Archives: August 1999

Caux Round Table (CRT) to develop a Total Social Impact (TSI) system of benchmarking the social responsibility performance of corporations in terms of trust, the environment, labor standards and other critical issues. CRT to step up efforts to encourage corporations around the world to accept the Principles, train their employees in the Principles and then to act by the Principles. (see Industry leaders discuss social responsibility and good corporate governance by Frank Vogl, Earth Times News Service)

Executives’ incentive-plan stock and options at the end of 1998 represented 13.2% of corporate equity or $1.1 trillion, at the 200 largest U.S. corporations according to Pearl Meyer & Partners.

Tracking shares which carry reduced ownership rights, allowing management to keep control of assets, assailed in July/August ISSue Alert. “Trackers have graduated from fad to staple in the last 12 months” with $400 billion pending or outstanding. Guest viewpoint is an informative piece by Geoffrey Bowes, chief executive of the Commonwealth Association for Corporate Governance (CACG), about the critical role that organization is playing in assisting developing countries in establishing good corporate governance.  

Two proxy guidelines that don’t make sense. This editor has repeatedly praised Domini Social Investments (Domini) and the California Public Employees Retirement System (CalPERS) for the leading roles each has played in the field of corporate governance. Both, for example, recently began to publish their proxy votes online and both have published their voting guidelines for some time. There are widely divergent opinions among shareholder activists concerning the value added by many policies so it doesn’t surprise me to find guidelines by Domini or CalPERS which I disagree with. However, two stand out: Domini’s policy to vote against cumulative voting and CalPERS’ policy to vote against proposals requiring director statements in support of candidacy.

Directors – Cumulative Voting Cumulative voting allows shareholders to cast all of their votes for one nominee to the board. Theoretically, it facilitates the election of dissidents to the board. In practice, however, it violates the principles of fairness and equity by granting minority shareholders a disproportionate voice in running the company. We will oppose bylaws requiring cumulative voting.

As a shareholder activist, Domini stands with the minority in almost every vote it takes in the field of corporate governance and certainly in the area of social activism. Cumulative voting would facilitate the possibility that Domini and other like minded shareholders could eventually elect a few directors who share their positions on social, environmental and governance issues. Instead of raising these issues only at annual meetings, sympathetic directors could ensure such issues become part of the regular board agenda. CalPERS votes in favor of cumulative voting proposals and against proposals calling for repeal of cumulative voting, consistent with the legal requirements of Section 6900, California Government Code.

1180 Director Statement in Support of Candidacy Shareholder proposals asking boards to adopt a policy requiring every nominee for a seat on the Board of Directors to provide a statement in support of their candidacy are believed in most cases unnecessary and generally will be voted against.

I haven’t seen any other institutional investor with a guideline on this issue. However, it seems inconsistent with the reputation that CalPERS has established around the world for seeking transparency and full disclosure. What possibly can be gained by voting against measures which seek to provide more information to stockholders about candidates for corporate boards? CalPERS has indicated it may run its own candidates for corporate boards. If they do, shouldn’t they be able to use the proxy mechanism to inform shareholders why they are running and how their policies would differ from those of other candidates?

As I have argued elsewhere, one of the primary stumbling blocks to achieving greater accountability of corporate boards to shareholders is the prohibition contained in SEC rule 14a-8(c)(8) which allows corporations to exclude shareholder nominations from proxy statements. Imagine a counterpart to this provision in government. Voters would be able to put an initiative on the ballot but wouldn’t be able to nominate candidates. The initiative process is used primarily as a last resort. Issues such as campaign finance reform are prime targets because elected officials are often reluctant to vote for changes which may reduce their own power.

Shareholder proposals which appear on corporate proxies should also become a mechanism to be used only when directors fail to represent shareholders. We will continue to see more and more proxy resolutions unless shareholders have reasonable access to the nomination process. Domini and CalPERS should take another look at the proxy guidelines discussed above. In addition, they should work to reform rules, such as 14a-8(c)(8), which deny shareholders effective access to the director nomination process.

Investor Relations (July) carried an IR Guide on Corporate Governance sponsored by (and I suspect written by) Georgeson & Company. The excellent booklet chronicles a shift in the balance of power from “corporate chieftains” who “could pretty much do what they liked” to shareholders who “have taken on a dramatically new governance role.” “Corporations around the world are waking up to the notion that to attract pension fund capital, they must alter corporate governance practices.” Confrontation is escalating with shareholders winning control of 20 companies in 1998 (mostly without a premium to market offer) and about 40 binding bylaws proposals submitted in 1999. 

“On the executive compensation issue, the decision-making process (of ISS) is completely formulaic.” The upside is that knowing the approximate formulas, proxy solicitors, such as Georgeson, can “accurately predict vote outcomes for various proposals.” The Georgeson slant comes through in a few places, such as in a discussion about the hope that audit committees can avert future disasters of the type seen at Cendant, Philip Services, Sunbeam and Waste Management. “Expecting a committee that meets a few times a year to probe deeply enough to spot fraud may be optimistic. Still, the thought gives shareholders a warm, cozy feeling.”

Still, the booklet is readable and packed with graphics that provide important information at a glance. There’s a bar graphs with the number of proxy contests between 1981 and 1998, as well as by issue; pie charts on the types of corporate governance proposals, withdrawn/voted on, and by type of sponsor; and a measure of the influence of ISS recommendations (with a reminder that among Georgeson clients shareholder base was a key factor).

