Archives: April 2001

Enhancing Director Performance

Strong boards provide competitive advantage and add value. Six keys to top-performance based on research findings by P. Michael Masher and Talcum C. Munro are as follows:

• Peer recognition. Ego and the basic need for recognition is a powerful motivator.
• Peer association. The mental stimulation produced by interaction with bright experience individuals provides further motivation to work hard and perform well.
• Opportunities to “make a difference.” If the expertise of individual board members is recognized and their talents sought out, they will work harder to accomplish agreed upon goals.
• Communicate effectively. Ongoing opportunities for communication between meetings and agendas received well in advance, accompanied by well-focused material, facilitate good performance.
• Celebrate victories. Selecting some directors with crisis management experience is critical to sucess in many difficult situations and may avoid the de-motivating effects of constant crisis management.
• Choose board chairperson carefully. The chairperson is primarily responsible for harnessing the energy and talent of individual members. Setting the tone and establishing the culture are critical skills.

For more information, see the March/April edition ofBoardroom. That issue also contains a tribute to J. Keith Louden, author of The Corporate Director, a corporate governance classic from 1966, and The Director in 1982. Louden was an early advicate that the CEO should be the only inside director and that the chairman should always be an independent director, realizing that nobody could monitor performance objectively if they also held executive management responsibility.

Domini Issues Challenge

Amy Domini, the founder and a managing principal of Domini Social Investments, issued a challenge along with disclosure of their proxy voting guidelines and actual proxy votes. “In our view, mutual funds have an obligation to their shareholders to disclose how they intend to vote and how they actually do vote on important issues of corporate governance, including social and environmental policies. Proxy voting transparency should not simply be considered an aspect of socially responsible investing – it should be considered a fundamental indicator of responsible mutual fund governance.” “We strongly encourage our colleagues in the mutual fund industry to follow our lead by making their proxy voting record public so that investors can properly assess the full implications of their investment .”

Domini disputed the view, taken by some of the nation’s largest mutual funds, that investors “are not interested” in how their funds vote. In addition to publicly disclosing its voting guidelines and how it voted its shares, Domini also files shareholder resolutions each year on important social and environmental issues. This year, Domini filed sixteen resolutions on a range of issues, including diversity, environmental reporting and sweatshops.

CEO Turnover Slows

Boards may be more tolerant of poor results when the CEO can blame external factors. During the first quarter of 2001, 9 of the nation’s largest 200 public companies replaced CEOs who retired, quit or were fired, according to Pearl Meyer & Partners. By contrast, during the first quarter of 2000, 14 of the nation’s 200 biggest public corporations replaced their chiefs.Total search activity was off about 17% in the first quarter from a year earlier. (see MSNBC, 4/24)

Bragging Rights

Comments by Royal Bank of Scotland Deputy Chairman Sir George Mathewson have sparked fury over executive remuneration policy. Mathewson was quoted as saying that his 750,000 share of the GBP 2.5 million bonus awarded to himself and three other executives “wouldn’t have given you bragging power in a Soho wine bar.” He defended the bank’s decision not to seek shareholder approval for the plan by saying, “Frankly, it was not worthwhile talking to shareholders about.” The National Association of Pension Funds (NAPF) disagrees. Angered by the comments, NAPF is recommending blocking the re-election of two non-executive directors serving on the company’s remuneration committee. “It is pretty crass to talk about pounds 750,000 not being enough to talk about in a bar when it is a sum most can only dream of,” said one Royal Bank shareholder. (The Corporate Library, 4/3)

Governance Strong Predictor Where Laws Are Weak

Bernard Black, of Stanford Law School, examined the relationship between corporate governance behavior and market value for a sample of 21 Russian firms. The correlation between value ratios and governance ranking is striking and statistically strong: Pearson r = 0.90 (t = 8.97). A worst (51 ranking) to best (7 ranking) governance improvement predicts a 700-fold increase in firm value.”The results suggest that corporate governance behavior has a powerful effect on market value in a country where legal and cultural constraints on corporate behavior are weak.” see The Corporate Governance Behavior and Market Value of Russian Firms, forthcoming in Emerging Markets Review, Vol. 2, 2001.

Back to the topSocially Responsible Investing Gains Institutional Ground

Interest in SRI mutual funds has grown in recent years. A 1999 Yankelovich Partners study based on interviews with 800 men and woman showed that 35% worked for companies that offered a SRI 401(k) or similar option, up from 16% in 1996; seven in 10 said they used those options, up from 56% in 1996. Of those that did not have access to a SRI option, 70% said they would invest in one if it were available, the study said.

