June 2003


The spring edition of Strategy + Business, a quarterly sponsored by consulting firm Booz Allen Hamilton, carries an article titled “Corporate Governance: Hard Facts about Soft Behaviors. The authors argue against mandatory rules, such as having independent directors, since data supporting the value of independent directors has been inconclusive. Instead, companies should focus on soft behaviors that will lead to success:

  • select the right directors
  • train them continuously
  • give them the right information
  • balance the power of the CEO and directors
  • nurture a culture of collegial questioning
  • gain from directors an adequate commitment of time
  • measure and improve.

No one can reasonably argue against most of the recommendations. My problem is with the typical definition of “independence.” The authors cite a survey by Korn/Ferry that 9 out of 10 directors say that “willingness to challenge management” is either the most important criterion or among the most important in selecting new directors.

The authors say we’re moving in the right direction because 70% of Korn/Ferry searches are initiated by nominating committees (vs 10% eight years ago). However, “because CEO-board chemistry is vitally important to corporate governance and operations, the chief should be able to vet and veto nominees with whom she or he is not comfortable.” Who is more likely to challenge management, a director chosen by the nominating committee, and vetted by the CEO, or one nominated and elected by shareholders?

They cite research by the New York Times, which found that at 20% of the 2,000 largest U.S. companies, members of the board compensation committee had business ties with the CEO. Ask yourself, is that more likely or less likely if directors are nominated by shareholders? It is clear that shareholders are far less likely to nominated directors with business ties to the CEO. Selecting the right directors ought to start by allowing shareholders themselves to place director nominees on the corporate ballot.

Inequality Growing

Income inequality in the US has grown sharpy, according to a recent study by Katharine Bradbury and Jane Katz of the Federal Reserve Bank of Boston. Upward mobility of families moving from one quintile in the income distribution to a higher quintile decreased in the 1980 and slipped even further in the 1980s. Almost 10% of families who started in the bottom 3/5 of national income rankings wound up in the top 1/5 by the end of the decade. By the 1990, only 7.2% made that jump. In 2001, the top 1% of families held 34% of America’s total household net worth and the top 10% held 70%, while the bottom 50% held only 2.8%.

In “Land of Less Opportunity” (6/30/03), BusinessWeek questions how long the public will maintain their faith that anyone in America can achieve affluence. “Unless the decline in income mobility is reversed, that faith may waiver.” Will elimination of the estate tax actually end the American dream, instead of encourage it? How will corporate governance be impacted, if the hopes of American workers evaporate?

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P&I Endorses Shareholder Democracy

The influential publication Pensions & Investments ran an editorial favoring shareholder democracy, complete with a cartoon of a shareholder activist tin man seeking a heart from a Wizard of Oz-like SEC. Indeed, shareholders won’t be truly whole until they have proxy ballot access for the purpose of nominating directors. Patrick McGurn of Institutional Shareholders Services calls it the “Holy Grail” of corporate governance. I think a better metaphor is the shareholder’s Magna Carta. However labeled, such voice is critical and P&I’s clear statement that the “SEC should grant that access” adds to the 405 comment letters that were almost unanimous in support.

The P&I editorial points out that Exxon Mobil and Intel submitted comments opposing shareholder access and gave little concession to shareholders. Exxon Mobil, for instance, did not offer to “provide information on directors to allow shareholders to evaluate their performance.” “Opening the process would be a worthwhile exercise. It would force management and the incumbent board to explain why their candidates should prevail over alternative candidates.”

P&I recommends caution. “Before opening the proxy process, the SEC needs to develop a reasonable mechanism for carrying it out, including who can nominate, how many nominees to allow on the corporate ballot, and how to ensure compliance and other due diligence for alternative nominees.” If the reforms don’t work out, “institutional investors will be the first to cry out to reverse or modify the changes. But true shareholder democracy deserves to be tried in the world’s greatest democracy.” We couldn’t agree more wholeheartedly.

