Archive | January, 2000

Archives: January 2000

Web posts blamed for firing, according to court documents filed on behalf of Dimitri Papadakos, formerly CEO of Gyrodyne Co. of America. Papadakos seeks $20 million in damages from Gyrodyne and various online posters, including his half brother, Peter Papadakos, a Gyrodyne director at the time. Also named were Peter Pitsiokos, Gyrodyne’s vice, president, corporate secretary and general counsel, who allegedly fed Peter Papadakos defamatory information for postings accusing Dimitri Papadakos of receiving illegal payoffs and diverting company assets for personal use. (WSJ, 1/27/00) No, this is not the kind of brave board activism we have been seeking.

Internet used to empower investors at Coho. See The Gadfly “Latest from the message board revolt: Coho investors swimming upstream,” by Michael Collins. Mr. Collins is one of the few in the mainstream press (if CBS MarketWatch can be called that) who routinely writes on shareholder activism.

Lens reported a preliminary vote tally showing 34% of shareholders supported their non-binding proposal which urged Ashland’s board to hire a nationally recognized investment banker to explore value enhancing alternatives for the company, including possible sale, spin-off, merger, or other transaction for any or all assets of the company. ISS had also recommended a favorable vote. (PR Newswire via Northern Light)

Deloitte & Touche guide says to expect shareholder questions on e-business, globalization, and M&A. “Questions at Stockholders’ Meetings 2000” is available for free: contact Andrea O’Neil at (203) 761-3059.

The Corporate Library sent letters to the Corporate Secretaries of more than 500 leading companies last July, requesting a copy of each CEO’s compensation agreement and the name of a corporate governance contact person. Nell Minow says responses have ranged from “rude and evasive to genuinely concerned and helpful.” The cooperative response rate appears to be approximately 16%. The report is scheduled for release on February 25, 2000. For more information, contact Nell Minow.

Hostile takeovers come to Japan. The country’s first such all-domestic battle may signal a changes in corporate culture. (Business warfare rubs off on Japan, The Detroit News, 1/25/00)

Back in 1940, John C. Bogle’s Princeton thesis noted the SEC call at that time for mutual funds to serve “the useful role of representatives of the great number of inarticulate and ineffective individual investors in corporations in which investment companies are also interested.” With mutual funds now controlling 35% of stock and churning them at rate of 112%/year, Bogle still hasn’t given up on that 60 year old goal. He says mutual funds have become a marketing business, reluctant to offend potential clients. But an industrywide effort of 1/1000 of a basis point could raise $60 million for active corporate governance (6 times what TIAA-CREF spends).

Of course funds are unlikely to raise corporate governance issues, Bogle notes, because they “live-in-glass-houses” and are controlled by small outside firms whose principle business is providing the funds with “all the services required to conduct its affairs.” The yield is rising expenses, managed corporate earnings, the stock market as casino, and growing stock dilution from free riding management options. His hope on the horizon is index funds whose only way to add value is through shareholder activism. He offers prescriptions but more need to listen. (Governance: The Silence of the Funds, in The Corporate Board, 1-2/2000)

Do You Need a Dissident Director?, asks Steven A. Seiden, in the same issue of The Corporate Board. Seiden notes TIAA 1998 purge of Furr/Bishop’s board and the growth of limited partnerships who seek to turnaround underperforming companies. Prime among Seiden’s recommendations is that dissident directors need to be “unfettered by any financial, family or close personal ties to the activist” investor.

Sean Harrigan, Member of the California State Personnel Board, has been named as its representative to CalPERS. Harrigan serves as the Regional Director and International Vice President of the Food and Commercial Workers International Union (UFCW) Region 8 – Western United States. Harrigan was appointed to the State Personnel Board by Governor Gray Davis in June 1999 and replaces Ronald Alvarado as the Board’s representative to CalPERS. See alsoCalPERS bio.

CalPERS took a 10 interest in San Francisco-based Thomas Weisel Partners which invests in the growing internet, technology and communication industries centered in California. CalPERS will commit $500 million to act as lead investor in new alternative investment funds and may make another $500 million available.

Willie Brown Jr., the current mayor of San Francisco and former Speaker of the California Assembly, is rumored to be Governor Gray Davis’ choice for a seat on the CalPERS board reserved for a representative of local government. (Sacramento Bee, 1/22/2000) The profile of California’s $168 billion retirement fund is about to rise dramatically.

