Archives: March 1998

Boardroom Basics are covered at the Online Business Women Center. Thanks to Ralph Ward for pointing us to this site.

Graef Crystal presents this year’s CEO pay heroes — and one villain. Villain Sanford Weill of Travelers’ Group was awarded 20 different option grants covering over 12 million shares. If Weill manages only to deliver gains equal to Treasury securities he’ll gain $177 million. In contrast, John Reed of Citicorp must achieve a 10.7%/yr. gain. Richard Sharp of Circuit City must show a stock price growth of 12.2%/yr. With Robert Shapiro of Monsanto, if the stock price fails to climb by at least 50%, he and other participating executives will actually lose real money, although not much of it. Crystal’s #1 pay hero this year is Frank Herringer of Transamerica. He not only has to raise the stock price, it has to stay up for at least 10 days out of 30 and “the option cannot be exercised unless Transamerica’s total shareholder return is at least equal to the median of a group of peer financial companies.” (San Francisco Business Times)

SEC ruled that Maxxam must include a resolution in its upcoming proxy statement demanding the cessation of clear-cutting and the harvesting of old-growth trees. Maxxam stated that clear-cutting virgin redwoods constituted “ordinary business operations.” However, the SEC disagreed; Maxxam’s next shareholders’ meeting is scheduled for Houston on May 20. Maxxam regulators are close to an agreement on the preservation of the 7,500 acre-Headwaters Forest but the plan is coming under fire for not preserving nearby groves owned by Maxxam and inadequately addressing wildlife and fisheries protection.

According to a recent Reuters report The average chief executive at a large U.S. company earns about 40 – 50% of pay from stock, and 27% from salary. Five years ago, about 30% came from stocks, 37% from salary.

Venture capital investments have been earning about 34% annually from 1990 to 1996. CalPERS recently decided to increase investments in this area by $350 million. They will invest through a third party, taking the form of a partnership, limited liability company or joint venture.

The European Corporate Governance Network went online last month. ECGN is a non-profit research network based at the European Centre for Advanced Studies in Economics.Corporate Governance NETwork member Stephen M. Davis’Global Proxy Watch says ECGN’s recent report, available on their site, points to “alarming information gaps in Europe” that “could be disabling shareholder oversight and undermining companies’ ability to compete for global capital.”

Empowering Investors: A Market Approach to Securities Regulation, by Roberta Romano, upcoming in June’s Yale Law Journal, is previewed in The Economist. Romano argues firms, with the approval of their shareholders, should be able to opt out of SEC oversight in favor of another regulatory jurisdiction, another state or even another country. The article points out this would be similar to the European Union’s system of mutual recognition of securities regulations. Would rivals compete to impose the lightest burden? Not necessarily, says Romano, capital is cheaper where regulations are believed to be sound.

In the coming year CalPERS hopes to add new features to its internet site, including:

• A shareowners’ forum on corporate governance issues.
• Expanded investment information to include historical pension fund growth and investment performance, policies and strategies.
• Daily net asset values for CalPERS public agency deferred compensation investment funds. (Business Wire)

Iwerks Entertainment Inc. announced that ISS issued a Proxy Analysis on March 24, 1998, that concludes that Iwerks’ proposed merger with Showscan Entertainment is “beneficial to both Iwerks and its shareholders” and that the merger “warrants shareholder support.” (ENTERTAINMENT WIRE)

Japanese companies begin adopting merit-based system. Fujitsu will become the first manufacturer to entirely abandon the seniority system. Matsushita Electric said Tuesday it would repurchase shares, introduce a stock option plan for senior executives and directors, link managers’ salaries to the performance of its stock and streamline its board room. (International Herald Tribune, 3/26)

March Director’s Monthly carries an article by Sir Adrian Cadbury which looks at some common trends in corporate governance, including: disclosure, checks and balances to guard against undue concentrations of power, diverging interests generally resolved through independent board members, harmonization across borders, employee representation (notes only German employees represented on most supervisory boards in Germany even though companies are now international), pressure groups communicating through new channels such as the internet, and growing importance of institutions (especially U.S. pensions who are required to vote shares).

Importantly, Cadbury notes “the issues of power and accountability were raised at the outset in relation to corporate boards. They will increasingly be raised in the context of the growing power and relative lack of accountability of institutional investors…Their exercise of power over boards will only be seen as legitimate if it is open and reflects the views of those who have entrusted their money to them.”

Editor’s note: The CalPERS corporate governance core principles and guidelines indicate that board members should no longer be considered “independent” if they have served for more than 10 years. Yet, their own board president has served for more than 10 years, their vice president for more than 14 years; one board member has served for more than 27 years. And the CalPERS board is probably more accountable to its investors/beneficiaries than most. How can corporations be expected to live by standards which institutional investors themselves refuse to follow?

