Archives: January 1998

Clemente Global Growth Fund, CLM, has approved a proposal to allow shareholders to vote on converting fund to an open-end investment company in the Spring of the year 2000, if the Fund is trading at a discount in excess of 15% of NAV. The current discount is about 16%. Management also offered a proposal to tender 10% of the Fund’s shares at NAV in the third quarter of this year and the third quarter of 1999. The proposals are subject to shareholder approval. (BUSINESS WIRE)

Companies have been slow to act on shareholder proposals. Anti-pill proposals won an average of 54% of the vote last year but only 6 of 38 companies where majority votes occurred have disclosed taking any action. This may be fueling the growth of binding resolutions and potential new proposals such as “fire the CEO.” The Teamsters and New York City Employees’ Retirement System have proposed a binding resolution to amend Kmart’s bylaws to declassify its board. The Teamsters and other unions are focusing on executive pay (no cashing of options within 6 months after a layoff, prohibiting option repricing without shareholder approval). Cref’s emphasis will be on director independence. Then there is Wyser-Pratte’s proposal for Pennzoil to dissolve the poison pill after 90-days unless shareholder approval is won to continue it. (Summarized from Corporate Agenda, 1/98) The Carpenter’s Ed Durkin is reportedly focusing on revamping their accountability mechanisms to create long-term share-value growth. Concerned that past practices encouraged a short-term focus, Durkin hopes to have changes in place for 1999. (1/16, IRRC).

IRRC reports that Becton, Dickinson has been indexing its stock option awards since 1990. This year they’re fine-tuning criteria to shift from the S&ampP 500 to a peer group and with another portion based on EVA and revenue growth. (IRRC, 1/23)

Corporate governance expert, John Pound, was appointed to serve as chairman of the board at financially troubled CML.

Voluntary corporate governance guidelines released by the Belgium’s Employers’ Federation (FEB) and Banking and Finance Commission (BFC) last week were the forerunner to the bourse’s Commission for Corporate Governance, set to be finalised in June. (Reuters)

Reforms announced at ARCO will eliminate all employee directors except the CEO.

To get their salaried employees thinking like owners, GM will award stock options for 25-100 shares to 70,000 salaried employees in the United States and Canada. (1/27, Detroit News)

Marjorie Kelly, editor of Business Ethics, address the difficult question of who owns intellectual capital with a look at DSC Communications v. Brown and its implications. The same issue also includes an article on the “best” socially screened mutual funds, referencing a recent study by the Social Investment Forum which claims that more than $1 trillion in assets are now under management in “socially and environmentally responsible portfolios.” (Jan/Feb)

Back to the topRalph Ward, editor of The Corporate Board and Ralph Ward’s Boardroom INSIDER speculates on the “shock wave” sent through the boardrooms of corporate America when CalPERS announced their shift in policy re a new willingness to place its own representatives on the boards of some troubled companies. (San Francisco Business Times)

Graef Crystal, editor of the Crystal Report, attacks the compensation awarded Lester M. Alberthal Jr., head of EDS. “If EDS were following a strict pay-for-performance philosophy, Alberthal would long before 1996 have been fired.” Instead, he’s gotten millions in bonuses and lavish perks such as “$53,000 for his personal use of the company’s aircraft and another $84,000 for ‘security services and equipment provided at his residence.” (Tampa Bay business Journal)

Last year’s shake-up at closed-end mutual funds is the subject of Fortune’s Feb 2nd The Fund Industry’s French Revolution. Proxy fights resulted in a change over of two slots on the board of the Growth Fund of Spain and close calls at Clemente Global and Scudder Spain & Portugal.

Suzanne Fallender, focuses on Yves Michaud’s battle to bring corporate governance reforms to Canadian banks (see hisProposals to Canadian Minister of Finance on our Bulletin Board). Michaud and his (APEIQ) were able to win substantial support for various proposals last year, although none received a majority. This year he submitted 9 proposals. He’d like to require that board members be elected individually and that shareholder’s with 1% of a bank’s shares be able to nominate board members (currently 5% is required). He hopes to be able to nominate a candidate to the National Bank of Canada’s board by early 1999. (ISS Friday Report)

Update from Yves Michaud this morning indicates growing support. At stockholders meeting of Canadian Imperial Bank of Commerce, his proposals won up to 40% of votes. The proposal for limitation of salaries was seconded by the leader of the New Democratic Party, Mrs. Alexa McDonough, who said that she will put the issues to the House of Commons, through a parliamentary commission.

