Archives: September 1998

IRRC released a new report, Executive Pay 1997, which shows that every element of CEO pay is on the rise, especially rewards due to optoin grants. The report provides a comprehensive study of compensation paid to the chief executives of S&P Super 1,500 companies as reported in 1997Executive pay is sure to be one of the hotly debated topics presented at IRRC’s Investor Responsibility and Shareholder Value conference, October 25-27 at the Renaissance Mayflower Hotel in Washington, DC. Contact Charine Adams at 202-833-0700.

Japanese firms considering U.S. style accountability to shareholders. Foreign investors now hold up to 40% of companies such as Sony and Orix. Pressure is growing for Japanese firms to increase public information. Proposals to improve corporate governance have been drafted by business lobbies Keizai Doyukai and Keidanren, by the ruling Liberal Democratic Party, and by the CalPERS. (9/20, Reuters)

Korn/Ferry International released its 25th Annual Board of Directors Study. Nearly 3/4 of directors surveyed have a formal CEO evaluation process. Nearly 2/3 of respondents have written guidelines on corporate governance, and more than half have a formal committee responsible for reviewing corporate governance. Nearly 2/3 are strongly opposed to placing limits on CEO compensation. Korn/Ferry predicts meetings of independent directors, without the CEO present, will grow rapidly. Committee chairs and members will be appointed by the board. Stock ownership by board members will continue to grow and pension plans will be phased out. For a copy, contact Stephanie Rosenfelt at (212) 984-9316.

LENS disclosed it has become the owner of more than 5% of Juno Lighting and will press for improved performance. LENS principal Nell Minow says Juno recently had over $90 million in low-yielding cash and marketable securities which could be put to better use. The firm also needs better succession planning and greater independence on its board, according to Minow.

UCLA introduced new mergers and acquisitions certificate program for executives focusing on the requirements of successful mergers. Contact Levente Orosz or Lewis Gildred at 310.825.2001.

IRRC released a new report, Corporate Governance State by State, which covers 11 issues such as cumulative voting, staggered terms, and amendment of bylaws. Of the 2,000 companies in IRRC’s core universe, 58% are incorporated in Deleware with New York incorporations next at 4%. IRRC is also set to release a report on board practices which shows small cap firms are appointing more women to boards. Women on boards are more likely to be company employees, nonCEOs, and younger than there male counterparts.

Director’s Monthly carried an excellent list of director and board publications in its September issue. Also check out NACD’s new internet site at

Connell v CalPERS decided in Connell’s favor. On September 17th, Sacramento County Superior Court Judge Cecily Bond ruled that restrictions imposed by the California Public Employees’ Retirement System on campaign contributions from those doing business with the System are invalid because the CalPERS board did not follow the Administrative Procedure Act (APA) in adopting the regulations.

The irony is that when the CalPERS board found itself heavily criticized for possible legal and ethical violations, such as “pay to play” where contractors feel compelled to donate gifts and make political donations, the board decided to put its house in order by once again taking questionable legal action. In court, the board’s counsel argued it was exempt from the APA. However, a July 3, 1993 memo from CalPERS outside counsel, Joseph L. Wayatt Jr., made it clear that proposition 162, which gave CalPERS a greater degree of independence in making investment decisions, did not exempt CalPERS from the normal principles of statutory construction.

It is plain that other generally-applicable state laws [such as the APA], which are not closely connected to a retirement board’s administrative functions, are still operative and are not superseded or overridden by the provisions of the Pension Protection Act…the board’s exercise of its plenary authority in derogation of such a statute must be consistent with its fiduciary duties.

The court’s decision now means that State Controller Kathleen Connell can continue to seek contributions from CalPERS contractors, as can those unaffected by the CalPERS underground regulation, such as the governor, who appoint members to the board. William Crist, president of the CalPERS board, said the board would seek to re-enact the regulations by submitting them to the Office of Administrative Law. He said he hoped to have them back in place by the end of the year.

Many in Sacramento speculate the heavy handed ban on political contributions v the low requirement on gifts, now required to be reported under the provisions of another underground regulation not challenged by Connell, reflect the board’s dislike of Connell who has tried to limit members from taking frequent international junkets.

