Archives: October 1997

Stern Stewart’s EVA product got a boost when CalPERS adopted its use in creating their annual focus list. It should help CalPERS pinpoint their targets with better accuracy and may result in increasing the “CalPERS Effect.” In other CalPERS news, they voted 36% of the time against executive stock plans and 39% of the time against exec bonus plans during the 1996-97 season. They voted in favor of management proposals 78% of the time and against 57% of shareholder proposals.

One size fits all? Not in the field of corporate governance. Governing Entrepreneurial Companies, a new publication from Ernst &Young LLP and Directorship Inc., fills the gap. The Fall 1997 contains solid articles by leading practitioners. Gregory Ericksen discusses the results of a new study entitled Measures that Matter which found that 35% of the average investment decision is based on non-financial data with the quality of a company’s execution of its corporate strategy and the credibility of a company’s management team being the highest factors. An article by James Casparie and Richard Torre provides excellent advise on how to transition when a company goes public. Look at it as a relay race not a marathon and apply several principles such as developing a clear strategy of how the board will be used to advance the company at different stages.

Japanese Pension funds are putting additional pressure on life insurers to disclose additional information on operations and asset management due to falling returns, according to ISS. “Activism by shareholders can be expected to increase as well.” In another report, ISS notes that about 1,000 of the top investment bankers, traders, salespeople and analysts on Wall Street will receive bonuses of at least $1 million…some may receive 50% more than last year.

Fewer Americans are covered by pension funds as companies adopt 401(k) plans that shift investment responsibility and risk to workers. The Bureau of Labor statistics reports that 25% of workers under 65 are in a traditional pension plan, while 60% of retirees over 65 receive a pension or something similar. (WSJ, 10/30, p. 1)

More on the SEC proposal from the Washington Post. They report that neither side is happy. Shareholder activists object to provisions that would let companies continue to exclude employment issues, such as low wages paid to overseas workers. They oppose the rise in “resubmission thresholds,” and the SEC’s proposal to remove themselves from proposals regarding personal grievances. On the other side, Martin Coyle of TRW said, “These are pro-activist proposals that swing the pendulum toward proponents of social issues.”

On the same topic, the Social Investment Forum’s SEC Update represents one of the more creative uses of the internet in the current dialogue. It will include a “toolkit” of sample letters, an op-ed piece and other information to facilitate the development of a higher rate of response by investors who would not normally take the time to analyze the proposed rule and provide a response.

November 10th issue of Fortune carries an article on Richard Koppes thoughts that corporate governance issues are heating up again. “The state of the conversation has deteriorated. There’s not a lot of dialogue. Groups are talking at each other, not with each other.” He believes European companies may soon experience the same type of revolution which occurred here in 1992-93 re CEO firings. At home, Koppes points out that institutions, such as CalPERS, have staggered boards or directors appointed to represent various constituencies. Is that hypocrisy worth exploring?

President and Chief Executive Officer of Campbell Soup Company (NYSE: CPB), David W. Johnson, has been named “Director of the Year” by the National Association of Corporate Directors (NACD) for his efforts at strengthening the principles of good corporate governance.

A coalition of groups opposed to elements of the SEC proposal on shareholder proposals is set to meet soon, according to a report in WSJ, 10/23. The coalition, which includes the Interfaith Center on Corporate Responsibility, CalPERS, AFL-CIO, and the Jessie Smith Noyes Foundation, objects to raising the threshold for resubmissions. Comments are due by 11/25.

SEC is embarking on an effort to persuade institutional shareholders to serve as lead plaintiffs in class-action lawsuits, Chairman Arthur Levitt said Tuesday. A study released in April found that Congress’ efforts to encourage more active participation by institutional investors has not yet taken hold. University of Arizona law school Professor Elliott Weiss has joined the commission’s office of the general counsel for one year to advise on the issue.

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A survey of “Funds With A Focus,” reported in 10/27 Business Week. “Diversified U.S. equity funds holding 25 or fewer stocks have persistently produced below-average returns at above-average risk, a search of the Morningstar Principia data base found.” What if the funds were limited to those with low turnover and high corporate governance involvement? Maybe in the next run.

In Australia, Shareholders will be given the power to take legal action against company directors under sweeping corporate reforms proposed by Federal Treasurer, Mr Peter Costello. Company directors will be offered a “safe harbor” from personal liability if they acted in good faith with the company’s best interests at heart. (see The Age, 10/21)

Sept/Oct issue of the Corporate Governance Advisor contains an excellent article by Henry Lesser and Douglas Sugimoto re use of shareholder bylaw amendments. The landmark cases shifting more authority to shareholders are briefly summarized. However, the authors point out that many company charters require super majority votes (as high as 90%). In addition, one common provision of shareholders initiatives is on tenuous legal ground – the provision prohibiting amendment of the bylaw by the board without prior approval of the shareholders – especially “when the certificate of incorporation itself endows the directors with the power to amend the bylaws.”

The same issue also discusses increasing use of search firms by both dissidents and defenders. s.576 contains a provision to limit the deduction allowed to an employer for stock options but provides an exception for “broad based” programs where “substantially all employees” participate and at least 50% of option are granted to nonmanagers.

