Archive | June, 2000

Archives: June 2000

Shareholders Virtually Screwed
Reliable sources tell me that Senate Bill No. 363, “An Act to Amend Title 8 of The Delaware Code Relating to the General Corporation Law” has been signed into law by Governor Thomas Carper and goes into effect July 1. Section 7 allows companies to hold stockholder meetings entirely by remote communication without a venue for physical attendance, at the sole discretion of the board of directors and without shareholder approval.

While I have always been a strong advocate of using electronic technology to inform shareholders and I support the Internet broadcasting of annual meetings, this measure appears to go too far and can easily lead to the further disenfranchising of shareholders as well as the loss of an important forum.

The Council of Institutional Investors expressed their concern about Section 7 in its newsletter dated June 15, 2000. “The proposed law could also mean that shareholders would no longer have an opportunity to question directors in person…virtual meetings could be abused by management, since shareholders can’t keep an eye on the proceedings of all-electronic meetings.”

Clearly, the result of repealing the requirement that companies convene physical shareholder meetings will be a reduction in management accountability by insulating executives and directors from shareholders.

While I’m complaining about Delaware, they could also do a better job of enabling the public to search bills, read their text and any committee analysis. Their Legislative Information System is totally inadequate. After too long, I finally found the text of SB 363 and a summary.

Stakes by Outside Directors Matter
Donald Hambrick and Eric Jackson examined companies with winning 10 year shareholder returns vs laggards and found that outside directors of winners held 4-5 times more equity in their firms than did outside directors of laggards. “Our results strongly suggest that directors with a meaningful stake are a pivotal factor in improved governance.”  Outside Directors With a Stake: The Linchpin In Improving Governance, forthcoming in California Management Review

SEC in Rewrite on Selective Disclosure
The US Securities and Exchange Commission has decided to revise its proposal regarding selective disclosure in response to complaints from news organizations. The amended proposal will reportedly allow corporate insiders to disclose material information to “legitimate” members of the press. Sources expect the final proposal to be released by the end of July. (The Corporate Library, News Briefs, June 14-20)

Women on Board in Georgia
Board of Directors Network (“BDN”) bills itself as “the only organization in the United States devoted to improving corporate governance in America through advocating gender diversity in the boardroom.”

A recent article in the Atlanta Journal Constitution (June 18th, 2000) discusses the findings of BDN’s 1999 survey. Women hold only 5 percent of the 1,808 board of director seats in public companies headquartered in Georgia. Only 13 of the 228 public corporations surveyed for a 1999 report have more than one woman director, and none has more than two.

Their survey mailing gets mixed responses, from handwritten notes telling the group “mind your own business” to wanting to learn more about their database of 500 potential board candidates.

BDN’s 1999 study also showed 162 of the 228 publicly held companies surveyed had no women executive officers listed in their 1998 SEC filings. A 1999 survey by the Society for Human Resource Management found that the number one barrier to corporate advancement for women is the lack of women on boards of directors. Therefore, BDN is not only helping women become directors but is also helping all women in corporations get ahead.

Broker Voting
We’re finally getting some attention on this issue. The Council of Institutional Investors is once again prodding the New York Stock Exchange to drop this practice. I urge readers to write to the NYSE and ask for a copy of their response to CII. Let them know this isn’t just an issue for CII.

Catherine Kinney, group executive vice president for the Office of the Chief Executive sent a letter to CII on 6/82000 that indicated they had studied the issue of broker voting and had decided to “maintain the exchanges’ discretionary voting structure with no changes.” That’s an outrage!

The Investor Responsibility Research Center carried an article in their June 23 newsletter Corporate Governance Highlights that discusses the recent exchange between CII and NYSE. In addition, it notes a study, “Does Managerial Control of the Proxy Process Disenfranchise Shareholders?” (now titledCorporate Voting and the Proxy Process: Managerial Control versus Shareholder Oversight), by Jennifer Bethel of Babson College and Stuart Gillan of the TIAA-CREF Institute.

Their research found that broker votes were associated with increasing management votes by more than 15 percent, depending on the type of proposal. As many as 4.7 percent of routine proposals might not have passed without broker votes.

I urge everyone to write to the NYSE, using the contact box athttp://www.nyse.com/about/about.html. Ask them to fax you a copy of Catherine Kenney’s letter June 8th letter to the Council of Institutional Investors.

Tell them you’d like to understand what rationale could possibly explain this continued anti-democratic practice, which dilutes the value of shareholders votes.

Board Study
Annual Study of Small-to-Midsize and Large Public Company Boards: 2000 found most directors are between 60-69. Only 13% of large company directors are women and 4% of small-to-midsize directors are women. Median pay of large firms is $35,000 vs $10,000 at small-to-midsize firms. Large firms address more issues using board committees; 33% of them have a committee dealing with corporate governance vs only 2% of small-to-midsize firms. The sample in the 2000 study includes 182 large public companies with median annual sales of $15.3 billion and median net earnings of $728 million as of December 31, 1998. It also includes 192 small-to-midsize companies with median annual sales of $149 million and median earnings of $13 million as of December 31, 1998.

Companies Reap Returns on Human Capital Investments
Shareholders of companies that already have superior human capital practices reaped huge returns in 1999, while shareholders who invested in companies with poor human capital practices lost money, according to new research by Watson Wyatt Worldwide. Companies that had received a high human capital index (above 75) in the original study provided a subsequent average 70 percent total return to shareholders for 1999. Companies with a human capital index between 25 and 75 returned just 12 percent to shareholders, while shareholders lost an average 6 percent by investing in low human capital index (below 25) companies. Want to determine where your organization falls? To complete a 36-item questionnaire and receive customized results, call 1-800-388-9868.

Option Use Grows
The “war for talent” is leading to a growing use of stock options to attract and retain employees. Almost 19% of employees were eligible in 1999, up from 12% in 1998, according to the latest survey from compensation consultants Watson Wyatt Worldwide. Average lowest qualifying salary level last year was $58,100. (reported in Directorship, June, 2000)

Mutual Fund Survey Results
Each year the Management Practice Inc. conducts a survey of mutual fund directors’ compensation. This year they found overall compensation grew by 9.1% while assets managed per director grew 7.8%. Mandatory retirement policies were in place at 64% of funds surveyed with 72 as the median retirement age. The median age of current trustees is 62 with 10 years of service. Most boards have 6-8 members, with a majority being independent. Independent directors chaired 25% of the boards and another 45% have designated one member as a “lead director or trustee.” For more survey results go tohttp://mfgovern.com and click on “Surveys & Publishing.”

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Hell Freezes Over and Bargain Hunting Ends
coverThe May/June edition of Business Ethics carried an article by Allan A. Kennedy based on his recently published book, The End of Shareholder Value. Kennedy claims “the end of the shareholder value era is drawing near.” “Managers everywhere took up the mantle of shareholder value, if for no other reason than to defend themselves from predators” during the late 1980s. In pursuit of shareholder value, managers sold off underperforming assets, downsized, cut R&D and launched buybacks.

His evidence that shareholder value has lost its mantra status? A Conference Board survey says 67% of corporations surveyed said the employment compact had changed; job security was no longer a part of it. He writes that in ten years, “virtually any employee making over $100,000 a year” will be using third-party agents to negotiate their contracts. (Maybe in 10 years my third party agent, part of the AFL-CIO, will get me a $100,000 contract…depending on the rate of inflation. What does that have to do with ending shareholder value?) Further evidence of the demise of shareholder value: suppliers have banded together, even government bureaucrats are withdrawing subsidies for plan relocation. “Companies must ensure they never again take their eye off the ball in pursuit of a false idol like shareholder value.”

