Archives: September 2000

Proxy Monitor Acquires Investors Research Bureau

Proxy Monitor, a leading proxy voting advisor to institutional investors, announced its acquisition of Investors Research Bureau, Inc., publisher of Securities Class Action Alert, the authoritative publication on federal securities class action lawsuits.

“Tracking securities litigation, and making sure that they participate in settlements and judgments, is an increasingly important compliance responsibility for our clients,” said James E. Heard, Proxy Monitor’s CEO. “This acquisition will enable us to provide Proxy Monitor’s clients with timely, accurate and comprehensive information about class action suits nationwide.”

“Decisions by institutional investors to become lead plaintiffs and record-setting settlements such as last year’s $3.42 billion Cendant Corporation’s settlement underscore why institutional investors need to carefully track securities litigation,” says Newman. “I am very excited at the opportunity to be a part of Proxy Monitor and to have a chance to work with Proxy Monitor and its clients while also continuing to serve existing Securities Class Action Alert clients.”

Pension Board Sets Own Course

The California Public Employees’ Retirement System’s board voted to invest $125 million in CIM California Urban Real Estate Fund, despite objections from investment staff who recommended only $50 million because of the firm’s inexperience managing money for institutions, according to the ISS Friday Report, 9/22. California Treasurer Philip Angelides (who often favors the “double dividend” of investing in California), State Controller Kathleen Connell and CalPERS President William Crist objected to the investment. The Sacramento Bee reported that former board members Villalobos and Shimada, as well as retired state state Senator William Campbell, will split a $2.5 million “placement agent” fee from CIM.

Name and Shame

Regulations which took effect in July required UK pension funds to disclose the extent, if any, to which “social, environmental or ethical concerns are taken into account in the selection, retention and realization of investments.” They don’t need to create such policies but, if they have them, they must be disclosed. Expectations are that fund managers and analysts will be under pressure to become familiar with socially responsible investment practices if they want to attract pension fund business. Friends of the Earth and others have promised to name and shame those funds that state they apply no social, environmental or ethical considerations but others warn that fund trustees aren’t the nation’s moral arbiters; that’s government’s job. To learn more see, U.K. Pension Funds Forced to Reveal Ethical Policies, Kit Bingham, ISS Issue Alert, 7-8/00.

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AFSCME Sides with Tenet

The American Federation of State, County and Municipal Employees, owner of 6.5 million Tenet Healthcare Corp shares valued around $235 million, urges Tenet shareholders to reject a slate of dissident directors headed by Dr. M. Lee Pearce and to support Tenet’s nominees. Their letter, cites Pearce’s conflicts of interest with Tenet and its shareholders and his lack of qualifications as a corporate governance reformer. Once again working capital is leading with full disclosure and smart tactics. See AFSCME Lobbies Shareholders to Vote Against Dissident Slate at Tenet Citing Group’s Conflicts of Interest, Checkered Governance Record.

However, California’s public employee pension system CalPERS has announced its 1.8 million Tenet shares will support the Pearce slate, citing Tenet’s failure to honor shareholder votes for annual director election and proposed “excessive” stock option grants to board members. Institutional Shareholder Services (ISS), the nation’s leading institutional shareholder advisory firm and provider of corporate
governance services, has also sided with the dissident nominees. ISS wrote in its report, “the incumbent board has shown a brazen indifference toward shareholder demands over the last few years. We also harbor concerns about senior management’s equity participation in Tenet’s Broadlane joint venture.”

ISS was particularly biting in its commentary on Tenet’s corporate governance philosophy: “Management … believes that varying industry and regulatory forces demand that directors take a longer-term view of company strategy and that a staggered board provides the continuity to achieve that end. This paternalistic argument — that shareholders somehow must be saved from themselves — does not hold water in today’s investment and corporate governance landscape. Effective corporate governance depends upon the board being accountable to shareholders … and we believe the Tenet board has failed on this account.”

