticals, while ISS favors the merger. Perhaps if there is a “trend” here, it is the continuing importance of independent analysis by proxy monitoring firms. The Medco case provides another example of healthy competition and independent insights.

The Cluetrain Manifesto may not live up to the forward by Thomas Petzinger, Jr. of the Wall Street Journal. “Recall what The Jungle did to meat packing, what Silent Spring did to chemicals, what Unsafe at Any Speed did to Detroit. That’s the spirit with which The Cluetrain Manifesto takes on the arrogance of corporate e-commerce.” E-commerce is a baby that’s just begun to babble, as far as I’m concerned. It isn’t mature enough to get knocked down from a position of arrogance… But then I’m no web expert and the authors of this book seem to have those credentials.

While the book focuses on the internet’s ability to facilitate dialogue and talking story, contrary to their great expectations, I think the web will represent “TV with a buy button,” for millions of sorry souls. However, I can see that in the world of corporate governance, the internet is making a huge difference by empowering shareholders. Maybe the Cluetrain authors aren’t exaggerating in the long run. The book is great for one liners. “Word of mouth has gone global.” “The community of discourse is the market.” “Markets…want to participate in the conversations going on behind the corporate firewalls,” and corporations that let them are likely to benefit.

There’s also the Cluetrain Corollary to Metcalfe’s Law. “The level of knowledge on a network increases as the square of the number of users times the volume of conversation.” So asNETwork grows, on this and other channels, it becomes easier to learn the truth about corporate governance around the world and at individual firms. Like Linux, nobody is managing or controlling it, but many voices are contributing. All those “best practices” are helping firms discover, rather than invent, their own identity when used properly.

Here’s another line from Cluetrain, “controlling information is like trying to control a conversation: it can’t be done and still be genuine.” “The questions we ask aren’t going to predict the future. They will create the future.” So far, what we hear most on the internet is positioning by those who want to be our saviors. “The questions themselves are intended to confuse the issue, and the answers are nothing but the smirk on the face of someone who just proved himself right.”

See The Cluetrain Manifesto site; then buy the book though our link and support this news site. (In the last quarter of 1999 we helped sell $2,048.02 on books, earning the huge referral fee of $110.12. No, we’re not getting rich but if readers will buy their books using our direct links, we’ll get 15%. If you just pop over to from our site and buy after browsing, we only get 5%. If everyone had bought those books in the last quarter using direct links, we’d have made another $200. Okay, I’m off the rant.)

Mannesmann to accept Vodafone’s $182 billion merger offer, ending a protracted battle for the German telecom firm, according to WSJ. The deal will create not just a European behemoth, but the world’s largest wireless provider.

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Archives: January 2000

Web posts blamed for firing, according to court documents filed on behalf of Dimitri Papadakos, formerly CEO of Gyrodyne Co. of America. Papadakos seeks $20 million in damages from Gyrodyne and various online posters, including his half brother, Peter Papadakos, a Gyrodyne director at the time. Also named were Peter Pitsiokos, Gyrodyne’s vice, president, corporate secretary and general counsel, who allegedly fed Peter Papadakos defamatory information for postings accusing Dimitri Papadakos of receiving illegal payoffs and diverting company assets for personal use. (WSJ, 1/27/00) No, this is not the kind of brave board activism we have been seeking.

Internet used to empower investors at Coho. See The Gadfly “Latest from the message board revolt: Coho investors swimming upstream,” by Michael Collins. Mr. Collins is one of the few in the mainstream press (if CBS MarketWatch can be called that) who routinely writes on shareholder activism.

Lens reported a preliminary vote tally showing 34% of shareholders supported their non-binding proposal which urged Ashland’s board to hire a nationally recognized investment banker to explore value enhancing alternatives for the company, including possible sale, spin-off, merger, or other transaction for any or all assets of the company. ISS had also recommended a favorable vote. (PR Newswire via Northern Light)

Deloitte & Touche guide says to expect shareholder questions on e-business, globalization, and M&A. “Questions at Stockholders’ Meetings 2000” is available for free: contact Andrea O’Neil at (203) 761-3059.

The Corporate Library sent letters to the Corporate Secretaries of more than 500 leading companies last July, requesting a copy of each CEO’s compensation agreement and the name of a corporate governance contact person. Nell Minow says responses have ranged from “rude and evasive to genuinely concerned and helpful.” The cooperative response rate appears to be approximately 16%. The report is scheduled for release on February 25, 2000. For more information, contact Nell Minow.

Hostile takeovers come to Japan. The country’s first such all-domestic battle may signal a changes in corporate culture. (Business warfare rubs off on Japan, The Detroit News, 1/25/00)

Back in 1940, John C. Bogle’s Princeton thesis noted the SEC call at that time for mutual funds to serve “the useful role of representatives of the great number of inarticulate and ineffective individual investors in corporations in which investment companies are also interested.” With mutual funds now controlling 35% of stock and churning them at rate of 112%/year, Bogle still hasn’t given up on that 60 year old goal. He says mutual funds have become a marketing business, reluctant to offend potential clients. But an industrywide effort of 1/1000 of a basis point could raise $60 million for active corporate governance (6 times what TIAA-CREF spends).

Of course funds are unlikely to raise corporate governance issues, Bogle notes, because they “live-in-glass-houses” and are controlled by small outside firms whose principle business is providing the funds with “all the services required to conduct its affairs.” The yield is rising expenses, managed corporate earnings, the stock market as casino, and growing stock dilution from free riding management options. His hope on the horizon is index funds whose only way to add value is through shareholder activism. He offers prescriptions but more need to listen. (Governance: The Silence of the Funds, in The Corporate Board, 1-2/2000)

Do You Need a Dissident Director?, asks Steven A. Seiden, in the same issue of The Corporate Board. Seiden notes TIAA 1998 purge of Furr/Bishop’s board and the growth of limited partnerships who seek to turnaround underperforming companies. Prime among Seiden’s recommendations is that dissident directors need to be “unfettered by any financial, family or close personal ties to the activist” investor.

Sean Harrigan, Member of the California State Personnel Board, has been named as its representative to CalPERS. Harrigan serves as the Regional Director and International Vice President of the Food and Commercial Workers International Union (UFCW) Region 8 – Western United States. Harrigan was appointed to the State Personnel Board by Governor Gray Davis in June 1999 and replaces Ronald Alvarado as the Board’s representative to CalPERS. See alsoCalPERS bio.

CalPERS took a 10 interest in San Francisco-based Thomas Weisel Partners which invests in the growing internet, technology and communication industries centered in California. CalPERS will commit $500 million to act as lead investor in new alternative investment funds and may make another $500 million available.

Willie Brown Jr., the current mayor of San Francisco and former Speaker of the California Assembly, is rumored to be Governor Gray Davis’ choice for a seat on the CalPERS board reserved for a representative of local government. (Sacramento Bee, 1/22/2000) The profile of California’s $168 billion retirement fund is about to rise dramatically.

Back to the topDirectorship’s, 1/2000 issue, carried an interesting interview with Woody Small, co-portfolio manager of Undiscovered Managers All Cap Value Fund which picks portfolio companies, in part, based on the quality of directors. The fund has outperformed the Russell 1000 Value Index since 1997. We applaud Mr. Small for his action but wish he would take the next logical step. He indicates he has never taken an affirmative action to recommend that a board member resign or not stand for reelect ion. In addition he has never recommended director candidates to management.

Governance Institute expanded its biennial hospital survey of health system boards to include a ranking of the nation’s 20 top hospital systems based on governance practices. (Modern Healthcare, 1/17/2000)

Ira Millstein is reportedly resigning from his post as chair of the World Bank’s Private Sector Advisory Group. (see IRRC Corporate Governance Highlights, 1/20/2000)

Corporate Governance of State-Owned Enterprises in China was the subject of two-day meeting, which was co-sponsored by the Development Research Center (DRC) of the State Council, the Economic Cooperation and Development, and the Asian Development Bank. (see China Holds Corporate Governance Seminar)

Accoss the Board, the Conference Board Magazine, reports that “while the business pages are full of newly minted millionaires and billionaires, half of all Americans have less than $1,000 in financial assets.” (1/2000, p. 9)

Koppes, Richard H., Lyle G. Ganske, and Charles T. Haag, “Corporate Governance Out of Focus: The Debate Over Classified Boards,” The Business Lawyer, May 1999, Vol. 54, No. 3, pp. 1023-1055. The author’s argue that shareholder activists should reexamine their call for annual elections. Classifying a board greatly improves the ability of a corporation to defend against unsolicited takeovers bids and proxy fights. Classified boards can protect poison pills from being removed and promote continuity, stability and independence. Takeover premiums have been shown to be higher for companies with takeover defenses. Independence is best secured by serving multi-year terms. The danger of one-year terms is that truly independent board members may not be invited to run again after their first term and it often takes more than a year to make major changes.

The authors argue that focus should, instead, be on increasing board independence and activism, citing theMillstein/MacAvoy study which found a “significant correlation between an active, independent board and superior corporate performance.” However, the Millstein/MacAvoy study measured not only board independence, but responsiveness to shareholders. Any firm that didn’t return the CalPERS survey was graded F, whereas those who took the action CalPERS desired got an A+. Board independence is important but responsiveness and accountability to shareholders may also be key.

