Nasdaq will seek public and industry comment on a series of changes to its asdaq will seek public and industry comment on a series of changes to its listing qualification standards. Among the governance standards are: a minimum of two independent directors; an audit committee with a majority of independent directors; an annual shareholders meeting; and shareholder approval for large, below-market issuances. The comment period runs through Dec. 20, 1996.
A survey of 203 company officers responsible for relationswith investor asked which factors have greatest impact on their company’s stockprice. Topping the list: the quality of senior management. (See National Investor Relations Institute.) We learned of the survey through the “Wharton Leadership Digest.” If you would like to receive it via e-mail, send a message to [email protected] . In the subjectline, enter the word subscribe.
Campbell Soup Co.’s board of directors was ranked thenation’s best by BusinessWeek, while scandal-ridden Archer DanielsMidland (look up ADM) took last place. Since the entire series of articles isonline, I won’t summarize it here. Its well worth a look, although I would have likeda fuller explanation of the methodology.
The rankings are based on a survey of 295 of the nation’s top pension funds, moneymanagers and experts on corporate governance (61 respondents). The overall scoreswere a composite of the survey results plus a board analysis performed by BusinessWeek. Business Week, for example, assessed accountability to shareholders based ondirectors owning a minimum of $100,000 in stock and not being offered a pension planby the company. I can think of many other valuable measures, such as confidentialvoting of proxies, that could have been used. However, the study represents anotherimportant step in the right direction. We look forward to next year’s survey and hopeit will identify positive movements.
The October issue of Director’s Monthlycarried an article by John H. Biggs of TIA-CREF which went over the history of their involvement with corporate governance with a recap of issues raised at a 1993symposium which they sponsored. This is great material for anyone interested in where some of the key leaders in the field stood in 1993. Biggs goes on to describe their policy statement and TIA-CREF’s new Corporate Assessment Program. They are planning to visit every U.S. company in which they have $50M or more invested and use their policy statement as an assessment tool. The effort is being undertaken by B. Kenneth West. The November issue focuses on ethics with several featured articles on that subject including a sidebar on the Federal Sentencing Guidelines. Among many other items was a short note on the Corporate Governance site. The November issue notes two studies which challenge claims that shareholder activism leads to value. The lead article by Gary Edwards discusses the need for director involvement in an effective corporate ethics program.
A panel put together by the National Association of CorporateDirectors has stressed the need for boards to be independent and to go throughperiodic evaluations. Boards should limit the number of seats any director may hold,to better ensure they have the time and energy required for good service.
The panel also recommended that boards limit the tenure of directors (to obtain freshideas), designate an independent lead director for critical board functions,establish an independent committee to oversee the board’s governanceresponsibilities, and operate independently of management .
The NACD’s recommendations are by no means binding. The Washington-based grouprepresents about 1,800 top executives who serve on or deal with corporate boards. Thecompanies in which they serve range from those belonging to the Fortune 500 orsmaller, private and closely held firms.
NACD President John Nash expressed hope that in the next three to five years, “ourrecommendations would be commonplace” in U.S. boardrooms.
The Conference Board is forming a Global CorporateGovernance Research Center to be headed by Dr. Carolyn Kay Brancato. The goal is toimprove communications and reduce tensions among management, boards, institutionalinvestors and international public institutions. They plan a series of conferencesin 1997 in Brazil, Canada and Singapore. The Conference Board is also developing anInternet site.
The May/June edition of the Employee Ownership Report discusses DOL regulations which may hold back expansion of ESOPs, the Springfield ReManufacturing Corporation’s “Great Game of Business Program” (which NCEO believes “is the most important concept in participative management there is,” and recent developments in politics.
July/August edition finds 13% of the Fortune 1000 companies offer stock options to60% or more of their workforce according to a study by EdwardLawler. Overall, 54% of the companies offer some kind of employee ownership program. Does giving employees options create the same “ownership mentality” that giving them ownership through an ESOP or having them purchase shares at market value through a 401(k) can? NCEO says the evidence points to an answer of yes by way of an interesting discussion.
NCEO has recently released an important new publication, Corporate Governance in Employee-Ownership Companies. Ed Carberry has written a brief but excellent guideto voting rights, board representation and other areas of employee involvement incorporate governance. His minimal use of legal jargon and frequent examples make this complex area of law more easily understood. The booklet is important not only for ESOP trustees and employee owners but also for institutional investors andshareholder activists attempting to work more closely with employee owners.