Back to the top

Taiwan’s Securities and Futures Commission is contemplating a rule to require foreign institutions to vote in favor of all management proposals, according to a report by Davis Global Advisors and reprinted by IRRC under the headline “Just Vote Yes.” Editor’s note: They’re really making progress; too bad it’s in the wrong direction.

IRRC also covered SWIB‘s appeal of an SEC no-action letter re Shiva‘s right to omit a binding proposal to prohibit repricing without shareholder approval.

Bernard Black’s (bblack@lawmail.columbia.edu) “Does Shareholder Activism Improve Company Performance” is featured in The Corporate Board (March/April). The available evidence is consistent with the level one might expect from a low level of effort, “namely, not much.” Black seems to believe institutions exaggerate the regulatory barriers to coordinated efforts. “The 13D filing is not complex, and the risk that a company will sue a major institutional investor is low.” “Failure to surmount this modest hurdle to coordinated activism suggests that there are limits, not rooted in legal barriers, on how active they are prepared to be.”

The Corporate Board also includes articles on takeovers, automating the boardroom and board evaluation.

The letter from Corporate Value Partners, L.P. to the Chairman of the Nominating Committee of the Board of Directors of The Reader’s Digest Association, Inc. substituting one of their nominees, William E. Mayer, with Daniel Kurtz, former Assistant Attorney General-In-Charge of the Charities Bureau Office of The Attorney General of New York is available via PR Newswire. (see also 3/2 Time)

Britain. Royal Dutch/Shell will publish an audited social responsibility report this year. Last year they defeated a proposal from Pensions &; Investment Research Consultants(PIRC) for external monitoring of its environmental and human rights policies. In a speech to PIRC, President of the Board of Trade Margaret Beckett warned of legislation if companies did not get their own house in order when it came to acting in shareholders’ interests and paying their boards. She wants success to be properly rewarded but pay policy transparent and widely understood. PIRC called for a changes including:

• full and relevant information to shareholders and stakeholders, including directors’ biographical and career history, attendance at board and committee meetings, environmental, social and employee information
• annual elections of all board members
• easier access for shareholders to resolutions at annual meetings
• shareholders to vote on remuneration committee report
• report of executive pay in relation to the company’s relative performance, benchmarked against employee remuneration
• all institutional investors should have to disclose their corporate governance policies and their voting record, and
• setting up of a companies commission “to ensure clarity and efficiency in the interests of competitiveness and public accountability.”

Italy’s cabinet approved a package of long-awaited new corporate governance rules including stiffer penalties for insider trading, an enhanced right to vote by proxy, more powers for internal auditors, and clearer rules governing takeover bids. The rules leave the ceiling for cross shareholdings at 2%, with 5% for “strategic or industrial reasons approved by shareholders.” The limit in France is 10% and in Germany 25%. Proxy votes may be collected by anyone, banks included. Shareholders can call an extraordinary meeting with 10%.

IMF’s Michel Camdessus called on Russians to make a major push towards transparency and quality of corporate governance in the wake of discipline measures taken by the federal securities commission against three different companies for securities law violations.

Back to the top

The Ontario Municipal Employees Retirement Systemupdated its guidelines to limit the length of time a director can serve on the board of a specific company to 15 years. The guidelines also call for individual election of board members (instead of slate) and splitting the positions of chief executive and chairman (allowing a lead director as an option).

CalPERS called for corporate governance reforms in Japanincluding: directors independent from the corporation and its affiliates, reduction in the size of boards, and independent auditors.

New fund launched. Hermes Pensions Management, the parent company of one of the UK’s largest pension management groups, and Lens Investment Management, the United States-based investment group, are linking up to create the UK’s first institutionally-backed fund manager with the specific aim of assisting in the improvement of shareholder returns on companies with hidden underlying value. The first fund, Hermes UK Focus Fund, will be launched in the Summer and will concentrate on mid- to large-capitalisation companies quoted on the London Stock Exchange.

Questions at Stockholders’ Meetings 1998, serves up a checklist of issues likely to be raised. The booklet includes industry specific-sections and corporate governance issues, as well as many others. Contact Deloitte &; Touche at 203-761-3065 to get a free copy.

