Archives: April 1999

CalPERS approved a $200 million investment in theHermes UK Focus Fund which will acquire large stakes in a small number of undervalued publicly traded companies in the UK, using its influence as a large and active investor to affect financial and operational restructuring to increase value for all shareowners. (see CalPERS press releases)

UK survey shows institutions ignored the Government’s calls to improve their voting record. If anything, there appears to have been a slight decline at small companies. (, 3-4/99, reported by Sarah

Andre Baladi, founder of the International Corporate Governance Network and longtime shareholder activist, is interviewed in Governance, 3-4/99. Last year Baladi launched the ABF Euro VA fund which tilts its investments towards companies earning top scores across a range of financial and shareholder-friendly governance measures. The fund has outperformed its benchmark by 5.21%. One of his dreams is to go into North America and establish a North Atlantic fund.

IRRC reports that 1999 will probably set a record for proxy fights, 20 fights so far compared to a total of 50 last year. Ron Olin of Deep Discount Advisors has apparently targeted 6 funds. 4/23/99

SEC is examining executive pay disclosure rules, according to a report by IRRC (4/16/99). Key concerns surfacing are the “need for greater details on corporate repricings and on board affiliations. Improved disclosure of non-employee director compensation arrangements also is being considered.” Look for a formal request for comments in the Federal Register in fall 1999.

In the same issue of Corporate Governance Highlights, IRRCreports that Eastern Enterprises decided to omit a binding shareholder proposal from SWIB. “Shareholder proponents will either have to drop their proposals or go the expense of litigating their status under Rule 14a-8, while management uses company funds to litigate against them,” noted SWIB’s attorney, Leonard Chazen. Shareholders would be forced to do so twice, once in federal district court and then in state court for adjudication of state corporation law issues.

Securities Laws and Corporate Governance: The Advent of a Meltdown?” is the title of a panel discussion to be held at on Thursday, May 13, 1999, from 1:30 p.m. to 3 p.m. EST. The event is sponsored by Reliance National. Guest speakers will include: Joseph A. Grundfest, director of the Roberts Program for Law, Business and Corporate Governance at Stanford Law School; William S. Lerach, partner of Milberg Weiss Bershad Hynes & Lerach LLP, the largest plaintiffs’ law firm in the United States; and Tower C. Snow, Jr., chairman of Brobeck Phleger & Harrison LLP, a leading defender of securities class action lawsuits. Nicholas J. Conca, of Reliance National will moderate the discussion. The panel will answer questions submitted via e-mail. There is no charge but registration at is required before May 10th. Registrants can download the appropriate audio and visual software from the site. An online replay will be available at the site. For additional information, contact Chris Duca at Reliance National by telephone at (212) 858-8836 or by e-mail

CalPERS named their 1999 underperforming firms. They include Circus Circus, Tyson Foods, Cummins Engine, Mallinckrodt, National Semiconductor, Pacific Century Financial, Pioneer Natural Resources, St. Jude Medical, and Sierra Health Services. The list is based on relative rates of shareholder returns, weaknesses in corporate governance practices and EVA. For the first time in five years, none of the companies named are repeaters. CalPERS has submitted resolutions at two of this year’s targets. It wants a majority of the board at Circus Circus and St. Jude’s Medical to meet the fund’s definition of independence. At Mallinckrodt, CalPERS may propose an audit committee exclusively composed of independent directors and at Tyson Foods, CalPERS may seek to do away with the dual-class stock structure. (WSJ, 4/21) See also “$150 billion pound gorilla: When CalPERS speaks, companies listen (cbs.marketwatch.comIRRC reports that 6 of the 9 companies have already agreed to adopt some corporate governance changes. 4/23/99

UK activists scored a victory at Mirror Group when Hermes effectively pushed CEO David Montgomery out of office. Activism is also encouraged by the government. Secretary Byers indicated he would keep a watchful eye on annual meetings to determine if boards and institutional shareholders are ensuring that remuneration packages do not reward mediocre performance. (ISS Friday Report, 4/16)

Ownership pays, according to a Hewitt Associates study reported in the 4/20/99 Wall Street Journal. Firms with ESOPS had nearly 7% higher total returns and annual returns on assets nearly 3% higher on average. Another study, Wealth and Income Consequences of Employee Ownership, by Peter Kardas, Jim Keogh, and Adria Scharf found that Washington participants in ESOPs received 5% to 12% higher wages and had three times the assets in their retirement plans in comparison with those in non-ESOP companies. For an update on such research, see NCEO’s The Employee Ownership Report (March/April, 1999).