Back to the topTidbits from (Jan, Across the Board). While CEO compensation for large firms jumped 56% last year, those heading small firms (sales under $15 million) declined 5%. Linda Wachner was the top paid female executive last year with a total compensation package of 11,165,000 for serving as CEO and president of the Warnaco Group and Authentic Fitness. Also included is an article by Melissa Berman, of The Conference Board, on “Sweating the Soft Stuff.” In a recent Conference Board study, CEOs identified people and cultural differences as their worst problems in the global growth area. Berman believes the corporate governance debate may be “moving from procedure to performance.” The challenge is to find objective evidence that some forms of governance produce much better results than others…key features that can be “objectively described and readily duplicated.” CEO succession is one of the prime areas of focus. People issues will be key.

Hoffer Kaback, president of Gloucester Capital Corp, writes that typical tests for “independence” of directors miss the point. Proxy rules should be amended to add something like the following: “Set forth fully for each director (and nominee) the duration and extent of his personal and business relationships with the CEO prior to, and since, becoming a director (or nominee). ‘Director,’ ‘nominee,’ and ‘CEO’ shall be deemed to include the immediate families of each.” (Nov/Dec, Across the Board)

February issue of SmartMoney magazine carries an article onEquus II which comes closer than most to being a corporate governance mutual fund. It isn’t diversified. It hangs onto its investments for years and it’s a closed-end fund. Equus buys controlling shares in private companies, often sits on the board, and takes them public, continuing to own a portion of the stock. At any time, its portfolio is a mix of public and private holdings. In its five-plus years as a public fund, the market value of Equus has appreciated 225%, compared with 164% for the S&ampP 500.

The SEC will make the short form Schedule 13G available, in lieu of Schedule 13D, to investors owning less that 20% of the outstanding class that haven’t “acquired and do not hold the securities for the purpose of or with the effect of changing or influencing the control of the issuer of the securities.” However, as Patrick McGurn, points out in the 1/16/98 ISS Friday Report, the “bad news” is that the SEC “failed to draw bright lines for Schedule 13 G filers (‘Passive Investors’) that engage in corporate governance activism.”

McGurn offers a lesson in investor passivity, as he explains that several years ago the SEC solicited comments as to whether the Section 13(d) reporting obligations restrict a shareholder’s ability to engage in proxy-related activities. Was relief with respect to soliciting activities necessary? Only seven commentors responded and the SEC provided only limited guidance which McGurn outlines. Since proposals and soliciting activity relating to executive compensation, removal of poison pills and removal of staggered boards might not have a disqualifying purpose or effect, the SEC is allowing a degree of leeway. However, solicitations calling for a change of control (contested election of directors) would clearly fall under 13D. “Under the new Rule 13d-1(h), if a reporting person loses Schedule 13 G eligibility due to soliciting activities and is required to then report on Schedule 13D, the reporting person can switch back to Schedule 13G when the reporting person is no longer involved in the soliciting activities and can make the necessary certifications.” At least the reform is a step in the right direction, from our viewpoint.

Britain’s National Association of Pension Funds (NAPF)launched a new shareholder governance initiative to increase the level of investor voting at shareholder meetings. The move may quell legislation requiring institutional investors to vote. The move was endorsed by the Institute of Chartered Secretaries and Administrators. (LONDON, Jan 14, Reuters)

Back to the topDeloitte & Touche LLP, have released their annual guide, Questions at Stockholders’ Meetings 1998. Stockholders will be particularly interested in M&ampA issues in 1998. Computer technology and year 2000 issues will be another prominent area. Copies are available, free of charge, by contacting Natalie Saviano of Deloitte & Touche at (203) 761-3065.

When CEO’s who reach the natural end of their tenure are replaced by an outsider the firm often experiences reduced financial performance. Whereas if the CEO has been forced out for poor performance, the appointment of an outsider can lead to better financial results. (Rakesh Khurana and Nitin Nohria, “The Effects of CEO Turnover in Large Industrial Corporations: A Study of the Fortune 200 from 1978-1993,” 1997, Harvard Business School. E-mail: rkhurana@hbs.eduand, reported in Wharton Leadership Digest)

The Belgian Commission on Corporate Governance is recommending a code of best practice, to be finalized by June 1998, instead of legally binding provisions to strengthen corporate governance. It also suggested that companies on the Brussels Stock Exchange should disclose measures governance measures in their directors’ reports.