Kennedy has a point; companies which concentrate on pumping up the price of their stock at the expense of employees, suppliers, government, and communities will get burned eventually. Wasn’t that lesson widely learned when thousands cheered at the firing of Al Dunlap? (see John A. Byrne’sChainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price)

Pick up any financial periodical and the evidence runs against the focus on shareholder value ending any time soon. The June 12th edition of Pensions&Investments carries an editorial on a “value rebound.” One mutual fund saw 20% of his portfolio bought by merger and acquisition activity with acquirers paying an average 60% premium. Didn’t the Dot.com sell off have something to do with investors seeking value? Open any financial publication and you’ll find plenty of money managers offering advice on where values can be found. Europe seems popular with many because they haven’t gone though the “consolidation” that US firms have experienced and “careful shoppers” can find bargains in East Asia, according the June 25th edition of BusinessWeek. The latest McKinsey study (seehttp://www.mckinsey.com/features/investor_opinion/index.html) concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.”

Kennedy has a catchy title that is bound to help him sell his book but the end of shareholder value will come at about the time shoppers stop looking for a sale. Maybe that’s happening in Kennedy’s neighborhood but I don’t see it in mine. In fact, what I see is everyone wanting to find a bargain and their willingness to band together on the Internet at places like http://eraider.comto engage in aggressive shareholder oversight to ensure that shareholders get a premium for improving corporate governance.

CalPERS Tobacco Sell Off Closer
The board of California’s giant public pension fund instructed the investment staff to draw up policy guidelines on divestiture that would apply to tobacco or any other industryCalSTRS, the State Teachers’ Retirement System recently took a similar route to divestment. See CalPERS inches closer to selling tobacco stock, Sacramento Bee, 6/20.

Good Governance Critical to Attracting Capital
McKinsey & Company completed an update and expansion of their previous “investor premium” work with a new Investor Opinion Survey, June 2000. Undertaken in co-operation with the World Bank, the surveys gathered responses from over 200 institutional investors, who together manage approximately US$3.25 trillion. Forty percent of the respondents were based in the U.S. Key findings include:

  • Three-quarters of investors say board practices are at least as important as financial performance when evaluating companies for investment.
  • Over 80 percent of investors say they would pay more for a well-governed company than for a poorly governed company with comparable financials. (A well-governed company was defined as having a majority of outside directors with no management ties; holding formal evaluations of directors; and being responsive to investor requests for information on governance issues. In addition, directors held significant stockholdings in the company, and a large proportion of directors’ pay came in the form of stock options.)
  • The actual premium investors say they would be willing to pay differs by country. Investors say they would pay 18 percent more for the shares of a well-governed UK company, 22 percent for an Italian company, and 27 percent for one in Venezuela or Indonesia.

The premium appears correlated with the perception of predominant governance standards, with investors willing to pay a higher premium where disclosure or shareholder rights are main concerns. McKinsey concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” “High governance standards will prove essential to attracting and retaining investors in globalized capital markets, while failure to reform is likely to hinder those companies with global ambitions.” See also Investors will pay for governance.

PSLRA Advances Corporate Governance Agenda
The recent Cendant settlement is seen by many as a vindication of PSLRA but its impact on furthering corporate governance is likely to have more lasting importance than achieving the original objectives of Congress.

Andrew Osterland reviews the recent settlement of a class-action suit against Cendant in the current issue of CFO magazine and concludes it may actually be good news for companies facing securities litigation. “Reason: Shareholders, unlike plaintiffs’ attorneys, have less interest in bringing a company to its knees.”

The Private Securities Litigation Reform Act (PSLRA) of 1995 was intended by Congress to: 1) reduce the number of “frivolous” lawsuits, by requiring more detail in complaints before being awarded discovery privileges, and 2) improve the recovery rates of shareholders, by increasing the role of institutional investors. Since passage the PSLRA, the percentage of dismissals has risen from 12% to about 25%. At Cendant shareholders recovered 34% of damages vs the usual 8-9%.

The PSLRA has been successful at reducing attorney fees when an institutional investor has sought lead plaintiff status but few have. Why? According to Osterland, the courts lack a clear definition of which claimant most adequately represents class members, most institutional investors lack legal staff or resources and many don’t want to upset business relationships with defendants and their Wall Street underwriters.

“CFOs now have more reason to hope that powerful institutional investors will help quash frivolous lawsuits that companies might otherwise settle rather than fight.” But if few are willing to step up to the plate, it seems PSLRA hasn’t really gone very far in achieving its goals. Perhaps the most significant outcome has been to provide activist institutional, such as CalPERS andSWIB with another tool for advancing their corporate governance agendas.

What do institutional investors want? The Cendant outcome is instructive: A majority of board members must be independent.

  • All members of the audit, nominating, and compensation committees must be independent.
  • The full board of directors must be elected annually.
  • Shareholders must vote their approval before options are repriced.

How about adding the need to split the CEO and board chair next time around? I don’t see how any board can be truly independent when the CEO sets the board’s agenda.

See CFO Magazine, June 2000, BETTER BALANCE: The huge settlement against Cendant may actually be good news for companies facing securities litigation.

OECD Activities
The May edition of NACD’s Director’s Monthly includes an excellent article by the US ambassador to the Organization for Economic Cooperation and DevelopmentAmbassador Amy Bondurant walks readers through how and why the OECD got involved in corporate Governance and her role in developing theOECD Principles of Corporate Governance. Bondurant argues that good corporate governance is essential to attracting and retaining investment, as well as an important contributor to performance. “Corporations with active and independent boards appear to have performed much better in the 1990s that those with passable, non-independent boards.” She cites a recent McKinsey study in Asia which found that “over three-quarters of respondents believe the quality of corporate governance is at least as important, if not more, than financial issues.” Her summary of the Principles is among the best I’ve seen in such a short write-up.

She also explains some of the other relevant OECD work, such as that of the Anti-Bribery Working Group. The Group monitors ratification and implementation of the Anti-Bribery Convention which entered into force in February 1999 with 34 signatory countries (20 ratified) representing 75% of world trade. See also Bribery and Codes of Corporate Conduct: An Analysis (March 2000) in their section on working papers. An additional initiative, the Good Governance Outreach, will project the Principles of Corporate Governance beyond OECD member countries, along with the Anti-Bribery Convention. The OECD is also updating its Guidelines for Multinational Enterprises to promote responsible business conduct by multinational enterprises. Its nonbinding standards cover employment, industrial relations, environment, competition, taxation, science and technology. A chapter on disclosure will be revised to ensure conformity with the Principles of Corporate Governance. Revisions are expected to be the most extensive since 1976 and will include input from labor unions and NGOs. Their internet site provide instructions on how to get involved.

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Declaration of Independence
Lew Lederman, Chairman and CEO of Knowledge E*Volutions proposes that boards declare their independence in writing. Some “bedrocks” of such documents include: separate chair, separate board secretary and secretariat, and a separate budget. (A Declaration of Independence for Boards in the Information Age,NACD’s Director’s Monthly, May)

First All Day Broadcast
Infonet Services will Web cast seven hours of interactive investment content. “Infonet is taking advantage of technological advances to level the playing field for all investors,” said Morgan Molthrop, Infonet’s Vice President of Investor Relations. “The same strategic information will be available to mom-and-pop investors in Peoria that has, in the past, been available only to investors that run billion dollar portfolios.” The Web cast is scheduled for Monday, June 26, at 8 AM Pacific Time.

BusinessWeek’s Criticism of CalPERS off Target
BusinessWeek’s Christopher Palmeri warns, “CalPERS May Not Do as Well by Doing Good.” While CalPERS has plenty of problems, attempting to do well by doing good is not one of them.

Rather than mandating divestitures and forcing a percentage of the fund into home state projects, Angelides should leave politics out of CalPERS’ investment policy. CalPERS has a 100-person investment staff. Let them decide where the best place to make money is.

While Palmeri is right that “muddying the waters with a social agenda can mean poor results in both areas,” Angelides’ proposed policies might be closer to extending the principles of good corporate governance than shifting CalPERS to a philanthropic fund.

For example, CalPERS governance policies call for disclosure and transparency because without information shareholders cannot make informed decisions. Angelides believes it may be better to invest in our own “emerging markets” in California than in countries where political freedom, basic workers’ rights and a free press conducive to secure investments are denied. Angelides is right to take risk into account.

Certainly, it would be wrong for the State Treasurer to use his position to advance his own political ambitions at the expense of fund members and beneficiaries, just as it was wrong for other members of the CalPERS board to vote in favor of policies to “muzzle critics” in order to stay in office. However, Angelides’ plan for investing in the “double bottom line” builds on partnerships not subsidies.

