A recent survey by KPMG and the Australian Institute of Company Directors showed fewer than one in six directors had a total understanding of corporate governance. Less than a third of the directors were implementing corporate governance initiatives, although another 21% said they already had initiatives in place. 58% said they would be looking at increasing shareholder value, while only 34% would be examining the fairness of remuneration of directors and upper management.
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The LA Times reports on sokaiya gangsters who threaten to disrupt shareholder meetings or threaten to expose corporate scandals. The Shareholder Ombudsman group, formed last year to increase corporate disclosure and accountability, now has its court calendar full of organized crime cases as they try to muscle the mob off the corporate payroll. Takashimaya execs pleaded guilty to paying $1.3M, Nomura may have paid $4000,000.
A survey by Grant Thornton LLP finds the boards of directors for many Minnesota midsize manufacturing companies do not meet frequently enough to be effectively involved in a number of critical areas.
In a mail survey of 125 Minnesota manufacturing companies, local board members report they are most involved in reviewing/approving corporate acquisitions (51%), monitoring their company’s financial status (34%) and reviewing strategic plans (33%). On the national level, board members are significantly more involved in monitoring their company’s financial status (56%), and in reviewing strategic plans (48%). The study reveals local boards are far less likely to be involved in reviewing/approving capital projects (19%) than are their national counterparts (42%).
More than a third (41%) of the Minnesota boards comprise five members or less while another 49% have between 6 and 10 members. Only 10% have more than 10 members. This compares to the national results which report nearly three-fourths (71%) of the company boards have five or fewer members, 24% have between 6 and 10 members and only 5% have more than 10 members.
More than half of Minnesota manufacturers (56%) compensate their boards with meeting fees compared to 32% nationally. Significantly more local manufacturers (40%) grant stock ownership to their board members than reported on the national level which is at only 22%. The number who pay an annual retainer fee (37%) is more than double the number (18%) indicated by the results of the national survey.
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CalPERS announced corporate governance principles for the United Kingdom and France building on six basic concepts that CalPERS has identified as fundamental to free and fair markets throughout the world. The six “global” principles include director accountability to shareholders, transparent markets, equitable treatment for all shareholders, easy and efficient voting methods, codes of best practices that clearly define the director-shareholder relationship, and long-term corporate vision which at its core emphasizes sustained shareholder value.
CalPERS principles are designed to complement the Cadbury Code and Greenbury Report in Britain, and the Vienot Report in France. In Britain this means regular elections of all directors, confidential voting, and improved access for shareholders to present resolutions through the company proxy. In France, CalPERS recommends an accountable and independent board and identifies ways to strengthen the director-shareholder relationship. The recommendations include a one-share, one-vote capital structure, an end to cross shareholding, the regular elections of all directors, and a greater disclosure of executive compensation.
Currently, CalPERS international equities comprise more than $20 billion of the System’s total investment portfolio. The System is expected to develop and consider governance principles for Germany and Japan by the end of the year.
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On March 19th Investor Relations Magazine announced the winners of its U.S. awards for excellence in the profession. The highlight was the presentation of the National Investor Relations Institute Grand Prix for Best Overall Investor Relations by a U.S. Company to General Electric, in the large-cap category, and to Morton International, in the smaller-cap category. Award winners and runners-up in 18 categories were determined by a survey of over 1,450 portfolio managers and buy and sell-side analysts. General Electric also won for best corporate governance.
TIAA-CREF is starting six no-load mutual funds.
Fortune carries an interesting article, CEO PAY: MOM WOULDN’T APPROVE by Thomas A. Stewart. He cites Pearl Meyer, an executive pay consultant in New York. The typical CEO pay package is now “21% salary, 27% short-term (annual) incentives,16% long-term incentives, and 36% stock-based pay (mostly options, which usually cannot be exercised for three years).” But he adds that “we’re still a long way from pay heaven. In the first place, the usual way to add risk to CEO pay has been simply to stack goodies on top of existing pay. Result: The CEO runs only the risk of making tons more money. Getting stock options, for example, is nothing like buying shares, since options have no downside.” Stewart’s main gripe, however, is that “shareholders don’t act like owners.” “hard numbers on the value of investor loyalty are hard to come by, but all the anecdotal evidence shows that superior long-term performance and a loyal shareholder base go hand in hand.”
