Archives: June 1999

SEC considers expanding reporting requirements for financial relationships between board members and their chief executives. Revisions are being proposed by the Council of Institutional Investors. Personal, professional, and financial relationships during the previous five-year period would need to be disclosed. Family relationships would include those by blood, marriage, or adoption through first cousins. Financial ties would include purchases, sales, loans, financing, common investments, and charitable contributions. Professional ties would include service on a government body, having the same employer, or rendering professional services. The cause of further disclosure was aided recently when four members of the Cendant audit committee were found to have undisclosed personal and financial ties to the company. (Bergen Record, 6/22 )

Mark Latham has continued to develop the Corporate Monitoring Project which now includes the beginnings of a helpful tool for individual investors, Voting Your Stock: A Guide.

European Corporate Governance Network has added a feature which allows automatic postings of information on new publications related to corporate governance. Also added is ECGNlist which provides a forum for discussion between academics and practitioners. The site continues as one of the best for its list of Corporate Governance Codes, Principles of Corporate Governance and Corporate Governance Reforms from around the World.

World Bank continues to add to their internet site on corporate governance. It now contains links to other sites, important speeches, policies, etc.

Centre for International Corporate Governance has been established at Nottingham Business School in the UK with the following aims: To conduct and encourage high quality research in corporate governance; To engage in interdisciplinary and cross-border research through collaboration with other disciplines in the University and with other institutions in the UK and overseas; To consult with professional bodies, corporations and other groups, as appropriate, on corporate governance issues; To disseminate the research of the Centre as widely as possible through published research, presentations at conferences, seminars and lectures.

Robert F. Carlson has been “re-elected” to another term on the Board of Administration of the California Public Employees’ Retirement System. An election for the retiree’s seat on the CalPERS Board was scheduled for this fall but potential challengers declined to file. Carlson has served on the Board since 1970 and was expected to be unbeatable, considering the many advantages of incumbent candidates. He was among the Board majority who recently voted to strengthen that advantage by seeking the adoption of regulations denying candidates the right to indicate their “positions on issues of general concern to the System’s membership” in future statements included with the ballot. (see CalPERS muzzles critics: Ballot rules protect board, keep others in the dark,Sacramento Bee) In addition to being a CalPERS Board member, Carlson also serves on the board of nine Franklin-Templeton Group mutual funds. See Mr. Carlson’s recentviewpoint article, Corporate Audits Need Greater Independence.

Director’s Monthly (5/99) included sometimes contrasting opinions in a discussion between James E. Heard of The Proxy Monitor and Peter D. Kinder of Kinder, Lydenberg, Domini. Kinder presents a somewhat more pessimistic view of corporations, arguing that stakeholder statutes are “self-erected monuments to legislators’ unwillingness to act constructively” in holding corporations accountable. Heard argues the basic corporate model is intact. Kinder is impatient that teacher pension funds are not protesting corporate efforts to extort tax concessions by threatening to move, thereby undermining support for public schools. Heard indicates that “if public pension funds someday conclude that social responsibility promotes higher returns, they might be willing to advance its cause.” However, both come down strongly supporting the need for management and board to engage in candid and open discussion on social and ethical issues.

Lewis Platt will step down from his position of CEO at Hewlett-Packard after 10 quarters of disappointing profits, according to Business Week (6/14/99, p. 49). Shareholder activist John Chevedden is calling for Boeing to take another look at its Board. He notes that at the April 26, 1999 Boeing shareholder meeting, three out of four directors presented for election were also directors of Hewlett-Packard (Condit, Platt and Fery). Chevedden asks, “If these Boeing directors can’t turnaround H-P performance after 10 quarters of disappointing profits, what business do they have on the Boeing board?”

Informed Investors Forum has been added to our Links for individual investors. The Forum holds investor conferences which we believe is a first step in getting retail investors to start thinking like owners.

Peter Burton, with AGC Consultants Ltd., has joined theCorporate Governance Network. Mr. Burton is a Chartered Engineer holding a Masters degree in Organizational Behavior. He has served as Managing Director and Chairman in a number of public and private companies, including CASE Group plc and Chiltern Radio plc, both of which he founded and took public. His particular interests are in helping clients achieve high levels of customer retention by developing appropriate management styles and organizational structures, and in facilitating self-appraisals of boards of directors. He is currently undertaking doctoral studies at Henley Management College into the relationship between board structure and effectiveness.