Early in the article, Koppes et al. quote from a recent statement by CalPERS in support of one of its proposals to eliminate a classified board. “We believe that the ability to elect directors is the single most important use of the shareholder franchise. Accordingly, directors should be accountable to shareholders on an annual basis.” The authors point to the fact that CalPERS itself has a classified board, where board members are elected or appointed for multi-year terms.

CalPERS is right in its first statement but their second statement does not follow. In fact the arguments of Koppes et al. would be convincing if certain steps were taken to reduce the likelihood of entrenchment by strengthening accountability to shareholders. First among these reforms would be the ability of shareholders to place nominees on the company proxy. One can argue about where the threshold should be set, but Bart Naylor’s recent proposal allowing those with 3% of shares to do so appears reasonable.

Secondly, to ensure those elected reflect the consensus of shareholders, any such proposal should be combined with the ability to use instant run-off voting (IRV). In 1993, for example, 96 candidates ran for two CalPERS Board positions. One of the winning candidates received less 5.5% of the vote. We certainly can’t say this was the candidate most voters wanted.

IRV facilitates expansion of voter choice by eliminating the “spoiler” impact of long-shot candidacies and avoids the expense of runoff elections. IRV works by allowing voters to rank candidates in order of preference, 1, 2, 3, and so on. The candidate who receives the fewest number of first choices from the voters would be eliminated in the first count and all his or her ballots would be redistributed to the voters’ second choice. Each successive count eliminates the next lowest polling candidate, transferring his or her ballots, until one candidate achieves a majority.

Other facilitating reforms would include confidential voting and a recognition that trust law requires that voting rights be subject to the same fiduciary standards as other plan assets. Although this rule has held since 1988 for pension funds, it has not yet been applied to other institutional investors, such as mutual funds and insurance companies.

Koppes et al. are right, but without mechanisms in place to allow shareholders better access to the nomination process, shareholders must continue to support annual elections as an important mechanism to avoid entrenchment.

Back to the topIRRC Corporate Governance Highlights discusses proposals for a one-time doubling of voting rights for shareholders who have continuously held shares for 5 years, establishing a right for shareholders with 2% of outstanding shares access to company’s proxy statement to nominate board members, electing the entire slate of board every 3 years, requiring an annual strategic report to shareholders, and implement exec compensation program that focuses management on the need to “maximize the company’s long-term wealth-generating capacity.” IRRC also summarizes some of the no-action relief letters from companies. (1/7/2000) IRRC indicates that CalPERS, NYCERS, and CII weighed in on the American Home Products sale. (1/14/2000) Still time to register for IRRC’s conference, to be held in New York City on Jan. 20-21.

Tidbits from Investor Relations, 1/2000. Less than 1/4 of ASX companies have internet sites with dedicated investor relations sections, according to a study by Computershare Analytics. Like the US SEC, the Australian Securities & Investments Commission is urging listed companies to dump briefings which are exclusive to analysts and institutions.International Accounting Standards Committee calls for the adoption of an international code of conduct to raise internet business reporting standards. Street-name investors of 5,000 publicly-traded US companies are enabled for internet proxy voting through ADP. Use of internet proxies is permitted in 20 states, up from 14 in 1998. States that do allow such voting are by far the leading states for registration. In 3rd quarter of 1999, over 1,500 publicly-traded companies webcaste their quarterly conference calls, according toStreetFusion. Investor Relations also profiles Yve Newbold who recently worked on raising voting levels in the UK. Her next project is chairing the Ethical Trading Initiative, to prod retail companies into applying proper labor standards in overseas factories.

Jason Zweig, mutual fund expert at Money Magazine, indicates that closed-end funds used to be a great corner of the market where you could find terrific stock pickers. “But I’m sad to say they have become a cesspool of lousy corporate governance, where the fund managers not only charge exorbitant fees but reject every single attempt at shareholder democracy.” He advises that he would not buy a closed-end fund without reading about “the latest attempts by shareholders to express their legitimate rights, and what the fund managers did to stomp on them.” (MoneyLive, 1/10/2000)

Sheryl Pressler, CalPERS investment manager, to step down on Feb. 28. A national search for her replacement has begun. Pressler is moving to Atlanta-based Lend Lease Real Estate Investments Inc. She earned just over $300,000 in fiscal year 1999 at CalPERS. William Crist, president of the CalPERS board, said “there’s no way, politically, we could have matched the (Lend Lease) pay.” (Sacramento Bee, 1/15/2000) Pressler dramatically raised the fund’s return, largely by increasing the proportion of investments in stocks.

BusinessWeek names General Electric as having best board, unseating Campbell Soup. For the third time in four years, Business Week surveyed Wall Street’s biggest investors and most prominent governance experts for their views of the best and worst boards in America. Boards of Campbell, IBM, Home Depot, Intel, Compaq, and Cisco Systems are near the top. Walt Disney Co. was named the worst in America. CEO Michael D. Eisner is coming under increasing fire for Disney’s recent lackluster performance. Institutional shareholders want Eisner to put more independent directors on a board that, despite improvement, remains packed with Eisner chums. Since May, 1998, Disney has lost nearly 18% of its market value, more than $15 billion. (BusinessWeek, 1/24/2000)

In an accompanying article entitled “Now, a Gadfly Can Bite 24 Hours a Day,” BusinessWeek calls eRaider “the most ambitious effort to use the Web as a tool to champion change.”  [eRaider, which will be starting up shortly, will operate as a mutual fund which tries to influence the companies they buy. However, eRaider will be the first fund that actively organizes on the Internet for this purpose.] BusinessWeek ended the article with the sentence,  “It’s enough to make a CEO sentimental about the good old days when gadflies were little more than an annual annoyance.”

For old fashion boards, that may be.  However, boards that have been through something of a corporate governance revolution meet more frequently, savor their independence, and recognize that well informed owners can add value. Gone are the days when the voices of  owners are an annual annoyance; chat rooms run 24 hours a day.

Gladflies have helped bring about important changes in corporate governance over the years.  It was largely the Gilberts who persuaded the SEC to enact the rules governing shareholder proposals in 1942. Before them, companies weren’t required to put proposals to a shareholder vote or to let shareholders speak at annual meetings.  Gadflies made the  system of activist shareholders possible.

However, provocative criticism from individuals only goes so far.  By bringing individual investors together with an institutional investor committed to activism, eRaider forges a new constructive model orchestrating change by influencing the direction of underperforming portfolio companies.

Back to the topCalPERS is debating if it should use its influence to impact labor and human rights practices in emerging markets. Staff has been asked to make a recommendation in April. The board appears to be split between those who want to impose screens and those who seek “constructive engagement.” Treasurer Phil Angelides would like to screen out countries with excessive risk factors and look at democratization efforts, shareholder, human and workers rights. Chuck Valdes, who heads the investment committe, wants the fund to be “proactive” and believes divestment would be a “violation of fiduciary duty.” (Pensions&Investments, 1/10/2000)

I doubt divestment, in the face of excessive risk, would be a violation of fiduciary duty but in order for “constructive engagement” to work, there must be a viable movement for human/labor rights. I’d like to hear from readers regarding this issue and what action you think CalPERS should take. Please write [email protected].

Ralph D. Ward, publisher of the Boardroom INSIDER online newsletter says the $142-billion buyout by America Online of Time-Warner announced is more than a triumph of New Media Over Old Media — it heralds “the triumph of the New Boardroom over the Old Boardroom.” “The AOL board of directors shows the strengths of the newer, high-tech model board with, with smaller membership (10 versus 13 at Time Warner), and a focused core of current leaders in the tech and venture industries,” including Nextel Chair Daniel Akerson, former Netscape CEO James Barksdale, and Frank Caulfield of Kleiner, Perkins Caulfield.

The Time-Warner board “is as blue-chip as the company itself, but older (average age 62), and less focused on up-to-the-minute media experience” with such directors as Beverly Sills, former Senator John Danforth, and retired Bank of New York Chair J. Carter Bacot. “Though the Time-Warner board has enormous talent, even a member like Ted Turner couldn’t turn them into a lean, nimble growth machine.”

Ward also predicts that it will be interesting to see how the final AOLTimeWarner board membership will shake out. “With names like those above, plus Colin Powell, Gerald Greenwald and [Fannie Mae Chair] Franklin Raines, how do you separate the sheep from the goats?”

Internet company board’s average 7 directors, much smaller than S&P 500 companies, which average 12 directors. While boards at most U.S. companies meet 8 times per year, Internet companies’ boards meet an average of 10 times per year. 53% of dot-com directors surveyed are considered independent, compared to 67.6% for the boards of S&P 500 companies. Only one in four of Internet companies surveyed has a nominating committee, compared with 90% at S&P 500 companies. Learn more about the findings of this recent IRRCstudy by attending their conference, to be held in New York City on Jan. 20-21.

Corporate Directors Forum, based in San Diego announced the six winners of its prestigious “Director of the Year,” award, which recognizes the leaders in the business community that represent superior corporate governance.

Those receiving awards include: Peter P. Savage, former president, CEO and chairman of the board of Applied Digital Access as Director of the Year for Corporate Citizenship; Gene Ray, chairman of the board of The Titan Corporation as Director of the Year for Companies in Transition; Irwin Jacobs, chairman and CEO of QUALCOMM, Inc., as Director of the Year for Enhancement of Economic Value; David R. Flowers, former chairman and CEO of Pulse Engineering, Inc., as Director of the Year for Corporate Governance; John C. Raymond, chairman and CEO of the Greystone Group, L.P, as Director of the Year for Not-for-Profit Organizations; and Jack Goodall, chairman of the board of Jack in the Box Inc., who will receive the Lifetime Achievement in Corporate Governance Award.

