G7 leaders to urge greater co-ordination in cross-border regulation of capital flows and to recommend a new code of conduct for open economies on financial disclosures and corporate governance, according to the the Financial Times. “It is likely to include support for a code of conduct for all open economies, requiring rules for disclosure of financial information and statistics on fiscal and monetary policy, with an agreed approach to corporate governance.” (10/30, Reuters)
John C. Bogle assailed the mutual fund industry at the Investor Responsibility Research Center’s annual conference for its failure to act on corporate governance issues and for failing to ensure that funds are managed in the interest of the shareholder. He noted the short term outlook of funds may change as more turn to indexing, which now represent 17% of institutional investments, since, in effect, they will be holding stocks forever. “It is hard to imagine that the trend toward indexing will not mean that all institutions — including mutual funds — will become far more assiduous, not only in their voting policies and in making proxy proposals where necessary, but in expressing their informed opinions to corporate directors and managers.” (CBS Marketwatch, 10/27)(Reuters)
Howard Schilit, author of Financial Shenanigans and president of the Center for Financial Research and Analysis in Rockville MD, is apparently a favorite of short sellers. Investor Relations Business (10/26/98) reports that companies receiving a negative valuation from Schilit over the past year were down an average of 42.73%. Red flags include: changes in auditors, outside legal counsel, CFO, accounting principles or estimates; large deficit of cash flow from operations relative to net income and substantial disparity between sales and receivables growth or between sales and inventory growth; and recording growth prematurely, such as stuffing distribution channels with product.
At a recent New York Society of Securities Analysts, Schilit outlined seven deadly shenanigans:
- Recording revenue before uncertainties are resolved.
- Recording bogus revenues such as income on the exchange of assets of similar value.
- One time gains by selling undervalued assets, retiring debt, burying losses under continuing operations.
- Shifting expenses to a later period by improperly capitalizing costs, depreciating costs too slowly or failing to write off worthless assets.
- Failing to record or disclose liabilities such as material commitments and contingencies, transactions to keep debt off the books.
- Shifting income to a later period; creating reserves and releasing them as income later.
- Shifting future expanses to current period by accelerating discretionary expenses or writing off future depreciation and amortization during the current year. [Investor Relations Business (10/26/98)]
Kevin F. Hallock of the University of Illinois at Urbana-Champaign analyzed CEO compensation at 550 firms between 1989 and 1995. Adjusting for size, CEO’s age and tenure, he found no relationship at all between layoffs and subsequent CEO pay hikes, contrary to popular conception. In addition, layoff announcements tended on average to slightly depress a company’s stock price. (BW, 11/2)
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Labor Rights — imposes no effective penalties for violation of internationally recognized labor rights and no meaningful obligation to enforce existing laws.
Expropriation and Compensation — grants extraordinary rights to corporations, including the ability to demand cash damages for any government action that has the “equivalent effect” of an “indirect expropriation.”
National Treatment – requires governments to treat foreign investors “no less favorably” than domestic investors regardless of preserving jobs or protecting natural resources.
Performance Requirements – restricts government ability to give preferences to domestic inputs, achieve a given level of domestic content, or hire local citizens.
Most Favored Nation – federal, state andlocal governments cannot differentiate between companies from countries that don’t comply with international labor or human rights standards and those that do.
Investor-to State Dispute Resolution – grants corporations the right to sue governments over public health or environmental regulations and “indirect” expropriation.
Capital Controls – restricts the tools governments may need to shield their economies from the destabilizing impact of speculative capital.
Immigration – allows unrestricted “temporary entry” for employees of multinational corporations.
Long Lasting Impact – most provisions lock in for twenty years.
The AFL-CIO calls instead for a restructuring of the world’s international financial institutions to promote sustainable, egalitarian economic development around the globe. “We support global rules that create strong enforceable rights for labor, communities, and the environment; that enunciate clear responsibilities for investors; and that create democratic accountability over capital. Such rules should be negotiated in a forum that allows for an open, inclusive, and democratic process.”
Pensions&Investments (10/19) puts institutional investing in perspective as P&I celebrates 25 years of reporting.
Chief Executive magazine named Praxair, Dana, Pfizer, Monsanto, and Summit Bancorp as the five best boards this year. Criteria used to evaluate boards included: size; representation of women and minorities; number of insiders; potential conflicts of interest; stock ownership by directors; and committee structure.
