Archives: November 1998

Barbara Hackman Franklin reviews 3 proactive processes to help audit committees prevent problems. Identify areas of potential risk with key players, hold regular executive sessions at each meeting with each of the key players separately, and report to the full board each meeting. (see Tone at the Top, 9/98)

NACD’s “Report of the Blue Ribbon Commission on CEO Succession” was released last July and is reviewed by John F. Olson (senior partner at Gibson, Dunn & Crutcher LLP) in the Corporate Governance Advisor (11-12/98). The Commission arrived at 5 core principles:

  1. The goal of the process is to find the right leader at the right time.
  2. CEO succession decisions should be board-driven.
  3. CEO succession is a continuous process.
  4. The board should ensure that the CEO builds a talent-rich organization.
  5. Succession decisions must be tied to corporate strategy.

The same issue includes an article by Matthew Gaved on recent governance reforms in Germany. The new Control and Transparency Law, effective May 1998, limits the number of boards a director can sit on, sets minimum frequency of board meetings, requires that auditors be appointed by supervisory boards (not management boards), and set out reporting requirements of supervisory boards to shareholders on how control is exercised with respect to management, details of committees established, the number of meetings. Multiple voting rights are diminished, transparency in stock owned by banks is improved, minority rights are further defined, repurchases and options are provided, auditors will be rotated and financial statements are required to include additional information on options and shares held by the company itself.

Business Ethics magazine announced its 10th annual business ethics awards. The award for philanthropic excellence went to SmithKline Beechman for its commitment of $1 billion to eradicating lymphatic filariasis worldwide. Wainwright Bank & Trust won an award for general excellence for dedication to social justice, in areas from community lending to domestic partner benefits. S.C. Johnson won for its 60 year involvement with sustainable community development. In other news from the 11-12/98 edition of Business Ethics an event study done by Whiton S. Paine, Shaoping Zhao, and Chaie-Lin Wu (contact: [email protected]) found that being named to the Business Ethics 100 was associated with a 1-2% increase over a two-day period.

SEC has placed proposed reforms re corporate registration and filing requirements on their internet site for comment. The proposal covers registration system reform; communications around the time of an offering; prospectus delivery requirements; integration of private and public offerings; and periodic reporting under the Securities Exchange Act of 1934. Comments are due April 5, 1999.

Singapore is about to notch up as a financial center by creating an SEC type body responsible for investigating fraud, insider trading, other securities violations and for bringing civil actions against violators. (see Marc Goldstein’s article in ISSFriday Report, 11/20/98)

Guy Wyser-Pratte has developed a new poison pill proposal to be introduced in the 1999 proxy season. A binding bylaw resolution, it will prohibit the board from changing the expiration date of the poison pill or adopting any new pill without shareholder approval. WWIB and several union funds to submit similar proposals according to IRRC CG Highlights 11/20. Same issue reports on a study entitled “Altering the Terms of Executive Stock Options,” by professors from New York University’s Stern School of Business, which find that “resetting represents a windfall for poorly performing managers rather than a necessary adjustment in incentives or a device for retaining talent.”

CalPERS and Hermes have formed a strategic alliance, endorsing each other’s home market corporate governance and voting practices, consult and cooperate when taking action, and represent each other at meetings.

Bosses Under Fire, chronicles turmoil in the European boardrooms of Hoechst, Telecom Italia, Philips, Siemens, British Airways, Alcatel, Baan, and others. European execs are rushing to embrace shareholder value and good corporate governance but many are “distressed by increasing transparency and initiated by investor pressure to boost performance. Behind closed doors, some are fighting to slow change, while publicly intoning the mantra of shareholder value.

Shareholders across Europe are achieving results, recently firing CEOs and dismissing entire boards. On Jan 1, stocks in all the member nations of the European Monetary Union will be priced in euros, so comparisons will be easier. Fund managers are responding to increased competition. Companies are restructuring. Last March, 15 Dutch pension funds with $42 billion worth of holdings in Dutch companies teamed up to investigate the corporate governance practices of all the companies on the Amsterdam market index. At the top of their hit list was Philips Electronics.

