Archives: April 1997

Average stockholder runs for board of BellSouth with backing of the Communications Workers of America. (seeAtlanta Business Chronicle)

The Boston-based Coalition for Environmentally Responsible Economies (CERES) in 1996 filed a record of 43 shareholder resolutions with U.S. companies, including five in Massachusetts. That’s up from 16 resolutions filed nationwide in 1995. But shareholders shouldn’t expect to see CERES resolutions on proxies. Instead, executives are going to the negotiating table. According to Mark Tulay, a spokesman for CERES, that’s exactly what the coalition wants. Of the 43 resolutions filed in 1996, all but 13 were withdrawn in favor of negotiations. The resolutions, filed by institutions which support CERES, ask companies to adopt the 10 CERES principles governing environmental business standards. This year the group expects additional progress. (see Boston Business Journal)

Pennsylvania’s Supreme Court ruled that shareholders who want to sue management or directors on behalf of a Pennsylvania corporation must first submit all claims to the board, which can then decide to pursue the claims or drop them. The board’s decision can’t be challenged unless plaintiffs show the directors failed to act in good faith. For more, seeWSJ 4/28/97, B3.

The National Association of Corporate Directors (NACD) will convene a panel of business and academic leaders beginning in 1997 to study governance issues affecting entrepreneurial public companies such as new regulations and laws designed to protect shareholders against fraud and illegal acts. The panel, which will be sponsored annually by Grant Thornton LLP, a major accounting and management consulting firm, will be called the NACD/Grant Thornton Best Practices Council. (see announcement)

Corporate Board Governance and Director Compensation in Canada, a survey conducted by Patrick O’Callaghan & Associates and The Caldwell Partners Amrop International covered 2,284 directors in 290 Canadian corporations. The average Canadian board has 11 people who have served eight, one-year terms. Average age is 59 years, they are male (93%), receive an annual retainer of $12,000 and are paid $900/meeting eight times a year. Nearly half have a stock component as part of their compensation, yet 15% don’t own any stock in the company.

The author’s believe the TSE guidelines are having an impact. Over 50% of boards have a corporate governance committee compared to 2% 2 years ago. More than 60% have a process for assessing board effectiveness, 41% for committee effectiveness and 45% for judging individual director performance. Almost 2/3 have separated the roles of CEO and Chair. For a copy, contact Patrick O’Callaghan, 604-685-5880 or Anne Fawcett, 416-920-7702. (Canadian Corporate NewsNet)

Back to the topEntrenched CEOs get higher pay and their companies have lower returns and weaker stock performance, according to a study by Wharton Professors John Core, Robert Holthausen and David Larker. Six characteristics were correlated with higher CEO Pay and weak performance: dual CEO/chairman; large boards, outside directors directly appointed by the CEO; outside directors who receive income from an association with the company; outside directors who sit on 3 or more other boards (six for retirees); and outside directors aged 70 or older. The study also found that better performance was linked to someone other that the CEO owning more than 5% of the stock. WSJ, 4/25/97, C2

Ira Millstein is termed “The Gruru of Good Governance” in aBusiness Week article focusing on his ability to prod companies into transforming their boards. The story provides a broad glimpse of this statesman of the field from selling hot dogs while working his way through Columbia University to GM to current efforts at Dow Jones & Co.

The April 28 issue of Time Magazine has gotten into the news glut on CEO pay. “The CEO-pay issue is beginning to feel like the start of a class war.” “One solution embraced by the likes of DuPont and BankAmerica is to grant CEO stock options that can be cashed only after the stock has risen a specified amount. That way a CEO doesn’t make a killing unless the stock really zooms. An even better answer is to devise stock options that are indexed to the market or some peer group. They would remain worthless unless the stock outperforms its competitors.” The second option is one endorsed by ISS in a recent editorial.

Theresa Welbourne and Alice Andrews have studied the initial public offerings (IPOs) of stock by 136 non-financial companies in 1986. Half of the firms had fewer than 110 employees at the time of the IPO, while a fifth had more than 700. They evaluated the company’s offering prospectus for evidence that the firm (1) placed a high value on its employees as a distinct asset, and (2) rewarded employees for organizational performance through such devices as profit sharing. The researchers find that the companies that value employees and use performance compensation at the time of the IPO are significantly more likely to survive for at least five years.

The researchers also interviewed the most senior executive who had been with each company since the IPO five years earlier. When they asked the executive to rate a set of factors that best explain the company’s performance since the IPO, the factor deemed most important is the quality of the top management team.

Implication: Build employee capacity and top leadership for growth and survival.

Source: Theresa M. Welbourne and Alice O. Andrews, “Predicting The Performance of Initial Public Offerings: Should Human Resource Management be in the Equation?” Academy of Management Journal 39 (August, 1996), 891-919.