Mark Mobius, of Templeton Global Investments, is looking more at corporate governance and how minority shareholders are treated these days. As a result of the downturn, he believes people are going to demand transparency and economic democracy which go hand in hand. Now he not only evaluates profit and loss statements but also the people behind the company and whether they’ve cheated investors in the past. (AsiaWeek, 10/30)
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Accton Technology Corporation elected a new General Manager, Lee Hong-Yuh, for the coming year through an unusual process. The vote taken on 9/30 was divided between Accton’s management board (30%), Accton’s management employees (50%) and business partners (20%). The candidates were the company’s six vice-presidents but in the future any employee will be able to nominate any other. Accton’s employees get a 1/3 or more of their salary in stock and own a quarter of the company. This year only 79 senior staff (out of 1,000 employees), 10 board members, and 16 business partners were qualified to vote but it appears participation will grow in the next election. The idea is to let all workers know they have a say in the firm’s management and to encourage them to perform well. Although some view the election with ridicule (see The Economist, 10/10), we believe Accton’s bold experiment is likely to pay dividends. Their action could well become a model for others grappling with the problem of how to create more democratic corporations. (Accton press release)
James Champy, coauthor of Reengineering the Corporation, provides advice on executive compensation in Forbes 10/19.
Social Choice for Social Change: Campaign for a New TIAA-CREF is calling on TIAA CREF to invest 5-10% of Social Choice Account assets in very-progressive, generally small, companies. This means $100-200 million invested-in perhaps 100 companies. The investment criteria might include a company’s relations with: employees (worker safety, equitable salaries, family-friendly policies, union relations, etc.), consumers (product safety and quality, truthful advertising, no animal-testing, etc.), communities (low-income housing, community development, etc.), and/or the environment (recycling, pollution prevention, life cycle analysis and design, etc.).
Bob Tricker’s editorial, “The Role of the Institutional Investor in Corporate Governance” (Corporate Governance: An International Review, 10/98) and Hoffer Kaback’s “Rabbi Hillel on Corporate Governance” (Directors & Boards, Summer/98) share a growing concern over who will hold institutional investors accountable. Tricker notes that institutional investors are not all alike but range from the shareholder activists, like Monks and Buffet, to short-termers, who are rewarded for churning stocks. One positive direction for Tricker is for boards to view shareholders as “part of the family,” rather than as faceless investors. He recounts Sir Adrian Cadbury’s exhortation that the power of institutional investors “will only be seen as legitimate if it is open and reflects the views of those who have entrusted their money to them.”
For Kaback it is clear that many institutional investors don’t “eat their own cooking.” Guideliners, such as CalPERS and TIAA/CREF are big on aligning director interests with shareholder interests but how many pension fund executives are paid solely on the basis of the stock market performance or their funds? Guideliners want to limit the number of board seats and individual director holds. Yet, how many pension funds limit the number of companies they invest in to the number they can reasonably follow? Independence is high on the list of guideliner values but the TIAA/CREF boards contain individuals whose firms do business with the funds and TIAA board members serve seven year terms.
Similar themes are to be found in Watching the Watcherswhere Monks and Minow call on the government to enforce the ‘exclusive benefit’ rule under ERISA and provide similar guidance for private fiduciaries.
Our own opinion is that concern is warranted. Pension fund practices which allow trustees to sit on other investment boards or to accept gifts from those doing business with the fund should be questioned as inviting conflicts of interest. Should a pension fund director still be considered “independent” after serving for 28 years? We doubt it. Is mindless indexing the best strategy or is a duty to monitor inherent in the standards of prudence? We believe prudence demands funds be limited to investments which can be reasonably monitored. (seeKoppes and Rielly) In addition, election procedures in many funds need to be changed to give a fair and active voice to plan beneficiaries. Incumbents should not be given unfair advantage. (see Sacramento Bee, 10/9 and rebuttal) As long a funds were earning double digit returns, members/investors were likely to be complacent. However, a continued downturn in the stockmarket is likely to bring a renewed interest in the accountability of institutional investors themselves. Legitimacy requires they eat their own cooking.
