Archives: June 2001

Proxy Monitor Recommends Lone Star Shareholders Dissidents

In a contested election, Guy Adams, is seeking to unseat Jamie Coulter, the company’s chairman and CEO. Mr. Adam’s objective is to enhance the independent representation on this board and to bring change and accountability to a board he believes has supported unacceptable corporate governance practices and a management team he believes has failed to return sustainable value to shareholders.

Two month’s after Adams filed his solicitation materials, Lone Star sued seeking to prevent him from soliciting or accepting proxy votes. The company alleged that Adams filed misleading proxy materials but a federal judge ruled he could proceed after correcting two errors in his filing. The company also implicated a highly-regarded institutional investor, claiming that Adams was a “stalking-horse” for the investment fund and “not a bona fide Lone Star investor.” In doing so Lone Star alienated at least a few investor groups who found the move to be arrogant and offensive.

Proxy Monitor ultimately asked and answered two questions:

1) Has the board done its job?
2) Could Mr. Adam’s membership on the board enhance shareholders’ long-term interests?

To the first question, we answered no. Not in terms of its compensation decisions, not in terms of its governance practices, and certainly not in terms of fully appreciating its fiduciary role nor respecting the shareholder franchise (including those “activist pension funds” with “unknown political agendas”). Indeed, we believe that management’s over-the-top response to Mr. Adam’s exercise of his ownership rights, lends itself to support the dissident’s concerns about the board’s commitment to an impartial and high-quality decision-making process, not to mention its good judgment.

To the second question, we answered yes. Mr. Adams is not seeking to gain control of the board or to push an agenda that management describes as different from other shareholders. Quite simply, Mr. Adams is seeking to ameliorate shareholders’ rights on a rather basic level – by respecting proper governance practices and by restoring accountability. Furthermore, we are not swayed by management’s assertion that Mr. Adam’s membership would “disrupt” or “destroy the progress that Lone Star has achieved.”

Accordingly, we recommend that shareholders DISCARD the WHITE proxy card, and vote FOR Mr. Adams using the GOLD proxy card.”

Institutional Shareholder Services also reportedly supports the dissident slate.

Rationalization of SRI Codes Predicted

Corporate social responsibility have proliferated so much that leaders in the field say they’re worried about company confusion and fatigue, as well as inconsistency. At the recent conference of Social Accountability International, Michael Goldstein, chairman of Toys R Us, and Mil Niepold, director of programs at Verite, said the proliferation of codes has left many suppliers “reeling.” The publication Ethical Performancepredicts that “ultimately institutional investors will force a rationalization because they require standardized measurement tools in order to assess companies.” From the July issue of BizEthics Buzz, a free service of Business Ethics magazine. Just e-mail your postal address to and they’ll send you a sample issue and include a special introductory offer for new subscribers.

SRI Codes Meeting Benchmark

Resolutions asking companies to improve worker standards — or adopt those set forth by the International Labor Organization — were among the top vote-getters of 138 social policy shareholder proposals that came to votes during annual meetings. Of the 27 proposals garnering support from 10 percent or more of shareholders, 15 addressed global labor standards or fair employment in the United States and Northern Ireland. The highest votes were at two companies with operations in Burma — Unocal Corp. (23% and McDermott International (16%). The International Labor Organization and other rights monitoring groups have raised alarm about the extensive use of forced labor in Burma, also known as Myanmar, which is run by a military junta.

“These votes reflect that a growing number of shareholders are sending management the message that they don’t want their companies profiting at the expense of workers being discriminated against or ruthlessly exploited,” said Meg Voorhes, Director of IRRC‘s Social Issues Service. Voorhes noted that some institutions, like CalPERS, are placing labor and human rights screens on their investments in emerging markets.

Among the other social issues proposals getting support of 10% or more were ones linking executive pay to social criteria at AT&T, Boeing, FleetBoston Financial and Unocal, and a resolution asking Chevron to report on its controversial plans to drill in Alaska’s Arctic National Wildlife Refuge (ANWR). Another ANWR resolution — filed with ExxonMobil — fell just shy of the 10% mark.

The 10% figure is an important because under the SEC a proposal that earns this level of support may be resubmitted, regardless of how many times it has appeared on the company’s proxy statement. Overall, the number of social issues shareholder proposals receiving 10% or more support this year has nearly doubled compared to recent proxy seasons, according to IRRC, which has tracked such shareholder activity since 1972.

