October 2002

Webster Named

The US Securities and Exchange Commission voted to approve five members of a new national accounting oversight board to be headed by ex-FBI-CIA chief William Webster whose only experience in accounting, as far as we know, was heading the auditing committee of U.S. Technologies, now bankrupt and facing fraud accusations. Shortly before Webster was appointed he told Harvey Pitt but Pitt chose not to tell the other four commissioners prior to their vote.

Webster edged out the much better qualified pension fund chief John Biggs, who would have done much to restore trust. The vote was 3-2. Webster becomes the first chairman of the Public Company Accounting Oversight Board, expected to get up and running early next year.

In addition to Webster, the commission approved former CalPERS attorney Kayla Gillan; accountant and former SEC general counsel Daniel Goelzer; former congressman Willis Gradison; and SEC Enforcement Division Chief Accountant Charles Neimeier.

SEC Chairman Harvey Pitt was joined by fellow Republicans Cynthia Glassman and Paul Atkins in voting for Webster and the other four board members.

Webster, a Republican, was named to head the FBI by President Carter in 1978. Under Webster, the FBI exposed numerous frauds behind the massive U.S. savings and loan crisis. He was named to head the CIA by Republican President Reagan in 1987. (see Haunted House? Spook to Run Oversight Board, CFO.com, 10/28/02)

Here’s hoping we will know if they accomplish anything. The law setting up the Board mandates extensive secrecy, something Webster and Pitt excel at, in order to to protect the reputations of accountants who might be wrongly accused. For example, if the Board finds auditing systems deficient, it can release that information only a year after a firm has been told to make corrections but has failed to do so. (Audit Overseer Cited Problems in Previous Post, NYTimes, 10/31/02)

The calls for Pitt’s resignation are expected to accelerate.

TIAA-CREF Opposes Improved Governance Measure: Vote “YES” on CREF Proxy Proposal #2 Urged

TIAA-CREF, the world’s largest retirement fund and the biggest retirement asset of most university professors and staff, has long professed to be a “concerned” investor and a leader in corporate governance. Yet in practice, TIAA-CREF does not appear to utilize internally the same good corporate governance practices it advocates publicly, such as transparency and accountability, according to a statement released by activsts.

In the document CREF describes as “How we factor economic and social concerns into investment decisions and into voting the shareholder proxies of companies in our investment portfolio,” CREF states that it considers “social factors appropriate to each fund’s objectives in selecting investments.” Yet, significant numbers of participants have voted their proxies to force divestment of companies widely considered to lack social and/or environmental responsibility, such as tobacco. CREF’s published opposing responses appear to convey a marked lack of consideration of social or environmental issues.

For years, participants have also requested CREF to disclose how it has advanced its claim of promoting good governance in portfolio companies through proxy voting. CREF has consistently kept its participants in the dark.

This year, CREF participants have the opportunity to vote their own proxies on a participants’ resolution. It requests CREF to be more accountable and transparent about how it votes the shares of participants’ assets and how it considers social and environmental issues in investment decisions. Although recommending a vote against the resolution, CREF’s elected trustees agree they should be encouraging socially responsible corporate behavior and improved governance practices in portfolio companies. Apparently, they just do not wish to be fully accountable to their participants.

After the resolution was submitted to CREF, the Securities and Exchange Commission voted unanimously to propose new rules requiring mutual funds to disclose how they cast proxy votes on behalf of their investors. SEC Chair Harvey Pitt stated: “If adopted, these proposals would give investors fundamental information about the practices of those who vote proxies on their behalf.” He added: “The securities belong to fund investors, who are entitled to know how their property is being voted.”

In a revised opposing statement, CREF Trustees deleted their acknowledgement of “the legitimate participant interest in how we vote proxies” and instead substituted language defending “the principle of confidential voting . . . which protects all shareholders from undue influence on the proxy voting process.” CREF seems to be saying their participants shouldn’t know anything about how their property is being voted on their behalf.

