On September 19, 1997 the SEC released its draft amendments to Rules on Shareholder Proposals [Rel. No. 34-39093; IC-22828; File No. S7-25-97]. Comments are accepted for 60 days. Amendment language is available online athttp://www.sec.gov/rules/proposed/34-39093.htm. Comments from Commissioner Wallman are also available. As expected, the rule would overturn the 1992 Cracker Barrel Old Country Store decision that the restaurant chain didn’t have to include a shareholder resolution that sought to bar discrimination against gay job applicants. The proposed rule was crafted to benefit both activist shareholders and companies seeking to limit shareholder proposals. It includes a provision allowing shareholders who can muster significant support to override some of the exclusions companies now use to keep resolutions off their proxy statements but it also raises the support needed for resubmissions. (see SEC Proposed Rules) Comments can be submitted via electronic mail to [email protected]. We urge our readers to do so and to cc us at [email protected].
World Bank came out with a report which said “Governments are more effective when they listen to businesses and citizens and work in partnership with them in deciding and implementing policy.” Money has been pouring into authoritarian states such as China, Indonesia and Vietnam from the market at a much quicker rate than India and Russia. The World Bank says that “capable” countries have managed to boost per-capita income by about 3% a year, as opposed to 0.5% for weaker countries. Its not exactly a ringing endorsement for democracies. India is “capable” by these standards but gets only 16% of the capital that goes to China. Ideal for the “market” seems to be Hong Kong. A first world infrastructure that fulfills “work in partnership” bordering an authoritarian state. One of the more hopeful signs is the chief economist of Deutsche Bank in Asia saying “In the end, the risks of autoritarian rule are so much higher than the prospective payoffs.” (9/18, WSJ, Free to Choose)
Labor’s use of pension funds to reshape corporate governance and policies is covered by an article in 9/29 edition of Business Week entitled “Working Capital: Labor’s New Weapon?” AFL-CIO Secretary-Treasurer Richard L. Trumka will announce a new Center for Working Capital prior to the AFL-CIO’s biennial convention in Pittsburgh. “Our goal is to make worker capital serve workers, not just when they retire, but on a day-to-day basis.” Union pension funds hold $1.4 trillion in corporate stock (14% of all outstanding US shares but the article notes few unions have chosen to bargain over the governance of single-employer plans and demand the appointment of union trustees. Trustees of multi-employer funds must be half-management and half-union and unions often have even more clout in public pension funds. The Center for Working Capital hopes to help 6,000-odd union trustees become activist investors.
The 9/12 Philadelphia Inquirer carried an interesting article on AT&T, Kodak, Sears, and Procter & Gamble. These firms and a handful of others are linking compensation of top execs to employee or customer satisfaction or to social and environmental performance as well as financial performance.
Institutional investors, brokerage research analysts and registered representatives can attend corporate presentations live via The Internet through Wall Street Forum.
H.J. Heinz proxy included pages on corporate governance which sings the praises of insiders and indicates that no practicing attorney “shall serve as a director of the company.” (Investor Relations Business who says attorney jokes are dead?) (for additional coverage on other aspects see Business Week). IRB also reports that Congress is gearing up to force securities class action suits to be heard in federal court, ensuring coverage by the Litigation Reform Act of 1995. FASB’s proposal on derivatives is on their site athttp://www.rutgers.edu/Accounting/raw/fasb/supplement/sep5.exe. (WSJ had interesting article in support on 9/11/97) More on the recent Korn/Ferry study of boards. 16% of those surveyed say they evaluate performance of individual members, 75% say individual directors should be evaluated.
Back to the topBoth ISS and IRRC covered a New York Times report on newIRS data showing that exec pay rose 182% between 1980 and 1995 while revenue rose 129.5%, profits 127%, and taxes 114% during the same period. However, the IRS understates the rise in exec pay because the heavy use of stock options delay tax deductions, often until after retirement. Graef Crystal told the Times the value of options awarded but not yet exercised by CEOs at the 1,000 firms he tracks was $9.9 billion last year in contrast to $1.1 billion they did exercise. Exec pay increased 29% faster in the 1st year after the 1993 law limiting compensation to $1 million for non-performance related pay went into effect. Robert Monks, of LENS, told the Times “the simple truth is that executives are setting their own pay.”