Angelides has called on CalPERS to join with CalSTRS in divesting the fund of tobacco companies based on their poor performance but it is clear that health concerns and social issues have played a part as well. The board’s President, William D. Crist indicates he is “against making investment decisions based on someone’s idea of what is good or bad for society, because I don’t know where that train stops,” ”Do we one day ban investments in alcohol, handguns, and rap music?” It could, indeed, be a slippery slope. However, unlike alcohol, handguns and rap music, tobacco products cause harm even when used as directed and, more important from an investors standpoint, tobacco companies are losing lawsuits at a growing pace.

Limiting investments to where transparency, disclosure and the guarantee of basic rights such as freedom of the press exist may be reasonable proxies for minimizing risk. Similar arguments can be made for divesting tobacco. It is doubtful CalPERS will take up the mantle of a “socially responsible investment.” State Controller Kathleen Connell was only convinced to vote for tobacco divestment at CalSTRS after a broader policy of assessing economic risks was adopted. (see Why Connell did about-face on tobacco stock) It clearly pointed to the unique vulnerability of the tobacco industry to bankruptcy. Those elected by the membership are also unlikely too go too far down the SRI path off. Most enjoy an occasional beer, hunting on the weekends and/or gambling at Lake Tahoe, Reno or Los Vegas.

Palmeri decries taking social forces into account and but applauds CalPERS’ corporate governance policies, indicating they “helped the fund post solid average annual returns of 17% over the past five years.” However, the vast majority of CalPERS funds are invested passively, as an indexed fund. Whereas activist funds such as LENS and the recently createdAllied Owners Action Fund take substantial positions in companies and then announce them as targets, each year CalPERS announces its corporate governance focus list without making further investments in them from its largely passive portfolio.

Where Reforms Are Really Needed

If Palmeri is really concerned about CalPERS’ returns, he should be advocating that CalPERS put its money where its mouth is. They should take advantage of the “CalPERS Effect” by increasing their investments in focus companies prior to announcing them.

If Palmeri is really concerned about CalPERS members he should be pointing to the need for governance reforms at CalPERS itself. Although it uses the resolution process extensively in corporate governance, CalPERS has no similar mechanism to let its own members place action items on the ballot when its own board refuses to act. It also has a “Shareowner’s Forum” on the Internet but only Board members and staff can meaningfully post to it. Should CalPERS divest its tobacco holdings? Why not put the question to the membership?

Elections at CalPERS have been won with less than 6% of the vote because the board refuses to authorize runoffs. It is practically impossible to defeat an incumbent. Those in office can campaign at member expense. Campaign rules can be freely violated unless they can be proved to have changed the results. Appeals are heard by staff whose bonuses are determined by incumbents. In addition, there are no term limits and conflict of interest rules are weak. One recently reelected board member will serve out 32 years by the end of his term, while simultaneously sitting on the board of nine mutual funds.

Palmeri’s advice to leave investment policies to professional staff misses a major point of the corporate governance revolution: informed shareholders participating in governance can add value. CalPERS members are some of the best-educated retirees and employees in the nation; why not involve them in the decision-making process?

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Ditching Directors
Nell Minow and John Robson argue for term limits. Why not let shareholders decide?

With sitting CEO’s stretched thin on boards, retired executives have become a popular source of directors. A recent survey of major corporations reported 86% had at least one retired CEO. Most recognize that board members grow stale and lack independence after too many years of service. In “Ditching Directors,” Nell Minow and John Robson argue that we need an impartial mechanism to weed out those whose contributions have worn thin. One common solution, mandatory retirement at age 70, effectively creates a “virtual drop-by.” They suggest, instead, term limits of 10 or 12 years of service for all directors.

Minow and Robson rightly argue that age limits are “blindly discriminatory” and a “clumsy substitute” for evaluating and replacing sitting directors. Most who have studied the issue agree the real solution is that all boards should have an effective means of evaluating individual director performance. Each board should establish performance criteria, not only for itself (acting as a collective body) but also individual behavioral expectations for its directors.

The elements of such criteria differ but those recommended by CalPERS are illustrative. Their US Corporate Governance Principles state that “minimally, these criteria should address the level of director: attendance, preparedness, participation, and candor.”

Minow and Robson argue one reason director evaluation and replacement hasn’t worked is because many don’t ask directors to sign a performance agreement going into the job. “There’s no reason why the conditions of continued director service cannot be established in a formal director’s ‘employment contract,’ just as a chief executive would enter.”

Unfortunately, the more fundamental problem is that even with an annual evaluation process in place, many boards will let mediocre directors continue. Forcing out a colleague is just too tough. As Minow and Robson note, “selective pruning of dead wood is, it seems, just too painful and disruptive.” “At Stone & Webster, a Boston-based engineering firm, J. Peter Grace sat on the board for 50 years.”

While I embrace their notion of term limits and the importance of a director-evaluation system embodied in corporate bylaws, a more ideal solution would be opening up the nomination process to shareholders.

Shareholder participation and free discussion, such as what occurs on the eRaider bulletin boards, can add value to the firm. Directors faced with the real possibility of being replaced by shareholders would rationally choose to be more responsive to shareholder issues and avoid self-interested actions, such as the golden parachutes and dead hand pill we see at Comshare. Directors who can easily be held accountable by shareholders will have a greater tendency to direct in a manner beneficial to shareholders than do directors where shareholders can only note their displeasure by withholding their vote without a practical alternative.

When eRaider or other serious minded shareholders discuss the issues facing a corporation, such as Employee Solutions orComshare where are the directors? Certainly, liability issues come into play but perhaps more important is the fact that currently it is extremely difficult for shareholders to hold directors accountable, so why bother?

Mandatory term limits are a good fall back but what is really needed are directors who face real contests, where shareholders decide who will stay and who will go.

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China Shifts
Bank of China (BOC) President Liu Mingkang told the 2nd Asia Development Forum that China was involved in a three step approach. Initial reform from 1978 to 1993 focused on enterprise autonomy. From 1993 to 1998 the Chinese government focused its efforts on sound corporate management. Beginning in September 1999, the Chinese government began to focus on six key elements of corporate governance:

  • a set of clearly defined strategies with a broad vision,
  • a transparent and sound decision-making process,
  • information disclosure arrangement based on prudent accounting norm and practices,
  • the establishment of well-defined accountability, responsibility with strict & explicit targets as well as relevant effective motivation schemes and checking mechanism,
  • a system ensuring independent, full and good play by all board members and fairly protecting interests of all shareholders, and
  • education and cultivation of the staff at all levels. corporate governance. (Xinhua News Agency, China Tries to Plant Good Corporate Governance Into SOEs, 6/7)

CalSTRS Swears Off Tobacco
The State Teachers’ Retirement System became America’s biggest pension fund to dump most of its tobacco industry holdings; is CalPERS next? The motion was made by state Treasurer Phil Angelides who will take his battle to CalPERS at its June 19 meeting. Through last week the tobacco sector was up just over 15% for the year, making it a leading performer. However, Angelides blamed a “free fall” in tobacco stock prices for costing the two pension funds a combined $600 million in lost stock value in 1999. Although their was much talk about health issues and the need for consistency with educational policies, board members based their decision on various reports that legal and financial pressures facing the tobacco industry threaten to throw it into bankruptcy and jeopardize CalSTRS’ tobacco holdings. see Sacramento Bee, 6/8, CalSTRS letting go of tobacco: Fund’s $238 million in shares to be shed.

Angelides is also calling on CalPERS to strengthen its standards for investing in foreign emerging-market stocks and bonds by analyzing financial criteria such as market liquidity, shareholder legal protections, and currency risk — along with screens to ensure political freedom, basic workers’ rights and free press conducive to sustained growth before funds are invested. His proposal is based on the premise that free markets, democracy and prudent financial standards offer the most optimum soil for cultivating growing returns. Are social goals compatible with high return on investments? Limiting Investments To Free Markets Will Offer Solid Returns writes California Treasurer Phil Angelides in the 6/5 San Francisco Chronicle.

