From a 1970 ruling on Dow Chemical’s napalm sales, which opened the door for social issues to be put to shareholder votes, to the focus lists of Council of Institutional Investors,Knowledge@Wharton reviews the rise of shareholder activism.
Metromedia Yields to Records Demad
Documents will be examined by Lens Investment Management to determine if John W. Kluge, Metromedia’s founder and Chairman, and Stuart Subotnick, its Vice-Chairman, President and Chief Executive Officer, have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting at the expense of Metromedia’s public shareholders. NewsAlert, 3/28
Changing Corporate Bylaws Via Class-Action Suits
At the spring meeting of the Council of Institutional Investors, William S. Lerach, a partner at Milberg Weiss Bershad Hynes & Lerach, said that in recent negotiations with an Internet company, “we accomplished more in one hour than all the shareholder resolutions could have done in 10 years.” As part of larger settlements, Cendant, 3Com and Samsonite have been forced to agree that boards will contain a majority of independent directors, audit committees will be comprised entirely of independent directors, and stock repricings are prohibited without shareholder approval. Now, maybe it is time to make such reforms the central reason for such class-action lawsuits.
The items on Lerach’s wish list include: require that officers hold one-third of the stock they acquire through options for a year; require that directors receive 50% of their compensation through stock and hold it as long as they remain on the board; no stock option repricing without shareholder votes; no insider stock sales during repurchase programs; and no accelerated vesting of options when shareholders merely vote for a merger, rather than waiting for the consummation of the deal. (Dow Jones Newswires, Class-Action Suit A Way To Change Corporate Bylaws, 3/28)
PSPD Criticizes Plan by Samsung Group
The shareholder rights group People’s Solidarity for Participatory Democracy is calling on the Samsung Group to cancel a plan to sell stakes held by Lee Jae-yong, son of group chairman Lee Kun-hee, in eSamsung and other internet companies to Cheil Communications and other profitable Samsung units. PSPD, led by Korea University professor Jang Hasung, said the Samsung group is selling its stakes “to pass the responsibility of Lee Jae-yong’s management failure to minority shareholders of the profitable companies.” (AFX News via Northern Light, 3/27)
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Dark Cloud Over Directors
Hoffer Kakback, President of Gloucester Capital and a regular columnist in Directors & Boards, calls for further disclosures by director-candidates and better opportunities for shareholders to evaluate them. Four years ago, in an article “Pals on Board,” Kakback sought to have director-candidates disclose their relationships with the company’s CEO. “Were the candidate and the CEO (or were their wives) college roommates? Have their fathers been best buddies for 50 years?”
Three years ago, in “Two Modest Proposals,” he advanced the idea that proxy statements should contain a short essay from each candidate on why he or she would add value to the board. In addition, directors should participate in a conference call, well in advance of the shareholders’ meeting, at which they could be questioned by the shareholder-electorate.
Now in “The Albanian candidate,” (Directors & Boards, Winter 2001) he renews his call. “If one or two major companies implemented all (or some) of the proposals contained in this column, others might follow. The amazing thing is that our present method of electing directors has remained more or less the same for as long as it has.” Kakback’s proposals are certainly modest, in comparison with electoral politics. He isn’t even calling on shareholders to have a voice in the nomination process or a choice between candidates.
Unfortunately, even his modest proposal is unlikely to be heeded. Instead, we seem to be entering a period of greater entrenchment, with the SEC allowing omission of two more board independence proposals. One proposal, submitted by John Gilbert to Boeing, asked the company to adopt a policy that its key committees will be comprised of a majority of independent directors. The second, a similar proposal, by John Chevedden at AT&T, was also ruled beyond the power of the board of directors to implement. These join earlier rulings on similar proposals at PG&E, Marriott International and Bank of America. Let’s hope this growing dark cloud doesn’t discourage shareholders from continuing to seek sunshine and accountability.
CalPERS Announces Targets
The California Public Employees Retirement System narrowed this year’s “Focus List” to five companies, Circuit City, Lance, Metromedia, Ralcorp and Warnaco Group. Selection was based on a combination of long-term performance, corporate governance practices, and economic value-added (EVA). In other CalPERS news, their International Proxy Voting Guidelines and the Domestic Proxy Voting Guidelines were consolidated and amended on March 19, 2001 by the CalPERS Board of Administration and are now known as theGlobal Proxy Voting Guidelines.
Link Between Governance Activism and R&D
Institutional investors are influencing company decisions through proxy challenges, public criticism, and direct negotiation. Researchers evaluated the impact of investor activism on a company investment in research and development, predicting that companies facing activist holders would increase their R&D budget since owners tend to favor long-term investments, while managers typically prefer short-term payoffs.