Forbes Covers Corporate Governance Web Sites

If you or your company can afford $5,550 tuition, Wharton, University of Chicago and Stanford Law School offer a three-day program called the The Directors’ Consortium. If you are at all fuzzy about the new rules of operating in this post-Enron environment, then you owe it to yourself and your shareholders to hit the Web. If the subject is Sarbanes-Oxley, a quick Google search will yield over 70,000 hits. Many of the sites listed merely post a PDF of the 130-page document; others are selling compliance software for IT departments or accounting offices. We found PricewaterhouseCooper’ssub-site devoted to the topic particularly useful.

Other essential bookmarks in the area of corporate governance are The Corporate Library, a Web site from a Portland, Me-based governance research firm led by shareholder activists Robert Monks and Nell Minow, and Corporate Governance, a treasure trove of links on the subject. Corporate Governance is one of the oldest sites on the Web devoted to the topic. It is a chore to scroll through, but its links are comprehensive. They range from research reports like a recent study by Harvard and Wharton on corporate governance and equity prices to news and listings of upcoming conferences devoted to governance.

That’s just a small sample of what can be found at Forbes’ Best of The Web: CEO’s Web-Guide To Corporate Governance.

CEO Pay Up

The average increase in total compensation for S&P 500 CEOs was 63%, compared to 51% percent for CEOs of non S&P 500 companies. “We look to the largest companies to lead the way in reform, but only a very few have made any attempt to rein in compensation,” said Paul Hodgson, senior research associate at The Corporate Library and author of the report, What Really Happened to CEO Pay in 2002.  Over the same period, the S&P 500 Index was down 23.3% and the S&P 1500 Index was down 22.5%.

Whose Money?

Herb Dyer, executive director of the Ohio State Teachers Retirement System (STRS) made an almost unbelievable blunder in a letter to one retiree, writing that the teachers’ pension fund belongs to STRS board members “to distribute as they see fit,” according to the Cleveland Plain Dealer. She also said the board is concerned about condescending, insensitive, and reckless comments that Dyer has made in public. 

Additionally, STRS suspended all employee bonuses and has begun a full review of policies on out-of-state travel and fringe benefits. Discretionary bonuses that were scheduled to be handed out next month would have come on top of “performance-based” bonuses, which totaled $1.75 million in 2000, $2.2 million in 2001, and $1.46 million in 2002.  Critics of STRS policies note that payment of $14 million in bonuses came during a period where the fund lost 21% of its assets, $12.3 billion. STRS oversees pensions for 424,171 teachers and retirees. (see Ohio Fund Wants A Closer Look at Bonuses, PlanSponsor.com, 6/23/03)

CNN’s Market Call with Rhonda Schaffler 6/20/03

Tough Call: whether it’s a good idea to give shareholders more power in the director nomination process. CorpGov.Net’s editor, James McRitchie, participated in this point counter-point with David C. John of the Heritage Foundation. Mr. John’s position is that recent rules have mandated independent directors and other important reforms…problem solved. In a few minutes, there wasn’t time to say everything I would have liked. Following are the major points I tried to make:

The so-called elections of corporate boards are a sham. They’re more like elections in a communist dictatorship than anything resembling democracy. The ruling party selects it successors. It’s a self-perpetuating closed loop. Unless shareholders spend millions of dollars to conduct a proxy solicitation, our only option is to vote for management’s slate or withhold our votes. That problem will remain until we get access to the company proxy.

While there has been a lot of focus on “independent” directors in Sarbanes-Oxley and proposed listing standards; having “no material relationship” with the company doesn’t make a director independent. They can still be the CEO’s personal dentist or their best friend.

To see how truly independent directors improve corporate governance and corporate performance take a look at some of the companies I’ve invested in and the people who are the driving force behind reforms. There’s Andrew Shapiro’s impact at Arlington Hospitality (HOST) and Quality Systems Inc. (QSII); Ralph Whitworth at and Richard Koppes at Apria Health Care Group Inc. (AHG) and Richard Koppes again at ICN Pharmaceuticals Inc. (ICN).

The petition that Les Greenberg and I submitted last year was cited by the $3 trillion Council of Institutional Investors as having “re-energized” the “debate over shareholder access.” In truth, it was the abuse of power at Enron and other companies that energized us all.

In 1977 the Business Roundtable, which represents CEOs, supported access. Yet, after Enron, Global Crossing, WorldCom and too many others to name, they now oppose access.