Back to the topDirectorship’s, 1/2000 issue, carried an interesting interview with Woody Small, co-portfolio manager of Undiscovered Managers All Cap Value Fund which picks portfolio companies, in part, based on the quality of directors. The fund has outperformed the Russell 1000 Value Index since 1997. We applaud Mr. Small for his action but wish he would take the next logical step. He indicates he has never taken an affirmative action to recommend that a board member resign or not stand for reelect ion. In addition he has never recommended director candidates to management.

Governance Institute expanded its biennial hospital survey of health system boards to include a ranking of the nation’s 20 top hospital systems based on governance practices. (Modern Healthcare, 1/17/2000)

Ira Millstein is reportedly resigning from his post as chair of the World Bank’s Private Sector Advisory Group. (see IRRC Corporate Governance Highlights, 1/20/2000)

Corporate Governance of State-Owned Enterprises in China was the subject of two-day meeting, which was co-sponsored by the Development Research Center (DRC) of the State Council, the Economic Cooperation and Development, and the Asian Development Bank. (see China Holds Corporate Governance Seminar)

Accoss the Board, the Conference Board Magazine, reports that “while the business pages are full of newly minted millionaires and billionaires, half of all Americans have less than $1,000 in financial assets.” (1/2000, p. 9)

Koppes, Richard H., Lyle G. Ganske, and Charles T. Haag, “Corporate Governance Out of Focus: The Debate Over Classified Boards,” The Business Lawyer, May 1999, Vol. 54, No. 3, pp. 1023-1055. The author’s argue that shareholder activists should reexamine their call for annual elections. Classifying a board greatly improves the ability of a corporation to defend against unsolicited takeovers bids and proxy fights. Classified boards can protect poison pills from being removed and promote continuity, stability and independence. Takeover premiums have been shown to be higher for companies with takeover defenses. Independence is best secured by serving multi-year terms. The danger of one-year terms is that truly independent board members may not be invited to run again after their first term and it often takes more than a year to make major changes.

The authors argue that focus should, instead, be on increasing board independence and activism, citing theMillstein/MacAvoy study which found a “significant correlation between an active, independent board and superior corporate performance.” However, the Millstein/MacAvoy study measured not only board independence, but responsiveness to shareholders. Any firm that didn’t return the CalPERS survey was graded F, whereas those who took the action CalPERS desired got an A+. Board independence is important but responsiveness and accountability to shareholders may also be key.

Early in the article, Koppes et al. quote from a recent statement by CalPERS in support of one of its proposals to eliminate a classified board. “We believe that the ability to elect directors is the single most important use of the shareholder franchise. Accordingly, directors should be accountable to shareholders on an annual basis.” The authors point to the fact that CalPERS itself has a classified board, where board members are elected or appointed for multi-year terms.

CalPERS is right in its first statement but their second statement does not follow. In fact the arguments of Koppes et al. would be convincing if certain steps were taken to reduce the likelihood of entrenchment by strengthening accountability to shareholders. First among these reforms would be the ability of shareholders to place nominees on the company proxy. One can argue about where the threshold should be set, but Bart Naylor’s recent proposal allowing those with 3% of shares to do so appears reasonable.

Secondly, to ensure those elected reflect the consensus of shareholders, any such proposal should be combined with the ability to use instant run-off voting (IRV). In 1993, for example, 96 candidates ran for two CalPERS Board positions. One of the winning candidates received less 5.5% of the vote. We certainly can’t say this was the candidate most voters wanted.

IRV facilitates expansion of voter choice by eliminating the “spoiler” impact of long-shot candidacies and avoids the expense of runoff elections. IRV works by allowing voters to rank candidates in order of preference, 1, 2, 3, and so on. The candidate who receives the fewest number of first choices from the voters would be eliminated in the first count and all his or her ballots would be redistributed to the voters’ second choice. Each successive count eliminates the next lowest polling candidate, transferring his or her ballots, until one candidate achieves a majority.

Other facilitating reforms would include confidential voting and a recognition that trust law requires that voting rights be subject to the same fiduciary standards as other plan assets. Although this rule has held since 1988 for pension funds, it has not yet been applied to other institutional investors, such as mutual funds and insurance companies.

Koppes et al. are right, but without mechanisms in place to allow shareholders better access to the nomination process, shareholders must continue to support annual elections as an important mechanism to avoid entrenchment.

