Archives: January 1999

January 1999

Mark Latham, author of the “The Corporate Monitoring Firm” in Corporate Governance An International Review (UK, January 1999), and founder of the Corporate Monitoring Project; has developed a newsletter and is working toward shareholder resolutions to be introduced in the year 2000. His articles on this innovative system were published in five countries and four languages last year. Robert Monks has written that Latham’s system proposes a “solution to two core problems – free riding and genuinely independent nomination of directors – that are rarely addressed effectively.” Planning a conference of institutional investors? Inviting Mr. Latham to speak would be a sure way to create a little excitement. To subscribe to the Project’s free newsletter

The Supreme Court rejected a bid from Hughes Aircraft employees who contributed to the plan to share in the firm’s $1.2-billion pension fund surplus. The employees argued that money diverted to the underfunded pension plan of General Motors was protected because the pension represented an “exclusive benefit” to workers and couldn’t be diverted for other uses. Hughes was joined in their appeal by the Clinton administration and the U.S. Chamber of Commerce. Hughes “never deprived [the retirees] of their accrued benefits,” wrote Justice Clarence Thomas. No surplus funds were available for distribution to the former employees, he said. John Chevedden, a Hughes retiree and shareholder activist (this year at Raytheon), said the decision emphasizes the need workers to have greater control over their pension funds. The ruling “gives companies carte blanche to siphon money from one pension plan to another” he said. “I think it shows a need for a change in the law.” (LATimes, 1/26/99)

Pensions & Investments has unveiled a redesigned web site today with daily news and more than 200,000 pages of databased information for institutional investors. Wow!

Canadian Imperial Bank of Commerce shareholders overwhelmingly approved shareholder activist Yves Michaud’s proposal that directors must hold shares in the bank equal to six times the annual fee they’re paid for their services (approximately $180,000). Michaud reportedly became a shareholder-rights activist after losing part of his retirement savings. In 1996, he won a landmark court ruling that forced a number of banks to put his proposals to a vote at their 1997 annual meetings. (Montreal Gazette, 1/22/99)

United for a Fair Economy, a network of wealthy investors, has filed shareholder resolutions asking eight companies to research, report and, in most cases, reduce pay gaps. The companies are AlliedSignal Aerospace Co., AT&T Corp., BankAmerica Corp., BankBoston Corp., Citigroup Inc., General Electric Co., Huffy Corp. and R.R. Donnelley & Sons Inc.

ATraitor To His Class: Robert A.G. Monks and the Battle to Change Corporate America, a new biography by Hilary Rosenberg, show Monks to be a specimen of a vanishing species: the Yankee Republican gadfly, according to David Warsh of the Boston Globe. Monks took shareholder activism to a new level of behind-the-scenes respectability, says Warsh. (Boston Globe, 1/19/99)

John Bogle, founder of The Vanguard Group, asks why mutual funds haven’t been more involved in corporate governance initiatives. One reason is that most mutual funds are short-term investors but that is changing with the growth of market indexing which he expects will take 15% of the market within the next decade. More central to Bogle’s analysis is that “we would prefer not to advise the companies in our portfolios about governance when our own houses are so fragile.” The fund’s manager typically sets its own fee which is duly rubber stamped by the fund’s “independent directors” who were appointed by the manager.

“Measured over the past 50 years, the average equity mutual fund has carried a volatility risk quite similar to that of the market, but has lagged the market return by about 1.5 percent annually over the long term, and about 2.25 percent over the past 15 years…professional managers, despite their expertise, have failed to outperform the market before the deduction of costs. Their costs doom them to below-market returns.” seeThe Corporate Board, 1-2/99

In the same issue, William Dimma asks “Why Not Director Accreditation?” and Susan Mosoff reviews “Global Stock Ownership Plans.” Mosoff’s article points to ShareNet , an Arthur Andersen product designed to help companies answer questions about operating stock ownership plans in different countries. The site notes that 54% of the world’s largest companies operating in the North America and Europe operate global share plans.

Back to the topAfter years as a corporate governance “bad boy” because of its poison pill polices, Fleming (FLM: NYSE) seems to have turned over a new leaf, announcing proposals to eliminate classification of directors and to require all new stock option plans to be submitted to shareholders for their approval. (Excite News)

Federal Reserve Chairman Alan Greenspan assailed President Clinton’s proposal to invest Social Security funds on Wall Street. “I do not believe that it is politically feasible to insulate such huge funds from government direction,” he told the House Ways and Means Committee. The $133 billion CalPERS experience demonstrates it would not be an easy task. That system finally gained its independence when California voters approved Prop. 162, making raids or interference illegal. However, now there are questions as to the accountability of its Board. For example, the Board continues to insist CalPERS is exempt from the California Administrative Procedure Act, which requires public notice and publication of rules. How can its members hold the CalPERS Board accountable if its rules aren’t easily accessible? Clearly independence must be combined with systems of accountability if either Clinton’s proposal or CalPERS have any hope of measuring up to the high standards Americans have come to expect.

Anthony Neoh, who I had the pleasure to meet last fall at the International Company Secretaries Conference in Hong Kong last November, reports on important developments in China in the January 14th edition of the Far Eastern Economic Review. A new Chinese Securities Law promises to further the transformation of the Chinese economy by requiring regulation of the markets by the China Securities Regulatory Commission which is about to quadruple in size. Public securities must now comply with specified disclosure standards, and be traded in approved exchanges. Company officers and all professionals will have specified duties, such as disclosure, and prohibitions, such as insider trading and market-manipulation.

