Archives: July 1997

Two press releases by CalPERS. One praised the actions of Japan’s Ministry of Finance for issuing severe penalties against Nomura Securities Co. for the company’s involvement with corporate extortionists, or “sokaiya.” The second expressed outrage at Governor Wilson’s inaccurate portrayal of negotiations that had been conducted to enable the state to stretch out a court-ordered $1.236 billion payment of money owed CalPERS. “The Governor has revictimized the victims — using the pension system as his pawn in a political chess game played over non-CalPERS related matters, including tax cuts, welfare reform and pay raises for state employees,” said Dr. Crist, president of the Board. “He essentially asked CalPERS to loan the state money at below market rates. This would violate both the California constitution and the federal tax laws. Under long-held principles of pension law, CalPERS would be allowed to accept delayed payments ONLY as long as the beneficiaries were compensated by a comparable offsetting benefit,” CEO Burton said.

Best practices conference to be held in Las Vegas December 11-12, 1997 sponsored by Investors Research Insitute, Inc., a non-profit organization whose mission is to develop higher standards of investor information accessibility for small cap companies. For information contact the Chinook Group at 206-667-8558, fax 206-667-8660, or via email at

The Dow Jones News Wire Service carried an interesting 7/29 report on a seminar organized by the Confederation of Indian Industry which sought feedback on their April draft code of draft code of desirable corporate governance. S.H. Khan, chairman of Industrial Development Bank of India indicated that directors nominated by financial institutions must be held to the same standards but should net be expected to undertake additional investigations. Omkar Goswami, Business India magazine, empowering small shareholders through a strong mutual fund industry would help ensure good corporate governance. Pratip Kar indicated the Securities & Exchange Board of India has recently introduced a series of measures to ensure greater responsibility by mutual fund trustees.

Back to the topWhile the US ponders privatization of Social Security other countries are going ahead with at least parts or their systems. Japan, singapore, Malaysia, Sweden, Chile, Argentina, Peru, Switzerland, Norway, Taiwan, and others are mentioned in a 7/29WSJ article. Most are reportedly faring well but Japan’s Nempuku has lost $8.6 billion. Some worry about companies being nationalized but CalPERS is noted as having large holdings without taking over industries. U.S. Social Security trust funds-which are invested in special issue U.S. government bonds-had an average annual return of 8.8% over the past 10 years.

The budget agreement will strip TIAA-CREF, the largest pension fund, of its tax exempt status.

The Stock Exchange of Singapore (SES) is working on corporate governance guidelines which will focus on ensuring timely and fair disclosure, and preventing directors and controlling shareholders from using their influence to personal advantage.

We’ve added recent articles about lenders by Drukarczyk, unions by Schwab, and exchanges as regulators by Mahoney to ourannotated list of articles. Other recent additions include an article by James Repetti on tax incentives, such as capital gains, which subsidize management inefficiencies. Lawrence Mitchell argues for a “conduit” theory of the corporation which views stockholders as humans.

Corporate pension funds underperformed a benchmark of 60% S&ampP 500 and 40% Lehman Bros Gov/Corp Bond Index by 1.16-1.41% per year between 1987 and 1996, according to a study by Piscataqua Research reported in Pensions & Investmentson 7/21/97. “To leave 1% on the table doesn’t sound like much,” according to Stephen Church, “but when you convert it to dollars…that’s $70 billion.” Performance has improved during the last 10 years largely due to increased use of indexing.

Kent Simons, co-manager of Neuberger & Berman Guardian Fund cautions that investing in the S&ampP 500 is increasingly risky because a few companies, like GE and Coke, comprise such a large share of the index which beat 90% of all growth-and-income funds in the past 10 years. (7/23, WSJ)

The May/June issue of the Corporate Governance Advisor carried an excellent article by Koppes, Ganske and Bereday on how directors should design and implement guidelines on corporate governance. The trio cite individual elements from guidelines adopted by TRW, BankAmerica, Campbell Soup, Pfizer, International Paper, Dayton Hudson, Colgate-Palmolive, CPC International, McDonald’s and others. The discussion ranges from the role of directors to the fine details of guidelines concerning the distribution of written materials in advance of board meetings. One worthy idea which few have adopted (Colgate-Palmolive being an exception) is providing boards access to their own legal and financial advisers. The authors also call for guidelines to be more specific in the process used and standards applied in the board’s own self-assessment. While man of the ideas discussed begin to form a consensus around the NACD Report, the authors emphasize tailoring guidelines to fit the individual.