Stock split announcements bring an average 3% immediate hike in stock price, according to a recent study by David Ikenberry at Rice University. These companies outperformed their peers by an average of 8% over the course of a year. Since there is no real quantitative event taking place, researchers speculate that a split signals a company’s optimism about its future and the clout individual investors can have in creating momentum. The strongest post-announcement fun-ups were found at bell-weather companies like IBM. Sites dedicated to predicting splits include Stock Splits, The Right Line Split Report , The Online Investor. However, Ikenberry warns that companies splitting under $20 or higher than $100 without an upswing in momentum are probably reaching for a gimmick. (as reported in Investor Relations Business, 6/4/99,

Directorship (6/99) includes an article ripping into stock option accounting practices. Warren Buffett equates the cost of options issued to employees in the same manner at those sold and traded to the public. “Employee options are sometimes forfeited – that lessens the damage done to shareholders – whereas publicly offered options would not be. It is true, also, that companies receive a tax deduction when employee options are exercised; publicly-traded options deliver no such benefit. But there’s an offset to both these points: Options issued to employees are often re-priced, a transformation that makes them much more costly than the public variety.”

In a related note, according to a recent study by Pearl Meyer & Partners, more than 10% of surveyed companies make all employees eligible for option plans but of options awarded in 1998, 17% went to the 5 most highly paid executives. CEOs alone received 7.4%, making up more than 1/2 their compensation. Large firms have set aside 13.2% of all outstanding common stock for management and employee incentive plans compared to 6.9% ten years ago. (more info: 212-644-2300)

In the same issue, Robert Kramer, Principal Researcher with the Conference Board, reports that corporate headquarters are strengthening their authority in two key areas: executive selection and strategic planning. Well managed firms are more likely to have a small headquarters staff (2%); have significantly revised their headquarters role in the 1990s; have strengthened HQ business development, procurement, best practices exchange and knowledge sharing roles.

Rainbow/PUSH Coalition’s Wall Street Project has purchased shares in 51 high tech companies. They’ll be posting information about minorities in the boardroom and on staff as well as introducing shareholder proposals next year, according to a report by IRRC (5/14/99).

Franklin Mutual Series funds continue to be among the few mutual funds using corporate governance rights to shareholder advantage. ISS (5/14) reports they are “playing hardball” with Thermo Electron Corp., urging the company to take steps to restructure operations.

Forbes Shareholder Activism Report joins our growing list of “stakeholders.” Check out this important new publication and let me know what you think.

Back to the topMorningstar, questions the independence of directors after finding that among the 82 largest fund families, the more that directors were paid, the more shareholders shelled out in expenses. “Shareholders in most publicly traded corporations can expect various parties — institutional investors, independent watchdog groups and securities analysts, to name a few — to help a company’s board keep an eye on what insiders are doing. But the fund industry leaves the job almost solely to independent directors — a disparate bunch.” This fall, the SEC will host a round table intended to air the issues and to work toward consensus needed changes. See Mutual Fund Directors: Empty Suits in the Board Room, 6/7/99, NYTimes.

Putting a Lid on Rising Dough (6/7), the LA Times reports on the shareholder activism activities of the Responsible Wealth organization. The questions boil down to fairness. Everyone agrees CEOs should be paid more than employees… just how much more continues to be a growing issue.

Shareholders filing more suitsCBS MarketWatch (6/7) discusses the record-setting $143 million securities settlement by Informix and notes there are 500 more actions pending in federal courts. “The bottleneck in the courts right now is the result of too few appellate court decisions to give lawyers an idea of how the 1995 reform law will be interpreted by the courts. This prevents attorneys on either side from knowing what a settlement is really worth and so negotiations stagnate.”

Full disclosure on mutuals can deliver loyal investors, says the Detroit Free Press (6/7) , which gives as an example of such action William Fries’ posting on the internet the latest stock purchases of the Thornburg Value Fund and Thornburg Global Value Fund. Our evaluation: not as important and theDomini Fund posting their proxy votes but certainly a step in the right direction.