Transparency Begins at Home

Pax World Funds, home of the original socially responsible mutual fund to be made available to investors, announced another milestone: The fund family is now the first in the socially responsible investment (SRI) world to provide complete details on the Web about the voting at its own annual meetings. The new step by Pax World also is a rarity in the broader mutual fund world, which has been slow to divulge the specifics of the voting behind closed doors at investment companies.

Information is now available about the most recent annual meeting of shareholders held on June 14, 2001. Voting tallies are accessible on such matters as the selection of fund Directors and public accountants, as well as other key administrative functions. In May 2000, Pax World was among the first mutual fund families to announce that it would publish its proxy voting in individual portfolio stocks. This information, provided in conjunction with Proxy Monitor, has become one of the most popular areas of the Pax World Funds Web site.

ASCS Survey

The American Society of Corporate Secretaries, with membership at 3/31 of 4,256, reports that

  • 51% of surveyed companies provided electronic voting as an option for their annual meeting, compared with 39% last year
  • 41 companies are making their annual meetings available via Internet with 24 “live,” compared to 4 companies using “live” broadcasts last year
  • 89% reported all directors attending their annual meeting (88% schedule a board meeting for the same day

Directors Survey

The Segal Company has conducted “The Annual Study of Small-to-Midsize and Large Public Company Boards: 2001” which examines the compensation of directors of companies by size group and reports on director’s fees, non-cash compensation, stock-option grants and stock held.

  • Large companies pay higher retainer fees than do small-to-midsize companies ($36,000 median annual retainer vs. $10,000).
  • Small-to-midsize companies grant more stock options than do large companies (Initial stock awards — 8,250 vs. 3,000). The median ongoing award at small-to-midsize companies is also greater (5,000 compared to 3,500).
  • Although most board members of small-to-midsize companies (82%) and large companies (91%) own company stock, directors of small-to-midsize companies have a greater number of shares in the companies they serve than their large company counterparts (50,000 vs. 18,787).
  • Some large companies offer benefits such as deferred compensation plans, life insurance, or retirement plans to directors; but very few small-to-midsize companies follow this practice.
  • Large companies address more issues at the board-committee level than do small-to-midsize companies. Only 51% of small-to-midsize companies have 3 to 6 board committees compared with 85% of large companies.
  • More large companies have committees dealing with corporate governance issues than do small-to-midsize companies. 37% of large committees have a governance committee compared with 2% of small-to-midsize companies.

The sample in the 2001 study includes 189 large public companies with median annual sales of $17 billion and median net earnings of $932 million as of December 31, 1999. It also includes 180 small-to-midsize companies with median annual sales of $154 million and median earnings of $13 million as of December 31, 1999. This is the fourth study of this type that The Segal Company has conducted. The first two were conducted with Grant Thornton, LLP. Contact Mary Feldmanfor copies of the complete study report.

Challenges to Executive Pay

Randall S. Thomas’ and Kenneth Martin’s paper, “Litigating Challenges to Executive Pay: An Exercise in Futility?“, finds that plaintiffs win a greater percentage of the time in compensation cases against closely held companies than against publicly held companies. Plaintiffs average about 30% success in maintaining duty of care claims. With waste claims, plaintiffs succeed about 40% of the time, while for duty of loyalty claims, they win about 35% of the time.

Comparison of Takeover Law

‘Share Ownership, Takeover Law and the Contestability of Corporate Control’ in Company Law Reform in OECD Countries. A Comparative Outlook of Current Trends is th title of Guido Alessandro Ferrarini’s paper on corporate control contestability as a policy objective for company law reform. He considers the impact of large shareholdings disclosure on the market for corporate control and posits that legal barriers to takeovers have a limited impact on the contestability of corporate control; their practical effect might simply be to re-orient defensive actions towards different techniques.

Ferrarini finds, for example, that legislation directed at mitigating the impact of mandatory bids on transfers of corporate control will lower the number of efficient transfers of control but a higher number of inefficient transfers will be allowed if the bid’s price is lower than that paid for the controlling block.

Self-Dealing: A Comparative Analysis

Luca Enriques, of the Universita’ di Bologna, looked at the legal tools employed in the United States, the United Kingdom, Italy, France, and Germany in order to regulate self-dealing. His paper, “The Law on Company Directors’ Self-Dealing: A Comparative Analysis,” published in the International & Comparative Corporate Law Journal, Vol. 2, 2000, describes the trade-off that any legal system faces in regulating self-dealing (deterrence versus the risk of overkill). It then provides a description of the individual legal tools adopted to regulate self-dealing transactions (i.e., prohibition, disclosure, approval or ratification by the board, approval or ratification by shareholders).