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Womenconnect.com Offers Advice
The latest issue of <a href="http://www.boardroominsider.com”>Ralph Ward’s Boardroom INSIDER, as always, carries many interesting tips for boardroom occupants. In one item Ward brings our attention to Womenconnect.comwhich offers a rich selection of advice and articles for women in business. Their Boardroom Bound offers advice on how to establish yourself in your first board seat no matter your gender.

Exposure Draft Released by Panel on Audit Effectiveness
The Panel on Audit Effectiveness released an Exposure Draft of its Report and Recommendations. The Panel’s recommendations are addressed to many constituencies: the Securities and Exchange Commission (SEC), standards-setters, firms, the American Institute of CPAs, corporate audit committees and others. The Panel will hold public hearings on July 10 and 11, 2000 to obtain the views of interested individuals and organizations about the recommendations of the Panel in the Exposure Draft. Written comments are invited by July 21, 2000. For details on how to participate in the public hearings and/or to submit written comments, please see “Public Hearings/Written Comments.”

Trouble at Mattel Meeting
Shareholder activist John Chevedden reports that at its 6/7 meeting newly appointed Mattel Chairman Robert Eckert “refused to release voting data by percentage or by numbers for any of the 6 items for vote. He merely said that the shareholder resolution to redeem the poison pill passed, the directors were reelected and accountants ratified.” Later Mattel issued a press release noting a 65% yes vote for Mattel to redeem its poison pill.

TIAA-CREF Proposals Supported
TIAA-CREF announced it won considerable support for shareholder resolutions it submitted to two companies with dual class common stock – and insider-dominated boards. The resolutions, at Cablevision Systems and Telephone and Data Systems, advocate independent boards. Each company is currently controlled by a particular group that has 10 votes per share, whereas public shareholders such as TIAA-CREF have only one vote per share. This stock structure violates the principle of one-share, one-vote, which TIAA-CREF regards as a bedrock principle of shareholder democracy.

At Cablevision the resolution reportedly won the support of an estimated 43% percent of shares voted that TIAA-CREF regards as independent of management. Similarly, at TDS’ annual meeting, holders of its common shares, excluding Series A common shares which are controlled by a family voting trust, cast 45 percent of their shares in favor of the TIAA-CREF resolution. (PRNewswire, 6/7)

Bug Biggs Campaign
Campaign for a New TIAA-CREF got some major publicity recently with a major article in the Los Angeles Times on 5/28. TIAA-CREF acknowledges that Neil Wollman was a player in the 1980s effort to get the company to launch Social Choice, which now boasts $4 billion in assets, but says he was not the catalyst. Neil Wollman and Abigail Fuller now want the company’s socially screened fund to set aside a portion of its assets–5% to 10%–to invest in community development projects and in venture funding for young firms that meet positive screens (by using environmentally friendly technology, for example, or exemplary hiring practices). TIAA-CREF wants to rely solely on negative screening. Want Your Retirement Fund to Put Your Money Where Your Heart Is? If so, mark your calendar for the next two Mondays and call CREF’s Chief Executive John Biggs at 1-800-TIA-CREF (842-2733), ext. 4280.; or 212-490-9000).

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Canadian Retail Investors Double 
In 1989 only 23% of Canadians held equities directly or indirectly; now 49% do according to a study conducted a Toronto Stock Exchange/World Investor Link study reported inInvestor Relations Business on 5/29. Only 4% trade on a daily basis; 40% hold stock for at least a year. The internet is a key factor in the growth of retail investing. Client rules, which changed in February, no longer require brokers to check with investors when they make a trade not in line with their typical investment objectives.

Dotcom Investors Flip
Shareholders keep their GE stock for an average 3.5 years, Microsoft for 3.5 months and Yahoo! for 3.5 days, according toGlenn Pascall, senior fellow at the Institute for Public Policy and Management. Pascall estimates that as many as 75% of new dotcoms will be swallowed by more established firms with better shareholder retention. A convincing long-term business plan can encourage investors to hold, as was the case with Amazon.com which remained relatively stable when the dotcom sector plummeted. Investors believed Jeff Bezos had an effective long-term strategy. Another strategy to retain at least some shareholders might be offering a direct stock purchase plan. Yahoo! recently became the first Internet company to do so. (Investor Relations Business, 5/29)

Labor & Corporate Governance
Proxy Voter Services (PVS), a division of Institutional Shareholder Services (ISS), has launched a no-cost newsletter designed to review proxy issues of current interest to multiemployer plans and to serve as an informational resource for trustees and investment professionals. Labor & Corporate Governance will provide readers with an up-to-date review of corporate governance issues and how they affect multiemployer and labor funds.

Green Power
Prompted by government pressure on institutional investors to act socially responsible, another U. advisor is marrying corporate governance to social issues analysis. Manifest, the Essex-based voting agency and governance specialist began its “Green Card” service. In partnership with London advisor Environmental Governance Ltd. (EnG), Manifest is rating top UK companies on environmental risk. The firm offers scores based on individual investor guidelines. Or clients can choose a set of default weightings.

CalSTRS Adopts Divestment Policy
The California Teachers’ Retirement System adopted a broad policy which may set the stage for tobacco divestment at its June 7 meeting. As reported by Pensions & Investments, 5/29, the new policy would allow divestment when three of four indicators have been met.

  • industry faces potential combined product liability judgments greater than net worth;
  • significant threat of industry-wide bankruptcy filings;
  • regulations/legislation which may substantially impair earnings; and
  • collective action by institutional investors has potential to drive down share prices.

Disclosure Theme at Asian OECD Roundtable
Organization for Economic Cooperation and Development’s 2nd Asian Roundtable on Corporate Governance opened in Hong Kong with disclosure as the theme. The role of the board of directors in overseeing disclosure, accounting and audit and non-financial disclosure such as related parties, ownership structures and government policies will also be examined. The First Asian Roundtable organized by the OECD was held in Seoul in March 1999.

Family-based business structures and poor enforcement of corporate laws will hinder adoption of international governance standards for another generation, according to Olivier Fremond of the World Bank’s corporate governance unit. The 53% rebound in the stockmarket during 1999 rewarded managements without requiring adoption of international norms. With China needing capital and about to enter the WTO, it is likely to drive corporate governance reform. “You can talk about different cultures and traditions and they do play an important role, but ultimately efficiency, fairness and accountability are principles that need to be employed in Asia,” Fremond said. “The force behind this is going to be the institutional investor.” (Reuters, 5/31, Good governance a generation away in Asia-W.Bank)

Australian Institutional Investors Apathetic Voters
A study by the Centre For Corporate Law and Securities Regulation found that, in companies with a wide shareholder base, proxy instructions for resolutions about the election of directors accounted for only 35% of possible votes in 1999. Similar figures applied for controversial and major resolutions. This compares with 80% in the US, 73% in Germany and 50% in the UK. (Sydney Morning Herald, 5/30, Institutions urged to use voting rights)

Reliance on Global Equity Grows
Companies in France, Germany and Japan are becoming increasingly dependent on open market equity for financing their expansion-they are becoming more like companies in the US and UK, according to the latest issue of The Conference Board’s Institutional Investment Report. The largest 25 US pension fund holders of international equity, held $265.6 billion in international stocks as of September 30, 1999. These 25 pension funds accounted for roughly 66% of the $403.7 billion foreign equity held by all US investors in the third quarter of 1999. This represents a phenomenal 24% increase from the third quarter of 1998 when the largest 25 pension funds held $181.1 billion, roughly 42% of $432 billion of all US foreign equity. In 1996, the largest 25 pension funds’ share of all US foreign equity was only at 28%, or $110.8 billion out of a total $397.7 billion. This small group of investors hold tremendous leverage. (see press release)

SEC Rulemakings
The SEC is soliciting input on concepts and proposed rules. Two which deserve attention are File No. S7-04-00: Concept Release on International Accounting Standards and File No. S7-04-00: Electronic Filing by Investment Advisers. I’ve posted my comments on both on our Commentary page or go directly toaccounting or advisors.