Investor Relations Advice

Investor Relations on the Web by Stephen J. Dolmatch & Amy L. Goodman offers excellent advice in a reprint from American Corporate Counsel Association Docket Magazine. Find it free on Companies are responsible for the accuracy of their Internet postings if they “reasonably can be expected to reach investors or the securities markets.” The article focuses on reviewing your firm’s entire website from the standpoint of securities law disclosure. Major points: avoid the duty to update through the use of archives, use disclaimers, hyperlink with caution, take special precautions before and during securities offerings, avoid a general solicitation of company securities, beware of chat rooms and message boards, recognize the limitations the SEC has placed on the Internet for fair disclosure, but take advantage of the tremendous opportunities the Internet offers for investor communications.

Corporate Rule or Shareholder Loss?

Russell Mokhiber and Robert Weissman’s latest article,Withering Democracy, calls attention to political contributions by corporations. Every major industrial sector except for communications/electronics now favors the Republican Party but most hedge their bets by contributing to both. Already, corporate contributions are 50 percent higher than in the 1992, and there’s plenty of time to go. “The system formally remains one of one person, one vote, but is it the people or the corporations who rule?” I would further question if such contributions are a wise investment of shareholder resources. The trouble is that one company can’t easily stop unless their competitors do as well. Campaign reform would pay double; more democracy for citizens, more money left for shareholder dividends or reinvestment.

Improving Survival of Family Firms

Privately-held companies have the advantage of being able to make long-term strategic decisions based, on “patient capital” but only if family members trust each and share a common vision for the company. Research by Wharton’s Family-Controlled Corporation Program (FCCP) focuses on relationship dynamics that include trust levels, goal agreement, a participatory culture and views on the long-term health and competitiveness of the business. Family leaders should invest time in building unity among shareholders and professionalizing the strategies and structures through which they interact, according to FCCP director Timothy G. Habbershon. Why they don’t and how they can are the subjects of a research paper, Improving the Long-run Survival of Family Firms.

Corporate Governance Responsibilities Outlined

Simeon Chanduru, partner in charge of Business Risk Consulting, Ernst & Young Zimbabwe, highlights the duties and responsibilities that directors assume when they accept appointment to the board in Zimbabwe’s The Financial Gazette, 9/21. For a Malaysian perspective, see Corporate governance way to renew vigour, by Cheah Foo Song,, 9/5.

Corporate Governance in the New Economy – Singapore

The New York Institute of Finance is offering a course in Singapore (30 October – 1 November 2000) which will cover topics such as: the legal environment for directors, what makes an effective board, how to assess board performance, minimizing risk, financial statements and audits, strategic planning, employee issues and future trends. For more information contact Calyn Siew, Director – Marketing (Asia Pacific), New York Institute of Finance, Tel : +65 236 9690.

Size Does Matter

As we reported last month, Dan Dalton and Catherine Daily, both of Indiana University, have found a positive correlation between large boards and performance. They reviewed 27 studies published over the last 40 years covering more than 20,000 firms. (Number of Directors on the Board and Financial Performance: A Meta-Analysis. Academy of Management Journal) In August’s Director’s Monthly, the authors explain that larger boards are better able to secure critical resources through the networks their directors create. In addition, larger boards allow coalitions to form that are more likely to challenge CEOs and moderate their dominating influence, they promote diversity and they provide an indispensable training ground for succession planning.

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Board Investments Make Difference

Donald Hambrick and Eric Jackson tracked the level of stock ownership at companies over a 10 year period and found that board members held an average $470,000 for top perfomers in each sector, in comparison with $80,000 for poorly performing companies. They suggest a matching purchase program so that each board member would have at least 5% of their net worth invested in the companies they serve. (CFO, September 2000, page 27)


Webcasting of conference call is now up to 61%, compared with 48% six months ago, according to a survey by the National Investor relations Institute. Hybrid pensions, including cash balance plans, now make up 32% of the Fortune 100’s plans, according to Watson Wyatt Worldwide. Pearl Myers survey finds that 17.5% of largest 200 firms offer stock options to all employees. Corporate giving as a percent of pretax income declined between 1986 and 1996 from 2% to 1%. aims to create greater transparency within Europe’s pension fund industry by providing news and information, analysis, statistics, company details and jobs in an interactive format. International Federation of Accountantsinvites comment on their code of ethics regarding independence.

