Archives: December 1999

Stock options granted in 1998 in public companies to nonexecs was $1,737, up from $1,269 in 1997, according to a survey by Sanford Berstein. Inc. magazine (10/99) says 39% of the Inc. 500 give stock options to all full-time employees, up from 26% last year. Data compiled by New York University economist Edward Wolff shows that top 10% of population held 73% of country’s net worth in 1997, up from 68% in 1983. Congressional Budget Office data shows top 1% has as many after tax dollars to spend as the bottom 100 million. Top 20% is gaining ground, while all other quintiles are dropping their share over last two years. Rutgers researcher May Kroumova found that where 401(k) plans are invested in employer stock, participants have 20-30% higher assets/employee. (Employee Ownership Report, 1-2/2000) Issue also contains feature articles on IPOs, negotiating an ESOP loan, case studies, surveys, etc. Sign up for their free bulletin for news about upcoming events.

AFL-CIO released their Investment Product Review which came out of its Capital Stewardship program, an effort to ensure workers have a voice in the institutions that manage their retirement funds. The products reviewed offer a broad range of collateral benefits, from job creation, promotion of workers rights to community economic development, both here and abroad. For a copy, call the Office of Investment at 202-637-3900.

Nell Minow may have left full time work at LENS but her move to The Corporate Library promises to continue to endear her to the corporate governance community; her 1st project is to publicly disclose the CEO contracts of the S&P 500. (ISS Friday Report, 12/17/99)

Patrick McGurn reports that more than 30 firms in 1999 ceded board seats to dissident nominees to end insurgent investors’ threats to incumbent directors. He spotlights recent action at GRC International and Cone Mills as well as the co-opting tactics of Dun & Bradstreet which is spinning off Moody’s Investors Service in an attempt to head off Harris Investments LP. (ISS Friday Report, 12/17/99)

Directors & Boards has revamped its web site and seeks to become the most powerful and sought-after tool for counsel in referencing the role, duties, structure and composition of corporate boards by incorporating an online archive of 23 years of articles. See James Kristie’s Board Trends 1970s to the 1990s: “The More Things Change…”

Institutional investor holdings have jumped from $770 billion in 1980 to $15.4 trillion at the end of 1998 with pension funds controlling 48%. The share held by open-end mutual funds has gone from 6% to 21% according to the Conference Board.

Ontario Teachers Pension Plan Board included a talk entitled “A Random Walk through Corporate Governance” which outlined many of the fund’s proxy voting decisions for 1998.Corporate Governance Review (a publication of Fairvest) reports that OTTPB opposed 76% of resolutions involving stock options in 1999 and 41 of 42 resolutions to adopt shareholder rights plans. (10-11/99

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Century’s top stories included Michael Milken changing the rules of corporate governance in the early 1980s, backing greenmail artists and corporate builders alike with his junk bonds. (Boston Globe 12/28/99)

SEC rulemaking on Role of Independent Directors of Investment Companies (Comments due January 28, 2000) October 15, 1999 [Release 34-42007; File No. S7-23-99; IC-24082] encourages further independence of directors but fails to require disclosure of investments in specific funds within a fund complex.

California Treasurer Phil Angelides slapped a moratorium on state investments in tobacco securities, saying “the extraordinary and unprecedented barrage of litigation” surrounding tobacco companies made them imprudent investments.” Angelides said he would use his position as chair of the Corporate Governance Subcommittee of the California State Teachers Retirement System (CalSTRS) to ask that fund’s board to consider a similar moratorium, as well as divestiture.

Individual Investor Group Inc. (INDI) broke new ground by discussing corporate earnings on the company’s message board. After third quarter results were announced, (see Press Release, Nov 4), they invited INDI stakeholders (including investors) to ask management questions. Questions and answers were then posted on the site. Hats off to an innovative approach. (reported in Investor Relations Business, 12/13/99)

Corporate Governance International’s 2/99 issue carries a detailed critique of UK corporate governance measures byJohnathan Charkham; excellent reading, especially for anyone involved in putting together a corporate governance code at corporate, national or transnational levels. The issue also includes a survey of recent developments in Germany and an empirical study of the perception of Korean executives toward corporate governance issues.