Verschoor and Viederman urge all CREF participants to vote YES on the Verschoor-Viederman proposal # 2 in their 2002 CREF proxy. They can be reached atcverscho@condor.depaul.edu

Dr. Verschoor is Research Professor in the School of Accountancy at DePaul University and Research Scholar in the Center for Business Ethics at Bentley College. Mr. Viederman is Cofounder, Initiative for Fiduciary Responsibility and Retired President, Jessie Smith Noyes Foundation.

The complete proxy has been posted on www.tiaa-cref.org (See Vote Your Proxy, then View the CREF Proxy, then scroll down to or search for PARTICIPANT PROPOSAL II)

CorpGov Bits

US accounting firms have boosted audit fees by as much as 35% this year as they do more to research irregularities like those that forced several companies into bankruptcy. Firms say they have also stopped discounting audit fees to lure lucrative consulting work, according to Bloomberg.

The average CEO pay package at major American corporations is estimated to be between $10 million and $25 million, according to several sources. William J. McDonough, president of the New York Federal Reserve Bank, decried the fact that while 20 years ago average CEO’s earning were 42 times the average worker’s, today the average CEO today earns 500 times what the average employee does. McDonough noted, “I find nothing in economic theory that justifies this development… I can assure you that we CEOs of today are not 10 times better than those of 20 years ago.”

Sociall responsible mutual funds saw assets grow by 3% in the first half of the year in comparison with a 9.5% decline for other diversified funds, according to the Social Investment Forum.

A majority of executives (56%) reported that workplace ethics have gotten worse over the last five years. 69% of executives surveyed say they will review the financial statements of potential employers more closely and 62% will investigate a prospective employer’s culture and value system more thoroughly. Close to 40% of executives interviewed have left a past job or company because of unethical business practices. However, 75% left without exposing the behavior. (Corporate ethics: Is it a contradiction in terms?, Albuquerque Tribune, 10/10/02)

Annual restatements by corporations due to accounting irregularities will increase 170% to a projected 250 by the end of 2002, compared with 92 in 1997, according to the GAO.

Three Push Disclosure

The SEC proposed an important rule on September 20, 2002, Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Release No. 33-8131. It would require registered management investment companies to disclose the policies and procedures they use to determine how to vote proxies for their portfolio securities and to provide disclosure about how they vote proxies. Comments must be received on or before December 6, 2002.

As of December 2001, mutual funds held $3.4 trillion in U.S. corporate stock, representing approximately 19% of all publicly traded U.S. corporate equity. Unfortunately, both mutual funds and corporate retirement plans are often managed by subsidiaries of commercial and investment banks and insurance companies.

While fund managers are paid by their employers to judge the performance of corporate managers, the banks and insurers that own the fund companies are paid by some of the same corporate managers for securities and loan underwriting as well as other financial services. In these situations, a fund’s adviser may have an incentive to support management recommendations to further its business interests, rather than voting in the best interest of shareholders or plan beneficiaries.

Three groups will launch a major public-relations effort designed to rally support – the AFL-CIO, Pax World Funds, and Fund Democracy. The groups are concerned with a variety of issues from excessive CEO compensation, to worker rights, global warming, board independence, sweat shops and tobacco.

A live, two-way phone-based news conference will be held at 1:30 p.m. EDT on October 22nd at 1-800/966-6338. Use ID number 39438 or ask for the “SEC proposal” news event. Speakers will include:

  • Thomas W. Grant, president, Pax World Funds, the oldest SRI mutual fund in the United States.
  • Michael I. Garland, corporate transactions coordinator, AFL-CIO Office of Investment.
  • Mercer Bullard, founder and president, Fund Democracy, a mutual fund shareholder advocacy group.

Pax World Funds will launchhttp://www.MutualFundProxyVotes.com at 1:30 p.m. on October 22nd to educate individual investors about the SEC rule proposal and make it easy to file a supportive comment for the record with the Commission via email.

CalPERS Reallocates

CalPERS approved a 2% fixed-income cut to 26% while adding 1% to private equity (now 7%) and 1% to real estate (now 9) in its first major asset reallocation in years. Their 39% weighting in US equities and 19% for international equities remain unchanged.