Continue Reading ·

Archives: June 2000

Shareholders Virtually Screwed
Reliable sources tell me that Senate Bill No. 363, “An Act to Amend Title 8 of The Delaware Code Relating to the General Corporation Law” has been signed into law by Governor Thomas Carper and goes into effect July 1. Section 7 allows companies to hold stockholder meetings entirely by remote communication without a venue for physical attendance, at the sole discretion of the board of directors and without shareholder approval.

While I have always been a strong advocate of using electronic technology to inform shareholders and I support the Internet broadcasting of annual meetings, this measure appears to go too far and can easily lead to the further disenfranchising of shareholders as well as the loss of an important forum.

The Council of Institutional Investors expressed their concern about Section 7 in its newsletter dated June 15, 2000. “The proposed law could also mean that shareholders would no longer have an opportunity to question directors in person…virtual meetings could be abused by management, since shareholders can’t keep an eye on the proceedings of all-electronic meetings.”

Clearly, the result of repealing the requirement that companies convene physical shareholder meetings will be a reduction in management accountability by insulating executives and directors from shareholders.

While I’m complaining about Delaware, they could also do a better job of enabling the public to search bills, read their text and any committee analysis. Their Legislative Information System is totally inadequate. After too long, I finally found the text of SB 363 and a summary.

Stakes by Outside Directors Matter
Donald Hambrick and Eric Jackson examined companies with winning 10 year shareholder returns vs laggards and found that outside directors of winners held 4-5 times more equity in their firms than did outside directors of laggards. “Our results strongly suggest that directors with a meaningful stake are a pivotal factor in improved governance.”  Outside Directors With a Stake: The Linchpin In Improving Governance, forthcoming in California Management Review

SEC in Rewrite on Selective Disclosure
The US Securities and Exchange Commission has decided to revise its proposal regarding selective disclosure in response to complaints from news organizations. The amended proposal will reportedly allow corporate insiders to disclose material information to “legitimate” members of the press. Sources expect the final proposal to be released by the end of July. (The Corporate Library, News Briefs, June 14-20)

Women on Board in Georgia
Board of Directors Network (“BDN”) bills itself as “the only organization in the United States devoted to improving corporate governance in America through advocating gender diversity in the boardroom.”

A recent article in the Atlanta Journal Constitution (June 18th, 2000) discusses the findings of BDN’s 1999 survey. Women hold only 5 percent of the 1,808 board of director seats in public companies headquartered in Georgia. Only 13 of the 228 public corporations surveyed for a 1999 report have more than one woman director, and none has more than two.

Their survey mailing gets mixed responses, from handwritten notes telling the group “mind your own business” to wanting to learn more about their database of 500 potential board candidates.

BDN’s 1999 study also showed 162 of the 228 publicly held companies surveyed had no women executive officers listed in their 1998 SEC filings. A 1999 survey by the Society for Human Resource Management found that the number one barrier to corporate advancement for women is the lack of women on boards of directors. Therefore, BDN is not only helping women become directors but is also helping all women in corporations get ahead.

Broker Voting
We’re finally getting some attention on this issue. The Council of Institutional Investors is once again prodding the New York Stock Exchange to drop this practice. I urge readers to write to the NYSE and ask for a copy of their response to CII. Let them know this isn’t just an issue for CII.

Catherine Kinney, group executive vice president for the Office of the Chief Executive sent a letter to CII on 6/82000 that indicated they had studied the issue of broker voting and had decided to “maintain the exchanges’ discretionary voting structure with no changes.” That’s an outrage!

The Investor Responsibility Research Center carried an article in their June 23 newsletter Corporate Governance Highlights that discusses the recent exchange between CII and NYSE. In addition, it notes a study, “Does Managerial Control of the Proxy Process Disenfranchise Shareholders?” (now titledCorporate Voting and the Proxy Process: Managerial Control versus Shareholder Oversight), by Jennifer Bethel of Babson College and Stuart Gillan of the TIAA-CREF Institute.

Their research found that broker votes were associated with increasing management votes by more than 15 percent, depending on the type of proposal. As many as 4.7 percent of routine proposals might not have passed without broker votes.

I urge everyone to write to the NYSE, using the contact box athttp://www.nyse.com/about/about.html. Ask them to fax you a copy of Catherine Kenney’s letter June 8th letter to the Council of Institutional Investors.

Tell them you’d like to understand what rationale could possibly explain this continued anti-democratic practice, which dilutes the value of shareholders votes.

Board Study
Annual Study of Small-to-Midsize and Large Public Company Boards: 2000 found most directors are between 60-69. Only 13% of large company directors are women and 4% of small-to-midsize directors are women. Median pay of large firms is $35,000 vs $10,000 at small-to-midsize firms. Large firms address more issues using board committees; 33% of them have a committee dealing with corporate governance vs only 2% of small-to-midsize firms. The sample in the 2000 study includes 182 large public companies with median annual sales of $15.3 billion and median net earnings of $728 million as of December 31, 1998. It also includes 192 small-to-midsize companies with median annual sales of $149 million and median earnings of $13 million as of December 31, 1998.

Companies Reap Returns on Human Capital Investments
Shareholders of companies that already have superior human capital practices reaped huge returns in 1999, while shareholders who invested in companies with poor human capital practices lost money, according to new research by Watson Wyatt Worldwide. Companies that had received a high human capital index (above 75) in the original study provided a subsequent average 70 percent total return to shareholders for 1999. Companies with a human capital index between 25 and 75 returned just 12 percent to shareholders, while shareholders lost an average 6 percent by investing in low human capital index (below 25) companies. Want to determine where your organization falls? To complete a 36-item questionnaire and receive customized results, call 1-800-388-9868.

Option Use Grows
The “war for talent” is leading to a growing use of stock options to attract and retain employees. Almost 19% of employees were eligible in 1999, up from 12% in 1998, according to the latest survey from compensation consultants Watson Wyatt Worldwide. Average lowest qualifying salary level last year was $58,100. (reported in Directorship, June, 2000)

Mutual Fund Survey Results
Each year the Management Practice Inc. conducts a survey of mutual fund directors’ compensation. This year they found overall compensation grew by 9.1% while assets managed per director grew 7.8%. Mandatory retirement policies were in place at 64% of funds surveyed with 72 as the median retirement age. The median age of current trustees is 62 with 10 years of service. Most boards have 6-8 members, with a majority being independent. Independent directors chaired 25% of the boards and another 45% have designated one member as a “lead director or trustee.” For more survey results go tohttp://mfgovern.com and click on “Surveys & Publishing.”

Back to the topHell Freezes Over and Bargain Hunting Ends
The May/June edition of Business Ethics carried an article by Allan A. Kennedy based on his recently published book, The End of Shareholder Value. Kennedy claims “the end of the shareholder value era is drawing near.” “Managers everywhere took up the mantle of shareholder value, if for no other reason than to defend themselves from predators” during the late 1980s. In pursuit of shareholder value, managers sold off underperforming assets, downsized, cut R&D and launched buybacks.

His evidence that shareholder value has lost its mantra status? A Conference Board survey says 67% of corporations surveyed said the employment compact had changed; job security was no longer a part of it. He writes that in ten years, “virtually any employee making over $100,000 a year” will be using third-party agents to negotiate their contracts. (Maybe in 10 years my third party agent, part of the AFL-CIO, will get me a $100,000 contract…depending on the rate of inflation. What does that have to do with ending shareholder value?) Further evidence of the demise of shareholder value: suppliers have banded together, even government bureaucrats are withdrawing subsidies for plan relocation. “Companies must ensure they never again take their eye off the ball in pursuit of a false idol like shareholder value.”

Kennedy has a point; companies which concentrate on pumping up the price of their stock at the expense of employees, suppliers, government, and communities will get burned eventually. Wasn’t that lesson widely learned when thousands cheered at the firing of Al Dunlap? (see John A. Byrne’sChainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price)

Pick up any financial periodical and the evidence runs against the focus on shareholder value ending any time soon. The June 12th edition of Pensions&Investments carries an editorial on a “value rebound.” One mutual fund saw 20% of his portfolio bought by merger and acquisition activity with acquirers paying an average 60% premium. Didn’t the Dot.com sell off have something to do with investors seeking value? Open any financial publication and you’ll find plenty of money managers offering advice on where values can be found. Europe seems popular with many because they haven’t gone though the “consolidation” that US firms have experienced and “careful shoppers” can find bargains in East Asia, according the June 25th edition of BusinessWeek. The latest McKinsey study (seehttp://www.mckinsey.com/features/investor_opinion/index.html) concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.”

