World Council for Corporate Governance to Hold Conference
The Council’s mission is to make a difference to national economies by improving the quality of their corporate governance practices. They hope to become a leading provider of knowledge about best practices in corporate governance to company boards, policy makers, investors, fund managers, financial advisors, researchers, academics and other interested parties by creating active partnerships and fostering cooperative relationships between organizations committed to improving quality of corporate governance worldwide.
The theme of their second conference, ICCG 2002, is “Corporate Governance -Turning Rhetoric into Reality.” It is recognized that many countries have developed corporate governance codes. Yet, how are these codes being implemented? The Conference will provide a unique platform for exchanging information on the practices of corporate governance worldwide. It is expected to be attended by 500 delegates from 38 countries and offers an unrivaled opportunity for interaction and networking with global leaders in business and government.
ICCG 2002 will be held from 18-19 January 2002 in The Taj Mahal Hotel, Mumbai, India. For more information, contactKlaus Bohnke, Director General.
FASB Accepts Comments on Intangible Asset Project Until October 5th
Due to the recent tragic events in New York, Washington and Pennsylvania, the Federal Accounting Standards Board (FASB) has extended its deadline for comments on its is proposed project on disclosure of intangible assets until October 5th. Go to fasb.org/tech/ and download “Proposal for a Project on Disclosure About Intangibles.”
I encourage readers to write a note of support to FASB’s Director, Timothy Lucas. Better disclosure and valuation of key intangible assets could eventually lead to better corporate disclosure on topics such as human capital, corporate governance, environmental management, labor issues, human rights and other corporate responsibility indicators.
Corporate governance experts and social investors argue that governance and social issues impact the bottom line through the creation or destruction of intangible assets such as the trust of shareholders, reputation, satisfaction of its workforce, consumer appeal, etc. Here a chance to eventually get the leading accounting standards body in the US to put some methodology, numbers and hopefully accounting principles in place.
The proposed scope is relatively narrow, being focused on disclosure about “intangible assets that are not recognized in statements of financial position, but would have been recognized if acquired either separately or in a business combination. It would also include in-process research and development assets that, under FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, are written off to expense on the day they are acquired.”
I believe that focus is about right for an initial project. However, I would hope the FASB’s focus would eventually evolve to include corporate governance and social issues.
Delaware Remains Virtually Alone
Shareowner activists succeeded in amending a provision in a Massachusetts bill that would have allowed companies to hold their annual meetings solely over the Internet. The bill now allows companies to broadcast annual meetings over the Internet, but still requires face-to-face meetings. The bill also allows companies to send proxy statements via the Internet to shareowners. Stephanie Haug, Assistant Portfolio Manager at Walden Asset Management, also indicates there is an effort underway in Delaware to rescind their recently enacted law allowing annual meetings to be held solely online. (see Shareowners Rally to Defeat Online Annual Meeting Provision in Massachusetts, SocialFunds.Com, 9/21)
Shareowner Alignment Index
Stern Stewart and Hackett Benchmarking & Research released findings of a new study of best practices in generating and sustaining shareholder value. Over 60 Global 2000 companies participated in the study, including Allied Waste, Briggs & Stratton, Conoco, Best Buy, Kimberly-Clark, RR Donnelly & Sons and Northrop Grumman, along with many leading firms based in Europe, Asia and Latin America. Top performers in the study produced more than twice the amount of shareholder value than nonaligned firms over the past five years. Overall, the study found that “value-aligned companies” — those that consistently deliver value to shareowners — share the following characteristics:
- Business decisions are made based on long-range economic value over short-term earnings impact
- Board members and top managers have significant equity holdings at risk
- Performance measurement focuses on a few objective and straightforward value metrics that include the cost of capital
- Incentive plans are uncapped, to instill a culture of ownership by offering an unlimited upside pegged to sustained value-creation
- Projects are ranked and funded strictly according to their economic value
- Middle-level managers possess a high degree of business and financial literacy
- Financial information is measured and freely shared throughout the
An executive summary of the Shareowner Alignment Index is available online from Hackett Benchmarking & Research.
