Archives: March 1999

ISS backs TIAA-CREF’s shareholder proposal to strike down Lubrizol Corp.’s (LZ) dead-hand poison pill. (Dow Jones newswires)

Ed Durkin, director of special programs for the United Brotherhood of Carpenters and Joiners of America, says labor might sponsor proposals to link executive pay to worker safety, job creation and the number of employees with health benefits. He also expects labor to vie for board seats. (Labor groups push change at local firms, Cincinnati Business Courier) Durkin has been a long time activist and played acritical role in the fight at ADM. Isn’t it about time the Carpenters got an internet site? Durkin sure helped me when he gave me a copy of IRRC’s excellent 1987 publication, “Conflicts of Interest in the Proxy Voting System.” I’m sure union members would like to learn more about Ed’s activities.

Pensions&Investments, reports there is a fairly good chance the Delaware Chancery Court will get a case at the end of the year and rule that while shareholders have the right to adopt bylaws, they don’t have the right to limit the managerial power of the board through binding shareholder resolutions. CII’sSarah Teslik is quoted as saying “it could mean that the last 15 years of (corporate governance) work is gone…the risk is the proxy process becoming meaningless.” Some shareholder activists view such a potential ruling as a major setback but not as catastrophic event. Others would view it as a challenge to move incorporation to other states where boards are more clearly controlled by shareholders.

While I certainly hope the Court does not expand the Quickturn ruling to reduce binding resolutions, if it does happen it would further point up the need for activists to focus more on removing impediments for shareholder nomination of board members. It takes a minimal amount of stock to put a shareholder proposal on the ballot and “frame the issue,” but clearly the board continues to make the day to day decisions. Imagine a political environment where citizens can put propositions on the ballot but can nominate candidates for office only with great difficulty.

Boardroom, a leading Canadian publication providing news, review, and commentary on corporate governance, has joined our family of stakeholders. The March issue includes articles on the OECD governance guidelines, a roundup of recent educational presentations at Canadian conferences, a piece on executive pay and an editorial titled “Employees as Citizens – Not Human Resources” on the work of Charles Handy, author of The Hungry Spirit. Handy argues that companies are communities and need constitutions which recognize the rights of different constituencies. “A community is responsible for its future to its members, not to its investors, who are entitled only to those due rewards.” Boardroom sees the merit in advocating enlightened relations with employees but sees Handy’s denigration of profit and other aspects of his work as contradictory to free enterprise and the assumption of free entrepreneurial risk.

UK’s Trade and Industry Secretary Stephen Byers told institutional investors that he was willing to legislate unless they did more to curb boardroom pay excesses. SmithKline Beecham’s Jan Leschly’s £93 million package appears to have set off the renewed debate, with Labor promising a more interventionist role than previous governments. The Guardianasks, “Can good guys win at work?” Does good corporate governance pay off? A study by Oxford University’s Said Business School found that although five shareholders control about 33% of the average company, they didn’t act until performance deteriorated to an extraordinary degree. “One problem is that large shareholders are wary of working together in public against an incumbent management. They are also determined not to get involved with running companies.”

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Dow Jones/Investor Relations Magazine Index Shows Good Investor Relations Equals Superior Performance. Can we assume a correlation with good corporate governance? The DJ/IR was launched in conjunction with the 1999 Investor Relations Magazine U.S. Awards.

UK pension funds found billions of shareholder proxy votes are missing each year. One large pension fund discovered average only about half its votes were actually being registered over five quarters. Overall, a committee headed by Yve Newbold found that whereas more than half of all votes are being cast, fewer than 40% are being registered. The committee recommended pressing ahead with plans for electronic voting and allowing custodians acting on behalf of various clients could cast some votes one way and others differently. (see This Is LondonPension fund probe highlights scandal of ‘missing’ votes)

Lobbying corporations in cyberspace is heating up. The Interfaith Center on Corporate Responsibility is engaged in a multi-faceted campaign to focus attention on the social shortcomings of Wal-Mart and is using its site athttp://www.asyousow.org/walmartletter.htm to collect signatures for a petition to CEO, David Glass.