Kennedy has a catchy title that is bound to help him sell his book but the end of shareholder value will come at about the time shoppers stop looking for a sale. Maybe that’s happening in Kennedy’s neighborhood but I don’t see it in mine. In fact, what I see is everyone wanting to find a bargain and their willingness to band together on the Internet at places like http://eraider.comto engage in aggressive shareholder oversight to ensure that shareholders get a premium for improving corporate governance.

CalPERS Tobacco Sell Off Closer
The board of California’s giant public pension fund instructed the investment staff to draw up policy guidelines on divestiture that would apply to tobacco or any other industryCalSTRS, the State Teachers’ Retirement System recently took a similar route to divestment. See CalPERS inches closer to selling tobacco stock, Sacramento Bee, 6/20.

Good Governance Critical to Attracting Capital
McKinsey & Company completed an update and expansion of their previous “investor premium” work with a new Investor Opinion Survey, June 2000. Undertaken in co-operation with the World Bank, the surveys gathered responses from over 200 institutional investors, who together manage approximately US$3.25 trillion. Forty percent of the respondents were based in the U.S. Key findings include:

  • Three-quarters of investors say board practices are at least as important as financial performance when evaluating companies for investment.
  • Over 80 percent of investors say they would pay more for a well-governed company than for a poorly governed company with comparable financials. (A well-governed company was defined as having a majority of outside directors with no management ties; holding formal evaluations of directors; and being responsive to investor requests for information on governance issues. In addition, directors held significant stockholdings in the company, and a large proportion of directors’ pay came in the form of stock options.)
  • The actual premium investors say they would be willing to pay differs by country. Investors say they would pay 18 percent more for the shares of a well-governed UK company, 22 percent for an Italian company, and 27 percent for one in Venezuela or Indonesia.

The premium appears correlated with the perception of predominant governance standards, with investors willing to pay a higher premium where disclosure or shareholder rights are main concerns. McKinsey concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” “High governance standards will prove essential to attracting and retaining investors in globalized capital markets, while failure to reform is likely to hinder those companies with global ambitions.” See also Investors will pay for governance.

PSLRA Advances Corporate Governance Agenda
The recent Cendant settlement is seen by many as a vindication of PSLRA but its impact on furthering corporate governance is likely to have more lasting importance than achieving the original objectives of Congress.

Andrew Osterland reviews the recent settlement of a class-action suit against Cendant in the current issue of CFO magazine and concludes it may actually be good news for companies facing securities litigation. “Reason: Shareholders, unlike plaintiffs’ attorneys, have less interest in bringing a company to its knees.”

The Private Securities Litigation Reform Act (PSLRA) of 1995 was intended by Congress to: 1) reduce the number of “frivolous” lawsuits, by requiring more detail in complaints before being awarded discovery privileges, and 2) improve the recovery rates of shareholders, by increasing the role of institutional investors. Since passage the PSLRA, the percentage of dismissals has risen from 12% to about 25%. At Cendant shareholders recovered 34% of damages vs the usual 8-9%.

The PSLRA has been successful at reducing attorney fees when an institutional investor has sought lead plaintiff status but few have. Why? According to Osterland, the courts lack a clear definition of which claimant most adequately represents class members, most institutional investors lack legal staff or resources and many don’t want to upset business relationships with defendants and their Wall Street underwriters.

“CFOs now have more reason to hope that powerful institutional investors will help quash frivolous lawsuits that companies might otherwise settle rather than fight.” But if few are willing to step up to the plate, it seems PSLRA hasn’t really gone very far in achieving its goals. Perhaps the most significant outcome has been to provide activist institutional, such as CalPERS andSWIB with another tool for advancing their corporate governance agendas.

What do institutional investors want? The Cendant outcome is instructive: A majority of board members must be independent.

  • All members of the audit, nominating, and compensation committees must be independent.
  • The full board of directors must be elected annually.
  • Shareholders must vote their approval before options are repriced.

How about adding the need to split the CEO and board chair next time around? I don’t see how any board can be truly independent when the CEO sets the board’s agenda.

See CFO Magazine, June 2000, BETTER BALANCE: The huge settlement against Cendant may actually be good news for companies facing securities litigation.

OECD Activities
The May edition of NACD’s Director’s Monthly includes an excellent article by the US ambassador to the Organization for Economic Cooperation and DevelopmentAmbassador Amy Bondurant walks readers through how and why the OECD got involved in corporate Governance and her role in developing theOECD Principles of Corporate Governance. Bondurant argues that good corporate governance is essential to attracting and retaining investment, as well as an important contributor to performance. “Corporations with active and independent boards appear to have performed much better in the 1990s that those with passable, non-independent boards.” She cites a recent McKinsey study in Asia which found that “over three-quarters of respondents believe the quality of corporate governance is at least as important, if not more, than financial issues.” Her summary of the Principles is among the best I’ve seen in such a short write-up.

She also explains some of the other relevant OECD work, such as that of the Anti-Bribery Working Group. The Group monitors ratification and implementation of the Anti-Bribery Convention which entered into force in February 1999 with 34 signatory countries (20 ratified) representing 75% of world trade. See also Bribery and Codes of Corporate Conduct: An Analysis (March 2000) in their section on working papers. An additional initiative, the Good Governance Outreach, will project the Principles of Corporate Governance beyond OECD member countries, along with the Anti-Bribery Convention. The OECD is also updating its Guidelines for Multinational Enterprises to promote responsible business conduct by multinational enterprises. Its nonbinding standards cover employment, industrial relations, environment, competition, taxation, science and technology. A chapter on disclosure will be revised to ensure conformity with the Principles of Corporate Governance. Revisions are expected to be the most extensive since 1976 and will include input from labor unions and NGOs. Their internet site provide instructions on how to get involved.

Back to the topDeclaration of Independence
Lew Lederman, Chairman and CEO of Knowledge E*Volutions proposes that boards declare their independence in writing. Some “bedrocks” of such documents include: separate chair, separate board secretary and secretariat, and a separate budget. (A Declaration of Independence for Boards in the Information Age,NACD’s Director’s Monthly, May)

First All Day Broadcast
Infonet Services will Web cast seven hours of interactive investment content. “Infonet is taking advantage of technological advances to level the playing field for all investors,” said Morgan Molthrop, Infonet’s Vice President of Investor Relations. “The same strategic information will be available to mom-and-pop investors in Peoria that has, in the past, been available only to investors that run billion dollar portfolios.” The Web cast is scheduled for Monday, June 26, at 8 AM Pacific Time.

BusinessWeek’s Criticism of CalPERS off Target
BusinessWeek’s Christopher Palmeri warns, “CalPERS May Not Do as Well by Doing Good.” While CalPERS has plenty of problems, attempting to do well by doing good is not one of them.

Rather than mandating divestitures and forcing a percentage of the fund into home state projects, Angelides should leave politics out of CalPERS’ investment policy. CalPERS has a 100-person investment staff. Let them decide where the best place to make money is.

While Palmeri is right that “muddying the waters with a social agenda can mean poor results in both areas,” Angelides’ proposed policies might be closer to extending the principles of good corporate governance than shifting CalPERS to a philanthropic fund.

For example, CalPERS governance policies call for disclosure and transparency because without information shareholders cannot make informed decisions. Angelides believes it may be better to invest in our own “emerging markets” in California than in countries where political freedom, basic workers’ rights and a free press conducive to secure investments are denied. Angelides is right to take risk into account.

Certainly, it would be wrong for the State Treasurer to use his position to advance his own political ambitions at the expense of fund members and beneficiaries, just as it was wrong for other members of the CalPERS board to vote in favor of policies to “muzzle critics” in order to stay in office. However, Angelides’ plan for investing in the “double bottom line” builds on partnerships not subsidies.