Last year, California State Treasurer Philip Angelides encouraged two of the state’s largest pension funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest tobacco and stocks. The funds have combined assets of about $265 billion. CalPERS also approved a plan to follow tough human rights, labor, and environmental standards when investing overseas. (see Dow Jones Newswires — April 20, 2001, Socially Responsible Invest Gaining Institutional Ground)

Class Action Settlements

Bank One Corp. has agreed to pay $45 million to settle a class action lawsuit that alleged the bank misled shareholders about the financial standing of its credit card operation. Shares of Chicago-based Bank One started to slide in August 1999, shortly after the company disclosed pricing and customer service woes at the unit First USA – problems that led to earnings shortfalls at Bank One. U.S.D.C. Judge Milton Shadur in Chicago is expected to rule on the settlement June 1. Plaintiffs’ lawyers plan to request payment up to $2.75 million, plus interest and reimbursement of expenses, all to be paid from the $45 million settlement fund.

MicroStrategy Inc.’s year long legal battle with shareholders accusing it of fraud officially ended recently when a federal judge approved a class-action settlement that awards investors an I.O.U. due in five years, but no cash upfront. The settlement approved by U.S.D.C. Judge T. S. Ellis III in Alexandria may deliver only pennies on the dollar for investors who bought MicroStrategy stock before the Vienna software firm reported in March 2000 that it overstated years of revenue and earnings and its share price plummeted.

Twinlab Corp. says that it has reached an agreement in principle to settle a series of shareholder securities class action lawsuits filed in the U.S.D.C. E.D. New York in late 1998 and early 1999. Under the agreement, which is subject to approval by the court, the company will pay $26 million, all of which is covered by existing insurance.

A federal judge in Chicago has ordered final approval of a $4.02 million agreement that settles five securities class actions filed against Nanophase Technologies Corp.

More details on these and other class actions can be found at the Stanford Securities Class Action Clearinghouse which is launching a new and improved database Their Website contains several new features designed in response to user requests. In addition to a new home page, they have dynamically updated tables that sort alphabetically, by name of corporate defendant, jurisdiction, and date of filing. They have also improved search features, and will soon be providing more extensive news services and bibliographies of securities related research.

Back to the topBelgian Government to Propose Reforms

The Belgian government will propose corporate governance reforms to meet concerns of investors in stock market-listed companies, L’Echo newspaper reported, citing finance minister Didier Reynders. The law will address conflicts of interest within groups, directors’ responsibilities, the independence of auditors, and disclosure of important stakes in companies. (AFX News, 4/20)

Canadian Social Investment Conference, June 3 – 5 in Montreal

For the first time in five years, financial advisors, asset managers and investors will gather to explore trends and developments in Canadian social investment. Confirmed speakers include:

Peter Kinder of Kinder, Lydenberg and Domini. Peter will discuss SRI trends and developments in the US. He will be joined by Michael Jantzi of Michael Janzti Research Associates (sponsor of the session); Stephen Hine of London-based Ethical Investment Research Service (EIRIS) and Dave Mowat, CEO of VanCity Credit Union in Vancouver.

Steve Viederman, formerly of the Jessie Smith Noyes Foundation, who is speaking on foundations and SRI. Steve will be joined by Tim Draimin, Executive Director of the Tides Canada Foundation and will talk about how foundations are aligning their investment policies with their granting missions.

Joe Henzlik of SRI Services, a division of Fairvest Proxy Monitor. Joe will be joined by Bill Mackenzie of Fairvest Proxy Monitor, Ginette Depelteau of Caisse de depot et placement du Quebec, Peter Chapman of the Shareholder Association for Research and Education (SHARE), Francois Rebello of Groupe Investissement Responsible (GIR) and Pat Doherty of New York City Pension Funds. This session will be devoted to the growing area of shareholder advocacy and institutional investors.

Jacky Prudhomme of Paris-based Arese, who will speak about public policy and SRI. Jacky will discuss new regulatory initiatives in France and the European Community on pension disclosure and other SRI-related policy issues.

To receive early registration discounts, register by May 4. Conference fees are CND $395, which includes a 12-month individual membership with the sponsor, Social Investment Organization.

Environmental Groups Endorse Shareholder Resolutions

SocialFunds.com reports that a coalition of five environmental groups led by Michelle Chan-Fishel, with Friends of the Earth, recently announced their support of over 75 pro-environment shareholder resolutions.” The resolutions are divided into six major categories: environmental codes, climate change and energy, threatened people and places, genetically engineered food, toxics and waste, and governance and environmental disclosure.