The net result is that CalPERS members lose again. The shakedowns and conflicts of interest continue and members must also bear the costs of a futile attempt by the board to put themselves above the law. Had the board acted properly, regulations to ban gifts and require more stringent disclosure of campaign contributions would have been in place long ago. (see Sacramento Bee, 9/19, PERS political donation rules thrown out: State controller wins her lawsuit on technicality)

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American Society of Corporate Secretaries finds growing alignment between shareholders and boards, as boards increase use of stock and options in compensation (up from 66.5% of the boards in 1995 to 80% in 1997). Vast majority have dumped pension plans for independent directors. Significant new trends include: regular meetings of outside directors often including formal review of CEO performance (without the CEO), periodic board meetings to review company strategy, reduction of board size, written board practices or corporate governance principles, periodic self-assessment of board functioning and effectiveness, allowing directors to be compensated by a deferral plan which includes a stock price-related investment feature, board nominating committees selecting candidates for director (instead of simply rubber stamping the CEO’s choices), majority of directors must be outside directors, and mandatory retirement age for directors.

The report indicates more than 75% of survey respondents turned “thumbs down” on establishing shareholder advisory committees, limiting the number of simultaneously held board memberships, setting term limits, formally designating a lead outside director, having the board meet directly with investors or other stakeholders, prohibiting a former CEO from sitting on the board of directors, separating the positions of Chairman and CEO, and setting up a procedure for formal evaluation of individual directors.

Copies of the study are available by writing David Smith at the Society, 521 Fifth Avenue, New York, N.Y. 10175. (PRNewswire, 9/15)

Florida Retirement System investments at stake. Tom Herndon, executive director for the State Board of Administration, wants to keep part of the pension fund in the hands of active money managers, whereas state auditors want a switch to index funds, which they say tend to perform better and cost less. In the 1996-97 fiscal year alone, the State Board could have earned an additional $612 million and saved another $49 million in fees if it had used just index funds, according to the auditors. (WSJ, 9/16)

The Economist calls on European companies to adopt the American practice of share buybacks as a crucial ingrediant of efficient capital markets. Governments will need to change policies to facilitate. (8/15/98)

Toronto Stock Exchange (TSE) to set disclosure guidelines to corporate web sites, according to report in Investor RelationsBusiness, 11/14/98. TSE suggests companies consider posting transcripts of all analyst conference calls, that material news releases be issued to newswires before posting, and that an e-mail link allow investors to communicate directly with IR reprensentatives. For more information, see the IRB article andTSE’s press release or call 416-947-4760 to obtain a copy.

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Corporate Watch reports 30 citizens’ organizations and individuals filed a 127-page petition seeking action by the California Attorney General to revoke the charter of the Union Oil Company of California (Unocal). Petitioning organizations include the Feminist Majority Foundation, National Organization for Women (NOW), Rainforest Action Network, Global Exchange, Earth Island Institute, Free Burma Coalition, the Alliance for Democracy, the Program on Corporations, Law and Democracy, and others.

Corporate charter revocation is gaining popularity as a legal maneuver. Earlier this year, the New York attorney general asked a court to revoke the charters of two tobacco industry research firms, and an Alabama judge, acting as a private citizen, filed suit to pull the charters of six tobacco companies in that state.

The petition to revoke Union Oil’s corporate charter (the parent company, Unocal, is chartered separately in Delaware) lists 10 causes of action alleging, among other things, complicity in “crimes against humanity” and environmental abuses related to Unocal’s dealings in Myanmar, formerly Burma; its plans, currently suspended, to build a gas pipeline through Afghanistan; its treatment of U.S. workers; and various
oil spills and chemical leaks.

Minneapolis/St. Paul study of 30 firms finds incestuous community, with regard to those serving on compensation committees. (see Top-paid execs are paid by peers)

Universal Banking, Control Rights, and Corporate Finance in Germany is the title of a paper by William R. Emmons, a research economist, and Frank A. Schmid, a senior economist, which appears in the lastes edition of the Review, the Federal Reserve Bank of St. Louis’ journal of economic and business issues. Their aim is to lay the groundwork for future research to determine how people and institutions (investors, banks, employees, etc.) fare under different financial systems. Subscriptions to Review are free and can be obtained by calling 314-444-8809.

Connell v CalPERS was heard in Superior Court on September 4th. No indication was given as to when a decision will be made. Fearing that CalPERS would file regulations to accomplish the same purpose as their adopted policies (which effectively prohibit certain campaign contributions), Connell’s attorney, argued constitutional issues, primarily free speech. However, the judge, Cecily Bond, appeared more interested in determining if the case could be decided on the applicability of the Administrative Procedure Act (APA).

