Archives: May 1999

Company Secretary: The Official Publication of the Hong Kong Institute of Company Secretaries (May 1999) is largely devoted to the question of offshore incorporation. Should Hong Kong be worried? We might also add, should the U.S. or other jurisdictions be worried? Probably.

Mark Sharp begins his article by noting a 43% increase in the number of companies listed on the Hong Kong Stock Exchange (SEHK) over the past 5 years but the number of companies listed in Hong Kong has practically remained unchanged. Over the past 10-15 years almost half of all locally listed companies were incorporated in Bermuda. For years, it was assumed the political uncertainty of Hong Kong’s political future was the driver but the move offshore continues to accelerate, attracted by reduced cost and less burdensome regulations.

“Bermuda will bend over backwards to ensure its company law is user-friendly.” The British Virgin Islands (BVI) has become the country of choice for private businesses. Lack of disclosure requirements mean that SEHK does not approve BVI companies for listing but the BVI has now registered about 300,000 so-called international companies during the past 10 years. Minority interests are not well protected in the BVI where even who owns the company cannot be learned at the registrar.

David Holloway, an investigator, points out that international offshore financial centers (IOFCs) lack transparency and allow easy concealment of assets. The Bahamas, for example, require little in the way of credentials screening, no screening of company assets, no regulation of trusts – “virtually no regulation whatsoever – and banking secrecy.” In Liechtenstein you can incorporate, through your banker or attorney, without even disclosing your identity. There are an estimated 1 million anonymous companies incorporated in IOFCs with assets around $5 trillion. Search the internet for “offshore incorporation” and you’ll come up with over 4,000 “hits,” usually someone offering to help you hide assets from someone else.

Nisson plans to cut its board from 37 to 10 with three of those directors coming from Renault, which recently bought a 37% stake in the company. The new board will be in their 40s and 50s instead of the current Japanese board average of 60. Several other Japanese boards are sliming down to provide “sharper oversight and more accountability to shareholder,” according to a 5/1/99 report in The Economist (No Country for old men, pp. 60-61). Firms are beginning to bring in outside directors but more change is needed.

Pensions&Investments editorial warns pension executives to ask their consultants to report how much revenue they have recieved in the previous 12 months from each of the money managers they recommend…an area missed by the SEC in proposing “pay-to-play” rules at public pension funds. The same issue includes an article on the interesting Social Choice for Social Change campaign being conducted by Neil Wollman and Abby Fuller in order to get TIAA-CREF to invest 5-10% of social choice account assets ($150-300 million) in companies that are models of social and environmental responsibility. (P&I, 5/17/99)

The Corporate Board 5-6/99 includes an article entitled “CEO Pay: Facts and Fallacies” by Jay W. Lorsch which attempts to demonstrate, through comparisons with the pay of sports players and other arguments, that CEOs are really not overpaid. “No mater how you look at it, CEO’s get less than one-half of one percent of pretax corporate earnings.”

Lorsch steps through several criticisms and often addresses them on the basis of a survey he recently completed of compensation committee chairs at 72 large public companies. For example, addressing dilution because of options he notes that use of options for broader groups are likely to cause the greatest dilution and that buying back stock to match the options being granted avoids dilution. True, however, broad based options are more likely to provide motivation to those who will make the most difference. It is absurd to believe that piling options on highly compensated CEOs will increase company performance as well as more broadly based options. In addition, many, including Gene Epstein of Barron’s, believe that “most options exercises involve the issuance of Treasury stock.” (see Little Big Men, Barron’s, 5/3/99)

Lorsch also indicates that “almost all of those he surveyed said they had not reset option prices and would not do so in the future.” While Lorsch does include good suggestions on how to reduce the “Lake Wobegone” effect (all CEOs are above average) it would be interesting if The Corporate Board ran a follow-up article by Graef Crystal to do a little fact checking counterpoint.

