Archives: February 1997

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

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

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

Within the pension fund sector, public pension funds (state and local funds) are generally outpacing private trusteed funds both in total asset growth and in their allocation to equities. “These trends may have profound effects on corporate governance since the public state and local pension funds tend to be the most activist of all types of institutional investors,” says Brancato.

Public funds increased their share of total U.S. equity markets from 8.4% in 1990 to 8.6% in 1996 while private trusteed funds reduced their share from 16.8% to 13.6%.

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This month’s Employee Ownership Report carried a summary of a study of 434 fast growing companies by Coopers and Lybrand. Companies that offered stock option programs saw revenues grow 40% faster. “Over the past year, companies with broader stock option plans have grown faster than those with programs for management only: 37.1 percent versus 24.6 percent respectively, a difference of 51 percent. And projected revenue growth for the next 12 months was higher for firms with broader stock option programs: 40.3 percent, compared to 24.3 percent, a difference of 66 percent.”

Outsider boards earned greater returns for their shareholders, according to a study by James F. Cotter of the University of Iowa, Anil Shivdasani of Michigan State University, and Marc Zenner of the University of North Carolina reported inBusiness Week. From the inception of an offer to its resolution, the returns averaged 62.3% when the target companies had independent boards, compared with 40.9% when they had insider boards.

A recent survey of 50 large institutional investors by McKinsey & Co. found stockholders willing to pay 11% more on average for companies in which outsiders constitute a majority of the board, own significant amounts of stock, are subject to formal evaluation, and are not personally tied to management. Business Week

CalPERS reported an earnings rate 12.9% for last year. Performance was helped by international and domestic equity stakes, which together account for roughly 62.8% of the Fund’s total assets up from 49% in 1994. The System’s alternative and private equity investments drew the greatest asset return at 22.7%.

World Bank economist Luc de Wolf recently spoke to a gathering of nearly 400 delegates from 18 countries in Morocco about how to join the “club” of successful emerging markets – dominated by East Asian nations – attracting billions of dollars from foreign investors.

Emerging markets now represent 2% or $70 billion of the portfolios of pension funds; mutual funds also invested about 2% in emerging markets, meaning another $35 billion. Growth from both these sources would continue, he forecast, while official foreign capital flows stagnated. 12 countries took 95% of capital flows to emerging markets. Investors want “high return and opportunities for risk diversification.” East Asian countries are expected to grow at an annual 8% to the year 2000, while OECD nations would grow at only 3%.

“Soundness of a macroeconomic system enhances the profitability of investments. Hence if it is not sound, why would an investor look at a country where profitability is undermined by high inflation, high current account and fiscal deficits,” de Wulf asked. “Low labour costs are essential for many investors,” he said, adding this did not necessarily mean low wages but more efficient use of labour. “It is efficiency which counts … a result of education and professional training. The importance that we give at the World Bank for emerging markets is education.”

Low taxation was also important, said de Wulf, adding that Morocco’s halving of taxation in five years was “a giveaway.” But more important is an “enabling environment.” “The ease with which an operation can be started, the ease of operating and the ease of closing an operation. Rules must be clear and be enforced. This environment was equally vital for domestic investors who provided 3/5 of investment in emerging markets.

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The Conference Board will release the first issue of The Institutional Investment Report on 2/26. Prepared by Dr. Carolyn Kay Brancato, director of The Conference Board’s Global Corporate Governance Research Center. The Conference Board will have 3 issues per year. Issue one will focus on total assets and equity holdings; Issue two will track trading and turnover patterns as well as trends in specific investments; Issue three will analyze institutional investor concentration of ownership and foreign investments. CONTACT: The Conference Board, Frank Tortorici, 212-339-0231.

Phillip B. Rooney, CEO of WMX, resigned a week after his ouster was demanded by an investment group controlled by financier George Soros. Rooney’s resignation may further signal WMX’s determination to meet its critics head-on at the upcoming early May annual shareholders meeting, where some analysts expect a heated battle for control of the company. “WMX put up Phil Rooney as their sacrifical child to get Soros off their back. … The board will now be able to point to some substantive changes that it’s made,” said James Kelleher, an industry analyst with Argus Research in New York.

From the Wharton Leadership Digest. Researchers examined the competitive actions of 32 U.S. airline companies during the period after deregulation, 1979-1986, and found that airlines whose top management team members have more diverse backgrounds are: 1.more likely to take competitive actions but less likely to respond to competitors’ actions; 2.slower to take competitive actions and react to competitors’ actions; 3.more likely to achieve greater market share and higher annual profits. Lesson: Build diverse leadership teams but also build devices to hasten decision making.

