Archives: February 2001

Allied Owners Action Fund to Call it Quits

Allied opened for business the same day the Nasdaq reached its all-time high. Now according to “Heard on the Net” at the Wall Street Journal (2/27), the fund is shutting down and returning the money invested by its 300 shareholders.

Allied invited investors and the public people to visit theirmessage boards, recommend underperforming companies and strategize. They aimed to give individuals the same governance clout as institutions such as the California Public Employees’ Retirement System. However, they largely went after relatively obscure firms with a low ratio of activist institutional investors.

Although the Wall Street Journal article indicates that other such “naked funds” such as Metamarkets Investments LLC’s Open Fund and Inc.’s Community Intelligence Fund are also down heavily, they also report that IPS Advisory Inc. plans to launch the IPS iFund shortly. Unlike other community-oriented funds, such as Allied Owners, where professional managers have final say on portfolio decisions, at the iFund shareholders will submit picks and vote on which stocks should be bought. For more on the collective intelligence of the mob, see Out Of Control.

Ownership Intensity Brings Gains

A study by Hewitt Associates found that companies ranking in the top half of their “ownership intensity” index had an average cumulative return to shareholders of 16 percent higher for the 1995-2000 period than those in the bottom half. Ownership intensity is a measure of the degree to which employees receive an equity stake, how much corporate information is shared with employees, and how much employees can influence day-to-day decisions. (Employee Ownership Report, 3-4/2001) Also reported in the same issue, one third of the households in Santa Clara County, California, have stock options.

Malaysian Shareholders Rights

Minority shareholders would gain derivative action and cumulative voting rights under recommendations outlined in the Capital Market Masterplan unveiled by the Securities Commission (SC). Datuk Megat Najmuddin Khas, president of the Malaysian Institute of Corporate Governance and one of the authors of the plan, explained that controlling shareholders “have their own agenda, which may not be the same as that of the minority shareholders and investors.” In addition, the SC is considering disclosure requirements regarding how securities issuance, restructuring, takeovers and merger exercises add value to shareholders. (, 2/23)

Disclosure Deadline Delayed

The Johannesburg Securities Exchange delayed a requirement that listed companies disclose directors salaries. Instead of an October 2000 implementation, the requirement will now take effect in March 2002. Objections have been that if directors revealed their remuneration, they or their families could become the targets of kidnappers or hijackers. (Africa News Service, 02/23)

CalPERS Emergency Election Rules Invalidated

Sacramento Superior Court judge James T. Ford voided emergency regulations filed by the California Public Employees Retirement System which had made several changes in the Board’s election process. Judge Ford ruled that the Board’s finding of emergency did not meet the statutory requirement that they were “necessary for the immediate preservation of the public peace, health and safety or general welfare.” The revisions would have allowed candidates to communicate more freely with members of the System and included language indicating that CalPERS staff cannot favor one candidate over another.

Lens Focuses on Metromedia International Group

Lens Investment Management, LLC, founded by Robert A.G. Monks, has taken shareholder activism to a new level by holding a meeting for shareholders of Metromedia International Group (MMG). Approximately 100 people attended in-person or by conference call, representing about 25% of the company’s common stock, or about a third of all common stock not controlled by MMG management. Shareholders expressed their frustration with MMG’s management and the company’s performance. Listen to a recording of the meeting and its discussion of shareholder initiatives until March 14th by calling 800-475-6701. See the accompanying slide presentation on the Lens site.

Business Courtesy

Normally dry SEC filings got hot on January 30th with thebody of a 13D filing by Robert L. Chapman Jr., whose Chapman Capital owns 9.5% of American Community Properties Trust. Apparently, Chapman’s repeated attempts to talk to management about their “highly leveraged balance sheet and unacceptably slow rate of asset liquidation,” were rebuffed until J. Michael Wilson, the REIT’s chief executive, finally took Chapman’s call. Seeking an explanation for the CEO’s unresponsiveness, Mr. Chapman said in the filing that Wilson responded, “You’re a f—ing pain in the a–, and we don’t want to talk to you.” Then Wilson hung up, according to the filing. Some people just can’t take criticism.

Responsible Wealth Battles for Tax Fairness and Corporate Responsibility

Responsible Wealth gets press coverage as dozens of the wealthy, including Warren Buffett, George Soros and William Gates Sr, join to fight repeal of the estate tax. All that attention should also provide a boost to their shareholder initiatives:

  • Freeze CEO Pay During Periods of Downsizing and Cost-Cutting
  • Executive Compensation Review Report
  • Severance Package Review
  • Broadening Ownership Resolutions

Rule 14a-8 Re-examined

In the Jan/Feb 2001 edition of the Corporate Governance advisor, John Wilcox of Georgeson Shareholder Communications takes another look at SEC rules governing shareholder proposals and declares the system broken. Investors are frustrated with “corporate indifference” to most of the 40 shareholder victories last year. The Council of Institutional Investors has recommended that boards implement any action recommended in shareholder proposals supported by a majority of votes cast. Institutional Shareholder Services recommends withholding votes from directors who ignore shareholder proposals approved by a majority of votes cast.