Angelides has called on CalPERS to join with CalSTRS in divesting the fund of tobacco companies based on their poor performance but it is clear that health concerns and social issues have played a part as well. The board’s President, William D. Crist indicates he is “against making investment decisions based on someone’s idea of what is good or bad for society, because I don’t know where that train stops,” ”Do we one day ban investments in alcohol, handguns, and rap music?” It could, indeed, be a slippery slope. However, unlike alcohol, handguns and rap music, tobacco products cause harm even when used as directed and, more important from an investors standpoint, tobacco companies are losing lawsuits at a growing pace.

Limiting investments to where transparency, disclosure and the guarantee of basic rights such as freedom of the press exist may be reasonable proxies for minimizing risk. Similar arguments can be made for divesting tobacco. It is doubtful CalPERS will take up the mantle of a “socially responsible investment.” State Controller Kathleen Connell was only convinced to vote for tobacco divestment at CalSTRS after a broader policy of assessing economic risks was adopted. (see Why Connell did about-face on tobacco stock) It clearly pointed to the unique vulnerability of the tobacco industry to bankruptcy. Those elected by the membership are also unlikely too go too far down the SRI path off. Most enjoy an occasional beer, hunting on the weekends and/or gambling at Lake Tahoe, Reno or Los Vegas.

Palmeri decries taking social forces into account and but applauds CalPERS’ corporate governance policies, indicating they “helped the fund post solid average annual returns of 17% over the past five years.” However, the vast majority of CalPERS funds are invested passively, as an indexed fund. Whereas activist funds such as LENS and the recently createdAllied Owners Action Fund take substantial positions in companies and then announce them as targets, each year CalPERS announces its corporate governance focus list without making further investments in them from its largely passive portfolio.

Where Reforms Are Really Needed

If Palmeri is really concerned about CalPERS’ returns, he should be advocating that CalPERS put its money where its mouth is. They should take advantage of the “CalPERS Effect” by increasing their investments in focus companies prior to announcing them.

If Palmeri is really concerned about CalPERS members he should be pointing to the need for governance reforms at CalPERS itself. Although it uses the resolution process extensively in corporate governance, CalPERS has no similar mechanism to let its own members place action items on the ballot when its own board refuses to act. It also has a “Shareowner’s Forum” on the Internet but only Board members and staff can meaningfully post to it. Should CalPERS divest its tobacco holdings? Why not put the question to the membership?

Elections at CalPERS have been won with less than 6% of the vote because the board refuses to authorize runoffs. It is practically impossible to defeat an incumbent. Those in office can campaign at member expense. Campaign rules can be freely violated unless they can be proved to have changed the results. Appeals are heard by staff whose bonuses are determined by incumbents. In addition, there are no term limits and conflict of interest rules are weak. One recently reelected board member will serve out 32 years by the end of his term, while simultaneously sitting on the board of nine mutual funds.

Palmeri’s advice to leave investment policies to professional staff misses a major point of the corporate governance revolution: informed shareholders participating in governance can add value. CalPERS members are some of the best-educated retirees and employees in the nation; why not involve them in the decision-making process?

Back to the topDitching Directors
Nell Minow and John Robson argue for term limits. Why not let shareholders decide?

With sitting CEO’s stretched thin on boards, retired executives have become a popular source of directors. A recent survey of major corporations reported 86% had at least one retired CEO. Most recognize that board members grow stale and lack independence after too many years of service. In “Ditching Directors,” Nell Minow and John Robson argue that we need an impartial mechanism to weed out those whose contributions have worn thin. One common solution, mandatory retirement at age 70, effectively creates a “virtual drop-by.” They suggest, instead, term limits of 10 or 12 years of service for all directors.

Minow and Robson rightly argue that age limits are “blindly discriminatory” and a “clumsy substitute” for evaluating and replacing sitting directors. Most who have studied the issue agree the real solution is that all boards should have an effective means of evaluating individual director performance. Each board should establish performance criteria, not only for itself (acting as a collective body) but also individual behavioral expectations for its directors.

The elements of such criteria differ but those recommended by CalPERS are illustrative. Their US Corporate Governance Principles state that “minimally, these criteria should address the level of director: attendance, preparedness, participation, and candor.”

Minow and Robson argue one reason director evaluation and replacement hasn’t worked is because many don’t ask directors to sign a performance agreement going into the job. “There’s no reason why the conditions of continued director service cannot be established in a formal director’s ‘employment contract,’ just as a chief executive would enter.”

Unfortunately, the more fundamental problem is that even with an annual evaluation process in place, many boards will let mediocre directors continue. Forcing out a colleague is just too tough. As Minow and Robson note, “selective pruning of dead wood is, it seems, just too painful and disruptive.” “At Stone & Webster, a Boston-based engineering firm, J. Peter Grace sat on the board for 50 years.”

While I embrace their notion of term limits and the importance of a director-evaluation system embodied in corporate bylaws, a more ideal solution would be opening up the nomination process to shareholders.

Shareholder participation and free discussion, such as what occurs on the eRaider bulletin boards, can add value to the firm. Directors faced with the real possibility of being replaced by shareholders would rationally choose to be more responsive to shareholder issues and avoid self-interested actions, such as the golden parachutes and dead hand pill we see at Comshare. Directors who can easily be held accountable by shareholders will have a greater tendency to direct in a manner beneficial to shareholders than do directors where shareholders can only note their displeasure by withholding their vote without a practical alternative.

When eRaider or other serious minded shareholders discuss the issues facing a corporation, such as Employee Solutions orComshare where are the directors? Certainly, liability issues come into play but perhaps more important is the fact that currently it is extremely difficult for shareholders to hold directors accountable, so why bother?

Mandatory term limits are a good fall back but what is really needed are directors who face real contests, where shareholders decide who will stay and who will go.

Back to the topChina Shifts
Bank of China (BOC) President Liu Mingkang told the 2nd Asia Development Forum that China was involved in a three step approach. Initial reform from 1978 to 1993 focused on enterprise autonomy. From 1993 to 1998 the Chinese government focused its efforts on sound corporate management. Beginning in September 1999, the Chinese government began to focus on six key elements of corporate governance:

  • a set of clearly defined strategies with a broad vision,
  • a transparent and sound decision-making process,
  • information disclosure arrangement based on prudent accounting norm and practices,
  • the establishment of well-defined accountability, responsibility with strict & explicit targets as well as relevant effective motivation schemes and checking mechanism,
  • a system ensuring independent, full and good play by all board members and fairly protecting interests of all shareholders, and
  • education and cultivation of the staff at all levels. corporate governance. (Xinhua News Agency, China Tries to Plant Good Corporate Governance Into SOEs, 6/7)

CalSTRS Swears Off Tobacco
The State Teachers’ Retirement System became America’s biggest pension fund to dump most of its tobacco industry holdings; is CalPERS next? The motion was made by state Treasurer Phil Angelides who will take his battle to CalPERS at its June 19 meeting. Through last week the tobacco sector was up just over 15% for the year, making it a leading performer. However, Angelides blamed a “free fall” in tobacco stock prices for costing the two pension funds a combined $600 million in lost stock value in 1999. Although their was much talk about health issues and the need for consistency with educational policies, board members based their decision on various reports that legal and financial pressures facing the tobacco industry threaten to throw it into bankruptcy and jeopardize CalSTRS’ tobacco holdings. see Sacramento Bee, 6/8, CalSTRS letting go of tobacco: Fund’s $238 million in shares to be shed.

Angelides is also calling on CalPERS to strengthen its standards for investing in foreign emerging-market stocks and bonds by analyzing financial criteria such as market liquidity, shareholder legal protections, and currency risk — along with screens to ensure political freedom, basic workers’ rights and free press conducive to sustained growth before funds are invested. His proposal is based on the premise that free markets, democracy and prudent financial standards offer the most optimum soil for cultivating growing returns. Are social goals compatible with high return on investments? Limiting Investments To Free Markets Will Offer Solid Returns writes California Treasurer Phil Angelides in the 6/5 San Francisco Chronicle.