Florida State Board of Administration Nations Most Litigious Pension System
The FSBA is involved in almost 300 securities fraud lawsuits against companies whose deceptive behavior it alleges compromised the value of its investments. “We have all seen an increasing number of corporate actions that border on criminal – and sometimes are criminal,” commented FSBA Executive Director John T. Herndon. The agency is currently lead or co-lead plaintiff in eight lawsuits, and has filed private actions against an additional 14 companies. In comparison, CalPERS, widely held as the paragon of corporate governance activism, has acted as lead plaintiff in only one suit. (Miami Daily Business Review, September 11, 2001 as reported by The Corporate Library, 9/18/01)
Providence Capital to Launch Anti-Poison Pill Campaign
Providence Capital will launch a major Anti- Poison Pill Campaign at a “Town Hall” meeting and simultaneous audio webcast on Tuesday, September 25, 2001 at 4:15 PM. The meeting will be held in New York City at the Le Parker Meridien Hotel (118 West 57th Street). The discussion will be open to the media and members of the investment community. A Q&A session will follow the presentation by Bert Denton, Founder & President of Providence Capital.
Speakers will include Jeffrey N. Gordon, of the Columbia University School of Law; and Michael Hanrahan, a Delaware corporate practitioner. Participants can register to attend in person by calling (212) 888-3200 or sign up for the webcast online or by calling (800) 540-0559, Conference ID: PC925.
The focus of the seminar will be on a director nomination by-law amendment (DNBA), viewed as a potential cure for the poison pill. The DNBA would attempt to hold board members accountable for failing to abide by shareholder votes to eliminate poison pills. Courts in Delaware, where most U.S. companies are incorporated, have ruled that poison pills fall under the domain of the board of directors. However, if the suggested DNBA is passed by the holders of the majority of outstanding stock, board members who have failed to approve elimination of poison pill rights within 180 days after passage of a stockholder resolution requesting such action would no longer qualify for nomination for an additional term as directors, unless the board has submitted to the stockholders a binding resolution to abolish the poison pill.
Advance publicity quotes include the following:
- Denton: Poison pills impede the maximization of value. If the DNBA initiative is successful, institutional investors will be able to hold directors accountable for their support of poison pills.
- Gordon: Drastic anti-takeover measures destroy stock value and investor confidence, injuring those they purport to protect. The DNBA will use corporate democracy to respond to directors who ignore those who the company is intended to serve – its owners.
- Hanrahan: Because the DNBA does not require or preclude board action, it avoids the primary legal argument against poison pill bylaws, by relying instead on the very mechanism pill supporters have cited in defending the pill – the ultimate right of the stockholders to control who serves on the board.
Back to the topMore Thoughts on The New Global Investors
Anne Simpson, senior specialist in corporate governance with the World Bank and coauthor of Fair Shares: The Future of Shareholder Power and Responsibility, has also written areview of Robert Monks’ recent book, The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide. In contrast to my own rambling essay (several items below), Simpson gets right to the point. “Monks’ prognosis is useful” but the problem is that his proposals don’t adequately address “the conflicts of interests within the private pension funds” which his book highlights so well. “Tackling these requires overhauling the governance regime of investors. Principles of good governance – transparency and accountability – need to be applied to the institutions that invest on behalf of the public.”
Transparency, according to Simpson, would mean that banks, insurance companies, mutual and pension funds would all be required to provide full details of their voting records. “We do not yet have a fully fledged model of investor governance that reflects the principles of transparency and accountability. One solution is visible in the activist public funds in the US, which elect trustees from active members and pensioners and thus allow the funds to tackle corporate abuse without fear or favor.”
Activist public pensions, such as CalPERS, do offer a model for private funds in that six of their 13 members are elected by members. However, many distant observers of CalPERS, along with many members of the System, appear to have an unrealistic view of its operations, which are far from ideal.