Mercer reports that median compensation at small firms rose 17% to $422,075 last year; those of large firms were up 12% to $1,992,490. Almost all the gains came from bonuses, stock options and other nonsalary items. 59% of smaller firms and 86% of large firms use stock to compensate directors, according to another Mercer study. The medium retainer was $12,000 annually compared to $30,000 for larger firms but both paid about $1,000 per board meeting.
The July/August ISSue Alert notes that nearly 100 corporate governance proxyinitiatives, a record number, resulted in negotiated withdrawals. Jill Lyons reportsthat dual-class capital structures have often resulted in a greater differential thanwas expected between the price of voting and nonvoting shares. Shares with votingrights were found to carry an average 8.7% premium…most recapitalizations haveserved as vehicles for management entrenchment. Bruce Babcock writes that thecombination of a breakdown of bureaucratic guidance, the collapse of the LDP’spolitical hegemony and other forces have demonstrated deficiencies within Japan’scorporate governance. These events and the rapid growth of foreign portfolioinvestment present an unprecedented opportunity to develop a meaningful dialoguebetween corporations and their nontraditional shareholders.
September ISSue Alert has an interesting article by Ralph Whitworth on the Active vs.Passive Debate. The October ISSue Alert has a “guest” viewpoint by Michael Useem and anarticle on Sunbeam which mentions the dialog at Japonica Partners.
The Council ofInstitutional Investors has created a Discussion Forum which, we expect, willsoon become an important resource for information and dialogue. Discussion Forum
In addition, CII announced their 1996 “Focus List” which includes hypertext links to the internet sites of listedfirms.
CalPERS issued a report recently entitled “Key Terms andConditions for Private Equity Investing.” The report, completed by William M. Mercerand sponsored by nine state funds representing about a half a trillion dollars,explores ways to better align the interests of general and limited partners. Thestudy serves to raise the reader’s knowledge of contractual terms and issues,provides a framework of items for consideration when negotiating such contracts, andreferences computer spreadsheet models to help evaluate the financial impact ofalternative contractual terms. CalPERS will soon have an internet site online (again)and the report is expected to be included. The CalPERS Public Affairs office can bereached at (916) 326-3991.
In other news, CalPERS announced they are developing “model U.S. corporate board”governance standards as part of its program for 1997. CalPERS plans to again targetsmall and medium-size companies. They will also expand their focus on the performanceof individual board members. The system will also create a “good workpracticesprogram” that identifies companies that have achieved long-term performance forshareholders without sacrificing the company’s work force. In the international arenaCalPERS will work on developing country-specific principles and then will call forcommunication of those principles through conferences and other meetings. (WSJ,9/20/p. 5A)
ISS Friday Report tracked 25 new poison pillsfor August, up from 20 in July. CalPERS named Kayla Gillan to the position of generalcounsel. Ms. Gillan has worked for CalPERS since 1986.
The PrivateSecurities Litigation Reform Act of 1995 included a provision which gaveinstitutional investors, such as mutual funds and pension funds, the right to becomeactivists in civil lawsuits. Under the “lead plaintiff” provision, large shareholderscan seek to be named controlling parties in class-action suits.
It appears the State of Wisconsin Investment Board is invoking its rights under theAct to assume the lead plantiff position in an action originally filed by Milberg,Weis, Bershad, Hynes & Lerach against CellStar Corporation. Stuart M.Grant, a lawyer with the Board, is quoted in the 8/8/96 Wall Street Journal as sayingthe case “is not going to be attorney-driven. It’s going to be client driven.” Thefund “feels there’s a very, very strong case.”
In July, the Colorado Public Employees Retirement Association, after voicing concernsabout plaintiff’s attorney fees of 20.5% of the settlement, was named lead plaintiffin a suit against California Micro Devices Corp. For more information see Institutional Shareholder Services (ISS) “FridayReoport” dated 8/16/96.