Also in the July issue is a good rundown of IR classes and programs at University of Connecticut, University of California at Irvine, New York University, University of Michigan, Stanford University, Richard Ivey School of Business and City University in London.

Since Domini’s April challenge to the fund industry for transparency in proxy votes, there is little sign that other funds are rushing to the Internet with their own voting decisions. Michael Collins of CBS MarketWatch says Investors should know how their fund votes.

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Activists win victory at Quality Systems Inc. (QSII) as two of its largest shareholders win four of the seven board seats. The company agreed to other changes including adopting new independence guidelines for the board and its committees as well as terminating its poison pill plan. The accord follows months of heated disagreements involving company founder and CEO Sheldon Razin, and dissident shareholders Lawndale Capital and Ahmed Hussein. The Board’s independence was questioned, especially after John Kutasi revealed in March that his company had made a bid to buy QSII in December 1998 but was rejected by Razin. A former board member who resigned in July said he didn’t know about the offer until months later. Razin will remain the chairman of the board, but a lead director will also be appointed to head up separate executive board sessions of the independent directors. One of the biggest factors in their ability to effect change at QSII was the company’s articles of incorporation, which allow for cumulative voting. (Dow Jones, 8/9/99)

Restrictions on shareholder corporate governance powers are prevalent in the charters and bylaws of IPO companies, according to a Howard, Smith & Levin LLP study of 44 companies. Only six companies had corporate governance arrangements that allowed public shareholders to elect a new board majority at each annual meeting. Click here for the full results of the study.

Christian Science Monitor reports that 42,000 top corporate managers own a fifth of corporate America. Perhaps the Berle and Means problem is over for the smaller firms where this shift in ownership has occurred (management continues to own a little over 5% at the largest 10% of firms). Berle and Means feared diffused stockownership would bring management’s control for management’s benefit. Now that it appears to have happened, researchers seem to be only celebrating the alignment of shareholder and managment interests. (see The boss’s cut of the pie, 8/4/99)

A major turning point may have come when CalPERS and other institutional shareholders played on popular disgust with high executive pay. They won an easing of SEC rules governing communications with other shareholders by focusing public attention on a change which linked executive pay to performance. Soon after SEC changes were in place, the FASB backed away from its 1993 proposal that options be charged to earnings as an expense.

An unintended consequence is that option driven compensation plans, a strong stock market, low wage competition from overseas, and less inhibited executives combined to bring us to the point where most corporations are now dominated by their managers. At least one researcher seemed to be praising this shift because it satisfies the alignment problem and “increases corporate efficiency and national productivity.”

But will it continue? True, changing economic and political forces have improved shareholders bargaining power vis-a-vis other stakeholders. Capitol can move at the speed of light to other companies/countries; labor and communities cannot. Yet, an important factor left out of the equation is the increasing value added by human knowledge, in contrast to the tangible assets of capital. Twenty years ago the contribution of “human capital” was about 25% of wealth creation; now it is more like 75%. (see the work of Margaret Blair at the Brookings Institute).

If value is primarily created by the “leadership” skills of CEOs, we are on target. However, what if employees, through their investments in firm specific human capital, are the ones actually creating most of the value? Then our current path appears unsustainable. Piling wealth and unaccountable power on a few at the top will create an authoritarian and divided society. Long term growth depends on a culture of innovation which shares the wealth with those who create it.

Danish Corporate Governance Network (DCGN) has gone online at DCGN is a non-profit, informal network among academics, government officials and business representatives with a common interest in corporate governance. Site includes bibliography, news and more.

The Corporate Governance Encyclopedia has been launched by Ph.D.-Scholar Henrik Mathiesen.

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Asian Corporate Governance Association formed to promote understanding that sound corporate governance will not only contribute to stronger companies and economies, but will also become a fundamental prerequisite of doing business internationally in the next century. “The globalization of the world business system and economy means that corporate governance is an inevitable international trend,” said David Chiang, chairman and managing partner of Lombard Asian Private Investment Company (LAPIC), a Hong Kong- based private equity fund and founder of the association. “Corporate governance is good for business because it raises investor confidence and reduces the cost of capital, and can lead to higher profit performance.” The association aims to promote corporate governance through four channels, namely, information analysis and dissemination, advocacy, education and networking/partnering.

Review posted on The Art of M&A Financing and Refinancing: Sources and Instruments for Growth by Alexandra Reed Lajoux, and J. Fred Weston, McGraw-Hill, 1999. (See Lajoux) Also posted notes on a few dozen other new books. (see Books)

Worldwide trends continue. Singapore government’s investment vehicle, Temasek Holdings, to adopt term limits for directors (6 years) and limit directors to 6 boards. UK government considering legislation to require shareholder vote on remuneration committee proposals, annual election of directors, and allowing shareholder proposals. Chile set to pass legislation providing minority shareholders greater legal protection. Japanese ownership data shows accelerated shift away from banks and life insurance toward individual and foreign shareholders. In the US the AFL-CIO and the Council of Institutional Investors step up their campaigns against stock option repricing without shareholder approval. (ISS Friday Report, 7/99)

UInstitute of Directors has obtained approval to establish the world’s first professional standards for directors, the Chartered Director. Candidates will need to be at least 28 years old, be able to demonstrate certain qualificaitons and experience, pass the IOD’s exam, be assessed by interview and adhere to a Code of Professional Conduct. (Boardroom, May 1999)


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