CalPERS is backing two independent directors for the board of Maxxam Inc. Also behind the effort: the Rose Foundation, the Steelworkers, New York State Common Retirement Fund, the New York City Employees’ Retirement System, and a private New York-based value-investment manager named Alan Kahn.

Responsible Wealth is sponsoring several shareholder resolutions. Eight ask companies to consider linking CEO pay to the pay of workers by establishing a maximum ratio between the pay of highest and lowest paid workers. In recent years, a prevailing view has arisen that CEO’s and a handful of leaders are responsible for the creation of shareholder value. The resolutions submitted by RW raise consideration that all employees, working together, create value and express concerns about the effects on corporate morale and productivity of policies that offer great financial gains to leaders at the same time workers may be losing their jobs. RW resolutions ask shareholders to affirm that during challenging financial times, all members of the enterprise should share in the sacrifice.

Resolutions addressing the wage gap between highest and lowest paid workers, come before shareholders starting April 20th.

AT&T (Proxy Item: Not Yet Announced)
ALLIED SIGNAL (Proxy Item 3)
BANKAMERICA (Proxy Item: Not Yet Announced)
BANKBOSTON (Proxy Item: C)
CITIGROUP(Proxy Item: 6)
COMPUTER ASSOCIATES (Meeting to be held in August, 1999; Proxy out in July)
GENERAL ELECTRIC (Proxy Item: 4)
HUFFY (Proxy Item: 3 — calls upon the company to report on the ratio between highest and lowest paid worker over each of the last ten years.

Director’s Monthly (March 1999) is a must read for anyone interested in health care governance with a roundtable discussion by 12 experts in the field brought together by Delitte & Touche LLP and the NACD. In addition, other articles discuss compliance programs, the case of Healthco and “A Shareholder Value Perspective on Managed Care.”

SEC Chairman Arthur Levitt unveiled a plan to improve the governance of mutual funds by strengthening their boards of directors. The proportion of independent directors would move from 40% to 50%, independents would nominate all new directors, boards would have their own outside counsel and funds would disclose how much directors have invested in the funds they oversee.” (seehttp://www.sec.gov/news/levitici.htm) The Investment Company Institute announced formation of a committee to study “best practices” for fund directors.

Shareholder rights activists clashed with Samsung Electronics, Hyundai Heavy Industries, Daewoo, LG Semicon and SK Telecom executives while attempting to introduce voting reforms. Chaebol executives said the minority rights movement had turned into a “politically motivated action to promote social justice, not to maximise shareholder value.” (South China Morning Post; 03/22/99)

TIAA-CREF has written to fellow shareholders of The Lubrizol Corporation (NYSE: LZ), urging support of TIAA-CREF’s shareholder resolution requesting the board to redeem the company’s “dead hand” poison pill defense and to withhold their votes on Lubrizol’s director nominees. Contact Ken Bertsch, TIAA-CREF’s director of corporate governance, 212-916-4972, or John Wilcox of Georgeson & Company Inc., TIAA-CREF’s advisor, 212-440-9800.

CalPERS Board of Administration unanimously re-elected William D. Crist as president and Charles P. Valdes as vice president. Michael Flaherman continues to head the Benefits and Program Administration Committee and Philip Angelides, the new State Treasurer, was elected to chair the Health Benefits Committee.

Burns Philp & Co case raises questions about the effectiveness of corporate governance codes and practices. Here was a company that won Australian Annual Report awards for the past four years and a US award for the best annual report in its industry. They looked great on paper. The Sydney Morning Hearld writes, “the Burns Philp experience raises the serious possibility that in some boardrooms the community-imposed obsession with the forms of good governance has distracted directors from the substantiative issues of ensuring viability and performance.”