The SEC plans to hold a number of “diversity roundtables” in coming weeks in an effort to boost the role of women and minorities in corporate America. They will begin in Los Angeles and will continue in other parts of the country. (WSJ, p. A6, 1/19/98)

A Watson Wyatt survey of 1406 companies found that option “overhang” — the number of shares available for future options + options previously granted as a % of total outstanding shares — has almost tripled in 6 years. Average share overhang was 13% in 1996 compared to 11% in 1995 and 5% in 1990. Overhang was highest in services (15%) and lowest utilities and energy (7%). (Ira Kay, global practice director for compensation consulting)

Barbara Kouskoulas and Srikant Raghavan propose that because of the conflicts of interest inherent between board members, boards should be constituted strictly on the basis of ownership of shares. No officers of the company would sit on the board. Board members would serve at their own expense and would not get any perquisites from the company. Composition and leadership would change yearly based on ownership percentages. (1-2/98, The Corporate Board) I can imagine a spate of objections. For example, institutional investors such as pension funds, who take a seat may lose indemnity protections and trading opportunities. Still, the idea may be worth exploring.

In the same issue, an analysis by William M. Mercer, Incfound that median year-to-year increases in CEO total compensation was 13% at top-performing companies and less than 1% at bottom-performers. The study confirms that CEOs achieve “greater financial gains when their companies do so.” However, can a causal relationship be assumed? If so, in which direction?

Stephen E. Hall, Managing Director of Pearl Meyer & Partners reports in the January issue of Directorship that the value of stock option grants accounted for 52% of CEO pay in major US corporations. “In fact the 200 largest US industrial and service corporations now set aside over 13 percent of the outstanding stock for senior executive and employee non-qualified equity incentive programs.” Fixed pay represents 15% and variable pay 85% of CEO pay at the top 200 corporations. CEOs of the top 100 firms owned an average equity stake of over $36 million or 1/2% of outstanding shares.

The Ontario Municipal Employees Retirement System (OMERS) makes available their investment and proxy voting guidelines to all interested parties. 12/97 ISS Alert includes an article by Lynn Clark, VP of Economic Policy and Strategic Research, on their corporate governance considerations. The same issue also notes a study by University of Pittsburgh professors Kenneth Lehn and Anil Makhija which finds a strong inverse correlation between EVA and CEO turnover.

Back to the topA shareholder proposal by UNITE requests that Dole Foodamend its bylaws to create a separate nominating committee composed entirely of independent directors. LENS will submit a resolution asking Temple-Inland to hire an investment banker to look into possible sale or merger of the company. (IRRC, 1/9/98).

IRRC released the study, Board Practices 1997: The Structure and Compensation of Boards at S&ampP Super 1500 Companies. Average base pay for board members increased 10%. A majority of new plans were tied to executive pay plans. 76 companies in the S&ampP 500 lack majority independent boards. Only 25% of all companies in the study have nominating committees made up completely of independent directors. Governance committees are reported in 36% of large, 15% of midcap and 9% of the smallcap companies. The report is available for $275 by calling Heidi Salkeld at 202-833-0700.

The SEC is expected to rewrite shareholder proposal regulations along lines suggested by Goldschmid and Millstein, according to 1/16/98 article in WSJIRRC has indicated Goldschmid and Millstein recommend the SEC keep current practices in the area of personal grievance and relevance exclusions, resubmission thresholds, and right to challenge company statement. They agree with reversing Cracker Barrel but recommend clarifying the commissions’s “ordinary business exclusion” on a case-by-case basis. They would scrap the override proposal. In addition, they recommend deleting the provision requiring management to include a box on the proxy card allowing shareholders to withhold discretionary voting authority from management.IRRC reports the SEC received 1,200 comments and hopes to have final rules out early this spring.

5th annual Mid-Sized Pension Management Conference will be held at the Hyatt Regency in San Francisco 3/8-11/98.

