Archives: October 1999

California Treasurer Phil Angelides may lead an effort to pull state investments out of companies negotiating Holocaust-related forced labor and asset seizure claims if they don’t reach a settlement soon. The companies involved include German banks, Daimler Chrysler, Ford and General Motors. (seeTreasurer: Settle Holocaust claims, Sacramento Bee, 10/29)

Mike Cohn, of the Cohn Family Business Group, is the newest member of the Corporate Governance NETwork. The firm advises family-owned businesses on succession planning and related governance issues. Their quarterly newsletter, TRANSITIONS & traditions®, helps stakeholders confront tough technical and emotional family business issues.

Indian business has a new mantra: corporate governance, according to a 10/29 report in the Financial Times. “There is no disguising progress in transparency and disclosure in a corporate world once synonymous with murky accounts and abuse of minority shareholders…Information rather than accountability has improved. Full accountability will take time. But the right place to start is with the board: genuinely independent non-executives representing shareholder interests heading audit and renumeration committees.”

SEC proposed rules on audit committee disclosure, Release No. 34-41987, debated in 10/25 New York Law Journal. “The most controversial part of the proposal aims to encourage board members who sit on corporate audit committees to ask outside auditors or management tough questions about the company’s financial statements.” “While defense attorneys applaud efforts by the commission to improve the quality of corporate financial reporting, they worry about the liability audit committees will face if this disclosure rule is passed.”

IRRC reports union pension funds will shift their focus in the next proxy season in an attempt to focus on the long term. One proposal seeks to increase the voting rights of shares held for an extended period of time, another seeks to allow 2% shareholders (individuals or groups) to nominate a board member. See Corporate Governance Highlights, 10/22, for additional details concerning these proposals and several more.

PG&E approved an amendment to their articles of incorporation to reduce the supermajority shareholder vote requirement for certain business combinations to a simple majority. The action was taken based on a shareholder resolution submitted on behalf of Mrs. Ersilia N. Davis byJohn Chevedden which won majority vote at the April 15, 1999 PG&E shareholder meeting.

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I was recently asked to provide more details on the choice ofWhole Foods as the choice for the first corporate monitoring shareholder’s resolution. First, and most compelling, their submission deadline was 10/15. Second, I’ve held several hundred shares since 1993. The company has been growing at a good clip. They have an ESOP and a participative team approach which draws on the knowledge base of all employees. They use the EVA system and have many other things going for them…basically a good company as far as I know (reminder: this site offers no investment advice).

However, the stock value has dropped from a high of about $70 a share in early 1998 to $30. Like many, I’m concerned about their planned spin off of WholePeople.com next year. In addition, they recently adopted a shareholder rights plan. Frankly, I haven’t taken the time to know if shareholders should be anything more than just concerned.

Mark Latham’s corporate monitoring proposal offers the perfect vehicle to shareholders, like me, who don’t have enough shares to make a substantial investment in research and possible shareholder action profitable but who would like to reap the benefits that professional advice and collective action can bring. Mr. Latham’s approach overcomes the free-rider problem. If shareholders vote in favor of the proposal not much will really happen until the subsequent year when the chosen monitor provides independent analysis and advice on issues facing the company at that time.

Knowing that such independent analysis will be made available to all shareholders may prompt a larger shareholder or group of shareholders to nominate members to the board, submit shareholder resolutions or take other initiatives. Shareholders might then support such actions, if these are determined advisable by their independent proxy monitoring advisor. In summary, I am convinced that having informed, knowledgeable owners will add value to Whole Foods Markets and any other firm that adopts the corporate monitoring proposal.

Hiring a proxy monitoring advisory firm is probably the most effective single action shareholders can take to further the accountability of corporations to their long-term investors. See Mark Latham’s FAQ page for more details. I plan to submit similar proposals this year to Pfizer and Equus II. Expect to see about a dozen such proposals surface this next proxy season and many more in the years to come.

