Archives: April 1998

April’s Director’s Monthly focuses on Mergers & Acquisitionsincluding Vice Chair Joseph G. Sponholz of Chase Manhattan reviewing their merger with Chemical Bank. Eileen Birge and Nicholas Vitalari of the Concours Group write on integrating information technology in M?. Also included is an extensive listing of upcoming NACD seminars around the country.

AFL-CIO “10 Key Votes Survey” found 45 money managers of union funds cast an average of 44% of their votes against the unions’ position. Votes apparently will be watched more closely this year. The report was reportedly a “real wakeup call” for some officials but also demonstrates there’s room for labor to increase its impact. (see 4/20 P?)

Thomas A. Stewart, author of Intellectual Capital: The New Wealth of Organizations, has written a provocative series of two articles in Fortune. The first appeared on April 13th and posits that is useful to think of employees not as assets but as investors since, increasingly, we are all expected to be knowledge workers. He points out that “overall, U.S. companies today need 20% less in tangible assets to produce a dollar’s worth of sales than they did a quarter-century ago.” Companies provide a place where the individual can do things they can’t do alone and they can also do them at lower cost. Today’s companies are magnets for intellectual capital; they provide a stimulating community of practice, a learning environment. In addition, they provide brand and reputation; Stewart notes that because he works for Fortune, people return his phone calls and presume he is talented. Third, the company “limits our liability, annualizes our income, tides us over during unproductive patches, collects money owed by our customers, borrows on out behalf. But if the intelligence of employees is contributing an increasing proportion of return, compared to the capital invested by stockholders, it may be time to reexamine how the returns from such different forms of equity are divided.

Stewart’s second article, which appeared in the May 11th edition, begins to address that issue. For example, if we are now to consider employees as investors, that has implications for the duty of directors, since it’s their responsibility to maximize investors’ rewards. The board becomes a “mediator of rents,” according to Ira Millstein. Millstein proposes that compensation committees ought to be replaced with “remuneration committees,” responsible for the entire reward system, setting the mix of wages and equity compensation appropriate given the nature of employees’ human-capital investment. “The more important human capital is to a business, the more those investors should stand to gain – or lose – and the greater voice they should have in governing it.”

In law, accounting, and consulting partnerships human capital is already king. Contrast these partnerships with a company relying primarily on large capital intensive factories, such as Alcoa, and we’ll find that most firms lie somewhere in the middle. Seeking a solution, Stewart points to Macquarie Bank, Australia’s premier investment bank. At Maquarie the entire first 10% goes to shareholders but additional profits are divided according to a formula whereby, as return on equity rises, the staff takes an increasing % of the pot.

Boards should use stock to compensate people for company specific knowledge investments for two reasons, according to Stewart. First, equity provides the knowledge employee (investor) with greater incentive to invest and a way to keep at least a portion of the returns even if they lose their job. Second, the voting power of stock offers a means of protecting their investment. Stewart eschews the use of options as a free ride using phony accounting.

Government should keep its hands out of regulating charity giving by corporations, according to an editorial in Directors & Boards. HR 944 would require disclosure of each gift in the annual proxy statement and HR 945 would require polling of shareholders to determine their wishes. Both measures are by Paul Gillmore. In another item, editor James Kristie notes the day Campaq was named to have the board of the year its stock went down 3 and 1/2 points, so we’re still looking for evidence to support the McKinsey & Company study.

Companies with at least 20% employee ownership were found to be more organizationally stable than non-employee ownership companies, in a recent study by Margaret Blair of Brookings and Douglas Kruse and Joseph Blasi of Rutgers. None of the employee ownership companies disappeared due to bankruptcy, liquidation, or private buyouts, while 25% of the matched sample did. Return on assets was also higher at 20.4% vs 16.7%.

Data compiled by London-based Capital Strategies shows an index of companies with at least 10% employee ownership continued to grow faster; up 26% in 1997 compared to 21% for FTSE. 100 pounds invested in the index in 1992 would be worth 341 pounds, compared to 196 pounds if invested in the FTSE.