IRRC reports the AFL-CIO has updated their Executive PayWatch site. Highlights include extensive information on compensation committee members at S&P 500 companies, many of whom are “too close for comfort” to the company or its management. The research for the site was done by IRRC. The AFL-CIO recommends companies adopt the definition of independent director definition developed by CII, a person “whose directorship constitutes his or her only connection to the company.” The redesigned Executive PayWatch site includes extensive recommendations for direct action, including:

  • how to find out how CEO salaries are set
  • how to influence your mutual fund, deferred compensation plan,
  • ESOP or pension
  • how to rally your co-workers and the community
  • how to influence the IRS and the SEC
  • examples of campaigns

SEC staff last year granted no-action relief to the Templeton Dragon Fund, allowing it to omit a reference to a shareholder’s Internet site in the proxy statement. While this may not be news to some or our readers, it was news to us. We learned about the no-action letter while reading Howard Friedman’sexcellent and recently revised “Securities Regulation in Cyberspace,” published by Browne & Co. The no-action letter is a real blow to shareholder rights and action. The original intent of the 500 word limit was probably to minimize the printing and mailing expenses of the issuer. The SEC is way out of line on this issue and those concerned should seek a reversal by contacting Chairman Levitt. (see also the Money Manager’s Compliance Guide from Thompson Publishing Group)

Back to the topAmerica’s worst boards, according to Fortune. The magazine canvassed institutional investors, corporate-governance experts, investor advisory firms, and shareholder-rights activists for nominations. Two companies, Advanced Micro Devices and Occidental Petroleum, repeat from last year. The same issue has several related articles, such as The 1998 Don’t-Get-It All-Stars: The world is obsessed with shareholder value, but these companies’ CEOs and directors haven’t heard. Their investors are drowning, and they don’t seem to care.

AFL-CIO review shows that one out of five companies have what the federation calls “conflicted” directors on their compensation committees. Amy Domini indicates that international mergers are combining the worst of both the U.S. and European traditions. Top executives are now getting U.S. compensation levels and European-based companies are still not disclosing. (4/7, Washington Post)

Corporate Lawyer Conference: Building Shareholder Equity, will be held May 12 at the Plaza Hotel in New York. The conference will focus on showcasing the need to have in-house counsel play an active role in solid corporate growth. Areas to be covered in depth include: Antitrust (trade associations, pricing, market share); Business Ethics; Corporate Governance (Caremark case); Employment Law (sexual harassment, ADA, FMLA, ADEA, Title VII); Intellectual Property and the Internet; International (FCPA, OECD Treaty and export controls); Securities (insider trading). (see American Corporate Counsel Associationpress release on Yahoo)

Good Practice in Corporate Governance: International Perspectives by R. I. (Bob) Tricker provides a great overview of corporate governance mechanisms around the world, including comparative tables on practices in 20 countries. Appendices include extracts of principles from the London Stock Exchange and the Hampel Report, Peter’s Report on Corporate Governance in the Netherlands, General Motors, CalPERS and the OECD Advisory Group.

Investor social activists notch it up again. The Interfaith Center on Corporate Responsibility(ICCR) and have jointly developed the Investor Activism Center – an interactive web-based tool which provides extensive coverage of social responsibility shareholder resolutions. This tool contains a wide range of resolutions pertaining to the environment, corporate governance, global finance, human rights, militarism, health, and equality issues, among others.

Desperately seeking a perfect model (from The Economist, April 10, 1999)
The Economist argues the American model may not be perfect after all. Their logic:
The best measure of economic performance is growth in GDP per head. Germany scored about 1.9%, U.S. and Japan about 1.6% over the last decade. In productivity growth, Germany came in at about 2.6%, Japan 1.3% and the U.S. at about .9%. Unemployment averaged about 7.8% in Germany, 6% in U.S. and 2.4% in Japan.

The U.S. model comes at a cost of income inequality: The ratio of what the richest 20% earn compared to the poorest 20% is 9/1, compared with 6/1 in Germany and 4/1 in Japan. The poorest 20% in Japan are about 50% better-off than America’s poorest 20%.

Nor is the U.S. the free model it claims to be. Anti-takeover practices, such as poison pills, continue to flourishd.

The U.S. wins praise for its flexible labor and product markets, low taxes, competition, and shareholder capitalism. We come out losers on income inequality, low welfare benefits, poor quality “public goods” (such as education), and low savings and investment rates. The Economist also rates the Japanese, East Asian, German, Swedish, New Zealand and Dutch models.