Phil Goldstein [email protected] of Opportunity Partners is upset. Brokers vote shares held in “street name” with management when a proxy proposal is uncontested. Trouble is, Mr. Goldstein is contesting a proposal before Scudder Spain and Portugal fund but didn’t go through the expense of a full-blown proxy solicitation. (Barrons, Oct 13th)

Amost 20% of CalPERS’ portfolio was invested in overseas shares at the end of July, compared to 45% in domestic stocks. (WSJ,10/20, p. C16)

Shareholders at Mallinckrodt Inc voted to abolish the company’s poison pill by a 63% majority. The resolution was sponsored by Ken Steiner, co-founder of IRRA.

Pension funds are increasingly taking advantage of lead plaintiff provisions of the 1995 Securities Litigation Reform Act but, according to a 10/14 article in WSJ (B8), they have shied away from hiring traditional plaintiffs’ firms, which usually represent large numbers of small shareholders and are used to controlling litigation without taking orders from clients.” The State of Wisconsin Investment Board went out to bid for services before hiring Grant &Eisenhofer.

The Boston Globe reports that acting Governor Paul Cellucci signed a ban on state investments in tobacco companies. In addition, the LA Times reports two new massive lawsuits seeking the recovery of billions spent treating sick smokers by the federal Medicaid, Medicare and veterans programs. These developments increase the likelihood of a national movement modeled after the divestment campaign of the 1980s aimed at South Africa’s apartheid system. In that movement, some pension funds who waited lost a fortune as stocks depressed with the sell-off. CalPERS, for example lost over half a billion dollars. Increased interest in spin-off/split the company shareholder proposals in the next proxy season is also predicted.

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We’ve added Ralph Ward’s Boardroom Insider to our list of Stakeholders. Ralph’s monthly online newsletter gives readers the inside track on how to be effective. Learn from dozens of intimate examples provided by Ralph and by some of the top “experts” in the field, CEOs and board members themselves. It’s delivered via e-mail, so you know it’s timely.

Shareholders, especially those concerned with social issues, are likely to voice strong objections to the SEC’s proposed new rules on shareholder proposals. Many agree with outgoing Commissioner Steven Wallman that “Cracker Barrel” should not be held “hostage” to the other proposed reforms. Many object to the steep rise in resubmission thresholds from 3%, 6%, and 10% to 6%, 15% and 30% since many social responsibility proposals never reach the 30% level but still have an impact. Fundamentally, the arguments may hinge on the purpose of shareholder proposals. Are they primarily a tool for communication or a form of internal corporate legislation?

In addition, while social policy proposals related to employment will no longer be automatically excluded, with reversal of “Cracker Barrel,” the new rules do little to guarantee that they will be included and they do nothing to open up the process to non employment related social issues. For example, an initiative circulating in California would bar unions from spending a member’s dues for political purposes without the written consent of members each year. If that initiative is successful, how long will it be before union pension funds sponsor resolutions to require written consent from each shareholder before corporations can use funds for political purposes? It is difficult to predict the impact of the proposed rules on such social initiatives.

Lucy Alexander, editor of Corporate Agenda, reports at the July conference of the American Society of Corporate Secretaries there seemed to be a backlash at the “one size fits all” approach to corporate governance. According to a recent survey by Directorship, only one company in their list of 861 top firms questioned meets all the CalPERS basic recommendations. “Despite the public embarrassment of not having the backing of its own board and the widespread criticism from all sectors of the business community, CalPERS is standing by its guidelines.” (ed. This strikes me as a rather odd statement. If the board rejected the guidelines in order to modify them, who is it that is “standing by its guidelines?”)

The IRRC notes that Paul Carey, son of former New York Governor Hugh Carey, has been named to replace SEC Commissioner Steven Wallman, who left the SEC, reportedly to head to the Brookings Institute. Laura Unger, former counsel to the Senate Banking Committee, is expected to fill another slot. IRRC’s October 3rd Corporate Governance Highlights also includes an analysis of the likely impact of the proposed rise in resubmission thresholds on shareholder resolutions. Reviewing the voting results on 344 resolutions in 1997, research indicates 40% could not be resubmitted in 1998 if the new rules apply.

Advise on how to sponsor a proxy resolution is spreading. Even the October issue of Delicious tells its readers how.

The 10/13 Business Week takes another cynical look at exec pay. A five year study of 120 major corporations titled “Overpaid CEOs and Underpaid Managers,” by Charles A. O’Reilly of Stanford and James Wade and Tim Pollock of the University of Illinois. Overpayment of CEOs tends to harm management loyalty resulting in higher turnover among subordinates. On a different note, a William M. Mercer Inc. study finds that 30% of America’s largest corporations have established stock options plans for a majority of their employees — but less than 10% have actually made such broad grants. Elsewhere in the same issue Union Carbide CEO’s William H. Joyce headlines about forfeiting his base salary–currently $850,000–if his company does not earn at least $4 a share in 2000 turns out to be “smoke and mirrors” with little or no real downside.

The Council of Institutional Investors released their Focus list of 20 worst performing companies. Half appeared on the previous lists. Nine companies of the twenty responded to CII inquiries. The companies are Adobe Systems, Apple Computer, Charming Shoppes, Cooper Industries, Countrywide Credit Und., Digital Equip., Dillard’s, EG&ampG, Fleming, Folden West Fin., Great Lakes Chem., Kmart, Loews, Mallinckrodt, Navistar Int., Novell, Pall, Salomon, and US Surgical. Half of the companies on the list didn’t even bother responding to CII’s inquiry and several criticized the Council’s rigid methodology of choosing companies.

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