I would add, that not all the ideas of the Report were good. For example, the idea that “Boards should require that all directors submit a resignation as a matter of course upon retirement, a change in employer, or other significant change in their professional roles and responsibilities.” I would argue with Joseph Hinsey IV, “the message to the outside world is that board membership is geared to the position, not the person. Stated another way, the apparent objective is to have a board stocked with celebrities, and if the director loses his or her brilliant colors – turns from a butterfly into a moth – then he or she no longer measures up. This view of the director’s role creates a terrible perception for the public. Beyond that, it is the antithesis of enlightened corporate governance.”

Waste Management may be finally getting approval from shareholders with the appointment of Ronald LeMay. The most colorful quote came from Nell Minow; “I haven’t popped the champagne cork, but I’ve put the bottle on ice.” Soros Fund Management also appears pleased. (ISS)

Back to the topJoann S. Lubin’s 7/18 WSJarticle “Turnover at the Top Puts Heat On Many Boards of Directors” is worth a read. She draws lessons from the recent experience at AT&ampT, Apple Computer, Waste Management and Delta Airlines. One common problem is the unwillingness to make a clean break from past management.

Back to the topSenator Adam Schiff will hold hearings on 8/25/97 to examine possible “pay-to-play” abuses CalPERS and STRS. (WSJ, 7/21/97) I hope to attend the hearings and bring our readers some interesting tidbits.

C/net reports that Apple canceled its meeting with CalPERS. The story includes an interesting quote. “We’re focused on improving the company and its performance,” said director Edgar Woolard, last night. “Personally, I’m not concerned about CalPERS. They can do whatever they want.” This doesn’t sound like a positive attitude towards an important shareholder.

An interesting course, The Virtual Chancery Court, is being offered though the internet.

Wharton professor Constance Helfat and colleague Dawn Harris of Loyola University completed a study which found that when a firm goes for outsiders it is willing to pay 36% more for executives with generic management and leadership skills but no industry- or company-specific experience. The return on assets among firms going to the outside for top talent is only 38% of the return among firms that select from the inside. (Wharton Leadership Digest)

Senator Adam Schiff will hold hold hearings on 8/25/97 to examine possible “pay-to-play” abuses CalPERS and STRS.

So far this year, only 101 of 2,577 general equity funds have outperformed the S&ampP 500. For the last year, it was 128 out of 2,302. For the last 3 years only 71 out of 1,421 funds. That’s 5%. As people come to realize the odds, they are pouring more money into indexed funds. Yet, the danger is that capital will no longer be allocated to companies that actually produce the greatest wealth. Its worth taking another look at Break the Wall Street Ruleand the possibilities inherent in “ownership” or “relational” funds.

Hoover’s opened a new site, StockScreener, which allows searches and sorts of 7,500 stocks by criteria such as P/E, beta, earnings growth, price/book value. To test it, I asked for all companies with a P/E lower than 1.2, and earnings growth rates above 20% for 1 and 5 years. Only one company fit the criteria,Raytech. The nice numbers could have something to do with the fact that Raytech has had asbestos personal injury and environmental liabilities pending since March 1989. Nevertheless, StockScreener is interesting to play with so we’ve added it to ourlinks.

In a move which surprised us, STRS sold it investment inMaxxam, the company which has become anathema to environmentalists for threatening to cut down old growth redwoods. The sale had been recommended by the California Federation of Teachers last February. The decision was made on investment factors not political pressure, according to STRS.

It makes us wonder about all those tobacco stocks. The Pennsylvania Public School Employees Retirement System can be added to the list of those who have stopped buying shares. I doubt if the recent settlement will stick. While I generally believe pension funds and other institutional investors should work for change through corporate governance mechanisms, the tobacco industry is a little different. They can split off their tobacco related components but they are not likely to fold up shop. Pension funds who were forced to sell their stock in companies doing business in South Africa may want to remember how much they lost. If the political pressure is going to rise, it might be better to move now, while prices are still relatively high.

Michael Price finally took an action we think will soon become more common for mutual funds; he succeeded in getting an independent director, Martin Solomon, elected to the board ofTelephone and Data Systems (New York) by a 78% margin. Franklin Mutual holds almost 10% of TDS (seePensions & Investments)

The July 7th edition of Pensions & Investments carries an editorial saying the tax-exempt status of TIAA-CREF is an anachronism. TIAA-CREF argues that “TIAA’s incorporation as an insurance company in no way offsets the fact that a pension system is what we are. As such, our participants should be entitled to the same tax exemption afforded to all other pension systems and multiemployer pension trusts throughout the nation.”

