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May 2003

, 05/30/2003 ,

BRT Leads Opposition

The Financial Times reports “the most powerful business lobby group in the US plans to ask the Securities Exchange Commission to delay sweeping reforms that investors say will improve shareholder democracy. Public and union pension funds, as well as individual investors, hope the SEC will change rules on proxy filings to make it easier for investors to add their own candidates to the slate of official board nominees at companies’ annual meetings.”

In August 1977 the influential Business Roundtable (BRT) recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” Their memo said such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.”

Now the Fincial Times reports the BRT is likely to ask the SEC to defer any changes until after implementation of new principles governing corporate governance proposed by the NYSE and Nasdaq. Why has the BRT changes its position?

The SEC first proposed a rule to allow access back in 1942. Investors have been waiting more than 60 years for that basic right. So far, no letters from opponents to democracy have been posted on the SEC’s website. Investors have united in their support for measures that would grant “equal access” to the official company ballot.

Editor Files Comments on S7-10-03 Possible Changes to Proxy Rules

Corpgov.Net editor, James McRitchie, filed comments on the SEC release for possible changes to regulations to bring about greater shareholder democracy. See the full letter (without the footnotes) herein our Commentary section. Based on feedback from readers and additional input, I would propose a few amendments to SEC Rulemaking Petition File No. 4-461, filed jointly in August 2002 with Les Greenberg of the Committee of Concerned Shareholders.Provisions should now include the following:

  • Minimum Ownership Threshold (included in 4-461): The threshold should be kept low, the same as for resolutions…a minimum holding of $2,000.

A higher threshold is likely to lock out most individual shareholders and even small institutional investors. Shareholder scrutiny would almost entirely focus on large companies, where the majority of stock is held by large institutional investors. Shareholders in the other 8,500+ companies would be left with the current system, which denies them any significant access to representation. 

Additionally, we do not want to move from management domination to domination by majority shareholders, as exists in much of Continental Europe. Such markets are not as robust because minority shareholders and prospective shareholders fear that dominant shareholders will divert value from the firm to themselves. Although strong fiduciary duties, laws against unfair interested party transactions, and other enforcement mechanisms can reduce these kinds of private benefits of control, the least costly mechanism is to allow all shareholders to have a voice in corporate governance. Active monitoring by investors of all sizes will ensure diverse ownership, proper valuation of stocks and robust markets.

  • Minimum Holding Period (included in 4-461): Shares held by the nominating shareholder must have been held for a minimum holding period in excess of one year. This helps to prevent use by short-term speculators. 
  • Good Faith Deposit: Nominations should be accompanied by a deposit of $3,000 per candidate nominated, which is to be refunded if each nominee meets the same threshold currently required for resubmission of proposals: minimum 3% vote in year one, 6% in year two and 10% in year three. This would discourage frivolous filings.
  • Competing Shareholders: In the even that multiple shareholders compete for access to the proxy for their director nominees, the SEC should employee a process similar to the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995. Only candidates from the largest two shareholder blocks should be required to be placed on the corporation’s proxy ballot. This is the fairest way to reduce the number of potential candidates to a manageable size. Any rulemaking should allow for at least two shareholders or groups of shareholders to have their director nominees included in order to ensure against domination by a single shareholder, as discussed above. 
  • Instant Run-off Voting (IRV): Since there may be up to three candidates for a given board seat and we want to ensure board members receive majority support, while minimizing the expense of elections, IRV should be required whenever there are three candidates. Under this procedure, voters rank the three candidates by preference. If no candidate wins a majority of first choices, then the last-place candidate is eliminated. Ballots of that candidate’s supporters are then reallocated to their next-choice candidate and the winner is determined. For more information on IRV, see “Voting System Reform” athttp://www.corpmon.com/VotingReform.htm.
  • Exemption from Regulation 13-D: Communication among shareholders together holding more than 5% should be exempted from burdensome requirements under Regulation 13-D so long as that communication is limited to efforts to nominate director candidates. Shareholders should be able to openly discuss the merits of candidates without the need to file burdensome paperwork. 
  • Maximum Permissible Slate: Qualifying shareholders should have the right to nominate a maximum of half the board minus one at each shareholder meeting. This will discourage short-term speculators from using the process. Existing methodologies for shareholders to run an entire slate would remain in tact and provide an alternative, if more expensive one, for shareholders to seek a change in control.
  • Director Statement: Each shareholder-nominated director candidate should have the opportunity to include a background statement (e.g. 500 word maximum) in the proxy statement in support of his or her candidacy. The word limit should include the ability to reference an Internet address where additional information can be obtained. Management-nominated candidates should be afforded the same opportunity with the same word limit.
  • Provisions to Prevent Management from Gaming the System: If current rules are insufficient, new rules should contain appropriate provisions to prevent management or the incumbent board from seeking to pre-empt an independent shareholder effort to nominate directors by, for example, colluding with a friendly shareholder group to nominate directors who are in effect their own nominees.
  • Broker voting (included in 4-461): When not directed by beneficial owners in each specific election, broker voting should not be allowed in the election of directors. Management should not gain an advantage from shareholders who are too lazy or busy to vote.

