Archives: August 1997

Dr Mark Blair, of the Australian Stock Exchange, announced ASX is developing a guidance note for listed companies which will “add flesh to the bones and assist as new codes [of corporate governance] are developed”. (see Financial Review)

August’s e-mailed Wharton Leadership Digest includes a list of corporate governance publications…added to their June list interested readers will now have a fairly comprehensive list.

Representatives of CalPERS and CalSTRS indicated the systems would reexamine current polices and would probably modify them to disclose votes in closed session taken on investments. The announcements came after continued pressure from the press (including Corporate Governance) and Senator Schiff who held a hearing on “pay to play” and related issues. At the hearing Senator Schiff focused on the fact that elected officials on the boards receive substantial contributions from investment firms and other contractors and yet disclosures of potential conflicts of interest are not required during deliberations nor are votes ever made public if taken in closed session.

CalSTRS Fiduciary Counsel, Ian Lanoff, dropped a bomb on the proceedings when he indicated he has repeatedly advised CalSTRS board members that they are prohibited, by provisions in the California Education Code, from assisting contributors and should recuse themselves from such votes and deliberations. It was clear the strength of Lanoff’s conviction came as a surprise to CEO James Mosman who indicated that constitutional officers on the CalSTRS Board had received different advise from their own counsels and did routinely participate in deliberations and votes involving contributors. It was also clear that potential conflicts of interest are not routinely discussed during such deliberations.

Defined-Benefit Pensions to Benefit by Tax Law, says Vanessa O’Connell in the 8/14 (WSJ). A little-noticed technical provision gradually lifts the cap on employer pension-fund contributions from 150% to 170% of current liabilities. Amounts beyond the caps are subject to stiff penalties. 59% of current plans reached full-funding limits in 1995, according to a recent study of 218 companies by Buck Consultants in New York. The current limit prohibits companies from putting money away and later forces them to make large contributions.

David Weidner, in a recent article questions the ability of Michael Price to sustain the performance that made him such a money magnet. Price’s numbers are starting to lag. The $7 billion Mutual Shares Fund, has underperformed its growth and income peers by nearly 4% so far in 1997. Camparisons are made with other fund managers who grew too fast. 8/14 (WSJ)

KPMG’s research found long-term incentives comprise 45% of most CEO executive pay packages (median value of $1,138,000). Base salary comprised only 30% of total compensation (median value of $694,000), bonuses comprised 25% (median value of $626,000). Total median CEO compensation was $2,219,000. The study, Executive Compensation Practices in Manufacturing, Retailing & Distribution Companies – 1997 examines the base pay, annual incentive and long-term incentive practices of 218 top publicly held companies in nine industries: automotive, chemicals, consumer products, energy, food and beverage, industrial products, retail, transportation and utilities. (KPMG)

Options now account for 40% of senior management pay, according to a recent study by Stanford C. Bernstein, as reported in The Eonomist 2/28 p. 77. Buybacks have also hit a record. Microsoft incurs a $1 billion liability each time its shares rise by around $4 to pay for options it has issued. The buybacks “largely represent a direct transfer of wealth from shareholders to employees,” according to the researchers.

Palo Alto’s Wilson, Sonsini, Goodrich & Rosati administered 12 pills — twice as many as New York’s Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom. (The Recorder)

Golden Boot award goes to John Walter, former president of AT&T Corp. After 7 months the AT&ampT board was denounced his lack of “intellectual leadership” while demonstrating its own decisiveness–$26 million to hit the road. (

We’ve added The Conference Board’s Across the Boardmagazine to our list of Stakeholders.

Shareholder activists are given some credit for the turnaround ofDigital Equipment (DEC). Bob Monks, of LENS said the sale of the printer business is a step in the right direction. “But the company should focus its energy where it has a future, and I worry that this might be a little too late. The company lacks a sense of where it is going.” Herbert Denton, of Providence Capital, said they’ve sent a wake-up call to the board of directors. (see c/net)

With the loss of tax exemption status, TIAA-CREF plans to tap into a number of new markets, including huge state-run pension funds for the country’s three million elementary and high-school teachers. TIAA-CREF already sells its retirement funds to state-employed college workers in 46 states. The pension fund also is weighing offering retirement investments to college employees’ families, and to hospital workers who previously were members of TIAA-CREF when they worked at teaching hospitals. (WSJ)

EVA, CFROI, MVA and other measures of value creation are reviewed in an August 2nd article titled Valuing Companies: A Star to Sail By? in The Eonomist.

