Corporate Governance Archives: July 1999

Stephen Davis, of Davis Global Advisors, is assembling a long-range list of global corporate governance-related conferences/workshops/events for the World Bank website and Global Proxy Watch newsletter. Please pass on the date, city, title, sponsor, location, and contact information for any such events you may know about by e-mailing Please cc me at so that I can add a select few to our education pages. You can also post a message on the ECGNlist, the information and discussion list of the European Corporate Governance Network.

When is a company ready to form a board? A recent article in the Atlanta Business Chronicle offers advice from Paul Lapides, director of the Corporate Governance Center at Kennesaw State University, Donald R. Duckworth, chairman and CEO of Atlanta-based Horton International Inc., an executive search firm, and others.

National Presto Industries, the maker of the Salad Shooter and pressure cookers, has come under scrutiny by a group of New York Society of Security Analysts members, whose goal is to look at the ways in which corporate-governance standards can affect and augment shareholder value. CEO Maryjo Cohen and her father, who is chairman, appear to possess a considerably large portion of the company, and they consistently have rejected suggested changes by shareholders. Moreover, National Presto’s board meets only infrequently and shows little independence. Finally, the group of security analysts was concerned with the fact that, while many large institutions hold shares of stock in National Presto, the stock has failed to do well.

Strengthening Mutual Fund Governance: A Research Report and Discussion Paper, available from Management Practice Inc., notes that “just as ERISA placed a higher standard of oversight on pensions in the 1960s, legislation concerning the privatization of social security will do the same for mutual fund governance.” The dirty little secret is that mutual fund directors are set up to fail. This pamphlet will be useful to any board members interested in examining governance issues. It discusses board independence, term limits, mandatory retirement, fee and expense disclosure, and best practices.

Critical Shareholders: People for Environmental Protection and Social Justice, a German group, offers to accept proxies from shareholders in all companies in whose annual general meetings the Critical Shareholders are active. “We do not charge any fees for this service, but our work is only possible when the shareholders donate a small portion of their dividends to us.”

Navellier decision expected to enhance the status of independent mutual-fund directors. A U.S. District Court in San Francisco dismissed charges of waste and breach of fiduciary duty filed by fund manager Louis Navellier against several of his fund’s former independent directors who had tried to remove Navellier as the fund’s manager. (see WSJ, 7/26/99)

TIAA-CREF won an overwhelming victory at Mylan Lab’s July 23 annual meeting. The resolution, requesting the company to redeem or put to a shareholder vote its “dead hand” poison pill, received support from 67% of the shares voted.

Shareholder activism on upswing, reads Shareholders of three Toledo-area companies forced five corporate-governance issues on annual-meeting ballots this spring, and four of them got approval from holders of a majority of the stock. The article includes plenty of quotes from the usual suspects, Sarah Teslik, B. Kenneth West, Bill Patterson, Graef Crystal, Nell Minow and others familiar to our readers. “It’s official: the 1999 proxy season is a record-breaker in terms of the number of resolutions winning majority support,” says the Council of Institutional Investors. At least 35 shareholder proposals have won this year so far, up from 32 in all of last year, and the total will likely rise by year-end.

Lynn Stout to serve as Director of the Georgetown-Sloan Project which will explore the economic, social and political roles played by corporations and other business institutions. Margaret Blair will come to Georgetown Law Center next January as the Project’s Director of Research. Blair and Stout recently co-authored “A Team Production Theory of Corporate Law,” published this spring in the Virginia Law Review. (see below, just before month of June) Funded by a $2.2 million grant from the Alfred P. Sloan Foundation for a period of 3 years, the Project will support research, seminars, conferences, workshops, and the publication of books, monographs, and journal articles. See

Global Proxy Watch reports that ICGN calls on companies to adopt OECD principles with 10 amplifications regarding mission, communications, voting rights, boards, executive pay, strategic focus, performance shareholder returns and corporate citizenship. Stephen Davis, GPW editor, criticized the recent TSE sponsored report “Five Years to the Dey.” “It relied almost exclusively on CEOs themselves grading how they have performed in adopting the Dey Committee’s 14 voluntary guidelines.” Nomura Research Institute’s Capital Research Journal is now available in English on the internet.

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What Investment Managers Need to Know About Charters and Bylaws by Leonard Chazen of Howard, Smith & Levin LLP which appeared in the 6/99 edition of ISSue Alert is now referenced in our online Library. I’ve added the European Corporate Governance Network (ECGN) to our Linkssection (we had linked to them only through the Library).

Investment Company Institute endorsed a series of best practices for mutual funds. Among the 15 recommendations is a call for independent directors to represent a “super-majority” (or at least two-thirds on all fund boards) rather than the current 40% required by law. The report recommends that former officers or directors of a fund’s investment adviser, principal underwriter or certain affiliates not serve as independent directors of the fund; that fund independent directors have legal counsel; and that a fund’s independent directors meet separately from management. The Institute will offer programs to educate members about the recommendations this fall.

