Archives: February 2000

Nell Minow, “CEO slayer,” is at it again. The Corporate Library began publishing the employment contracts of top corporate CEOs. “In theory, these documents have always been public, because they are filed with the SEC. But in reality, they are hard to track down. We wanted to make them easily accessible so that anyone who is interested can evaluate them.” “It does not surprise us that General Electric’s CEO, Jack Welch, has one of the best. It is not about perks or parachutes, but about securing his assistance as he leaves the company.” The worst contract reviewed to date belongs to another CEO with outstanding performance: Robert Annunziata of Global Crossing. Minow said, “Clearly, the company’s performance has been spectacular, and Mr. Annunziata has created tremendous shareholder value. But the contract’s pay/performance link is weak.”

Mr. Annunziata gets a $10 million signing bonus and two million stock options at $10 a share below market. The make and model of the Mercedes the company will buy for him and his wife is also spelled. To keep him from getting homesick, his mother gets first class airfare to come see him once a month. “The amount involved may be small in relation to the value he has created,” said Minow. “But it seems to us that anyone who gets the equivalent of $30 million just for showing up can pay for his own airfare and Mercedes. More important, the fact that these were the details he and the board were thinking about during that busy weekend is an indication that the new CEO is not as willing to bet on himself — and put his money where his mouth is — as shareholders might wish.”

Minow says the “CEO employment contract can provide some useful insight into the board’s performance and some insight into the board’s relationship with the CEO.” CEO pay is one of those “swimsuit issues” – so popular and so revealing.  Minow’s preliminary report is highly entertaining and very informative…an A+.  The Corporate Library has quickly become the most important source for information on corporate governance on the internet, outside of the SEC. We look forward to more.

Limits of shareholder activism, a perspective from London. (US shareholder activists bid for a bigger say, London Evening Standard, 2/24/2000).

Governance, 2/2000, reports on “Germany’s quiet revolution.” In late 1999 the German government proposed to abolish the 50% capital gains tax. Sales may lead to a drastic reduction in cross-holdings which have been a fundamental feature of German corporate governance. While providing stability and protection against takeover, cross-holdings have also reduced flexibility and liquidity. Once the reform is enacted, many expect a merger mania. The Portuguese Securities Markets Commission has endorsed 17 corporate governance principles. As Governance points out, few global institutions are likely to embrace recommendation 15 which calls for inclusion of 1 or more independent directors, but it does represent a step toward wider acceptance of international standards.

Sarah Teslik, executive director of CII, argues that directors should just say no to large payouts to poorly performing executives. (Governance, 2/2000) We agree, but we also embrace an editorial criticizing both CII and the SEC which appears on Pensions & Investments, 2/21/2000. Both organizations will hold a closed-door, members-only meeting in late March. SEC chairman, Arthur Levitt, has repeatedly called on corporations to open up their conference calls so as to not disadvantage those not allowed to participate. CII should just say no to a setting which P&I says serves to create the impression of “special deals, or at least the suspicion of favoritism.”

Boardroom, 1-2/2000, reports on a ground-breaking study in South Africa under the sponsorship of the Institute of Directors that surveyed directors on what type of person made the best chairman. About 38% favored statesman, 29% entrepreneur profile, an 18% the driver style. A smaller study in the UK had found the top pick to be facilitator, then thinker and driver. Boardroom points out the least favored type of chairman, the pioneer, appears to possess the qualities to fulfill the most significant roles recommended by the King and Cadbury reports. For more on the study, contact theWoodburn Mann Graduate School of Business Administration at the University of Witwatersrand.

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eLOT takes advice from Andrew Shapiro, president of Lawndale Capital Management and agrees to proactive reforms which may attract institutional and socially responsible investors. The news was presaged by an article in the 1/24/2000 edition of Barron’s where Stanley Kabala, eLot’s chairman and CEO, said the company’s board was in “unanimous agreement” about adopting Shapiro’s proposal if the details are worked out. On 2/122/2000, eLOT announced adoption of the following principles:

  • The Board of Directors shall at all times be composed of a majority of independent Directors, using the NASDAQ definition of independence. The Board will appoint the following committees:
    – Audit Committee
    – Corporate Governance and Succession Committee
    – Nominating Committee
    – Compensation Committee
  • Before each annual meeting the Nominating Committee shall solicit recommendations for candidates to fill Board vacancies from each holder of more than 5% of the Company’s fully diluted shares.
  • The majority of the Board members’ compensation should be equity-based.

