Archives: November 2001

Monks Online

Capstone Publishing has made available online the full text of The New Global Investors by Robert A. G. Monks. You can download it a chunk at a time in Adobe or the entire book via a zip file. That’s the second book Monks has made available online. The first was Power and Accountability. That book, with Nell Minow, brought many into the field of corporate governance. With The New Global Investors, Bob is introducing his important work to another generation. Read it online and then buy them both through Amazon (Global and Power).

Corporate Governance – Turning Rhetoric into Reality

2nd International Conference on Corporate Governancescheduled to be held in Hotel Taj Mahal, Mumbai on 18th and 19th January, 2001 will proceed despite the monumental tragedy of 11 September 2001. Most countries have developed their corporate governance codes. Therefore, the most challenging task is to assess how these codes are 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 30 countries and offers an unrivaled opportunity for interaction and networking with global leaders in business and government.

CREF Keeps Tobacco

At its annual meeting, College Retirement Equities Fund (CREF) encountered a large number of activists seeking to have the fund withdraw its investment tobacco companies led by the national corporate accountability organization, Infact. TIAA-CREF is one of Philip Morris’ largest institutional investors. The resolution was defeated by 70.1% to 24.6% (with 5.2% abstaining).

“Philip Morris’ Marlboro Man is arguably the world’s leading source of youth tobacco addiction. It was designed nearly 50 years ago to capture the youth market and it has succeeded,” said Camille Chow, a sophomore at Brown University who participated in the protest. “How can an investment fund that is dedicated to serving the education and research communities justify funding the Marlboro Man’s global rampage?”

The activists also challenged Elizabeth Bailey, a professor of business ethics at the
University if Pennsylvania’s Wharton School of Business, a CREF trustee and holds a seat on Philip Morris’ board.

401(k) Fatally Flawed

Watson Wyatt Worldwide examined 252 large companies with both defined-benefit and 401(k) plans for the 1990-1995 period and found the defined-benefit plans bested the 401(k) plans by 2.4% per year. 401(k) plans at Morningstar, Prudential, and Hewitt Associates between 1995-1998 earned annualized returns of 13.5%, 10.5%, and 11.8%, respectively, versus a 21.2% return for a global 70/30 mix of stocks and bonds. According to an article in Barron’s, “Given low equity returns, high expenses, and poor planning, it is likely that most 401(k) investors will obtain near-zero real returns in the coming decades.” “The inevitable government bailout will make the savings and loan resolution of the last decade look like lunch at Taco Bell.”

“The self-managed defined-contribution concept is fatally flawed,” according to William Bernstein. (Barron’s, Riding for a Fall: The 401(k) is likely to turn out to be a defined-chaos retirement plan, 11/26)

State Pensions Squander Surpluses

According to an article in November’s Institutional Investor, before he became the Bush administration’s antiterrorism czar as head of the new Office of Homeland Security, Tom Ridge bought off Pennsylvania opponents of a piece of legislation by giving legislators a 50% hike in their retirement packages, while the state’s 234,000 teachers, and 109,000 other public workers, won a 25% increase. Critics blasted the compromise as a $10 billion giveaway.

Ridge did it by making use of the surplus in the Pennsylvania Public School Employees’ Retirement System. “Arcane rules of pension accounting” allow states to average their assets over several years. “Smoothing” allows them to bank on “surpluses” by using financial data that is two to five years old. Institutional Investor reports that at least 4 of the 11 states that tapped their pension funds in the past year have moved from surplus to deficit. Assuming current market valuations, Pennsylvania, has smoothed a 123.8% level of funding on June 30, 2000, to about 97%. However, Stephen Nesbitt, senior managing director at Wilshire Associates, estimates “the actuarial value of assets is roughly 10 percent less than the market value of assets.”

The average pension fund has fallen from a 116% to a 106% surplus, according to Wilshire Associates, and 44 states have seen revenues decline this year. In 1996 the average public pension was funded at 92% but with the four year bull market, that increased to 116% by January 2000. Assets rose 20% annually, from $825 billion to $1.72 trillion.