Have funds drawn up guidelines on when this provision of law should be used? On thecompany side, what guidelines are being developed on how forecasts should be couchedto take advantage of immunity provisions? Please e-mail us on these issues so thatwe can share your thoughts with our readers: [email protected]
The March/April edition of TheCorporate Board: The Journal of Corporate Governanceis outstanding. A. S. Sommer, Jr recommends institutional investors take a greaterrole in finding suitable independent board nominees. Timothy R. Donovan discusseslawsuit reforms under the Private SecuritiesLitigation Reform Act of 1995″; an article by Gallo addresses paying directors instock to help them think like shareholders; MacMillan and Salwen take this notion astep further in their important article “Paying in Stock: The Rank and File”; whileKelly and Gouillart argue for a broader role for directors in transforming theorganization. The May/June issue includes articles on the board’s role in developingstrategy, the Russell Reynolds survey of institutional investors, D&O Insurance,Audits under the Litigation Reform Act and independent staffs for boards. TheJuly/August edition contains a thoughtful article by Jay Lorsch, “The Board as ChangeAgent.” Jonathan Macey’s article “Wealth Creation as a Sin” is sure to provoke somecontroversy. Macey challenges the logic of taxes on golden parachute payments,greenmail and executive compensation. “In Review” carried many interesting tidbits.Deferred stock awards are up, pension plans for outside directors are down. Bell &Howell held it annual meeting on the Internet. US institutions increased purchases offoreign equities from $97.5 billion in 1990 to $281.7 billion in 1994; the percentageof proxies they voted increased from 24% in 1991 to 65% in 1994.
The September/October edition has an exclusive interview with Labor Secretary RobertReich on corporate responsibility and a rebuttal by John J. Hanks, Jr., corporateattorney. Mary Ann Butera writes on how to turn shareholders into customers, EdwardCarberry, of NCEO provides guidance on CorporateGovernance in Employee-Ownership Companies, and editor Ralph Ward provides somehighlights from his new book The 21st Century Corporate Board. In theNovember/December edition Kevin LaCroix of Genesis D&OAdvisory Services takes a look at the Private Securities LitigationReform Act of 1995. We are having more lawsuits, not less. He offers some goodadvise on taking advantage of “safe harbor” provisions. A copy of the letter from T.J. Rogers, of CypressSemiconductor to Sister Doris Gormley explains how Cypress stands for personaland economic freedom and is opposed the use of coercion by the federal government toforce arbitrary “corporate responsibilities.” Francesco Cantarell offers a moreconvincing argument in his article “The Growth of Responsibility Committees.” Use ofTexaco as one of the examples does not take away from Mr. Cantarella’s arguments.However, it does lend even more credibility to the arguments of the author of Corporate Governance at theSpeed of Light. Richard Nathan’s most recent article continues the theme of “virtual boardrooms.” Its agreat article and we appreciate the reference to the Corporate Governance site. We only wish Mr.Nathan, who provides great insight into the “emerging opportunities for director’son-line,” would take more advantage of hyperlink abilities on his own site. When hewrites of working from scattered geographic locations he could mention LENS as a prime example. Both LENS andJaponica Partners have already used theirsites to share information and advocate views at a sophisticated level concerninginvestments. Although it has yet to really take off, the Council of InstitutionalInvestors’ Corporate Governance Discussion Forum has great potential.
the Corporate GovernanceAdvisor Sept./Oct edition carried a cover article on the SEC’s final section 16 rules and an updateon Executive Compensation Disclosure During the 1996 Season based on a survey andreview of section 162(m) disclosures. A letter to the editor from Geneva B. Jonesprovided an excerpt from the proxy statement of the Wisconsin Energy Corporation(WEC) which devotes significant attention to corporate governance issues. The IRRCMonitor section includes a report that the State of Wisconsin InvestmentBoard and Council of InstitutionalInvestors are exploring whether or not the proxy voting tabulation system needsreformed after debacles at Rowan and Kmart.Nov/Dec issues contains a guest editorial by Clifford J. Alexander of Kirkpatrick & Lockhart calling for a review of theentire process of collecting, tabulating, and recording proxies, as well as theresponsibilities of banks, broker-dealers and other custodians. Another interestingarticle in that edition is on Mandated Disclosure of Board Leadership Structure by Constance E.Bagley and Richard H.Koppes. The authors call on NYSE and NASD to require companies which do notchoose to designate a lead director or separate the roles of CEO and chair to explaintheir reasons in the proxy statement. They cite precedents in the UK and Canada.