The Company also announced that the Board of Directors has established a goal that not less than 10% of the Company’s purchases be from Minority and Women’s Business Enterprises (MWBE) qualified under the applicable federal and state definitions, and instructed eLOT management to develop a plan to further that goal. eLOT invites qualified MWBE companies to submit proposals and qualifications via e-mail to MWBE@elottery.comBusiness Wire, 2/22/2000

CalPERS released “focus list” of Advanced Micro Devices; Bob Evans Farms; Crown Cork and Seal; A.G. Edwards; First Union Corporation; Intergraph Corporation; Lone Star Steakhouse & Saloon; J.C. Penney Company; Phycor; and Rite Aid. Many have agreed to a number of corporate governance changes. (Reuters, 2/23/2000)

Barron’s, 2/21/2000, carried an article titled, “NEUTRAL GROUND? A Boardroom Battle May Land In the Conference Room,” which discussed Mark Latham’s upcoming presentation at a Pfizer sponsored conference on International Corporate Governance. Mr. Latham will be presenting our proposal which seeks to have shareholders select a firm to advise them on future proxy issues. Patrick McGurn, of ISS, is quoted as saying that although Latham “diagnosed the problem correctly, he hasn’t necessarily come up with the solution.” Understandable, since ISS might possibly lose business if the proposal catches fire at Pfizer and elsewhere.

However, the Barron’s editor then writes, “McGurn notes that there are plenty of chat rooms where investors can talk to each other on these issues.” Surely, Mr. McGurn does not believe ISS and chat rooms offer investors equivalent advice. I’ve been reading McGurn’s analysis for years and it’s much better than anything I’ve found in chat rooms. In fact, his article in January’s ISSue Alert, “The 2000 Proxy Season: From A to Z,” is a great example of the good humor and thorough analysis that is typical of Mr. McGurn. Yes, he’s even got X covered. “X is for Xenophobia” and he goes on to discuss recent concerns of the Corporate Governance Network, OECD and the World Band in two brief paragraphs.

Management Practice Inc. bulletin for 2/2000 assesses trends in the compensation of mutual fund trustees. Compensation is growing a little slower than at comparable sized corporations (9% v 11%). Trustees appear to devote a comparable amount of time to their duties (200 hours a year). The greatest difference appears to be in the form of compensation. Both are moving toward payment in real or deferred shares but funds are lagging. The MPI Compensation survey concludes by noting that both corporations and funds tend to draw from the same pool of candidates. “By this measure independent trustees of mutual funds are comparatively inexpensive.” However, my personal impression is that most trustees aren’t acting as independently as they should, so maybe their lower compensation is warranted.

Whole Foods Market did not ask for an SEC no-action letter and has agreed to include our slightly revised “Shareholder Power Proposal” resolution in their proxy package. Despite the SEC’s puzzling 6/15/98 no-action letter in the case of theTempleton Dragon Fund, Whole Foods did not object to inclusion of internet site addresses in the resolution. We applaud their progressive attitude and trust that forward looking shareholders of the company will vote in favor of hiring a proxy advisor to analyze future proxy issues.