His analysis shows that the regulation of self-dealing is more sophisticated and has more bite where equity markets have a longer traditions and dispersed ownership is more common, i.e., in Britain and the United States. The paper concludes with possible explanations for the minor significance of self-dealing regulations in continental Europe, and advocates a reform of the Italian law on self-dealing.

Shareholder Activism in Malaysia

A minority shareholder watchdog group has been set up in Malaysia to encourage active shareholder participation in listed companies. According to Securities Commission chairman Ali Abdul Kadir, “the watchdog group will be licensed as an investment advisor in order to ensure its independence and is expected to be fully operational by this year.” Ali also said corporate success in raising funds hinges directly on their ability to earn good corporate governance reputations. Institutional investors will pay a premium for shares of companies with good corporate governance but will also butally punish companies perceived to practice poor corporate governance. (AFX News, 6/26)

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South Africa Leads

South Africa is ahead of other emerging markets in terms of corporate governance, according to Stephen Dover, chief investment officer for Franklin Templeton Investments’ global activities. However, he believes institutional investors should be more proactive to ensure independence of directors, protection of minority interests and linking executive remuneration to performance.

The World Bank’s task force promoting corporate governance indicates that South Africa, Brazil, South Korea, Russia and India would benefit most by corporate governance reforms, but, according to Dover, South Africa is “far ahead” of the other four. (Country Faring Well in Terms of Corporate Governance)

Monks and Sykes Offer Advice on Myners

The central proposal of the Myners review of UK institutional investment, closely modeled on the approach taken on corporate governance by the Cadbury (and subsequent) Codes, is a short set of clear principles of investment decision-making. These would apply to pension funds and, in due course, other institutional investors. As with the Cadbury code, they would not be mandatory.  But where a pension fund chose not to comply with them, it would have to explain to its members why not.

One of the more provocative recommendations is incorporation of the US ERISA principle on shareholder activism into UK law quoted on p. 92 of the report, making intervention in companies, where it is in shareholders’ interests, a duty for fund managers. According to the report, managers should have an explicit strategy, elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy.

In a recent e-mail, corporate governance author and activist Robert AG Monks writes, “There has been so much talk about activism and corporate governance over the last 15 years that it is gratifying finally to contemplate a government formally adopting activism as a national policy and taking specific steps in order to implement that policy.” He also includes a link to a recent posting to his own site, a letter to the Myners Commission with some specific suggestions entitled “Principles of Institutional Investment Decision Taking: A Response to the Treasury’s Requested Consultation on the Myners’ Proposals,” by Robert A G Monks (author of The New Global Investors: How shareholders can unlock sustainable prosperity worldwide and Allen Sykes (who recently wrote Capitalism for Tomorrow: Reuniting Ownership and Control).

Monks and Sykes argue that government retirement policies have fundamentally altered the previously existing state of shareholder control by encouraging development of pension funds, which are now majority shareholder. “No longer do individuals have the power to require accountability because government created fiduciaries have majority control which they choose not to exercise.” “Only government action can remedy the fault created by government inaction.”

Under absentee ownership, managements have become self-governing, self-perpetuating and self-serving. “This concentration of power has led to widely recognised abuses by executive directors, to often huge remuneration packages poorly related to performance, and to takeovers and mergers frequently driven by managements’ motives rather than shareholders’ interests.”

In both America and Britain the most active fiduciary shareholders are public sector pension funds, even though they are largely staffed by personnel with little or no professional business experience. This is because of the more direct conflicts of interests faced by funds in the private sector. Investment institutions have trustee and fiduciary duties to their beneficiaries to act solely in their interests but cannot exist without corporate business. The crux of the problem is that institutional investors are powerless to fulfill their fiduciary duties to it and there is at present no enforcing mechanism.

I also raised this issue years ago in an essay entitled Fiduciary Responsibilities For Proxy Voting where I noted that the Pension Welfare Benefits Administration had never taken an enforcement action against a fiduciary for failing to monitor or for voting a proxy contrary to the best interests of plan participants.

Referring primarily to the Myners recommendation to incorporate an ERISA type duty for fund managers to intervene in companies where it is in shareholders’ interests, Monks and Sykes indicate the result is “by far the boldest and most far reaching of any major official enquiry on institutional investment for a generation, and on corporate governance ever.” However, they believe that voluntary efforts are likely to be “stillborn,” since the risk-cost-benefit ratios are likely to be unfavorable for pioneering activists as compared to their passive competitors who also reap the benefits of their action.

