Hermes announced a halt to its planned merger with Lens but also indicated it has addedCalPERS, OMERS, and SPP from Sweden as investors in its shareholder activism funds which now total $560 million. “HLAM is growing so quickly that we have decided the London based management team must focus on opportunities in [the] UK, and thereafter extend to Europe as a whole,” said Alastair Ross Goobey, chief executive of Hermes. The Corporate Library News Briefs, 11/29.
Ford Motor Co.
Herman Miller Inc.
Old Kent Financial Corp.
Aastrom Biosciences Inc.
Mechanical Dynamics Inc.
Secom General Corp.
Charles O. Holliday, chairman and CEO of DuPont, was elected chairman of the World Business Council for Sustainable Development (WBCSD). Key focus areas for the future will include climate and energy, making markets work for sustainability, embedding social responsibility in corporate governance, and the importance of innovation and technology in moving toward sustainable development. The WBCSD is a coalition of 120 companies, from 30 countries and more than 20 major industrial sectors, committed to sustainable development. PRNewswire, 11/29/99
Innovators. Laborers International Union of North America(LIUNA) resolution asks Flour, PPG Industries and Texaco to provide for an increase in the voting rights of shareholders who hold stock for an extended period of time. Similar proposals have been submitted by International Brotherhood of Electrical Workers‘ (IBEW) to MGIC Investment and by United Brotherhood of Carpenters’ (UBC’s) to Mead. Another innovative proposal from these unions seeks access to the nominating process for shareholders through the proxy statement. Bart Naylor, formerly with the Teamsters, is submitting proposals to include shareholder nominees on the proxy card (access to be open to groups holding 3% of shares). Responsible Wealth plans to ask Disney to establish and ESOP and to fund it with stock contributions at least equal to stock given to corporate officers. IRRC Corporate Governance Highlights, 11/19
The company-pay proposal for shareowner proxy voting advice has now been submitted to Equus II (EQS) for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the news releases, text of other proposals, reasons for selecting these companies, and answers to other frequently asked questions.
Shareholder activist, John Chevedden continues his campaigns at Northrop & Airborne. After receiving substantial majorities last year, and being ignored by the companies, he’s back. Will Northrop submit its poison pill to a vote by shareholders? 64% voted in favor last year. Will Airborne hold annual election of all directors? Last year 70% voted in favor.
Korn/Ferry reports that more retired execs are sitting on boards. Current CEOs have now dropped to 3rd place, behind retirees and major shareholders. Average compensation at the Fortune 1000 is also up, rising from $40,651 to $41,949, not including stock grants.
Italy’s Milan stock exchange is expected to introduce a rule next month to encourage quoted companies to adopt its new voluntary corporate governance code. “If they do not use it, companies will have to explain why and outline their own model of governance,” said Stefano Preda, chairman of the stock exchange. The voluntary code of conduct was introduced last month as a means to protect minority shareholders and create value. Financial Times, 11/10/99
AFL-CIO’s Office of Investment has contacted investment managers for collectively-bargained benefit funds asking them to oppose Vodafone Airtouch Plc’s hostile bid for Mannesmann. Contact: AFL-CIO Bill Patterson, 202/637-5372. For additional information see WSJ, 11/29, pp. A4, A23,& 28.
Investor relations sites visited frequently by buy and sell side analysts, according to Investor Relations Business (11/15/99) However, they commonly complain that information is not updated. Article advises IROs to use internet tracking information to develop a list of possible institutional investors.
Steven Kaplan of the University of Chicago and Bernadette Minton of Ohio State University find that if a Japanese company’s stock returns declined by 50% in a given year, the firm was almost twice as likely as normal to bring a new outside director onto the board and the chief executive was significantly more likely to be forced out or fail to become chairman (normally some 70 percent of retiring CEOs move up to the chairmanship). Wharton Leadership Digest, 10/99
November issue of Governance contained several excellent articles on large trends and developments in the field of corporate governance. First was an announcement about theGlobal Corporate Governance Forum. Governance reports their first practical project is to work with the Confederation of Indian Industry to bring 50 Indian companies into compliance with NY Stock Exchange standards for disclosure and accountability.