The January edition of the Corporate Governance: An International Review carries a summary of the Greenbury Report on directors’renumeration and the results of a study by Philip Stiles and Bernard Taylor whichshows that rubber-stamp boards are in the minority, in contrast to research findingsof 25 years ago. Most boards in their study of 101 U.K. firms were involved in highlevel strategy-making in partnerships with the Chief Executive. Excellent reviews arealso provided of two important books…Good Practices for Directors: Standards forthe Board by the Institute of Directors, London, who recognized the need for suchguidance after one of their surveys showed that 92.4% of the large sample ofdirectors had no board training. The other book review is of CorporateGovernance by Monks and Minow. April brought articles on international accountingstandards, corporate governance in Australia and South Africa (which has a corporatelandscape “dominated by pyramid holding companies”) as well as an article comparingthe framework and voting practices in the U.S. and U.K. One interesting finding wasthat “there have already been instances in the U.K. of U.S. institutional investorsoutvoting their U.K. counterparts, not because of the size of the shareholding butbecause they bothered to vote.” The article concludes with an excellent list ofcontacts for anyone interested in U.K. or U.S. proxy voting issues. The Octoberedition carries an important article by Frank L. Winfrey on key issues developed bythe Corporate Governance Project of the American Law Institute including theobjective and conduct of the corporation and fiduciary duties, including the duty ofcare and the duty of fair dealing. Another article discusses research in the area ofbuy-outs and buy-ins with implications for monitoring by institutional investors.Corporate Governance continues to have the best international update we have seenwith short pieces on Australia, Canada, China, France, UK, and the US.
TheApril edition of the Crystal Report on Executive Compensation tells us in detail why Robert Allen (AT&T) has “guaranteed himself a spot in the finals for executive compensation poster child of the year.” Crystal also takes aim at Gilbert Amelio (Apple) and Floyd Hall (K-Mart), while defending Frank Shrontz (Boeing). He also explains why those reported pay ratios between CEOs and average workers differ, discusses what should drive the size of stock option grants and provides other insights.
The April edition of Directorship carries an interview withHerb Kelleher (Southwest Airlines); Marguerite W. Sallee writes about her experience as a woman on the formerly all male board of MagneTek, Inc.; other features discuss the recent Directorship survey, the ideal director, pay for performance and how to pick outside directors. In the May edition both Richard Mahoney and Michael Useem discuss some of the implications of the growing strength of pension funds and retirement accounts. The June edition includes articles on new stock compensation accounting rules issued by the Financial Accounting Standards Board and on the importance of addressing issues of director compensation in order to keep stockholders happy.
The Calvert Group has come out inopposition to The Pension Protection Act of 1995 sponsored by Rep. Jim Saxton. Thebill may jeopardize the ability of pension fund managers’ to make economicallytargeted investments. See What’s New.
Carolyn Kay Brancato of The Conference Board reported recently US Institutionalinvestors are not only increasing their holdings abroad, from $97 billion in 1990 to$300 billion in 1994, they are also increasing their use of shareholder ballots,which moved from 24% in 1991 to 65% in 1994.
NCII Corporate Accountability1000
The January edition of the “Corporate Secretary” features an NYSE proposal for fees paid by issuers to brokers for distribution of proxy materials to street name holders (it turns out current charges have been “unrelated to costs actually incurred or services rendered” and are “in excess of fees that would be available in a competitive marketplace”). Also of interest is a commentary by Murry Hillman on “Using ‘Parallel Accounting’ to Measure CEO Performance.” Hillman notes that, “for example, the quality of incremental profit generated through a three-day price promotion is worth less to the future growth of the business than an incremental profit dollar generated from creating a new, loyal heavy-user customer.” Determining what might constitute a quality profit dollar might be one of the more important steps CEOs and their boards can take in developing new ways to objectively measure executive performance and corporate worth.
In theDecember edition of the Corporate Governance Quarterly, Paul Chow discusses Hong Kongdevelopments in the context of a report entitled “Who Holds the Rein” by theInternational Task Force on Corporate Governance of the International Capital MarketsGroup (ICMG). Also included are articles by Robert Monks and others. The Apriledition of the Company Secretary carries an article by Mervyn E. King on the findingsof the King Committee on Corporate Governance in South Africa, an article comparingcorporate forms in France and Germany, an update on corporate reforms in Australiaand several articles with a focus on Hong Kong and China.PHILADELPHIA, December 7, 1995 — The Wharton School of the University ofPennsylvania and Spencer Stuart, the international executive search firm, presentedthe first “Board of the Year” Award to the directors of Mallinckrodt Group, Inc. (MKG- NYSE), a St. Louis-based company with sales of $2.2 billion which provides humanand animal health care products and specialty chemicals worldwide.