    For example, the New York Stock Exchange’s “10-day rule,” adopted in 1937, allows brokers to vote on certain proposals if the beneficial owner hasn’t provided voting instructions at least 10 days before a scheduled meeting. These broker votes are always cast in favor of management. The exchange justifies this unfair system by claiming that these proxy items are “routine.” However, it is clear that even ratification of the auditor cannot be taken for granted as a “routine” matter. 

  • Improve disclosure requirements, not just for shareholder nominated directors, but for all nominees and directors: The SEC should require nominees to disclosure professional, financial and family relationships between themselves, other directors, top management and the corporation itself. Shareholders cannot properly assess the independence of potential directors unless potential conflicts of interest are properly disclosed. 
  • Reimbursement of expenses: Although SEC amendments should not provide reimbursement of campaign expenses for shareholder director nominees, the rules should include potential reimbursement if the company takes legal action to block shareholders using the open access process from their right to nominate and run candidates. Additionally, I would favor some overall limitation on campaign expenditures to prevent companies from overspending shareholder assets to protect the status quo. 
  • Diluting the board: Companies should be prohibited from increasing the number of board seats to dilute the impact of cumulative voting or the influence of shareholder nominated board members, as Sears did in one of the examples cited above.

Conclusion

Providing shareholders the ability to place the names of director nominees on the corporate ballot is the most significant step the SEC can take to restore investor confidence, avoid the need for overly detailed prescriptive regulations to prevent Enron type abuses and to release the wealth generating powers of the modern corporation. Shareholders can do much of their own monitoring and policing, if given this most significant tool.

It is vitally important that this right extend to individual small shareholders, as well as large institutional investors. Otherwise the positive effects will only be felt among Fortune 500 companies, instead of the 9,000+ public companies that make our economy so innovative and dynamic. Additionally, we don’t want to move from management-dominated corporations to corporations dominated by a single shareholder. Both suffer access agency costs and are to be avoided. I urge the SEC to keep thresholds low so that all shareholders will see that they have an important voice in corporate governance and will be encouraged to use that voice to improve its value, rather than selling at the first sign of disappointment.

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Recent Comments on S7-10-03 Possible Changes to Proxy Rules

Several new comments have been filed. Among the most interesting are those of Jerome L. Dodson, President of Parnassus Investments(in the interest of disclosure, the editor has investments with Parnassus). Recommendations include the following:

  • Shareholders with a substantial amount of stock, say $100,000 in value, that they have held for at least one year, could nominate directors using the company’s proxy.
  • To prevent too many candidates from running for the board and confusing matters, at any one annual meeting, only two non-management candidates for each board seat could be nominated. If more than two non-management candidates are proposed for each seat, then only the top two candidates with the highest dollar amount of stock backing them would be nominated.
  • The company’s proxy statement would have to carry biographies of the nominees and brief statements of policy.
  • The SEC would eliminate restrictions on shareholders’ talking among each other and communicating about the proposed candidates.
  • To ensure that a majority would vote for each elected director, there could be an “instant run-off” provision that would allow shareholders to rank preferences among several candidates.
  • The SEC should consider making cumulative voting mandatory so that an important minority viewpoint could be heard on the board.