Brazilian corporate governance reforms expected to address lack of corporate transparency and the diminishing rights of minority shareholders, if a bill authored by lower house deputy Emerson Kapaz passes. Kapaz, who belonged to President Fernando Henrique Cardoso’s Social Democrat Party (PSDB) when he started drafting the bill in mid-1999, but shifted to the Progressive Socialist Party (PPS), which isn’t a part of the government alliance. (Mara Lemos; Dow Jones Newswires; 5511-813-1988;

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Willie Brown Jr., the current mayor of San Francisco and former Speaker of the California Assembly, was apparently sent a letter in error notifying him that he was Governor Gray Davis’ choice for a seat on the CalPERS board, as was earlier reported by the Sacramento Bee, 1/22/2000. Apparently, someone in the Governor’s office goofed. However, the day after that announcement comes news that he is to be appointed after all. (see Willie Brown gets seat yanked from under him, Sacramento Bee, 2/16/2000; A state post for Brown –really: Davis confirms CalPERS offer, Sacramento Bee, 2/17/2000;Dan Walters: Davis’ gaffe — how bad is it?Brown appointed to CalPERS – againGray Grants Willie a Job — One He Already HasGray Comes Out of Brown Funk Appointment mix-up a comedy of errors, San Francisco Examiner, 2/17-24/2000; Davis Flipflops on Willie Brown Appointment , Los Angeles Times, 2/17/2000, The times they are a-changin’ at CalPERS, Sacramento Bee, 2/19/2000). As I’ve indicated previously, Brown’s appointment will raise press coverage of CalPERS.

Crist stays CalPERS president; Flaherman new VP, reportsSacramento Bee, 2/17/2000. Valdes will continue to serve as investment committee chairman until at least next month, when the board will elect committee chairs.

CalPERS Board comes to its senses and refuses to commit political suicide. President William Crist presented a “compromise” option for regulations on board candidate statements. Instead of prohibiting future candidates from criticizing opponents or telling voters why they are running and also removing the current prohibition against misleading remarks, the Board voted to put a new version of the rules out for public notice.

James Morgan, testified that he circulated a petition against the earlier proposal at his workplace, Cal/EPA. “Every single person that I talked to signed it. I have circulated assorted petitions over the years and I have never ever had every single person I talked to sign.” Stephen Brackett, of the Santa Monica Police Officer Association, testified that he also found that “100% of the people I spoke to were opposed to the concepts that are before you today.”

The newly proposed rules would expand candidate statements to 200 words but would also allow candidates to revise their statements after reading those of the other candidates. It was just such an action by Dr. Crist in 1998 which precipitated a protest by this editor. Although the protest panel appointed by the same General Counsel who allowed the action found it was arguably a technical violation of the rules, the election could not be overturned because CalPERS rules require the protester to prove the outcome would have been different. In other words, CalPERS staff is free to assist incumbents as long as their actions cannot be directly tied to the outcome.

The Sacramento Bee said the proposed rules previously approved by a majority of the Board, including Dr. Crist, would risk creation of a permanent board: “unaccountable, untouchable and isolated from its members.” Dr. Crist’s new proposal is certainly better. It would allow candidates to review all the statements and revise their own within 10 days. I question the value of letting candidates take ideas from their opponents without voters knowing where the ideas originated. The rule would encourage candidates to initially file poorly crafted and perhaps deceptive arguments. On refiling they would then reap the benefit of anything of value submitted by their opponents, while letting their opponents appear to address phantom arguments which no longer appear with the ballot. Far better, would be to require submitted statements to remain unedited, but to allow a second round of perhaps 100 words which could be used to rebut opponents or add new information.

On an even more positive note, the Benefits and Program Administration Committee agreed to examine other election issues in the near future. (see McRitchie’s testimony)

CalSTRS scored an 18.3% return last year on its cash, stock, bond, real estate and private equity investments. CalPERS, America’s largest pension fund, logged a return of just under 16%. (Sacramento Bee, 2/12/2000)

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Stephen Viederman (president, Jessie Smith Noyes Foundation) and Peter Camejo (trustee, Contra Cost County Employees Retirement Association) argue that fiduciary duty requires looking at the potential risks and rewards related to tobacco, the environment, treatment of employees, or any other of a range of social concerns in view of the fact that social funds perform as well as if not better than comparable funds. Morningstar has found socially screened mutual funds have, on average, performed better over the last one and three year period, a finding confirmed by other researchers. Isn’t it time, they ask, for “more open discussion of these issues by pension fund executives, following the lead of Contra Costa County.” On the other hand, Pensions & Investments editorial director, Mike Clowes, decries the vanity behind the ‘social’ mantle. He argues that investing in arms-makers, for example, is not socially irresponsible. “Invest as your conscience directs you, but don’t proclaim moral superiority by claiming to be socially responsible.” In our opinion, both are right. Fiduciary duty requires an examination of risk, including legal liability, but socially responsible investing needs a new name. The same issue of Pensions & Investments carries an article about a new startup fund, Eco-Enhanced Index Management, which is betting that corporate environmental are positively correlated with financial performance. (P&I, 2/7/2000)