Franklin Resources Inc. (BEN) reported that third-quarter net income rose 37% from the year before. Analysts attribute the company’s recent share-price charge to several factors – not the least of which is Michael Price, the company’s star fund manager, who is one of the only mutual fund managers occasionally using corporate governance strategies. 85% of its funds have 4 or 5-star ratings from fund tracker Morningstar Inc.

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The Hampel committee, headed by ICI chairman Sir Ronald Hampel, released their report, which follows the earlier Cadbury code on governance and Greenbury recommendations on executive pay, and came out against “box-ticking” — where companies have to comply with lists of principles. It also called for a lead non-executive director to be identified in the annual report, regardless of whether the roles of chairman and chief executive were combined. It stopped short of recommending that voting at meetings should be compulsory, but said institutional investors had an obligation to their clients to “adopt a considered policy on voting their shares.” Hampel also suggested shareholder bodies the Association of British Insurers and National Association of Pension Funds should examine a problem caused by the existence of different and incompatible shareholder voting guidelines. Hampel invited comments on the report to arrive by the end of September, with the aim of producing a final report with a single set of recommendations uniting Cadbury and Greenbury, in December. The impact of both the Cadbury and Greenbury codes of practice stems largely from their adoption by the London Stock Exchange. Through its listing rules, the LSE obliges companies to comply with the codes or explain why they haven’t.

Executives of Apple Computer are scheduled to meet withCalPERS on 9/3 to address their concerns. “Although they stacked their board with some heavy hitters, they aren’t out of the woods until we talk to them about their process for choosing a CEO. This is the most critical element as far as CalPERS is concerned,” said Brad Pacheco, a CalPERS spokesman. (c/net)

Kurt Schacht, general counsel for the State of Wisconsin Investment Board raises the alarm in the August edition ofCorporate Agenda about the over use of options. “It is no longer unusual to see options representing over one-third of a company’s stock being given to managers and directors.” The result is a “huge transfer of value from existing shareholders.” He also denounces repricing ‘underwater’ options. “Oddly, they always say it is unforeseen circumstances or market gyrations that cause stock to decline – it is strong management that makes the stock go up.”

The same issue also carries an article by Dr Brancato, director of the Global Corporate Governance Research Center which provides several figures turnover by fund type and pointing to greater control over US equities by the top 25 institutional investors. They controlled 16.7% of total outstanding equities in 1996, up from 15.4% just a year before. Institutions have increased their holdings from an average of 46.6% of total stock in 1987 to an average of 58.8% of total stock by the beginning of 1997. Editor Lucy Alexander writes on the tobacco companies and speculation of a renewed attempts at spinoffs, such as last year’s effort by Carl Icahn and Bennett LeBow at RJR Nabisco. There is also a report from the American Society of Corporate Secretaries’ annual conference. At a panel on successful board practices, Jonh Wilcox of Georgeson dismissed discussion of term limits, separation of CEO and chair, etc. as “external matters.” “What is really important is what goes on in the boardroom and companies need to find a way of informing investors about that.”

An 8/4 editorial in Pensions & Investments calls for an end to sole trustees of pension and trust funds. It points to the disruptions. For example, “every Connecticut state treasurer since 1958 has left office in midterm.” The lure of lucrative positions in the investment management industry is too great to hold them. However, more important than the lack of continuity is the lack of accountability. “The system doesn’t ensure accountability when the sole trustee decides which investment companies to hire and fire, perhaps talking to them about future, very-well-paying employment opportunities.” They argue that closed door investment advisory meetings contribute to a lack of accountability. In addition, as elected office holders, many have accepted thousands of dollars in campaign contributions from firms hoping to get their business.