Focused funds were the subject of a recent article in WSJ(12/20/99, C25). It seems the average diversified mutual fund with 132 holdings does no better than funds holding 35 or less. The article goes on to mention several focused funds, such as Janus Twenty (up 78% in 12 months) and Turner Top 20 (up 95% since inception) which have done well. These funds have greater potential not only because managers know their companies better, as WSJ writer Mara Der Hovanesian, points out. They also have greater incentives to be active shareholders and add value.

Corporate governance reforms have been pushed by giant pension funds like CalPERS and TIAA-CREF, as well as limited partnerships like LENS, Relational Investors and Lawndale Capital. Recently, mutual funds have begun to realize there is money to be made in good corporate governance. Witness Heartland Advisors recent pressure on Commercial Federal, Gehl and ICN Pharmaceuticals, Oakmark’s action at Dun & Bradstreet and T. Rowe Price’s pressure on Cort Business Services.

SEC Commissioner, Paul Carey’s address this month to the Investment Company Institute Procedures Conference (see bleow) emphasized that mutual fund advisers have a fiduciary duty to vote portfolio securities “in the best interest of the fund,” a duty which many are not fulfilling because they are spread too thin to know the issues and because of potential conflicts of interest. Prudent monitoring requires focus. When more funds take up this banner we will all be better off.

CalPERS grew by $20.5 billion last year. At the end of September 1999, CalPERS had earned an 18.2% return on its investments. The Fund’s investments in U.S. stocks, which account for more than $72 billion of the System’s portfolio, returned more than 27%. CalPERS’ $31 billion invested in the international markets gained 31%.

Ernst & Young, the former auditor of CUC International, Inc., agreed to a $335 million settlement in the securities class action lawsuit on behalf of shareholders of Cendant Corporation (NYSE: CD). The $335 million settlement is the largest amount ever paid by an accounting firm in a securities class action case. Hopefully, the action will act as a stimulus for accounting firms to take their watchdog roles seriously. PR Newswire,12/17/1999

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SEC Commissioner Paul Carey delivered an important address to the Investment Company Institute Procedures Conferenceon 12/9/99. Although his remarks may not reflect the SEC’s official opinion, it is heartening to hear Mr. Carey affirm that mutual fund advisers, as fiduciaries, “must act in the best interest of their beneficiaries. Thus, when voting portfolio securities, a fund adviser must act in the best interest of the fund, and not in its own interest.”

The Department of Labor (DOL) affirmed this opinion with regard to pension funds in 1988. Since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets (see “Avon” letter). As indicated on the “home” page of this publication, we have long advocated that the same standards of trust law should also hold for mutual funds and other institutional investors.

Mr. Carey goes on to recommend that mutual fund board members “can and should play a role in the voting process,” ensuring “the funds’ voting power is being exercised to benefit fund shareholders” by

  • Finding out if their advisers are voting and what methodology they are using.
  • Providing guidance on the need for cost benefit analysis in determining how to vote, and setting policies with regard to strategy and when voting is to be used to influence company policy to maximize shareholder value.

Carey believes board should consider how their votes should be exercised in conflict of interest situations and advises they may want to disclose voting policies to fund shareholders, pointing to the efforts of CalPERS, Domini Social Equity Fund, and TIAA-CREF. In closing, he notes “the Division of Investment Management is exploring possible recommendations concerning investment advisers’ obligations to disclose how they vote proxies.” In our opinion, such measures could go a long way toward ensuring accountability to shareholders.

Chainsaw, just in time for Christmas. Read John Byrne’s thrilling nonfiction version of Mean Business and think of Scrooge without the ghosts. There’s no salvation for Al Dunlap here but shareholders might find redemption. Though hundreds of interviews, Byrne has done an excellent job of documenting what really happened and how intelligent investors and directors got snookered.

Another great gift is The Millionaire Next Door: Special Edition by Thomas J. Stanley and William D. Danko.

Strategic Corporate Research has been added to our list of Stakeholders. Please pay them a visit and get to know their services.

CalPERS accidentally released a list of 15 companies being considered as possible targets. Among them is First Union. CalPERS has introduced a shareholder resolution to divide roles of CEO and chairman. First Union’s shares have tumbled 40.8 percent so far this year. The “accidental release” brings to mind that each year the System’s release is premature because each year CalPERS fails to up their holdings prior to naming targeted firms. Would Michael Price or Robert Monks announce they have targeted certain firms for changes without first increasing their investment? Of course not.