The winners will be recognized during the Corporate Directors Forum Annual Director of the Year Awards dinner on February 23, 2000 at the Hyatt Regency LaJolla. Thickets are still available by contacting Larry Stambaugh, Chairman of the Board of Corporate Directors Forum, 858-455-7930.

English version of “Corporate Governance Principles: A Japanese View” has been added to the ECGN codes page.

Back to the topShareholder activist John Chevedden raised an important issue in a recent letter to the SEC’s Jonathan G. Katz. Rule 14a-8(j)(1) requires that companies “simultaneously” provide proponents and the SEC with a copy of their no action requests. “Companies are evading the spirit of this rule by sending the Commission’s copy by courier or overnight delivery. Meanwhile, the proponent’s copy arrives by ordinary mail – 5 days later. Companies can further exacerbate this by using certified mail for more delay.” Chevedden notes further that while the company often has 40 days to respond to a short 500-word resolution, the proponent must often prepare a rebuttal of a 20 page company document – “with 5 days lost in transit.” Clearly, Chevedden is right. The SEC should clarify that Rule 14a-8(j)(1) requires companies to make a diligent effort to ensure letters delivered to the proponent and the SEC arrive on the same day. I urge readers to join Mr. Chevedden’s effort to seek clarity on this issue.

SEC released proposed rules on Fair Disclosure (File No. S7-31-99) moving to take advantage of the communication revolution. The rule would help to level the playing field when an issuer chooses to disclose material nonpublic information. A new item 10 would be added to Form 8-K but the rule would alternatively allow disclosure through qualified press releases or any other method reasonably designed to provide broad public access.

Although the rule does not consider an internet posting on the issuer’s site to be sufficient for public disclosure, I expect this will be one of the most popular mechanisms when used in conjunction with press releases and publicly accessible conference calls, especially with regard to playback. The internet is now the leading source for retail investment information. 75% of individual investors use corporate sites as important research tools and 90% choose companies without the help of an advisor.

As mentioned last month, Individual Investor Group Inc.(INDI) broke new ground by discussing corporate earnings on the company’s message board. The FD rule should facilitate such innovation. By removing some of the speculative advantage which a few investors enjoyed, the Fair Disclosure rule and other recent developments may convince stockholders to act as owners, taking a more active role in corporate governance rather than doing the Wall Street walk.

SEC also released final audit committee disclosure rules. Independent auditors must now review the companies’ financial information prior to the companies filing their Quarterly Reports on Form 10-Q or Form 10-QSB with the Commission. Company proxy statements must include additional disclosures and reports about and from their audit committees. The rules are designed to improve disclosure related to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements of public companies.

Boardroom INSIDER’s Ralph Ward reviews the new regs, noting that “Audit committees now have to put it on the line with a proxy report that they’ve reviewed financial issues with management, and that they stand behind the numbers. The committee also has to have a written charter, independent members with specific financial savvy, and be in charge of hiring and fire the outside audit firm.”

Ward notes that “most people are probably surprised to learn that these standards aren’t already required. If it raises a stir to say audit directors must be financially literate, independent, and responsible, what does that say about our current boardroom standards?” How should corporate boards cope with the new audit crackdown? Ward’s publication gives several tips

Wharton professors John E. Core and David F. Larcker studied 195 firms that adopted target ownership plans involving senior-level managers between the years 1992 and 1996. While target ownership plans aren’t a magic bullet, when CEOs with below-average stock ownership in their companies increase their holdings, company performance definitely improves. (CEOs and Their Companies Profit from Executive Stock Ownership, [email protected] Newsletter)

NASD restructuring to streamline corporate governance. (seeNASDAQ/AMEX Newsroom)

Class action law suit alleges CalSTRS held retirement workshops and distributed information to members early in 1998 but never mentioned pending legislation which would boost their monthly retirement checks by $240 a month if they retired after 1/1/99. The suit alleges that employers contemplating changes in their pension program have a legal obligation to inform employees if that information might affect employees’ retirement decisions. (2 retired teachers sue pension fund, Sacramento Bee, 1/5/00.

Magellan trustees recommending shareholders approve allowing up to 25% of assets to be invested in a single company and to allow the fund to make investments that represent more than 10% ownership in a single company. This will allow Magellan to stop bumping up against its current 5% limit when investing in large companies and will facilitate investment in small firms. Although not mentioned in a recentWSJ article (“Fidelity Seeks More Freedom for Magellan,” C28, 1/1/00), it could also facilitate a move toward greater involvement in corporate governance activities.

Mark N. Clemente and David S. Greenspan have released their 1999 list of M&A “bloopers.” “This year, we are particularly amazed by the number of transactions that…are revealing serious accounting and financial irregularities.” Those making the list include America Online-Netscape, @Home-Excite, Disney-Infoseek, BNP-Bank Paribas, Tyco International Ltd-Binge/Purge, Deutsche Telekom, American Home Products-Warner Lambert, Aetna U.S. Healthcare, AutoNation, and Bank One. The Corporate Library LLC News Briefs, 12/15-28/1999.

CalPERS launches all-out campaign to rid Tyson Foods of dual-class structure. IRRC reports they have engaged Garland Associates (212) 866-0095 to assist in soliciting shareholder votes. (Corporate Governance Highlights, 12/30/99).

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Archives: December 1999

Stock options granted in 1998 in public companies to nonexecs was $1,737, up from $1,269 in 1997, according to a survey by Sanford Berstein. Inc. magazine (10/99) says 39% of the Inc. 500 give stock options to all full-time employees, up from 26% last year. Data compiled by New York University economist Edward Wolff shows that top 10% of population held 73% of country’s net worth in 1997, up from 68% in 1983. Congressional Budget Office data shows top 1% has as many after tax dollars to spend as the bottom 100 million. Top 20% is gaining ground, while all other quintiles are dropping their share over last two years. Rutgers researcher May Kroumova found that where 401(k) plans are invested in employer stock, participants have 20-30% higher assets/employee. (Employee Ownership Report, 1-2/2000) Issue also contains feature articles on IPOs, negotiating an ESOP loan, case studies, surveys, etc. Sign up for their free bulletin for news about upcoming events.

AFL-CIO released their Investment Product Review which came out of its Capital Stewardship program, an effort to ensure workers have a voice in the institutions that manage their retirement funds. The products reviewed offer a broad range of collateral benefits, from job creation, promotion of workers rights to community economic development, both here and abroad. For a copy, call the Office of Investment at 202-637-3900.

Nell Minow may have left full time work at LENS but her move to The Corporate Library promises to continue to endear her to the corporate governance community; her 1st project is to publicly disclose the CEO contracts of the S&P 500. (ISS Friday Report, 12/17/99)

Patrick McGurn reports that more than 30 firms in 1999 ceded board seats to dissident nominees to end insurgent investors’ threats to incumbent directors. He spotlights recent action at GRC International and Cone Mills as well as the co-opting tactics of Dun & Bradstreet which is spinning off Moody’s Investors Service in an attempt to head off Harris Investments LP. (ISS Friday Report, 12/17/99)

Directors & Boards has revamped its web site and seeks to become the most powerful and sought-after tool for counsel in referencing the role, duties, structure and composition of corporate boards by incorporating an online archive of 23 years of articles. See James Kristie’s Board Trends 1970s to the 1990s: “The More Things Change…”

Institutional investor holdings have jumped from $770 billion in 1980 to $15.4 trillion at the end of 1998 with pension funds controlling 48%. The share held by open-end mutual funds has gone from 6% to 21% according to the Conference Board.

Ontario Teachers Pension Plan Board included a talk entitled “A Random Walk through Corporate Governance” which outlined many of the fund’s proxy voting decisions for 1998.Corporate Governance Review (a publication of Fairvest) reports that OTTPB opposed 76% of resolutions involving stock options in 1999 and 41 of 42 resolutions to adopt shareholder rights plans. (10-11/99

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Century’s top stories included Michael Milken changing the rules of corporate governance in the early 1980s, backing greenmail artists and corporate builders alike with his junk bonds. (Boston Globe 12/28/99)

SEC rulemaking on Role of Independent Directors of Investment Companies (Comments due January 28, 2000) October 15, 1999 [Release 34-42007; File No. S7-23-99; IC-24082] encourages further independence of directors but fails to require disclosure of investments in specific funds within a fund complex.

California Treasurer Phil Angelides slapped a moratorium on state investments in tobacco securities, saying “the extraordinary and unprecedented barrage of litigation” surrounding tobacco companies made them imprudent investments.” Angelides said he would use his position as chair of the Corporate Governance Subcommittee of the California State Teachers Retirement System (CalSTRS) to ask that fund’s board to consider a similar moratorium, as well as divestiture.

Individual Investor Group Inc. (INDI) broke new ground by discussing corporate earnings on the company’s message board. After third quarter results were announced, (see Press Release, Nov 4), they invited INDI stakeholders (including investors) to ask management questions. Questions and answers were then posted on the site. Hats off to an innovative approach. (reported in Investor Relations Business, 12/13/99)

Corporate Governance International’s 2/99 issue carries a detailed critique of UK corporate governance measures byJohnathan Charkham; excellent reading, especially for anyone involved in putting together a corporate governance code at corporate, national or transnational levels. The issue also includes a survey of recent developments in Germany and an empirical study of the perception of Korean executives toward corporate governance issues.