We agree that a board is much less susceptible to corruption, although even some of the best boards are not immune from criticism. Note an article which appeared in the Sacramento Bee on May 17th about a questionable $100 million closed door deal where the placement agent was a former board member. CalPERS has called for the individual accountability of directors for corporations. We would take the P&ampI editorial one step further and call on public pension funds to make all relevant closed session meeting notes public, once the investments have been executed.

In the same issue, Keith Ambachtsheer of KPA Advisory Services Ltd., Toronto, argues against a previous commentary by Douglas B. Roberts and Mathew J. Hanley who asserted that a defined contribution (DC) plan was right for Michigan. Ambachtsheer compares the total expense ratios of a defined benefit (DB) plan like CalPERS (17 basis points) with that of the typical 401(k) plan (100 basis points). While DC plans often enhance vesting and portability, create greater cost transparency and stakeholder symmetry between who benefits and who underwrites losses, they jetison other important benefits. DB plan participants typically benefit from risk pooling, large scale economies and from dedicated corporate governance which leads to “a healthy reconnection of corporate ownership and control in the economy.”

Yet, the growth of DC plans continues. Pensions & Investmentsreports that abolition of tax credits, combined with the effects of the 1995 Pensions Act will lead many U.K. firms to abandon DB plans. A recent Aurther Anderson survey found “80% of employers plan to review their plan structures, with fully two-thirds saying changes would trigger a move to defined contribution schemes.” Recent Italian pension fund reforms will also lead to new DB plans with assets expected to exceed $50 billion by the end of 2002.

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An interesting article in Corporate Governance: An International Review provides a broader than usual perspective. See the Politics of Corporate Control and the Future of Shareholder Activism in the United States under authors Thompson, Tracy A. and Gerald F. Davis.

We’ve added the Investor Responsibility Research Center (IRRC)to our list of Stakeholders. Their May-June Corporate Governance Bulletin carried a wealth of information as IRRC begins to analyze results of the 1997 proxy season. Investors continue to make inroads on antitakeover defenses. One of the big developments was the submission of binding bylaw amendments by theInternational Brotherhood of Teamsters at Fleming. Shareholders filed 120 proposals on executive compensation, up from 63 in 1996.

IRRC reports the SEC received 333 responses to its survey on the shareholder proposal process (177 corporations, 82 shareholder groups, 58 individuals, 15 institutional investors and 1 proxy solicitation firm). Most corporations advocated raising thresholds of stock held to qualify for submission of proposals. The Bulletin lists hundreds of proposals and their status. It also includes articles on significant developments in Japan, the Netherlands and Russia as well as the CalPERS draft guidelines and many other important topics. Another IRRC publication, Corporate Governance Highlights, recently included coverage of a no-action letter suggesting that Nike may exclude a broad-based sweatshop resolution submitted by the Board of Pension and Health Benefitsof the United Methodist Church and others. IRRC also reports that the National Association of Corporate Directors will launchanother “blue ribbon commission” on CEO succession. They will begin on September 11 and expect to release a study six to eight months later.

The Securities and Exchange Commission, Department, and FBI are investigating possible kickbacks in exchange for steering investments to the former Shawmut National Bank in Boston. (Washington Post)

Managing CEO succession is a major theme in the current issue of Business Week.

CalPERS and the Florida Retirement System Trust Fund are appealing an $8 million lawsuit settlement made by Archer-Daniels-Midland Co. (ADM), which awarded $4 million to plaintiffs attorneys and included a watered-down attempt to improve corporate governance practices. (WSJ)

Dissident Sallie Mae shareholders, the Committee to Restore Value at Sallie Mae, defeated a management’s slate for the board of directors, and overwhelmingly approved privatization. Albert Lord, who will become the CEO indicated top priority would be to the cost of buying student loans by 50% within five years. It will also tie directors’ compensation to stock performance and provide performance incentives to its 4,700 employees. Sallie Mae shares jumped $4.8125 to close at $149.9375. (WSJ)

With Delano E. Lewis, president and CEO of National Public Radio stepping down, the board of Apple Computer now has 4 vacancies. Most of the board members, with the exception of A.C. “Mike” Markkula Jr., have little or no stock in the company and are not in the computer industry. (TechWire)

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