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American Society of Corporate Secretaries met with Institutional Shareholder Services to discuss the process by which ISS researches proxy issues and advises its clients. Although the report in Pensions&Investments (10/5) starts by indicating ISS “is under pressure to make changes,” the meetings appear to have resulted in an exchange of ideas which should be welcome on both “sides.” Apparently, ASCS representatives expressed the fact that companies would like to see ISS’ analysis before it goes out. ISS noted they review 8,000 domestic companies so that isn’t practical. However, they do go back and forth with the company if there is a proxy contest, according to the P&I article.
Governance in a Bear Market is the title of a September ISSeditorial in which they recommend giving shareholders a chance to vote on option repricing (target) and poison pills (consider chewable features). ISS also calls for companies to adopt governance standards requiring a substantial majority of independent directors who are in charge of evaluating top execs, ensuring CEO succession plans are in place. Only independents should serve on compensation, nominating and audit committees. ISS also reports NYSE has proposed revision of its April requirements to adopt a broadbased stock option plan without shareholder approval…moving from 20% to 50 of “full-time, nonunion, U.S. employees” being eligible to participate. The changes are meeting a mixed response. Labor doesn’t like elimination of union
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the Corporate Governance Advisor, 9-10/98, contains one of the best short summaries we have seen in table format comparing corporate governance standards of the Business Roundtable, CalPERS, CII, NACD, TIAA, and ASCS while discussing how 15 firms met or failed to meet the benchmarks.
India is busy ironing out the Companies Bill with concerns raised on provisions limiting the age of directors and fixing remuneration. (see The Hindu, 06-10-1998)
Fairvest Securities, which publishes “Corprate Governance Review,” joins our growing list of Stakeholders. Their June/July edition included excerpts from remarks prepared by the Honourable Michael J..L. Kirby to the International Pension Conference held in Vancouver on July 21, 1998. The 1998 proxy season is reviewed by Deborah S. Gauris and the issue also includes a summary of 11 key recomendations which the Internaitonal Corporate Governance Network is making with respect to share voting procedures, including: abstentions should not be counted in favor of management, at least 28 days notice should be provided, verification of votes through independent tabulators, etc.
IRRC reports on CalPERS votes at shareholder meetings. CalPERS indicates they voted for management proposals 78% of the time. Executive stock option plans drew the most opposition. Of 399 proposals considered, CalPERS voted against 44%. In addiiton, they voted against 32% of the proposals to increase capital and 22% of the proposed director stock option plans.
IRB reports that the Association for Investor Awareness has started rating individual corporate investor relations. Looks like their off to a good start and we’ve added a link to their site under our Corporate Sites page. However, we wonder why such a site would include a mirror to the Kenneth Starr Report, investigating President Clinton. Sorry, we won’t be linking. The 9/28 edition of IRB includes an editorial against the way H.J. Heinz handles its earnings reports. We applaud Mr. Greco’s remarks. It does seem reasonable that numbers in the narrative should bear some relation to those in the actual income statement. Stockholder Consulting Services announced a new investor relations tool shareholder surveys. In conjunction with Rutgers, SCS, tested their survey for a Fortune 500 company. The private survey lets companies benchmark responses against peer groups or against all companies in the database.
Georgeson & Company Inc. has sold its investor relations division to Thomson Financial Services. Georgeson will retain its company name and continue as the leading provider of consulting and services to corporations on matters relating to proxy solicitation, mergers and acquisitions, corporate control, shareholder activism and corporate governance. (BUSINESS WIRE–Oct. 1, 1998)
Central trade unions in India have opposed the Government’s proposal to revise the guidelines which would fund the Employee’s Provident Fund entirely by the workers diverting 8.33% of wages per month to the new pension fund. (The Hindu, 10/4)
Ralph Ward’s Boardroom INSIDER offers advice on executive pay from Bud Crystal, editor of the Crystal Report. Make sure your consultant covers the possibility of both up and down markets, check out the benchmarks, question the use options and beware of option repricing; these are a few of the ideas covered.
CREF, part of TIAA-CREF, filed a brief in a Pennsylvania court objecting to the defensive tactics AMP has employed to ward off a hostile takeover by AlliedSignal (ALD). CREF, said AMP’s “poison pill violates basic core principles of shareholder democracy and corporate governance.” CREF owns about 1.3 million of AMP’s 218.6 million outstanding shares and about 9.8 million shares of AlliedSignal. (CBS MarketWatch)