For example, the CalPERS Board long argued that they were under no legal or moral obligation to release minutes or vote counts from closed door investment sessions. Without such a record being made public there was no way to determine if contributions or gifts were influencing Board members in their decisions and no way to hold them accountable. Only after a scandal involving what was essentially a Ponzi scheme, made against the advice of staff and a CalPERS consultant, was legislation enacted requiring such disclosures.
The Board of CalPERS continues to argue that their constitutional authority places them above the law, even though that position was discredited in Sacramento County Superior Court. (Kathleen Connell for Controller et al. v. CalPERS Board of Administration, case no. 98CS01749) and again in a 1999 Office of Administrative Law Determination (No. 18), which I filed.
The purpose of Proposition 162, which grants the Board authority under Caliofornia’s Constitution, was to prevent raids, limit political interference, and firmly establish the System’s primary obligation to its members. It was never meant to allow the Board to avoid public scrutiny or to place itself above the law. Last year the Board gave itself a raise even though their reimbursement rates are set in the Government Code. Kathleen Connell again took them to court; I again sought the less expensive route of a determination by the Office of Administrative Law.
When one recent candidate (the author) raised potential conflict of interests during his campaign, such as the Board members accepting gifts from contractors and serving, staff violated the System’s election rules in order to assist the incumbents reelection. After negative press, the Board proposed rules to avoid such future embarassments by banning discsussion of the issues in materials sent by the System to members. A Sacramento Bee editorial said the proposed rule “muzzles challengers in ways that risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (CalPERS muzzles critics: Ballot rules protect board, keep others in the dark, 5/25/99)
Anne Simpson is right, the most likely route to getting corporations to be responsible and accountable is through a law or other action that allows direct election of a substantial proportion of pension fund trustees from acttive members and pensioners. However, even if more funds provide such elections, like CalPERS, we will still need to educate members and pensioners.
One might expect that at a minimum, members and beneficiaries of CalPERS would vote out Board representatives who have declared bankruptcy more than once, failed to pay their taxes for years that support members and don’t get along with the Legislature whose support is required for raising benefits. Yet the incumbent in this year’s election is almost certain to get reelected, even though he failed all the above tests and more. (Member of PERS Board Faces Financial Difficulty: Debts Include More Than $84,000 in Taxes, 8/9/97, Sacramento Bee and Low Road At PERS: Ethnic Remarks Are Another Sign Of Arrogance, 11/2/99, Sacramento Bee). Since CalPERS is one of the best pension systems, it makes me wonder what world shaking changes would occur if all pension funds were run democratically and their members were well informed.
Activism Pays, But Could Pay Better for CalPERS
Gary L. Caton (Washington State University), Jeremy Goh (Singapore Management University) and Jeffery Donaldson (University of Tampa Florida) found that institutional activism to reform corporate governance pays. Evaluating 108 companies included in the Council of Institutional Investors’ annual hit list. “For those companies with little chance for improved performance (measured by Tobin’s Q-ratio), inclusion on the focus list is interpreted by the market as bad news initially but (it) tends to stop the slide in stock performance indicated in the pre-release period.” “For companies with performance slack, however, making the list not only stops the pre-release slide in equity values but also seems to mark an upturn in stock market performance, as indicated by the post-release average of abnormal (excess) return.”
Perhaps the most frequently cited study of such efforts is that of Stephen L. Nesbitt of Wilshire Associates. He found that prior to being targeted by CalPERS the stock returns for the 95 companies appearing on their targeted lists averaged 14% below the S&P index return. For the 5 year period after targeting, they averaged a return 2.6% above the S&P. (“Study finds activism does pay off,” Pensions & Investments, 8/20/01)
What continues to amaze me is that that CalPERS doesn’t take greater advantage of the “CalPERS effect” by increasing investments in targeted firms prior to public release of such lists. Would Warren Buffet, Michael Price, Robert A. J. Monks or any other rational investor who targets corporations for needed changes fail to take advantage of probable bounce in price? I don’t think so and neither should CalPERS. The current Board is cheating CalPERS members, beneficiaries and employers out of the benefits of their own activism. When will they wake up and smell the money?