Focused funds were the subject of a recent article in WSJ(12/20/99, C25). It seems the average diversified mutual fund with 132 holdings does no better than funds holding 35 or less. The article goes on to mention several focused funds, such as Janus Twenty (up 78% in 12 months) and Turner Top 20 (up 95% since inception) which have done well. These funds have greater potential not only because managers know their companies better, as WSJ writer Mara Der Hovanesian, points out. They also have greater incentives to be active shareholders and add value.

Corporate governance reforms have been pushed by giant pension funds like CalPERS and TIAA-CREF, as well as limited partnerships like LENS, Relational Investors and Lawndale Capital. Recently, mutual funds have begun to realize there is money to be made in good corporate governance. Witness Heartland Advisors recent pressure on Commercial Federal, Gehl and ICN Pharmaceuticals, Oakmark’s action at Dun & Bradstreet and T. Rowe Price’s pressure on Cort Business Services.

SEC Commissioner, Paul Carey’s address this month to the Investment Company Institute Procedures Conference (see bleow) emphasized that mutual fund advisers have a fiduciary duty to vote portfolio securities “in the best interest of the fund,” a duty which many are not fulfilling because they are spread too thin to know the issues and because of potential conflicts of interest. Prudent monitoring requires focus. When more funds take up this banner we will all be better off.

CalPERS grew by $20.5 billion last year. At the end of September 1999, CalPERS had earned an 18.2% return on its investments. The Fund’s investments in U.S. stocks, which account for more than $72 billion of the System’s portfolio, returned more than 27%. CalPERS’ $31 billion invested in the international markets gained 31%.

Ernst & Young, the former auditor of CUC International, Inc., agreed to a $335 million settlement in the securities class action lawsuit on behalf of shareholders of Cendant Corporation (NYSE: CD). The $335 million settlement is the largest amount ever paid by an accounting firm in a securities class action case. Hopefully, the action will act as a stimulus for accounting firms to take their watchdog roles seriously. PR Newswire,12/17/1999

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SEC Commissioner Paul Carey delivered an important address to the Investment Company Institute Procedures Conferenceon 12/9/99. Although his remarks may not reflect the SEC’s official opinion, it is heartening to hear Mr. Carey affirm that mutual fund advisers, as fiduciaries, “must act in the best interest of their beneficiaries. Thus, when voting portfolio securities, a fund adviser must act in the best interest of the fund, and not in its own interest.”

The Department of Labor (DOL) affirmed this opinion with regard to pension funds in 1988. Since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets (see “Avon” letter). As indicated on the “home” page of this publication, we have long advocated that the same standards of trust law should also hold for mutual funds and other institutional investors.

Mr. Carey goes on to recommend that mutual fund board members “can and should play a role in the voting process,” ensuring “the funds’ voting power is being exercised to benefit fund shareholders” by

  • Finding out if their advisers are voting and what methodology they are using.
  • Providing guidance on the need for cost benefit analysis in determining how to vote, and setting policies with regard to strategy and when voting is to be used to influence company policy to maximize shareholder value.

Carey believes board should consider how their votes should be exercised in conflict of interest situations and advises they may want to disclose voting policies to fund shareholders, pointing to the efforts of CalPERS, Domini Social Equity Fund, and TIAA-CREF. In closing, he notes “the Division of Investment Management is exploring possible recommendations concerning investment advisers’ obligations to disclose how they vote proxies.” In our opinion, such measures could go a long way toward ensuring accountability to shareholders.

Chainsaw, just in time for Christmas. Read John Byrne’s thrilling nonfiction version of Mean Business and think of Scrooge without the ghosts. There’s no salvation for Al Dunlap here but shareholders might find redemption. Though hundreds of interviews, Byrne has done an excellent job of documenting what really happened and how intelligent investors and directors got snookered.

Another great gift is The Millionaire Next Door: Special Edition by Thomas J. Stanley and William D. Danko.

Strategic Corporate Research has been added to our list of Stakeholders. Please pay them a visit and get to know their services.

CalPERS accidentally released a list of 15 companies being considered as possible targets. Among them is First Union. CalPERS has introduced a shareholder resolution to divide roles of CEO and chairman. First Union’s shares have tumbled 40.8 percent so far this year. The “accidental release” brings to mind that each year the System’s release is premature because each year CalPERS fails to up their holdings prior to naming targeted firms. Would Michael Price or Robert Monks announce they have targeted certain firms for changes without first increasing their investment? Of course not.

CalPERS claims they have gained $150 million per year through targeting activities. The System should take better advantage of its own activism by increasing its investment in a few of these firms before releasing the list and pursuing needed corporate governance changes. See CalPERS jumps the gun on targeting 15 firms, Sacramento Bee, 12/15/99 and CalPERS List Reveals Tentative Target Firms, LA Times, 12/15/99. More links and commentary on Yahoo!

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Telecom Italia had to scrap plans to split off its wireless unit because of protests from minority shareholders. Telecom Italia apparently had the majority to vote in favor, but backed off because of the debate in the media. See Hark! The Shareholders Are Restless in Europe in 12/12/99 New York Times for a roundup of recent actions in Europe.

SEC’s comment period on “pay to play” has ended with 55 letters received. As proposed, the new rule would prohibit investment advisers from managing money for government clients for two years if the adviser, partner, officer or solicitor contributes to certain elected officials or candidates. The proposal also would require registered advisers with government clients to keep records of political contributions made by the firm or its officials. (, 12/7/99)

Corporate Governance NETwork registration can now be paid using a credit card. After 5 years on the net, we’ve finally decided to join take the e-commerce plunge.

Bart Naylor’s open ballot shareholder’s resolution to allow 3% holders to nominate candidates for the board of directors is now available. Naylor is attempting to address the major problem facing shareholders; how to make the board accountable. If shareholders have no say in the nominating process and have no alternative candidates, why should directors listen to them?

Largest shareholder settlement in history at Cedant, $2.83 billion, arising from fake reporting of $500 million in 1998. The lawsuits, filed in the U.S. District Courts of New Jersey, Connecticut and Pennsylvania, alleged that Cendant issued false and misleading financial statements to the investing public about the company’s income and earnings. The lawsuits further alleged that certain former officers and directors of the company sold or filed intentions to sell over 4 million shares of Cendant common stock preceding the announcement. Cendant Corp. will make major changes in corporate governance:

  • limiting all board of directors’ terms of tenure to just one year,
  • bar on repricing stock options without shareholder vote,
  • majority of board to be independent,
  • audit, compensation and nominating committees to be entirely independent directors.

According to New York State Comptroller H. Carl McCall, the settlement should also allow shareholders at the nation’s 3 largest public pension funds to recover from 40-60% of the $89 million they lost when Cendant’s shares dropped by over 50% after the accounting fraud was made public last year. “This is a landmark victory for CalPERS and all Cendant shareowners,” said Charles P. Valdes, Chairman of CalPERS Investment Committee. “This settlement demonstrates the important role that pension funds play as lead plaintiffs in securities actions. Not only have we recovered a substantial portion of the losses incurred by all class members, but the company is emerging stronger and worthy of greater confidence by the financial markets.” (WSJ, A4, 12/8/99)

New York Post reports that “after years of excesses marked by manic mergers and astronomically high compensation that regularly landed him on the list of highest-paid CEOs, (Henry) Silverman will effectively be operating with his hands tied behind his back.” Silverman collected $199.3 million in total compensation last year, even as the company restated 1997 earnings from a profit of $115 million to a $216 million loss.

In a related story, the SEC is to boost its attack on accounting fraud with more criminal prosecutors. The SEC is irritated by the cavalier attitude of some executives toward bookkeeping and weak-kneed auditors. (WSJ, A6, 12/8/99)

IRRC will host, a conference which will explore how high tech and dot-com businesses will influence, and be shaped by, the corporate governance movement.  President of AmTech Dr. Gilbert Amelio, NASDAQ chief operating officer J. Patrick Campbell, Razorfish Inc. President & CEO Jeffrey Dachis and Portal Software Inc. CEO and founder John Little will headline the conference. For more information on the issues, see Dot.Com Boards are Flouting the RulesBusiness Week, 12/20/99, p. 130-134.

UK’s Trade Union Congress notes that UK has widest gap between pay of top execs and workforces. See top directors’ pay packets fatter than ever. TUC calls for dramatic changes such as trade union represention on remuneration committees while performance criteria should be long-term and should include non-financial performance indicators. TUC also calls for additional disclosures such as positions on other boards held by members of the remuneration committee and share options should be charged against profit.

Ralph Ward’s Boardroom Report warns boards to focus less on Y2K and more on corporate governance. Board recruitment is moving from CEOs to auditors and e-commerce experts. Ward provides tips on the boardroom talent pinch, family succession planning, an emeritus program for retirement-age directors, and how to cope as an inside director. has increased their news coverage through an agreement with NewsEdge Corporation. “Institutional Investors Grow Bolder about Demanding Change,” for example highlights changes in the Carolinas reported by the Charlotte Observer and discusses the strategies of activist funds such as CalPERS and LENS, as well as many institutional investors in the Carolinas. State Treasurer Harlan Boyles investment style is quoted as, “Our philosophy toward risk is analogous to the way Woody Hayes coached football: three yards and a cloud of dust.”