Additionally, the Board approved plans to file a shareholder challenge to “excessive” executive compensation policies at General Electric, demanding the company adopt a pay-for-performance approach. CalPERS will join with Amalgamated Bank to co-sponsor a shareholder resolution urging GE’s board of directors to ensure that future stock option grants to senior executives are linked to company performance.

Treasurer Phil Angelides, who encouraged CalPERS to take a stand on General Electric, issued a statement declaring that reining in executive pay packages would curb “excesses which undermine the economy and jeopardize the public’s faith in the marketplace.” In a recent Harris Poll 87% responded that top company managers are paid more than they deserve, at the expense of ordinary workers.

Angelides’ office said the focus on GE arose out of the lack of any measurable link between pay and performance at the company, noting that former GE Chief Executive Officer Jack Welch received a compensation increase of 80% in his final year despite a drop in the company’s aggregate market value.

In other CalPERS news, the San Jose Mercury News filed a suit against CalPERS trying to force disclosure of the fund’s private equity investment returns, arguing that members of the System and California residents have a right to know how their retirement funds are performing. CalPERS had previously refused a request by the newspaper under the state’s Public Records Act to provide individual venture-capital fund returns.

Recent Press for McRitchie, CorpGov.Net and Petition to the SEC

We’ve gotten a bit of press recently in Mary Walsh’s extensive article, Calpers Wears a Party, or Union, Label (October 13th, New York Times). Yes, CalPERS may be potentially taking a new course with staff and board changes in place or on the way. I’m sure fiduciary duty will come first but the union and party affiliation of board members does make a difference in both corporate governance policies and investments.

I strongly disagree with one statement by Ms. Walsh. “When Republicans are in power in Sacramento, the interests of employees and the state — roughly the same as labor and management — are balanced and offset each other.” In watching the board over the last couple of decades, I don’t think Republicans are any more likely to serve the interests of the state than Democrats. If anything, they are less inclined to do so. Members of both parties look out for their own interests and accept political contributions from those doing business with the System. Democrats, however, especially Phil Angelides, seem more inclined to invest in California in ways intended to create jobs and raise the taxbase. That should be considered in the best interest of management (the state) as Ms. Wash has defined it.

BusinessWeek gave CorpGov.Net a favorable mention in an October 21st Commentary: “Bring Democracy to Boardroom Elections.” According to the commentator, both CorpGov.Net and the Council of Institutional Investors (CII) endorse putting all corporate board candidates on the same ballot, creating a campaign fund for all qualified candidates (with a cap) and eliminating broker voting.

However, I know that we at CorpGov.Net have never favored corporate funding for every qualified candidate who wants to run for the board. We’d like to see a more level playing field. Our SEC petition would give shareholder nominees 500 words in the proxy materials to make their case. If that doesn’t bring about needed changes, then we would seek a cap on expenditures, rather than favoring the use of corporate (shareholder) money to fund expensive campaigns on both sides.

If the commentator got our position wrong, he probably got CII’s position wrong as well. I believe they favor the elimination of broker voting for all purposes but obtaining a quorum but I haven’t seen any policies from them supporting putting shareholder nominated candidates on the corporate ballot or forcing corporations to fund dissident board candidates. I’m virtually certain they do favor opening up the proxy to shareholder nominees but under what conditions? While each week brings additional comments to the SEC on our petition, CII has not weighed in. I wrote to Ms. Yerger at CII to get clarification of their position and received the following:

“at this point, we are developing a fuller policy on this issue. As a result, we can’t comment yet on specific proposals.”

Providence Capital, Inc., a well-known securities brokerage firm that actively seeks and encourages Institutional Investors to seek director accountability to shareholders, has wieghed in, “We fully support the efforts of the Committee of Concerned Shareholders and James McRitchie with respect to their Petition for Rulemaking (SEC File No. 4-461). It is time that democracy comes to the corporate ballot.” We urge other members of CII to join in.