Back to the topWomenconnect.com Offers Advice
The latest issue of <a href=”http://www.boardroominsider.com”>Ralph Ward’s Boardroom INSIDER, as always, carries many interesting tips for boardroom occupants. In one item Ward brings our attention to Womenconnect.com<a href=”http://www.boardroominsider.com”>which offers a rich selection of advice and articles for women in business. Their Boardroom Bound<a href=”http://www.boardroominsider.com”> offers advice on how to establish yourself in your first board seat no matter your gender.

Exposure Draft Released by Panel on Audit Effectiveness
The Panel on Audit Effectiveness released an Exposure Draft of its Report and Recommendations. The Panel’s recommendations are addressed to many constituencies: the Securities and Exchange Commission (SEC), standards-setters, firms, the American Institute of CPAs, corporate audit committees and others. The Panel will hold public hearings on July 10 and 11, 2000 to obtain the views of interested individuals and organizations about the recommendations of the Panel in the Exposure Draft. Written comments are invited by July 21, 2000. For details on how to participate in the public hearings and/or to submit written comments, please see “Public Hearings/Written Comments.”

Trouble at Mattel Meeting
Shareholder activist John Chevedden reports that at its 6/7 meeting newly appointed Mattel Chairman Robert Eckert “refused to release voting data by percentage or by numbers for any of the 6 items for vote. He merely said that the shareholder resolution to redeem the poison pill passed, the directors were reelected and accountants ratified.” Later Mattel issued a press release noting a 65% yes vote for Mattel to redeem its poison pill.

TIAA-CREF Proposals Supported
TIAA-CREF announced it won considerable support for shareholder resolutions it submitted to two companies with dual class common stock – and insider-dominated boards. The resolutions, at Cablevision Systems and Telephone and Data Systems, advocate independent boards. Each company is currently controlled by a particular group that has 10 votes per share, whereas public shareholders such as TIAA-CREF have only one vote per share. This stock structure violates the principle of one-share, one-vote, which TIAA-CREF regards as a bedrock principle of shareholder democracy.

At Cablevision the resolution reportedly won the support of an estimated 43% percent of shares voted that TIAA-CREF regards as independent of management. Similarly, at TDS’ annual meeting, holders of its common shares, excluding Series A common shares which are controlled by a family voting trust, cast 45 percent of their shares in favor of the TIAA-CREF resolution. (PRNewswire, 6/7)

Bug Biggs Campaign
Campaign for a New TIAA-CREF got some major publicity recently with a major article in the Los Angeles Times on 5/28. TIAA-CREF acknowledges that Neil Wollman was a player in the 1980s effort to get the company to launch Social Choice, which now boasts $4 billion in assets, but says he was not the catalyst. Neil Wollman and Abigail Fuller now want the company’s socially screened fund to set aside a portion of its assets–5% to 10%–to invest in community development projects and in venture funding for young firms that meet positive screens (by using environmentally friendly technology, for example, or exemplary hiring practices). TIAA-CREF wants to rely solely on negative screening. Want Your Retirement Fund to Put Your Money Where Your Heart Is? If so, mark your calendar for the next two Mondays and call CREF’s Chief Executive John Biggs at 1-800-TIA-CREF (842-2733), ext. 4280.; or 212-490-9000).

Back to the topCanadian Retail Investors Double 
In 1989 only 23% of Canadians held equities directly or indirectly; now 49% do according to a study conducted a Toronto Stock Exchange/World Investor Link study reported inInvestor Relations Business on 5/29. Only 4% trade on a daily basis; 40% hold stock for at least a year. The internet is a key factor in the growth of retail investing. Client rules, which changed in February, no longer require brokers to check with investors when they make a trade not in line with their typical investment objectives.

Dotcom Investors Flip
Shareholders keep their GE stock for an average 3.5 years, Microsoft for 3.5 months and Yahoo! for 3.5 days, according toGlenn Pascall, senior fellow at the Institute for Public Policy and Management. Pascall estimates that as many as 75% of new dotcoms will be swallowed by more established firms with better shareholder retention. A convincing long-term business plan can encourage investors to hold, as was the case with Amazon.com which remained relatively stable when the dotcom sector plummeted. Investors believed Jeff Bezos had an effective long-term strategy. Another strategy to retain at least some shareholders might be offering a direct stock purchase plan. Yahoo! recently became the first Internet company to do so. (Investor Relations Business, 5/29)

Labor & Corporate Governance
Proxy Voter Services (PVS), a division of Institutional Shareholder Services (ISS), has launched a no-cost newsletter designed to review proxy issues of current interest to multiemployer plans and to serve as an informational resource for trustees and investment professionals. Labor & Corporate Governance will provide readers with an up-to-date review of corporate governance issues and how they affect multiemployer and labor funds.

Green Power
Prompted by government pressure on institutional investors to act socially responsible, another U. advisor is marrying corporate governance to social issues analysis. Manifest, the Essex-based voting agency and governance specialist began its “Green Card” service. In partnership with London advisor Environmental Governance Ltd. (EnG), Manifest is rating top UK companies on environmental risk. The firm offers scores based on individual investor guidelines. Or clients can choose a set of default weightings.

CalSTRS Adopts Divestment Policy
The California Teachers’ Retirement System adopted a broad policy which may set the stage for tobacco divestment at its June 7 meeting. As reported by Pensions & Investments, 5/29, the new policy would allow divestment when three of four indicators have been met.

  • industry faces potential combined product liability judgments greater than net worth;
  • significant threat of industry-wide bankruptcy filings;
  • regulations/legislation which may substantially impair earnings; and
  • collective action by institutional investors has potential to drive down share prices.

Disclosure Theme at Asian OECD Roundtable
Organization for Economic Cooperation and Development’s 2nd Asian Roundtable on Corporate Governance opened in Hong Kong with disclosure as the theme. The role of the board of directors in overseeing disclosure, accounting and audit and non-financial disclosure such as related parties, ownership structures and government policies will also be examined. The First Asian Roundtable organized by the OECD was held in Seoul in March 1999.

Family-based business structures and poor enforcement of corporate laws will hinder adoption of international governance standards for another generation, according to Olivier Fremond of the World Bank’s corporate governance unit. The 53% rebound in the stockmarket during 1999 rewarded managements without requiring adoption of international norms. With China needing capital and about to enter the WTO, it is likely to drive corporate governance reform. “You can talk about different cultures and traditions and they do play an important role, but ultimately efficiency, fairness and accountability are principles that need to be employed in Asia,” Fremond said. “The force behind this is going to be the institutional investor.” (Reuters, 5/31, Good governance a generation away in Asia-W.Bank)

Australian Institutional Investors Apathetic Voters
A study by the Centre For Corporate Law and Securities Regulation found that, in companies with a wide shareholder base, proxy instructions for resolutions about the election of directors accounted for only 35% of possible votes in 1999. Similar figures applied for controversial and major resolutions. This compares with 80% in the US, 73% in Germany and 50% in the UK. (Sydney Morning Herald, 5/30, Institutions urged to use voting rights)

Reliance on Global Equity Grows
Companies in France, Germany and Japan are becoming increasingly dependent on open market equity for financing their expansion-they are becoming more like companies in the US and UK, according to the latest issue of The Conference Board’s Institutional Investment Report. The largest 25 US pension fund holders of international equity, held $265.6 billion in international stocks as of September 30, 1999. These 25 pension funds accounted for roughly 66% of the $403.7 billion foreign equity held by all US investors in the third quarter of 1999. This represents a phenomenal 24% increase from the third quarter of 1998 when the largest 25 pension funds held $181.1 billion, roughly 42% of $432 billion of all US foreign equity. In 1996, the largest 25 pension funds’ share of all US foreign equity was only at 28%, or $110.8 billion out of a total $397.7 billion. This small group of investors hold tremendous leverage. (see press release)

SEC Rulemakings
The SEC is soliciting input on concepts and proposed rules. Two which deserve attention are File No. S7-04-00: Concept Release on International Accounting Standards and File No. S7-04-00: Electronic Filing by Investment Advisers. I’ve posted my comments on both on our Commentary page or go directly toaccounting or advisors.

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