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Don Fites, who recently retired as CEO of Caterpillar, received $3.7 million in 1998 and will earn an annual pension of $1+ million. He’s got options worth $19 million, yet the company is now paying $185,000 for his home security. “Maybe it’s to protect him from shareholders,” says compensation expert Graef Crystal in a USA Today story, Corporations Supersize Executive Perks. Caterpillar shares fell 4% last year and slumped about 10% last week after the company warned that first-quarter earnings would be 50% below expectations. Since companies aren’t required to report perks totaling less than $50,000 or 10% of pay and bonuses, much of it is rarely disclosed. From free appliances to free jets, read about the “good life” at shareholder expense.

Tidbits. Kuala Lumpur and Korea’s Pohang Iron & Steeladopt new standards. Southeast Asian finance ministers meet. “Other than speeding up banking reform and improving corporate governance and restructuring, which is already happening, there is little ASEAN governments can do to improve the situation, says one observer. Million-dollar payday for some Net boards: Amazon, Yahoo, AOL lead the pack.

Corporate Governance: An International Review revised its editorial policy to balance refereed research-based and theory papers with experiential, practice-oriented professional papers. The current issue (1/99) includes an article by Kenneth Simmonds which argues that clauses giving boards, rather than directors, the power to remove directors, can allow the CEO or chair to consolidate power by purging dissidents. Simmonds evokes Machiavelli to argue for fixed terms as the preferred alternative.

Mark Latham’s proposal for The Corporate Monitoring Firmnow addresses the issues of employee ownership, arguing that route and their voting of shares is more appropriate than directly placing employees on the board. He also sees proxy advisor firms in a better position to act as CMFs than executive search firms and he expands his discussion regarding the applicability of the CMF concept to international situations. As Mr. Latham keeps growing his idea, it becomes more and more likely to move from concept to reality.

SEC is still looking at how to ban on “pay to play” to money managers for public pension funds. (Dow Jones News Service, 3/15/99)

David Dando, Director of ISS Europe reports that the European Federation of Employed Shareholders for Employee Ownership and Participation (EFES) has identified 6 basic principles of corporate governance: transparent and truthful accounting, independent and accountable directors, high-caliber and effective worker and employer representatives, clear well-conceived strategies, motivated innovative and productive employees and acknowledgement of the key role of the general meetings of shareholders. Further, voting rights should be 1 share = 1 vote, all shares should have = rights, foreign shareholders should be able to exercise their right to vote, procedures of institutional investors should be simplified, voting instructions respected, maximum notice to allow voting in good time without additional cost, and counting of votes should be beyond reproach. (ISS, Friday Report, 2/26/99) Anyone know if the EFES has an internet site?

Kuala Lumpur Stock Exchange announced measures to improve corporate transparency and governance. Listed companies must release quarterly financial results, directors can hold only up to 10 directorships.

Washington Post, 3/9 edition, “7 Who Get Extra Icing on Their Cakes: Billionaire Executives Take Options as Part of Pay” looks at “the folks who are already loaded to the eyeballs with stock in their own companies but take stock options as part of their pay package.” Researched by our friends atInstitutional Shareholder Services, worth a look.

Stock performs better if CEO owns plenty of it, study says (3/9/99, San Jose Mercury News). Watson Wyatt study shows companies performing above the median (28% annual return over 5 years) were headed by CEO with an average $8.1 million in company stock in 1993. Those who performed below the median (13%) held just $4.5 million in company stock.

Korn/Ferry International studies find compensation in stock, evaluation of boards, use of committees and diversity of board composition are gaining greater acceptance in the UK but are only beginning to be found in Continental Europe.