Examining the impact of investor activism on R&D as a percentage of sales among 73 large U.S. industrial companies from 1987 to 1993, they found:
- Companies targeted by investors increase their R&D spending over several years.
- The impact is greatest on firms that faced growth opportunities and in high-technology industries that have under-invested.
- Shareholder proposals and proxy contests fostered greater R&D increases than other forms of investor pressure.
See “The Influence of Activism by Institutional Investors on R&D” by Parthiban David, Michael A. Hitt, and Javier Dimeno in the Academy of Management Journal, February, 2001, pp. 144-157.
Canadian Report Recommends Charters and NonExec Chairs
Boards of directors can add value by fostering a culture aimed at improving the effectiveness of governance in Canadian public corporations. The Joint Committee on Corporate Governance report entitled Beyond Compliance: Building a Governance Culture contains 27 recommendations including:
- All boards should have charters outlining their responsibilities
- Boards should have non-executive chairs and should meet regularly without management present.
CII Joins Protest
The Council of Institutional Investors joined in protesting a recent decision by the SEC to allow AT&T to exclude from its proxy a proposal from the Communications Workers of America recommending the same person doesn’t serve as chairman and chief executive. AT&T argued the proposal was a thinly disguised vehicle to embarrass AT&T Chairman and Chief Executive C. Michael Armstrong by preventing his reelection as chairman of the board.”
However, CII, whose representatives hold $1.5 trillion in assets, argued the proposal “doesn’t call on shareholders to vote against current chair and CEO C. Michael Armstrong or vote for another candidate. Nor does it prohibit Mr. Armstrong from serving as director. The resolution simply calls on AT&T to adopt a policy that the chair and CEO jobs be held by separate individuals.” (Pension Grp Backs CWA In AT&T Shareholder Proposal Flap, Dow Jones, 3/19) For more, see CWA’s sponsored site, AT&Tinsider.com.
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Link Added to RealCorporateLawyer.com
RealCorporateLawyer.com has been added to our Links page. The site, by publisher RR Donnelley Financial, focuses on legal issues involving corporate and securities regulation. Among the items covered are the following: Analyst Communications, Cybersmears and Message Boards, Direct Public Offerings, Direct Stock Purchase Plans, Disclaimers, Electronic Delivery, Free Stock Offerings, Hyperlinks, Multimedia Disclosure, Offshore and Crossborder Offerings, Private Offerings, Proxy Fights, Public Offerings, Regulation FD, Road Shows, Shareholder Proposals, Stock Plan Communications, Stockholders’ Meetings, Voting, and Web Site Liability. The site also features R.R. Donnelley Financial’s complimentary monthly Ezine that updates users on recent corporate and securities law developments and the latest corporate trends and practices. RR Donnelley also launchedAll About Edgar, a comprehensive information site about EDGAR, the SEC’s electronic filing system.
International Conference On Corporate Governance
April 23 – 24, 2001, at the Mandarin Oriental Hotel, Kuala Lumpur organized by the Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA) in collaboration with the Malaysian Institute of Corporate Governance (MICG). The theme of the Conference, “From Conformance to Performance,” is in line with the main objective of enhancing awareness and commitment of corporate leaders to accountability and transparency with a view to improving confidence. to view the program, see theMAICSA site. Sign up before March 24th for reduced registration fees.
Foliofn to be Offered at 401(k) Plans
For a flat fee of just $29.95 a month, you get 3 Folios, personalized baskets of stocks you can change as often as you wish. Former SEC Commissioner Steven M.H. Wallman’s online brokerage firm will soon be offered to some 401(k) plan participants, according to a recent article in Pensions & Investments. The average mutual fund investor pays $467 per year in fees on a typical $38,000 investment, according toFoliorfn, whereas Foliorfn costs are only $359. More important, from our perspective, is the increased likelihood that shareholders are more likely to be owner activists than mutual fund holders. (Foliorfn service to mimic mutual funds,Pensions & Investments, 3/5/01)
Dow Jones newswires article asks, Who’s calling the shots in corporate boardrooms? While some corporations claim shareholders do, many shareholder activists think the Securities and Exchange Commission is blocking their proposals to strengthen the independence at corporate boards. Ann Yerger, director of research at the Council of Institutional Investors, says the trend is “extremely disturbing.” The SEC allowed Bank of America to exclude a proposal to install an independent audit committee and Marriott International to strike a proposal for an independent board.
The SEC “seemed to zero in on independence proposals this year” with a different stance, said Patrick McGurn, director of corporate programs at Institutional Shareholder Services. According to the article, activists say the SEC’s hostility emerged when they agreed that Pacific Gas & Electric could omit a shareholder proposal seeking a bylaw revision requiring independent directors on its audit, and nominating and compensation committees, even though it had been introduced and voted on three times before, with last year’s proposal winning 45% of the vote, according to Rosemary Lally, an editor at the Investor Responsibility Research Center.