Apple set aside 17 million shares or 13% its outstanding shares for top execs and key employees. “They are using the only currency they have,” says Alan Johnson, an executive pay consultant. Kodak’s CEO, George Fisher, and 800 other managers won’t receive a bonus for 1997. The company is laying off 19,900 workers and paid Fisher a $1.98 million bonus on top of $2 million base pay for 1996. This year he says “I don’t deserve a bonus this year, and that’s half my pay.” To improve morale, Kodak will make a special grant of options to 90,000 nonmanagement employees. (3/14, WSJ)

Ned Regan’s article “Board Governance and Corporate Performance: Assessing the Connection,” does an excellent job of reviewing this topic in a few pages. Bernard Black’s conclusion that there is very little, if any, impact made by governance activity and Ira Millstein and Paul MacAvoy’s opposite conclusion that governance can positively impact the bottom line are not inconsistent. Regan points to a crucial difference, Millstein and MacAvoy’s methodology leads them to look not just at who has adopted governance practices but rather who is acting on such board structures and practices. When corporate governance procedures are present there is no direct link to corporate performance. “But when governance procedures demonstrate that the board acts independently of management, there is a correlation with improved performance.” “The proxy resolution was like a doorknocker. The thump of the knock was heard throughout the executive suite signaling the occupants that, after an absence of several generations, the owner was back. Management and boards listened and reacted, to the benefit of shareholders and the economy.” (Directorship, 3/98)

Family-owned firms, “provide heftier stock market returns and more cash flow per employee, and use less short-term debt than their counterparts,” due to greater control by owners according to a study by University of Cincinnati associate professor of management Charles Matthews and some of his colleagues. (Fortune, 3/16)

Privatization of Social Security is the subject of a 3/23Business Week series of articles.

Geoffrey Colvin writes about some of the all-star dogs when it comes to shareholder value. In a few paragraphs he covers the transition from the golden age of management (1930-90) to the rise of shareholders (caused by crossing the 50% line and the 1992 SEC rule change). His don’t-get-it list includes: Advanced Micro Devices (repricing), Apple Computer (wrong strategy, wrong CEO), Dow Jones (a family that didn’t care), Occidental Petroleum (tradition of shareholder disrespect), Ogden (too many old inside directors who can’t make up their minds), Reader’s Digest (CEO George Grune heads controlling nonprofits). (Fortune, March 30)

CEOs would loose 33% of their total equity if the market plunged 25% because of their heavy ownership of options. Those in the top 200 firms owned $57 million equity. (3/98,Across the Board)

CalPERS to soften its proposed corporate governance standards. The age limits are gone and the 10 strict measures of independence now show up as “guidelines.” Proxy statements should disclose what the corporation’s definition of independence. The lead director concept is kept. Fund officials also say they have dropped plans to grade the 300 biggest U.S. companies in its $128 billion stock portfolio on whether they meet “core principles.” A vote on the revised proposal isn’t expected before April. (3/13, WSJ)

Back to the top

Repricing seems to be the issue of the year at SWIB who is submitting binding bylaw amendments to 4 companies. Apparently, they won concessions from most of 22 companies approached last fall.

Japan likely to join the shift to defined contribution poension plans as the Liberal Democratic Party announced plans to ease restrictions. (Marc Goldstein,ISS)

Indexing in the S? 500 hasn’t grown as quickly as many of us thought. At the end of 1991, 6.7% of all U.S. stocks were so indexed, estimates Melissa Brown, head of quantitative research at Prudential Securities. By the end of 1997, it was down to 6.1%. Only 26% of actively managed U.S. stock mutual funds were beating the S? 500 so far this year, according to Morningstar Inc. Apparently size does matter. From 1995 to 1997, the top 100 rose 140%, the middle 107%, and the smallest 100 only 92%. But the 700 largest stocks outside the index were up 99%. Brown believes two drivers are foreign investors “who favor large, well-known stocks and active managers trying to keep up with the index.” (3/11, WSJ)

We’ve added another “stakeholder,” the Institute of Internal Auditors and their publication, Tone at the Top.

Robert Monks’ new book The Emperor’s Nightingale; Restoring the Integrity of the Corporation in the Age of Shareholder Activism is now available. If widely read, it could be one of the most significant contributions to reuniting the corporation, our most powerful disembodied force, with the spirit of humankind in nature. Monks blends the new science of complexity with the insights he and Nell Minow have developed on corporate governance to arrive at fresh insights on the future of capitalism.

Back to the top

Ralph Ward’s Boardroom INSIDER for March discusses the idea of advisory boards, especially at pre-venture stage firms. They can give the founder needed contacts and advice as well as building the firm’s reputation. Ralph also indicates smaller companies, particularly those in high tech, are using secure online chat sessions to let them use director expertise around the world, and they use more email and remote committee meetings. The March newsletter also provides tips on evaluating personal conduct problems of a CEO unrelated to his executive duties.

Innovations to avoid takeover proliferate. Echlin is asking Connecticut legislators to take away the right of a newly elected board to make decisions over a merger, leaving that decision to the old board. Computer Sciences stripped shareholders rights, raised personal questions about Computer Associates’s Chinese-born chairman, and sued CA’s bankers for using nonpublic information. For more, see WSJ 3/10, More Companies Avoid Takeover Through Use of Innovative Tactics.