Comments from the AFL-CIO recommended the following criteria (disclosure: the editor is a member of an affiliated union):

  • Minimum Ownership Threshold: Nominating shareholder group should own a substantial block of shares (e.g. 3% minimum).
  • Minimum Holding Period: A majority of the shares held by the nominating shareholders must have been held for a minimum holding period in excess of one year.
  • Exemption from Regulation 13-D: Communication among shareholders together holding more than 5% should be exempted from burdensome requirements under Regulation 13-D so long as that communication is limited to efforts to nominate director candidates.
  • Maximum Permissible Slate: Qualifying shareholders should have the right to nominate a maximum number of directors at each shareholder meeting (e.g. equal to the greater of (a) two directors or (b) one-third of the number of company nominees standing for election at a particular meeting, but in no case a majority of the entire board). This represents the maximum number of shareholder nominees that would be allowed in the company’s proxy, regardless of the number of competing shareholder groups seeking to nominate candidates.
  • Competing Shareholder Groups: Unlike the pressures present at many large cap companies regarding shareholder proposals under Rule 14a-8, we think it is relatively unlikely that multiple shareholder groups at a particular company will compete for access to the proxy for their director nominees given the high ownership threshold required. Thus, we believe a simple decision rule (e.g. the largest shareholder block) will be sufficient to address the possibility of competing shareholder groups collectively exceeding the maximum permissible slate size.
  • Director Statement: Each shareholder-nominated director candidate should have the opportunity to include a background statement (e.g. 500 word maximum) in the proxy statement in support of his or her candidacy. In contested situations, management-nominated candidates should be afforded the same opportunity.
  • Provisions to Prevent Management from Gaming the System: The new rules should contain appropriate provisions to prevent management or the incumbent board from seeking to pre-empt an independent shareholder effort to nominate directors by, for example, colluding with a friendly shareholder group to nominate directors who are in effect their own nominees. In addition to strong language prohibiting such collusive activity, the rules could include a provision whereby the only incumbent directors eligible to be nominated by shareholders would be those who (a) were originally elected as a shareholder nominee or (b) are being ousted by the incumbent board without adequate justification to shareholders.

The Council of Institutional Investors made the following major points in their comment letter (disclosure: the editor’s pension fund, CalPERS, is a member of CII):

  • First, the Council believes that the single most important reform is to give shareholders more of a voice regarding who represents them on corporate boards. The Council believes that reasonable access to company proxy cards for long-term investors to nominate candidates for directors would substantially contribute to the health of the U.S. corporate governance model and U.S. corporations by making boards more vigilant about their oversight responsibilities.
  • Second, we believe enhanced shareholder access to management’s proxy cards must be carefully structured to ensure that such a mechanism would not impose unnecessary costs or burdens on companies and not be used for change-in-control purposes. Companies should provide access to management proxy materials for a long-term investor or group of long-term investors owning in aggregate at least 5 percent of a company’s voting stock to nominate less than a majority of the directors. Eligible investors must have owned the stock for at least three years. Company proxy materials and related mailings should provide equal space and equal treatment of nominations presented by qualifying investors.
  • Third, the SEC needs to review and modernize the 13D filing requirements to ensure that the rule applies only to an investor or group of investors attempting to truly change the control of a company.
  • Fourth, the Council believes that to ensure that shareholders have a meaningful opportunity to vote on directors, broker votes should be prohibited on contested and uncontested elections of directors.
  • Fifth, the Council believes that the shareholder proposal rules should be updated to streamline the process for companies, shareholders and the SEC.
  • Finally, it’s time for the SEC to improve the disclosure requirements regarding director relationships, executive compensation and director compensation.