To address these concerns, Monks and Sykes recommend the following:

  • The government should affirm that creating an effective shareholder presence in all companies is in the national interest, that there should be no power without accountability and that this principle should be taken into account by all regulators, the Takeover Panel, the competition authorities, etc.
  • All pension fund trustees and other fiduciaries holding shares, must act solely in the long-term interests of their beneficiaries and for the exclusive purpose of providing them with benefits. (While it can fairly be argued that this is already trust law, it needs to be given specific, continuous and strong public emphasis and enforcement to overcome present inertia and conflicts of interest – i.e. to make all trustees, fiduciaries, etc., pro active in the sole and exclusive interest of their beneficiaries.)
  • To give full effect to the first two proposals institutional shareholders should be made accountable for exercising their votes in an informed and sensible manner above some sensibly determined minimum holding (e.g. £10m). As the Report notes, votes are an asset (voting shares always have a market premium over non-voting ones). Accordingly they should be used to further beneficiaries’ interests on all occasions. In effect, the voting of all institutionally held shares would be virtually compulsory.

Additionally, the authors call for a regulator to enforce the law and express their belief that once market forces have been established there may be no further need for such government enforcement.

While I strongly agree that enforcement is the key and am eager to see the Myners recommendations implemented, along with the reforms called for by Monks and Sykes, I think the best long term answer may lie in developing a framework which 1) allows the members and beneficiaries of trust funds to have more say in their governance, 2) provides a clear framework for disclosing how proxy voting and other fiduciary decisions are made, and 3) provides a clear avenue to sue for breach of duty. As Monks and Sykes indicate, “no-one looks after other people’s assets as well as their owners.”

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CalPERS Approves $250 Million Investment to Relational Investors

The action increases CalPERS’ investment in Relational to $750 million. Relational’s investment strategy often involves two steps. The fund makes a moderate investment and begins to communicate with the company’s management, board of directors and other investors. Depending on the outcome of the communications, the firm may increase its investment to gain more leverage in negotiations with management. In cases of persistent underperformance or where other factors warrant, Relational may submit shareholder proposals or seek board representation.

As of March 31, 2001, Relational made 34 investments. Examples include Apria Healthcare Group, Mattel, and Waste Management. Annualized returns on realized investments have exceeded more than 70%, versus an approximately 24% return for the same period for the S&P 500 Index.

Shareholders Less Patient

Russell Reynolds Associates annual survey of institutional investors finds that investors in a bearish market increasingly willing to act. Fifteen-percent of investors polled reported having called for a CEOs’ termination within the past year.

Ninety-four-percent of all respondents cite a company’s financial performance as among the most important factors influencing investment decisions. Eighty-five-percent point to poor strategy and lack of vision as key early warning signs indicating that a CEO is in trouble. With regard to CEO compensation, overwhelming majorities of those polled feel that boards should link CEO compensation more directly to performance and that CEO severance packages are excessive (93 percent and 89 percent, respectively).

Most noteworthy among this year’s findings may be that succession planning is a major concern of the institutional investor community. Eighty-one-percent of investors surveyed are troubled by the perceived failure of companies to properly groom internal CEO candidates. Most investors believe that companies in their country adhere to sound corporate governance practices; notable exceptions include Japan (3 percent) and Australia (37 percent). Two-thirds of investors surveyed have voted for a shareholder resolution within the past year; 15 percent have sponsored a resolution.

The survey, titled “CEO Turnover in a Global Economy,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, an international opinion research organization, and is based on interviews with more than 300 institutional investors from six countries: Australia, Canada, France, Japan, the United Kingdom and the United States.

High Plains Continues Reforms

Ethanol makers, High Plains (O-HIPC), moved to de-stagger its board of directors. Lawndale Capital Management’s Andrew Shapiro noted, “that High Plains voluntarily and pro-actively adopted this governance improvement is quite refreshing. We hope more companies will follow High Plains’ lead and come to the realization that good corporate governance adds shareholder value.”

This action will increase the Board’s accountability to shareholders,” said Donald Schroeder, High Plains’ Board Chairman, “and is one more step in the progression of good corporate governance we initiated last year with the adoption of a formal corporate governance by-law.” The prior by-law amendment, announced May 9, 2000, formalized increased oversight responsibilities of the Board, and requires at least two-thirds of the Board (and 100 percent of many critical committees) to be independent, and to meet in independent executive session each meeting.