The same issue of the Employee Ownership Report, (May/June) includes a case study on R.R. Donnelly & Sons. This Fortune 500 firm uses a broad option grant pland and open-book management, and focus groups to foster its participation in decision-making by its employee ownership community.

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Royal Dutch/Shell published its first social responsibility report, detailing failings and successes on issues from bribery to global warming and community projects. (

Making CEOs whole is the subject of an article in 4/22 WSJ. Highlighted is Ronald T. LeMay’s movement to Waste Management and back to Sprint.

Tracking shares, which don’t represent legal ownership of corporate assets and carry practically vote-less rights, have reached about $100 billion in issues, according to a report in the WSJ (4/20).

McKinsey & Co. reviewed 115 acquisitions in the U.K. and the U.S. done in the early 1990s; 60% failed to earn returns greater than the annual cost of the capital. Keefe Bruyette & Woods found that 6 out of 8 of the largest bank mergers announced in 1995 underperformed Keefe’s bank-stock index from the day before the mergers were announced to last July 16th. First Union’s purchase of CoreStates, for example, was for more than five times CoreStates’ book value. “First Union has talked about wringing out $250 million in annual cost savings, and, if in place last year, that would have brought the annual take to $1.1 billion and increased the return — to 6.8%.” Hardly stellar. A study by, Steven Kaplan at the University of Chicago and Michael Weisbach at the University of Arizona done in 1992 found that 44% of acquired companies were later sold off — often at a loss. (Barron’s, 4/20) (see also BusinessWeek, 4/27 and The Hindu, 4/20)) For help in avoiding these problems see The Art of M? and The Art of M? Integration by Lajoux.

Apple bars the press from their shareholders meeting which is scheduled for April 22 at 10 a.m. Pacific time at Apple headquarters in Cupertino, Calif. (

Study finds small-to-midsize companies grant more than four times the median current-year stock option grant than large companies. Directors at small-to-midsize companies own a median of 51,080 shares — at large companies, the median is 15,674. The median number of board members at large companies is 16; of these 11 (69%) are outside directors. At small-to-midsize companies, the median is nine with only four (44%) independent directors. For a copy of the complete survey report, fax a request to Mary L. Feldman, Senior Vice President, Public Affairs, The Segal Company, One Park Avenue, New York, NY, 10016, 212-251-5490. (PRNewswire)

Y.R.K.Reddy invites submission of articles for a book to promote Corporate Governance in India. Papers on specific country models (American, German, East European); country comparisons; Corporate Controls & Market Structures; debates on specific codes (like the Cadbury Committee’s); and theories on handling dilemmas, carrying out fiduciary responsibility under hostile conditions are welcome.

Control of the internet to be given over to an independent global board to reduce the government’s legal liability. “What we are looking to do is to turn over all the authorities we have to a neutral, private, non-profit organization that would have a fully international board of directors which would be constructed in a way so that it could withstand legal challenges and not have to depend on the authority of the U.S. government or any other government,” said Ira Magaziner, Clinton’s information technology policy adviser. (WSJ, 4/17)

Use of the internet is up. Ameritech reports 10 times as many voting on the internet for this year’s annual meeting as last year’s. ADP says it offers to log votes via the internet for about 1,000 companies and plans to extend this option to all by next year. (WSJ, 4/16)

The current Ivey Business Quarterly contains a facinating article entitled “Beyond Carrot and Stick” which attempts to build from the work of Alfie Kohn. Authors Paul Britton and Terrence Walker indicate the first step is to get base pay right. This is the amount the market is willing to pay for the level of talent required. The danger is in losing sight of the value of the employee’s contribution to the organization. Although the author’s don’t note it, this might be what Blair terms firm specific human capital. “Designing a plan without stretch will get you entitlement, and designing an incentive plan with no hope of payout will demoralize.” One of the case studies cited is that of Springfield Remanufacturing Corporation (SRC) and open-book management which Jack Stack documented in The Great Game of Business. “When you appeal to the highest level of thinking, you get the highest level of perfomance.” Britton and Walker, following Stack, point out that employees must have access to information and the ability to understand how to translate business objectives into action locally. (reprint BQ97205; call 800-6496355 to order)