In 1998 and 2000, the National Center for Employee Ownership conducted surveys of companies using broad-based stock option plans. In 1998 they found that 35% of respondents said they had repriced in the last three years. In 2000, only 8% had repriced since the new accounting rules requiring variable accounting for became effective (12/15/98). Attracting and retaining employees was the primary objective of options plans. About 3/4 also hoped to create an ownership culture. Half the companies reported regularly scheduled meetings for employees to discuss work issues in 2000, compared to 38% in 1998. To obtain the full 500 page report, “Current Practices in Stock Option Plan Design,” contact NCEO.
Geneva based Sustainability Asset Management has created a European Employee Ownership Index. Each company is assessed in terms of the availability and quality of its broadbased employee ownership program. ABN/AMRO Bank (Germany) will offer a specific financial product based on theSAM Employee Ownership Index.
NCEO, in conjunction with Watson Wyatt Worldwide and Katherine Klein at the University of Maryland, is conducting a major national survey. Participating companies will receive detailed feedback on how their plans compare with the others in the sample. If your company is interested in participating, contact Ed Carberry.
Employee ownership case studies sought for articles to be developed for trade and professional publications. ContactCorey Rosen. International case study participants sought for large-scale case study and survey on US and US multinational companies. If interested in participating, contract Michael Jones.
Guy Adams Wants Reforms
Guy Adams, the Lone Star Steakhouse & Saloon shareholder who unseated its chairman in July, told a Dow Jones reporter that the proxy process needs reform to make it easier for small shareholders to vote over the Internet and to make it easier for dissident groups to get reimbursed for legal efforts if they win. Adams reportedly spent about $50,000 on proxy materials and $350,000 in legal costs to defend his campaign. I’m a small shareholder and I’ve found it fairly simple to vote over the internet. Just how difficult is it to get legal expenses reimbursed? Can anyone enlighten me? (Dissident Who Won Wants Proxy Fights To Be Easier To Wage, Dow Jones Newswires, 9/10)
Research of 4,200 companies concluded that auditors are potentially compromised if clients pay them less for the annual audit then they do for consulting services…and almost half of the surveyed companies did. The authors found that such companies are more likely to carry substantially higher discretionary reserves for hyping future earnings. They’re also more likely to beat earnings benchmarks, suggesting a reduction in the quality of earnings. However, such companies may be paying a price, since the authors also conclude that investors are discounting the earnings and paying less for the stock of companies that pay the most in consulting fees to their auditors. (Does consulting compromise independent audits?Directorship, 9/01)
That’s the headline of a c/net article by Margaret Kane. Flop refers to the fact that although Delaware recently passed a law allowing companies to hold shareholders’ meetings in virtual, instead of physical reality, none have done so. Charles Elson, director of the Center for Corporate Governance at the University of Delaware is quoted saying, “No one has (held a meeting solely online) and no one will. The surest way to encourage substantial shareholder ire and potentially run afoul of possible legal constraints would be to do that.”
Sorry, I’m just too cynical to believe no one ever will. Amy Domini, of the Domini Social Equity Fund points out in the article that management today can “just turn off the mike and say, ‘we don’t want to hear from you,’ but they can’t physically turn (shareholders) away. You go online and the sky’s (the) limit. You can have a phony person pretending to be a real person, zero accountability, and total control by management of the owners.”
Most will recognize they need to continue to play the charade that shareholders control the corporation. They’ll increasingly webcast the meetings and secretly hope that shareholders will eventually just go away.
I love the quote near the bottom of the article from Donald H. Meiers, a partner at Holland & Knight and a former adviser with the Securities and Exchange Commission. “If you take a typical look at shareholder votes on board-of-director-initiated proposals vs. shareholder-initiated proposals, board proposals usually get a 90 percent approval and shareholder proposals usually get a 5 percent approval. So you can’t say there’s ever been any meaningful input by shareholders from that standpoint.” I think there’s been “meaningful input” from shareholders on a growing number of issues but Meiers conclusions just adds to the need for a wake-up call, perhaps for something like the Shareowners’ Alternative Voting Information proposal.