“We believe de-staggering the Board will increase potential institutional interest in High Plains, and will help us focus on our priority of enhancing shareholder value,” continued Schroeder. “The Board has been sensitive to the fact that many large institutions prefer the annual election of all directors. We also recognize that this is an era in which management of many large companies is in conflict with its shareholders over out-dated corporate control provisions, and we are proud to have adopted one of the strongest, and most shareholder friendly, corporate governance programs of any public company,” he concluded. The previous board independence by-law put in place by High Plains Corp. in July 2000 is virtually similar to the Quality Systems (O-QSII) governance bylaw Lawndale introduced to members of the Council of Institutional Investors at its Fall 2000 Meeting in Boston.

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eRaider Triumphs in Goldfield Proxy Contest

Activist investor website eRaider claims to have became the first Internet organized group of dissident shareholders to win a proxy contest with its victory at Goldfield Corporation(Amex: GV). ERaider’s Shareholder Value Slate outpolled management on the key question of cumulative voting at the annual shareholder meeting near GV headquarters in Melbourne, Florida. ERaider’s victory to save cumulative voting for the next election ensures that shareholders can continue to make their voices heard by management. “Shareholders won a victory even before a single vote was counted because Goldfield’s stock price has been very well supported during this contest which has energized shareholders and management alike, ” according to eRaider co-founder Aaron Brown.

Although the Shareholder Value Slate prevailed on the question of cumulative voting, the management-recommended slate of directors won a narrow victory over eRaider’s dissident slate. Management nominees received 11.6 million to 10.4 million for eRaider’s nominees. “This victory proves that Internet shareholder activists are a force to be reckoned with,” eRaider co-founder Aaron Brown says. “As big a win as it is for website message boards and eRaider, it’s an even bigger win for Goldfield and its shareholders. We began this fight because we want to make money for this company and its shareholders, and now we’re in a better position to do that..”

Unlike most dissident groups, eRaider’s Goldfield Shareholder Value Slate candidate ran on a platform that pledged not to break up the company, fire management or impose similar radical changes. Instead, it promised more aggressive oversight of management, highlighting low stock ownership among incumbent outside directors, and to raise Goldfield’s profile in the investing community.

Corporate Governance and the Indian Private Sector

A new book by that title has been authored by Jairus Banaji and Gautam Mody, two visiting fellows of the University of Oxford who studied corporate governance in the context of large private sector companies in India, against a changing regulatory background and mounting public concern ((1998-2000). The study consists of two reports:

  • The first report deals with the results of 170 interviews with a very wide range of business representatives including CEOs, non-executives, fund managers and audit firms on the main issues in question (boards, accounting and disclosure standards, institutional investors).
  • The second report examines the fragmented nature of corporate regulation in India and the need for consistency at this level.

The authors recommend that:

  • regulatory intervention needs a much stronger definition of ‘independence’ for directors, in line with best practice definitions now adopted in the US and UK, as well as the mandatory introduction of nomination committees,
  • financial institutions need not rely primarily on their own resources in the job of monitoring managements; a more active approach to corporate governance on the part of these shareholders requires larger changes in the nature of the FIs’ ownership and control by government, greater autonomy for institutional managers, and the active development of a market for corporate control.

Available from Orient Longman Limited, Kamani Marg, Ballard Estate, Mumbai 400 001, Tel: +91 022 261 6918, 261 6919, Fax: +91 022 2691278; Special 10% discount on orders for 6 copies and above.

Phantom FDI

The staggering increase in foreign direct investment into Hong Kong last year suggests a growing flight of hot money out of China with Hong Kong at considerable risk to its financial reputation. FDI into Hong Kong climbed from about $14.7 billion in 1998 to $24.4 billion in 1999 to a staggering $64.3 billion last year, far in excess of the $38 billion in offshore investment that poured into mainland China. Over the same period that $64.3 billion flowed in last year, about $62.9 billion described as outward FDI left the city. Under IMF guidelines, FDI is defined as when an investor based in one country acquires an asset in another country with the intent to manage that asset.

Money from tax havens and the mainland made up almost 70% of Hong Kong’s FDI inflows according to official statistics. Apart from mainland money, the boom in Taiwanese investment in the mainland could also explain some of the influx because the island’s businesses are forced to conceal their transactions to avoid Taipei’s restrictions on cross-strait economic ties. Analysts see much of the inflow as due to tax avoidance and disguised capital flight from domestic corporations which overprice exports and the “re-nationalize” the money, taking advantage of generous tax breaks and other incentives extended to foreign investors.