CalPERS claims they have gained $150 million per year through targeting activities. The System should take better advantage of its own activism by increasing its investment in a few of these firms before releasing the list and pursuing needed corporate governance changes. See CalPERS jumps the gun on targeting 15 firms, Sacramento Bee, 12/15/99 and CalPERS List Reveals Tentative Target Firms, LA Times, 12/15/99. More links and commentary on Yahoo!

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Telecom Italia had to scrap plans to split off its wireless unit because of protests from minority shareholders. Telecom Italia apparently had the majority to vote in favor, but backed off because of the debate in the media. See Hark! The Shareholders Are Restless in Europe in 12/12/99 New York Times for a roundup of recent actions in Europe.

SEC’s comment period on “pay to play” has ended with 55 letters received. As proposed, the new rule would prohibit investment advisers from managing money for government clients for two years if the adviser, partner, officer or solicitor contributes to certain elected officials or candidates. The proposal also would require registered advisers with government clients to keep records of political contributions made by the firm or its officials. (, 12/7/99)

Corporate Governance NETwork registration can now be paid using a credit card. After 5 years on the net, we’ve finally decided to join take the e-commerce plunge.

Bart Naylor’s open ballot shareholder’s resolution to allow 3% holders to nominate candidates for the board of directors is now available. Naylor is attempting to address the major problem facing shareholders; how to make the board accountable. If shareholders have no say in the nominating process and have no alternative candidates, why should directors listen to them?

Largest shareholder settlement in history at Cedant, $2.83 billion, arising from fake reporting of $500 million in 1998. The lawsuits, filed in the U.S. District Courts of New Jersey, Connecticut and Pennsylvania, alleged that Cendant issued false and misleading financial statements to the investing public about the company’s income and earnings. The lawsuits further alleged that certain former officers and directors of the company sold or filed intentions to sell over 4 million shares of Cendant common stock preceding the announcement. Cendant Corp. will make major changes in corporate governance:

  • limiting all board of directors’ terms of tenure to just one year,
  • bar on repricing stock options without shareholder vote,
  • majority of board to be independent,
  • audit, compensation and nominating committees to be entirely independent directors.

According to New York State Comptroller H. Carl McCall, the settlement should also allow shareholders at the nation’s 3 largest public pension funds to recover from 40-60% of the $89 million they lost when Cendant’s shares dropped by over 50% after the accounting fraud was made public last year. “This is a landmark victory for CalPERS and all Cendant shareowners,” said Charles P. Valdes, Chairman of CalPERS Investment Committee. “This settlement demonstrates the important role that pension funds play as lead plaintiffs in securities actions. Not only have we recovered a substantial portion of the losses incurred by all class members, but the company is emerging stronger and worthy of greater confidence by the financial markets.” (WSJ, A4, 12/8/99)

New York Post reports that “after years of excesses marked by manic mergers and astronomically high compensation that regularly landed him on the list of highest-paid CEOs, (Henry) Silverman will effectively be operating with his hands tied behind his back.” Silverman collected $199.3 million in total compensation last year, even as the company restated 1997 earnings from a profit of $115 million to a $216 million loss.

In a related story, the SEC is to boost its attack on accounting fraud with more criminal prosecutors. The SEC is irritated by the cavalier attitude of some executives toward bookkeeping and weak-kneed auditors. (WSJ, A6, 12/8/99)

IRRC will host, a conference which will explore how high tech and dot-com businesses will influence, and be shaped by, the corporate governance movement.  President of AmTech Dr. Gilbert Amelio, NASDAQ chief operating officer J. Patrick Campbell, Razorfish Inc. President & CEO Jeffrey Dachis and Portal Software Inc. CEO and founder John Little will headline the conference. For more information on the issues, see Dot.Com Boards are Flouting the RulesBusiness Week, 12/20/99, p. 130-134.

UK’s Trade Union Congress notes that UK has widest gap between pay of top execs and workforces. See top directors’ pay packets fatter than ever. TUC calls for dramatic changes such as trade union represention on remuneration committees while performance criteria should be long-term and should include non-financial performance indicators. TUC also calls for additional disclosures such as positions on other boards held by members of the remuneration committee and share options should be charged against profit.