CalPERS Shouldn’t Ignore the Law

The California Public Employees Retirement System Board recently voted themselves pay increases and higher reimbursements to their employers so they can put in more time on Board activities. See CalPERS board votes itself big pay increase, Sacramento Bee, 9/20/00. On the surface their action sounds fine, but the Board is ignoring the law and risks permanent alienation from its members.

Government Code, section 20092 limits the reimbursement CalPERS can provide to a Board member’s employer to an amount “not to exceed 25 percent of the member’s total annual compensation.” The wise men and women who created CalPERS wanted to ensure those elected by the System’s members remain well connected to the membership. Yet, a majority of the Board voted reimbursements well beyond the legal limit of 25%, voting increases ranging from 60% to 90%.

Article XVI, section 17 of the California Constitution, enacted by Proposition 162, gives the Board sole and exclusive fiduciary responsibility over the Fund. The Board now argues, that it is “impossible” for them to fulfill their fiduciary duty if they are “limited to the 25 percent cap specified in Government code 20092.”

Several of the same Board members previously invoked this same Constitutional authority in an attempt to ignore public participation and other requirements of the rulemaking process. Thankfully, both the Office of Administrative Law and the court thoroughly rejected their argument. (see OAL Determination 18, requested by James McRitchie, and Kathleen Connell for Controller et al v. CalPERS Board of Administration, Sacramento County Superior Court Case No. 98CSO1749.)

The purpose of Prop 162 was to prevent raids, limit political interference and firmly establish the System’s primary obligation to its members. It was never meant to allow the Board to avoid public scrutiny or to place itself above the law.

A majority of the Board now argues they need more time to do their jobs. President Crist, for example submitted a claim that he is working up to 105 hours a week on CalPERS activities. However, previous testimony by Dr. Crist revealed that he counted time for sleeping because he dreams of CalPERS. Questioned about counting more hours of work than there are in a week, Dr. Crist joked that he had passed over the international dateline.

Do Board members really need more time for trips to Frankfurt, Paris and Sardinia? Conference providers are eager to pay their expenses because they attract attendance from firms that want to sell investments and services to the world’s largest pension fund. However, the benefits to members are questionable.

Board members who spend little time with their fellow workers, who are wined and dined all over the world and who can look forward to $800,000 “placement fees” for selling investments to CalPERS once they leave the Board are unlikely to relate to member needs for health care or disability claims. (see also CalPERS may boost board pay, Sacramento Bee, 9/20/00) When we worked and voted to enact Proposition 162, we did so to keep greedy politicians from diverting our money. We never dreamed it would be used by the Board to place themselves above the law.

CalPERS Board members should get a pay raise and there should be some adjustment in the 25% ceiling. However, they should do so by seeking a change in the law, not by ignoring it. In the words of a previous Sacramento Bee editorial on the Board’s election process, let’s not “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (see CalPERS muzzles critics, Sacramento Bee, 5/25/99)

The Board should take a direct approach and seek the necessary changes in statute. However, if a majority on the Board wants to maintain the legal fiction that Prop 162 places them above the law, they could “save face” by calling for “cleanup” legislation. They could argue, for example, that although the Constitution gives them the authority to raise the ceiling, they are seeking Legislative concurrence in order to remove any inconsistency in statute. Either way, members should demand that CalPERS not ignore the law and the need to change it.

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Reg FD Criticised By Trade Associations

Fair disclosure rules which take effect October 23rd are still coming under fire from trade associations like the Financial Executives Institute which says two business days would have been more reasonable than 24 hours for reporting accidental releases. Their members may only recognize the significance of information provided once analysts use it. Stuart Kaswell, of the National Investor Relations Institute, says “many companies will probably clam up. Reg. FD creates an uneven playing field and stymies competition – it will do the exact opposite of what it’s intended to do.”