Final guidance had been issued in the UK on how companies should manage internal controls. Boards are now expected to practice continuous assessment of risk issues. The Institute of Chartered Accountants in England & Wales has already issued guidance. Doloitee & Touche survey of FTSE 250 found less than 25% compliant on ongoing monitoring. Article provides additional numbers.
Stephen Davis argues that remuneration issues in the UK are only “the tip of the governance iceberg.” Davis favors legislation which would mandate annual elections for the board as a whole. In addition, each committee should be required to submit an annual report to investors discussing their membership, director attendance and work product.
Julia Bright interviews Julian Treger of UK Active Value Investors. Treger discusses their recent move to take over Hogg Robinson, their call for a corporate governance report on corporate Britain’s response to the internet and the strategies their firm uses to target under-valued companies.
Governance also contains an opinion piece by Shann Turnbullwho recommends the use of advisory boards of stakeholders with a combination of interest and “intimate business specific knowledge.” Turnbull sees the members elected by stakeholders. He also calls for proportional (cumulative) voting and a “watchdog” senate elected by one vote per investor. “A fundamental flaw in the Anglo practice of a unitary board is that directors have absolute power in managing their own conflicts of self-interest.” “The watchdog board provides external directors with the power and capability to stop problems of insider dealing before they occur.”
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William Crist, chairman of CalPERS, responded to a recent editorial in the Sacramento Bee entitled Low road at PERS: Ethnic remarks are another sign of arrogance. His remarks, “CalPERS’s record since Proposition 162” (11/19) included misleading statements. An “independent panel of attorneys” did not find the election protest to be “without merit.” Instead, the panel found they could not overturn the election because CalPERS rules also require a finding that election results “would have been different.” Allowing Mr. Crist to dramatically change his statement to address gave him an advantage but no one can say with certainty that he would have lost. The standard set by the regulations regarding protests was impossible to meet.
In addition, the protest panel was anything but “independent.” Mr. Crist sits on the Performance and Compensation Committee which recommends how much to pay the General Counsel. The panel that ruled on the protest was hand picked by the same General Counsel who had been accused of conspiring with Mr. Crist to violate the rules.
In 1997 candidates were denied the right to make even minor changes in punctuation to their statements. Yet, 1998 General Counsel allowed Mr. Crist’s changes because “the First Amendment applies to political speech, and that the purpose of the candidate statements is to permit the voters to make an informed choice.”
In a report to the Board, which CalPERS failed to disclose in its current rulemaking, the Legal Office now contends that prohibiting candidates from disclosing their opponent’s record or expressing their opinions on issues of general concern is not a violation First Amendment rights. Clearly, CalPERS regulations are being used to favor incumbents over challengers.
Governance experts weigh in on battle for American Home Products. Richard Koppes questions whether Warner-Lambert “is fulfilling its fiduciary duty to shareholders” because of its use of an options package explicitly designed to kill any chance other suitors, such as Pfizer. Jeffrey Gordon said the option grant is likely to be upheld in court, especially since the attractive accounting method is being phased out by accounting bodies. As long as shareholders can vote up or down, Warner-Lambert’s moves aren’t violating good governance. Others appear to disagree, including Joseph Grundfest and Nell Minow. (see WSJ, p. C1, 11/17/99)
CalPERS investment committee chair, Charles Valdes, publicly apologized for remarks interpreted as disparaging to state Treasurer Phil Angelides and others of Greek descent. The apology came after critical letters from members of the Legislature and Governor Gray Davis. Assemblyman Louis Papan, said he will urge fellow legislators to discuss setting minimum eligibility requirements for board members. (Valdes reportedly filed for bankruptcy in 2/91 and 1/97.)