CalPERS is allying with local relational investors in Britain, France, Germany, and Japan, doubling its international equity holdings since 1995, to $22.8 billion in 1998. The euro could also help drive a convergence of global corporate governance standards, according to Business Week, 11/30/98. “A new generation of European managers recognizes that unless they make shareholder value a priority, raising capital will be tough for them in the future.”

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Japanese have finally embarked on a “nationwide process of rooting out nasty truths about their system.” The pillars of the system are crumbling. The Economic Strategy Council (ESC) wants to roll back government’s role in everyday life and bring Japan up to global standards of transparency and efficiency. Others call for a national job-retraining program or a high-consumption economy. Cross-shareholdings are being dumped to free badly needed funds. Roughly two-thirds of the stock market’s tradable shares were locked up in such networks. Now, it’s less than 50% and falling fast. Business Week, 11/30/98

Fairvest Securities retained Philip Anisman to respond to a proposal by the Canadian Centre for Ethics and Corporate Policy to amend the Canada Business Corporations Act (CBCA) to authorize directors and officers to consider the interests of persons other than shareholders who may be affected by corporate conduct. Anisman correctly points out the proposed subsection would enable directors and officers to pick and choose among the various interests and “would result in their having responsibility to none.” When directors and officers legitimately take into account the interests of those other than shareholders, it is “always in the context of furthering corporate business interests.” (Corporate Governance Review, 8-9/98)

In the same issue researchers Jeffery G. MacIntosh and Larry Schwartz find empirical support for the notion that, in Canada, institutional investors increase value and reduce the danger of redistributive transactions engineered by controlling interests by monitoring corporate managers and/or controlling shareholders.

Greenbury has failed to provide for his own succession and has discovered just how important good corporate governance is, according to The Economist. Stitched onto a cushion in his office are the words “I have many faults, but being wrong is not one of them.” A joke, perhaps, but Sir Richard’s tendency toward absolutism is failing at his venerated firm of Marks and Spencer. With 16 executive directors, only 6 are nonexecutives and one of those is a former executive member of the founding family. Their experience is too narrow to serve M&S’ expanded focus which has moved beyond clothes to financial services. (The Economist, 11/21/98, p. 80)

Quickturn Design Systems’ limited “dead hand” poison pill defense, whereby the board of directors is frozen and precluded for six months from acting on Mentor’s bid, could be decided next week when the Delaware chancery court is expected to rule. See Directors Choose Their Poison: High-tech companies are waiting on a Delaware ruling that could refine anti-takeover defenses.

BNA has joined our NETwork. Contact Samara Ferber, BNA Product Specialist.

Kinder, Lydenberg, Domini & Co., Inc. (KLD) and Proxy Monitor announced a new strategic alliance to serve the needs of socially conscious institutional investors. “Our clients can receive expert advice not only on socially responsible shareholder proposals, but also on corporate governance and executive compensation issues,” said Peter Kinder, President of KLD. “Proxy Monitor clients that use social criteria to make investment decisions will have access to the best research available not only for proxy voting, but also for portfolio selection and evaluation,” Proxy Monitor’s Chairman and CEO, James E. Heard noted. Contact: Susan Assadi[email protected] 602-860-8792 (Proxy Monitor) Peter Kinder 617-426-5270 (KLD).

Proxy Monitor also announce creation of Year 2000 Portfolio Reporting Services to assist investment advisers in reviewing public companies’ exposure to the Year 2000 (Y2K) problems. Investment advisers have about a month to respond to Question 11 Form ADV-Y2K posed by the SEC asking if they have reviewed the Y2K exposure of issuers they recommend.