However, an analysis by Investor Relations Business says “those companies that make it a point not to practice selective disclosure say that the rule will not change much of what they did before.” If those who have been selectively disclosing “clam up,” the regulation will have served its purpose. FD mandates an even playing field for information users. Those who are not adept at providing it fairly are likely to stumble. Its up to trade associations like FEI and NIRI to build their membership and provide training so that companies have an even playing field when it comes to knowing what information is likely to be deemed materially significant. The competition for providing good information on how to live within the rules may be just beginning.

Backers of FD, such as the Council of Institutional Investors are right, analysts who owe a company for selective disclosure aren’t producing objective reports. FD isn’t a perfect solution but it certainly is a step in the right direction. I doubt if it creates the precipice that critics imagine but only time and future SEC enforcement actions will tell. (see Criticism of Reg. FD Continues, Investor Relations Business, 9/11)

Paid Exposure offers monitoring and reporting exposure. Companies can send in a brief summary, and $11,250 for the first 90 days. The company also collects a fee from companies for arranging introductions to outside analysts and distributing research to brokers and investors. According to Investor Relations Business (9/11),’s 18 own analysts write reports “at their own discretion.” Companies covered “have no control over the content of reports.” Of course if their reports are unfavorable, companies aren’t too likely to renew, are they? They are reportedly “in negotiation with six or seven companies” for their services.

I’ll be stopping by their site now and then to see how business is going. I’ve got a feeling the SEC might also be popping by for a visit.

Group Under PSLRA Defined

Group created by Milberg Weiss Bershad Hynes & Lerach isn’t a “group” within the meaning of the 1995 Private Securities Litigation Reform Act, according to U.S. District Court Judge Jeremy Fogel who held it “beyond dispute that one of the Reform Act’s primary purposes was to eradicate lawyer-driven securities fraud class actions.” The Policemen and Firemen retirement System of the City of Detroit was awarded lead plaintiff status instead, even though the reportedly alleged half the damages of the solicited group. (Corporate Governance Highlights, 8/25)

Exec Pay Levels Inconsistent With Healthy Democracy

CEO compensation rose 535% in the 1990s, while the S&P 500 rose 297%, according to a report by the Institute for Policy Studies and United for a Fair Economy. If the minimum wage had risen as quickly, it would now be $24.13/hr. instead of $5.15. The trend toward greater inequity “is inconsistent with a healthy democracy, according to the Institute. Top execs as 50 top Internet firms held an average $235 million in unrealized options. The report also expresses concern that an increasing gap between top level public and private sector execs will lead to a government brain drain, especially since 65% of government’s senior execs will be eligible for retirement by 2004. (ISS Friday Report, 9/8)

In a related item, a PricewaterhouseCoopers survey found Internet firms are transitioning to exec compensation packages similar to traditional firms, large base salary and bonuses for meeting revenue and profit goals. Fewer managers are now willing to accept lower cash compensation. (ISS Friday Report, 8/25)

Labor Coalition Blocks Insider Takeover

The AFL-CIO and the Paper Allied-Industrial, Chemical and Energy Workers Union won a vote against the Crown Central Petroleum insider Takeover by Rosemore Acquisition, run by the Rosenberg family which also owns a controlling interest in Crown. The Rosenbergs controlled nearly 46% of Crown’s voting power but the offer required a two-thirds majority of all shareholders. Labor’s clout in corporate governance continues to grow. (ISS Friday Report, 8/31)

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Europeans to Disclose Executive Pay

Disclosure of executive pay is taboo no longer in Europe, according to a 9/11 report in the Wall Street Journal. In France the Socialist-led coalition government wants to require it through federal regulations. The Irish Stock Exchange has mandated salary disclosure a condition for listing. “The writing is on the wall: Secrecy is on the way out for executive pay,” says Stephen Davis of Davis Global Advisors.

Dick Cheney: Corporate Governance Hero Or Political Greedhead?