Back to the topIRRC Corporate Governance Highlights discusses proposals for a one-time doubling of voting rights for shareholders who have continuously held shares for 5 years, establishing a right for shareholders with 2% of outstanding shares access to company’s proxy statement to nominate board members, electing the entire slate of board every 3 years, requiring an annual strategic report to shareholders, and implement exec compensation program that focuses management on the need to “maximize the company’s long-term wealth-generating capacity.” IRRC also summarizes some of the no-action relief letters from companies. (1/7/2000) IRRC indicates that CalPERS, NYCERS, and CII weighed in on the American Home Products sale. (1/14/2000) Still time to register for IRRC’s governance2000.com conference, to be held in New York City on Jan. 20-21.

Tidbits from Investor Relations, 1/2000. Less than 1/4 of ASX companies have internet sites with dedicated investor relations sections, according to a study by Computershare Analytics. Like the US SEC, the Australian Securities & Investments Commission is urging listed companies to dump briefings which are exclusive to analysts and institutions.International Accounting Standards Committee calls for the adoption of an international code of conduct to raise internet business reporting standards. Street-name investors of 5,000 publicly-traded US companies are enabled for internet proxy voting through ADP. Use of internet proxies is permitted in 20 states, up from 14 in 1998. States that do allow such voting are by far the leading states for registration. In 3rd quarter of 1999, over 1,500 publicly-traded companies webcaste their quarterly conference calls, according toStreetFusion. Investor Relations also profiles Yve Newbold who recently worked on raising voting levels in the UK. Her next project is chairing the Ethical Trading Initiative, to prod retail companies into applying proper labor standards in overseas factories.

Jason Zweig, mutual fund expert at Money Magazine, indicates that closed-end funds used to be a great corner of the market where you could find terrific stock pickers. “But I’m sad to say they have become a cesspool of lousy corporate governance, where the fund managers not only charge exorbitant fees but reject every single attempt at shareholder democracy.” He advises that he would not buy a closed-end fund without reading about “the latest attempts by shareholders to express their legitimate rights, and what the fund managers did to stomp on them.” (MoneyLive, 1/10/2000)

Sheryl Pressler, CalPERS investment manager, to step down on Feb. 28. A national search for her replacement has begun. Pressler is moving to Atlanta-based Lend Lease Real Estate Investments Inc. She earned just over $300,000 in fiscal year 1999 at CalPERS. William Crist, president of the CalPERS board, said “there’s no way, politically, we could have matched the (Lend Lease) pay.” (Sacramento Bee, 1/15/2000) Pressler dramatically raised the fund’s return, largely by increasing the proportion of investments in stocks.

BusinessWeek names General Electric as having best board, unseating Campbell Soup. For the third time in four years, Business Week surveyed Wall Street’s biggest investors and most prominent governance experts for their views of the best and worst boards in America. Boards of Campbell, IBM, Home Depot, Intel, Compaq, and Cisco Systems are near the top. Walt Disney Co. was named the worst in America. CEO Michael D. Eisner is coming under increasing fire for Disney’s recent lackluster performance. Institutional shareholders want Eisner to put more independent directors on a board that, despite improvement, remains packed with Eisner chums. Since May, 1998, Disney has lost nearly 18% of its market value, more than $15 billion. (BusinessWeek, 1/24/2000)

In an accompanying article entitled “Now, a Gadfly Can Bite 24 Hours a Day,” BusinessWeek calls eRaider “the most ambitious effort to use the Web as a tool to champion change.”  [eRaider, which will be starting up shortly, will operate as a mutual fund which tries to influence the companies they buy. However, eRaider will be the first fund that actively organizes on the Internet for this purpose.] BusinessWeek ended the article with the sentence,  “It’s enough to make a CEO sentimental about the good old days when gadflies were little more than an annual annoyance.”

For old fashion boards, that may be.  However, boards that have been through something of a corporate governance revolution meet more frequently, savor their independence, and recognize that well informed owners can add value. Gone are the days when the voices of  owners are an annual annoyance; chat rooms run 24 hours a day.

Gladflies have helped bring about important changes in corporate governance over the years.  It was largely the Gilberts who persuaded the SEC to enact the rules governing shareholder proposals in 1942. Before them, companies weren’t required to put proposals to a shareholder vote or to let shareholders speak at annual meetings.  Gadflies made the  system of activist shareholders possible.