McRitchie was quoted by the San Jose Mercury News in a 10/17 article, Election could alter CalPERS’ non-disclosure. Greater disclosure of investment performance appears likely when new board members are installed early next year.

Our petition to the SEC on was noted in TheStreet.com’sIn Search of Director Independence on 10/15/02. Several organizations have made positive references to the Petition for Rulemaking (SEC File No. 4-461) on the web.The Corporate Library includes a link to the petition and an e-mail link for comments to the SEC on their front page. Shareholder Action NetworkeRaiderReal Corporate Lawyer, and the Securities Industry Commentator have all featured articles in support.SocialFunds.com included a reference to the petition in an analysis of Korn/Ferry International’s 29th Annual Board of Directors Study of directors. Less than half of board even routinely meet without the CEO present at the Fortune 1000. Such a long way to go. Of course, theCommittee of Concerned Shareholders, which co-filed with us, remains a constant source of information on the petition. If you see others, please drop our editor a line atjm@corpgov.net.

Possible Fire in the Kitchen

C. Russel Hansen, Jr., formerly President and CEO of the National Association of Corporate Directors, founded The Board Place to “provide assistance to Boards and CEOs in their efforts to contribute to corporate performance and public good.” Their latest newsletter floats an interesting concept, that of a “kitchen counsel.”

Sarbanes-Oxley makes it clear that counsel have a duty to report evidence of material violations of law and breaches of fiduciary duty up the line. Yet, many cling to the idea that corporate counsel represents them, as well as the company. Corporate counsel might consider creating a list of “kitchen counsel” that do not have the same legal obligations to report but who can communicate with corporate counsel on a “hypothetical basis,” if appropriate. “Because these lawyers are recommended by company counsel, employees, officers and directors can expect kitchen counsel to be trusted, competent advisors.”

Although the kitchen counsel approach “reduces the likelihood that corporate counsel will inadvertently fall into a conflict of interest or loyalty,” we question how long and under what circumstances such kitchen counsel would remain to be seen as separate and apart from the company. Caution is advised.

New Dow Jones Publication

Dow Jones Corporate Governance is a new weekly “designed to keep corporate executives, shareholders, financial advisors and investors apprised of developments in corporate disclosure.” Edited by Michael Rapoport, the sample issue covers a broad range of issues, including:

  • accounting reform (international convergence is more likely)
  • coming split between analysts and bankers
  • upcoming conferences
  • American Institute of Certified Public Accountants losing clout?
  • research: companies expensing stock-option don’t get much upside share-price movement
    • highest paid executives saw 1.9% decrease in compensation in second quarter, in sharp contrast to the 15.7% increase two years ago
    • 90% of top execs recognize importance of transparency and 40% would expect more from their own company as an outside investor
  • investors call for annual elections
  • Fred Buenrostro Jr., the new CEO of California Public Employees’ Retirement System faces challenges
  • plus various bits

It looks like a good start and they certainly have the resources to put out a quality publication in an increasingly crowded field. We hope to keep our readers posted.

Democracy in Board Elections

BusinessWeek’s Lewis Braham identified three of the major reforms still needed in his recent commentary, “Bring Democracy to Boardroom Elections.” (10/21/02) He writes, “dissident corporate board candidates almost never get elected. Here’s how to give them a fair shake:”

  • Put all candidates on the same ballot.
  • Create a campaign fund, with a reasonable cap, for all qualified candidates.
  • Eliminate broker voting except for the purpose of establishing a quorum.

These solutions get to the heart of fixing the problems in corporate governance instead of simply addressing symptdemocracyoms like so many other reforms. While it came as no surprise to see CorpGov.Net listed as supporting such changes, we were amazed to see the Council of Institutional Investors also listed. The Council has supported the elimination of broker voting for years but does it really support open access to the ballot or creating a campaign fund for all qualified candidates (or otherwise leveling the playing field)? I certainly believe they should support such measures but I haven’t seen evidence of it. Our proposal would provide 500 words in the proxy materials for shareholder nominated candidates to explain their qualifications and reasons for running. Rather than create a campaign fund for qualified candidates using corporate funds, I would rather see a reasonable cap placed on expenditures for board elections by both sides.