Apparently, Beijing has been trying to curb illegal outflows but it is extremely difficult for governments to tackle this problem when the international banking system is so accommodating. (China’s Money Laundry, Far Eastern Economic Review, 6/21 issue) See also People’s Republic Of Cheats in the same issue. “Half of all business contracts signed in China are fraudulent in some way, officials say, while two-thirds of all state firms cook their books.” According to recent officially published figures:

  • Economic corruption eats up 13%-17% of the country’s annual GDP.
  • Tax evasion accounts for 50% of taxes due in the private economy, while total losses from tax evasion are 100 billion renminbi ($12 billion) a year.
  • Counterfeit goods and substandard goods account for 40% of all products made in China, with losses running at 200 billion renminbi a year.
  • Two-thirds of the biggest state firms produce false accounts.
  • The underground economy is the equivalent of 20% of GDP (actually twice that, say independent estimates).
  • 15%-20% of the spending on an average infrastructure or building project is lost to bribery, fraud, and poor-quality work.

Phantom Wealth

Thomas Parker is the author of What If Boomers Can’t Retire : How to Build Real Wealth Security, Not Phantom Wealth. An article based on his book appears in the May/June issues of the Conference Board’s magazine of ideas and opinion, Across the Board. Parker argues that baby boomers will all want to cash their stock in upon retirement and the result will be an insufficient number of workers continuing in employment to pay the prices boomers expected. Stocks are a dangerous way to fund your retirement unless you sell them all out long before 2008 because of demographics.

Parker argues that we should value the stocks in our retirement portfolios conservatively at cost or market, whichever is lower. “Gains should not be recorded until the stocks have been sold and the gains have become cash in hand.” What would that do for a portfolio the size of CalPERS, which recently dipped about $20 billion? He has good points. Many with dotcom investments would agree with his assessment that “phantom wealth often comes before the company has created real wealth by adding to the pie, and sometimes it vanishes before additions have been made to the pie.

The article and book are certainly spurring debate. The same issue of Across the Board contains commentaries from Ken Goldstein of the Conference Board, corporate governance notable Robert A. G. Monks, and Jeremy J. Siegal of the Wharton School. In my opinion, Parker is raising important issues but offers little in the way of solutions.

Instead of recommending more money be funneled into smaller more risky ventures as he seems to, I’d recommend that we require our pension and mutual funds to act more like owners instead of speculators. If they were to take a growing role in governance, we’d have greater disclosure and fewer bubbles. In addition, corporations think they are surrounded by gadflies at annual meetings now; just wait until we retire! I know people who are amassing wealth and investments primarily so that they can wield power in their old age. They’re not going to cash out. They hope to keep building wealth through eternal vigilance.

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ISS Backs Goldfield

The Goldfield Corporation (Amex: GV) announced that Institutional Shareholder Services (ISS) recommended that shareholders vote FOR management’s slate of director nominees at the Company’s Annual Meeting, scheduled to be held on June 19, 2001, rather than the dissident nominees proposed by an e-Raider activists.

ISS noted: “The company’s operational and stock performance have been exemplary, especially for a micro-cap company. Management has implemented a specific long-term strategy for the company to improve shareholder value.” The report concluded that “it would be in the best interests of all shareholders for the company to ‘stay the course.'”

However, Aaron Brown, eRaider co-founder provides perspective. According to him, ISS “supported eRaider’s ( Inc.) dissident recommendations over management’s on two out of the three agenda items. On the third item ISS took a neutral stance, recommending an independent outside director with mining or electrical construction experience (eRaider’s original proposal) over eRaider’s and management’s nominees.”

“Goldfield adopted many of our proposed changes in order to win the neutral verdict on one item,” Brown stated. “John Sottile indicated he would resign from the nominating committee of the board, thus opening up the board to independent nominees. Further he said he would have no objection to the board redeeming his preferred stock, which gives him controlling voting rights in some circumstances, despite representing only about 1.5 percent of the shares outstanding. He finally answered questions about a missing $583,000 that shareholders have been asking for ten months. Outside members of the board increased their holdings of Goldfield stock from a low of $375 among all members to $65,000 and officers of the Company bought another $425,000. Sottile outlined a long-term strategy that impressed ISS, but had never before been communicated to shareholders. Even if we lose on every agenda item, we have won most of what we set out to accomplish.”

There appears to an inaccuracy here one party or the other but it also appears that eRaider may be on the verge of a victory dispite that lack of full support from ISS.