Claude Smadja, managing director of World Economic Forum, calls for an international code of corporate governance to ensure global accounting standards and protect the interests of the shareholders. (The Hindu, 12/8/99)

Seattle reports streaming in from everywhere. A coalition of teamsters, consumers, sea turtle protection activists, religious people, women’s groups, environmentalists, students and others certainly had an impact. Will a coalition build? See Robert Weissman’s A Whiff of Democracy in Seattle.

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Hong Kong Society of Accountants (HKSA) has urged listed companies to improve the transparency and accountability of directors’ pay. The society called for the establishment of remuneration committees composed of independent directors to act as a check and balance on corporate policy. (South China Morning Post, 12/3/99)

Arthur Andersen introduces web-based SEC financial reporting courses. An introductory discount of 20% is being offered until December 31, 1999. UK Has Largest Pay Gap Between Directors and Workers in all Europe. Japanese Government to Rescind Law Banning Educators from Serving on Corporate Boards. More on these an other stories at The Corporate Library.

Internet leading source for retail investment information. 3/4 now use corporate websites as important research tools and 90% choose companies without the help of an advisor. Among features wanted on corporate sites: timely news releases (96%), income/balance sheets (93%), ownership profile (92%), e-mail connection to IR department (92%) and many want the option to get data automatically e-mailed to them or at least an indication that information has been updated. (Investor Relations Business, 11/29/99)

An article in the New Zealand Herald (11/27) opines that “absence of a strong shareholder activism group – together with a weak and ineffective Securities Commission and stock exchange – have been contributing factors to the poor performance of companies and the sharemarket.” Australia has the Australian Shareholders Association (ASA) with 450,000 subscribers at $A60 a member (with some additional income, $A186,000 a year). A similar organization in New Zealand would be lucky to raise much more than $A30,000 a year…not enough to effectively monitor non-performing companies. Several examples of problem firms are addressed and the article concludes with a statement that “the free market model is less effective in a small economy.” NEW ZEALAND HERALD: INVESTORS CRY FOR GUIDANCE (, 12/2) I know when you’ve got a hammer in your hand, everything looks like a nail but this is another perfect example of the need for shareholders to cooperatively hire a proxy monitoring firm.

Mauro F. Guillen, of Wharton, reports a trend toward distinctiveness rather than convergence in a recent paper, “Corporate Governance and Globalization: Arguments and Evidence Against Convergence.” Factors working against convergence include complex webs of banking, labor, tax, and competition laws and political dynamics unique to each country. Along with adoption of best practices comes adaptation to the unique culture. “Countries develop corporate governance models that fit their legal traditions, social institutions, and development path.” (see Leveraging Differences in an Increasingly Borderless World) Courtesy ofEDGEvantage, a monthly electronic briefing on developments in corporate strategy, governance and responsibility, available free to registered members.

Irish Stock Exchange to introduce a new listing rule forcing publicly quoted companies to reveal individual directors’ remuneration in their annual reports for 2000. The Irish Times, 11/27

Our Bulletin Board seeks your assistance. Maybe you can answer some of the many questions that arrive…or post a few of your own.

Holidays bring our greatest revenue stream (generally a trickle). Remember, you can support the site by giving books and other items purchased through our affiliates during the holiday season. See our shameless promotions area.

I can’t think of a better present for these times than Kevin Keasey, Steve Thompson and Mike Wright’s four volumeCorporate Governance. This set, published in 1999, by Edward Elgar is a ready reference to classic writings in the field and is sure to be accessed frequently by owners, like this editor, who wake up in the middle of the night with corporate governance concerns. The authors place the movement in context, address accountability and performance, consider the efficacy of various stakeholders and institutional structures and integrate writings from numerous disciplines. It sure beats running to the library when someone calls and mentions that seminal work from an Academy of Management Journal in 1991. I can’t say that I’ve read the set thoroughly but I have ambitions. Alhough I would have liked to have seen additional chapters by M. Blair, Monks, Minow, Tricker and others, the authors have done a great job and still have plenty of new material for the next edition.

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Archives: November 1999

Hermes announced a halt to its planned merger with Lens but also indicated it has addedCalPERSOMERS, and SPP from Sweden as investors in its shareholder activism funds which now total $560 million. “HLAM is growing so quickly that we have decided the London based management team must focus on opportunities in [the] UK, and thereafter extend to Europe as a whole,” said Alastair Ross Goobey, chief executive of Hermes. The Corporate Library News Briefs, 11/29.

Detroit News Corporate Report Card evaluated 111 publicly-traded firms with headquarters in Michigan.

   Top Performers
Ford Motor Co.
Herman Miller Inc.
La-Z-Boy Inc.
Old Kent Financial Corp.
SPX Corp.

Poorest Performers
Aastrom Biosciences Inc.
Code-Alarm Inc.
Mechanical Dynamics Inc.
Secom General Corp.
Somanetics Corp.

Charles O. Holliday, chairman and CEO of DuPont, was elected chairman of the World Business Council for Sustainable Development (WBCSD). Key focus areas for the future will include climate and energy, making markets work for sustainability, embedding social responsibility in corporate governance, and the importance of innovation and technology in moving toward sustainable development. The WBCSD is a coalition of 120 companies, from 30 countries and more than 20 major industrial sectors, committed to sustainable development. PRNewswire, 11/29/99

Dr. Y. V. Reddy calls for reform of Indian government owned enterprises. See The Hindu, 11/29/99.

Innovators. Laborers International Union of North America(LIUNA) resolution asks Flour, PPG Industries and Texaco to provide for an increase in the voting rights of shareholders who hold stock for an extended period of time. Similar proposals have been submitted by International Brotherhood of Electrical Workers‘ (IBEW) to MGIC Investment and by United Brotherhood of Carpenters’ (UBC’s) to Mead. Another innovative proposal from these unions seeks access to the nominating process for shareholders through the proxy statement. Bart Naylor, formerly with the Teamsters, is submitting proposals to include shareholder nominees on the proxy card (access to be open to groups holding 3% of shares). Responsible Wealth plans to ask Disney to establish and ESOP and to fund it with stock contributions at least equal to stock given to corporate officers. IRRC Corporate Governance Highlights, 11/19

The company-pay proposal for shareowner proxy voting advice has now been submitted to Equus II (EQS) for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the news releases, text of other proposals, reasons for selecting these companies, and answers to other frequently asked questions.

Shareholder activist, John Chevedden continues his campaigns at Northrop & Airborne. After receiving substantial majorities last year, and being ignored by the companies, he’s back. Will Northrop submit its poison pill to a vote by shareholders? 64% voted in favor last year. Will Airborne hold annual election of all directors? Last year 70% voted in favor.

Korn/Ferry reports that more retired execs are sitting on boards. Current CEOs have now dropped to 3rd place, behind retirees and major shareholders. Average compensation at the Fortune 1000 is also up, rising from $40,651 to $41,949, not including stock grants.

Italy’s Milan stock exchange is expected to introduce a rule next month to encourage quoted companies to adopt its new voluntary corporate governance code. “If they do not use it, companies will have to explain why and outline their own model of governance,” said Stefano Preda, chairman of the stock exchange. The voluntary code of conduct was introduced last month as a means to protect minority shareholders and create value. Financial Times, 11/10/99

AFL-CIO’s Office of Investment has contacted investment managers for collectively-bargained benefit funds asking them to oppose Vodafone Airtouch Plc’s hostile bid for Mannesmann. Contact: AFL-CIO Bill Patterson, 202/637-5372. For additional information see WSJ, 11/29, pp. A4, A23,& 28.

Investor relations sites visited frequently by buy and sell side analysts, according to Investor Relations Business (11/15/99) However, they commonly complain that information is not updated. Article advises IROs to use internet tracking information to develop a list of possible institutional investors.

Steven Kaplan of the University of Chicago and Bernadette Minton of Ohio State University find that if a Japanese company’s stock returns declined by 50% in a given year, the firm was almost twice as likely as normal to bring a new outside director onto the board and the chief executive was significantly more likely to be forced out or fail to become chairman (normally some 70 percent of retiring CEOs move up to the chairmanship). Wharton Leadership Digest, 10/99

November issue of Governance contained several excellent articles on large trends and developments in the field of corporate governance. First was an announcement about theGlobal Corporate Governance Forum. Governance reports their first practical project is to work with the Confederation of Indian Industry to bring 50 Indian companies into compliance with NY Stock Exchange standards for disclosure and accountability.

Final guidance had been issued in the UK on how companies should manage internal controls. Boards are now expected to practice continuous assessment of risk issues. The Institute of Chartered Accountants in England & Wales has already issued guidance. Doloitee & Touche survey of FTSE 250 found less than 25% compliant on ongoing monitoring. Article provides additional numbers.

Stephen Davis argues that remuneration issues in the UK are only “the tip of the governance iceberg.” Davis favors legislation which would mandate annual elections for the board as a whole. In addition, each committee should be required to submit an annual report to investors discussing their membership, director attendance and work product.

Julia Bright interviews Julian Treger of UK Active Value Investors. Treger discusses their recent move to take over Hogg Robinson, their call for a corporate governance report on corporate Britain’s response to the internet and the strategies their firm uses to target under-valued companies.

Governance also contains an opinion piece by Shann Turnbullwho recommends the use of advisory boards of stakeholders with a combination of interest and “intimate business specific knowledge.” Turnbull sees the members elected by stakeholders. He also calls for proportional (cumulative) voting and a “watchdog” senate elected by one vote per investor. “A fundamental flaw in the Anglo practice of a unitary board is that directors have absolute power in managing their own conflicts of self-interest.” “The watchdog board provides external directors with the power and capability to stop problems of insider dealing before they occur.”

