Archives: July 1998

Pensions&Investments, 7/27, editorial calls on the New York State Common Retirement Fund to drop out of the lead in the class action suit against Cedant. H. Carl McCall, sole trustee, as elected comptroller of New York state, apparently got a $40,000 political contribution from Bernstein Litowitz Berger & Grossman, the same firm handling the case. The editorial is especially timely given the recently released American Bar Association task force report on lawyers’ political contributions and pay to play.

The same issue of P&I also notes the growing influence of the internet in linking shareholders, citing CIILENSAFL-CIO’s Executive PaywatchCalPERSMotly Fool and our own “huge website on corporate governance.” Yes, and we’re just getting started.

Risk of being sued down but 37% of corporate directors report being sued at least once, according to a 1998 Louis Harris report.

Nell Minow took the NYSE to task for appointingDavid Smith, head of the American Society of Corporate Secretaries, to represent shareholders in reviewing its proposal to exempt certain broad-based stock option plans. ISS reports that while Minow has high regard for Smith, she believes it is “unimaginable” that he could be considered a representative of the very group that files resolutions often opposed by the members of ASCS. Minow also called on the SEC to hold a hearing on the proposed policy. (ISS Friday Report , 7/24) We suggest you may want to join her by e-mailing your objections to Ms. Catherine Kinney, NYSE Group Executive Vice President. We couldn’t locate her address but we used theNYSE form and asked them to forward our note to Ms. Kinney.

Nicholas Benes, president of Japan Transaction Partners, advocates breaking the power of managers by requiring the boards of all listed corporations to have a majority of outside directors–not insiders nor from cross-shareholding companies. “The bridge-bank scheme as it is now conceived looks to be just a clever way of continuing the old practice of keeping deadbeat borrowers on life support. Nobody should believe the Japanese government is serious about reform until it takes power away from managers and puts it in the hands of shareholders, where it belongs.” (WSJ, 7/27)

Delaware court rules against “dead-hand” poison-pill, saying it strips shareholders of their rights. The court found that continuing-director provisions make a proxy contest realistically unattainable. “Absent express language in the charter, nothing in Delaware law suggests that some directors of a public corporation may be created less equal than other directors, and certainly not by unilateral board action,” wrote Delaware Chancery Court Vice Chancellor Judge Jack Jacobs. (WSJ, 7/27)

Who should be entitled to a voice in running a corporation? Carlin Meyer asks the question in the context of SEC’s reversal of Cracker Barrel. “It is time to reassert greater public control over these entities — to collectively establish policies, guidelines and even rules for everything from employment policies (including officer salaries) to product decisions to political and charitable giving to advertising campaigns.” Ms. Meyer calls for international treaties that subject corporations to democratic control. (San Francisco Chronicle,7/24, A25)

Drawing on data for 258 large U.S. companies in 1992, Gerard Sanders and Mason Carpenter found that multinational firms with more international operations have higher:

1) levels of CEO pay;

2) fraction of the CEO’s compensation that is long-term (largely stock based);

3) size of the top management team and its governing board.

Source: W. Gerard Sanders and Mason A. Carpenter, “Internationalization
and Firm Governance: The Roles of CEO Compensation, Top Team Composition,
and Board Structure,” Academy of Management Journal, 1998, Vol. 41, No. 2,
pp. 158-178. From Wharton Leadership Digest, July.

James Kristie won the Philadelphia Prize, awarded by the Financial Analysts of Philadelphia, for his article “Timeline: The Evolution of 20th Century Corporate Boards” which appeared in the Fall 1997 edition of Directors & Boards. If we gave a prize for the best article of 1997, we’d give it to Kristie as well.