Editor’s comments: Investors are in basic agreement. We need access to the corporate ballot for shareholder nominees. Our major disagreement lies in what the threshold. Should it be $2,000; $100,000; 3% or 5%. My thought is that a threshold in the 3-5% range will result in an unfulfilled promise. Take a quick look at the institutional holders of some of your favorite companies at Multex Investor or LionShares and you’ll quickly see that, if you set most large mutual funds aside because they have too many conflicts of interests to run candidates, it will take several large pension funds, the size of CalPERS, to reach even the 3% level for most firms. They will need to agree on the need to field candidates and which candidates to field. That would likely happen to only a dozen or so focus companies a year. What about the other 9,000? Here are a few of the provisions think address the need to limit the candidate pool but without keeping out those who are really dedicated to improving corporate governance.

  • Good Faith Deposit: If nominators have to put up even a token deposit of several thousand dollars that will only be returned if nominees achieve a minimum threshold vote, fewer will play the game but it won’t keep out serious players.
  • Lead Nominator Provision: Like the “lead plaintiff” provision in the Private Securities Litigation Act, we can ask for a provision that allows large shareholder to trump small shareholders. I suggest allowing at least two shareholder nominees per director slot in order to avoid moving from management dominated corporations to dominant shareholders who could also siphon off company resources.
  • Instant Run-off Voting (IRV): We then need IRV so that shareholder nominees don’t cancel each other out.

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PA Battle Over Pension Funds Audit

A battle has been brewing over who will audit the Pennsylvania State Employees’ Retirement System and the Public School Employees’ Retirement System. Members want an independent audit.

“The misuse of funds in our retirement systems and the possible mismanagement of our accounts must be investigated. The systems were created and designed to serve the retired public employees of Pennsylvania. It is time that we have an independent review of what is happening within our retirement systems. Independent reviews are needed here, and we call upon both Auditor General Casey and Attorney General Fisher to do so immediately.”  Lois Joan Stuck /President, PASR.

Investment Company Institute Meeting

The $6.3 trillion dollar fund industry is meeting in Washington. We would be interested in hearing from readers who attend. What is being discussed? Are members actually discussing how so-called “independent directors” are selected and how they demonstrate their independence from the executives running their portfolios? Whose interest are they watching out for? What’s being said about the upcoming requirement to disclose policies and votes in corporate elections. Will funds really monitor or just go through the motions? At the recent hedge fund hearings in Washington, there was talk of allowing mutual funds to employ some tactics used by hedge funds, such as the ability to sell short or borrow money to fuel returns. Do funds want such tools? Where will ICI come down on these and other issues?

Corporate Library News Briefs

The following are a few highlights from the excellent news briefsproduced by The Corporate Library:

A survey by Business Daily found that only one in 13 American’s have high confidence in the honesty and integrity of corporate chief executives and chief financial officers. Sixty percent of investors to not expect honesty from CEOs and CFOs, compared with 51% of non-investors.

A Booz Allen Hamilton survey of the world’s 2500 most prominent firms. Overall, the survey found 253 changes in chief executives worldwide in 2002, up from 231 in 2001. While CEO departures in the US dropped to 10.6% in 2002, from 13.4% in 2001 and 17.9% in 2000, forced ousters doubled from 20% in 2001 to 40% in 2002.

A Foley & Lardner survey of 450 proxy statements filed between September 2002 to April 2003. The survey found that accounting costs at mid-size companies increased 105%, while legal fees jumped 90.6 % and insurance fees to protect directors and officers increased 94.2%.

American Bar Association (ABA) Task Force on Corporate Responsibility report calls for changes in governance policies to enhance the role of corporate lawyers to ensure corporate responsibility.

If you’re not getting The Corporate Library’s News briefs we suggest you sign up for a free subscription now. They include domestic and international developments, although we’ve only hightlighted here a few of the domestic issues covered in the latest edition.

Diverse Boards Still a Dream

The Conference Board released their Executive Action Report, Bridging the Gaps … Putting Women on an Equal Footing, at the 2003 Women’s Leadership Conference in New York. Despite progress, only 15.7% of Fortune 500 companies are women and in Europe women hold only 3-4% of senior executive positions. (PRNewswire, 5/19/03)

TIAA-CREF Pushes Government Reforms

Peter C. Clapman, Senior Vice President and Chief Counsel for Corporate Governance at TIAA-CREF, addressed the US Senate concerning the need for changes regarding executive compensation.