Reuter’s reports the board of directors of WMX rallied around its CEO indicating they “unanimously reaffirmed its support for Phillip B. Rooney and his leadership of the company during his seven months as chief executive officer.” WMX said Wednesday that Soros’ board nominees do not qualify for consideration at the company’s annual meeting since the nomination documents “arrived after the filing deadline and contained incomplete information.” WMX added that its board was committed to search for the best possible candidates and its nominating committee had agreed to consider the Soros nominees later this year.

The WSJ reports that investor George Soros stepped up his attack on WMX Technologies Inc. by asking its board to oust CEO Phillip B. Rooney and nominate a slate of four candidates to the board.

New York State Teachers’ Retirement System committed $25 million to Mesirow Capital Partners VII, said Candace Ronesi, a spokeswoman for the $55 billion fund. Mesirow VII will make later-stage private equity investments and participate in management buy-outs. P&ampI Online

Investor Relations Business [email protected]reports that “your never too small to escape notice.” Michael Price’s Mutual Series, with 5.4% ownership, is urging S.C. Bancorp of Downey, CA to find a suitor. So is Basswood Partners with 9.8% at stake and Boston Provident Partners with another 5%.

IRB also reports that sweatshops will top the list of hot issues from the Interfaith Center for Corporate Responsibility this year. Other issues will include tobacco and the use of chlorine bleach in paper products.

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CalPERS announced their top 10 underperformers. Apple Computer and Reebok are joined by eight other companies on the target list. They include two technology companies: Novell, Inc., of Provo, Utah and Sybase, Inc. of Emeryville, California; and two product manufacturers: Stride Rite Corporation of Lexington, Massachusetts and Bassett Furniture Industries of Bassett, Virginia. Filling out the remainder of the target list is one of the nation’s largest food distributors Fleming Companies, Inc. of Oklahoma City; the hazardous waste treatment company Rollins Environmental Services of Wilmington, Delaware; the worldwide leader of ophthalmic laser systems Summit Technology, Inc. of Waltham, Massachusetts; and electronic surveillance system provider Sensormatic Electronic of Boca Raton, Florida. see press release

A current SEC survey requests input on improving the shareholder proposal process. Among the issues being studied: voting over the Internet, whether proposals on workplace issues should be allowed, whether to allow companies to accept only shareholder proposals on each issue, and whether companies should be allowed to place a cap on the number of resolutions accepted. The SEC plans to draft recommendations this summer, said Brian Lane, director of the SEC’s division of corporation finance. P&ampI Online

The LongView Collective Investment Fund asked SEC commissioners to overturn a staff opinion that Monsanto Co. may exclude from its proxy an investor request to prepare a report on its affirmative action policies and programs. P&ampI Online

Cross-Border Publishing is coming out with a new publication. CORPORATE AGENDA will focus on corporate governance. From trends in proxy voting to changing regulatory standards.

A report by P&ampI Online indicates LENS may have won something of a victory at WMX Technologies Inc. which announced a major restructuring. The company plans to sell $1.5 billion of assets, cut capital spending and eliminate 3,000 jobs by the end of the decade. The board also approved a $1 billion-plus repurchase program. Paul Montrone, one of four people suggested by LENS, will join the company’s board. However, the WSJ quotes LENS principle Nell Minow as “very disappointed.” LENS had been “looking for a very positive, focused statement of a coherent strategy.” “What we got was a little bit of this and a little bit of that.” A separate report by PRNewswire points to another LENS victory asStone & Webster announced its incentive compensation program to better align management with the company’s objective of achieving shareholder returns.

The Center for Strategic and International Studies (CSIS) and Congress recently announced the establishment of a bipartisanNational Commission on Retirement Policy. The Commission will hold a series of meetings around the country to engage all affected parties in a national debate on the entire range of issues impacting retirement income: Social Security, pensions, and personal savings. “It is our intention to see the work of this project influence the development of policy choices necessary to protect the American retirement dream.” The topics to be discussed include the future of the pay-as-you-go Social Security system, the impending insolvency of the Medicare program, under funding and termination of certain corporate pension plans, the shift from defined benefit to defined contribution plans, and the inadequate levels of private saving and biases against such saving in the federal tax code.

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Sunbeam announced that all of its remaining U.S. employees would become shareholders though an expansion of their employee stock option plan. CEO Al Dunlap, who two months ago announced the layoff half Sunbeam’s employees in a restructuring, says he is “firm believer in creating incentives for employees through stock options. The Sunbeam program allows them to share in the wealth they create for the shareholders.” In other Friday Report news the Teamsters won a recent court order requiring Fleming to allow shareholders to vote on a binding bylaw proposal to rescind the company’s shareholder rights plan. Institutional Shareholder Servicesreports that to date less than half of the firms that had one or more nonbinding proposals pass have subsequently terminated their plans.

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