Trustees of CalPERS approved a $200 million investment with Active Value Fund Managers L.P., a UK fund using activist corporate governance tactics such as buying undervalued companies, making recommendations to management, and taking stronger steps if unheeded. Steven Davis indicates AVFM is likely to be aggressive. P&ampIreports a previous AVFM fund generated an internal rate of return of 29%. In other news from P&ampI, U. S. pension assets grew by 23% last year to $7.3 trillion. In an editorialP&ampI praises the Swiss Pensionskasse Schweizerischer Elektrizit?tswerke (PKE pension fund) posting its investment management structure, asset mix, manager mandates, performance results and volatility quarterly on its internet site. The action has been criticized because it will likely lead to questions by participants on managerial performance.P&ampI‘s position is that “the pension industry has too long hidden from public scrutiny. PKE, at least, is breaking away from that attitude.”

Back to the topMore on TIAA-CREF‘s shareholder resolution urging that Disney take steps to restructure its Board so that a majority of its directors will be independent of the Company’s management. (see Jan. 14th, PRNewswire)

Our Bulletin Board is starting to get some use. See postings on ADP’s growing monopoly in the beneficial and registered proxy industry and advise to the Canadian Minister of Financeon protecting the interests of shareholders.

The M&ampA market should remain white hot in 1998, ISS reports. Six annual records have been broken in a row with 10,700 U.S. transactions worth $919 billion compared to 1996’s record of 10,340 deals worth $626 billion according toSecurities Data. What’s the hottest new field in M&ampA? Our guess would be post-merger integration. A trio from theBoston Consulting Group provides advise to boards in the January/February edition of The Corporate Board. For more depth see The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities (McGraw-Hill, 1997) by Alexandra Reed Lajoux. There are nearly 500 books in print on M&ampA but less than a dozen on the postmerger period. Those seeking advise on what to do after the papers have been signed will find Lajoux’s work a practical guide. It fills a vacuum in the field with an instant classic.

PBS is running a series entitled “Surviving the Bottom Line” starting January 16th. The 1st episode “Running with the Bulls” takes viewers behind Wall Street to reveal a massive power shift from CEOs to Wall Street.

Tne National Center for Employee Ownership (NCEO) recently completed a study which shows that adding open book management practices such as sharing the income statement and balance sheet, sharing production and other data, encouraging employees to use the information at work, training employees to understand financial numbers and grainsharing, resulted in higher average growth rates ranging from 1.3% to 2.2%.

Proxy Season Preview from IRRC, New York, 2/13/98

Bowne & Co is offering The Best In D&ampO Duties And Liabilities (780 pages, $175).

Director’s Monthly, the NACD newsletter, includes part one of a report on supplemental executive retirement plans(SERPs) undertaken by TIAA-CREF. They found that the maximum potential annual pension for CEOs of companies with independent compensation committees is, on average, $800,000 lower than those of companies with non-independent compensation committees. It wasn’t a statistically valid sample but it confirms our instincts. Part II will look at suggested approaches to avoid abuse. NACD notes the study is available from Brett Hammond of TIAA-CREF at 212-490-9000, extension 2279.

The December issue also includes an interview with judge William Webster focusing on the first decision of the Delaware Chancery Court in which a special litigation committee settled, rather than dismissed, the derivative claims. ($14.9 million settlement of TLC Beatrice) Director compensation at 220 surveyed firms rose about 10% to $73,000 according toExecutive Compensation Reports. NACD’s 1997 Corporate governance Survey finds 60% of company boards are still all-male, 80% have no minority directors. (call 202-775-0509 for a copy) The Conference Board released their report on Corporate Directors’ Compensation in 1997; stock based packages are up from 54% in 1996 to 84% with retirement plans are down from 30% to 19%. Median pay was about $58,000.

Australian requirements for disclosure of executive compensation in annual reports could be significantly reduced under Federal proposals according to the 1/7/98 Sydney Morning Herald.

The LA Times reported that TIAA-CREF filed a shareholder resolution to “force” Disney to increase it independent directors. TIAA-CREF claims 9 of 12 independent directors have “significant personal or financial ties to the company’s management.”

We’ve posted a review of Donald H. Chew’s excellent reader,Studies in International Corporate Finance and Governance Systems: A Comparison of the U.S., Japan and Europe. The book is primarily a compilation of articles previously published in the Journal of Applied Corporate Finance.