Community Growth Fund (CGF) in South Africa paves way in SRI by only investing in those companies which met a set of ethical criteria. CGF, 50% owned by trade unions, has grown its portfolio of assets to over R700 million. The fund has seen an 4.6% return over the past 3 years, ranking 5th out of 15 SA general equity funds on financial performance alone. Standards include commitment to 1) Create jobs through innovation and expansion plans. 2) Training of workers to enhance skills. 3) Economic and social empowerment. 4) Equity through affirmative action in the workplace. 5) Good conditions of employment. 6) Promote sound environmental practices. 7) Apply high health and safety standards. 8) Demonstrate open and effective corporate governance.

In other news from South Africa, fewer than 12% of the listed companies on the Johannesburg Stock Exchange have confirmed verbally that they will take part in this year’s Corporate Governance Awards sponsored by Deloitte & Touche. The awards recognize companies which have the best corporate governance practices in place in keeping with the recommendations of the King report.

Back to the topThe Economist, 5/15/99, carried another article on the shift to defined contributions plans. “The end of the Company Pension” points out that in many countries, including the U.S., such plans have now overtaken defined benefit plans in the number of individuals covered. Such plans are popular among both employers (who get out from under liability) and employees (who gain portability and control). They are creating a new breed of worker capitalism. Yet, they are not without risk. An employee who works at the same firm for 30 years can be expected to get a pension about 1/2 as large as under a defined benefit program. In addition, those in self-directed plans may not end up saving regularly. Eeven if they do, they may invest badly. The Economist calls on governments to make sure that financial intermediaries, such as mutual funds, are subject to sound regulation with regard to the advice they dispense. We might also suggest that governments require mutual funds to vote company proxies in a manner which is beneficial to those who have invested in the fund, as pension fund trustees are required to do under ERISA.

Shareholder activists score another first. A group of investors led by Martin Stoller, a professor of rhetoric at Northwestern University, secured a spot this month in federal bankruptcy court traditionally reserved for giant creditors. The group swapped 6,000 posts on a popular Internet message board as they debated what action to take regarding high-risk lender, United Companies Financial Corp., which filed for Chapter 11 bankruptcy protection March 1. The Internet is uniting shareholders and giving them a forum for their opinions. Grass-roots corporate governance is beginning to take off. 35 proposals opposed by management have been passed so far this year, compared with 32 for all of last year. (see Internet Gives Small Investors Clout International Herald Tribune, 6/4/99.)

U.S. pension funds continue to dominate overseas markets despite a slight dip, according to the Conference Board’s latestInstitutional Investment Report and 25 pension funds accounted for 42% of the $432 billion foreign equity held by all U.S. investors in the third quarter of 1998. Dr. Carolyn Brancato, author of the report and Director of The Conference Board’s Global Corporate Governance Research Center, indicates “The U.S. clearly has the economic clout and therefore the advantage in international markets to insist corporations adhere to high levels of shareholder accountability.” Brancato notes that although ownership in the largest 25 companies is more highly concentrated in large investors in Germany, France and Japan, “these investors are not likely to exercise U.S. style activist governance monitoring over the management of their portfolio companies.”

Outside company directors enjoyed an 11% increase in median total compensation last year, largely because companies are increasingly offering stock as well as basic pay, according to another report by The Conference Board. While basic pay for outside directors was virtually the same in 1998 as in 1997, stock compensation boosted total packages to a median of $45,000.

Investor Relations contains and excellent article, All Eyes on Value by Jeff Cossette on how “activist funds around the world are combining their clout to invest more power over companies.” Cossette discusses CalPERS, Active Value Advisors, HermesLensAB Custos and others. In a sidebar, Robert Monks explains how much easier it is in the UK with the law “behind you.” “You can, for example, call an EGM with 10 percent to the vote. Then, you can change any or all of the board with 50 percent plus one vote.” (May 1999)

Karen Nelson Hackett, a floor broker for ING Barings Furman Selz LLC, was elected the the first woman governor in the New York Stock Exchange’s history. Governors (there are now 20) are unpaid referees elected from the floor membership, with duties that include supervising unusual openings and closings, approving trading halts, officiating disputes between members and interpreting the exchange’s rules. In other Exchange news, 5 new members were elected to the board of directors …none were women. The Board continues to include 2 women and 22 men.