“If you can’t manage your own finances, what the hell are you doing as the head of the CalPERS investment committee?” Papan was quoted as saying. Board members may pick a new investment committee chair in March. (CalPERS official says he’s sorry: Remarks were called offensive to Greeks, Sacramento Bee, 11/16/99) The board unanimously approved a “resolution of reprimand” which states that Valdes’ remarks “raised an implication of ethnic prejudice that is unacceptable and hurtful to the mission of CalPERS.” The censure results in further public humiliation for Valdes. (CalPERS officially censures Valdes for insensitive remarks, Sacramento Bee, 11/18/99)
Mutual funds are putting more pressure on underperforming companies. Mentioned in this growing trend is pressure from Heartland Advisers on Commercial Federal, Gehl, and ICN Pharmaceuticals, as well as similar moves by Oakmark on Dun & Bradstreet, and T. Rowe Price on Cort Business Services. Commercial Federal, which was also being hit by Mutual Series, Acadia Fund and John Hancock Funds, apparently has accepted two board nominees from Mutual Series. (WSJ, 11/15/99, C1)
Patrick McGurn’s “The Internet and the Rise of Corporate Governance Activism” in the October 1999 edition of ISSue Alert offers good advice. He outlines some of the recent developments, including: CalPERS “push-back” function which will alow visitors to automatically receive e-mails with the content of new material posted to its site (I have advised CalPERS to create a portfolio function which would not only track in individual’s stock but would directly link to proxy positions taken by CalPERS), permanent sites maintained byGreenway Partners LP and LENS, campaign specific sites such as richmondsavingsbank.com, sites by other players such as AFL-CIO’s Paywatch and Responsible Wealth site as well as chat rooms at Yahoo!, Silicon Investor and Motley Fool. McGurn warns that corporations aren’t keeping up.
In the next century, battles for shareholders’ hearts and proxies will be fought in cyberspace. To defend themselves, companies must adopt governance guidelines and make them a central focus of their web strategies. Boards also must review and update these guidelines on a regular basis.
The same issue also offers some excellent advice on how to design shareholder-friendly poison pills of the type recently proposed by Adaptive Broadband.
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Across the Board, the Conference Board’s magazine, carries an informative article arguing against paying directors in stock. The percentage of firms with stock-base compensation has risen from 17% in 1990 to nearly 80% in 1996. The authors note that while base compensation has remained essentially stable, stock and options awards have skyrocketed. Stock dilution, selling the company short through reloads, market timing, and the increased likelihood of accepting an above-market premium are but a few of the problems raised. Another is the appearance of conflict of interest. “Perhaps it would be wise to restrict such programs to stock awards, but not options, and certainly not resets, reloads, and similar transactions. In this way, some independence of th board – or at least the perception of its independence – might be reasonably maintained. (Daily, Certo and Dalton, Pay Directors in Stock? No., issue 11-12/99, pp. 46-50)
A bad example in this area could turn out to be Tyco’s recent decision to pay its board of directors 90% of their current year cash compensation in the form of Tyco shares or options, or a combination of the two. The move may be designed to show confidence in the company’s price but what will happen if the options are repriced? (WSJ, 11/4/99)
the Corporate Governance Advisor (9-10/99, pp. 10-12) carried on article based on empirical research on the same subject by Bhagat, Carey and Elson, entitled “Director Ownership, Corporate Performance, and Management Turnover.” Their study found a significant correlation between the amount of stock owned by individual outside directors and firm performance. “Second, the greater the dollar value of the individual outside director’s equity holdings in the enterprise, the more likely a disciplinary-type CEO turnover in a poorly performing company would exist.”
The same issue notes a court settlement with Occidential Petroleum in February is what led their board to adopt progressive board corporate governance guidelines. “Such court-sanctioned governance changes are becoming commonplace,” noting such court mandated changes at Computer Sciences, Fleming, and KeySpan Energy.