Ralph Ward’s Boardroom Report warns boards to focus less on Y2K and more on corporate governance. Board recruitment is moving from CEOs to auditors and e-commerce experts. Ward provides tips on the boardroom talent pinch, family succession planning, an emeritus program for retirement-age directors, and how to cope as an inside director. has increased their news coverage through an agreement with NewsEdge Corporation. “Institutional Investors Grow Bolder about Demanding Change,” for example highlights changes in the Carolinas reported by the Charlotte Observer and discusses the strategies of activist funds such as CalPERS and LENS, as well as many institutional investors in the Carolinas. State Treasurer Harlan Boyles investment style is quoted as, “Our philosophy toward risk is analogous to the way Woody Hayes coached football: three yards and a cloud of dust.”

Claude Smadja, managing director of World Economic Forum, calls for an international code of corporate governance to ensure global accounting standards and protect the interests of the shareholders. (The Hindu, 12/8/99)

Seattle reports streaming in from everywhere. A coalition of teamsters, consumers, sea turtle protection activists, religious people, women’s groups, environmentalists, students and others certainly had an impact. Will a coalition build? See Robert Weissman’s A Whiff of Democracy in Seattle.

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Hong Kong Society of Accountants (HKSA) has urged listed companies to improve the transparency and accountability of directors’ pay. The society called for the establishment of remuneration committees composed of independent directors to act as a check and balance on corporate policy. (South China Morning Post, 12/3/99)

Arthur Andersen introduces web-based SEC financial reporting courses. An introductory discount of 20% is being offered until December 31, 1999. UK Has Largest Pay Gap Between Directors and Workers in all Europe. Japanese Government to Rescind Law Banning Educators from Serving on Corporate Boards. More on these an other stories at The Corporate Library.

Internet leading source for retail investment information. 3/4 now use corporate websites as important research tools and 90% choose companies without the help of an advisor. Among features wanted on corporate sites: timely news releases (96%), income/balance sheets (93%), ownership profile (92%), e-mail connection to IR department (92%) and many want the option to get data automatically e-mailed to them or at least an indication that information has been updated. (Investor Relations Business, 11/29/99)

An article in the New Zealand Herald (11/27) opines that “absence of a strong shareholder activism group – together with a weak and ineffective Securities Commission and stock exchange – have been contributing factors to the poor performance of companies and the sharemarket.” Australia has the Australian Shareholders Association (ASA) with 450,000 subscribers at $A60 a member (with some additional income, $A186,000 a year). A similar organization in New Zealand would be lucky to raise much more than $A30,000 a year…not enough to effectively monitor non-performing companies. Several examples of problem firms are addressed and the article concludes with a statement that “the free market model is less effective in a small economy.” NEW ZEALAND HERALD: INVESTORS CRY FOR GUIDANCE (, 12/2) I know when you’ve got a hammer in your hand, everything looks like a nail but this is another perfect example of the need for shareholders to cooperatively hire a proxy monitoring firm.

Mauro F. Guillen, of Wharton, reports a trend toward distinctiveness rather than convergence in a recent paper, “Corporate Governance and Globalization: Arguments and Evidence Against Convergence.” Factors working against convergence include complex webs of banking, labor, tax, and competition laws and political dynamics unique to each country. Along with adoption of best practices comes adaptation to the unique culture. “Countries develop corporate governance models that fit their legal traditions, social institutions, and development path.” (see Leveraging Differences in an Increasingly Borderless World) Courtesy ofEDGEvantage, a monthly electronic briefing on developments in corporate strategy, governance and responsibility, available free to registered members.

Irish Stock Exchange to introduce a new listing rule forcing publicly quoted companies to reveal individual directors’ remuneration in their annual reports for 2000. The Irish Times, 11/27

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I can’t think of a better present for these times than Kevin Keasey, Steve Thompson and Mike Wright’s four volumeCorporate Governance. This set, published in 1999, by Edward Elgar is a ready reference to classic writings in the field and is sure to be accessed frequently by owners, like this editor, who wake up in the middle of the night with corporate governance concerns. The authors place the movement in context, address accountability and performance, consider the efficacy of various stakeholders and institutional structures and integrate writings from numerous disciplines. It sure beats running to the library when someone calls and mentions that seminal work from an Academy of Management Journal in 1991. I can’t say that I’ve read the set thoroughly but I have ambitions. Alhough I would have liked to have seen additional chapters by M. Blair, Monks, Minow, Tricker and others, the authors have done a great job and still have plenty of new material for the next edition.

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