The Award recognizes the outstanding performance of Mallinckrodt’s board of directorsand its pivotal role in improving corporate performance and governance. Mallinckrodtwas selected from among 16 finalists by a jury of nine leaders from business,academia and government. Nominations were solicited from boards, shareholders, andmanagement over the past year. The event is part of the Wharton/Spencer StuartDirectors’ Institute, a special institute for board directors which explores the bestpractices in corporate governance.
“The Mallinckrodt Group serves as a superb example of what can be accomplished when aboard acts productively to add value,” said Robert E. Mittelstaedt, Jr., vice deanand director of executive education at Wharton. “Its actions show that the board hasa complete understanding of its responsibilities to shareholders, management andemployees. It encouraged open discussion and supported strong ethical standards.”
The Mallinckrodt Group’s board, nominated by one of its major institutionalshareholders, TIAA-Cref, is cited by the Award’s jury for its role, since 1990, intransforming the company into a $2.2 billion global force with a diverse set ofbusinesses. The board developed principles of corporate governance, formal guidelinesdefining responsibilities for current and prospective directors. The principles haveallowed the board to act with confidence on a variety of difficult issues including achange in strategic direction, and a CEO changeover. Between 1990 and 1995,Mallinckrodt’s profits tripled, profitability ratios increased over 50 percent, andits stock more than doubled.
“Mallinckrodt’s board surpassed the jury’s selection criteria,” said Dennis C. Carey,a managing director of Spencer Stuart and a member of the selection committee. “At atime when boards are increasingly under scrutiny, it is important to recognize thoseboards — like Mallinckrodt’s — that are examples of best practices in corporategovernance.”
C. Ray Holman, chairman, president and chief executive officer of the MallinckrodtGroup said, “We are deeply honored to receive this prestigious award and to be namedthe first Board of the Year by such an outstanding organization. Our management teamis extremely proud, and I would add fortunate, to work with such an outstanding groupof directors.”
Prompted by the belief that shareholders should have confidence in a board’s abilityto understand and do its job, the Mallinckrodt’s board developed, adopted, refined,and published its formal principles of governance. The principles include an explicitstatement of duties and responsibilities; the board’s concept of how the board andmanagement are expected to interact; and the boardÜs view of management’sresponsibilities.
To align the directors’ interests with those of shareholders, Mallinckrodt’s boardchanged its director’s compensation package to encourage board members to shift cashcompensation into stock equivalents which over time would ripen into actual shares.In addition, the board became actively involved in oversight of management; reviewingand approving senior executive performance and compensation; research and technologyplanning; management succession; and strategic planning.
Mallinckrodt’s board has complete access to management as well as a thoroughunderstanding of the company’s businesses and the capabilities of its key managers.Board meetings incorporate site visits to operating facilities, and usually includeexecutive session critiques of the meeting and management’s presentations. Corporateofficers regularly attend meetings. The CEO is the only board member who is also anemployee of the company.
The board also established formal procedures for selecting new director candidates,including a listing of director qualifications. No invitation to join the board isextended until after each member of the board’s corporate governance committee hasinterviewed the prospect. According to the jury, the company has adopted ideal boardmember and CEO evaluation procedures.
The jury used six standards of outstanding board performance in reviewingnomination;
A board which acts productively, in a timely fashion, to add value;
A board which understands and acts on its responsibilities to shareholders;
A board which understands and can articulate its role and relationship tomanagement;
A board which understands and acts on its responsibilities to employees and tosociety;
A board which encourages discussion and exhibits courage in the handling of difficultissues; and
A board that supports strong ethical and moral standards of business.
The criteria were developed as part of the Wharton/Spencer Stuart Director’sInstitute, the leading institute of its kind designed for CEO’s and directors. The program is held twice each year in the U.S. and the United Kingdom.
Nominations for the 1996 Board of the Year Award may be made by an individual boardmember, a shareholder or a member of management. Inquires should be addressed to:Robert E. Mittelstaedt, Jr. Vice Dean and Director Aresty Institute of ExecutiveEducation 255 South 38th Street Philadelphia, Pennsylvania 19104-6359. Press contact:Michael Baltes, 215-898-7640