The company-pay proposal for shareowner proxy voting advice has now been submitted to Citigroup, General Electric,Gillette, Pfizer, Whole Foods Market and Warner-Lambert, for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the full news release, text of proposals, reasons for selecting these companies, and answers to other frequently asked questions. A balanced article byLynn Cowan appeared over the Dow Jones newswire on 11/12/99. Ms. Cowan indicates that corporate governance experts and a proxy advisory firm had mixed reactions to the proposal. Among the issues raised were concern about the level of independence an adviser could maintain if it was being paid by the company it was supposed to evaluate; the cost of such services eating into shareholder returns; and the likelihood that a company would not adopt such a proposal, since proxy questions are suggestions that management can ignore.
My guess is these issues will begin to resolve themselves as people become more familiar with the proposal. Advisors will maintain their independence because they will be selected directly by the shareholders, not the company’s management. The cost of such services “eating into shareholder returns” is minimal because those costs are capped at $5,000 to $10,000, depending on the size of the firm.
John Wilcox, vice chairman of Georgeson Shareholder Communications, indicated that institutional fund managers own stock in thousands of companies and don’t have the time to sort through every proxy question; small investors, on the other hand, generally don’t own as many stocks and don’t have a fiduciary duty to other investors to research their votes. Yet, the fact that individual investors do not have fiduciary duties doesn’t mean they have no need for proxy advice. The proposal would provide them with an alternative to voting with management or doing the Wall Street Walk. To say that institutional fund managers don’t have time to sort through every proxy question simply reinforces the need for the resolution. Since proxy voting can add value, voting rights should be subject to the same fiduciary standards as other plan assets. If institutional investors can’t find the time to meet their fiduciary duty to review proxy issues they’d better vote for this proposal because it will provide the advice they need.
Jamie Heard, chief executive of Proxy Monitor, felt management may not go along with the proposal, given the voting support that generally comes from individuals. However, those which have shown leadership in the area of corporate governance may wish to stay at the front of the pack. I believe we will find several firms who recognize that informed shareholders can add value. The two which I submitted, Whole Foods and Pfizer, are currently seen as progressive. Wouldn’t they want to maintain that reputation?
Let’s hope there will be a few brave firms ready to move the herd. A few years ago not many had adopted corporate governance principles or established corporate governance committees but times are changing. I’m betting that several firms will be willing to raise the bar. For the laggards, there is always the threat of bylaw amendments or other action.
Fund managers from TIAA-CREF, Franklin/Templeton, Fidelity, Vanguard and others request publishers of global-market indexes factor the quality of corporate governance into rankings. WSJ, 11/5, p. C14.
John Smale, who in 1992 helped lead the corporate governance revolution, has announced he will retire from GM’s board in May, before GM’s annual meeting. seePhiladelphia Inquirer, 11/3.
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AFL-CIO President John Sweeney called on pension fund administrators to manage worker assets in ways that help, not hurt, working families and communities. At a convention of the International Foundation of Employee Benefits, Sweeney spoke in favor of “greater diversity in the boardroom and more equality between the executive suite and the shop floor.” Worker-owners at Taft-Hartley benefit plans won 15 shareholder proposals in 1999, more than any other group. “We want our money to create jobs, not destroy them. We want our money making real investments in communities, not sent chasing after the latest fad. We want to see our money supporting good corporate governance, not lining the pockets of overpaid executives, and we want our money supporting partnerships with workers, not encouraging confrontation and destructive downsizing.” (PR Newswire via Northern Light, 11/1/99)
Korn/Ferry’s 26th Annual Board of Directors Study finds 84% of directors receive some of their compensation in stock, up from 62% 4 years ago. 56% report committees overseeing corporate governance and making committee appointments is shifting from the CEO to the board. Over 60% of respondents are deeply involved in the strategy setting process. Minority directors now have a presence in 60% of America’s boardrooms and women are represented at 73% (ed. but the proportion of representation is still dismal). More than 1,000 directors participated in the 1999 Korn/Ferry International Annual Board of Directors Study, including 215 CEOs, 187 inside directors and 614 outside directors. The study also analyzes proxy information from over 900 of the largest U.S. corporations. (Disclosure: Corpgov.net editor owns stock in Korn/Ferry)
Pensions&Investments reports that “a citizens’ group advising the Labor Department is recommending expanding current law to let companies dip into their pension fund surpluses to pay for anticipated retiree health care liabilities.” Michael Fulotta of ASA Inc is quoted as noting, “there has been a consistent decline in pension assets since 1990, which has resulted in the decline of …funding ratios across all industries.” See DOL panel to suggest wider use of surpluses, 11/1/99.