Recognition of Need for Board Independence Grows
Written corporate governance guidelines are up this year (75% vs 69% last year). Two-thirds have a formal process for evaluating the CEO and 71% believe directors should receive individual performance evaluations regularly but only 19% conduct them, so there is still plenty of room for improvement. Independence is evolving, according to the latest Korn/Ferry Study. “Five years ago, 57 percent of respondents said the CEO chose committee chairs and members. This year, only 37 percent indicate the CEO continues to wield the same authority. Now, this responsibility is assumed by a corporate governance committee (33 percent) or the full board (27 percent).” (Korn/Ferry’s ’28th Annual Board of Directors Study’ Finds CEO, Board Evaluations on Upswing, Outsiders Deciding Committee Membership, Compensation Static, 9/5)
CalPERS Bows to Pressure
CalPERS has deleted individual fund performance statistics for private equity firms from its website. “Based on feedback we got from the market, we concluded that posting per fund performance might hurt our competitive position,” a CalPERS representative said. Publishing the data was felt to put at risk accessibility to further investment in some of the funds. According to a report in London’s Financial Times, “the figures, listing the returns to the end of last year for every private equity fund in which Calpers has invested in the last decade, lifted the lid on the performance of a secretive industry.” The data had been available for years in reports to the CalPERS Board, but apparently posting on the Internet got a lot more attention. (Calpers bows to pressure and axes fund data from website)
- Mark Latham of the Corporate Monitoring Project has a September 2001 newsletter out. Our SAVI proposal got a 17.8% confirmed share of the vote at Equus II and Mark is already considering next year’s proxy efforts. He’s also got a new paper on his site on Democracy and Infomediaries.
- From the ever creative Phil Goldstein comes word of a way to access the SEC’s phone book. See R. R. Donnelley Financial’s RealCorporateLawyer.com and keep it handy for next year’s battles.
- Philip Verhaeghe seeks suggestions or reactions on theBelgian Directors Institute internet site.
- Shareholders have filed a record number of class actions this year, with nearly half the suits alleging IPO foul play. Investors can watch the bloodbath at the Securities Class Action Clearinghouse.
- From Wendy Wong So in Mauritius comes word of a posting “Corporate Governance for Competitive Advantage” and an upcoming issue of “Industry Focus” on the subject. Industry Focus is a bi-monthy publication of the Export Processing Zones Developement Authority.
- Marc Goergen, University of Manchester, brings word of a book on corporate governance edited by Klaus Gugler entitled Corporate Governance and Economic Performance. I haven’t reviewed but looks interesting from the table of contents.
- From the Foundation for Enterprise Development, theirSeptember E-Zine is loaded with information on employee ownership and related topics.
King Committee Report
Another King Committee Report on Corporate Governance in South Africa was released and assigned some blame for the inertia of shareowners and, more particularly institutional shareowners, as being responsible for the non-enforcement of steps taken against directors and managers who breach their trust. The report recommends the office of the Registrar of Companies should establish a register of delinquent directors which should be posted on a website. Committee chair, Mervyn King says responsible corporate entities are driven by fairness, accountability and transparency.
The King Report also calls for the separation of the positions of chairman and chief executive. The primary responsibilities of the chairman are to ensure governance, conduct director inductions and director evaluation. The chief executive should be able to develop a vision, strategy, business plans, values of the organization and monitor operations.
The report recommends that payment of directors be transparent and disclosed in the company’s annual report. A substantial portion should be performance based. While share options can be granted to directors, prior approval by shareowners should be required.
The European Corporate Governance Network – a loose grouping of people interested in governance issues – has incorporated. With plans for permanent funding and new articles of association, it has launched itself as the European Corporate Governance Institute. The 11 directors are split five academic and six general. ECGI’s mission is to improve corporate governance through independent scientific research and related activities taking into account the interests and concerns of the corporate, financial and public sectors.