Les Greenberg, of the Committee of Concerned Shareholders, and I submitted SEC Rulemaking Petition File No. 4-461, which is gaining support. So far CII hasn’t commented but we hope they will. If you are on the board of a pension or mutual fund or are simply a beneficiary or shareholder, please seek your fund’s endorsement.

S&P Corporate Governance Ratings

George Dallas, who was on a panel with the CorpGov.Net editor at the Asian Development Bank meeting earlier this year in Shanghai, and others with Standard & Poor’s will unveil their approach to assessing corporate governance practices. Building on its global corporate governance research and experience, Standard & Poor’s has developed both a scoring process to aid companies and boards examine internal corporate governance controls; and a ranking process that uses publicly available information to assess company transparency and disclosure practices. I found the international presentation interesting and informative; I’m sure this one will be as well.

When: 9:00 am – 10:00 am (EDT), 10/15/02
Where: S&P, Riverview Room, 37th Fl., 55 Water Street, NYC, (Bring this notice and photo i.d.)
Journalists outside New York City may participate in the press conference via teleconference:
CALL TIME: 9:00 am (EDT); DURATION: 1 hr; Dial-USA Toll Free #: 888-928-9528; USA International Toll Number: +1-630-395-0055: PASSCODE: 38242; Leader: Michael Privitera
To confirm participation in press conference or teleconference call: Mary Loffredo (work) 212-438-3468 or e-mail her at Mary_loffredo@standardandpoors.com.
Replay available for seven days: Dial-USA Toll Free #: 888-566-0447; USA International Toll Number: +1-402-998-0615.


That’s a headlines in Ralph D. Ward’s Boardroom INSIDER. “U.S. corporate boards,” he says, “have made news in recent months for sleeping through the biggest wave of corporate scandals in history, and now for the big changes they face through reform laws. What next for the boardroom? An exploding price tag.”

Among the items turning the board into its own whopping new budget item:

  • Director fees and training. With directors facing huge new time and expertise demands (and scary new liabilities), plus a shrinking pool of candidates willing to take on boardroom burdens “basic free market principles tell you which way director pay is headed.” Also boosting costs — greater board training needs.
  • Director & Officers (D&O) insurance spikes. Insurance rates for directors are soaring already, Ward notes, and when suits for the recent corporate scandals work their way into the system, coverage costs will be “exorbitant, assuming its obtainable at all.”
  • Board support services. At most corporations, the corporate secretary supplied info and support to the board as an afterthought, but now, more (and more specialized) administration will force “companies to hire dedicated board staff.”
  • Outside board services. Reform laws will require the board to contract its own outside audit, legal, and pay consulting expertise, compelling the board to have “its own budget for these pricey services.”

My two cents? Director training, outside audit, legal and consulting services for boards are long overdue. D&O insurance will continue to climb until investor confidence is restored. Of course the best way to do that is by opening the corporate ballot to allow shareholder nominated candidates to be listed. That would reduce conflicts of interest and put real teeth into boards.

Mass Pension Relies on 1928 Mortality Rates

The Massachusetts state pension fund harms spouses by discouraging retirees from structuring their benefits to protect them if they die, according to a Boston Globe report. Most state workers reject the joint and survivor pension option because it provides smaller monthly payments – a result compounded by the state’s use of mortality tables from 1928. Shorter life expectancies presume that the retiree will die younger and the spouse will start collecting survivor benefits sooner. (PlanSponsor.Com, Study: Mass. Pension System Hurts Women, 10/8/02)

Biggs’s Selection Not Dead, Says Times

Democratic leaders of the Senate and House urged President Bush to replace SEC Harvey Pitt. His decision to back away from appointing John H. Biggs, of TIAA-CREF, to head the new accounting oversight board “represents the culmination of a pattern of behavior by Mr. Pitt that is steadily eroding the credibility of the SEC,” according to a report in the New York Times. Pitt reversed himself last week after complaints that Mr. Biggs might be too aggressive.