Over the last two years, not only have assets been falling but liabilities have been rising due to both benefit hikes and the decline in interest rates, which should lead states to use lower discount rates and expected earnings. “According to the pension liability index produced by New York-based money manager Ryan Labs, between September 2000 and September 2001 pension liabilities grew at a 14.64 percent clip.” While some retirement systems have chosen to lower their discount rate assumptions, Governmental Accounting Standards Board rules do not require them to do so.

Smoothing works both ways. asset growth lags as market values climb bu smoothing works to prop up values when the market declines. However, a fund can also choose to ignore its normal smoothing process to embrace market values. Institutional Investor provides examples, most dramatically West Virginia and Louisiana, where lower contributions and generous pay hikes produced large unfunded pension liabilities and dramatic debt loads. (Institutional Investor, Squandering the surplus, 11/2001)

CEOs on the Line

The 2001 survey, “CEO Turnover in a Global Economy,” administered for Russell Reynolds by Wirthlin Worldwide which conducted interviews with 300 institutional investors in Australia, Canada, France, Japan, the UK and the US, found 15% of institutional investors called for a CEO’s termination in the past year. In Australia and the UK the numbers were even higher, 37% and 27% respectively said they had “contributed” to a CEO’s departure. Succession planning has become a major concern of 81% institutional investors.

US investors express dissatisfaction with a CEO either through written communication (37%) or selling their stock (35%), while investors in Australia, France, Japan and the UK convey opinions of a CEO’s performance through meetings with a company’s board and senior management. Most investors believe that companies in their country adhere to sound corporate governance practices; notable exceptions include Japan (3%) and Australia (37%). Establishing global corporate governance standards are favored by Canadian (68%), Japanese (53%) and French (51%) investors more than those in the UK (43%), US (38%) and Australia (37%). Two-thirds of investors surveyed have voted for a shareholder resolution within the past year; 15% have sponsored a resolution. (CEO Turnover in a Global Economy)

UK Firms Improving but Still Fall Short

Four out of five companies fail to meet corporate governance expectations, according to the UK’s National Association of Pension Funds (NAPF). In a report on compliance with the FSA’s Combined Code, NAPF found that 49% of UK’s top 400 companies failed to meet the recommendation that only independent non-executive directors should set directors’ pay levels. However, the percentage complying with NAPF policy expectations in all respects has nearly doubled in just two years.

Labor’s Money

Labor funds showed increased sophistication in choosing where to file proposals, and the more focused approach was rewarded with high shareholder votes, especially for executive compensation proposals, according to the IRRC. The average vote on executive compensation proposals rose from 8.5% in 2000 to 13.45%. The International Brotherhood of Electrical Workers (IBEW) Pension Benefit Fund proposal with the New York State Common Retirement Fund (NYCERS) asking Sprint’s directors to adopt a no-repricing policy won the support of approximately 46% of the votes cast. For a wrap-up of the last season, see Labor’s Money.

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IRRC Study Results

IRRC’s “Board Practices/Board Pay 2001: the Structure and Compensation of Boards of Directors at S&P 1,500 Companies,” found advancement in rising director independence and in the overall composition of audit committees. However, after years of gradual director diversification, it appears that the spread of women and minority directors to more boards has come to a halt. Cash amounts paid to directors continue to increase and 81% of the S&P 1,500 companies analyzed grant their directors supplemental stock options or share awards, or both, and most companies make grants every year.

Study highlights include the following:

  • The trend toward increased independence on boards goes on, rising another 2% this year. Compensation committees continue to post high levels of independence, but the biggest jump occurred on audit committees, which rocketed to 90% average independence overall this year. Also, 70% of the companies surveyed had completely independent audit committees, increasing from just 51% three years ago.
  • Most boards have stabilized in size, but Technology boards actually got smaller in 2001.
  • Women and minorities are more likely than directors overall to be independent from the company where they sit on the board. 86% of directorships held by women and 82% held by minority directors are classified as independent, compared with 66% generally.
  • Annual retainers grew by 7% this year, to $28,292 while the median level rose more than 10%. Interestingly, the biggest jumped in retainer levels occurred in the beleaguered Communications Services sector, where the average retainer rose 14% to $41,818, and the median level soared almost 17% to $35,000.
  • Slightly more than 10% of companies have disclosed stock ownership guidelines for directors.
  • The average value of one-time stock option grants is typically about three times that of annual option awards.
  • About a fifth of companies give directors an opportunity to take stock in lieu of cash annual pay—and 30% of those companies provide directors with an incentive to do so.