However, provocative criticism from individuals only goes so far.  By bringing individual investors together with an institutional investor committed to activism, eRaider forges a new constructive model orchestrating change by influencing the direction of underperforming portfolio companies.

Back to the topCalPERS is debating if it should use its influence to impact labor and human rights practices in emerging markets. Staff has been asked to make a recommendation in April. The board appears to be split between those who want to impose screens and those who seek “constructive engagement.” Treasurer Phil Angelides would like to screen out countries with excessive risk factors and look at democratization efforts, shareholder, human and workers rights. Chuck Valdes, who heads the investment committe, wants the fund to be “proactive” and believes divestment would be a “violation of fiduciary duty.” (Pensions&Investments, 1/10/2000)

I doubt divestment, in the face of excessive risk, would be a violation of fiduciary duty but in order for “constructive engagement” to work, there must be a viable movement for human/labor rights. I’d like to hear from readers regarding this issue and what action you think CalPERS should take. Please write [email protected].

Ralph D. Ward, publisher of the Boardroom INSIDER online newsletter says the $142-billion buyout by America Online of Time-Warner announced is more than a triumph of New Media Over Old Media — it heralds “the triumph of the New Boardroom over the Old Boardroom.” “The AOL board of directors shows the strengths of the newer, high-tech model board with, with smaller membership (10 versus 13 at Time Warner), and a focused core of current leaders in the tech and venture industries,” including Nextel Chair Daniel Akerson, former Netscape CEO James Barksdale, and Frank Caulfield of Kleiner, Perkins Caulfield.

The Time-Warner board “is as blue-chip as the company itself, but older (average age 62), and less focused on up-to-the-minute media experience” with such directors as Beverly Sills, former Senator John Danforth, and retired Bank of New York Chair J. Carter Bacot. “Though the Time-Warner board has enormous talent, even a member like Ted Turner couldn’t turn them into a lean, nimble growth machine.”

Ward also predicts that it will be interesting to see how the final AOLTimeWarner board membership will shake out. “With names like those above, plus Colin Powell, Gerald Greenwald and [Fannie Mae Chair] Franklin Raines, how do you separate the sheep from the goats?”

Internet company board’s average 7 directors, much smaller than S&P 500 companies, which average 12 directors. While boards at most U.S. companies meet 8 times per year, Internet companies’ boards meet an average of 10 times per year. 53% of dot-com directors surveyed are considered independent, compared to 67.6% for the boards of S&P 500 companies. Only one in four of Internet companies surveyed has a nominating committee, compared with 90% at S&P 500 companies. Learn more about the findings of this recent IRRCstudy by attending their governance2000.com conference, to be held in New York City on Jan. 20-21.

Corporate Directors Forum, based in San Diego announced the six winners of its prestigious “Director of the Year,” award, which recognizes the leaders in the business community that represent superior corporate governance.

Those receiving awards include: Peter P. Savage, former president, CEO and chairman of the board of Applied Digital Access as Director of the Year for Corporate Citizenship; Gene Ray, chairman of the board of The Titan Corporation as Director of the Year for Companies in Transition; Irwin Jacobs, chairman and CEO of QUALCOMM, Inc., as Director of the Year for Enhancement of Economic Value; David R. Flowers, former chairman and CEO of Pulse Engineering, Inc., as Director of the Year for Corporate Governance; John C. Raymond, chairman and CEO of the Greystone Group, L.P, as Director of the Year for Not-for-Profit Organizations; and Jack Goodall, chairman of the board of Jack in the Box Inc., who will receive the Lifetime Achievement in Corporate Governance Award.

The winners will be recognized during the Corporate Directors Forum Annual Director of the Year Awards dinner on February 23, 2000 at the Hyatt Regency LaJolla. Thickets are still available by contacting Larry Stambaugh, Chairman of the Board of Corporate Directors Forum, 858-455-7930.

English version of “Corporate Governance Principles: A Japanese View” has been added to the ECGN codes page.

Back to the topShareholder activist John Chevedden raised an important issue in a recent letter to the SEC’s Jonathan G. Katz. Rule 14a-8(j)(1) requires that companies “simultaneously” provide proponents and the SEC with a copy of their no action requests. “Companies are evading the spirit of this rule by sending the Commission’s copy by courier or overnight delivery. Meanwhile, the proponent’s copy arrives by ordinary mail – 5 days later. Companies can further exacerbate this by using certified mail for more delay.” Chevedden notes further that while the company often has 40 days to respond to a short 500-word resolution, the proponent must often prepare a rebuttal of a 20 page company document – “with 5 days lost in transit.” Clearly, Chevedden is right. The SEC should clarify that Rule 14a-8(j)(1) requires companies to make a diligent effort to ensure letters delivered to the proponent and the SEC arrive on the same day. I urge readers to join Mr. Chevedden’s effort to seek clarity on this issue.

