September 1997 News and Views

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 at 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 We urge our readers to do so and to cc us at

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&ampT, 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 at (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.

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Both 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.”

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CEO 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&ampP 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&ampP index or industry peer groups by a specified amount.

Del Guercio, Diane, 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)

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In 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.”

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The 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 of TIAA-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?)

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Rick 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&ampA 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?

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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 Beeon 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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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.

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While 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 & Investments on 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)

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Joann 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.

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Senator 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 Rule and 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)

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The 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.

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Russia 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.

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A 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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