Canadians Call for Greater Board Independence

In Canada, the Joint Committee on Corporate Governance released its final report, Beyond Compliance: Building a Governance Culture. Key recommendations include:

  • All boards should have an independent board leader who is chosen by the full board and who is an outside and unrelated director. This requirement should be a condition of listing on a Canadian stock exchange.
  • The independent board leader should be accountable to the board for ensuring that the assessment of the CEO and the succession planning functions are carried out and the results discussed by the full board.
  • All boards should develop and disclose a formal mandate setting out their responsibilities. Performance should be assessed against this mandate and the results of the assessment discussed by the full board.
  • Outside board members should meet at every regularly scheduled meeting without management and under the chairmanship of the independent board leader.
  • Independent directors of a public corporation remain responsible for significant shareholder. All parties must ensure the proper functions of governance are carried out.

Joint Committee was established by the Canadian Institute of Chartered Accountants (CICA), the Canadian Venture Exchange (CDNX) and the Toronto Stock Exchange (TSE) to review the state of corporate governance in Canada and recommend changes to ensure Canadian governance practices are among the best in the world. A copy of the final report can be downloaded from the at the Joint Committee on Corporate Governance’s internet site.

CalPERS Turns Up Heat

The CalPERS Board of Administration approved a strategic plan that adds $1.7 billion to the pension fund’s active corporate governance investments and targets additional corporate governance strategies in Japanese and European markets. The action brings CalPERS investments in active corporate governance strategies to $3 billion. The plan includes a $1.2 billion investment to external active corporate governance managers in the U.S., Japan, and Continental Europe; and a $500 million allocation to establish “CalPERS Internal Relational Program.” Listed below are some developments in the Japanese and European markets cited by CalPERS staff as recent developments that “make governance strategies attractive to institutional investors.”


  • Cross shareholdings have declined from 45.8% to under 35% and will likely continue to decline
  • Foreign equity ownership has increased steadily since the mid 1980’s and is now approximately 20%
  • Merger and acquisition deals in Japan reached a record 1,635 in 2000 up 40% from 1999
  • Shareholder lawsuits have risen from less than 30 in 1992 to nearly 300 in 1999
  • Implementation of mark to market accounting effective March of 2002
  • Foreign acquisitions are becoming more common, for example, Ford taking over Mazda, Renault acquiring Nissan, and GE Capital taking over Japan Leasing
  • Financial deregulation laws passed in 1999

Continental Europe

  • June 2000 Publication of Berlin Group’s German Code of Corporate Governance
  • January 2002 marks the start of new tax reforms in the EU which will limit the capital gains burden for unwinding cross shareholdings
  • Germany and France now allow any shareholder with a 5% holding in a company to call an Extraordinary General Meeting
  • Privatization of retirement obligations from the state into private sector pension funds in the EU will significantly increase the funds flowing into European equity markets. Globalization of capital markets have forced companies on the Continent to focus on governance issues or be shunned by foreign institutional investors
  • Corporate collapses of Metallgesellschaft and Schneider property group in Germany and the financial scandal of Olivetti in Italy are breaking the traditional stakeholders power over these companies

CalPERS’ primary source of potential investments for the internal program will be “through value and governance screens developed in the Corporate Governance Unit. Potential investments may include current, previous, or potential Focus List companies. However, we expect the number of Focus List companies that will be held in the Internal Relational Portfolio to be limited.” (for more information see Item 6E from theNovember 2001 Investment Committee agenda)

Great to see this move. It would be more encouraging, however, if CalPERS were actually commit to increase investments in its Focus List companies before announcing them. Would Warren Buffett or Robert A. G. Monks target firms without adding additional investments? Neither should CalPERS.