CalPERS took action to reduce gift reporting requirements for fund fiduciaries and contractors to the more minimum requirements of state law. In February 1998 I requested theOffice of Administrative Law (OAL) to make a regulatory determination as to whether or not CalPERS rules governing gift reporting are “underground regulations.” Although I agreed with the thrust of the rules, I wanted CalPERS to go through the rulemaking process to afford members of the System and other interested parties an opportunity to offer amendments, such as a ban on gifts by contractors above a specified level. On August 11, 1999 OAL concluded the regulations were invalid because they should have been, but were not, adopted pursuant to the Administrative Procedure Act.

CalPERS staff report for agenda item 9 of the October meeting of the Benefits and Program Administration Committee recommended the policy be amended to not apply to gifts received from persons that have no relationship with CalPERS. Staff argued against taking the change through the rulemaking process because that would “accede” authority to OAL, since they would have an opportunity to opine on the “necessity” of the disclosure rules.

In testimony before the Committee, I brought up the fact that OAL reviews for necessity to a standard, that of substantial evidence. OAL is not empowered to substitute its judgement regarding substantive content. Although CalPERS does has separate constitutional authority over specified fiduciary matters, they have no blanket exemption from California laws and the courts have overturned other rules when the CalPERS Board has refused to comply with the APA’s reqirements.

CalPERS is currently going through a rulemaking which, in part, removes a prohibition by candidates for the Board against including remarks that are “inherently misleading” in their candidate statements which go out to members with the ballot. To satisfy the necessity standard, CalPERS argues the amendment is necessary “to apply the policy that candidate statements should be a brief, biographical description of the candidate’s education and background.”

Apparently, at least some staff at CalPERS believe that OAL is likely to reject a rulemaking requiring Board members to report gifts of less than $50 per month because the regulation isn’t necessary but accept the necessity argument that candidates must be able to include inherently misleading remarks in their statements because that’s the only way they can describe their education and background…or maybe elections just aren’t real unless voters can be misled?

I recommended to the Board that they make the proposed amendments but then submit them to OAL, as required by law. I also indicated that if the rule weren’t taken through the legally required procedure, I would sue in court to make them do so. Instead of amending the underground regulation, as recommended by staff, Board members voted to drop back to the more minimum reporting standards required by law. The higher standards which the Board instituted after criticism in the press and other investigations have now been put aside. I doubt you will find the news reported in a CalPERS press release. Understandably, lowering standards does not seem to warrant the same effort by CalPERS to generate press coverage as in February 1998 when standards were raised.

In other CalPERS news, the System approved settlement of a shareowner’s lawsuit against the former officers and directors of W.R. Grace. In 1996, CalPERS intervened under the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995 in an existing shareowner lawsuit and was later named lead plaintiff. As we have indicated elsewhere, an amicus brief filed in the case of Bragdon v. Telxon by DOL asserted fiduciaries have an affirmative duty to determine whether it would be in the interests of plan participants to pursue litigation. This brief was filed long after CalPERS took the initiative in the W.R. Grace case. The CalPERS Board is to be praised for taking this action. We hope others will follow their lead. You will find a CalPERS press release on this important event.

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Vanguard to publish after-tax returns.

CII named Linda Wachner as CEO pay anti-hero for her 1998 pay package worth $74 million in direct compensation, in addition to almost $76 million in exercised options at a time when the company’s stock suffered a decline of nearly 25% and losses of $32 million. Home Depot chairman Bernard Marcus earned honors among the heros for never taking options and for total direct compensation at $3 million (82% below market). See 10/8/99 ISS Friday Report for others and for further details. “Awards” based on study of 857 CEOs by Graef Crystal. Same issue also reports CII has released its annual Focus List of underperforming companies.

Responsible Wealth to broaden shareholder action campaign next year to include: freeze exec pay during downturns/layoffs, broaden ESOPs, report on political contributions and lobbying, report on corporate welfare and hold real elections (nominate more candidates than there are seats). National conference to be held in Boston, 4/7-8/2000.

First Corporate Monitoring shareholder proposal submitted. Whole Foods first target because of early deadline. Adoption is viewed by the author, Mark Latham, and the shareholder, James McRitchie (Corporate Governance editor) as a good governance measure applicable to all firms.