Back to the topCEO compensation doubled last year, with the median pay package rising from $1,152,000 to $2,615,000, according toKPMG Peat Marwick LLP’s annual study of publicly held financial services companies. Long-term incentives, tied to shareholder return measures, comprise 45% of the typical CEO pay package, annual incentives, which depend on achieving short-term financial goals, make up approximately 30%, base salary, accounts for only 25%, or $653,000. The median CEO option grant (shares times exercise price) was $3.5 million, up from $2.2 million last year.
The Business Roundtable put out a press release on September 11th which refers to “a white paper issued today” which cautions against the application of rigid requirements that don’t take into account individual circumstances. Audit, compensation/personnel, nominating/governance committees should be limited to outside directors. They don’t endorse a specific limitation on the number of directorships an individual may hold. Boards should consider some form of equity as a portion of each director’s compensation. Corporations are generally well served by a structure in which the CEO also serves as chairman of the board. (ed. no great revelations)
The latest Friday Report cites a recent study by Investor’s Business Daily which targeted CEOs and CFOs from the fastest growing companies. 71% don’t expect a resurgence of labor in the wake of UPS. Among those heading union shops, 80% believed the strike would have little impact compared to 69% in companies who don’t have organized labor forces.
Septembr’s Directorship reports that of the 878 Fortune 1000 public companies in 1996, 73% had investment bankers on their boards, 53% had government workers, 53% had academic and 27% had commercial bankers. In the same issue, Richard J. Mahoney suggests raising the bar for performance-based stock options. He points out that a typical annual CEO stock option grant issued in 1990 giving the right to buy 100,000 shares before the year 2000 at the 1990 issued price – say $50 per share, would be worth $6 million if the company simply tracked the S&P index. And that’s just one year. Mahoney suggests adding a requirement that options don’t vest until the company meets targets such as exceeding the S&P index or industry peer groups by a specified amount.
Del Guercio, Diane,[email protected] and Jennifer Hawkins, The Motivation and Impact of Pension Fund Activism, 8/97. Examines the impact of pension fund activism by the largest and most active funds (CREF, CalPERS, CalSTRS, SWIB and NYC) during the period 1987-93. Their overall conclusion is that fund behavior is consistent with maximization of fund value and that funds do have a significant impact on target firms. (for more see annotated bibliography)
Back to the topIn the September/October Employee Ownership Report, Michael Brown, CFO of Microsoft, says that Microsoft went public not to raise capital (it didn’t need it even back then) but to provide liquidity for the 85% of its employees who were owners. The issue also contains a primer on the Black-Scholes model of valuing options drawn from one of NCEOs publications, the “Stock Options Book.”
The August Investor Relations Business newsletter included a report from ASCS re annual meetings. New York remained the most popular location, followed by Houston and Chicago. April and May are the most popular months, while August and December are the least. Bell & Howell and BCE went live on the internet. Wal-Mart had the largest attendance; each store sent a representative at company expense.
August’s Director’s Monthly featured articles on not-for-profits suggesting the need to institute clearer measures of accomplishment, definition of stakeholders and focus on legal duties such as care and loyalty and business judgement. Also of interest is a primer on “best practices” for corporate web sites.
The latest Issue Alert carries a roundup of the 1997 proxy season… labor-sponsored proposals scored more majority votes and higher average support than resolutions sponsored by pension funds, individuals, or private groups. Binding bylaw amendments remain the season’s primary innovation. Compensation, boardroom, and measures to sell the company continue. Next year will prove the most interesting season ever, if the SEC loosens up, as expected, on issues such as sweatshops, forced labor and child labor. The same issue includes an informative survey of pension reform in Latin America. Their August 15th “Friday Report” was titled the “Russian Edition” and contains one of the best survey’s we’ve seen. We’ve added The Federal Commission for the Securities Market to our links under “international Corporate Governance.”
Back to the topThe news is getting personal. First the Sacramento Bee ran a story about Charles Valdes, chairman of CalPERS‘ Investment Committee, filing for personal bankruptcy protection. NowPensions & Investments is running a profile of the personal investments of Alexis Herman, Secretary of Labor, David Strauss, Executive Director of PBGC, and Olena Berg, Assistant Secretary of Labor, PWBA. The article points to the irony that Herman and Berg often stump for employers to better educate their workers on financial planning. Yet, the author believes all three “need a class in investing” claiming they have “learned little about such concepts as diversification, or long-term investment planning.”