CalPERS announced they will begin managing more of their domestic equity portfolio in-house. Currently, about 83% of that portfolio is passively managed. The move will bring the actively managed proportion up to about 20%. (see press release) A March 17th editorial in Pensions & Investments says the plan “deserves tough scrutiny and skepticism” and goes on to raise doubts concerning probable success.
We have added a link to the Securities Class Action Clearinghouse, under LinksLaw. I expect it will become an important site to any of you who are taking advantage of provisions of Private Securities Litigation Reform Act of 1995. We also want to point out an important new article “Does Coordinated Institutional Activism Work? An Analysis of the Activities of the Council of Institutional Investors.”
Institutional investors are calling for more information on individual directors, including their business track records and their specific contributions. They want boards to be evaluated by outside observers and they want boards to be more aggressive in weeding out underperforming members, according to the 1997 U.S. Survey of Institutional investors, released by Russell Reynolds Associates.
The survey, entitled “Setting New Standards for Corporate Governance,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, and is based on interviews with 231 portfolio managers and institutional shareholders. 62% of investors opposed limits on CEO compensation. In the past year alone, 77% of the investors surveyed have communicated their opinions directly to a board either verbally or by letter, sought more direct involvement in board oversight, sponsored a shareholder resolution or voted in favor of one. CONTACT: Russell Reynolds Associates, Sally Laroche, 212/351-2000 Fax: 212/286-8518.
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The LENS site recently posted an excerpted version of“Putting a Value on Corporate Governance” which appeared in The McKinsey Quarterly. In a survey of investors and CEOs, the authors found that investors would pay more for good corporate governance. Those more likely to do so were investors with low turnover in their portfolio, “value” investors, and those with high net worth.
February’s Corporate Secretary carried an article by Olena Berg, of the PWBA. She discusses the findings of PWBA’s third proxy practices project, pointing out that a significant number of plans did not routinely monitor their managers’ voting to ensure that proxies were voted in accordance with the plans’ stated policies…many did not even provide investment managers with voting guidelines. In addition, few of the plans surveyed engaged in any form of corporate governance activism.
Berg cites a study by the Competitiveness Policy Council saying that institutions should acquire larger stakes in fewer companies. This would encourage them to act as long-term owners. Since corporate managers complain of pressures for short-term results from impatient investors, such a shift would meet their needs as well. However, the Council also recommended that PWBA allay unfounded fiduciary concerns with respect to prudent investing by clarifying that ERISA’s diversification standard does not require investment in hundreds or thousands of stocks. Although Berg’s remarks implied agreement, we still haven’t seen formal clarification through administrative guidance. In addition, although she is obviously concerned, Berg’s agency has never taken action against a plan sponsor for failure to monitor the voting decisions of outside managers tainted by conflict of interest. Perhaps she will have more to say about these issues when she addresses the Society of Corporate Secretaries at their conference this July in Boston.
The WSJ featured an article about the growing trend by mutual fund managers to have a substantial investment in the funds they run. Among those so mentioned were Neuberger & Berman; Tweedy, Browne Co.; Franklin Resources (Michael Price); Baron Asset Fund; Delafield Fund; Yacktman Fund; Davis Selected Advisers (Davis New York Venture); Friess Associates (the two Brandwine funds); Southeastern Asset Management (the three Longleaf Partners funds); Harris Associates (the Oakmark funds) and the Crabbe Huson Special Fund.
CalPERS continues to shake Apple. According to CalPERStwo of Apple’s directors sit on four or more boards. They question if Apple’s directors have the time and dedication to turn around Apple when they sit on other boards and are also concerned that three board members don’t even own stock.
Apple’s 1996 compensation plan was to provide senior executives bonuses correlated with performance. However, when losses continued to drain the company, Apple changed the plan so that senior managers would get a bonus if Apple reported a profit in the fourth quarter. They did it by taking a one-time gain from inventory adjustments. In the tree quarters that didn’t count last year (for executive pay) Apple lost $841 million. Shareholder’s might well wonder if Gilbert Amelio really earned his bonus of $2,334,000.
TIAA-CREF increases its investments in Project Finance, according to PRNewswire. Their portfolio of loans for large capital projects is now crossing the billion dollar mark.