Another Good Year for Dissident Shareholders
Shareholders seeking minority positions on boards have captured victories in 40% of 20 proxy contests, according to figures from proxy advisor Institutional Shareholder Services (ISS). The Wall Street Journal (WSJ) reports that record is on track with last year and compares with 26% in 1999. Entire boards are rarely outsted (partly because 57% have staggered boards). This year was no exception, with no such revolutions.
Shareholders who endorse the need for change often see attempts to replace the entire board as going too far. Yet, even minority changes can be dramatic. Last month investors of Lone Star Steakhouse & Saloon Inc. ousted Chairman, CEO and largest shareholder Jamie B. Coulter and replaced him with Guy W. Adams, an individual investor with no background in the restaurant business but who did have the backing of ISS. (Shareholders Shy From Board Ousters, Instead Opting for Dissident Members, WSJ, 8/30)
Back to the topWorker Owners: Global Investors
Monks, Robert A. G., The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, Capstone Publishing, 2001.
Like many, Robert Monks recognizes that corporations have become the most dominant institution of our time. While they appear to be the most effective tool for creating wealth ever created, they also exact a growing cost…primarily the corruption of government and externalization of risks and responsibility with growing social and environmental damage.
Monks weaves an effective tale but his perspective is that of an aristocratic shareholder activist, not a street demonstrator against the World Trade Organization. For example, he sees the biblical Parable of the Talents as a lesson in active investment. In the parable, those with more money (talents) invested and doubled their money, while the poorest amongst them buried it, stagnated and caught God’s wrath. I always viewed the Parable of the Talents as a Darwinian justification as to why the rich get richer and the poor deserve what they get.
Monks discusses early innovations of the East India Company, such as power sharing between investors and the leaders of government (often the same people) and the growing recognition of the need for long-term commitments, instead of voyage by voyage investments. Yes, this was an important innovation but the relationship of the Company with the government might also be seen as one of the earliest military-industrial complexes, with its corrupting influences.
When discussing Bill Gates’ rise through the “fruits of his own genius” and “some help from outside investors,” his praise appears unqualified. There is no mention of criminal activity or anticompetitive practices. Again, when Monks discusses the classic Berle Means dilemma of the separation of ownership and control, he sees it as the death of corporate social responsibility. Maybe so, but the social responsibility of Carnegie and Rockefeller certainly was very paternalistic…not based on balanced power and too often came at the end of their careers.
I have my differences with Monks’ perspective but our basic concerns are similar and our musings regarding solutions at least point in the same general direction. Fundamentally, Robert A. G. Monks is worried that corporations aren’t being socially responsible. He quotes a Harris poll conducted in late summer of 2000, which found that only 4% of Americans thought corporations should have only one purpose – to make the most profit for the stockholders, while 95% agreed that corporations owe something to their workers and communities (1% weren’t sure or didn’t answer).
Monks appears to believe, and I agree, that corporate control has been largely hijacked by CEOs for their own selfish interests. “Corporations are truly getting to the same place as Church and nation state before them, where the position of the leader rather than the institution becomes paramount. This is the condition that precedes loss of legitimacy and collapse.” At bottom, we’re both not so much concerned with the corporation as an institution but with the people who are impacted by it. Monks sees the rise in CEO pay to 475 times what their workers earn, as well as their political arrogance and their path of environmental degradation, as analogous to Marie Antoinette’s “Let them eat cake.”
David Korten presents an interesting analogy in his recent book, The Post-Corporate World. Just as King Midas destroyed and himself and those he loved when everything he touched turned to gold, the modern corporation has the potential to destroy everything in its path by turning nature and human relationships into money.
Change can come from outside the corporation in the form of laws or the marketplace or it can also come from inside the corporate structure itself, through the CEOs or shareholders. In previous books, Monks has rejected the need for new laws. “No new laws need be passed, no new regulations promulgated, no new agencies formed,” he says on page 184. However, by the next page he concludes that “amendments or possibly new regulations may prove necessary.”