Legislation has been introduced to restore the tax exempt status ofTIAA-CREF and Mutual of America, a New York pension administrator for various charities.
CEO celebrity was the subject of a WSJ cover story on 9/3/97. CEOs have emerged like royalty putting a human face on multinational conglomerates. They noted that Time magazine last year concluded 7 of the most powerful 10 Americans were CEOs. “While probably nothing can silence an hysterical shareholder, many CEOs find celebrity can help them rouse employees… in an era when loyalty has been blunted by corporate downsizing… CEOs say their top priority is to enhance ‘intellectual capital’ by managing human relationships.” Sara Teslik, executive director of the CII warns “too many CEOs have the attitude that “I am an entity to be marketed, and the company will be lucky to have me.”
At the root of this condition, we believe, is a massive income shift from workers to top management. CEOs say they value intellectual capital but the rise in the proportion of managerial employees mirrors the decline in wages for 80% of employees. In the US, 13% nonfarm workers are managerial and administrative compared to 4.2% in Japan, 3.9% in Germany, and 2.6% in Sweden. (see Fat and Mean) Why does it take so many managers to ensure employees are working? Again, we would stress the benefits of ownership and participation in decision-making by all employees, not just by the CEO and the Board.
I offer the following which I expect to see in Dilbert soon (if you have trouble with the formulas ask a scientist or engineer):
Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.
Work/Time = Power and since Knowledge = Power and Time = Money, then
Work/Money = Knowledge
Solving the equation for Money we get Work/Knowledge = Money
Therefore, as Knowledge approaches zero, Money approaches infinity regardless of Work done. Conclusion: The less you know, the more you make. (ed. Who says we don’t have a sense of humor at Corporate Governance?)
Back to the topRick Crangle with ISS reports that Radnor Financial Advisors president Edd Hyde is going after mutual funds with 70 other independent advisors. While mutual fund assets have quadrupled, fees and other expenses have continued to rise. Where are the economies of scale? Shareholders are demanding changes and are getting a boost from the ranks of investment managers. (see alsoBusiness Week 9/1)
The August 9th edition of The Economist looks at strikes at “employee owned firms such as UAL and UPS. Why would employee owners strike their own firm? In the case of UAL, the 20,000 flight attendants are not owners. At UPS 27,000 supervisors and managers own a combined 29% of the firm, whereas 60,000 nonmanagement employees own less that 3% and part time employees own an insignificant amount. “Giving all employees a chance to own a stake in their company can be a unifying, productivity-boosting strategy; making shares available only to a select group will simply deepen existing divisions.” However, they also warn that “even the most equitable share-ownership schemes will flounder if workers feel they still have no say in how their firm is run.” The NCEO says that 9,500 firms, such as UAL and UPS, are on average enjoying a 10% faster growth rate because of employee ownership and participation.
In our opinion, if this is so for “employee owned” firms like UPS, it is even more true with respect to companies where the CEO is an owner but the average employee is not. Today when firm specific human capital contributes so much more heavily to the bottom line, it is important that workers be owners and decision-makers as well.
McKinsey finds that from 1970-90, a focus on shareholder value actually leads to more jobs (comparison between companies in U.S./Canada with Continental Europe). (Businessweek)
August 28th WSJ reports the SEC will vote in early Sept on proxy reforms so they will be in place for the 1998 meetings. The rule is expected to reverse Cracker Barrel and raise the threshold of those eligible to file to owning at least $2,000 shares in the company.
The August 16th edition of The Economist reports on papers presented to the Academy of Management meeting in Boston. James Westfal, University of Texas, found that CEOs with outsider boards spend their time doing favours for the board. Such companies diversified, increased executive pay and weakened the link between pay and performance. In another study with Edward Zajac, Northwestern University, Westfal found CEOs attend to measures that affect their own income more than those that don’t…pay for performance promotes “tunnel vision.” William Sanders, Bringham Young, found a link between pay in options and M&A and divestiture activity. Churning promotes the image they are doing something important. With options they lose nothing on the way down but reap substantial rewards on the way up. CEOs are smart enough to beat the system; are shareholders and boards smart enough to call them on it?