New Books

Two major issues in corporate governance are the extent to which governance impacts financial performance, and the growing impact of social issues on corporate activity.

Corporate Governance and Economic and Economic Performance, edited by Claus Bugler, tackles the first issue with an analysis of Austria, Belgium, Germany, France, Italy, Japan, the Netherlands, Spain, Turkey, and the UK. He concludes that more direct shareholder monitoring is beneficial to a firm’s success and that minority shareholders are consistently worse off in countries with weaker shareholder protection and illiquid securities markets. The key to more efficient corporate governance is vigilance by institutional investors and prudent regulation by government.

John Elkington, whose Cannibals With Forks: The Triple Bottom Line gave us the concept of “triple bottom line” reporting (company disclosure of social, environmental and economic performance), now provides advice on how companies can build sustainability into their operations. The Chrysalis Economy: How Citizen CEOs and Corporations Can Fuse Values and Value Creation claims to be “an early guide to new forms of capitalism that will eventually come to dominate the global economy.”

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CalPERS Board Overruled

Last year the CalPERS Board raised their own salaries in defiance of Government Code limits and also raised their portfolio managers’ pay by 11%, claiming a provision in the state constitution that gives them protection from political interference also gives them broad authority to ignore state laws which make it difficult to fulfill their fiduciary duty. The California Department of Personnel Administration (DPA) refused to recognize such extralegal authority. The CalPERS Board then issued letters to State Controller Kathleen Connell to implement the pay hikes over DPA’s objections. When Connell refused, the Board set up its own payroll system. Connell took the Board to court, arguing the Board is subject to state law. I filed a similar action with the Office of Administrative Law.

Judge Charles C. Kobayashi, of the Sacramento Superior Court ruled that CalPERS can’t ignore state law. “The authority to administer the retirement fund does not mean CalPERS has become a separate system that is no longer subject to existing state laws that apply to all governmental agencies.” If CalPERS believed they were right, they should have challenged DPA and the Controller in court, instead of simply ignoring the law. CalPERS was permanently enjoined from increasing the per diem of Board members or employees, increasing the reimbursement to public agency employers of Board members, maintaining a separate payroll system for employees, increasing employee salaries and, most importantly, “declaring a statute unenforceable…unless an appellate court has made a determination that such a statute is unconstitutional.” CalPERS appealed the ruling. I’d guess their chances of success are slim to none. The only press coverage I saw on the ruling itself was in the October 29th edition ofPensions&Investments.

CalPERS Chief Investment Officer Daniel Szente also seems to have little faith the Board will prevail, announcing he will step down on November 30, 2001 to take a new job at McMorgan & Co. rather than await the outcome of the legal battle to roll back his compensation. Szente lasted only 15-16 months. SeeCalPERS press release.

Szente said that if Connell is successful it will hamper CalPERS’ ability to achieve excellent investment returns and effectively manage risk. Yet, for many years the CalPERS system operated just fine without offering enormous salaries to attract investment managers from outside the civil service. It would be interesting to see a comparison of portfolio performance (based on value added above the market) before and after the higher salaries. Since CalPERS has offered no such evidence of pay for performance, I doubt a positive correlation exists.

In addition, many, if not most, professionals who choose to work for the State of California are underpaid in relation to private sector counterparts. Why should investment managers at CalPERS be singled out for higher pay than their counterparts at CalSTRS or the Treasurer’s Office? The Board is in danger of creating a revolving door where CIO’s pick up a year or two investing huge amounts for CalPERS and then negotiate a fat deal for themselves elsewhere. If the Board really believes the high salaries are justified, they should sponsor legislation to raise their own pay and should document the need for higher pay for their investment officers with DPA.