Back to the topGovernance (, which is quickly becoming what it aspires to be, “the world’s leading newsletter on issues of corporate governance, corporate responsibility and boardroom best practice,” points to an internet fight being waged by Premier Oil Plc Shareholders Association which claims “the dice are completely loaded against outsiders.” The dissidents certainly have a comprehensive internet site. This appears to be the future of proxy battles. See also Premier Oil Plc.

In the same April/May issue Stephen Davis reports on adoption of codes in Malaysia and Italy with those in Malaysia being “far more prescriptive and detailed than Cadbury or its successor guidelines.” Phillippa Haslegrave sees Anglo American governance standards driving change in Europe. Boards will become smaller and more independent, use of outside specialists to grow, upward pressures on director compensation, board professionalization will be guided by regular reviews of board performance and more directors will have international experience, among other insights. See alsoCross-Border Mergers, Globalization of Equity Markets to Focus Scrutiny on European Boards, New Study Shows,Largest Investors Favor Worldwide Corporate Governance Standards, New Study Shows.

Survey of UK directors by Hay Management Consultants finds that 89% rate communication with investors as important but only 7% speak to them on a regular basis – most continue to rely on PR and corporate affairs departments. 96% said it is vital for the company to communicate with its customers, yet, again, nearly 2/3 said they had no role in such communications. William M. Mercer’s 8th annual European Pension Managers’ Guide is out. Among the findings: 35 managers now control $8.2 trillion, indexing continues to grow and a “leveling up” of governance standards is expected as funds increasingly take a European-wide view. launched their site in April 1999 “to establish a vibrant Internet community dedicated to helping fund sponsors share ideas, exchange investment insights and learn from their peers throughout the United States and around the world.”

UK Pensions Minister Stephen Timms referred to a collection published by John Wesley in 1760 on the subject “The Right Use of Money” in a recent speech to the PIRC Corporate Responsibility Conference.

Rule 1: Gain all you can …but not at any expense of life nor at the expense of our health. The genesis of ethical screening. Wesley condemns those who make their fortunes by selling alcohol while caring nothing for its effects on the consumer; but he acknowledges that distilling, tavern-keeping and so on can be conducted honorably.

Rule 2: Save all you can. Don’t be distracted from the path of responsibility and prudence or waste money which could be set aside for future use. Balance risk against return.

Rule 3: Give all you can. Central to his message is the idea of stewardship: everything we gain or are given is only conditionally ours. We are not the absolute owners of our wealth; rather, we are custodians or stewards. Our children and grandchildren will have to deal with the environmental problems we leave them. Wesley says, “Nor indeed can a man properly be said to save anything, if he only lays it up. You may as well throw your money into the sea, as bury it in the earth.” Gaining money is good, provided it is carried out with due regard to the rights and well-being of others and is used rightly.

Timms then goes on to apply these principles to Corporate Governance. Shareholder activism and the exercise of voting rights, and engagement policies which prevent the exploitation of child labor or damage to the environment, are right uses of money, in that they seek to promote policies and actions which, in Wesley’s terms, do not gain money at the expense of life or health, whether they be our own or our neighbour’s. Pension funds should therefore make “direct references to socially responsible, environmentally responsible and ethical investments, as well as the exercise of rights, including voting rights” in their statement of investment principles.

Back to the topMaxxam vote shows dissatisfaction with performance and operations. Nearly 1.2 million shares (22%) voted against the company’s incumbent directors through a direct vote for Senator Metzenbaum and Judge Mikva or a direct vote against the incumbent directors. This vote represents 42% of the vote outside the control of Maxxam CEO Charles Hurwitz. A CalPERS’ proposal to hold annual elections for all board members received 15% of the common and preferred shareholders voting together. A proposal by As You Sow, the Rose Foundation and others to install cumulative voting received 13.3%. Both measures garnered over half of the vote of publicly traded shares outside the control of Hurwitz.