The usually obscure world of “golden parachute” payments to departing chief executives has burst into the headlines with media fretting over the rich package Haliburton Corp. is paying departing CEO (and US Republican VP nominee) Richard Cheney. The Haliburton board’s fond farewell drew fire for its richness (originally $20 million by some estimates) and for its unvested stock options (currently worth over $13 million) that Cheney announced on September 1 he’d abandon.

But the fuss is based far more on political perception than on corporate governance reality, says Ralph D. Ward, publisher of online newsletter Boardroom INSIDER and a speaker on governance issues. “Corporate boards should – and do – get slammed for giving fat parachutes to failed CEOs” he says, citing the recent controversial cases of Mattel chief Jill Barard and Times Mirror’s Mark Willes.

At Haliburton, however, Ward notes that Cheney spent the past five years building shareholder value, boosting company sales to $14.9 billion in a tough industry (up 14% in just the last year). Cheney even shaped a solid succession plan that leaves the respected David Lesar in charge. “This is just the sort of performance by a corporate leader the Haliburton board should reward.”

Ward adds that CEO pay and severance packages are not designed solely to keep chief executives at the company, but to drive them toward — and reward — excellence during their tenures. “Do shareholders want CEO pay incentives to incent, or don’t they? The Cheney controversy suggests that the difference between the worlds of corporate governance and politics seems to be that the former rewards achievement, while the latter punishes it.” (Editor’s comment: The stock option award set up a potential conflict of interest that had to be addressed. Both corporate governance and politics should reward achievement and demand independence, neither of which were likely with the conflict of interest Cheney faced before abandoning the stock options.)

Click Locally, Vote Globally

That’s the reported unofficial motto of, a new service of Institutional Shareholder Services, which will enable institutional investors to customize their proxy voting policies and vote online for 9,000 US and 8,400 nonUS firms. (see Proxymaster website to offer proxy voting, Pensions and Investments, 9/4 or contact )

Analysts Need to Retool

An editorial in Pensions and Investments (Everyone an Analyst, 9/4) praises the SEC’s rule requiring broader disclosure and calls on analysts to take a new role in providing “value-added interpretation of data.” “Analysts have spent far too much time trying to estimate, with the help of nods and winks form corporate managments’, next quarter’s earnings per share. But research suggests analysts’ earnings estimates, despite the information from corporate managements, are unreliable.”

Severance Pay Reaches Obscene Levels for Failure

Louis Lavelle editorializes in Business Week the with regard to CEO pay, “Nothing Succeeds Like Failure.” Looking at the severance packages of failed CEOs, Lavelle finds them “insulting not just to us workers, but to shareholders as well.” The latest evidence is the $9.5 million bonus given to ousted Durk I. Jager by P&G, even though during his short 17 months the stock is down 50%. “Directors should take the lead of Sunbeam Corp. (SOC), which after firing Albert J. Dunlap in the face of a disastrous restructuring and allegations of accounting improprieties, resisted his demands that he be allowed to accelerate all of his outstanding options.”

Business Week Calls for New Social Contract

Noting the American people are upset with corporations who invade their privacy, overwork and underpay them, threaten their safety and buy off their government, a Business Week editorial (9/11) (subscription required for link) calls on corporations to take the following steps:

  • Embrace the McCain/Feingold campaign-finance-reform legislation
  • Take responsibility for overseas factories
  • Spread option grants to more employees
  • Curb CEO pay

Cultural Exchange Promoted by Japanese Businesses

Japanese firms have gotten the message…more independent board members are needed to ensure better alignment of management and shareholder interests. However, in “High-profile foreigners take seats in Japan’s boardrooms” the Financial Times rightfully questions the value of substituting senior executives with little experience in other industries with foreign dignitaries.

FT notes that Corazon Aquino, recently appointed to the board of Sanyo Electric, is “more famous for her yellow dresses than her knowledge of semiconductors.” Former US vice president, Dan Quayle, has joined the board of Aozora Bank, the former Nippon Credit Bank. “Analysts warn the external director system may end up being little more than a cultural exchange between Japanese and foreign businessmen.”