Back to the topDomini Social Equity Fund (DSEF) (ticker symbol: DSEFX) gets our award for the most newsworthy corporate governance event of the year by becoming the first mutual fund company to provide public access to their current proxy voting decisions. The CalPERS Shareowner Forum , which went up in February and will include votes for 100 companies is a close second. CalPERS has long been at the forefront of the corporate governance movement, their votes are a matter of public record, they have the resources to make the effort ($150 billion in assets) and they incur less of a risk. Domini Social Investments manages “only” a little over a billion dollars in assets. They can’t spread the costs of such an effort as easily as CalPERS and, by posting their votes, they are bound to risk losing some business from firms where they are voting against management (this appears to be fairly frequently on social, as well as on some governance, issues). In addition, they intend to post their votes for all 400 firms this year, not just a small portion of their portfolio. Domini’s press release indicates:

In 1992, our semi-annual report to shareholders described how we would vote our proxies on a range of issues. In 1996, we became the first mutual fund to publish comprehensive annual proxy voting guidelines. Now we have become the first mutual fund company to provide public access to the specific proxy votes, for each company in our portfolio. Shareholders deserve to know how the mutual funds they invest in are voting their shares? We strive for transparency in all that we do, and we challenge other mutual fund companies, whether they consider themselves ‘socially responsible’ or not, to do the same? We are committed to sustaining an ongoing dialogue with the corporate community, and to work with them to address issues of corporate responsibility. Furthermore, we sincerely hope that the public will consider our Guidelines and our public voting record, to be a resource for them as they vote the shares they may own individually.

The firm intends to post their votes approximately two weeks prior to each company’s annual meeting. The database of meetings and voting information was developed and is being maintained by Proxy Monitor.

For years, I have been advocating that mutual funds should be required to meet the same standards with regard to voting on behalf of members as is required under ERISA. (see Ending the Wall Street Walk: Why Corporate Governance Now?) Hopefully, other funds will now begin viewing their voting rights as important assets which require the same exercise of due diligence as other fiduciary duties. I believe DSEF, and others who follow their example, will find that such actions will help them develop more profitable investment strategies as well.

DSEF’s posting is another important sign of convergence between the corporate governance and the socially responsible investment movements. Largely, this publication focuses on corporate governance because I believe that is the primary driver behind both wealth creation and corporate responsibility. Only when investors begin to see “their” companies from the perspective of an owner, and mutual funds as their corporate monitoring agents, will corporations be held accountable. Only then will concerns for such laudable goals as protecting the environment be met in a cost effective manner. DSEF is taking a lead role in corporate monitoring. I look forward to further refinements, such as the adoption of corporate governance “screens” or the development of acorporate governance fund.

FASB prepares for battle on its exposure draft “Accounting for Certain Transactions involving Stock Compensation,” an interpretation of APB Opinion No. 25 (Proposed Interpretation) March 31, 1999. The deadline for written comment is June 30th to In the ISS Friday Report, 4/2/99, Pactrick McGurn continued his excellent coverage of FASB’s controversial proposal to force companies to take charges against corporate earnings when they reprice stock options. McGurn once again goes briefly through the history of this important issue and goes on to describe the proposal. One important feature is that FASB defines repricings broadly to include cancellation and regrants within 6 months to the same individual. The Software Publishers Association has reportedly signaled their intention to oppose the new interpretation. FASB’s exclusion of independent directors from the scope of Opinion 25 may disturb many institutional shareholders. McGurn argues that FASB’s decision to lump directors in with consultants “misconstrues the increasingly important role played by directors” who represent shareholders and owe fiduciary duties similar to those for corporate officers. “One suggested compromise: exclude from the scope of Option 25 (and require expensing for) any option of awards made to nonemployee directors who also serve as consultants to the company.” A free copy can be ordered by calling 800-748-0659.

ISS also reports the SEC may expand its plan to strengthen corporate audit committees by including smaller companies in proposed disclosure rules. A quoted study notes that most financial statement fraud was committed by companies with less than $100 million in assets and revenues. In addition, 83% of the cases involved the CEO, CFO or both.

Mid Atlantic Medical Services Inc. board recently modified their bylaws. “Previously, at a company meeting, it took a three-fourths majority vote of shareholders to fill newly created board seats, such as the seat the current board is proposing to add. That’s still the rule for board seats added through a shareholder initiative, but the board last month changed the bylaws so that it only takes a plurality to fill seats added by the company itself. Nell Minow, with Lens, criticized MAMSI’s rule. “It’s highly suspect to have a double standard that makes it easier for management candidates than for outside candidates, and it’s unnecessary,” Minow said. “The impact will certainly be one of entrenchment.” (see Washington Post, 4/6, “New MAMSI Leadership May Already Be in Place“)

Back to the topWatch out Europe Inc., reads the headline of a recent Dow Jones Newswire. Deminor, an independent consultant partnership in Brussels, has launched a new service to rate 160 blue-chip companies from six European countries on corporate-governance criteria that consists of the following: rights and duties of shareholders; absence of takeover defenses, disclosure, and board structure. Subscribers include Deutsche Bank AG, Hermes, and others.