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William Crist, chairman of CalPERS, responded to a recent editorial in the Sacramento Bee entitled Low road at PERS: Ethnic remarks are another sign of arrogance. His remarks, “CalPERS’s record since Proposition 162” (11/19) included misleading statements. An “independent panel of attorneys” did not find the election protest to be “without merit.” Instead, the panel found they could not overturn the election because CalPERS rules also require a finding that election results “would have been different.” Allowing Mr. Crist to dramatically change his statement to address gave him an advantage but no one can say with certainty that he would have lost. The standard set by the regulations regarding protests was impossible to meet.

In addition, the protest panel was anything but “independent.” Mr. Crist sits on the Performance and Compensation Committee which recommends how much to pay the General Counsel. The panel that ruled on the protest was hand picked by the same General Counsel who had been accused of conspiring with Mr. Crist to violate the rules.

In 1997 candidates were denied the right to make even minor changes in punctuation to their statements. Yet, 1998 General Counsel allowed Mr. Crist’s changes because “the First Amendment applies to political speech, and that the purpose of the candidate statements is to permit the voters to make an informed choice.”

In a report to the Board, which CalPERS failed to disclose in its current rulemaking, the Legal Office now contends that prohibiting candidates from disclosing their opponent’s record or expressing their opinions on issues of general concern is not a violation First Amendment rights. Clearly, CalPERS regulations are being used to favor incumbents over challengers.

Governance experts weigh in on battle for American Home Products. Richard Koppes questions whether Warner-Lambert “is fulfilling its fiduciary duty to shareholders” because of its use of an options package explicitly designed to kill any chance other suitors, such as Pfizer. Jeffrey Gordon said the option grant is likely to be upheld in court, especially since the attractive accounting method is being phased out by accounting bodies. As long as shareholders can vote up or down, Warner-Lambert’s moves aren’t violating good governance. Others appear to disagree, including Joseph Grundfest and Nell Minow. (see WSJ, p. C1, 11/17/99)

CalPERS investment committee chair, Charles Valdes, publicly apologized for remarks interpreted as disparaging to state Treasurer Phil Angelides and others of Greek descent. The apology came after critical letters from members of the Legislature and Governor Gray Davis. Assemblyman Louis Papan, said he will urge fellow legislators to discuss setting minimum eligibility requirements for board members. (Valdes reportedly filed for bankruptcy in 2/91 and 1/97.)

“If you can’t manage your own finances, what the hell are you doing as the head of the CalPERS investment committee?” Papan was quoted as saying. Board members may pick a new investment committee chair in March. (CalPERS official says he’s sorry: Remarks were called offensive to Greeks, Sacramento Bee, 11/16/99) The board unanimously approved a “resolution of reprimand” which states that Valdes’ remarks “raised an implication of ethnic prejudice that is unacceptable and hurtful to the mission of CalPERS.” The censure results in further public humiliation for Valdes. (CalPERS officially censures Valdes for insensitive remarks, Sacramento Bee, 11/18/99)

Mutual funds are putting more pressure on underperforming companies. Mentioned in this growing trend is pressure from Heartland Advisers on Commercial Federal, Gehl, and ICN Pharmaceuticals, as well as similar moves by Oakmark on Dun & Bradstreet, and T. Rowe Price on Cort Business Services. Commercial Federal, which was also being hit by Mutual Series, Acadia Fund and John Hancock Funds, apparently has accepted two board nominees from Mutual Series. (WSJ, 11/15/99, C1)

Patrick McGurn’s “The Internet and the Rise of Corporate Governance Activism” in the October 1999 edition of ISSue Alert offers good advice. He outlines some of the recent developments, including: CalPERS “push-back” function which will alow visitors to automatically receive e-mails with the content of new material posted to its site (I have advised CalPERS to create a portfolio function which would not only track in individual’s stock but would directly link to proxy positions taken by CalPERS), permanent sites maintained byGreenway Partners LP and LENS, campaign specific sites such as, sites by other players such as AFL-CIO’s Paywatch and Responsible Wealth site as well as chat rooms at Yahoo!, Silicon Investor and Motley Fool. McGurn warns that corporations aren’t keeping up.

In the next century, battles for shareholders’ hearts and proxies will be fought in cyberspace. To defend themselves, companies must adopt governance guidelines and make them a central focus of their web strategies. Boards also must review and update these guidelines on a regular basis.

The same issue also offers some excellent advice on how to design shareholder-friendly poison pills of the type recently proposed by Adaptive Broadband.

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Across the Board, the Conference Board’s magazine, carries an informative article arguing against paying directors in stock. The percentage of firms with stock-base compensation has risen from 17% in 1990 to nearly 80% in 1996. The authors note that while base compensation has remained essentially stable, stock and options awards have skyrocketed. Stock dilution, selling the company short through reloads, market timing, and the increased likelihood of accepting an above-market premium are but a few of the problems raised. Another is the appearance of conflict of interest. “Perhaps it would be wise to restrict such programs to stock awards, but not options, and certainly not resets, reloads, and similar transactions. In this way, some independence of th board – or at least the perception of its independence – might be reasonably maintained. (Daily, Certo and Dalton, Pay Directors in Stock? No., issue 11-12/99, pp. 46-50)

A bad example in this area could turn out to be Tyco’s recent decision to pay its board of directors 90% of their current year cash compensation in the form of Tyco shares or options, or a combination of the two. The move may be designed to show confidence in the company’s price but what will happen if the options are repriced? (WSJ, 11/4/99)

the Corporate Governance Advisor (9-10/99, pp. 10-12) carried on article based on empirical research on the same subject by Bhagat, Carey and Elson, entitled “Director Ownership, Corporate Performance, and Management Turnover.” Their study found a significant correlation between the amount of stock owned by individual outside directors and firm performance. “Second, the greater the dollar value of the individual outside director’s equity holdings in the enterprise, the more likely a disciplinary-type CEO turnover in a poorly performing company would exist.”

The same issue notes a court settlement with Occidential Petroleum in February is what led their board to adopt progressive board corporate governance guidelines. “Such court-sanctioned governance changes are becoming commonplace,” noting such court mandated changes at Computer Sciences, Fleming, and KeySpan Energy.

The company-pay proposal for shareowner proxy voting advice has now been submitted to CitigroupGeneral Electric,GillettePfizerWhole Foods Market and Warner-Lambert, for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the full news release, text of proposals, reasons for selecting these companies, and answers to other frequently asked questions. A balanced article byLynn Cowan appeared over the Dow Jones newswire on 11/12/99. Ms. Cowan indicates that corporate governance experts and a proxy advisory firm had mixed reactions to the proposal. Among the issues raised were concern about the level of independence an adviser could maintain if it was being paid by the company it was supposed to evaluate; the cost of such services eating into shareholder returns; and the likelihood that a company would not adopt such a proposal, since proxy questions are suggestions that management can ignore.

My guess is these issues will begin to resolve themselves as people become more familiar with the proposal. Advisors will maintain their independence because they will be selected directly by the shareholders, not the company’s management. The cost of such services “eating into shareholder returns” is minimal because those costs are capped at $5,000 to $10,000, depending on the size of the firm.

John Wilcox, vice chairman of Georgeson Shareholder Communications, indicated that institutional fund managers own stock in thousands of companies and don’t have the time to sort through every proxy question; small investors, on the other hand, generally don’t own as many stocks and don’t have a fiduciary duty to other investors to research their votes. Yet, the fact that individual investors do not have fiduciary duties doesn’t mean they have no need for proxy advice. The proposal would provide them with an alternative to voting with management or doing the Wall Street Walk. To say that institutional fund managers don’t have time to sort through every proxy question simply reinforces the need for the resolution. Since proxy voting can add value, voting rights should be subject to the same fiduciary standards as other plan assets. If institutional investors can’t find the time to meet their fiduciary duty to review proxy issues they’d better vote for this proposal because it will provide the advice they need.

Jamie Heard, chief executive of Proxy Monitor, felt management may not go along with the proposal, given the voting support that generally comes from individuals. However, those which have shown leadership in the area of corporate governance may wish to stay at the front of the pack. I believe we will find several firms who recognize that informed shareholders can add value. The two which I submitted, Whole Foods and Pfizer, are currently seen as progressive. Wouldn’t they want to maintain that reputation?

Let’s hope there will be a few brave firms ready to move the herd. A few years ago not many had adopted corporate governance principles or established corporate governance committees but times are changing. I’m betting that several firms will be willing to raise the bar. For the laggards, there is always the threat of bylaw amendments or other action.

Fund managers from TIAA-CREF, Franklin/Templeton, Fidelity, Vanguard and others request publishers of global-market indexes factor the quality of corporate governance into rankings. WSJ, 11/5, p. C14.

John Smale, who in 1992 helped lead the corporate governance revolution, has announced he will retire from GM’s board in May, before GM’s annual meeting. seePhiladelphia Inquirer, 11/3.