The Board of CalPERS adopted revised corporate governance principles. The draft released last June probably served as something of an embarrassment to the Board. The most aggressive standards, such as recommending that directors who sit on a board for more than 10 years be considered company insiders and that boards limit those over age 70, have been dropped. One of CalPERS’ own board members has served for more than 27 years. The head of the Investment Committee and the President of the Board have both served more than ten years. Those over 70? I won’t go there. Under the standards adopted, boards should “consider the issue of continuing director tenure” and take steps to ensure the board “maintains an openness to new ideas and a willingness to critically reexamine the status quo.” (see press release)

The Public Employment and Retirement Committee of the California Senate approved SB 1753 (Schiff) and SB 1879 (Hayden), both measures intended to prevent conflict abuses at CalPERS and CalSTRS. For more information contact David Felderstein or Nancy Shipley at 916-445-8958.

Nuevo Energy Co. will name shareholder activist Charles Elson to its board, according to a report in the 4/14 WSJ. Elson’s may come at the behest of Relational Shareholders LLC, a La Jolla firm that invests in companies with undervalued stock which tries to turn companies around by seeking to change the board, either through proxy battles or through the appointment of new board members. Relational Shareholders bought 5% of Nuevo Energy last year. Nuevo’s largest investor is CalPERS.

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Pactrick McGurn continues his coverage of options issues in the 4/10 ISS Friday Report. He reports that SWIB has asked the full SEC commission to reverse a staff decision that may allow Shiva Corp to exclude an anti-repricing bylaw from its ballot because staff considered the subject “ordinary business” excluded under Rule 14a-8(c-7). SEC staff believes that since SWIB’s proposal covers all corporate employees, it relates to general compensation policies. According to McGurn, they left the door open for SWIB, CII and other interested parties to raise concerns over “changing capital structure” and the cost of repricings to shareholders via dilution.

McGurn notes several reasons why the SEC should “graduate” option repricing from the ranks of “ordinary business.” These include the fact that repricing is becoming commonplace (14% of the Technology 250 repriced last year), and they are a matter of growing public concern. An ISS survey of 118 large institutional investors found 71% in favor of prohibiting repricings without shareholder approval. Additionally, the use of board-based option programs has exploded, the cost of repricing such plans is likely to be large, and broad-based plans are rarely put to shareholders for a vote.

Management Fads and Fashions by Richard Petty, provides a handy one paragraph synopsis of four major areas, such as performance measurement, as well as over a dozen fashions, such as customer profitability analysis. (see Company Secretary, April 1998) In the same issue, Bob Garratt, Chairman of Organisation Development Limited, calls for tougher regulation of boards and directors in his “Targeting Complacency in the Boardroom.” He warns readers, primarily in Hong Kong, that Singapore is looking to establish its own institute of directors, codes of conduct, and accreditation. Hong Kong could be left behind unless complacency is reduced. Garratt points to the accredited diploma program run by the Hong Kong Institute of Directors and foresees a time “when all directors will be accredited and registered.”

Over the last two months South Korea, Thailand and Indonesia have agreed to implement IMF reforms that call for greater governance and accountability from financial and investment institutions and corporations. The driving force is the need to provide investors with transparency — timely, accurate information about company performance. Agreements call for audits of corporations and financial institutions to be conducted according to internationally acceptable standards using teams from internationally recognized audit firms. (seeModel of Compliance: U.S. Corporate Governance Standards Go Global, New York Law Journal, 4/9)

Assets of U.S. pension funds stood at $7.4 trillion at the end of 1997, up from $6.3 trillion a year earlier, dwarfing the $5.6 trillion held by mutual funds and life insurance companies combined. Equity holding were down to 28.1% vs 28.5% at end of 1996. As a share of total wealth by American households (excluding real estate), pension fund assets represented 27.5% (19% if real estate is included). Public pension funds increased 22%; private pension funds grew 17.6%. Defined benefit pension plans exceeded contributions by $2.7 billion, while defined contribution plans netted $85.6 billion. DB plans have been net sellers of equities for more than a decade, whereas DC plans have continued to be net purchasers. (see 4/6 P?)