Leonard Chazen, a partner at Covington & Buling, offers excellent advice to the SEC. He notes 1999 no-action letters have consistently refused to include a position on shareholder proposals raising unsettled questions of state law, such as many issues surrounding poison pills. The “agnostic” position of staff is “not easily reconciled” with Rule 14a-8(g), which gives the company the burden of proving it is entitled to exclude the proposal. The SEC’s failure to apply that burden means companies can exclude a proposal with little risk if they believe the proponent lacks the resources or resolve to litigate. The SEC should return to its earlier position that the improper subject exclusion does not apply to a proposal that raises an unsettled question of state law since, in such instances, companies cannot meet the burden of proving the proposal is improper, as is required under Rule 14a-8(g). (the Corporate Governance advisor, 11-12/99)

Congressman Bernard Sanders authored a letter signed by 46 Members of Congress urging the SEC to allow a stockholder resolution sponsored by 300 employees which seeks to reverse pension and retiree health benefit cuts. A recent release praised IBM workers for their determination and the SEC for their ruling.

Tomorrow the World. Anne Simpson describes the work the World Bank is now doing with the Confederation of Indian Industry to improve corporate governance and the ability of 17 Indian firms to tap international capital markets. As those firms reap anticipated rewards, other firms and necessary government reforms will follow. Sounds like an excellent strategy for the Global Corporate Governance Forum. (Director’s Monthly, 1/2000)

Sheet Metal Workers International Association to run an independent candidate at Paul Mueller and cumulative voting will increase the prospects of their board pick, Joseph ‘Nick’ Bacino. (IRRC Corporate Governance Highlights, 2/11/99)

Patrick McGurn highlights the debate between “do-it-yourself” slates stacked with large investor members of insurgent groups and new school players who prefer “independent” candidates. “Each school’s greatest strength is also its biggest weakness.” The investors have better alignment with shareholders but they also fuel charges of self-interest. McGurn’s excellent analysis goes over several of the recent cases, including Pfizer, and concludes experience will tell which side has growing influence. However, I’d bet there is no one size fits all. The value of either strategy is tied to factors, such stage of development. A recent IPO will usually go the investor route, while established firms will opt for independent directors. (ISS Friday Report, 2/11/2000)

Fairvest annual survey finds general decline in shareholder opposition to management proposals among Canadian firms. Their analysis indicates this may have more to do with the voluntary reporting methodology of their survey than actual practice. However, it appears poison pills were more shareholder friendly. M. Yves Michaud appears to be among the most innovative and successful crusaders. A proposal at the Canadian Imperial Band of Commerce requiring directors to hold shares equal to 6 times fixed remuneration got 88% of the vote. His proposal that BCE nominees be voted individually got 94% of the vote and another proposal at 2 banks to require minutes of the annual meeting to be sent to all shareholders got 58% and 65% of the vote. (for more seeCorporate Governance Review, 12/99-1/2000)

Germany’s first corporate governance code of best practices has been released and attempts to balance a strong commitment to stakeholders and a mandate to maximize shareholder value. The Fairvest analysis notes the cod neglects to require disclosure of executive pay and tolerates directors who can miss half the meetings before their lack of attendance is made public. (for more see Corporate Governance Review, 12/99-1/2000)