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Shareholders at Oregon Steel Mills Inc. overwhelmingly voted in favor (averaging almost 80%) of labor-backed nonbinding resolutions to request board declassification, shareholder approval of “poison pills,” and confidential voting. However, since the shareholder activist did not achieve a 50% plus 1 majority of outstanding stock (only 42%), the Committee to Restore Shareholder Value ultimately lost. “This is a 9.5” on a scale of 1 to 10, said Bill Patterson, director of the AFL-CIO’s Office of Investment, who helped organize labor’s effort at Oregon Steel. Maybe American workers are beginning to realize the clout of their $6 trillion in retirement assets such as pensions, stock plans and 401(k) savings plans. Last year labor unions introduced 43% of all shareholder resolutions, according to Georgeson and Co. (Washington Post, 3/4/99, Page E03)

IRRC coverage (3/5) goes into some detail about the campaign which used the growing strategy of a consent solicitation rather than waiting for the annual meeting. They note a growing trend by companies to eliminate this right of shareholders, although they report the trend is being challenged by some institutional investors. “This year, the New York city Employees’ Retirement System plans to sponsor proposals at Louisiana-Pacific, Sensormatic Electronics and Metromedia International Group to restore the right.”

Proxy Monitor recommends shareholders of Applied Materials’ (NASDAQ:AMAT) vote in favor of a bylaw amendment to require shareholder approval of poison pills. The State of Wisconsin Investment Board (“SWIB”) is the sponsor of this resolution which is scheduled to come to a vote at the company’s March 31st annual meeting. In the past similar non-binding proposals have passed at other companies but the results have been ignored by company management.

The company has indicated that it intends to introduce a new poison pill upon the expiration of the existing pill on 6/3/99. The bylaw amendment that is intended to achieve the following goals:
(a) prohibit the board from extending the expiration of the current rights plan or implementing a new one without shareholder approval; and
(b) allow 10% of the company’s outstanding shares to call a special meeting in order to repeal any board action that amends or rescinds this bylaws amendment.

Georgeson’s Research Group provides evidence for a different view on poison pills. Their study of 319 takeover transactions found a strong correlation between pills and takeover premiums, suggesting pills are associated with a significant and tangible economic benefit to shareholders. “Companies that have a large portion of their shares held by activists, many of which are public and union pension plans, are likely to have higher rescission votes.” “Many institutions adopted voting policies in the early days when poison pills were new and evidence of their economic value was unavailable. In light of mounting evidence of pills’ economic benefits to shareholders, institutions might reconsider their voting policies.” See Poison Pills, Shareholder Value, and Voting on Rescission Proposals.

Shareholders fight to be heard in Korea. The People’s Solidarity for Participatory Democracy, a watchdog group for minority shareholders rights, said five affiliates of the top five chaebol have scheduled their general shareholders meetings for the same day, March 20, to stymie its attempts. The group rose to prominence last year after its relentless questioning of executives at Samsung Electronics about diversion of company money to prop up the fledgling Samsung Motors, transforming the meeting “from a 20-minute rubber-stamp affair into a 13-hour marathon.” (The Australian Financial Review, 3/9/99) For more background, see Crusader aims at S. Korea’s corporate might, Boston Globe, 1/30/98.

Graef Crystal always has interesting observations. According to Crystal, Steve Jobs has delivered a compounded total shareholder return of 102.8%/year at Apple. Yet, “Jobs earns nothing as the CEO of Apple” and he “owns but one share of stock in Apple Computer.” Jobs is also the CEO of Pixar where he owns 30 million share worth $1.2 billion as of Jan. 29, 1999. “Pixar went public on Nov. 29, 1995, and between that date and Jan. 29, 1999, the total shareholder return has been precisely 0.” Maybe Jobs should talk to Crystal about restructuring his compensation…then maybe the convention wisdom will work again. See Tampa Bay Business Journal, 3/8/99.