A recent Korn/Ferry study finds that boards of the largest U.S. companies are moving toward the ideals which were contained in the CalPERS corporate governance policies. Larger companies are phasing in stock payments and phasing out retirement benefits for directors. The vast majority have age limits (even though CalPERS is likely to back away from this as an ideal). Directors serve on an average of 2.5 boards vs the CalPERS maximum of 3. However, only half require the former CEO to leave the board, few have term limits (the final CalPERS guidelines will probably change in this area as well), boards usually have 2 inside directors instead of 1, and less than half have regular board evaluations. The study also notes increasing diversity among board members…an area which the CalPERS draft was silent on but which, we believe, will be covered in the standards when adopted. (for more details see Businesswire)

Back to the topThe Irish Times reports that Alan Hevesi, New York’s comptroller, is still ready to throw his weight behind the Ireland Peace Bonds plan which would pour billions of investment dollars into Irish businesses if a peace process is worked out.

Rep. Bill Archer (R., Texas), estimates a proposed tax on TIAA-CREF would bring an additional $1.1 billion into federal coffers over the next 10 years. TIAA-CREF cries foul.

Back to the topRussia now has a higher proportion of private shareholders than the US, and the share of GDP in private hands is higher than Western Europe’s. Managers and employees controlled 64% of corporations in 1996 and 2/3 reject bringing in “outside” capital to modernise. (Kremlin Capitalism: Privatising the Russian Economy by Joseph R. Blasi, Maya Kroumova and Douglas Kruse. Cornell University Press.1997) (reviewchapters)

A study by James A. Brickley of the University of Rochester and Jeffrey L. Coles and James S. Linck of Arizona State University finds that 90% of retiring CEOs from major corporations sat on at least one corporate board and nearly two-thirds held at least two seats. Performance as a CEO was related to the number of seats held. (BusinessWeek 7/14/97)

A study conducted by William M. Mercer, Inc showed that Illinois companies lead the nationwide trend towards compensating outside directors with stock. 97% percent of the Illinois companies surveyed reported some sort of stock-related compensation scheme, compared to 89% percent nationwide. “The larger a company, the higher the profile of its directors. Given this high profile and the company’s likelihood of institutional shareholder involvement, its board is more likely to be concerned with good corporate governance and related directors compensation practices,” noted Erin Milligan, a principal in the area of executive compensation in Mercer’s Chicago office.

The Economist (6/28/97 issue) carried a Survey of Japanese finance which includes one of the better explanations of how the current system came about historically as well as current moves to increase competition and returns for savers. Expect bankruptcies to rise and creative entries into unrelated fields to fall as cheap capital comes to an end.

A wide ranging article on corporate governance was featured in the June 1997 edition of International Fund Strategies. Jim Mellon, of Regent Pacific, and Stephen Viederman, of the Jessie Smith Noyes Foundation provide contrasting perspectives which both depend on corporate governance activism in varying degrees.

One interesting note in the article is a reference to a CalPERS mission statement, “to advance the financial and health security for all who participate in the System.” “Although CalPERS makes clear that its corporate governance activity is firmly returns-based, a mission to advance the health of plan participants could naturally extend into co-called “social” shareholder activism, as a natural progression of fiduciary responsibility.” I believe the author is reading more into the CalPERS statement than is intended. The reference to advancing the health security of participants is much more likely tied to the benefit programs administered by CalPERS than to any corporate governance efforts. The bulk of the article is on-target and extends the dialogue between those focused strictly on increasing shareholder value and those seeking a wider responsibility. We welcome their favorable mention of theCorporate Governance site and their reference to several of thebooks we have reviewed recently.

Back to the topA Korn-Ferry study of Australian and New Zealand company boards found less than 1% of Australasian companies had foreign nationals on their boards, far below Britain, where foreign directors sit on 38% of the boards, and the US, with 17%. Women still only made up 6% of all directors. (The Age)

A recent study of 1,000 companies by Graef Crystal finds that executive pay rose 16% in 1996, while employee raises averaged only 3%. Crystal found links between pay and performance in 5% of the cases. “A similar study of baseball players salaries found some years ago that 75 percent of pay differences could be explained by differences in batting averages, earned run averages and the like. (Philadelphia Inquirer)

E: the Environmental Magazine for July/August includes an article by Marshall Glickman on “How to Use Your Shares to Change Company Environmental Behavior.” One example from the article is the use by Steve Viederman, executive director of the New York-based Jessie Smith Noyes Foundation, of a shareholder resolution to influence Intel’s hiring practices, its water use and toxic emissions. Intel agreed to work on its community disclosure policy, and Noyes has at least temporarily withdrawn its resolution.

Howard M. Friedman’s (email: Regulation In Cyberspace has just been released by Bowne & Co., Inc. $175 (800) 370-8402. For a review seeFriedmanSecurities Regulation in Cyberspace is a must read for anyone concerned with the future of shareholder communications and the use of cyberspace in corporate governance.

A recent draft study by Mark R. Huson (, Does Governance Matter? Evidence from CalPERS Interventions lends additional support to the CalPERS Effect. see Huson

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