The above is taken directly from the WHARTON LEADERSHIP DIGEST, April, 1997, Volume 1, Number 7. Michael Useem, Professor of Management, serves as editor, and suggestions for items or topics for inclusion in future digests can be sent to him at The same address can be used to subscribe to the digest. Back issues.

Back to the topA new publication from Deloitte & Touche LLP, “Questions at Stockholders’ Meetings 1997,” can help you prepare by anticipating critical issues of concern. Mergers and acquisitions could be high on the list this year. Copies of are available by calling Natalie Saviano at 203-761-3065.

CalPERS is using the Internet to seek out active domestic equity managers to manage more than $6 billion of the Fund’s assets. The RFP is online at Release of The RFP is the latest step in CalPERS approach to reorganize management of its domestic equity portfolio. Last month, the Board approved changes to the Fund’s domestic equity portfolio that included the development of an internal active management capability, and an increase in the active management portion of the portfolio up to 20%. Currently, 13% of domestic equities are managed actively by external fund managers.

From Directorship. CEOs of multi-billion dollar American companies were paid, on average $4.85M in 1996 up 11% form last year according to a survey by Pearl Meyer & Partners. In an unrelated story, Campbell Soup last year offered no gifts or refreshments at its annual meeting. Attendence was down from 1,500 to 200.

Back to the topA new report worth getting is “Twenty Best Practices To Improve Board Performance,” by Korn/Ferry in conjunction with the University of Southern California.

Some of the recommendations include: Tie the compensation of board members to changes in shareholder value. Formally evaluate the performance of the board and the individual board members every year. Provide independent board members the opportunity to meet without company executives present. Set board member compensation based on what directors of other comparable corporations receive. Make sure to have a sufficient number of independent directors. To obtain a copy, call Stephanie Rosenfelt at Korn/Ferry International at 212/984-9316.

An interesting story covered by ISS on excessive executive compensation (primarily in the form of options) points out that, to keep dilution under control, companies are repurchasing their own shares at a record rate (up 70% in 1996 from 1995). These outlays are eating into cash flow and profits. Dividend payouts are at an all time low. In the current downturn the pressure will be on to reprice “underwater” options. In addition, the broad adoption of increased equity shares for insiders may lead to insider control.

From P&ampI. Vermont may pull their pension funds out of tobacco stocks. The following joined CII: Compaq, Marriott, Morgan Guaranty Trust; Navistar; Indiana Public Employees Retirement Fund; Hartford City Municipal Employees Retirement Fund; Massachusetts Pension Reserves Investment Management Board; Milwaukee City Employees’ Retirement System; Montana State Board of Investments; Virginia Retirement System; CWA/ITU Negotiated Pension Plan, IAM National Pension Fund and United Association Local Union Officers and Employees Pension Fund. Two funds dropped out: Consolidated Freightways Inc. and Detroit City General Retirement System.

CEO pay jumped 20% last year while corporate profits grew 11% and workers’ wages rose just 3.3%, is now 212 times greater than the average worker’s pay, up from 44 times greater in 1965, according to the AFL-CIOExecutive Paywatch, will provide salary and other compensation information for the CEOs of Fortune 500 companies and allow workers to compare their pay with that of the boss. The site will also carry proxy information. It was getting 4,000 hits an hour the first day. For more on executive pay see San Jose Mercury News.

Back to the topCEOs will see more challlenges to their pay with 112 proxy resolutions, up from 63 in 1996, according to IRRC. The share of stockholders voting against new executive pay plans jumped to 19% last year, up from 3.5% in 1988. Lawrence Coss, of Green Tree Financial brought home $102.4 million last year. The average salary and bonus for a CEO rose a phenomenal 39%, to $2.3 million. Add in retirement benefits, incentive plans, and gains from stock options, and total compensation jumped 54% to $5,781,300. That largesse came on top of a 30% rise in total pay in 1995. CEOs earned 209 times that of factory employees, who garnered a 3% raise in 1996. White-collar workers eked out just 3.2%, though many now get options too. (Business Week related stories and tables).

CEO pay was up 5.2% in 1996 according to a William M. Mercer study for the Wall Street Journal. Stanford Weill ofTravelers Group took $93.9 million to head the list. Median total compensation rose from $2M in 1995 to $2.4M in 1996. More people are beginning to ask the question, how much is to much?

Bank of America’s Journal of Applied Corporate Finance focuses leading academic theorists on corporate governance systems in the U.S., Canada, Japan and Europe.

Mark J. Roe kicks off the special issue with his proposition that politics restricting the activities of financial intermediaries played a role in the evolution of U.S. corporate governance.

Frank Easterbrook argues that differences corporate governance reflect differences in the efficiency of capital markets. Unlike nations in Asia and most of Europe, the U.S. and the U.K. have large, efficient capital markets with no restrictions on cross-border capital flows.