“Executive compensation is a window into broader corporate governance issues at a company,” Clapman said. “If the directors do not get executive compensation right, they probably will fail shareholders in other areas as well.”

Appearing before the Senate Commerce, Science and Transportation Committee, chaired by Senator John McCain, Clapman urged Congress to support the following reforms:

  • Board compensation committees should act a truly independent fashion and having know enough to comprehend the stakes for shareholders.
  • Independent directors must retain only truly independent outside consultants, not consultants selected by incumbent management.
  • Compensation committees must reverse the ratcheting effect of positioning all CEO compensation levels at the 50th to 75th percentile.
  • Compensation committees must stop rewarding performance failures by corporate management’s.

(See PRNewswire,) 5/20/03. In our opinion, these are all great goals but the more efficient way of obtaining them would be to submitcomments to the SEC in response to their Solicitation of Public Views Regarding Possible Changes to the Proxy Rules. If the SEC would only change its rules to promote democracy in corporate elections, TIAA-CREF wouldn’t have to go begging to Congress; it would instead use its considerable financial clout to throw compensation committee members off the board if they don’t act in the best interests of shareholders.

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AFL-CIO Weighs In

The AFL-CIO responded to the SEC’s Solicitation of Public Views Regarding Possible Changes to the Proxy Rules. Key points:

  • Minimum Ownership Threshold: Nominating shareholder group should own a substantial block of shares (e.g. 3% minimum).
  • Minimum Holding Period: A majority of the shares held by the nominating shareholders must have been held for a minimum holding period in excess of one year.
  • Exemption from Regulation 13-D: Communication among shareholders together holding more than 5% should be exempted from burdensome requirements under Regulation 13-D so long as that communication is limited to efforts to nominate director candidates.
  • Maximum Permissible Slate: Qualifying shareholders should have the right to nominate a maximum number of directors at each shareholder meeting (e.g. equal to the greater of (a) two directors or (b) one-third of the number of company nominees standing for election at a particular meeting, but in no case a majority of the entire board). This represents the maximum number of shareholder nominees that would be allowed in the company’s proxy, regardless of the number of competing shareholder groups seeking to nominate candidates.
  • Competing Shareholder Groups: Unlike the pressures present at many large cap companies regarding shareholder proposals under Rule 14a-8, we think it is relatively unlikely that multiple shareholder groups at a particular company will compete for access to the proxy for their director nominees given the high ownership threshold required. Thus, we believe a simple decision rule (e.g. the largest shareholder block) will be sufficient to address the possibility of competing shareholder groups collectively exceeding the maximum permissible slate size.
  • Director Statement: Each shareholder-nominated director candidate should have the opportunity to include a background statement (e.g. 500 word maximum) in the proxy statement in support of his or her candidacy. In contested situations, management-nominated candidates should be afforded the same opportunity.
  • Provisions to Prevent Management from Gaming the System: The new rules should contain appropriate provisions to prevent management or the incumbent board from seeking to pre-empt an independent shareholder effort to nominate directors by, for example, colluding with a friendly shareholder group to nominate directors who are in effect their own nominees. In addition to strong language prohibiting such collusive activity, the rules could include a provision whereby the only incumbent directors eligible to be nominated by shareholders would be those who (a) were originally elected as a shareholder nominee or (b) are being ousted by the incumbent board without adequate justification to shareholders.

A complete copy of their letter can be found at The Corporate Library, which continues to do an outstanding job of keeping people around the world informed on important developments in corporate governance. Personally, I think the AFL-CIO’s response is excellent. I like their recommendation concerning Competing Shareholder Groups, although I would prefer allowing two groups to compete and winnowing down through the use of instant runoff voting. I also think the threshold should be the same low $2,000 worth of stock that is currently used for resolutions, but believe their Provisions to Prevent Management from Gaming the System could be an important feature to prevent abuse.