The same issue of The Corporate Board includes an article onDemocratic Governance by James McRitchie and a look ahead at “Your Next Generation of Directors” by Linda Wilson of Holland & Davis.

Australian study finds proxy vote averaged only 32% of voting capital. Very few institutions bother to vote. When they do they tend to vote in favor of the board position. (see It’s time for institutions to stand up and be counted, by Stephen Bartholomeusz in The Age, 5/14/99)

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John Chevedden, one of our forum contributors, achieved an 18% vote at Ford for a resolution to appoint independent directors to key board committees. As noted by the Wall Street Journal, “an 18% vote against management where the Ford family controls 40% of the voting rights is a signal to Ford that holders are looking for a more independent voice on the board.” In a personal note, Chevedden pointed out that at least Ford has welcomed attendance and has, in fact broadcast the meeting in Times Square and on the internet. In contrast, GM has held recent meetings in Wilmington, Delaware. The highlights of the Delaware meetings have been metal detectors for all shareholders, a hotel basement location, attendance of about 99 shareholders and timing to coincide with the eve of the 3-day Memorial Day weekend.

John tells us of a real victory at Northrop Grumman, with 3 shareholder resolutions winning: Restore simple majority vote 66% (authored by Jerome McLuaghlin), restore annual election of all directors 52% (Larry Anduha) and enable stockholders to vote on poison pills 69% (John Chevedden) Chevedden said these votes send the message that shareholders want greater management accountability for company performance. He has posted the text of the shareholder resolutions at Warning: you’ll have to search on that board for messages 1343, 1384 and 1387, but it is a simple task.

Update on the above. According to a May 20 1:57 PM ET wire service report, Northrop said one of three proposals narrowly missed victory by a margin of 50.16% vs. 48.7% of votes cast. Preliminary tallies had shown the measure passing, but those did not include a large block of shares voted at the company’s annual meeting Wednesday.

Northrop’s last-minute acceptance of ballots (to its own advantage) is in contrast to Boeing that announced that it was closing its telephone and internet voting 1-day before the annual meeting. Boeing later admitted it actually closed voting 3-days before the meeting. One shareholder proposal on the Boeing ballot received a 49.9% yes vote.

Chevedden notes, “This raises the question of who establishes and monitors the rules on closing the polls. This is particularly important because according to the Investor Responsibility Research Center, Washington, DC, Northrop does not have confidential voting. Hence, management can track how large blocks of stock are voting and could contact large blocks of stock to submit a vote or change a vote. Did Northrop allow extra time past a previously established deadline to enable lobbied votes to arrive?”

IRRC reports on a recent meeting of the ABA. Among many issues discussed, it was noted that because the SEC rule requiring disclosure of repricing activities in a proxy statement generally applies only to the 4 most highly paid employees and the CEO and because repricing outside director’s stock options might not be considered significant under FASB rules, “many companies may not disclose information about the repricing of outside director’ stock options.” (see Corporate Governance Highlights, 5/7/99)

Center for International Private Enterprise (CIPE), an affiliate of the U.S. Chamber of Commerce, has posted an excellent international review of corporate governance by Stephen M. Davis, president of Davis Global Advisors, entitled “The Race for Global Corporate Governance.” Davis contends G7 leaders last year identified corporate governance reform as the “newest pillar of the post-Cold War economic architecture” and view it as “key to spurring prosperity and jobs by strengthening corporations’ ability to compete for global capital.” Davis reviews how countries around the world are performing on five Leading Corporate Governance Indicators™ tracked by DGA which include:

1. presence of national best practice codes for corporate boards;

2. relative participation of non-executives on corporate boards;

3. tendency to split the roles of chairman and CEO;

4. presence of key board committees; and

5. degree of disclosure of executive compensation information.