The ranking of 138 mutual fund boards by Schlindwein Associates is certainly a step in the right direction. (see WSJ, “Study Ranks Fund-Board Effectiveness, 10/8/99, C1) On top were the Nicholas Funds, Alleghany Funds, Alliance Capital Management, Ariel Capital Management, BT Funds, Accessor Funds, Global Asset Management, Harbor Capital Management, Vanguard Group and Glenmede Trust. I hope the ranking becomes an annual event and is joined by others applying further refinements in methodology.

While a board’s structure and performance should be major factors in any such evaluation, additional factors to be considered are a fund’s level of communication with its owners and willingness to be involved in the governance of the corporations it invests in. Future measures of board effectiveness should include an evaluation of how well they fulfill their fiduciary duty to monitor companies, vote on behalf of shareholders and intervene in corporate governance in order to maintain the health of their investments.

Reviews of Jonathan Charkham and Anne Simpson’s Fair Shares: The Future of Shareholder Power and Responsibility, as well as Scott Rodrick and Corey Rosen’s Employee Stock Ownership Plans: A Practical Guide to ESOPs and Other Borad Ownership Programs, are now posted in the Book Review section of our Library. Both are excellent.

Ralph Ward’s <a href=”http://www.boardroominsider.com”>Boardroom Insider moves into its second year of publication. Worth noting is the colorful table of contents for the current edition. Ralph slices and dices boardroom advice quicker than a Ginzo knife on the Home Shopping Channel and like the knife (at least as advertised) he cuts to the bone and keeps up the pace.

  • The Personal Boardroom: Oprah or Jerry Springer?
  • New Guidelines Your Audit Committee Must Know
  • How Our Family Business “Non-Board” Succeeds
  • Corporate Counsel as a Board Minutes “Bomb Squad:” 4 Tips
  • Update: What’s Hot (and Not) in Fighting Takeovers
  • 4 Secret Weapons for Great Board Administration
  • Great Board Admin Goodies From the Folks Who Know
  • Q&A: When Your Board Stops Trusting You

The Corporate Library, recently founded by Nell Minow and Robert AG Monks, is “intended to serve as a central repository for research, study and critical thinking about the nature of the modern global corporation, with a special emphasis on best practices and standards.” The Corporate Library appears to be another outstanding venture by leading practitioners in the field of corporate governance and will be headed by long-timeLENS associate Ric Marshall. The Library has excellent features such as news, links, events listings and a searchable library. The Corporate Library will quickly become the primary internet portal for those searching for answers concerning the direction of corporate governance.

Investor Relations on the Internet: New Distribution Channels and the Changing Face of Shareholder Communications also features Nell Minow and Ric Marshall. It takes place 11/3-4/99 at the Stanhope, Fifth Avenue, New York.

CalPERS voted against 18% of management proxy proposals, against directors at 20% of companies, director options plans at 18%, exc option plans at 35.5% and in favor of 52% of stockholder proposals at 1,880 US firms last proxy season.Independence Standards Board issued Exposure Draft 99-1, “Certain Independence Implications of Audits of Mutual Funds and Related Entities.” Firm as a whole, the audit engagement team, specified others, and certain of the firm’s retirement plans would have to be independent of all sister mutual funds and all related non-fund entities. Public comments due 10/31/99. CII released its 1999 Focus List with more than 1/2 being repeaters from previous years. Sealed Air’s T.J. Dermot Dunphy explains how difficult it was to abolish its antitakeover devices. “Maintaining maximum shareholder democracy, to us, is a crucial element in fostering a genuine all-involving atmosphere of trust in the company.” For more on each of the above, see IRRC Corporate Governance Highlights, 9/24 and 10/1.

Corporate Board Member (Fall/99) names best and worst boards. Best: Apple, Apria Healthcare, Home Depot, Pfizer, Sunbeam. Worst: Ascent Entertainment, Bank of America, Maxxam, Penzoil (offspring), Livent. See also, ISS Friday Report, 10/1/99.

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