SEC Examining Vote Disclosure For Mutual Funds

The Washington Post reported that in response to a written request from the AFL-CIO in December, the SEC has started to examine the proxy disclosure issue for mutual funds, according to Douglas J. Scheidt, chief counsel of the SEC’s division of investment management. Domini Social Equity Fund ($1.8 billion) is one fund cited in the article that reports their votes. The $7 billion Calvert Group of funds, based in Bethesda, recently made its voting record available on the Internet (see PR Newswire). The $1.3 billion PAX World Funds, based in Portsmouth, N.H., have been doing so for a year. According to the reporter, a Fidelity spokesmen says their funds’ investors just don’t care how the fund votes. Vanguard would consider disclosing proxy votes if its investors indicated a “significant” interest.

Ned Regan, former head of New York’s state pension fund, and now a director of Oppenheimer Funds, which manages $120 billion is quoted as saying that “I very strongly believe that mutual funds ought to be like pension funds and vote with shareholders in mind” but “nobody wants it.” “If we ever had shareholders asking, would we put it on the Web? I don’t know.” “I’m in favor of it. I’m in favor of lots of things. But it’s not at the top of the list of the items that investors in Oppenheimer want. In fact, it’s not even on the list.” (Prodding for Disclosure of Funds’ Proxy Votes, 4/7)

AFL-CIO Steps Up Campaign to Rein in Runaway CEO Pay

Average US CEO pay in the top 200 firms rose to $10.89 million in 2000, according to Pearl Meyers. The 28% increase in the use of stock options since 1999 results in their making up about 60% of the entire pay package. US Vice President Cheney for example, gained $22 million in 2000 by exercising stock options at Halliburton. Last year’s top pay, $293 million, went to John Reed, who retired at Citigroup.

United for a Fair Economy’s report entitled “The Bigger They Come, The Harder They Fall,” they concluded that a huge compensation package was no guarantee for rising stock prices, in fact the report’s author Scott Klinger says, “When Business Week releases their list of the ten companies with the highest paid CEOs for 2000, that would be a good list of stocks to sell short.” Klinger examined stock price performance of companies headed by the top ten highest paid CEOs for each of the seven years between 1993 and 1999. The stock performance of each company was compared to both the S&P 500 and the company’s peer group over one-year and three-year time periods. In six out of the seven one-year time periods following a CEO’s appearance on the top ten list, at least half the companies under-performed the S&P 500. In 40 percent of the cases, the companies trailed the S&P 500 by more than 15 percentage points.

The AFL-CIO’s Executive Paywatch site lists several ways the average person can use to join in the fight against excess exec pay.

• Get Inside the Boardroom
• Use Your Shareholder Clout
• Rally Your Co-Workers and the Community
• Take It to the IRS
• Call on the Regulators
• Join the Working Families e-Activist Network and e-Campaigns to Stop Runaway CEO Pay

Shareholders of Sprint, for example, defeated proposals to curb executive severance pay and discourage repricing of stock options, but the measures garnered more than a third of the shares cast at the company’s annual meeting. A resolution to limit severance agreements with senior executives received nearly 36%, while a measure seeking to limit option repricings got more than 42%. (The Kansas City Star, 04/17/01)

Options Exchanges

BusinessWeek Online says “these new practices are just as bad for outside shareholders as the simple repricing schemes they replace. In some cases, they’re even worse.” “Such gimmicks don’t get around many of the problems investors have with repricings. Providing employees with the chance to make a huge equity gain through new, lower-priced options at a time when shareholders have suffered significant losses from stock drops simply isn’t fair play.” They recommend old fashioned cash that doesn’t dilute shares. ” It’s time for a reminder that options were intended to reward superior performance, not simply showing up.” (When Stocks Suffer, So Should Options, 4/11)

Back to the topHong Kong Watchdog Joins Oversight Committees

David Webb, longtime critic and corporate governance activist, joins two stock market oversight committees. Webb’s hard-hitting investment news service at webb-site.com has long been an excellent source of news in Hong Kong and East Asia. See A New Role for a Hong Kong Gadfly, International Herald Tribune, 4/7. Webb is among seven new members appointed to the Takeovers and Mergers Panel and the Takeovers Appeal Committee. He was also recently appointed to the Shareholders’ Subcommittee of the Standing Committee on Company Law Reform. Among other reforms, Webb has been promoting a proposal to establish HAMS – the Hong Kong Association of Minority Shareholders, as a levy-funded body to catalyse shareholder involvement in the corporate governance process.