BusinessWeek senior writer John A. Byrne says challenges to poison pills are long overdue. “Shareholders should have the right to vote on whether a pill–which could affect the stock’s value–should be nenewed and under what circumstances.” Addressing Lubrizol’s reluctance to accept TIAA-CREF’s winning initiative to dump their dead-hand pill, Byrne writes, “perhaps the ultimate irony is that it was exactly this kind of self-serving management that helped fuel many of the raiders that these pills were designed to ward off in the first place.” (see Poison Pills: Let Shareholders Decide, 5/17, p. 104)

European CEO pay may be catching up with those in the US but it’s a trend that doesn’t go over too well among many, according to Forbes writer Deborah Orr. Her 5/17 article, entitled Damn Yankees, includes a brief recount of findings by Korn/Ferry, news reports and opinions. One anecdote involved a change in Dutch law after 4 board members at Dutch insurer Aegon made $50 million off stock options. The new law adds a tax formula to factor in the implied future value of options.

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Call for papers. GOUVERNANCE, aims to be a forum for the dissemination of knowledge, innovative developments, best practices and new approaches in the field of corporate, organizational and institutional governance for French speakers around the world. The first issue, to be launched in winter Y2000, will be focused on the theme of Corporate governance: theories, challenges and paradigms. For more information contact: Valérie Lehmann, MBA, coordinator, or Editor: Ameur Boujenoui, Ph.D.

Peter Eigen, chairman of Transparency International, argues NGOs must fight for freedom of the press, an independent judiciary, effective auditing of government and protection for whistle-blowers, and the environment as part of an international corporate governance strategy. (see Can we count on industry to ensure good corporate governance becomes reality? By Frank Vogl, Earth Times News Service)

Shareholder Communications to acquire Georgeson to create Georgeson Shareholder Communications, the largest global proxy solicitor with combined revenues of $100 million.

Sacking season: CEO purges abound, according to CBS MarketWatch. “Technology companies were among the biggest contributors to growth in the first quarter, corporate America’s best yet in terms of profit growth since the fall of 1997.” Patrick McGurn, of ISS indicates the higher turnover in that industry is probably due to short product cycles. “These guys keep their resumes up to date because they know they are only as good as their last quarter,” said Ralph Ward, publisher of the Boardroom Insider newsletter.

Binding proposals are up this year with 39 submissions thusfar compared with 23 last year, according to IRRC. Shareholders won major victories to eliminate Bergen Brunswig’s dead hand poison pill (74% in favor), do the same at Lubrizol (68% in favor), and allow shareholders to redeem or vote on renewal of Chubb’s poison pill (69% in favor). Chubb has made it clear they will not implement the bylaw. John C. Wilcox, Chairman of Georgeson argues Binding Shareholder Proposals are Un-American, arguing in part, that to the extent shareholders disagree with their representatives’ actions, they should “elect new ones in their place.”

Boeing internet voting glitch or fraud? A shareholder proposal calling for annual election of all directors won 49.9% of votes cast; 47.8% opposed it and the remaining shares abstained. Some shareholders complained they were shut out because they couldn’t cast their vote on the Internet starting on the Friday pior to the meeting. (see 1st Boeing e-mail proxy vote called success, South County Journal, 5/5/99)

Maxxam shareholders activists are urging election of outside directors and cumulative voting. (see PR Newswire, 5/5/99)

Nell Minow spoke about shareholder activism to the 36th annual conference of the Society of American Business Editors and Journalists. (see Shareholder Activist Nell Minow Addresses SABEW Convention)

Pension funds in the US increased equity allocations from 39% in 1993 to 61% in 1997. Watson Wyatt analysts expect to see increased pension equity allocations by 2002 in Hong Kong, Canada, Ireland, Australia and most major European markets with declines only in the UK which is already at 72%. Passive management strategies, such as indexing, is expected to increase from 26% in US to 35% of equity asset investments. In the UK it is expected to grow from 20% to 30%. Foreign equity exposure is also predicted to rise around the globe. (see Foreign pension markets growing faster than U.S., Watson Wyatt survey says, P&I, 5/3/99)

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Daily inflow of investments to index funds contributes to performance of S&P 500. As reported in 5/10/99 edition of Business Week, researcher William N. Goetzmann notes the data “suggest that the performance of the S&P 500 has gotten a permanent lift from the popularity of index investing.” (seeIndex Funds and Stock Market Growth, William N. Goetzmann, Massimo Massa) Implications for corporate governance? We touched on this subject in a conversation withRichard Koppes in 1996.