Australian Institute of Company Directors CEO Ian Dunlop, told the Australian Financial Review that Asia’s faster-than-expected economic recovery may hinder corporate governance reforms which are needed to enhance the integrity of Asian markets. “As markets pick up, it’s getting harder to keep a focus on making these types of changes.”

Tiarnan O’Mahoney, director of Anglo Irish Bank, has some thoughts about incorporation of the Hampel report into the Irish Stock Exchange rules last March. (see Corporate governance: a key factor, The Irish Times, 7/12)

Directors&Boards in going online. In their spring edition, Harold Reiter discusses “Opening up an insular culture” and the advantages of an outwardlooking organization, Bruce Wasserstein is interviewed concerning the art of M&A, Pascal Levensohn addresses “The problem of emotion in the boardroom” and Robert A.G. Monks sees his next frontier as addressing the conflicts of interest that keep major financial institutions from being involved owners for fear they will lose business through customer backlash.

Ralph Ward’s Boardroom INSIDER, 7/99 discussed Thomas Pipe & Steel’s innovative approach to finding a director, an ad in the Wall Street Journal. It worked for them and Ward sees it as a possible future trend.

TDC Consulting, in Ontario, Canada, offers an excellent online guide for writing your own board manual. See their Board Governance Responsibilities Checklist. Ward also continues his fascination with numbered lists; the INSIDER includes 5 hot trends in CEO compensation, 4 ideas for CFOs and boards, 6 ways to screw up CEO evaluations, 5 steps to board benchmarking and more. Always a quick read with helpful tips.

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Brazil joins code club, reads the Governance reports on the Brazilian Institute of Directors which has changed its name to Brazilian Institute of Corporate Governance. In early May the IBGC issued a six page advisory code which states as its first principle, “The mission of the board of directors is to maximize shareholder value.” The code provides a rigorous definition of “independent” directors, stresses the need for regular non-executive sessions. The system for evaluating the board, individual directors, CEO and officers “should be explained in the annual report.

Governance also contained a fascinating interview with Penny Shepherd, Director of the UK Social Investment Forum who discusses Stephen Timm’s speech where he emphasized that funds should consider the social ramifications of their investments. Shepherd indicates that insurance companies have been among the first to open their eyes. “Analysts are beginning to wake up but I don’t think you would find many City institutions yet that take an integrated approach to environmental and social performance as part of overall financial performance. I think that over the next few years that will change.” Increasingly, the interest is in positive, rather than negative screening and shareholder action.

Governance reports that I the 15 months since its launch ABF Euro, which weights investments according to corporate governance criteria, has outperformed its FT/S&P European Benchmark by 5.7%. Read about its active stance at Rhone-Poulenc.

ISS reports that a June 1999 report on Spanish companies’ adherence to the Olivencia Report, shows that only 9 of 35 companies on the IBEX index pass the basic corporate governance litmus test. (ISS Friday Report, 6/11)

In its 7/2 Friday Report, ISS notes that smaller firms such as Apria Healthcare (which this editor holds stock in), Nuevo Energy and Adaptive Broadband are setting new and higher standard in corporate governance. Changes such as scrapping shareholder rights plans, classified boards, guidelines which clearly indicate directors act as fiduciaries on behalf of stockholders, mandatory retirement, term limits, minimum stock ownership, limits on how many other seats a director may hold, prohibiting repricing of options.

Institutional investors in the UK need to take their shareholder voting rights more seriously, according to an independent inquiry set up by Britain’s National Association of Pension Funds. The inquiry rejects mandatory voting but calls for institutional investors to detail policies in writing to shareholders. Only 40% of shares are exercised, compared with 80% in the US. The NAPF set a goal of reaching 60% of U.K. voters in two years.

Pensions&Investments asked 23 experts in various fields about the future of investing. Only Robert A.G. Monks brought up the subject of corporate governance, indicating he thought it would become “a major factor on which money is invested.”

World Bank and OECD to push voluntary minimum corporate governance standards for developing countries. The initiative seeks more stable, lower-priced flows of international capital by advocating improved disclosure, independence of corporate boards and enhanced rights for shareholders.

Ira Millstein will chair a Private Sector Advisory Group. Anne Simpson, formerly with PIRC Ltd., has been hired to staff the project from the World Bank’s Washington headquarters in Washington, DC.

The program will bring government officials, business leaders, investors, bankers regulators and others together in individual countries to sensitize them on corporate governance issues and assess their practices. Programs for action will then be developed based on legal and regulatory reforms, training programs for directors, strengthening auditing practices and improving regulatory oversight. The program builds on previous World Bank experience in Russia. (P&I, 6/28, see also OECD press release and A Framework for Co-operation between the Organisation for Economic Co-operation and Development and the World Bank)

UK’s new regulation requiring pension funds to state their policy on social, environmental or ethical issues warmly welcomed by PIRC. (see press release)

Flows into stock funds in the first four months of this year were down nearly 40% from 1998. SmartMoney’s Lewis Braham discusses new strategies to attract investments in Funds With the Personal Touch. Ron Baron, who manages the mid-cap Baron Asset Fund (BARAX), not only invites shareholders to meet the CEOs of the companies the fund owns, he also connects shareholders to the Web sites of companies in the fund and encourages shareholders to buy their products and services. Braham mentions that Domini Social Investments became the first to disclose its proxy voting decisions on its Web site. In addition, William Fries of Thornburg Value (TVAFX) and Thornburg Global Value began disclosing new stock positions in his portfolio on Thornburg’s Web site as soon as he finished establishing them. The common theme is that these funds are beginning a movement which treats shareholders as owners.