Brazilian Reforms Stall

Corporate governance reform has been postponed again and a vote will not come until after the October elections. Under the stalled legislation, ordinary shareholders would be guaranteed the same selling price when a company is taken over as those with a controlling interest. Minorities with a stake of 15 percent or more would be entitled to a seat on the board. The powers of Brazil’s securities regulator would be strengthened and insider trading would be outlawed.

An editorial in the Financial Times says the reforms should go further, claiming that preferred shareholders should also receive “tag along” rights to the same selling price. In addition, they should consider an “alternative stock market on which only those companies meeting best practice of corporate governance and transparency could be listed.” Editorial comment: Brazil’s market, 9/6

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Ten Step Plan for Better Boards

The Board Book: Making Your Corporate Board a Strategic Force in Your Company’s Success bycover Susan F. Shultz is one of the most readable guides for directors available. The majority of the book is devoted to individual chapters on each of ten critical mistakes which boards commonly make:

  1. Failure to recruit strategically
  2. Too many insiders (more than two)
  3. Too many paid consultants (should have no paid; no more than two venture capitalists)
  4. Too much family (should have 3 independents to each family member)
  5. Too many cronies, interlocks and conflicted directors
  6. Getting the money wrong (CEO and board pay should be performance based in line with company pay scales)
  7. Fear of diversity
  8. Information block (should be open, unrestricted and effective communication)
  9. Passive boards (should be proactive, independent and strategic)
  10. Failed leadership (should have strategic leadership, positive culture, effective meetings, member rotation and transparency)

Shultz also includes a discussion of director liability and future board trends. Appendices contain additional resources:

  1. Comparing statutory and advisory boards
  2. List of actions requiring board approval
  3. Sample corporate governance guidelines
  4. Fortune 500 firms without women directors
  5. Sample director’s evaluation of a CEO
  6. Sample board evaluation
  7. Sample board self-assessment
  8. Governance resource list

Shultz interviewed an impressive list of academics, attorneys, CEOs, consultants, directors, institutional investors, and others for background material. This allows her to pepper her book with real life examples and compelling stories. The Board Book can help boards avoid common pitfalls and investors act like owners, instead of speculators.

Ethical Laws and Investments Go Hand In Hand

In “Look Who Demands Profits Above All” (Los Angeles Times, 9/1) former Secretary of Labor, Robert Reich, argues that CalPERS and TIAA-CREF are only doing their job, maximizing the value of their investors’ portfolios, when they refuse to consider ethics in their investments. “If we want companies to be more socially responsible, we’ll have to pass laws requiring them to be so, and those laws will have to be enforced. And not just national laws…ultimately, many such laws will have to be international.”

Reich appeared to take a much different position while at the Department of Labor when he released a booklet, “Road to High-Performance Workplaces: A Guide to Better Jobs and Better Business Results” which argues:

  1. High performance companies view their workers as valuable assets and make investments accordingly. Training is viewed as continuous, with a commitment to life-long learning.
  2. High performance workplaces encourage workers to accept multiple new roles as problem-solvers, self-managers, and entrepreneurs. Management also invites workers to participate in the day-to-day activities of the company.
  3. High performance companies gain long-term worker commitment by creating compensation systems tying pay to individual, team, and corporate performance. Such companies also seek to make executives more responsive to shareholder concerns by linking executive compensation to longer-term corporate goals.

While his more recent statement is true, international laws are needed and must be enforced, it is also true that pension and mutual funds have an important role in finding the correlation between responsible investments and positive returns. SRI funds have been out-performing the market, not just because they identify good management and reduce liability, but because SRI funds recognize social trends and consider them an essential part of their investment strategy.

Tobacco is one example. It can only be profitable if we give little value to life and society agrees to pay for the health care needs which tobacco use creates. The Council for Responsible Public Investment estimates that California looses more than $10 billion a year from tobacco use due to health costs and time lost at work. As these “hidden” costs are revealed tobacco profits erode. Outraged citizens demand litigation, increased taxes, reduced subsidies, etc. SRI pension and mutual funds will outperform where they can identify the convergence of investment opportunities and social concerns.

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