Caisse, Ontario Teachers, the Ontario Municipal Employees Retirement System, Burgundy Asset Management Inc. in Toronto and Montreal’s Jarislowsky Fraser & Co. Ltd. identified as activist investors in Canada. Others prefer to apply pressure through surrogates like Fairvest Securities, a Toronto brokerage that specializes in shareholder-rights advocacy. (Montreal Gazette, 4/30/99, When the head of Ontario teachers’ fund blasts management greedheads, shareholders benefit.)

If any CEO deserves to be highly paid, Gap’s Millard Drexler has to be the man. But, asks consultant Graef Crystal, “is it appropriate to give someone restricted stock and stock options that, using contemporary values, would be worth some $1.4 billion?” Crystal suggests that Drexler take $200 million of his after-tax option profits and make a $2,000 gift to each of his “front-line” employees. “And that $2,000 would be tax-free to the employees, because Drexler is permitted to give small gifts tax-free to any number of people in a given year. Even after doing this, he would still be left with his hundreds of millions in stock as well as lots and lots of remaining option profits.” (San Francisco Business Times, 5/3/99, Gap CEO’s bounty could be perfect perk for clerks)

Ira Millstein to highlight ASCS annual conference to be held at the Greenbriar on June 23-27. Participants will also hear from SEC Commissioner Laura Unger. ASCS survey finds May is still the most popular month for annual meetings and 10 a.m. is the most popular starting time. More than 80% continue to serve lunch or refreshments, 13% provide sample products. The Society’s “Job Bank,” which encourages companies to turn first to society membership when filling vacancies, is reportedly off to a good start (“members only” part of their site). The ASCS site has one of the better summary listings of SEC proposals and a discussion about the comprehensive “Aircraft Carrier” release.

Ralph D. Ward takes a look at the recent sacking of Compaq Computer’s CEO, Eckhard Pfeiffer, and reaches an interesting conclusion. See his guest commentary, “COMPAQ: Management Failure or Boardroom Success?” in our Forumssection.

More evidence of a paradigm shift from “managed” corporations to “governed” corporations can be seen in April’sDirectorship which reports the number of CEOs sitting on their own nominating committees has decreased by 116 since 1994 among those firms in their databank. Further, Richard Koppes discusses his experience on Apria Healthcare Group’sboard. The board includes a mix of talent and ownership which some see as a prototype for the next millennium. (In the interest of full disclosure, the editor made an an investment in Apria when Koppes was appointed; its value has more than doubled.)

Foundation for Enterprise Development has developed a “virtual interactive consultant,” VIC, designed specifically to help entrepreneurs who are considering using equity sharing (employee ownership) as a means to recruit, motivate, and retain their workforce. Also of interest is their online Ezine,Leading Companies. Each issue contains case studies, tips, trends and articles on employee ownership and open book management.

Mutual funds, the fiduciary obligation of directors is to hold down costs for investor/owners. Yet, Nikolaj Siggelkow, of the University of Pennsylvania’s Wharton School, finds that fund sponsors do everything they can to increase their own profits. The dubious theory is that fund holders pay 12b-1 fees so the fund can run ads. As more money flows economies of scale are created and total costs will fall. It doesn’t happen. Business Week advises, “although 6,722 of the 10,614 funds in Morningstar’s database charge 12b-1 fees — and more than a third take the maximum — that still leaves 3,892 that don’t. Look to those first.” (Business Week, 4/30/99, “Who Do You Think Those Mutual-Fund Fees Fatten?“) Visit their Fund Fee Hall of Shame.


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