Good Corporate Governance Pays in Asia

The Corporate Library reported that corporations with better corporate governance practices substantially outperformed domestic equity market benchmarks in the past five years, according to a report byCLSA Emerging Markets. “Over short periods, the outperformance of high-scoring stock is tenuous,” said the report, “But over the past five years, stocks in the top 25% of the CG (corporate governance) survey outperformed their markets by an average of 35 percentage points, while those in the bottom 25% underperformed by 25 percentage points.” In its fourth annual Corporate Governance report, CG Watch: Fakin’ it – Board Games in Asia, CLSA teamed up with the Asian Corporate Governance Association (ACGA) to examine the region’s commitment to corporate governance over the long term.

The CLSA survey ranked 380 companies in 10 Asian economies, and named HSBC Holdings, Infosys Technologies, TSMC, KT Corp., BAT Malaysia, Public Bank, Singapore Press Holdings, ST Engineering and Standard Chartered as among those with the best governance scores. The report said that Singapore, Hong Kong, and India offer investor the best corporate governance environment, with the Philippines, Indonesia and China as the riskiest. “For their part, Korea and Malaysia have seen the highest improvement in our macro CG scores since we began these in 2001,” the CLSA report said.

The report, however, questions the depth of commitment Asian the companies surveyed really have for better governance. Many of the 380 companies, said CLSA, seem more concerned with the appearance of good governance than good governance itself, with many of the survey’s high scores contingent on “easy stuff” such as making statements of commitment to better governance and discussing governance in annual reports. “A policy statement that says [corporate governance] is important,” said CLSA, “And a few paragraphs in an annual report that give lip service to [corporate governance] can be just that – lip service.” “There is no question that Asian companies are picking up their game but the depth of their commitment is not yet clear.” “Quality of management and boards is the key that ties in companies with good CG together with higher financial ratios and share-price outperformance.”

Resolutions Winning

Shareholder activist John Chevedden reports that shareholder proposals are winning higher percentages this year. Proposals against poison pills won at Bristol-Myers (BMY), Proponent: Chris Rossi, 69%; at UST Inc. (UST), Rossi, 57%; at CSX Corp. (CSX), Chris Rossi, 74%, at General Dynamics (GD), John Chevedden, 54%, at Goodyear (GT), Chris Rossi, 53%, at KeySpan (KSE), Emil Rossi, 52% and at Maytag (MYG), Rossi, 60%, 3rd consecutive year above 51%. Also at Maytag (MYG), shareholders voted for the annual election of each director, Ray T. Chevedden, 59%, 5th consecutive year above 51%. Are they getting the message?

Calvert Urges Board Diversity

Calvert, the nation’s largest family of socially responsible funds, issued model charter language for corporate nominating and governance committees focused on attaining diversity in corporate board rooms. The firm argues that diversity is critical to a well-functioning board and an essential measure of good corporate governance.

“Against the back drop of Sarbanes-Oxley reforms and proposed New York Stock Exchange rules requiring a majority of independent directors and key committees composed exclusively of independent directors, we have an historic opportunity to change the face of corporate boards”, said Barbara J. Krumsiek, President & CEO of Calvert. “As potentially hundreds of corporate boards bring on new members, companies have an unprecedented opportunity to increase the number of women and people of color on their boards, which is an excellent way to assure the diversity of experience and perspective needed for sound corporate governance,” Ms. Krumsiek added. 

Women, who account for nearly half the nation’s workforce, college graduates, and talent pool, occupy just 14% of Fortune 1,000 board seats, while African Americans hold just 3% and Hispanics only 1%. Calvert contacted over 600 companies in their Calvert Social Index Fund, encouraging them to recruit qualified women and minority board candidates. Calvert also filed shareholder resolutions with nine companies this year, asking the companies to diversify their boards of directors. For more information on Calvert’s shareholder resolutions, read an issue brief on board diversity authored by Calvert’s shareholder research staff.

We applaud these actions by Calvert and sincerely hope the companies they contact will head their advice. We also hope Calvert will join with us in urging the SEC to amend their regulations to enable shareholder’s to place the names of board nominees on corporate proxy ballots. That way, if corporate boards refuse to budge, Calvert can nominate directors that reflect the diversity of their shareholders, customers and the larger society.