Laurentian Bank Claims Lead in Corporate Governance

Jon K. Grant, the new Chairman of the Board of Laurentian Bank of Canada, opened the Bank’s annual meeting of shareholders, and discussed several Bank policies that make Laurentian a leader in corporate governance. (listen to speech)

• separation of the duties of the Chairman of the Board and the Chief Executive Officer since 1984
• representation of women on the Board at 27% instead of the Canadian averate of 12%
• cumulative voting for electing its directors since 1993
• reduction in the number of directors from 18 to 15
• open and frank character of the Board’s discussions

Shanghai Stock Exchange (SSE) Guidelines for Corporate Governance

Draft guidelines require at least two independent board members in each listed company, who will make up at least 20 percent of the total number of board members. The principles also clarify the rights and duties of shareholders, directors and management, maintain the independence of the board, establish and guide the carrying out of effective disclosure standards, and guarantee equal treatment of all shareholders. (Asiaport Daily News, 4/11)

Proxy Contest

An article in the April 9th issue of Barron’s points out these words take on new meaning this season with “millions of investors in thousands of companies are being offered the chance to enter a $50,000 sweepstakes when they receive their proxy mailings.” Automatic Data Processing, which handles mailings for brokerage accounts, had the brainchild but asserts the prize “isn’t given for anyone who voted in a particular manner.” However, the same might have been said about contests held by Publishers Clearinghouse. Unfortunately, many people will think there is a connection, especially if it, for example, comes with a letter from Caterpillar recommending a vote for its slate of directors and against the three shareholder proposals. It looks like a bad idea from here.

Twilight of the Gods?

That’s the title of a guest editorial in the same April 9th edition of Barron’s by Ralph D. Ward, editor of the online newsletterThe Boardroom Insider. Ward points to the increasing churn rate for CEOs. “Lucent, Gillette, Mattel, Compaq, Maytag, and Campbell Soup are some of the major companies whose boards have pushed out chief executives over the last year. Altogether, 41 of the largest 200 U.S. corporations changed leaders in 2000, says pay consultant Pearl Meyer & Partners, with the pace accelerating in the first months of 2001.”

A turning point, noted by Ward and other commentators was the Coca-Cola board’s turn down of CEO Douglas Daft’s proposal to takeover Quaker Oats. After the $15.75 billion deal was rejected, observers questioned if anyone can negotiate for Coke now. Ward reveals that “those of us who have worked to empower corporate boards greet this revolution with cheers, but also with a few concerns.” How will companies be able to take bold moves or maintain long term strategies? Will we shift from the Imperial CEO to the Imperial Board or to a balance between CEO, board, and owners? For further insights, read Rolf Carlsson’s new book, Ownership and Value Creation.

Important New Book

Ownership and Value Creation: Strategic Corporate Governance in the New Economy by Rolf H. Carlsson argues the “role of the ownership function is to link the sources of risk capital in stock markets to the fundamental processes in corporations and indivudual businesses so as to achieve sustainable vallue-creation.”

Most books on corporate governance focus on accountability, balance of power issues and the costs of separating ownership from control. Whereas, management books focus on value-creation. Carlsson tries to show the role for “strategic” corporate governance or the role of the owner specialist in value-creation. The book does an admirable job of introducing the rise of corporate governance as an ownership concern. He then uses a case history, that of the Swedish Wallenberg dynasty, to explain the success of owner specialists based on ownership values, mega-management skills, institutionalization skills and business risk competence.

Fundamentally, Carlsson believes the corporate governance movement has done a good job in pressing for accountability but that role has been largely a reactive one. He now presses us to acknowledge the proactive role that owners can take in value creation by making direct investments and by investing through owner specialists. He also strongly makes the point that we need to be on guard with regard to instutional investor governance as well. “They should be accountable for how they exercise their francihised ownership as agents of the private owners, how they contribute to fundamental and sustainable value-creation in their total portfolios of investments.”

Carlsson’s work begins the foundations of what will likely become an important frame of reference. In an age of global financial markets, owners are likely to demand access to quality information, formal control aspects and a balance of power with incumbent management which works more in favor of capital. “Incessant renewal and meta-management, to manage the process of taking as well as reducing/eliminating risks, are the cornerstones of strategic corporate governance.”