The search is in turmoil but it is not clear that Mr. Biggs’s selection is dead. The Times report notes that some Republicans on the commission may have approached former head of the FBI and CIA, William H. Webster. He wouldn’t be our choice at a time when the need is for full disclosure. We’ve even heard rumors in Sacramento that (Top Democrats and White House Battle Over S.E.C. Chairman, 10/9/02)

Susan Phillips, dean of the George Washington University business school here, a former Federal Reserve governor and former chairwoman of the Commodity Futures Trading Commission is also rumored to be under consideration , as is Kayla Gillan, former general counsel of CalPERS. Gillan has apparently already been interviewed by four agency commissioners, according to sources.

Help for Startups

Cogitas Partners will offer a seminar, “Corporate Governance: Best Practices for Funded Startups,” sponsored by Jones-Day at 2882 Sand Hill Road, Suite 240, Menlo Park , California on 11/1/02.

They will describe legislative developments and practices of corporate governance as they apply to funded startups. “We will give you in a time-effective, condensed form the main points you need to know to increase Board accountability, effectiveness and manage risk.”

Mutual Funds to Face New Liability

The new SEC proposal requiring mutual funds to file proxy voting records and make them available to shareholders could result in increased liability for mutual funds, reports Senior Editor, Will Boye in The ISS Friday ReportTM (10/4/02). Let’s hope so. Ever since the Avon letter, pension funds have also faced increase liability for voting shares against the best interest of their beneficiaries. Yet, to my knowledge there has not been one successful suit for failure to meet fiduciary responsibilities with regard to voting.

Robert Todd Lang, a partner at Weil, Gotshal & Manges, suggests that funds “will be very careful to leave themselves some flexibility,” allowing for inconsistent votes.

See also Levitt Launches New Board Criticisms; Industry Unmoved and Proxy Proposal Pumps Up The Pressure(institutionalinvestor.com, 10/9/02)

Lerach Takes Underwriters to State Courts

William S. Lerach, whose shareholder lawsuits have turned him into one of corporate America’s most despised enemies, going after them in state court, where the legal rules tilt in his favor. Instead of fighting for shareholders, he is filing claims on behalf of bondholders such as CalPERS, CalSTRS and others.

As well as of hometown juries, the threshold for success is lower. Instead of having to proving fraud, underwriters can be found liable if they simply issued misleading financial statements when they underwrote corporate bonds. In California, a jury needs to vote only 9 to 3 on behalf of a pension fund for it to prevail instead of unanimous consent in federal court. Additionally, the rules of discovery are often more favorable at the state level.

WorldCom’s bankruptcy, for example, has led him to Citigroup, J. P. Morgan , Lehman Brothers, NationsBanc Montgomery Securities, Credit Suisse First Boston, Deutsche Bank, Bank of America, ABN Amro, Goldman Sachs and UBS Warburg. He hopes to recover $1.5 billion to $3 billion from them for WorldCom bondholders. (A New Tack for Recovery of Money Lost in Scandals, NYTimes, 10/5/02)

Stewart Resigns From NYSE

Martha Stewart, dogged by questions about her role in the ImClone Systems Inc. insider trading scandal, resigned from the New York Stock Exchange’s board of directors. She announced her departure a day after an assistant to her stockbroker agreed to help prosecutors investigating Stewart’s sale of ImClone stock before the pharmaceutical company’s shares plunged.

“I did not want the media attention currently surrounding me to distract from the important work of the NYSE and thus felt it was appropriate to resign,” Stewart said in a statement after she sent her resignation letter to Dick Grasso, the NYSE’s chairman and chief executive. Congressional investigators have asked the Justice Department to begin a criminal investigation into whether Stewart knowingly lied to lawmakers about her stock sale. Stewart had joined the NYSE’s board of directors in June 2002 and was one of 27 members. Her term was set to expire in 2003.