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Marjorie Kelly, editor of Business Ethics (May/June 1999), points out that stockholders have “no tangible relationship” to the modern corporation, “take no responsibility for its misuse, and play no part in its upkeep.” Yet, an ownership myth persists and with it undertones “more at home in the medieval era,” including:

  • A concept of ownership extending beyond tangibles, which produce only 1/4 of the wealth, to humans…something akin to slavery.
  • The needs of owners as masters come before those of employees and communities.
  • The company has no independent integrity but exists at the discretion of its master.

Kelly appears to rely, in part, on the work of Margaret Blair. Let’s look at her recently published “Team Production Theory of Corporate Law,” written with co-author Lynn Stout, which appears in the Virginia Law Review (3/99, vol 82, #2). Blair and Stout propose a brilliant alternative to the principal-agent model, with its emphasis on reducing agency costs and maximizing shareholder wealth. Their team production approach hypothesizes that public corporations arise primarily where team members with firm specific investments need an independent authority to mediate disputes and distribute rents fairly. Corporations and their boards exist not to maximize shareholder return but to protect the enterprise-specific investment of all members of the corporate team, including shareholders, managers, workers and creditors.

To support this model, where directors act more as trustees than agents, Blair and Stout review case law and demonstrate the significant difference between public corporations and privately held firms. While their arguments offer a cogent explanation of corporate governance history, the future could look quite different. For example, they note that “shareholders’ voting rights – at least in publicly-traded corporations – are so weak as to be virtually meaningless.” “Shareholders’ voting rights give them little or no control over directors” who essentially “elect themselves.” Of course that began to change, especially during the landmark period of the early 1990s when directors toppled CEOs at many major corporations, assisted by shareholder activists.

While the team production approach offers a sound historical model, Blair and Stout acknowledge the rise of institutional shareholders during the 1980s “has tipped the political balance of power toward shareholders by reducing obstacles to collective investor action.” In addition, “technological change and an increasingly globalized economy have exerted downward pressure on U.S. workers’ wages while increasing investors’ opportunities to seek higher returns abroad.” The shift is also to be seen in recent legal reforms, such as the lead plaintiff provision of the Private Securities Litigation reform Act of 1995.

Kelly appears to believe that a key to shifting our current course would be our ability to recognize shareholder ownership as a myth. Once its fallacies are openly recognized, we can get on with the reforms that are needed. However, the conclusions of Blair and Stout are instructive. The shift in the balance of power to shareholders is “the result not of directors’ sudden recognition that shareholders are in fact ‘owners’ of the corporation but of changing economic and political forces that have improved shareholders’ relative bargaining power vis-à-vis other coalition members.” Capital can move at the speed of light to another company/country where labor costs are cheaper.

Although Kelly’s analysis certainly has merit, the power of shareholders appears likely to continue to increase, relative to other stakeholders. The OECD recently published its Principles of Corporate Governance. While the document gives a nod to other stakeholders, in substance it leans to the rights of shareholders. Arthur Levitt, Chairman of the SEC, recently remarked that “corporate decision-making has become more accountable to the true owners of every public company: the shareholders.” (Remarks at 1999 Directors’ College) The Brazilian Institute of Corporate Governance leads off their new code of best practices with the following first principle: “The mission of the board of directors is to maximize shareholder value.” Pick up any trade publication in the field and the direction is obvious.

As a recent article in the Employee Ownership Report put it, “owner’s have always gotten richer.” “Returns on stock investments have averaged 10% to 12% per year for a century; wages have gone up only a fraction of that.” They key is to help employees bargain for more ownership and to assist the rights of owners to hold corporate directors, mutual fund trustees, and pension fund trustees accountable.

In a private correspondence (after the above posting), Blair argues that because shareholders themselves are splitting into separate interest groups (social activists, public employee pensions, employee owners, etc.), and because human capital in firms is becoming so much more important in value creation, the need for directors to be neutral mediators is getting stronger, not weaker. Many of the features that provide protection of minority shareholders against majority shareholders also provide protection for the other stakeholders.

I agree that directors occupy the position of quasi trustees to the corporation itself. I don’t know if that extends to individual stockholders and other stakeholders. Certainly, Blair and Stout, as well as Kelly, offer a great deal of food for thought as to the need to establish corporate governance frameworks where those who have firm specific investments are treated with fidelity and good faith.

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