Back to the topCorporate Governance and Merger Activity in the US: Making Sense of the 1980s and 1990s

Holmstrom and Kaplan describe and consider explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. They conclude that “if the stock markets are flat or down for the next few years, then the extensive reliance on stock options may again dissipate, leading managers to have less focus on stock prices. But even after taking such reservations into account, it seems to us that a more market-oriented style of corporate governance than existed up to the early 1980s is here to stay.” (Download from SSRN)

Does Corporate Governance Matter? A Crude Test Using Russian Data

Do a firm’s corporate governance practices affect its value? In most empirical tests in developed countries, firm-specific corporate governance practices have little or no effect on firm value. But these weak results could reflect limited variation between firms in governance practices.

In contrast, the corporate governance practices of Russian firms vary widely, from quite good to awful. Bernard Black tested whether firm-specific corporate governance affects the value of Russian firms using (1) corporate governance rankings developed in fall 1999 for a sample of 17 Russian public companies by one Russian investment bank, and (2) the “value ratio” of actual market capitalization to potential Western market capitalization for these firms, determined independently at the same time by a second Russian investment bank. He finds strong evidence that firm-specific corporate governance matters – and matters a lot – in a country where other constraints on corporate behavior are weak.

Black’s research has practical significance for investors in Russian firms, in predicting by how much governance affects value. A one-standard deviation governance change predicts a 6-fold increase in firm value; a worst (51 ranking) to best (7 ranking) governance change predicts a 450-fold increase in firm value. (Download from SSRN)

Conference Notice

A New Era in Corporate Governance: Regulatory Demands, Fair Disclosure & Best Practices
June 25-26, 2001
Washington D.C.
Featuring: Laura Unger, Acting Chairman of the U.S. Securities and Exchange Commission. Chancellor William Allen, Director of the Center for Law & Business, New York University, and Lanny Davis, former White House Special Counsel.

Contact: Julie W. Munro
Director of Conferences, C.P.E. Inc.
370 Reed Road, Suite 227, Broomall PA 19008
Phone (610) 328-7086 ext. 1101 Fax (610) 328-7061

Myners Report

The full text of the Myners Report, which calls for much greater transparency and more professional stewardship by pension trustees, is available for downloading at EDGEvantage.com. You’ll also find other, mostly UK and EU, related news items on corporate governance.

AFL-CIO Key Votes

Last month the AFL-CIO issued their 2000 Key Votes Survey on the behavior of 156 money managers (representing $6.7 trillion in assets). They were rated on 38 shareholder proposals voted on during the 2000 season. Advocating a worker-owner view that values “management accountability and good corporate governance,” proxy voting performance continued to increase, even as the AFL-CIO was “raising the bar.” In 1998 the median score of money manager participants was 60.8%, rising to 65.1 in 1999 and 72.9 in 2000. The Survey will, once again, help trustees fulfill their fiduciary duty to ensure voting rights, which are pension plan assets, are managed in the long term interests of employee and retiree shareholders.

Ranked at the bottom of the list was PNC Advisors (0 out of 27 votes). It is hard to imagine they will be managing much Taft-Hartley or public pension money next year. According toIRRC‘s Corporate Governance Highlights (3/30), the AFL-CIO has released a list of 30 shareholder proposals, 2 vote no campaigns and one management proposal to be used in its Key Votes Survey for 2001. The proposals reportedly range from routine governance proposals, such as declassifying boards, to business in Burma. No, the management proposal on the list isn’t one they support; its AT&T’s charter amendment, which they have vocally opposed. To receive a copy of the full Key Votes Survey, call the AFL-CIO Office of Investment at 202.637.5372.

Corporate Governance Looking Up in Singapore

Singapore published its first corporate governance code, the result of a 15-month review of business practices by a special government-appointed committee. Recommendations in the code include

• At least one-third of a board membership to be non-management for independence
• Disclosure of directors and key executives remuneration
• Audit committees made up entirely of non-executive directors
• Disclosure of information to all shareholders should be “in a fair and equitable manner.”

January 1, 2003 is the deadline for all Singapore listed companies to start including their corporate governance practices in their annual reports, with explanations for any deviations from the official code. (AFX News via Northern Light) In related news, Institutional Investors Give Singapore’s Corporate Governance Regime the Thumbs Up. A PricewaterhouseCoopers survey found Singapore’s standard of corporate governance rated slightly higher than Hong Kong’s and Japan’s, with a larger gap separating Malaysia, Taiwan and Korea. Over half of survey respondents also voiced the need for

• increased disclosure of directors’ dealings with related parties
• separation of the roles of chairman and chief executive/managing director

Back to the top