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Resolutions Up

1,009 shareholder resolutions have been filed with the SEC this year, according to the Investor Responsibility Research Center. That’s up from 802 last year, or a 26 percent increase. About one-third of the total want to change the way company executives are paid. Executive pay at the largest companies jumped 14% last year-even as the value of the S&P fell 22%. Altogether, the difference between the pay of CEOs and rank-and-file workers is about 350 times, says Frank Glassner, CEO of Compensation Design Group. About 20% of all directors are expected to be replaced this year, with a good number of those coming in to have a focus in finance, according to personnel firm Korn Ferry International. Are the changes just window dressing or are they fundamental?

Questions for Prospective Board Members

As corporations seek out nontraditional (nonCEO) board members and shareholders anticipate placing their own nominations on the corporate proxy, Weil, Gotshal & Manges has released Ten Topics of Inquiry for a Prospective Board Member. Here’s an example of just one of the ten topics:

Executive Compensation. What is the board’s philosophy with respect to CEO and senior management compensation? How is compensation linked to performance? Have performance thresholds ever been lowered to meet compensation expectations? Does the board consider the ratio of the CEO’s compensation (including stock-based compensation) to that of the lowest paid employees of the company?

The Sarbanes-Oxley Act of 2002 made the most significant changes in a generation in the laws governing the responsibilities of directors and officers and corporate disclosure obligations, and also established a new regulatory system for auditors of publicly-traded companies. Weil, Gotshal & Manges has developed a website“designed to provide clients and friends of this firm with information on these important legal developments.”

  • An introduction to the provisions of the Act.
  • A status report on the implementation of the Act , in chart form, organized by subject matter, including information on the effective dates of the various provisions of the Act and the implementing regulations, along with links to further information on these provisions.
  • A chart summarizing the corporate governance requirements of the Act and the proposed NYSE and Nasdaq corporate governance listing standards.
  • The most recent materials for distribution to clients generally regarding developments of the Act.
  • Other materials concerning the Act, and related matters, organized by subject matter categories and also by date.

WEPR Annual Pacesetters Luncheon

During the high-flying 90s, media and public relations pros seemed to lose their way as watchdogs and guardians of good corporate behavior. Now, the tide is turning as more and more breaches of public trust are revealed. Our distinguished panelists will look at how business can regain public confidence and the roles that media and public relations advisors will play in this critical process. $60 MEMBERS / $75 NON-MEMBERS Wednesday, May 21, 2003, 11:30am – 2:00pm
3 West Club
3 West 51ST Street (bet. 5th – 6th Aves., New York City)
Moderator, James Kristie, Editor, Directors & Board

  • Patti Domm, CNBC Senior News Editor
  • Brendan Intindola, Correspondent, Reuters
  • Jim Rogers, Chairman, President & CEO, Cinergy
  • Ray Troubh, Interim Chairman, Enron

Fax or email reservations (and names of guests) to: Barbara Coen,Women Executives in Public Relations Administrator (fax: 212-697-0910 or email: info@wepr.org). Checks payable to WEPR should be received by Friday, May 16 and sent to: WEPR, FDR Station, P.O. Box 7657, New York, NY 10150-7657

Superman Can’t Do It for Us

In a New York Times editorial The Acid Test, Paul Krugman argues that Eliot Spitzer’s noble war against “malefactors of great wealth” is a losing battle. Thanks mainly to Mr. Spitzer, a group of investment banks paid $1.4 billion to settle charges that their stock analysts had been shilling for corporate clients. But “the bad guys, though they lose an occasional battle, are winning the war.” Self-dealing continues.  Investors can’t rely on a few government officials, no matter how dedicated, to protect the integrity of capitalism. Democracy is the cure.