Corporate Governance Ratings

Moody’s Investors Service plans to account for corporate governance in its ratings by November, in time for the first installation of 10Qs filed in accordance with the Sarbanes-Oxley disclosure rules and the ceo/cfo-certified annual audits in March. Both Moody’s and Standard & Poor’s are hiring accounting and corporate governance experts to serve as internal advisors. (Agencies Focus On Folding Governance Changes Into Corporate Ratings, Corporate Financing Week, 10/02/02) Kenneth Bertsch, director of corporate governance at TIAA-CREF will assume the title of director of corporate governance at Moody’s.

The Investor Responsibility Research Center (IRRC) will launch a new scoring system for evaluating and benchmarking corporate governance performance in a strategic partnership with TrueCourse, Inc., a New York based financial research firm specializing in takeover defense intelligence. The product will feature a scoring system developed interactively with key market constituents. Advisory panels consisting of representatives from a broad range of investor, corporate, and professional organizations will identify the quantitative factors to be covered by the scoring system. To ensure that the scores reflect market views, IRRC will survey their client base to determine how U.S. institutional investors actually weight the relative importance of factor categories.

The Securities and Exchange Board of India (SEBI) is also formulating guidelines for corporate governance ratings, according to Chairman G.N. Bajpai. The ratings will judge the companies and parameters like transparency in decision-making and general adherence to corporate governance laws. (The Hindu, 9/27/02)

Better Environmental Reporting Needed

During August, socially responsible (SRI) funds experienced net inflows of $200 million, while US equity funds saw net redemptions of $3.4 billion, according to Lipper. A growing trend is the rise of “sustainability investing,” which relies on environmental performance with traditional financial information. It targets companies embracing sustainability as opposed to screening out “sin” stocks such as arms makers, gambling operations or tobacco groups.

For Timothy Smith, a senior vice-president at Walden Asset Management and president of the Social Investment Forum, the key words are “fiduciary duty.” “It is the responsibility of mutual funds, pension funds and money managers to look at issues likely to impact the bottom line, whether that be corporate governance, environmental responsibility or sweatshop issues.” The new direction is to take full advantage of mounting pressure for businesses to be transparent to the point of leading the charge.

For example, many SRI funds such as Trillium, Parnassus, Citizens, Calvert, Domini, Walden, and Green Century recently joined with progressive foundations and petitioned the SEC to adopt regulations for estimating and disclosing environmental liabilities developed by the American Society for Testing and Materials International (ASTM), the Standard Guide for Disclosure of Environmental Liabilities [E 2173-01] and the Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters [E 2137-01]. These standards, which were developed by a consensus process conducted by one of our nation’s leading engineering organizations, provide guidance to companies for the accurate estimation of environmental liabilities andexplicitly require reporting companies to aggregate environmental liabilities to determine whether they exceed the SEC’s materiality threshold. The ASTM’s development of these standards has been backed by the insurance industry, in response to the current paucity of information about the financial significance of environmental liabilities.

You can read more about this petition on the internet site of The Rose Foundation for Communities and the Environment. Treasury & Risk Management also discussed the petition on 10/9/02 in an article entitledToxic Numbers. You can support the petition by writing to the SEC at rule-comments@sec.gov with Rulemaking file number 4-463 in the subject line and letting the Commission know you support full disclosure of aggregate environmental liabilities. This is the type of reform that will keep SRI funds leading, both in terms of earning money for shareholders and making this a better world to live in.

Three Struggle for CalPERS Leadership

San Francisco Mayor Willie Brown wants to be president of CalPERS, according to a recent article in the San Francisco Chronicle. “I’m certainly looking at it,” Brown said in an interview. “I represent as good a member as any to help the new members coming on next year.” “It comes down to money. The cost of health care. The size of the portfolio. The board’s influence, obviously, is tied directly to how much money they have and who the president is definitely impacts that,” said Tom Branan, publisher of the Public Retirement Journal.

Two of the departing board members include the president and the chair of the investment committee. A fight to be board president was expected between Sean Harrigan, another Davis appointee to the board who wants to be president and Bob Carlson, a 31-year veteran of the Board, who also serves on the board of 12 Franklin Funds and current holds the office of vice president.