As we have reported elsewhere, in the U.S. tangibles contributed by capital, such as property, plant and equipment, accounted for 62% of the total value of mining and manufacturing firms in 1982 but only for 25% most recently. Intangibles contributed by employees, such as labor, patents and trademarks, now contribute 75% of the total value. The SEC hosted an exploratory seminar on intangible assets in 1996 but nothing seems to have come of it. Nor does the FASB appear eager to delve into valuing knowledge work. However, CFO Magazine has jumped in with both feet. Their February 1999 article, SEEING IS BELIEVING: A Better Approach To Estimating Knowledge Capital is a worthy start. Knowledge-capital methodology is provided by Baruch Lev, the article is written by S.L. Mintz. The bottomline formula: Normalized earnings – earnings from tangible and financial assets*/Knowledge-capital discount rate**. (*Using appropriate aftertax expected returns applied to reported asset values. **10.5 percent after tax.) The article compares knowledge capital in the pharmaceutical and chemical industries. I see the methodology being used to better determine the share of profits most appropriately going to labor vs capital and maybe what percent of the firm should be owned and controlled by employees. Of course, it also promises to be a strong tool for allocating investments. Also worth reading is BETWEEN THE LINES: The hard truth about open-book management. Why companies that use the technique say it leads to better profits and a more stable workforce and why the other 99 percent remain skeptical.

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The number of minorities serving on corporate boards of America’s largest companies has “increased 79% in five years,” according to a new study just released by Directorship but “continues to be small compared with the overall number of directors sitting on boards.” Women’s participation on corporate boards rose to 10% in 1998 compared with 6% in 1992 and “there was a marked decrease by 1997 in the number of board members over 65, to 1,355, compared with 1,548 in 1992.” Since 1992, the number of companies offering both stock options and grants increased by 441%; corporations offering stock grants alone increased by 110%; and companies offering stock options increased by 100%. The Directorshipstudy, “Significant Data for Directors 1999,” analyzes corporate governance information from proxy statements of 860 publicly traded Fortune 1000 companies and features a 38 page compilation of critical board practices. For a copy, contact Ted Dysart by phone: 203-618-7050; or e-mail at[email protected]; or fax at 203-618-7007.

CalPERS study by Wilshire Associates found the median returns on stock-market portfolios for the 10 years ended Sept. 30, were 15.6% a year for public pension funds and 15.4% for corporate pension funds. A second analysis, by Cost Effectiveness Measurement Inc. found 34 U.S. public pension funds had success records similar to 51 U.S. corporate pension funds — but with “somewhat lower operating costs” and “lower risk exposures.” CalPERS released its press statement in response to Greenspan’s contention that “numerous studies” show the average return on state and local funds is usually two or three percentage points lower than on comparable private pension funds. He’s 20 years out of date.

German law guaranteeing labor representation on the boards of coal and steel ruled unconstitutional. Germany’s largest trade union, IG Metall, attacked the ruling and called on Bonn’s center-left government to pass new legislation to secure full representation for around 220,000 German workers. Under the normal rules of German corporate governance, labor holds half the seats on a company’s supervisory board and shareholders elect the others. However, in the coal and steel industry, workers elect a member of the management board as well. Apparently, this aspect has been ruled unconstitutional according to my reading of a March 2 Reuters release.

Olivetti-Telecom Italia drama seen by some as the biggest consequence so far of the waves of privatization, deregulation, and modernization that have swept Europe. see Raiders at the Gate, Business Week int’l edition, Olivetti’s bold bid for Telecom Italia signals a turning point for European capitalism, shattering long-held taboos.

Bob Tricker

As the editor of Corporate Governance, the internet site, I frequently get requests from new directors who are looking for a practical guide to help them meet the most challenging task in the modern corporate world, how to improve their effectiveness and that of their board. What single book will explain their duties, describe needed core competencies, evaluation practices and inform them of fundamental debates in corporate governance? The Pocket Director not only deals with these issues, it also includes an A-Z dictionary of the field’s most important ideas and concepts, a list of best practices, proforma charters, sources of information and recommendation for further reading.

The most amazing feature of the Pocket Director is its universal relevance for directors in every situation, from nonprofits and family firms to public corporations in locations as varied as Afghanistan, Zimbabwe and the United States. As the editor of Corporate Governance – An International Review, Bob Tricker is uniquely qualified to provide examples common to most directors but explained in terms specific to the cultural circumstances of individual countries. Frankly, I wouldn’t have thought it possible, especially in a slim volume not much larger than a checkbook. The Pocket Director should be the first book in any corporate governance library.

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