More than 80% of Fortune 500 companies (up from 41% in 1988) now have exit packages for their CEOs which include huge payouts and perks ranging from paying taxes on the windfalls to country club memberships and chauffeur-driven cars. According to Carol Bowie, editor of Executive Compensation Reports, 2/3 now extend well below the rank of CEO. USA Today notes, “Parachutes – also known as golden goodbyes, handshakes, boots and carrots – fall below the radar of most corporate governance experts. Yet they provide a fascinating look at the underbelly of the fat pay and perk packages executives cut.” (see Sweet exit deals get sweeter, 3/31/91)

NYSE proposes “pilot” policy (until 9/30/2000) to exempt board-based plans (majority of full-time employees eligible and majority of shares awarded are granted to nonexecs or directors). A letter from the NYSE to the SEC quoted byIRRC (Highlights 3/26) indicates that NYSE anticipates proposing a dilution test to replace the revised stockholder approval test before the year 2000 proxy season.

Barriers to Good Corporate Governance. During the past year, 18 corporate governance experts synthesized a list of barriers which can impede good corporate governance. The results appear in the pages of CalPERS’ Shareowner Forum and, in my opinion, are worthy of examination by any board. I thought it might be interesting to make a few thumbnail observations about how these barriers might apply at CalPERS itself, since they have posted the Barriers to their site and because 3 of the 18 participants are either current or former members of CalPERS’ executive staff.

Because of time and space limitations, I only reviewed the first section which deals with what the experts termed “Structural Issues.”

1. Does the board include members who have conflicting interests that prevent them from effective
representation of all shareholders?
One of CalPERS’ strengths is that its elected and appointed board members represent its different constituents (taxpayers, active members, retirees). Board members are independent not because they meet some relatively arbitrary definition of independence but because they have an independent base of support. However, some CalPERS board members also serve on private investment boards and this may present a barrier. Can a CalPERS board member effectively represent CalPERS retirees and also serve on nine mutual fund boards?

2. Does the compensation of directors encourage them to act in shareholders’ interests?

a. Do the directors have ownership positions which positively align their interests with shareholders? interests?
Even directors who are active members in the System benefit from good performance only the same as any other taxpayer. Although directors cannot be given stock options in CalPERS because it isn’t a corporation, it might be appropriate to modify the current benefit structure so that members and retirees share in the benefits of good performance. For example, while the state has seen its contribution level lowered 8 times in the last 11 years, employee contributions have stayed the same. Aligning director interests by modifying the retirement system to pay higher benefits to retirees if fund performance is good, instead of turning all surpluses back to the employer, might result in both better performance and more oversight of directors by members and retirees.

b. Are the directors dependent on the cash compensation and perquisites from their directorship to an extent which precludes responsible action on the shareholders’ behalf?
While cash compensation is minimal, the press has frequently intimated that perquisites that come in the form of gifts from those doing business with CalPERS may unduly influence directors. The Board insists they are not influenced by basketball tickets, golf games, dinners and the like. Those who are truly interested in the issue can obtain public records of the gifts and try to correlate them to board votes but few have bothered.

B. Cultural Issues:
1. Do directors overly identify themselves with management of the company?
It seems that if a director has served for more than 28 years, as one CalPERS board member has, there is less likelihood of independent oversight.

2. Are directors overly prone to yield to the CEO?
It wouldn’t appear so from the meetings I have attended.

3. Do the directors insufficiently recognize their accountability to shareholders?
There is a mix on the CalPERS Board. Although the California Constitution indicates the Board’s highest duty is to its members, a growing number of members may believe the Board’s actions have favored the employer.

4. Do directors participate actively in the decision-making process?
I believe most observers would agree the CalPERS Board is extremely active in decision-making.

5. Have directors made an adequate commitment of time to every company on whose board they serve?
State law provides System reimbursement of up to 25% of the earnings of public employees elected to the Board. That allows many to devote at least 40 hours a month …more time than most corporate board members devote to their boards. However, at least one of the board members has been known to arrive at meetings consistently late, reportedly because his mutual fund board meetings are scheduled on the same day.

Section II covers barriers to how the board operates and Section III with disenfranchisement of shareholders. The list should give any board food for thought on how to improve investor relations.

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