Appealing through the courts on this case is a waste of money better spent on member retirements and services. In addition, whereas before the Board could argue they were complying with the law, even though their constitutional authority grants them certain exemptions, it will soon be clear to everyone that the constitution protects the fund against political raids; it doesn’t place the Board above the law. The court is no more likely to allow the Board to unilaterally raise their own pay and that of civil servants as it is to forgive speeding tickets to members who claim travel at the posted speed would cause them to violate their fiduciary duty because they’d be late for a meeting. Board members should learn to follow the law and plan ahead.

Which Shareholders Should Decide at TIAA-CREF?

Business Week’s Robert Barker has weighed in on the running battle between TIAA-CREF and SRI activistsLet Shareholders Decide This One, he says in the 11/19 edition. Barker points out that SRI advocates have failed to seek to get their issue on the TIAA-CREF “proxy” for fear of losing, even though a 1995 survey found that 81% of what he says are “contributors” (I’m sure most would see themselves as investors) to/in the Social Choice Account favored seeking out “companies who have an outstanding record of good performance on social issues rather than relying on negative screens.”

Barker says “the people whose money is at stake” should be able to “make broad decisions about how it is invested.” However, its not clear if his solution is to let all members of TIAA-CREF decide the issue by vote or just those invested in the Social Choice Account. How many of TIAA-CREF’s 2.3 million clients are invested in the Social Choice Account which makes up about 1.5% of its $260 billion portfolio? If investments are proportionate to members, should 98.5% of members who have nothing invested overrule the 1.5% that are willing to put their money at risk.

On the surface a vote appears very reasonable. I wish other funds, such as CalPERS had provisions for such voting on issues the board refuses to address. Even if the vote is limited to those with investments in the Social Choice Account, we all know that TIAA-CREF can easily influence the voting by inflating cost projections or claiming that positive investments are likely to earn less or that they are somehow illegal. TIAA-CREF should either honor the 1995 survey, which was to evaluate “whether any changes should be made,” or they should agree to be neutral on a vote by Social Choice investors.

SRI Gains Ground

Australian pension funds must now report on how they handle social issue proposals at corporations they’ve invested in, according to Fairvest’s Corporate Governance Review (CGR). Similar legislation was enacted not long ago in the UK and has been introduced in Canada as bill S-11. According to Stephen Davis, editor of Global Proxy Watch, pension fund disclosure will emerge as the “darling corporate governance bill of political parties around the world.” The same issue reports that average voter turnout (including proxies) ranged from a low of 35% in Australia to 83% in the US, with Britain, Germany, France and Japan following between from low to high.

Blueprint for Success

The October edition of Director’s Monthly contains an informative article on Compensation Committee Structure by James Reda of Buck Consultants in Atlanta. He include much of the usual good advice concerning the need for independence, the scope of activities, communication and minutes. However, one factoid stood out in my mind; committee chairmen are nominated by the CEO 40% of the time. Not exactly independence, eh?

E-Delivery Offers Savings Aplenty

The 2001 survey by the American Society of Corporate Secretaries estimates that E-delivery of annual reports and proxy materials could save $38 million industry-wide in postage savings alone. One method used is to collect e-mail addresses and send an e-mail notice when proxy season rolls around. No paper is involved so the potential savings is great. However, sending a paper proxy in the mail and instructions for finding the annual report online results in greater savings because twice as many shareholders opt in.

Also in the Fall edition of The Corporate Secretary is Gwendolyn King’s expectationss of a corporate secretary. They should have the administrative skills of a chief administrative officer, interpersonal skills of the chief human resources officer, legal skills of the general counsel, financial skills of the CFO and vision and decisiveness of the CEO.

Creative Accounting and Shareholder Lawsuit

The SEC’s Financial Fraud Task Force expects to review one out of every four annual reports. Prosecutors last year obtained convisions in 62 of 64 cases.

Ten Overnite Transportation worker/shareholders filed a shareholder suit against executives at parent company Union Pacific charging breach of ficuciary duty for wasting corporate assets on a “concerted, unlawful anti-union campaign.” According to the NLRB, Overnight has had more complaints filed per employee than any othher company in the US. “The severity of the misconduct is compounded by the involvement of high-ranking officers,” according to the NLRB. (For these and other interesting items, see Business Ethics, 9-10/2001 edition.