My guess is that as a Republican, he’d love to see our problems solved by the marketplace, without government intervention. He founded Institutional Shareholders Services (ISS), a service which tells institutional investors how to vote in corporate elections to increase shareholder value. He founded LENS, a corporate governance turnaround fund, which has successfully outperformed the S&P 500 since its inception. Monks has certainly done more than most to use the market to move corporations toward more responsible governance to their shareholders.
As both a Democrat and public employee, my primary reservation against depending on government to solve our problems is that it is too often indistinguishable from the interests of corporate CEOs. Corporate contributions appear to determine who gets elected and corporate lobbyists largely determine what laws they write. That concern also appears to be shared by Monks.
We’re both pinning our hopes on pension funds. They’ve got the money, holding almost a third of US and a growing portion of global equity markets. With a base in millions of employees, their long-term perspective and universal ownership (owning a chunk of virtually all public companies) make them the vehicle of choice. Pension funds can set the standards for corporate governance around the world. The flow of money, much of it from pension funds, “creates the future of society”…”determining which regions will prosper, what technologies will be advanced, which jobs will be created, and what educational requirements will be set.” (p. 81)
“Why substitute a new institution – pension funds – for an existing one – large corporations? The answer is simple: pension funds have more of a stake in the good of society and the world.” “If pension funds can be liberated from the dead hand of tolerated trust abuse, this significant ownership element can function as the independent force that can call management to account.” (p. 181)
Pensions have more of a base in the average worker than other funds. They have more flexible rules governing their investments than other funds and they also have a longer timeline. They’re not dependent on getting a bump in the next quarter. Instead, they can look to the next ten or twenty years. With that long-term perspective, they should be more likely to favor sustainable environmental practices, community involvement, and employee participation.
We’ve identified the tool, but now the problem is putting it to use. Pension law, ERISA, requires funds to be administered solely in the interests of the participants and beneficiaries. That standard applies to all duties charged to a fiduciary, including the voting of proxies. However, as Monks points out, “there is the problem of proof. How can it be proven that the vote, or failure to vote, of a single shareholder caused a specific amount of damage.” Certainly corporate pension funds don’t want to develop an activist stance; voting against management at other corporations is likely to lead to retaliation.
One part of his solution would be a revision in the law, which would presume the following:
If a corporation has underperformed drastically for a substantial period of time, it can be presumed that the fiduciary shareholders have failed to take appropriate action to safeguard the interests of their beneficiaries.” (p. 130)
Monks provides support for his position that active investors help unleash wealth enhancing. A few of his citations include:
- McKinsey Study showed investors are willing to pay up to 27% more for companies with good governance.
- LENS, Hermes, and ABF Euro V.A. funds have all performed better than the standard indexes.
Investing based on corporate governance practices is likely to get a boost with the recent announcement by ISS that they will soon release their “corporate governance quotient” (CGQ). This will give clients one number, ranging from 0 to 100, which will reflect ISS’ judgement as to where a company’s corporate governance practices rank. Better performers will not only be more open to shareholder influence, as a reflection of their standing in the ratings, but will also be viewed favorably for additional investments, thus lowering their cost of capital.
Monks is nothing but prolific in citing good ideas.
- He points to the need to reform Generally Accepted Accounting Principles (GAAP), since “the absence of a convention for valuing ‘intellectual property’ has doomed GAAP to obsolescence.” Although he doesn’t mention Margaret Blair’s work in this area which shows that such intangibles often make up about 75% of a firm’s value, he does cite Baruch Lev’s “Knowledge Capital Scoreboard,” which attempts to rank companies by their return on investments in research and development.
- Paul Hawken and W. McDonough’s “Seven Steps to Doing Good Business,” which include eliminating waste, restoring accountability, reflect cost in prices, promote diversity, make conservation profitable, trade based on sustainability, minimal interference by businesses and unions in government.
- Coalition for Environmentally Responsible Economies (CERES) Global Reporting Initiative (GRI) to design globally applicable guidelines for enterprise-level sustainability reports based on environmental, social and economic factors…the triple bottom line.