Phillip R. Lochner, Jr., writes that lists of the best and worst boards are generally a “trivial pursuit.” Too often companies are ranked by those with little board experience based on stock price, reputation, short-term prospective and luck. He levels a similar criticism at ratings of individual board members. He notes that directors have ample opportunity to “tell shareholders what they are doing and why.” “Just such a dialogue between shareholders on the one hand and boards and management’s on the other is the best way to begin to discover which directors and boards are rally performing well, rather than relying on outsiders whose judgments may be based on nothing but thin air.” I’m in total agreement, but until boards are willing to enter the chat rooms or post to the boards, at least the top 10 lists provide the something to attack or defend. Shareholders aren’t in the meetings; its up to directors to come out of the boardrooms or invite shareholders in. (Directorship, 2/2000)

Executive pay up 24% in 1999 over 1998, according to Pearl Meyer & Partners survey of 55 service and industrial companies with revenues averaging $18.5 billion. Average CEO compensation at such firms stands at $9.4 million. (Directorship, 2/2000)

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Transparency International ranked the US 9th out of 19 countries whose companies are perceived to dole out bribes. China had the highest level of perceived bribery and Sweden the lowest, with Australia and Canada close behind. The index is based on perception, not fact.

Public retirement funds manage about five times as much equity as their private counterparts but also index at about five times the rate of privates. One surprise in the analysis performed by Thomson Financial Investor Relations was that public funds invest more aggressively. Those with active allocation patterns invest 83% of their equity in growth stocks vs only 51% for privates. For more information, contact Richard Wines at 212-510-9350.

SEC’s selective disclosure may mean investor relations officers have to release information they know only a small portion of the investment community will understand, according to Sara Brody of Brobeck, Phleger & Harrison LLP. “If selective disclosure means saying the same thing to everyone, the real question is whether the level of information needs to be degraded,” said Brody at a National Investor Relations Institute Rock Mountain chapter lunch. (Investor Business Relations, 2/7/2000)

TIAA-CREF established a policy “a number of years ago” to absolutely do no soft dollar business, according to Peter Clapman, senior vice president and chief counsel. That means no payments, for what normally takes the form of research services from brokers to investment managers. Sounds like a good policy. Such commissions, often in the form of rebates, take on the appearance of bribes and kickbacks. Joyce Mader, who served on DOL’s ERISA advisory panel on soft dollars is quoted as saying, “abuse of soft dollars can cost a plan tens of hundreds of thousands of dollars, which is bad enough. But if investment professionals steer a plan to inappropriate investments because they’re getting a cut of commission, that can cost a plan millions.”

Union money is beginning to go into direct investments with collateral benefits. Bob Eason discusses the MFS Union Standard Equity Fund, not only its positive labor screens, but also public relations aspects and the enhanced ownership in fewer companies which facilitates active ownership and involvement. Another union focused fund has been set up by the Machinists. IAM Share invests mostly in companies with Machinist contracts, with about a third in a mix of large-cap companies in other industries. According to State Street, a similarly modeled portfolio would have outperformed the S&P 500 over the last ten years.

Proxy professionals often key to winning key proxy campaigns. “When management faces numerous dispersed shareholders, it almost always wins, but if those shareholders can speak with one voice, the playing field is leveled,” according to Rich Ferlauto of ISS’ Proxy Voting Service. At Marriot, “all the proxy voting services did the right thing and supported us,” said Matt Walker who worked on the campaign against management’s dual-class stock proposal for the Hotel Employees & Restaurant Employees. (for more on the above 3 items, contact the Center for Working Capital, 202-637-5179)

Friends of the Earth US, released an online Confronting Companies Using Shareholder Power: A Handbook on Socially-Oriented Shareholder Activism “written for socially-conscious or mission-based investors who recognize their obligation to exercise ownership responsibility in the companies they hold. It is intended to assist investors who have long-term commitment to social issues and who are committed to using shareholder activism tools in a prudent and responsible manner.” This single posting to the internet will generate more and better crafted shareholder resolutions than any prior publication. I know, sounds like hype, but I think it’s true. Shareholder activists will be bringing issues to a boil with this recipe book.