PG&E argued the company didn’t have authority to implement the proposal since directors are elected by shareholders, not corporate boards. The SEC staff agreed, saying boards don’t appear to have the power to ensure the election of independent directors. Of course, the argument is absurd since shareholders “elect” directors, but boards have control over the nomination process.
Judith Burns, of Dow Jones Newswires, goes on to relate how subsequent approaches were attempted at Bank of America and Marriott. Edward Durkin, director of special programs for the United Brotherhood of Carpenters, says shareholders will eventually prevail. “We’ll get to the issue in another time and another way.” Shareholder activists don’t give up easily. (Shareholders See SEC Reversal On Corporate Governance, 3/14)
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SEIU Opposes Kodak Directors
The Service Employees International Union Master Trust announced it will campaign to oppose the directors at Eastman Kodak, after the company ignored repeated efforts to provide more accountability to stockholders. For an unprecedented fourth year, Kodak has ignored an SEIU proposal calling for annual board elections. That proposal has won majority votes at Kodak each year beginning in 1997.
“This is a core governance principle. Our members who have invested their retirement savings in companies such as Kodak expect them to be accountable to shareholders and meet the highest standards,” said Andrew L. Stern, SEIU president and chair of the Master Trust. “We have been patient investors but it is time for Kodak’s directors to understand that there is a price to pay when they ignore majority shareholder votes.”
This year, Kodak will put four directors on the ballot:
- Alice F. Emerson, senior advisor to the Andrew W. Mellon Foundation;
- Laura D’Andrea Tyson, dean of the Walter A. Haas School of Business, and a former Clinton economics advisor
- Hector Ruiz, COO of Advanced Micro Devices, Inc.
- A fourth director will be named in the proxy statement.
The vote will take place at the Kodak annual meeting on May 9th in St. Paul, Minn. The SEIU campaign comes as many institutional investors have adopted policies to press shareholder rights in board elections. Institutional Shareholder Services, the leading proxy advisory service, recommends withholding votes from directors where the board “ignore[s] a shareholder proposal that is approved by a majority of the votes cast for two consecutive years.”
The policy of the Council of Institutional Investors, whose members control well over $1 trillion in assets, provides that “Boards should take actions recommended in shareholder proposals that receive a majority of votes cast for and against. If shareholder approval is required for the action, the board should
submit the proposal to a binding vote at the next shareholder meeting.” (from Bart Naylor)
Swiss Cheese Argument by SEC has Holes
Phil Goldstein of Opportunity Partners sent me a copy of his response to SEC no action letter on Mayor Jewelers. The SEC apparently conclude that because his shareholder proposal implies the directors of the Fund violated their fiduciary duty, it may be excluded from the Fund’s proxy materials. Goldstein responds:
However, you do not say that we did not provide a factual foundation to support the charge. Rule 14a-9 only prohibits a malicious statement if it does not have a factual foundation. In fact, our supporting statement discusses the undisputed fact that the directors of the Fund recently adopted a number of bylaws whose primary purpose is to interfere with the shareholder franchise. Under Delaware law, such action is presumptively a violation of fiduciary duty.
We would ask along with Goldstein, is it the SEC’s policy to categorically ban any proposal malicious statement critical of a management regardless of evidence provided to support the allegation? For more on Goldstein’s battle and to engage him in conversation, see the eRaider corporate governance message board. (from Phil Goldstein)
Environmental Responsibility Pays
Investing in companies that use environmentally sound business strategies could lead to increase shareholder value, according to a a new report, “The Emerging Relationship Between Environmental Performance and Shareholder Wealth,” by the Assabet Group. They looked at studied both academic research and nine different environmentally focused investment funds. Each of the nine funds examined outpaced their respective benchmarks.
Bill Clinton in Your Boardroom?
Former president Bill Clinton has grabbed headlines more since leaving the White House than when he was in office but could this notoriety be sidelining his lucrative move into America’s corporate boardrooms? In the March issue of online newsletter Boardroom INSIDER, Ralph D. Ward notes that former presidents have traditionally been eagerly sought by the Fortune 500, and that rumor has Oracle Corp. CEO Larry Ellison flirting with adding Clinton to the software giant’s board.
Given Clinton’s controversial tenure, especially the pardon- and influence-peddling storm that has raged since he left office, Ward doesn’t see Clinton quietly slipping into any boardrooms soon. Ward further notes that corporate boards have become increasingly responsible, public faces for the company. No board can ignore the shareholder reaction of putting Bill Clinton on display at their annual meeting.