CalPERS argued they are exempt from the APA because the California Constitution grants the board “plenary authority and fiduciary responsibility for investment of moneys and administration of the system.” Could OAL’s review really be considered “substantive,” questioned judge Bond. Yes, responded CalPERS counsel, especially troubling is OAL’s ability to rule on the “necessity” of a regulation. CalPERS argued the campaign contribution policies are strictly internal and that a gift policy adopted at the same time had not been challenged. Judge Bond questioned how the policy could be interpreted as “internal” when it obviously requires external contractors to make disclosures.

The petitioner argued Senator Schiff’s recently passed SB 1753would provide needed protections. The fact that the legislature continues to enact measures which restrict CalPERS is evidence, he indicated, that their plenary authority is limited.

Most interesting to this observer was that CalPERS counsel, at one point, argued that no first amendment rights are violated, since the resolution could easily be circumvented by donating to the Democratic Party and requesting they provide assistance to Connell’s campaign. A would be contributor could also have their spouse donate or they could solicit friends to donate. None of these activities are prohibited by the polices, according to CalPERS counsel. One might wonder, if the policy is so easy to circumvent, why is CalPERS claiming it assures members and taxpayers “that there can be no question that their pension fund is managed responsibly and ethically“?

On the other side, it was interesting that Connell’s counsel failed to bring up the issue that if CalPERS considers themselves exempt from the APA, why do they use the process sometimes but not at other times? For example, on August 24, 1998 CalPERS regulations on board members elections were filed with the Secretary of State, adding section 554.10 to their regulations (OAL file #98-0810-01R).

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IRRC released software allowing investors to establish their own screens for socially responsible investing. Company profiles include involvement in alcohol, tobacco, firearms, human rights and other criteria as well as % of revenue from such sources.

IRB covers appointment of investor relations personnel to corporate boards and calls it evidence that corporate governance is advancing in the right direction– toward investor relations. Mentioned are the appointment of AT&T’s Connie Weaver to Applied Cellular Technology (she also serves on Primark Corporation’s board) and Rust Page’s appointment to Network Long Distance Inc. In other articles, IRB discusses the growth of chewable pills and the recent court decision in favor of SWIB on options repricing at CardioThoracic Systems. (IRB, 8/31/98,

Brussels bourse to require compliance with corporate governance rules or explanation, according to newswire reports (

Peter Drucker predicts Europe and Japan, diriven by a social security crisis, will reform their corporate governance practices and move from an emphasis on stakeholder to shareholder concerns…but it will take five, eight, ten years and it won’t look like an American copy. (Forbes, 7/98)

Rhoda G. Edelman, Managing Director of Peal Meyer & Partners, surveyed mutual fund managers and leading securities analysts. Nearly all were favoralbly influenced by CEO direct purchases with their own funds. Most also favored board-based stock option grants to rank-and-file employees. In another survey, her firm finds that net income for 100 companies surveyed went up 29% in 1997, shareholder return 35% but CEO compensation only 25%. Toronto Stock Exchange‘s Roland W. Fleming see convergence on the horizon with Anglo-Saxon countries moving toward “stakeholder” capitalism, whereas Japan and Germany are moving the other direction. (sounds like a polite line for International Corporate Govnce Network conference) Davis Global Advisors ranked UK above US for shareholder friendliness..less powerful CEOS and better shareholder protection. Germany is moving up due to increased discloure and increased shareholder voting rights. (Directorship, 9/98)

Ralph Ward’s Boardroom Insider speculates. “Recall that the US’s last boardroom tsunami coincided with our most recent recession of 1990-92.  A booming market can obscure management failures, but weak markets bring out the weaknesses in companies, and lead to unpleasant questions from investors.  If recent corrections really mean that the late 1990’s bull market is over, look for a new era of splashy investor activism, busy boards and some unemployed CEOs.”

Setting up new boards is another topic for Ward’s publication this issue as he interviews Delphi Automotive Systems’ chairman-designate J.T. Battenberg, setting up a spin-off of General Motors. A second expert is Bill Gross, chairman of Idealab who has literally learned how to “mass produce” effective, entrepreneurial corporate boards from scratch.

Equity losses at CalPERS could be pegged at $13.92 billion and at CalSTERS at about $9 billion but both funds are reportedly unfazed by the equity plunge. (WSJ, 9/1)

Will equity losses result in option repricing? Among those hardest hit: Eastman Kodak Co.’s George M.C. Fisher (paper loss $23.8 million); Oracle Corp.’s Lawrence J. Ellison ($18.2 million) and CSX Corp.’s John Snow ($15 million). (WSJ, 9/1)

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