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Insurers Support Disclosure of Social, Environmental and Ethical Risks

The Association of British Insurers (ABI) announced that its members expect companies to disclose how social, environmental and ethical risks are being handled. Examples include board-level identification and assessment of risk, descriptions of company policies for managing risk, and descriptions of procedures for verifying company disclosures.

“SRI disclosure will provide investors with confidence that a company understands the risks it faces and is positioning itself to deal with them,” said Chris Mellor, chief executive of AWG, one of the UK’s largest water utilities. “The ABI’s guidelines are a crucial and valuable step in helping companies prove to themselves and others that they are up to the mark.” (Social Funds, 10/30)

ISO Tackles Corporate Social Responsibility

The International Organization for Standardization has launched an online forum to study the feasibility of standardizing the measurement of corporate social responsibility. The forum, hosted by the Canadian Office of Consumer Affairs, has been set up to facilitate worldwide discussion of the possible role of standards in defining the elements of corporate social responsibility. It is designed to provide a mechanism for increasing awareness and promoting constructive discussion of new and existing corporate social responsibility initiatives, and their relevance to existing or potential standards projects.

The forum operates as a list-serve. E-mail postings are sent to every member of the forum, and there is no cost to participate. To join the online forum, contact the forum facilitator, Dr. Kernaghan Webb, senior legal policy advisor and chief of research at the Canadian Office of Consumer Affairs, At the initiation of the Trinidad and Tobago Bureau of Standards, a workshop on corporate social responsibility will take place on 10 June 2002, in Port-of-Spain.

IOD Establishes Indian Corporate Governance Center

Institute of Directors forms Corporate Governance Center to improve the functioning of corporations and the credibility and liquidity of stock markets by promoting research and practice of Corporate Governance Principles. For more information, contact The center will undertake the following functions.

  • Formulate Codes for good Corporate Governance in government, trade and industry.
  • Advise government and industry on best practices in good Corporate Governance.
  • Conduct research relating to best practices in Corporate Governance internationally.
  • Organize seminars, conferences, and workshops to create awareness in the Indian corporate sector of the need for good Corporate Governance.

NACD Report on Board Evaluation

The National Association of Corporate Directors has released its Report of the Blue Ribbon Commission on Board Evaluation: Improving Director Effectiveness. This groundbreaking study on effective self-evaluation is designed to help boards and individual directors improve performance. The report was led b a commission of 30 corporate directors and leading governance experts.

Regular board and directors evaluations are favored by 91% of directors, according to a recent NACD survey. The report provides tips on directors, issues, information, evaluation process and performance goals. It also provides sample evaluation forms, a case study and diagnostic tools. Copies available by calling Doreen Kelly Ruyak at 202-779-0509 or e-mailing you request to

Director’s Pay Up in 2001

A Towers Perrin survey of annual proxy statements filed this year by 250 companies representing a cross section of the S&P 500 found that nonemployee corporate director compensation has risen to $118,337 in cash and stock in 2001, up from $100,807 in 2000. Most of the increase is in the form of stock options. Directors received three-quarters of their compensation in stock and one-quarter in cash, a shift from last year’s mix of two-thirds stock and one-third cash.

Ninety-four percent of all companies provided some form of annual or recurring stock compensation to directors. Median annual stock compensation, based on each company’s 2000 fiscal year-end stock price, jumped 23% to $73,205 in 2001 from $59,430 in 2000. Median cash compensation of $49,000 was up modestly from $46,000 in 2000.

Seventy-four percent awarded stock options; 26% made outright grants, and 25% awarded deferred, or phantom stock, which settle upon termination or at some future date. Restricted stock, granted subject to limits on sale or transfer until certain future conditions are met, was awarded by 18% of the companies.

One-time grants were awarded by 29% of the companies, typically paid when a director is first elected to a board. The median one-time stock-based grant was $151,587. Only 4% of companies reported a retirement plan, down from 22% four years ago.

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