Last August, Les Greenberg, of ConcernedShareholders.Com, and I petitioned the SEC to turn corporate board elections into democratic contests where board members know they must watch out for shareholder interests, or be turned out of office. The $3 trillion Council of Institutional Investors (CII), representing mostly large pension funds, acknowledges that our Petition File No. 4-461 “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” (see Equal Access – What Is It?) Thanks to hundreds of you who sent supporting comments to the SEC. Those comments are what helped move CII to action.

The SEC has announced they will now consider possible changes “to improve corporate democracy.” Suggestions should be e-mailed torule-comments@sec.gov, with File No. S7-10-03 in the subject line. It is critical that proposals keep the threshold for submission of candidate names at the same low levels as those currently applicable to shareholder resolutions ($2,000 in stock or 1% of stock held continuously for at least a year).

If only shareholders or groups holding 3% or more of a company’s entire outstanding stock can nominate, we will have the Superman-Spitzer phenomenon. CalPERS, and a few other activist funds, will create a handful of contests at companies where self-dealing has already impacted shareholder value. The majority of corporations will continue with elections modeled on Soviet style politics; vote for so-called “independent” directors selected by the current board, often with the approval of the CEO, or don’t vote at all, unless you can mount a $1 million proxy contest.

Proactive shareholders can ensure that board members are either actively engaged or thrown out of office, but to govern our companies well, we must have the tools of democracy. The right of shareholders to place board nominees on the corporate ballot would be a crucial beginning to corporate accountability.

Shareholders would be better protected and so would the environment, public health and so many more of the values we hold dear. Workers own about $6 trillion of stock. Most of it is entrusted to our pension funds, mutual funds and other such vehicles. As early as 1988 the Department of Labor (DOL) set forth their opinion that, since proxy voting can add value, pension fund voting rights are subject to the same fiduciary standards as other plan assets. Last year former SEC Chair Harvey Pitt clarified that the same standards of trust law also hold for mutual funds. On January 23, 2003, the SEC ruled that proxy votes made by mutual funds must be disclosed in the near future.

Pension and mutual funds will face increasing pressure from beneficial owners to ensure votes are cast in a manner they agree with. Opening the corporate ballot will further increase monitoring of management by shareholders. The most vigilant shareholders, especially with regard to submitting resolutions, have been those who profess to be “socially responsible.” That includes mutual funds, as well as labor and public pension funds which seek to increase triple bottom line returns (adding economic, environmental and social value). Public employees, for example, don’t want to work during the day to protect the environment, only to find the corporations their pension funds have invested in are polluting it. Workers want to live in a healthy environment, get decent wages and have some say over how their workplace is governed.

It is paradoxical that the standard justification for autocratic corporate governance structures are their alleged efficiency, since the empirical research results do not support that conclusion. At the shop and office floor level, increased rank-and-file responsibility, increased participation in decision-making and increased individual autonomy are all associated with greater personal involvement and productive results. At the board level, researchers have found that “firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions.”

Why, against the findings of so many studies, do organizations continue to allow workers so little control over their jobs and investments? Our best guess is that most decision-making structures are designed around status needs related to dominance and control over others. They are not designed to maximize the creation of wealth. In order to gain higher status, individuals seek to dominate more and more people, leading to a widespread dynamic over time, which shapes the organization so as to move the locus of control upward.

In order to reach our wealth generating potential, we need to take advantage of all the brains within our organizations, as well those of concerned shareholders. We can do so by making corporations more democratic, top to bottom. The keys to creating wealth and maintaining a free society lie primarily in the same direction. Both require that broad-based systems of accountability be built into the governance structures of corporations themselves. By accepting the responsibilities that come with ownership, pension funds and other institutional investors have the potential to act as important mediating structures between the individual and the dominant institutions of our time, the modern corporation.

However, there will always be a role for the dedicated individual if they have access. Watchdogs like Eliot Spitzer and Nell Minow; shareholders like John Chevedden, Les Greenberg, and Robert A. G. Monks; and activists trying to build more democracy within pension funds themselves, like Neil Wollman’s work to reform TIAA-CREF. Our institutions need these innovative proactive individuals to blaze a path to enhanced values. Don’t shut them out. Tell the SEC we want the threshold for shareholder nominees on corporate ballots to be low.

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