Mutual funds, in theory owned by its shareholders; in practice owned by one fund company. At even the fund families, directors “can range in background from experienced corporate managers and directors to the friends or college buddies of the top executives of the fund management company.” This fall, the SEC will host a round table intended “to air the issues and to work toward a consensus on whether changes are needed in the current system,” accoding to SEC Chairman Arthur Levitt Jr. (NYTimes, 7/7) Also in the same issue, “directors with a lot of money tied up in the stock of the company they oversee are more likely to dismiss a poor-performing chief executive than directors who don’t have much money at stake, according to a new study.

As little as 1/3-1/2 of most companies’ stock-market value is accounted for by hard assets such as property, plant and equipment. This has led to a search for elaborate computer models to measure the links between employee satisfaction, customer satisfaction and revenue. Sears, for example found that if employee attitudes improve by 5%, customer satisfaction will jump 1.3%, resulting in a 1/2% rise in revenue. (WSJ, 7/22, B1)

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NACD’s Blue Ribbon Commission on CEO Succession recommends assessment take place regularly by independent directors and that boards have a contingency plan in place at all times. Core principles include: finding the right leader at the right time, board driven collaborative process, continuous, ensure CEO builds talent-rich firm by attracting and developing right people, driven by corporate strategy. For a copy of the report call 202.775.0509 or 202.467.8076.(IRRC, 7/13)

Fortune magazine compiled a list of the top 50 companies for Asians, Blacks and Hispanics. Pacific Enterprises, a $2.8-billion-a-year Southern California utility holding company comes in first. Companies that do good things for minorities also do well by shareholders. “The average return to investors for the publicly traded companies on our list walloped the S&P 500 over the past three- and five-year periods: 125.4% to 112.2% and 200.8% to 171.2%, respectively.”

Gag Rule. William Crist, president of the CalPERS board, asked Charles Valdes, chairman of the investment committee, to rule State Controller Kathleen Connell’s representative out of order for questioning money management executives about political contributions. Pensions&Investments, 7/13 The majority of the board appears to continue to support a recently enacted policy which cuts off political contributions to the controller and treasurer but leaves intact such contributions to the governor and legislative leaders who appoint four board members.

In other news at CalPERS, Governor Wilson signed a bill appropropriating $332.8 million in court-ordered back-interest payments resulting from a raid on the fund (missed contribution payments) repaid last year. President Crist said the payment shows employers can’t “shortchange” employees. However, Jake Petrosino, a board candidate for the public agency seat, points out the state paid only 8.75% compound annual interest, instead of the annualized system return of 19%. Petrosino says the plan “got screwed” by the state.Pensions&Investments, 7/13

We’ve posted a conversation with Margaret Blair, author of the classic Ownership and Control. Please let us know others in the field you would like to hear from.

Telxon Corp. sued Guy Wyser-Pratte to stop him from making “false and misleading statements” and to prevent him from soliciting proxies for proposals the company believes are “illegal and unenforceable.” Wyser-Pratte who holds about 730,000 shares, or 4.95% of Telxon’s outstanding stock, proposed amendments to Telxon’s bylaws to allow shareholders to vote directly on proposals to buy the company and to defuse Telxon’s “poison pill.” See Akron Beacon Journal, 7/14Wyser-Pratte responds.

Highlights from the International Corporate Governance Network conference held in San Francisco are reported by CalPERS on its press release page.

report by NACD’s Blue Ribbon Commission on CEO Succession “seems sure to intensify many boards’ involvement in power transfers at the top, according to a report in the Wall Street Journal (B6, 7/13). Prior commissions, “sparked extensive boardroom changes in such touchy areas as excess board seats, CEO report cards and stock pay for directors.”

July 10th is the last day to get comments in to the New York Stock Exchange regarding their Shareholder Approval Requirements for Broadly-Based Stock Option Plans. (see letter of comment by Jamie Heard, Chairman and CEO Proxy Monitor) (see also comments by Thomas E. Flanagan on ourbulletin board or on the IRAA site or the CNNfn articleExecutive ‘gravy train?’)

Ousted Sunbeam CEO, Chainsaw Al, seeks to clear his “good name.”