- Innovest’s survey that found the top half of firms ranked by environmental sensitivity outperformed the bottom half by up to 21.8% over a two year period, depending on industry. Their Eco-enhanced S&P 500 has outperformed the actual index by 11% over the same period.
- Brightline, Monks’ own brand of performance simulation that he hopes will be used by pension fund trustees a prudent basis for activism, directing their focused portfolio companies to comply with the law. His simulations have shown that while “the most aggressive, externalizing and Eco-unfriendly companies gain a market advantage” in the short-term, the focus companies win 17 out of 20 simulations over a 12 year time horizon.
His idea that chronic underperformance and inaction by pension fund trustees should give cause to lawsuits by beneficiaries has merit. I’m not sure this will lead to social justice but at least it will help dislodge CEO dictators who rob from their own companies.
What tears it for me is Monks’ belief that the President of the United States “can simply state that as a matter of policy the public good and the law of the land require effective and informed shareholder involvement in the governance of corporations.” (p. 184) What would that mean coming from the President, especially the current President?
While Monks has embraced the probable need for new laws, his proposed vehicle to explore what “may prove necessary” is Congressional and Parliamentary hearings regarding shareholder rights, conflicts of interests among fiduciaries, and the role of governmental agencies in enforcing trust laws. Certainly such hearings could result in great steps forward. However, they aren’t likely to address the needs of people marching in the streets against corporate power.
A more likely vehicle, although not nearly as well written (because it is a collection of essays, rather than the more coherent package of one brilliant mind) is the book Working Capital: The Power of Labor’s Pensions by Archon Fung, Tessa Hebb and Joel rogers (ILR Press, Ithaca, New York, 2001). Working Capital is written from a worker owner perspective. Like Monks’ book it stresses sustainable economic growth and triple bottom line returns. However, it also focuses on more equitable distribution of the wealth created by corporations, their employees, and their communities.
Worker owners (largely pension fund holders) want more secure better paying jobs, affordable housing, reduced environmental degradation and a more cooperative/participatory workplace. High CEO pay lowers worker morale. One of the authors, Marleen O’Connor, goes so far as predicting that corporate governance will trump labor laws in importance. Institutional shareholders, led by public pensions are creating new norms of conduct in the boardroom. Labor-shareholder proposals receive a statistically higher percentage of favorable votes. Unions have a great incentive to make sure firms are healthy because of the firm specific investments their members make, not just in their 401(k) plans but in their “firm specific human capital.”
Working Capital is replete with examples of innovations by labor in corporate governance from binding bylaw amendments to acting by written consent without waiting for formal shareholder meetings. Unions have become the leading proponents of shareholder resolutions and they know how to organize a winning campaign in the boardroom, in the press and on the streets. Unions can provide their members with the academic research needed to justify taking “social issues” into account in fiduciary voting. For example, Executive Paywatch (the AFL-CIO’s Internet site on CEO greed) cites a 1992 Berkeley study that found that pay inequality leads to less cooperative work environments, higher turnover, and lower product quality.
Labor’s shareholder activities provide good publicity for labor by demonstrating concern for long-term value. Those reading Working Capital will learn that pension plans with representatives from labor are more likely to transmit gains from bull markets to plan beneficiaries than single employee plans. They also have enhanced security. Maybe if enough of us learn about the power of our deferred wages we’ll recognize the need to get greater control over how our money is invested and how our shares are voted. Teresa Ghilarducci’s essay, “Small Benefits, Big Pension Funds and How Governance Reforms Can Close the Gap,” discusses legislation has been introduced to require pension boards to have worker representation but who knew about it? Ideas like that need to be pushed by voters all around the country.
Reforms and revolution will take the combined efforts of those working with corporate and institutional investor elites, as well as union members and street demonstrators. The New Global Investors and Working Capital point to the enormous potential of pension funds. Both provide ideas and examples that provide realistic models for pension fund management in the the twenty-first century.
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