Back to the topThe number of firms offering DRIPs has grown from about 50 to more than 350 in the past 3 years. These small investors are more loyal shareholders and customers. DRIPs are also often a cheaper source of funds than a secondary offering. (The Business Journal)

A 1996 study by Steven Huddart of Duke University and Mark Lang of the University of North Carolina, found that 90% of lower-level employees sold their stock right after exercising options. Senior executives tended to hang onto their stock for a significantly longer period of time. (St. Louis Business Journal)

Investor Business Relations (IRB) reports that ADP Investor Services is set for proxy voting via the internet and/or telephone. Also on the internet is Data Downlink Corp. which offers information from several databases dowloadable to the users spreadsheet (see

IRRC continued its excellent coverage of the SEC shareholder proposal by reporting on recommendations from Millstein and Goldschmid. The corporate governance experts recommend scraping most of the proposal. IRRC also reported on shareholder proposals being filed by the Teamsters, including proposals at AlliedSignal and Time Warner “asking that shareholders be allowed to vote on severance packages that cross certain monetary thresholds” and one at American Home Products asking for a report to shareholders on political contributions.

Graef Crystal suggests investor activists might profit from CEO pay abusers by shorting the company’s stock. He outlines the case of Lester Alberthal Jr. at EDS. Under his leadership EDS underperformed the S&P500 Index by 67% yet Alberthal received a salary increase of 8.6% to $733,333, a bonus of $1 million, and 150,000 shares of stock valued at $6.75 million. (San Francisco Business Times)

I‘ve uploaded my comments on the SEC Shareholder Proposal regulations. Among the many amendments suggested is one to allow shareholders to use the Rule 14a-8 process to nominate directors by deleting subsection (c)(8). Although I have not seen this explicit suggestion from others responding to the proposed regulations, it would seem to be one which is fundamental to democratic capitalism and a free society. If directors more frequently faced a true contest, they will be forced to take stands on issues of importance to shareholders such as poison pills, staggered boards, etc. Most shareholder proposals might thereby be eliminated.

The current system of corporate governance is like having the executive cabinet appoint our legislative representatives and relying on the initiative process to pass any significant legislation. Imagine how badly drafted our laws would be under such circumstances. Now imagine the shareholder proposals twenty years from now if shareholders continue to be locked out of the nominating process.

Patrick McGurn, with ISS, reports that NACD recently surveyed CEOs. Shareholder nominations of directors ranked as the “most unpopular” reform on the corporate governance front. “Nearly three-fourths (72 percent) of the CEOs turned thumbs down on the idea.” “Ironically, when the NACD asked these CEOs to check off what ‘constituency representation,’ if any, could be found on their current boards, 70 percent said shareholders.” Most CEOs believe shareholder activists are acting irresponsibly by interfering in areas beyond there expertise. There’s probably more than a grain of truth to that belief but wouldn’t shareholders be less like to raise such issues if they could hold directors accountable?

CalPERS tentatively approved a staff draft policy that could result in taking a more active role in corporate board elections, including direct pursuit of directorships when the fund owns enough shares to be seen as a “controlling shareholder” and where the benefits “outweigh the risks of increased liability exposure, potential conflicts of interest and trading restrictions.” (12/26, WSJ)

The move promises to open a new chapter in shareholder activism and follows the recent move by Franklin Mutual Advisers who earned a board of directors seat at Chicago-based Telephone and Data Systems. “Franklin’s nominee received overwhelming support from TDS shareholders, garnering substantially more votes than the management’s nominee.” (The National Law Journal via Law Journal Extra, Koppes, 9/8)

Patrick McGurn, with ISS, suggests that CalPERS already holds stakes in equity investment vehicles such as Relational Investors LP and Active Value Fund Managers Ltd. who could offer such board representation. CalPERS trustees and staff apparently heard advice from corporate governance experts at a recent forum calling on CalPERS to take larger positions in companies and a more active stance.

However, CalPERS spokeswoman Patricia Macht said “anyone who thinks this is a new weapon in our arsenal for corporate governance is going down the wrong track.” “Historically, we have declined to be represented on corporate boards,” she said. “Even when we are a controlling shareholder, our practice has been not to designate a Calpers representative on board. … That has not changed.” (seeLubbock Online, 12/28) In addition, the tentative policy reportedly continues a CalPERS policy of not recommending possible director candidates.


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