As vice president, Carlson becomes acting president when Bill Crist leaves the board in January. A new president will be elected in February. “As long as I’ve been on the board, the custom is an elected member serves as president,” said Carlson.

Brown’s term expires Jan. 15, 2003, can reappoint him. His mayoral term expires in January 2004. That means, at best, he could only serve as president for one year. The Chronicle notes, “ironically, Brown represents local government employees — about one-third of CalPERS members — but presides over a city that has its own retirement system. Only about 2,000 of the city’s employees are members of CalPERS.”


Someone finally picked up on the fact that former Tyco CEO Dennis Kozlowski, indicted in June on tax evasion and probably other charges, endowed a Robert Monks Chair in corporate governance at Cambridge University.

I, and many others, view Monks as the virtual father of the modern corporate governance movement in the United States. Yes, it is odd that funding for research at Cambridge on how to avoid future corporate governance failures came from the poster boy of corporate excess. Yet, it somehow is fitting. I’d like to see Enron, Global Crossing and WorldCom endow additional chairs but I doubt bankruptcy judges will allow it.

Monks may have been somewhat blind to Kozolwski’s game but the moves occurred well after he was off Tyco’s board. The endowed chair couldn’t have a better brand name. Robert Monks played a central role – ensuring that pension (and soon mutual) fund votes are considered assets to be used for the exclusive benefit of beneficiaries and shareholders. He founded ISS. His company LENS was a pioneer in targeting companies in need of reform. Monks has written several of the most important books on corporate governance and he continues to see miles further down the appropriate road of reform than most of us. (see Corporate thorn Monks silent on Tyco, endowment, By Tim McLaughlin, Reuters, 10/2/02)

CEO Cult Criticized

Rakesh Khurana’s book, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEO’s, argues that company directors rely too heavily on social connections when choosing a chief executive. Boards have helped create a “distinctly American cult of the CEO” and have encouraged extreme levels of executive compensation and other “self-interested decisions.” He says that selecting a chief executive is like “crowning Napoleon.”

Despite the rise to power of a few women, racial, ethnic and religious minorities, the majority of CEOs and the directors who hire them serve together on boards, belong to the same clubs and business groups or share educational backgrounds. Personality may be more important than skills. When a board looks for charisma to heal a trouble firm, they often ignore factors more closely inked to financial performance, such as broad industry trends. Khurana believes CEOs are so constrained by internal politics, investments and organizational norms that they can only have a minor impact in the short term.

The author seems to favor a tilt back toward the time when the emphasis was on developing CEOs internally. He is critical of Wall Street analysts and journalists for building the images of CEO worship but fails to call for anything like giving shareholders access to the corporate ballot to ensure boards will be accountable.

EU Reform Ahead

European Union governments agreed to take urgent action to reform corporate governance rules in an attempt to avoid Enron-style scandals in Europe. The plan of action will call for reform of national rules concerning issues such as executives’ pay, audit practices, a strengthened role of non-executive directors and supervisory boards and increased management responsibility for financial information. Increased independence of audit committees is also expected.

The research group, chaired by Unilever legal advisor Jaap Winter found that there are more than 40 different corporate governance codes in the EU. Although they called for a reduction in the number of codes, they stopped short of calling for a single European code. (EU states agree to reform corporate governance, Financial Times, 10//2/02)

Sarbanes-Oxley Compliance Workshop

Boston, 12/3/02 at the Boston Harbor Hotel at Rowes Wharf; SEC Officials and Legal Experts to Illustrate Best Practices for Meeting the Act’s New Requirements. $895 for Full Day Pass, Call 1-888-519-9200.

Bank Enforcement and Corporate Governance Conference

Dates: November 18-19, 2002
Location: Renaissance Hotel, Washington DC
Keynote Presenter: Donald Powell, Chairman, Federal Deposit Insurance
Corporation; Special Address: Eugene Ludwig, Managing Partner, Promontory Financial
Group, LLC

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