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AFL-CIO President John Sweeney called on pension fund administrators to manage worker assets in ways that help, not hurt, working families and communities. At a convention of the International Foundation of Employee Benefits, Sweeney spoke in favor of “greater diversity in the boardroom and more equality between the executive suite and the shop floor.” Worker-owners at Taft-Hartley benefit plans won 15 shareholder proposals in 1999, more than any other group. “We want our money to create jobs, not destroy them. We want our money making real investments in communities, not sent chasing after the latest fad. We want to see our money supporting good corporate governance, not lining the pockets of overpaid executives, and we want our money supporting partnerships with workers, not encouraging confrontation and destructive downsizing.” (PR Newswire via Northern Light, 11/1/99)

Korn/Ferry’s 26th Annual Board of Directors Study finds 84% of directors receive some of their compensation in stock, up from 62% 4 years ago. 56% report committees overseeing corporate governance and making committee appointments is shifting from the CEO to the board. Over 60% of respondents are deeply involved in the strategy setting process. Minority directors now have a presence in 60% of America’s boardrooms and women are represented at 73% (ed. but the proportion of representation is still dismal). More than 1,000 directors participated in the 1999 Korn/Ferry International Annual Board of Directors Study, including 215 CEOs, 187 inside directors and 614 outside directors. The study also analyzes proxy information from over 900 of the largest U.S. corporations. (Disclosure: editor owns stock in Korn/Ferry)

Pensions&Investments reports that “a citizens’ group advising the Labor Department is recommending expanding current law to let companies dip into their pension fund surpluses to pay for anticipated retiree health care liabilities.” Michael Fulotta of ASA Inc is quoted as noting, “there has been a consistent decline in pension assets since 1990, which has resulted in the decline of …funding ratios across all industries.” See DOL panel to suggest wider use of surpluses, 11/1/99.

He survived double bankruptcies, conflicts of interest and ischanging the rules to silence challengers, but now CaliforniaAssemblyman Lou Papan is calling on the chairman of the powerful CalPERS Investment Committee to resign. seeStatement on Turkish Past Fuels Feud at Pension Fund,10/25, LA Times and Resignation of CalPERS Official Urged, Sacramento Bee, 10/27. Papan has now been joined by 22 additional members of the Legislature, including the Speakerand the Minority Leader, in his call for the resignation of Mr. Valdes. Their letter to Mr. Valdes includes the following:

Your attempt to dismiss protests that you were violating California’s open meeting laws by implying that these protests were based on ethnic hatred is beyond acceptability. This is unacceptable not because it is offensive to Greek-Americans, but because it is offensive to all Californians.
In today’s society we cannot stand for any level of racial or ethnic intolerance. Your display of racial insensitivity combined with your blatant disregard of the Open Meeting Act leads us, as elected officials, to insist upon your immediate resignation.

The arrogance of the CalPERS Board has even led some to question the independence which was given to it under a constitutional amendment in 1992. The Sacramento Bee (Low road at PERS: Ethnic remarks are another sign of arrogance, 11/2/99) has editorialized

The CalPERS attempt to hire this consultant without proper notice and then respond with ethnic insults are sadly consistent with other actions, including the board’s move last year to tip its election in favor of an incumbent and its adoption of new election rules this year that deny challengers an opportunity to criticize board policy. Such arrogance can’t be smoothed over with apologies. Ever since voters in 1992 freed PERS from any oversight by the people’s elected representatives, it has grown more haughty and insular. Lawmakers need to give voters an opportunity to reverse that mistake.

When CalPERS broke its own election rules to favor an incumbent, it did so to the thwart a challenge from this editor. When the board voted to change election rules to ban debate, again the editor of this publication was named as the cause of that action. However, the answer is not to amend California’s constitution, which grants a degree of autonomy to CalPERS; the answer is to be found in an active and informed membership. The Sacramento Bee has provided the only press coverage of the issues at CalPERS but only a small minority of CalPERS members live in Sacramento. The membership of CalPERS is likely to be aroused only when the Los Angeles Times, San Francisco Chronicle, Wall Street Journal and others begin covering governance issues at this $160 billion fund.

On the other side of the Atlantic the Chairman of CalPERS, Dr. William Crist, is labeled ‘Darth Vader’ and gets a chilly reception in Paris. see International Herald Tribune, 10/18/99.

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Retirees are uniting online to protect their pension funds, highlight key issues impacting retiree pensions and benefits, and to publicize positive steps some employers are taking to protect and enhance retiree pensions and benefits. The site has a special interest in the right of employees to share in their pension surplus. The site is concerned with ensuring that promised financial benefits are maintained once the employee completes his part of the employment contract. The site includes links to several organizations fighting for retiree rights and trying to get some control over their pensions. SeeRetiree News.

Shareholder resolution presented to CREF (College Retirement Equities Fund) for its November 9th annual meeting in New York City to divest the CREF Stock Account/CREF Global Equities Account of Freeport McMoRan Copper and Gold stock. Freeport runs the world’s largest copper mine in Irian Jaya, Indonesia. Major concerns regarding human rights and environmental impacts continue to
plague this project. CREF’s response is that they don’t want to screen funds no matter what a corporation like Freeport is doing in Indonesia. see

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Archives: January 1999

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 protected because the pension represented an “exclusive benefit” to workers and couldn’t be diverted for other uses. Hughes was joined in their appeal by the Clinton administration and the U.S. Chamber of Commerce. Hughes “never deprived [the retirees] of their accrued benefits,” wrote Justice Clarence Thomas. No surplus funds were available for distribution to the former employees, he said. John Chevedden, a Hughes retiree and shareholder activist (this year at Raytheon), said the decision emphasizes the need workers to have greater control over their pension funds. The ruling “gives companies carte blanche to siphon money from one pension plan to another” he said. “I think it shows a need for a change in the law.” (LATimes, 1/26/99)

Pensions & Investments has unveiled a redesigned web site today with daily news and more than 200,000 pages of databased information for institutional investors. Wow!

Canadian Imperial Bank of Commerce shareholders overwhelmingly approved shareholder activist Yves Michaud’s proposal that directors must hold shares in the bank equal to six times the annual fee they’re paid for their services (approximately $180,000). Michaud reportedly became a shareholder-rights activist after losing part of his retirement savings. In 1996, he won a landmark court ruling that forced a number of banks to put his proposals to a vote at their 1997 annual meetings. (Montreal Gazette, 1/22/99)

United for a Fair Economy, a network of wealthy investors, has filed shareholder resolutions asking eight companies to research, report and, in most cases, reduce pay gaps. The companies are AlliedSignal Aerospace Co., AT&T Corp., BankAmerica Corp., BankBoston Corp., Citigroup Inc., General Electric Co., Huffy Corp. and R.R. Donnelley & Sons Inc.

ATraitor To His Class: Robert A.G. Monks and the Battle to Change Corporate America, a new biography by Hilary Rosenberg, show Monks to be a specimen of a vanishing species: the Yankee Republican gadfly, according to David Warsh of the Boston Globe. Monks took shareholder activism to a new level of behind-the-scenes respectability, says Warsh. (Boston Globe, 1/19/99)

John Bogle, founder of The Vanguard Group, asks why mutual funds haven’t been more involved in corporate governance initiatives. One reason is that most mutual funds are short-term investors but that is changing with the growth of market indexing which he expects will take 15% of the market within the next decade. More central to Bogle’s analysis is that “we would prefer not to advise the companies in our portfolios about governance when our own houses are so fragile.” The fund’s manager typically sets its own fee which is duly rubber stamped by the fund’s “independent directors” who were appointed by the manager.

“Measured over the past 50 years, the average equity mutual fund has carried a volatility risk quite similar to that of the market, but has lagged the market return by about 1.5 percent annually over the long term, and about 2.25 percent over the past 15 years…professional managers, despite their expertise, have failed to outperform the market before the deduction of costs. Their costs doom them to below-market returns.” seeThe Corporate Board, 1-2/99

In the same issue, William Dimma asks “Why Not Director Accreditation?” and Susan Mosoff reviews “Global Stock Ownership Plans.” Mosoff’s article points to ShareNet , an Arthur Andersen product designed to help companies answer questions about operating stock ownership plans in different countries. The site notes that 54% of the world’s largest companies operating in the North America and Europe operate global share plans.

Back to the topAfter years as a corporate governance “bad boy” because of its poison pill polices, Fleming (FLM: NYSE) seems to have turned over a new leaf, announcing proposals to eliminate classification of directors and to require all new stock option plans to be submitted to shareholders for their approval. (Excite News)

Federal Reserve Chairman Alan Greenspan assailed President Clinton’s proposal to invest Social Security funds on Wall Street. “I do not believe that it is politically feasible to insulate such huge funds from government direction,” he told the House Ways and Means Committee. The $133 billion CalPERS experience demonstrates it would not be an easy task. That system finally gained its independence when California voters approved Prop. 162, making raids or interference illegal. However, now there are questions as to the accountability of its Board. For example, the Board continues to insist CalPERS is exempt from the California Administrative Procedure Act, which requires public notice and publication of rules. How can its members hold the CalPERS Board accountable if its rules aren’t easily accessible? Clearly independence must be combined with systems of accountability if either Clinton’s proposal or CalPERS have any hope of measuring up to the high standards Americans have come to expect.

Anthony Neoh, who I had the pleasure to meet last fall at the International Company Secretaries Conference in Hong Kong last November, reports on important developments in China in the January 14th edition of the Far Eastern Economic Review. A new Chinese Securities Law promises to further the transformation of the Chinese economy by requiring regulation of the markets by the China Securities Regulatory Commission which is about to quadruple in size. Public securities must now comply with specified disclosure standards, and be traded in approved exchanges. Company officers and all professionals will have specified duties, such as disclosure, and prohibitions, such as insider trading and market-manipulation.