Long-term corporate investment and the % of institutional ownership were found to be positive correlated in a study entitled “Do Institutional Investors Exacerbate Managerial Myopia?” Contact authors Sunil Wahal, Emory University and John J. McConnell at Indiana University. (see 4/6 P?)

Ronald Machold, director of the New Jersey Division of Investments and one of the first co-chairs of CII, is profiled inP?.

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Three new funds in Europe are aimed at creating shareholder value. As we reported last month, 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, taking stakes of 2-10%. The fund will work with management but confrontation might be necessary at times.

The European Renaissance Fund Ltd., will be an open-end fund with an initial target of $109 million. It’s a joint effort of Arlington Capital Management Ltd and Taube Hodson Stonex Partners Ltd. Arlington will reportedly communicate specific business strategies to boards of portfolio companies and may take seats on boards.

The third new fund is ABF Euro V.A., a combination ofAndre Baladi, co-founder of the International Corporate Governance Network, and Pierre-Henri Leroy, founder of Paris-based Proxinvest. It will use an index-fund strategy (180 stocks) tilted in favor of companies that meet corporate governance criteria. Fees will run 1% of annual asset value plus 20% outperformance relative to the FT Europe index. Criteria include corporate communications, voting rights, board composition, corporate strategy, corporate performance compensation, shareholder returns and stock price. Favorably rated stock will be overweighted and those with a poor rating will be underweighted. (see 4/6 P?)

New service available through First CallInstitutional Shareholder Services (ISS) is making its information available over FIRST CALL Research Direct and FIRST CALL Notes(tm). The Wall Street Transcript, a weekly publication representing the interests of long-term investors, is now available on Research Direct as well. With these agreements,there are now 15 subscription services available on Research Direct.

Arecent survey of leading U.S. banks, insurance companies, pension funds and mutual funds by Broadgate Consultants(212-232-2222) found that although they expect to increase investment substantially over the next twelve months in European equities, over 90% were are concerned that foreign companies do not pay enough attention to shareholder value and governance issues. Nine of 10 said information was less complete than what they are accustomed to receiving, 40% felt that European-based research was not useful in for specific companies. Most felt regular and systematic contact with senior management was very important.

Areport to the OECD chaired by Ira Millstein by titledCorporate Governance: Improving Competitiveness and Access to Capital in Global Markets, recommended that OECD issue voluntary “best practices” guidelines for boards, formulate standards for transparency and accountability, and consider the right to vote and participate in annual meetings an asset that provides opportunity to influence the direction and management companies. These and many other recommendations are listed and discussed in an April 3rd IRRC Corporate Governance Highlights.

The Teamsters lauched their annual attack on the “least valuable” directors with Robert Stone, who sits on the boards of Kirby, Tandem Computer, NovaCare, Core Industries, Russell Reynolds Associates and various funds managed by Scudder, Stevens and Clark, in the number one position. (IRRC)

Expanded thoughts on The Emperor’s Nightingale; Restoring the Integrity of the Corporation in the Age of Shareholder Activism by Robert A. G. Monks, our featured book of the month. (see review. Please share your opinion).

New Shareholders’ Bill of Rights adopted by the Council of Institutional Investors calls for indexing options granted to directors and managers to peer or market groups. In other news covered by ISS, IBM, which doubled the number of employees receiving stock options last year, more than tripled the number this year. The move is intended to keep talent with the firm.

Weil, Gotshal & Manges produced a report for the OECD on best board practices around the world. Contact Holly Gregory at 212-310-8038 for details. (reported in Directorship)

Business philosopher, Charles Handy, and author of The Hungry Spirit: Beyond Capitalism: A Quest for Purpose in the Modern World, calls for voting and nonvoting shares. Voting shares would be confined to and traded among core employees, long-term investors, and others with a long-term relationship with the business, such as large suppliers. This would differentiate among those who are merely betting on the company and those who have a real stake in its future.