Neoh points out that the savings rate in China is about 40% of income but the public owns stock valued at just 7% of the country’s GDP. “Clearly, the stockmarkets have immense growth potential? The new Securities Law will not provide a cure for all the markets’ ills, but it will provide a firmer foundation. It compares well with the securities laws of emerging markets.” By this April, CPAs engaged in securities work must be members of independent partnerships with unlimited personal civil liability. “Already, in a Shanghai court, an investor is suing a listed company’s directors and its public accountants for deficient disclosure of company accounts.”

As Mr Neoh points out, “the test for this law, however, lies in its implementation.” Anthony Neoh is a visiting professor of law at Peking University and the former chairman of theSecurities and Futures Commission in Hong Kong.

CalPERS vs. Felzen, 97-1732, went before the Supreme Court to block an Archer-Daniels-Midland $8-million settlement that went entirely for legal fees. (see LA Times, 1/11/99)

Not everyone agrees with the shareholder value mantra…but maybe their arguments aren’t too strong. (see Earth Times News Service)

Annual meetings are getting “shorter, more boring and less well-attended, say those who follow annual meeting trends” but Sarah Teslik says “the annual meeting ought to be the single most important thing for shareholders.” Corporate internet sites, electronic chat rooms, and teleconferences with analysts and the media seem to be displacing much of the role of annual meetings. (read more in the 1/10/99 Philadelphia Inquirer)

Back to the topGovernance: The International Corporate Governance Newsletter has joined our growing list of Stakeholders. From their November issue. European share plans are quickly catching up with North America. Global Share Plan Survey 1998 revealed that 75% of UK companies have set up global executive share plans, compared with 66% in North America. In Continental Europe 80% had employee stock purchase plans covering all national employees compared with 65% in US and 24% in UK. UK firms favored option plans with 82% of firms, vs 56% in the US and 36% Continental Europe. The issue also included a useful matrix comparing the membership, duties and other features of audit, remuneration and nomination committees.

The December issue discusses the new Hermes/LENS alliance and promises an interview with Bob Monks in the next issue. An analysis of board structures and practices in six countries reveals some real differences in the professions of outside directors but typical size hovered around 12. The authors could not find any correlation between board size, structure and profitability. An interview with Sir Adrian Cadbury reveals that in the UK institutional investors own 75% of big companies. Although they’ve increased their voting, 40% compared with 20% in 1990, that still leaves 60% “who just collect their money and do nothing.” Cadbury believes we need to focus on the responsibilities of institutional shareholders for the standards of companies in which they have put their funds. However, a second major issue is the accountability of institutions to their own investors. According to Cadbury, we need to focus on conflicts of interest.

College faculty have launched a nationwide campaign to persuade TIAA-CREF to begin “positive investing” of a small portion of their pension funds. Campaign for a New TIAA-CREF is calling for 5-10% of assets in the Social Choice Account, a socially responsible fund, to be invested in companies that are models of social and environmental responsibility. They cite a recent survey showing that over 80% of TIAA-CREF’s Social Choice Account participants favor “seeking out for investment companies [that] have an outstanding record of good performance on social issues, rather than rely on negative screens.” Only 3% oppose this investment strategy. For a brochure and other campaign materials, contact Social Choice for Social Change: Campaign for a New TIAA-CREF, MC Box 135, Manchester College, 604 E. College Ave., North Manchester, IN 46962, (219)982-5346/5009, or e-mail Neil Wollman at NJW@Manchester.eduor Abigail Fuller at

ISS reports that NYSE has extended their deadline for comments on their revised proposal regarding shareholder approval of stock option plans. The new comment period extends to January 25th. Under the proposal, shareholder approval of stock option plans would be mandatory unless at least 50% of employees are eligible and a majority of the shares are issued to employees who are not officers or directors.

Most mergers (58%) fail to create substantial returns for shareholders, according to a recent study by management consultants at A.T. Kearney. The first 100 days are the most critical for success when speed in appointing top management , specific goals and excellent communications are critical. SeeInvestor Business Relations, 1/4/99, p. 9. See also Alexandra Reed Lajoux, The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities, McGraw-Hill, 1997.

Jürgen Schrempp of DaimlerChrysler chats with Forbes in their 1/11 issue on converging corporate governance.

New Jersey removes barriers to internet proxy voting. seeBergen Record, 1/6.

Corporate Governance Review from Fairvest Securities Corporation covered recent Canadian developments in poison pills and lock-up agreements in their October/November issue. Fairvest also reports on its research on 300 TSE companies which finds ownership broadening. In 1983 48% had a 50% or over control owner; that is now down to 23%. Similarly, firms with a 20% or higher shareholder have dropped from 78% to 43% during the same period.

Catherine R. McCall reports on the Kirby Commission findings. The Report expresses concern that boards of public pension funds may not have the skills to deal with complex financial issues. The Standing Senate Committee on Banking, Trade and Commerce recommends that individuals appointed to pension plan boards have the necessary knowledge to enable them to effectively monitor. The Committee found that social investment should be subordinate to long term growth of the fund. Like the Dey Report, the Committee looks to peer pressure rather than a legal requirement to report annually to pension plan members on adherence. In their review of mutual funds, the Committee rejected a suggestion that such funds have a responsibility to exercise their proxy votes. However, they did recommend that the federal government examine the issue of confidential proxy voting with respect to mutual funds. See Corporate Governance Review for Ms. McCall’s analysis of 11 recommendations.

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