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California Controller Kathleen Connell’s re-election committee sued CalPERS over a new rule prohibiting those doing business with the system from making campaign contributions to its directors. (See Sacramento Bee, 7/6) The rule was put into place only after board actions were heavily criticized in the press, came under the scrutiny of the FBI and were subjected to a Senate hearing. Each focused on possible conflicts of interest such as deals involving relatives and former board members, gifts, allegations of high living, extensive travel, and campaign contributions funded by those doing business with CalPERS.

In total denial, CalPERS President William D. Crist then issued a press release stating “There has been no evidence or even suspicion of corruption by any CalPERS fiduciaries because of political contributions or gifts. Nevertheless, we have taken the extreme measure of banning political contributions and requiring the fullest disclosure possible (of gifts).”

Some speculate the campaign policy was payback for Connell’s aggressive stance on board members accepting free travel. The action may have also been motivated by a desire to focus the spotlight on campaign contributions, largely raised by the Controller and Treasurer, instead of gifts received by most of the 13 member board…gifts which under the new policy, they can continue to receive.

The writ of mandate was filed by Connell’s re-election committee on July 2nd. The committee alleges a violation of First and Fourteenth Amendment rights, discrimination (only incumbents are fully subject to the policies, not other candidates for the same office), lack of statutory authority to enact the regulation, and failure to comply with the Administrative Procedure Act (notice, comment, consistency, clarity, necessity and other requirements). They appear to have an excellent case.

This time CalPERS President Crist said in a July 4 statement, the “board evaluated this issue over an eight-month period, considering very carefully the potential impact on the political process. Ultimately, the board determined that the protection of the system’s one million members from the taint of “pay-to-play” was absolutely necessary to comply with our fiduciary duties.”

However, this editor attended the committee meeting where the rule was introduced. While the board may have contemplated the issue carefully for months, the wording of the policies was not made available to interested parties prior to being publicly discussed and major portions were crafted by Crist on the spot. Because of these improprieties, I petitioned CalPERS to go through the rulemaking process for its conflict of interest policies and, when that was rejected, requested a determination from the Office of Administrative Law (OAL) on 4/30. Unfortunately, because of staffing cutbacks, OAL is not expected to get to my case until next year; we can expect action on the Connell writ much sooner.

The irony is that CalPERS is viewed an effective leader in the area of corporate governance… seeking independent boards with high moral standards. Yet, the ethical policies it chose to adopt for its own board consisted largely of unenforceable window dressing in violation of several laws. Had the policies gone through the legally required rulemaking process, CalPERS would likely have adopted more modest conflict of interest regulations with regard to political contributions and stronger regulations with regard to gifts. As it is, the court will likely throw out the rules regarding political campaign contributions but will probably leave the weaker gift policy standing, since Connell’s campaign committee did not ask the court to address that issue.

Stanford University Law School has announced that it is planning to establish a Fiduciary College for trustees and senior management officials of public and corporate pension funds, Taft-Hartley pension funds and endowment funds. Curriculum of the initial Fiduciary College would focus on the fundamentals of modern finance and portfolio theory and their implications, fiduciary duties and responsibilities, governance issues for the funds, risk-adjusted performance assessment, roles in corporate governance, trading issues, and international investing. Teaching faculty would include appropriate practitioners, as well as faculty from the Law School, including Professor Joe Grundfest. Fiduciary College will be directed by Richard Koppes. For more information, seeNAPPA.

NACD will hold its 16th Annual Corporate Governance Review Meeting in Washington DC, 11/1-3, and will present its Blue Ribbon Commission Report on CEO Sucession as well as its Director of the Year Award. Call 202/775-0509.

Richard Ayers, one of the more interesting characters I’ve met through Corpgov.Net, has finally gotten his way with Nevada Power. As IRRC (5/1) put it, “Third Time is the Charm.” Mr. Ayers used the unususal tactic of phrasing his proposals agaomst the director retirement plan so that a yes vote was a vote against terminating such benefits. He withdrew it this year when he learned the board had finally caved. Congratulations! One relatively small investor can make a difference.