Social Choice for Social Change’s Response to Editorial inPensions&Investments (see Limits to Activism, CorpGov.Net, May)

We are writing to present the context of our protest tactics that you judge “extremist” (“Brokers, not soldiers,” April 30, 2001). In particular, our group decided to carry signs in front of the high-rise residence of CEO John Biggs only after several years of using less confrontational means failed to convince the firm to heed its own survey, which found that 81 percent of participants support positive investing in its socially responsible Social Choice Account. We want TIAA-CREF to invest in companies
with outstanding track records on environmental or social issues. The respected Natural Investment Service rated the fund one of the worst ethical funds because of its failure to do so.

We have presented sound arguments for positive investing that are supported by experts in the field. We met with Mr. Biggs personally (and were told within three minutes why he wouldn’t implement our proposal). We instituted a call-in campaign. We took our story to the press. We held a peaceful protest in front of TIAA-CREF headquarters. Nothing worked. So, in the time-honored tradition of grassroots groups in pursuit of a just cause, we upped the ante.

This is deja vu for us. In the 1980s, we lobbied for four years for TIAA-CREF to create the fund in the first place. We heard essentially the same arguments then–financial, administrative, and legal–as now. When they finally consulted with experts who assuaged their concerns, they set up the fund. TIAA-CREF has refused to meet again with outside consultants. We hope the picture is becoming clear.

Intimidation? Groups like ours must utilize the kinds of power we have at our disposal (short of violence or threats thereof), which includes the power to bring public attention to the actions of a high-ranking executive. The anti-apartheid movement that the author finds “honorable” was successful in part because when polite entreaties to divest from South Africa failed, activists organized more disruptive rallies and sit-ins. In any case, the possible negative consequences of ours and others’ protests typically pale in comparison to the injustices they fight.

Instead of brokers seeking protection against protesters, perhaps they should pay more attention to what activists–and shareholders–are saying. More often than not, protests escalate because people in powerful positions fail to listen to reasonable arguments in support of popular causes.


Abigail A. Fuller
Co-chair, Social Choice for Social Change: Campaign for a New TIAA-CREF
MC Box 178, Manchester College
604 E. College Ave.
North Manchester, IN 46962

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BusinessWeek’s Barker to Fidelity’s Johnson

BusinessWeek’s Robert Barker offers advice to Fidelity’s Abigail Johnson (Offering Advice to Abby, 6/18/01), indicating that “Fidelity does little to explain the key legal fact of life for every investor in every mutual fund: when investors buy in, they become the outright owners of the fund.” Barker expresses his disappointment that Fidelity’s trustees are almost nonexistent on; he found only their names on the last page of the fund’s annual reports. As an example, he notes a new name on the list, Marie L. Knowles, indicating that investors can only find out about her by obtaining an “obscure Securities & Exchange commission filing called ‘Statement of Additional Information.'” Fidelity is not alone in leaving its trustees in obscurity. He found no mention of directors at Janus and only the barest of description at T. Row Price, although the Vanguard Group did a much better job.

“By early next year, the SEC will force funds to include basic information on trustees in annual reports. That’s why now is the moment to steal a step on your rivals…Encourage your independent trustees to take a high profile. Highlight their watchdog role in your marketing materials and new-account applications.”

I would add that disclosing how Fidelity votes its proxies would also go a long way in helping the owners of the fund know if trustees are doing their job. Such disclosures would be welcomed not only by those interested in the many social issues raised in proxies but also by those looking for the correlation between good governance and increased profitability.

eRaider’s Shareholder Value Battle

Goldfield’s management has countered eRaider’s Shareholder Value Slate challenge by spending more than 1.5% of the Goldfield’s market capitalization on a proxy fight and trying to reverse the company’s 95-year-old policy of cumulative voting for directors, which gives dissidents a better chance of gaining a seat. If management fails to overturn cumulative voting, it now plans to adjourn the meeting before electing directors. eRaider is soliciting proxies for Goldfield’s annual meeting on June 19, 2001. eRaider strongly advises all shareholders to read the proxy statement or by emailing, or a free copy is available from:

Privateer Asset Management
PO Box 20170
Park West Station
New York, NY 10025

Goldfield’s market capitalization declined from over $100 million in 1969 to $5 million in 1998, despite the injection of additional shareholder capital. If it had performed in line with the S&P 500 over that period, Goldfield share would be priced about $75 rather than the current $0.66. The stock has rebounded 76% from its low since eRaider announced it had accumulated shares in the company and invited stockholders to its Internet message board to use them as a resource to revitalize the stock. (6/10/01)