Juno Lighting to face proxy battle at June 29th meeting, according to a report in the Wall Street Journal (Dissident Investors Fight for Seats On Boards Without Seeking Control, 6/1/99). Juno Lighting’s five-member board includes two insiders, the company’s investment banker and an outside lawyer who serves as its corporate secretary. Robert A.G. Monks and Nell Minow, principals of the Lens Fund, are seeking board acquiring nearly 7% of the firm. Juno is attempting to bar the move by unveiling a $25/share merger and recapitalization plan. Several institutional holders with sizable stakes will reportedly join Lens in opposing the deal. Insurgents won 25 of the 35 directorship fights they waged last year. That is up from just eight of 16 such fights in 1996.

EDS shareholder resolution for annual election of all directors won 38% of the vote at the May 25, 1999 shareholder meeting. Proponent John Chevedden said that this is a good vote for a first submittal given that GM’s pension fund owns 25% of the stock and that EDS does not have confidential voting. Chevedden said the vote sends a message to management to eliminate the many potential conflicts-of-interest cited in the resolution that hold back EDS performance. For the resolution text see message #9509 at:

Global Forum on Corporate Governance to be launched in late September of 1999, to be sponsored by the World Bankand the Organization for Economic Cooperation and Development (OECD). Development of the Forum is another sign of the widespread recognition that sound corporate governance is needed to strengthen the international financial system and is essential for a well-functioning market economy.

The Forum will provide a global dialogue on corporate governance reform and will assist individual countries in developing their own programs for improved corporate governance. The Forum will bring together relevant international institutions, developing and developed countries, as well as private sector participants and other stakeholders. A high-level Private Sector Advisory Group will be established consisting of distinguished corporate and institutional leaders from developed and developing countries that have championed and pioneered best practices. The new OECD Corporate Governance Principles will serve as a starting point for debate. For more information contact Nadereh Chamlou Tel: +1 202 458 0473.

Templeton Emerging Markets’ Mark Mobius speaks out on the need for public companies to give proper consideration to minority shareholders – corporate governance. He won’t hesitate to sell companies that don’t agree. He has spoken out against share placements which dilute the equity of existing shareholders in the company. “What’s the use of having the best corporate governance laws in the world if they are not [enforced] or only selectively [enforced]?” Mobius notes that those in charge of enforcing the laws are “the same people who control the companies that openly flout the laws.” “There is growing evidence that better corporate governance leads to better returns on investment.” On May 11, Templeton issued a press release urging shareholders to vote against placements that did not give existing investors first option to participate. The same day, Templeton voted against a resolution at the annual general meeting of Hong Kong Electric Holdings Ltd. authorizing private share placements by the company’s management. (WANTED: GOOD GOVERNANCE, Top stock picker warns companies to shape up, AsianWeek, 6/4/99) (see also, Hong Kong Firms Assailed, International Herald Tribune, 5/24/99.

Indian Industry speaks out on a Desirable Corporate Governance Code. A few highlights include: The quality of corporate governance improves with the induction of outside professionals as non-executive directors. No single person should hold directorships in more than 10 listed companies. Shareholders should be given a record of board attendance. Directors who fail to attend half the meetings should not be reappointed. Audit Committees should consist of at least three members, all drawn from a company’s non-executive directors. Recommends many financial as well as non-financial disclosures. Specifies creditor rights.

Points to problems: the manner in which the government calls the shots unrelated to shareholder value, directors of financial institutions (FIs) who have no personal incentive to monitor their companies and FI tradition of supporting existing management. “FIs simply do not have enough senior-level personnel who can properly discharge their obligations as good corporate governors. In a nutshell, therefore, while nominee directors of FIs ought to be far more powerful than the disinterested non-executive directors, they are in fact at par. Consequently, the institutions which could have played the most proactive role in corporate governance India’s largest concentrated shareholders-cum-debt-holders have not done so. The long term solution requires questioning the very basis of majority government ownership of the FIs.”

The report envisions a future where a “larger number of foreign portfolio investors will constantly raise their demand for better corporate governance, more transparency and greater disclosure.” “The loyalty of a typical Indian investor is far greater than his counterparts in the USA or Britain. But, our companies must not make the mistake of taking such loyalty as given. To nurture and strengthen this loyalty, our companies need to give a clear-cut signal that the words ‘your company’ have real meaning. That requires well functioning boards, greater disclosure, better management practices, and a more open, interactive and dynamic corporate governance environment. Quite simply, shareholders’ and creditors’ support are vital for the survival, growth and competitiveness of India’s companies. Such support requires us to tone up our act today.”

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