Fund Democracy Campaigns Against Self-Dealing Mutual Fund Directors
Maryland is considering a bill that would requiring courts to treat mutual fund directors as independent, even when they have significant conflicts of interest. According to Fund Democracy’s Mercer Bullard, the bill would effectively prevent tens of millions of fund shareholders from being able to sue companies that defraud their funds. We suggest you let the Maryland Assembly know that you oppose House Bill 1045. For more information, see Maryland Protection for Self Dealing Directors.
Fund Democracy has also teamed with proxy advisory firm Institutional Shareholder Services in asking the SEC to hold a hearing on the exemptions it has provided to hundreds of mutual funds from the requirement that shareholders approve contracts with fund managers. See Multimanager Funds and Your Voting Rights. Read about another SEC exemption, this one granted to Goldman Sachs from self-dealing prohibitions so that it could trade securities with the funds it advises. As Mercer Bullard observes, “How will the funds know if they are receiving a fair price from Goldman Sachs the securities dealer? Why, they’ll ask Goldman Sachs the fund manager, of course.” (Another Chink in the Wall: SEC Grants Self-Dealing Exemption to Goldman Funds, TheStreet.com, 3/1/01)
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EDGEvantage.com Reports on Several News Items
The March issue of EDGEvantage.com reports on the following and other items:
- stock option plans: the drive UK’s Hermes fund to require shareholder approval, the SEC’s proposal and the Wharton School of Management’s outline of the debate.
- non-financial disclosures: a proposal from Shann Turnbull
- French Commission des Opérations de Bourse expanded its mediation service between investors, intermediators and issuers.
- guidance from the American Society of Corporate Secretaries on what proxy statements need to include about audit and non-audit fees paid
- Call by Pensions & Investment Research Consultants demanding shareholder approval of director compensation at 800 UK firms.
SEC No-action Letters to be Posted
Commissioner Isaac C. Hunt Jr., of the US Securities and Exchange Commission, criticized the Commission for not requiring non-U.S. issuers to make required securities filings electronically via the SEC’s EDGAR system. He hopes that by the end of this year they will be required to do so. In addition, he indicated that the Commission’s no-action letters should be made available on the SEC’s site before the end of this year. (SEC’s Hunt Criticizes SEC, 3/2) Let’s hope that what should be done, will be done.
Unofficial Guide Asks Tough Questions
An editorial, “The Unofficial guide to Questions to Ask at an Annual Meeting,” in February’s ISSue Alert goes well beyond the usual Cliff Notes variety of pabulum regarding what to expect at the annual meeting. Get ready for embarrassing questions on consulting services provided by the company’s auditor, conflicts of interest among board members with other business ties to the company, the correlation (or lack of) between options awarded and shareholder value, severance provisions of CEO contracts and change-in-control provisions. In abbreviated form, that only takes us down the alphabet through letter “c” and the guide goes to “s.” This single page is more informative than most glossy guidebooks.
CorpGov.Net Editor Responds to Pensions & Investments
Joel Chernoff’s 2/19 article in Pensions & Investments asserts that State Controller Kathleen Connell’s suit against the California Public Employees’ Retirement System (CalPERS) over pay hikes will provide the “first court test of CalPERS’ independence” under Proposition 162, which was designed to protect it from political meddling. Unfortunately, that is not the case.
On September 17, 1998 the Sacramento County Superior Court ruled that restrictions imposed by the board on campaign contributions from those doing business with the System were invalid because the board did not follow the Administrative Procedure Act (APA) in adopting its regulations.
CalPERS had argued it was exempt from the APA. However, the court ruled that CalPERS is not exempt from state laws that are not inconsistent with the board’s exercise of its fiduciary duties.
In my opinion, there is little chance the court will accept CalPERS’ argument that it could not meet its fiduciary obligations without setting up its own payroll system, bypassing the State Controller’s statutory authority, in order to award pay increases to key employees.
The court is even less likely to agree that the board cannot meet its fiduciary obligations
(1) without exceeding the statutory limits on board member per diem by a factor of four, or
(2) by reimbursing employers substantially more than allowed by statute for the time their employee board member representatives spend on CalPERS board activities.
An editorial by Pensions & Investments in the same issue argues that “paying below-market salaries to executives at large, complex pension funds is short-sighted.” Agreed. However, the CalPERS board is stretching what was meant to be the minimum protection of Prop 162 against raids into nearly a whole wardrobe.
Skating on the edge of the law would be a bad habit for any public pension fund to acquire. CalPERS should work with the Legislature and Governor Davis to raise legal limits, rather than asserting that the board’s actions are above the law.
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