Watch for June 19th News of Internet-Organized Victory Inc. filed a definitive proxy statement to run a dissident slate of directors at Goldfield Corp. (AMEX: GV). eRaider is unhappy with the level of oversight offered by the existing Goldfield board so it has nominated a short slate of Sam Rebotsky (a 25-year shareholder and CPA), Aaron Brown (eRaider CEO and finance professor) and Deborah Pastor (eRaider portfolio manager and MBA). Other participants in the solicitation are Martin Stoller (communications professor), Paul Zarowin (accounting professor), David Groelinger (CFO of Riddel Sports) and Scott Lodin (Chief Counsel of Andrx).

eRaider has organized an Internet alliance of individual Goldfield shareholders (there are no known institutional holders other than eRaider) with 875 names. If self-reports are accurate and everyone in this group votes for the slate, eRaider expects to elect two or three directors on June 19th under cumulative voting. Should eRaider succeed in getting even one nominee on the board it will prove that Internet energy can wage a successful proxy contest without the expenses of mail or telephone solicitation.

The larger message will be that activist institutions can hope to gain 25 percent to 40 percent of the individual shareholder vote in contested elections on business issues without significant expenditure. For many companies this would be the difference that will allow a jump from passing generic governance resolutions to electing directors, requiring or vetoing merger proposals and enforcing binding shareholder will on major strategic issues. I’m looking forward to the news. (6/08/01)

Union-Based Shareholder Activism

The Council of Institutional Investors (CII) reports that CII member union funds file 58% of all proxy resolutions in 1999. Georgeson, a proxy solicitation firm, said they filed 43% of those dealing with corporate governance in 1998. Nneka Fletcher discusses the trend in ISSue Alert, 3/2001. She points to labor based web sites such as and the AFL-CIO’s Executive Paywatch. Critics argue that shareholder activism is being used simply as another tactic to further collective bargaining. Some inside labor are concerned that maximizing shareholder value may take away from traditional concerns.

Fletcher, however, concludes that union shareholder activists bridge the gap between shareholders and stakeholders. If shareholder value is maximized using excellent corporate governance practices, the company will perform better with increased profits also trickling down to employees in the form of pay raises. The way I see it is that unionized employees typically receive higher compensation. Shareholder activism is one more tool in a long tradition of working smarter and ensuring that unionized workplaces are more efficient.

“CalPERS Effect” Updated

Stephen Nesbitt, senior managing director and a principle of Wilshire Associates, updated his assessment of the impact of CalPERS’ good governance campaign. CalPERS has been a leading activist in the US corporate governance movement since its beginnings. Indeed, CalPERS has been the prime instigator of many aspects, including annual focus lists for poor performance and governance, which CalPERS awards each proxy season. Nesbitt, who’s firm has provided CalPERS with advice concerning firms to be targeted, assessed the performance of the 95 firms awarded this dubious distinction, beginning in 1987 through November 2000.

Key finding: “Despite underperforming the S&P 500 Index by 14 percentage points for the five years up to CalPERS’ shareholder activism, the 95 companies that were targeted by the system from 1987 to 2000 have outperformed the S&P 500 Index by 14 percentage points over the subsequent five-year period.” (The “CalPERS Effect” on targeted company share prices, Directorship, 5/01)

The obvious lesson is that poorly managed corporate assets present a substantial opportunity to obtain a premium on investments. However, the implication is that such turnarounds are not merely regression to the mean but are the result of intervention by CalPERS. Resources spent on identifying and rectifying poor corporate governance can be profitable. Both Nesbitt and CalPERS have been asserting such for years.

I assume that Nesbitt has earned money over the years by providing his advice to CalPERS. What strikes me as absurd, however, is that, as far as I know, CalPERS has still never made a move to increase its holdings in target firms prior to announcing their intention to seek changes. Although they have benefited financially from their annual Focus List because their existing holdings include most top US firms, they continue to forgo additional revenues that any private investor, such as Warren Buffett, would not fail to mine by increasing his stake prior to announcing his efforts to add value at the firm through corporate governance activism.

Perhaps this is because almost half the Board members are elected by members of the System who do not benefit directly from increased earnings? Most of the System’s gains have gone back to employers in the form of lowered contribution rates and members of the System have seen little in the way of increased benefits. If they shared more directly in the gains, wouldn’t the “CalPERS Effect” be mined more deeply?

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