SEC released proposed rules on Fair Disclosure (File No. S7-31-99) moving to take advantage of the communication revolution. The rule would help to level the playing field when an issuer chooses to disclose material nonpublic information. A new item 10 would be added to Form 8-K but the rule would alternatively allow disclosure through qualified press releases or any other method reasonably designed to provide broad public access.

Although the rule does not consider an internet posting on the issuer’s site to be sufficient for public disclosure, I expect this will be one of the most popular mechanisms when used in conjunction with press releases and publicly accessible conference calls, especially with regard to playback. The internet is now the leading source for retail investment information. 75% of individual investors use corporate sites as important research tools and 90% choose companies without the help of an advisor.

As mentioned last month, Individual Investor Group Inc.(INDI) broke new ground by discussing corporate earnings on the company’s message board. The FD rule should facilitate such innovation. By removing some of the speculative advantage which a few investors enjoyed, the Fair Disclosure rule and other recent developments may convince stockholders to act as owners, taking a more active role in corporate governance rather than doing the Wall Street walk.

SEC also released final audit committee disclosure rules. Independent auditors must now review the companies’ financial information prior to the companies filing their Quarterly Reports on Form 10-Q or Form 10-QSB with the Commission. Company proxy statements must include additional disclosures and reports about and from their audit committees. The rules are designed to improve disclosure related to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements of public companies.

Boardroom INSIDER’s Ralph Ward reviews the new regs, noting that “Audit committees now have to put it on the line with a proxy report that they’ve reviewed financial issues with management, and that they stand behind the numbers. The committee also has to have a written charter, independent members with specific financial savvy, and be in charge of hiring and fire the outside audit firm.”

Ward notes that “most people are probably surprised to learn that these standards aren’t already required. If it raises a stir to say audit directors must be financially literate, independent, and responsible, what does that say about our current boardroom standards?” How should corporate boards cope with the new audit crackdown? Ward’s publication gives several tips

Wharton professors John E. Core and David F. Larcker studied 195 firms that adopted target ownership plans involving senior-level managers between the years 1992 and 1996. While target ownership plans aren’t a magic bullet, when CEOs with below-average stock ownership in their companies increase their holdings, company performance definitely improves. (CEOs and Their Companies Profit from Executive Stock Ownership, [email protected] Newsletter)

NASD restructuring to streamline corporate governance. (seeNASDAQ/AMEX Newsroom)

Class action law suit alleges CalSTRS held retirement workshops and distributed information to members early in 1998 but never mentioned pending legislation which would boost their monthly retirement checks by $240 a month if they retired after 1/1/99. The suit alleges that employers contemplating changes in their pension program have a legal obligation to inform employees if that information might affect employees’ retirement decisions. (2 retired teachers sue pension fund, Sacramento Bee, 1/5/00.

Magellan trustees recommending shareholders approve allowing up to 25% of assets to be invested in a single company and to allow the fund to make investments that represent more than 10% ownership in a single company. This will allow Magellan to stop bumping up against its current 5% limit when investing in large companies and will facilitate investment in small firms. Although not mentioned in a recentWSJ article (“Fidelity Seeks More Freedom for Magellan,” C28, 1/1/00), it could also facilitate a move toward greater involvement in corporate governance activities.

Mark N. Clemente and David S. Greenspan have released their 1999 list of M&A “bloopers.” “This year, we are particularly amazed by the number of transactions that…are revealing serious accounting and financial irregularities.” Those making the list include America Online-Netscape, @Home-Excite, Disney-Infoseek, BNP-Bank Paribas, Tyco International Ltd-Binge/Purge, Deutsche Telekom, American Home Products-Warner Lambert, Aetna U.S. Healthcare, AutoNation, and Bank One. The Corporate Library LLC News Briefs, 12/15-28/1999.

CalPERS launches all-out campaign to rid Tyson Foods of dual-class structure. IRRC reports they have engaged Garland Associates (212) 866-0095 to assist in soliciting shareholder votes. (Corporate Governance Highlights, 12/30/99).

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