Handy notes that much of the wealth of advanced industrial societies is now derived from the knowledge that workers bring to the job. “If anyone buys the business, they are buying a customer list, some product brands, and maybe some research, but, mainly, the hope that the best of the people working there will stay with the new owners for the ride.” Handy believes the influence of shareholders has become too dominate, that individuals will “begin to expect from their work communities the same collection of freedoms, rights, and responsibilities that they have in the wider society. People are property no more.”

As businesses realize their best people are really volunteers, there because they want to be and not because they have to, Handy expects models will be created which will provide them with a more democratic workplace. (see interview and A Better Capitalism, Across the Board. 4/98)

An assessment of the impact of the 1995 Private Securities Litigation Reform Act by Jay Eisenhofer and Abbott Leban leads off the March/April edition of the Corporate Governance Advisor. They find that only 6 public pension funds have participated as lead plaintiffs in the first 124 cases. They point to a recent perspective offered by Wayne Schneider, General Counsel of NYSTRS; a Federal securities law claim is a plan asset, and as such, it must be managed with a view to optimizing the fund’s return. The incremental return from a fund taking a lead plaintiff role is often not worth the costs. The authors review landmark cases and conclude that total volume of securities class litigation hasn’t changed much; traditional firms still dominate; and there has been a shift to state courts. They don’t expect institutional investors in the private sector to seek an activist role because most are “hopelessly conflicted.” On a positive note, increased competition among the qualified firms for the business of activist funds is reducing the attorney-fee portion of expenses.

Vermont enacted legislation banning trustees of the state teachers’ pension fund from accepting gifts and favors from money managers and others conducting business with the fund. (Pensions & Investments) California will consider two bills which attempt to address conflicts of interest at public pension funds at a hearing of the Public Employment and Retirement Committee on April 13th.

The Corporate Governance site was visited 27,000 times in the last year. Our influential readership is small but growing and is expected to easily double or triple in the coming year. Most of our readers are from the U.S. Most access the site Monday through Thursday. Readership outside the U.S. is greatest in the Britain, Australia, Canada, Japan, and the Netherlands (in that order). Thanks to members of ourNETwork for their continued financial support. Please let us know what news or features you would like and keep those link suggestions coming.

Arecent ISS Friday Report carried more on the previously reported move by Taiwan’s Securities and Futures Commission to require foreign institutions to vote in favor of all management proposals. Apparently, the rationale is to reduce the lack of quorums. ISS notes a better way to resolve the issue is to provide timely disclosure of meetings and greater detail of the items being submitted to a shareholder vote. Investors are invited to comment on the proposed regulation by faxing Philip Ong, Deputy Director of the SFC, International Division at 886-2-8773-4146. We would also suggest e-mailing the SFC, attention: Mr. Ong

Update 4/2/98. Mr. Ong responded to our recent inquiry as follows: “The issue you raised concerning the possibility of requiring institutional investors to vote in favor of all management proposals is still under consideration. The draft proposal was originally intended to require local securities investment trust enterprises to vote in favor of management resolutions. Yet in a preliminary meeting, participants suggested that it be expanded to apply to foreign institutional investors as well. The Commission will hold a public hearing to invite more thoughts on this issue. The public hearing is scheduled on April 4 (9:30am) at my Commission. Your comments are welcome.”

The Council of Institutional Investors adopted recommendations calling for options to be indexed against the performance of the overall stock market or an executive’s peer group. It also called for full disclosure and the unbundling of money that brokers charge investors for trading shares used to pay for other purposes, such as research.

The Essays of Warren Buffett: Lessons for Corporate America (Cardozo Law Review, $14.95) by Lawrence A. Cunningham distills 20 years of Buffett’s annual letters to Berkshire Hathaway shareholders. The author is interviewed in the April 6th edition of Forbes.

French investors want more disclosures by directors. A poll carried out by Ecocom, a communications consuzltancy, in conjunction with accountants Deloitte Touche Tohmatsu, found that 82% wanted directors to disclose the boards on which they sit, 80% wanted disclosure of the number of shares they hold and 73% wanted details of directors’ pay. (Financial Times, p. 17, 3/30)

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