Listen to a broadcast of the National Investor Relations Institute (NIRI), Pittsburgh Chapter, on “Shareholder Activism” held on 11/10/98. Panelists are Mr. Patrick McGurn, VP, Director, Corporate Programs at Institutional Shareholder Services, and Mr. Stanley Yorsz, Securities Litigator at Buchanan Ingersoll PC. Topics discussed include:

  1. Trends in institutional investors…attitudes toward corporate governance
  2. How buy-side institutions set policies on corporate governance, what is expected from companies in which they invest
  3. Tips on protecting yourself against shareholder lawsuits

CalPERS elections called into question. Protest Panel to make decision concerning violation of the board election rules. (Sacramento Bee, 11/13/98)

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Mutual fund managers are under increasing attack. Donald Yacktman will face off Nov. 24 against directors of the board that oversee his two funds and charge investment “deviations” and “code of ethics” violations. Recently dissident directors won control of closed-end Clemente Global Growth Fund. (see Detroit News, 11/12/98)

Victoria University of Technology survey found that 47.4% of shareholders rated the CEO remuneration information contained in annual reports as of little or no use. 76.7% saw the remuneration levels as excessive. “We now know that the single most important piece of information shareholders wish to see disclosed in annual reports relates to the achievements of the CEO relative to targets. The overwhelming majority of shareholders are dissatisfied with the current lack of transparency.” (Sydney Morning Hearld, 11/11/98)

You’ve Come a Short Way, Baby. According to a Business Week report, women are making progress in Corporate America–but it’s slow going. In the same issue, Conseco execs rake in more than $590 million if they sell the company. “The most dramatic perk at Conseco is an exceptionally lavish stock option program…kicks in when there is a change of control.” “Pass me the smelling salts,” says compensation expert Graef S. Crystal. (BW, 11/23)

Should mutual funds give kickbacks to employers for including them in their 401(k) plans? Are employers choosing funds on their own merits or because they deliver fat rebates? A 11/11 WSJ article entitled “Rebate War Is Waged for Pension Funds,” asks the intelligent question, “Is the money that is being rebated to the plan ultimately benefiting the individual investors?” Do the employees know who is getting the rebates? It would seem a lot cleaner just to lower the fees for qualifying investment plans. DOL should not only require full disclosure of fees to employees but should ban rebates to employers to avoid the appearance of any conflict of interest.

Australian Securities and Investments Commission requires annual reports to report to their shareholders on environmental compliance. Reporting requirements are ill-defined as yet but are expected to evolve. Examples of environmental performance covered by the new provision may include compliance with air, water and noise pollution, contaminated lands, and threatened species laws. (The Sydney Morning Hearld, 11/11/98)

Female corporate executives earn 68 cents to every dollar earned by the highest-paid men, according to Catalyst, a New York-based nonprofit group. Median total compensation of men in a recent study was $765,000; for women it was $518,596. For the U.S. work force as a whole, women earned 76 cents for every dollar men made in the first quarter of 1998. Among Fortune 500 companies, there are only two female CEOs — Jill Barad of Mattel Inc. and Marion Sandler of Golden West Financial Corp. The 1998 Catalyst Census of Women Corporate Officers and Top Earners found only 63 women (2.7%) among the 2,320 top-earning corporate officers in Fortune 500 companies (an increase of two since 1997).

Secretary of State Madeleine Albright said Washington would push “beyond government to the needs of business in Asia: pressing for corporate restructuring, considering ways to deal with the burden of corporate debt and improving corporate governance” at the 11/17-18 meeting of APEC (Asia Pacific Economic Cooperation) in Kuala Lumpur. “Nations with deeper problems must take tough steps required to develop broad-based and accountable democratic institutions that will curb corruption, earn investor confidence and engender support.” (Reuters, Silicon Valley Forum in San Jose)

Institute of Chartered Secretaries and Administrators study of top 350 UK firms found 93% reporting their remuneration committee is comprised entirely of nonexecutive (outside) directors and 92% of the chairs took questions at the last annual meeting. IRRC notes, “the results underscore just how quickly Greenbury and Hampel’s provisions regarding remuneration committees have gained market-wide currency.” (IRRC, 10/30)

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