Neoh points out that the savings rate in China is about 40% of income but the public owns stock valued at just 7% of the country’s GDP. “Clearly, the stockmarkets have immense growth potential? The new Securities Law will not provide a cure for all the markets’ ills, but it will provide a firmer foundation. It compares well with the securities laws of emerging markets.” By this April, CPAs engaged in securities work must be members of independent partnerships with unlimited personal civil liability. “Already, in a Shanghai court, an investor is suing a listed company’s directors and its public accountants for deficient disclosure of company accounts.”

As Mr Neoh points out, “the test for this law, however, lies in its implementation.” Anthony Neoh is a visiting professor of law at Peking University and the former chairman of theSecurities and Futures Commission in Hong Kong.

CalPERS vs. Felzen, 97-1732, went before the Supreme Court to block an Archer-Daniels-Midland $8-million settlement that went entirely for legal fees. (see LA Times, 1/11/99)

Not everyone agrees with the shareholder value mantra…but maybe their arguments aren’t too strong. (see Earth Times News Service)

Annual meetings are getting “shorter, more boring and less well-attended, say those who follow annual meeting trends” but Sarah Teslik says “the annual meeting ought to be the single most important thing for shareholders.” Corporate internet sites, electronic chat rooms, and teleconferences with analysts and the media seem to be displacing much of the role of annual meetings. (read more in the 1/10/99 Philadelphia Inquirer)

Back to the topGovernance: The International Corporate Governance Newsletter has joined our growing list of Stakeholders. From their November issue. European share plans are quickly catching up with North America. Global Share Plan Survey 1998 revealed that 75% of UK companies have set up global executive share plans, compared with 66% in North America. In Continental Europe 80% had employee stock purchase plans covering all national employees compared with 65% in US and 24% in UK. UK firms favored option plans with 82% of firms, vs 56% in the US and 36% Continental Europe. The issue also included a useful matrix comparing the membership, duties and other features of audit, remuneration and nomination committees.

The December issue discusses the new Hermes/LENS alliance and promises an interview with Bob Monks in the next issue. An analysis of board structures and practices in six countries reveals some real differences in the professions of outside directors but typical size hovered around 12. The authors could not find any correlation between board size, structure and profitability. An interview with Sir Adrian Cadbury reveals that in the UK institutional investors own 75% of big companies. Although they’ve increased their voting, 40% compared with 20% in 1990, that still leaves 60% “who just collect their money and do nothing.” Cadbury believes we need to focus on the responsibilities of institutional shareholders for the standards of companies in which they have put their funds. However, a second major issue is the accountability of institutions to their own investors. According to Cadbury, we need to focus on conflicts of interest.

College faculty have launched a nationwide campaign to persuade TIAA-CREF to begin “positive investing” of a small portion of their pension funds. Campaign for a New TIAA-CREF is calling for 5-10% of assets in the Social Choice Account, a socially responsible fund, to be invested in companies that are models of social and environmental responsibility. They cite a recent survey showing that over 80% of TIAA-CREF’s Social Choice Account participants favor “seeking out for investment companies [that] have an outstanding record of good performance on social issues, rather than rely on negative screens.” Only 3% oppose this investment strategy. For a brochure and other campaign materials, contact Social Choice for Social Change: Campaign for a New TIAA-CREF, MC Box 135, Manchester College, 604 E. College Ave., North Manchester, IN 46962, (219)982-5346/5009, or e-mail Neil Wollman at [email protected]or Abigail Fuller at [email protected].

ISS reports that NYSE has extended their deadline for comments on their revised proposal regarding shareholder approval of stock option plans. The new comment period extends to January 25th. Under the proposal, shareholder approval of stock option plans would be mandatory unless at least 50% of employees are eligible and a majority of the shares are issued to employees who are not officers or directors.

Most mergers (58%) fail to create substantial returns for shareholders, according to a recent study by management consultants at A.T. Kearney. The first 100 days are the most critical for success when speed in appointing top management , specific goals and excellent communications are critical. SeeInvestor Business Relations, 1/4/99, p. 9. See also Alexandra Reed Lajoux, The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities, McGraw-Hill, 1997.

Jürgen Schrempp of DaimlerChrysler chats with Forbes in their 1/11 issue on converging corporate governance.

New Jersey removes barriers to internet proxy voting. seeBergen Record, 1/6.

Corporate Governance Review from Fairvest Securities Corporation covered recent Canadian developments in poison pills and lock-up agreements in their October/November issue. Fairvest also reports on its research on 300 TSE companies which finds ownership broadening. In 1983 48% had a 50% or over control owner; that is now down to 23%. Similarly, firms with a 20% or higher shareholder have dropped from 78% to 43% during the same period.

Catherine R. McCall reports on the Kirby Commission findings. The Report expresses concern that boards of public pension funds may not have the skills to deal with complex financial issues. The Standing Senate Committee on Banking, Trade and Commerce recommends that individuals appointed to pension plan boards have the necessary knowledge to enable them to effectively monitor. The Committee found that social investment should be subordinate to long term growth of the fund. Like the Dey Report, the Committee looks to peer pressure rather than a legal requirement to report annually to pension plan members on adherence. In their review of mutual funds, the Committee rejected a suggestion that such funds have a responsibility to exercise their proxy votes. However, they did recommend that the federal government examine the issue of confidential proxy voting with respect to mutual funds. See Corporate Governance Review for Ms. McCall’s analysis of 11 recommendations.

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Contact: [email protected]

All material on the Corporate Governance site is copyright ©1995-1999 by Corporate Governance and James McRitchieexcept where otherwise indicated. All rights reserved.

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Archives: October 1999

California Treasurer Phil Angelides may lead an effort to pull state investments out of companies negotiating Holocaust-related forced labor and asset seizure claims if they don’t reach a settlement soon. The companies involved include German banks, Daimler Chrysler, Ford and General Motors. (seeTreasurer: Settle Holocaust claims, Sacramento Bee, 10/29)

Mike Cohn, of the Cohn Family Business Group, is the newest member of the Corporate Governance NETwork. The firm advises family-owned businesses on succession planning and related governance issues. Their quarterly newsletter, TRANSITIONS & traditions®, helps stakeholders confront tough technical and emotional family business issues. Continue Reading →

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Review: Fair Shares: The Future of Shareholder Power and Responsibility

Much has been written about the role of directors and boards but far too little on the how shareholders can add value. Carolyn Kay Brancato did so in her excellent book, Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value. However, Brancato was primarily writing from the perspective of managers. Although there was general recognition that shareholders can add value, the thrust of the book was on what managers need to know about shareholders and how to attract shareholders who will support them. Charkham and Simpson take a larger societal viewpoint. At bottom, they are concerned not with what is best for managers but what system will best provide the goods and services that society needs. Continue Reading →

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Archives: September 1999

NYSE to consider stricter listing rules, including a much higher hurdle for adopting stock option plans without shareholder approval.ISS Friday Report (9/24/99) contains analysis by Patrick McGurn of a provision which requires adoption of the standard by NASD for the rules to go into effect. McGurn elaborates on why this may be the “kiss of death.”

Business Ethics (7-8/99) offers “A New Vision of the Corporate Board” by Corporate Governance editor, James McRitchie. Based on the writings of Margaret Blair, the board is not just an agent of shareholders but acts as a mediator among all members of the team with firm-specific investments. Continue Reading →

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Archives: August 1999

Caux Round Table (CRT) to develop a Total Social Impact (TSI) system of benchmarking the social responsibility performance of corporations in terms of trust, the environment, labor standards and other critical issues. CRT to step up efforts to encourage corporations around the world to accept the Principles, train their employees in the Principles and then to act by the Principles. (see Industry leaders discuss social responsibility and good corporate governance by Frank Vogl, Earth Times News Service)

Executives’ incentive-plan stock and options at the end of 1998 represented 13.2% of corporate equity or $1.1 trillion, at the 200 largest U.S. corporations according to Pearl Meyer & Partners. Continue Reading →

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Corporate Governance Archives: July 1999

Stephen Davis, of Davis Global Advisors, is assembling a long-range list of global corporate governance-related conferences/workshops/events for the World Bank website and Global Proxy Watch newsletter. Please pass on the date, city, title, sponsor, location, and contact information for any such events you may know about by e-mailing [email protected]. Please cc me at [email protected] so that I can add a select few to our education pages. You can also post a message on the ECGNlist, the information and discussion list of the European Corporate Governance Network.

When is a company ready to form a board? A recent article in the Atlanta Business Chronicle offers advice from Paul Lapides, director of the Corporate Governance Center at Kennesaw State University, Donald R. Duckworth, chairman and CEO of Atlanta-based Horton International Inc., an executive search firm, and others. Continue Reading →

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Archives: June 1999

SEC considers expanding reporting requirements for financial relationships between board members and their chief executives. Revisions are being proposed by the Council of Institutional Investors. Personal, professional, and financial relationships during the previous five-year period would need to be disclosed. Family relationships would include those by blood, marriage, or adoption through first cousins. Financial ties would include purchases, sales, loans, financing, common investments, and charitable contributions. Professional ties would include service on a government body, having the same employer, or rendering professional services. The cause of further disclosure was aided recently when four members of the Cendant audit committee were found to have undisclosed personal and financial ties to the company. (Bergen Record, 6/22 )

Mark Latham has continued to develop the Corporate Monitoring Project which now includes the beginnings of a helpful tool for individual investors, Voting Your Stock: A Guide. Continue Reading →

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Archives: May 1999

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. Continue Reading →

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