He survived double bankruptcies, conflicts of interest and ischanging the rules to silence challengers, but now CaliforniaAssemblyman Lou Papan is calling on the chairman of the powerful CalPERS Investment Committee to resign. seeStatement on Turkish Past Fuels Feud at Pension Fund,10/25, LA Times and Resignation of CalPERS Official Urged, Sacramento Bee, 10/27. Papan has now been joined by 22 additional members of the Legislature, including the Speakerand the Minority Leader, in his call for the resignation of Mr. Valdes. Their letter to Mr. Valdes includes the following:
Your attempt to dismiss protests that you were violating California’s open meeting laws by implying that these protests were based on ethnic hatred is beyond acceptability. This is unacceptable not because it is offensive to Greek-Americans, but because it is offensive to all Californians.
In today’s society we cannot stand for any level of racial or ethnic intolerance. Your display of racial insensitivity combined with your blatant disregard of the Open Meeting Act leads us, as elected officials, to insist upon your immediate resignation.
The arrogance of the CalPERS Board has even led some to question the independence which was given to it under a constitutional amendment in 1992. The Sacramento Bee (Low road at PERS: Ethnic remarks are another sign of arrogance, 11/2/99) has editorialized
The CalPERS attempt to hire this consultant without proper notice and then respond with ethnic insults are sadly consistent with other actions, including the board’s move last year to tip its election in favor of an incumbent and its adoption of new election rules this year that deny challengers an opportunity to criticize board policy. Such arrogance can’t be smoothed over with apologies. Ever since voters in 1992 freed PERS from any oversight by the people’s elected representatives, it has grown more haughty and insular. Lawmakers need to give voters an opportunity to reverse that mistake.
When CalPERS broke its own election rules to favor an incumbent, it did so to the thwart a challenge from this editor. When the board voted to change election rules to ban debate, again the editor of this publication was named as the cause of that action. However, the answer is not to amend California’s constitution, which grants a degree of autonomy to CalPERS; the answer is to be found in an active and informed membership. The Sacramento Bee has provided the only press coverage of the issues at CalPERS but only a small minority of CalPERS members live in Sacramento. The membership of CalPERS is likely to be aroused only when the Los Angeles Times, San Francisco Chronicle, Wall Street Journal and others begin covering governance issues at this $160 billion fund.
On the other side of the Atlantic the Chairman of CalPERS, Dr. William Crist, is labeled ‘Darth Vader’ and gets a chilly reception in Paris. see International Herald Tribune, 10/18/99.
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Retirees are uniting online to protect their pension funds, highlight key issues impacting retiree pensions and benefits, and to publicize positive steps some employers are taking to protect and enhance retiree pensions and benefits. The site has a special interest in the right of employees to share in their pension surplus. The site is concerned with ensuring that promised financial benefits are maintained once the employee completes his part of the employment contract. The site includes links to several organizations fighting for retiree rights and trying to get some control over their pensions. SeeRetiree News.
Shareholder resolution presented to CREF (College Retirement Equities Fund) for its November 9th annual meeting in New York City to divest the CREF Stock Account/CREF Global Equities Account of Freeport McMoRan Copper and Gold stock. Freeport runs the world’s largest copper mine in Irian Jaya, Indonesia. Major concerns regarding human rights and environmental impacts continue to
plague this project. CREF’s response is that they don’t want to screen funds no matter what a corporation like Freeport is doing in Indonesia. see http://www.tiaa.org/voting/cref/