Julian Franks and Colin Mayer characterize corporate governance systems in the U.K. and the U.S. as “outsider” systems with large numbers of widely held public corporations and well-developed takeover markets. By contrast, German and French corporations are governed by “insider” systems — where founding families, banks or other companies maintain controlling interests, and outside shareholders are not able to exert significant control.

F.H. Buckley suggests we look to our northern neighbor where most large firms are members of a keiretsu — an interlocking group of corporate clients, investment dealers, trust companies and professional advisors that is designed to “facilitate information-sharing and monitoring among group members.”

Jonathan R. Macey and Geoffrey P. Miller believe German and Japanese governance systems fail to produce well- developed capital markets along with active takeover markets. The problem with U.S. corporate governance stem from “regulatory restrictions and misguided legal policies” which make takeovers more difficult.

William S. Haraf argues that instead of eliminating remaining entry barriers, Congress should promote genuine financial integration with a much simpler and more streamlined system of regulation. Manuscripts for the Journal and letters to the editor are welcome. For more information about the Journal, contact Bank of America editors Stephen Scheetz, 312-974-1930, or Kelly Chambers, 312-828-7130.

Back to the topThe Corporate Board, The Journal of Corporate Governance, is hosting its 3rd Annual Corporate Board Symposium on September 14-16, 1997 at Lansdowne Conference Resort in Lansdowne, Virginia. CEOs and directors interested in attending the 3rd Annual Corporate Board Symposium may obtain more information and register for the conference by calling The Corporate Board at (800) 757-0667. For more information see conferences.

The April 14th edition of Business Week rates annual reports on the Internet.

The Washington Post reports that “in an unscientific sample of proxy statements of a dozen companies whose stock prices have declined, it appears that while some chief executives shared in the pain of their shareholders, just as many others did not.” Graef Crystal points out that one reason is that nearly all companies aim to pay their chief executive at least what the “average” CEO makes at comparable companies, if not more. But as every company moves to put its CEO at or above the average, the average is continually moved upward. “If you read these reports from the directors, when things are going well it’s always because of the brilliance of the CEO,” Crystal said. “But on the downside, it’s those damn politicians in Washington or it’s Wall Street or it’s the drop in oil prices; somehow it’s always someone else’s fault.”

The Wall Street Journal picked up on a study by Grundfest and Perino on the results of the Private Secutities Litigation Reform Act. We linked to their Securities Class Action Clearinghouse, about a month ago. According to the authors, “the level of class action securities fraud litigation has declined by about a third in federal courts, but that there has been an almost equal increase in the level of state court activity, largely as a result of a “substitution effect” whereby plaintiffs resort to state court to avoid the new, more stringent requirements of federal cases. There has also been an increase in parallel litigation between state and federal courts in an apparent effort to avoid the federal discovery stay or other provisions of the Act.” WSJ reports that Rep. Joseph Kennedy may carry a bill to stop the law from being so easily circumvented.

The Washington Post reports that “three prominent Washington insiders have the dubious distinction of topping the Teamsters pension fund’s second annual list of America’s ‘least valuable’ corporate directors. Former House Democratic whip Tony Coelho leads the lineup, followed by former secretary of defense Frank C. Carlucci and former secretary of state Lawrence Eagleburger. Directors get named to the list by serving on too many boards, collecting consulting or other fees from the company, poor attendance at board meetings and being on a board that overpays a chief executive even when the company is performing poorly.”

Back to the topMoney management is going global. P&ampI reports on a survey by Investment Counseling; “the 50 largest money managers handled 43% of the total invested assets in the US in 1996, compared with 50% in 1989.” In other news from P&ampI, “CalPERS and the New York City Employees’ Retirement System will support a shareholder proposal asking RJR Nabisco at its April 16 annual meeting to stop using the Joe Camel advertising campaign by 1998, unless research shows the ads do not promote underage smoking.” A Federal Reserve study found that funds with an average of $85 billion under management had average annual expense ratios of 0.7%. Small companies, with an average of about $33 million, had expense ratios of 2.8%. P&ampI also reports on a study byRandal S. Thomas, University of Iowa and Kenneth J. Martin, New Mexico State University, which found that labor-sponsored proxy proposals receive higher votes than those sponsored by private institutions and individuals. An editorial in the 3/31 edition advised pension funds not to prohibit tobacco-related investments. “Such a policy would lead to pension funds hiring nutritional consultants to add to the coterie of consultants they now employ to analyze investment decisions. Ultimately, investments would have to be subjected to moral or health scrutiny on almost every aspect of our lives…the system would go up in smoke.” The guest editorial points out that 159 individuals control $762 billion in public funds and applauds Michigans’s shift to defined contibution plans.

The Washington Post carried an interesting article on executive compensation. Use their searcher to locate Green Tree CEO Paid $102 Million Bonus.

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