14% of companies tie 401(k) contributions to corporate performance, up from 4% two years ago, according to Hewitt Associates. 93% provide some match to employees’ savings plans. (LATimes, 3/9, Many Firms Link 401(k) to Bottom Line)

Who Owns American Companies? Managers Of Course. That was headline in a New York Times article by Floyd Norris on 3/8. Citing moves by Computer Sciences and Echlin Inc. to disenfranchise owners by changing bylaws, in the one case, and seeking legislation to end the right of shareholders to throw out the board through a special shareholder meeting, in the other. Dividends are at a record low. “Most corporate executives have a lot of stock options…but few actual shares. And while option holders benefit from rises in the stock price, they do not share in dividend payments.” Norris ends with a lament, “It will probably not be until the good times are over, and a long bear market is in force, that the owners of American companies start looking for ways to take back the prerogatives of ownership.”

South China Morning Post calls for an end to Japan’s roller-coaster market. They report that corporations and banks have been selling off each other’s stock but the slack has been taken up by the postal savings bank and public pension funds. Rather than “keeping brain-dead companies on life support,” Japan should “let the markets do their thing.” “Inefficient firms would perish…the day would also come when management could be forced to resign by shareholders and when hostile takeovers become a possibility.” (SCMP, 3/6)

Back to the top

Margaret Beckett, President of UK’s Board of Trade, unveiled a three-year review process. The first working group will publish its proposals in December. A final report is due in March 2001. (speech to PIRC, see Financial Times, 3/4)

Retired Conrail employees lost a legal battle to block the company from using surplus pension fund assets to help pay for an early-retirement program. (3/3, Philadelphia Inquirer)

Venture capital firms have so much money pouring in that firms are increasing the “carry,” or the percentage of profit general partners keep. “Hal Brown, an investment officer with the California Public Employees Retirement System (CALPERS) said that the $130 billion pension fund is upping the ante with virtually all its partnerships simply to meet its goal of keeping 5 percent of its total portfolio in private equity investments. In some cases it is willingly accepting diminished terms of the partnership in order to do so.” (3/2, San Francisco Business Times) It appears CalPERS may be letting its William M. Mercer Study: Key Terms and Conditions for Private Equity Investing go to waste.

Highlights from the CalPERS annual report can be found on their press release page.

Readers of the LA Times are warned not to use CalPERS’target list as an investment strategy, citing mixed evidence that such targeting results in gains. Michael Smith, who did one of the studies showing gains for CalPERS, notes that its unlikely that individuals could profit by investing in targeted firms because “the price of the stocks will change as soon as the market finds out CalPERS has targeted them.” What the article fails to note is that CalPERS itself doesn’t even invest more heaviliy in their own targets, and they have advance notice. (3/3, LA Times or 2nd version)

On February 2nd the American Bar Association approved the Uniform Management of Public Employee Retirement Systems Act promulgated by the National Conference of Commissioners on Uniform State Laws. Some have indicated its provisions endanger “socially responsible investment” (SRI) by pension funds. Section 7(h) in a draft I saw appears to allow the application of social screens only if they provide “collateral benefits” and only if the screened investments are at least as good as the unscreened, in terms of expected return and risk. Is this really a plot by drafters, such as Professor John H. Langbein of Yale and others, to weaken SRI? Apparently John H. Langbein’s &; Richard A. Posner’s, Social Investing and the Law of Trusts, 79 Mich. L. Rev. 72 (1980) made quite an impact on the SRI community.

The Drafting Committee suggests that laws in 22 States with statutory language on economically targeted investments and 10 States with language limiting investments in South Africa, Northern Ireland, Cuba, or companies complying with the Arab League’s boycott of Israel, believe these statutes should be repealed when the Act is enacted. Have any pension fund attorneys analyzed these provisions of the Act further? I’d like to see more analysis, if available. I’m surprised I didn’t see anything in the news on this. It seems like a rather large step to go unnoticed.

CalPERS press release on targeted firms includes hyperlink to explanation of EVA and profiles of each target company in their most thorough job to date in this area.

David Leonhardt assails the lack of board member independence at McDonald’s where only 4 of 15 “can be called independent–meaning they don’t work for the company, do outside business with it, or have a McDonald’s exec sitting on their own board.” See THEY DON’T BITE THE HAND THAT FEEDS THEM in 3/9 Business Week.

Lawndale Capital, lead by by Andy Shapiro, has returned 21.8% on an annualized basis over the five years ended January 30th by using various corporate governance strategies, according a report in Barrons. “We help companies find new board members, new customers, new joint-venture partners. And we can pass along feedback from Wall Street to help management maximize shareholder value.” (Valuing Complexity, 3/2)

Received for review, Corporate Governance and the Duties of Company Directors, edited by Ian Ramsay, Centre for Corporate Law and Securities Regulation, 1997.