On the other side, companies complain that shareholder proposals often have little relevance to wealth creation and actually destroy value through costly distractions. According to Wilcox, the SEC’s Director of Corporation Finance, David B.H. Martin, has “warned repeatedly that administration of the rule is consuming staff time and wasting public funds” in processing nearly 500 no action letters last year.

Wilcox provides much good advice to issuers and proponents in preparing for the 2001 season but his assessment of how to move from the current gridlock seems way off. His claim that “shareholder activists have achieved virtually all of their goals in an unbroken string of successes,” would be widely disputed by shareholder activists.

In 1997, the SEC proposed that resubmission thresholds be raised from 3, 6 and 10 percent of votes cast to 6, 15 and 30 percent in years 1, 2 and 3 respectively. Although that proposal generated an enormous number of comment letters in opposition, Wilcox now proposes that thresholds be doubled every year, starting with 5 percent in the first year and rising to 40 percent in the fourth.

The bone he would throw to shareholders would be the power to override a company’s decision to exclude any proposal based on the troublesome “relevance” and “ordinary business” exclusions, if the proposal comes from owners representing at least 5 or maybe as high as 10 percent of the outstanding shares. Again, Wilcox proposes moving the bar considerably beyond the 3 percent bar previously proposed by the SEC.

His proposal looks like a win/win for management and a lose/lose for shareholders, many of whom are unlikely to be satisfied until they can use the proxy process to nominate board members.

CalPERS Board Puts Independence at Risk

By ignoring the legal limits to their own pay and voting themselves a raise (State controller sues CalPERS, 2/2/01, see also Connell’s 2/1 press release) the CalPERS Board breached its duty of care and loyalty. The interests of CalPERS members are served when the Board follows the law, not when they break it.

If CalPERS elections worked properly, we might expect members to vote for change. Unfortunately, the Board’sproposed election rules continue favor incumbents. They allow CalPERS staff, except those “directly involved” in the elections, to use their official positions to sway elections. In addition, they require an expensive dispute resolution process, paid for by candidates, with arbitrators chosen by the Board. Although an improvement over a previous proposal (seeCalPERS muzzles critics: Ballot rules protect board, keep others in the dark, Sacramento Bee editorial, 5/24/99), the draft regulations do little to level the playing field between incumbents and challengers.

Senator Burton has introduced SCA 2 to require Legislative review of CalPERS’ proposed budget for personnel, operating expenses and equipment. It would also require the System to submit to an independent actuarial and financial audit.

Board independence works when a board acts responsibly. Unfortunately, the CalPERS Board has too often abused itsConstitutional authority (see section 17), this time claiming (without evidence) that no qualified candidates would run for the Board without the raise. Not raising their own pay, they argued, would breach of their fiduciary duties and put the System at risk.

More clearly at risk is the Board’s ability to place the interests of the System’s members above their own. If the Board continues to ignore the law and members can’t change the Board, Legislative intervention will become almost inevitable.

Back to the topCoffee Named to Advisory Board

The Nasdaq Economic Advisory Board (EAB) announced the addition of three new members: Professor Michael J. Barclay, Professor John C. Coffee Jr., and Professor Frank M. Hatheway. The Board discusses and communicates specific policy recommendations to Nasdaq, meeting formally twice a year. John (Jack) C. Coffee Jr, a professor at the School of Law of Columbia University should bring a significant corporate governance perspective to the Board. Market News Publishing Inc.

Korn/Ferry Reports on Canadian Corporate Governance

The proportion of directors of Canadian companies who are U.S. residents rose from 10 percent in 1995 to 15 percent in 1999, according to the 8th annual edition of the Report on Corporate Board Governance and Director Compensation in Canada. The Report, the most comprehensive survey of corporate governance in Canada, collected data from 324 public companies for fiscal year-ends in 1999.

Elan Pratzer, managing director of Korn/Ferry International in Toronto indicated, “The trend to U.S. directors on Canadian boards is not surprising, but it is significant. As Canada’s economy shifts increasingly north-south, Canadian companies are coming to view North America as their core market. So it makes sense that they would want counsel at the board level from people who are expert in 90 percent of that core market. If anything, the internationalization of Canadian boards will accelerate as our largest companies become more global in their presence and marketing.”

Nominating and governance committees, rather than CEOs, are increasingly providing leadership in identifying and selecting new directors. As a result of pressure from institutional shareholders and others, the number of companies with Governance Committees has risen from 2 percent in 1993 to 65 percent in 1999. The stock component of board compensation increased from 22 percent of the companies surveyed in 1993 to 65 percent in 2000. Market News Publishing Inc.

Women on Australian Boards

Research by corporate governance adviser Egon Zehnder shows that 65 percent of Australian boards have at least one woman director while 17 percent have at least two. Although this is far more than companies in Asia where 86 percent of boards have no female directors, it is far behind North America, where 16 per cent of all boards have three female board members. (The Australian, 2/7/01)

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