OECD is undertaking a major Review of its Guidelines for Multinational Enterprises and is seeking public comment. The Guidelines haven’t been altered significantly since their adoption in 1976. Also of interest at the OECD site is a recent report, Deciphering Codes of Corporate Conduct: A Review of their Contents (updated version as of December 1999).

CERES 2000 Conference in San Francisco April 13-14th, “Navigating the Networks of Change,” is based on the premise that environmental improvement in the 21st century will require new forms of cooperation and mutual accountability among key sectors of society. The conference will focus on the issues that arise at the crossroads of corporate accountability, environmental protection and stakeholder engagement in an era of globalization and information revolution. I’m going to be there. Contact me prior to the conference if you’d like to get together for a few minutes, lunch or whatever.

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IRRC conference goers discussed the need for independent boards, the use of stock options and other governance concerns at dot-com companies without reaching consensus. TIAA-CREF announced continued focus on eliminating dead hand poison pills. Use of internet voting up but still only represents about 6% of balloting. SEC encouraged use of internet. If shareholders agreed to view documents online, companies could save as much as $700 million industrywide. SEC granted no-action relief from Bart Naylor’s proposal to allow shareholders to place nominees on company ballots. Naylor is now hoping to get firms to nominate two persons for each slot. (IRRC Corporate Governance Highlights, 1/28/2000)

I generally limit my commentary to trends and don’t focus on specific companies. However, its worth noting that Proxy Monitor’s recommendation to Medco Research shareholders was to reject the proposed merger with King Pharmaceuticals, while ISS favors the merger. Perhaps if there is a “trend” here, it is the continuing importance of independent analysis by proxy monitoring firms. The Medco case provides another example of healthy competition and independent insights.

The Cluetrain Manifesto may not live up to the forward by Thomas Petzinger, Jr. of the Wall Street Journal. “Recall what The Jungle did to meat packing, what Silent Spring did to chemicals, what Unsafe at Any Speed did to Detroit. That’s the spirit with which The Cluetrain Manifesto takes on the arrogance of corporate e-commerce.” E-commerce is a baby that’s just begun to babble, as far as I’m concerned. It isn’t mature enough to get knocked down from a position of arrogance… But then I’m no web expert and the authors of this book seem to have those credentials.

While the book focuses on the internet’s ability to facilitate dialogue and talking story, contrary to their great expectations, I think the web will represent “TV with a buy button,” for millions of sorry souls. However, I can see that in the world of corporate governance, the internet is making a huge difference by empowering shareholders. Maybe the Cluetrain authors aren’t exaggerating in the long run. The book is great for one liners. “Word of mouth has gone global.” “The community of discourse is the market.” “Markets…want to participate in the conversations going on behind the corporate firewalls,” and corporations that let them are likely to benefit.

There’s also the Cluetrain Corollary to Metcalfe’s Law. “The level of knowledge on a network increases as the square of the number of users times the volume of conversation.” So asNETwork grows, on this and other channels, it becomes easier to learn the truth about corporate governance around the world and at individual firms. Like Linux, nobody is managing or controlling it, but many voices are contributing. All those “best practices” are helping firms discover, rather than invent, their own identity when used properly.

Here’s another line from Cluetrain, “controlling information is like trying to control a conversation: it can’t be done and still be genuine.” “The questions we ask aren’t going to predict the future. They will create the future.” So far, what we hear most on the internet is positioning by those who want to be our saviors. “The questions themselves are intended to confuse the issue, and the answers are nothing but the smirk on the face of someone who just proved himself right.”

See The Cluetrain Manifesto site; then buy the book though our link and support this news site. (In the last quarter of 1999 we helped sell $2,048.02 on books, earning the huge referral fee of $110.12. No, we’re not getting rich but if readers will buy their books using our direct links, we’ll get 15%. If you just pop over to from our site and buy after browsing, we only get 5%. If everyone had bought those books in the last quarter using direct links, we’d have made another $200. Okay, I’m off the rant.)

Mannesmann to accept Vodafone’s $182 billion merger offer, ending a protracted battle for the German telecom firm, according to WSJ. The deal will create not just a European behemoth, but the world’s largest wireless provider.

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