Financial Women’s Association of New York (212) 553-2141, with 1,100 members, has launched a campaign to encourage more women on corporate boards. IRRC (5/1)

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10 year limit on board tenure, as initially proposed by CalPERS staff for their corporate governance principles, would apply to 45.8% of directors at companies analysed byIRRC, according their 4/2 report. As I recall, only about 38% of the CalPERS board itself would fall into that category.

Employees, through their ESOP, sought to send a message toAvondale Industries by sponsoring proposals to redeem poison pill, declassify the board, and implement confidential voting. (ISS, 6/5)

Direct Report announced it can provide their on-line investors with over fourteen separate news, research, and communications functions — all customized and seamlessly integrated with their existing corporate web site.

Meredith Miller, who has served as PWBA’s Deputy Assistant Secretary for Policy for the last 5 years, will carry out the duties of Assistant Secretary until a permanent candidate is appointed to fill the post. She will be responsible for administration, policy making and enforcement of the Employee Retirement Income Security Act (ERISA). (PWBA, 7/2)

Contrasting shareholder meetings. Dell Computer will useADP’s internet voting facility and will conduct an audio broadcast through their internet site, while the Green Bay Football Corporation will hold its shareholders meeting at Lambeau Field, expecting 20,000. (ISS, 7/2)

Apria Healthcare (AHG) has created a model corporate governance board (exceptional talent, independent and strong shareholder orientation) but can they turn the company around? Patrick McGurn, of ISS, reports that “some commentators view this mix of talent and ownership as a prototype for boards in the next millennium. Given the stakes in this game, however, there are some defenders of the status quo who would love to see the grand experiment fail.” If it does fail, it will be hard to know if failure is due to reduced Medicare rates, past billing practices or the new board. I’m betting they’ll succeed. (ISS, 7/2)

Ralph Ward’s Boardroom INSIDER… 7/98, reminds us that Al Dunlap will be remembered for making his boards a real tool of shareholder value. “He frowned on ‘professional’ directors who serve on too many boards (and eased one such member off the board at Sunbeam), favored term limits, and cut the number of Sunbeam insiders at the table. Perhaps Dunlap’s biggest contribution was to make director stock pay and stock holdings a religious conviction.” “So before you cheer too loudly over Chainsaw Al getting the chop, bear in mind that it was his own board reforms that assured he’d receive no slack. Those who live by shareholder value die by shareholder value.”

SB 1879 (Hayden) passed out of the California Assembly Committee on Public Employees, Retirement and Social Security on July 1st. The bill is intended to provide greater clarity with regard to potential conflicts of interest by CalPERSboard members. One provision, for example, requires that any gifts, including the reimbursement of travel expenses by parties financially interested in investment transactions are to be disclosed. Failure to do so would carry a financial penalty of $10,000. SB 1753 (Schiff), dealing with potential conflicts of interest at CalPERS and CalSTRS, is also moving through the Assembly. SB 1753 would bar the boards from considering matters in closed session involving a vendor without prior disclosure of the vendor’s gifts and campaign contributions. Requires investment decisions made in closed session to be made by roll call vote and disclosed within 12 months. Prohibits specified communications by the governing board members with financially interested persons during the contract awarding process. Prohibits specified communications by a financially interested person with board members on matters relating to the transaction or evaluation, without disclosing the communication to the executive officer and the board. Requires elected members of the PERS governing board to file semiannual campaign statements.

The $38 billion New York City Employees’ Retirement System spent four years and as much as $150,000 on 4 studies before deciding to freeze tobacco holdings in their passive portfolios. According to a report in the June 29th edition ofPensions&Investments, their tobacco holdings lost an estimated $50 million in value while they deliberated.

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