Virtually all of the 300 recent comments to the SEC on proxy rules and the election of directors from shareholders favored access. CalPERS and the Council of Institutional Investors suggest a five percent threshold. The AFL-CIO favors a three percent threshold. Others, including foundations, socially responsible mutual funds and individual investors propose one percent or less.

One route to try to restore market confidence is to put an SEC cop or an Elliot
Spitzer on every block to police “corporate wrong doers.” That’s an expensive notion and bound for failure. The other option is to empower the owners of corporations to monitor management. Let those who own the companies nominate and elect directors who will be accountable to us.

It’s high time the SEC quit restricting the rights of shareholders to manage our own affairs. Either set a low threshold, allowing shareholders to nominate directors and place them on the corporate ballot or empower the shareholders of each company to come up with our own framework to ensure democratic corporate governance. It’s time to move forward.

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SEC Comment Period Ends: Time to Assess Comments

Last June, Fortune magazine featured an article featuring Robert A.G. Monks where he was quoted saying, “The so-called elections of corporate boards are mostly a sham, and will remain so until dissidents can get access to the company proxy statement to challenge the management slates.” Enron was in the air, unions and socially responsible investment (SRI) funds were frustrated that companies were ignoring successful shareholder resolutions, and I was disappointed with the rules proposed by the NYSE and Nasdaq concerning “independent directors.”

Having “no material relationship” with the company doesn’t make a director independent. I wanted directors who are accountable to shareholders and who can be removed through the election process if they are not doing their job. In the case of The Business Roundtable v. SEC (905 F.2d 406, D.C.Cir. 1990), the court indicated the “goal of federal proxy regulation was to improve those communications (with shareholders) and thereby enable proxy voters to control the corporation as effectively as they might have by attending a shareholder meeting.”

We were far from that ideal and I could think of no better way to achieve that goal than to allow shareholders access to the corporate proxy. Reading about Les Greenberg’s experience at Lubys, I thought it was a good time to raise the issue once more . . . this time using a formal petition. So, last August 1st, Les Greenberg, representing the Committee of Concerned Shareholders, and I filed a petition with the SEC.

We called for open/equal access to the corporate ballot for shareholder nominees. We specified the same time honored requirements that currently apply to resolutions, $2,000 held for at least a year and we also called for the elimination of broker voting. eRaider submitted a similar petition, but with less specifics. AFSCME filed shareholder resolutions at several firms calling for shareholders to be able to place nominees on the corporate ballot.

The SEC actually adopted regulations requiring mutual funds and money managers to disclose their voting policies and their votes. Unions, public pension funds, SRI funds and corporate governance activists launched their biggest season of resolutions ever. They also began to endorsing what Patrick McGurn of Institutional Shareholder Services (ISS) called the “Holy Grail” of corporate governance. Our petition was cited by the $3 trillion Council of Institutional Investors (CII) as having “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” In truth, Enron had energized us all.

AOL Time Warner, Citigroup, ExxonMobil and others successfully lobbied the SEC to issue “no action” letters on proposals by AFSCME that called for shareowners to nominate candidates. Yet, the Commission also decided to solicit comments from the public on how to “improve corporate democracy.” Comments were due June 13th. The SEC staff now has until July 15th to come up with its recommendations. Where do we stand?

SocialFunds.com summarized 300 comments to the SEC on the issue of increasing democracy in corporate elections with the following statement: “The question is not whether shareowners should have access to the proxy to nominate directors, but what percentage of stock ownership qualifies shareowners to make nominations.”

However, it almost goes without saying that those who benefit financially from the current system oppose any substantial change. AutoZone and ExxonMobil both of flatly opposed the idea of shareholder access. Cary Klafter, of Intel, expressed the more common theme of management. “Sarbanes-Oxley and the revised stock exchange listing requirements are barely in place and ought to be given time to work before considering a revamp of the proxy rules to ‘fix’ perceived problems when the solutions may already be in place and in the process of implementation.”

Similarly, Patrick Mulva, ExxonMobil’s corporate secretary, wrote that allowing certain shareholders access to the proxy statement “would be detrimental to good corporate governance” and urged the agency to “stay on course with the significant corporate governance reforms already enacted.” “Most advocates of the ‘open ballot’ recognize that the process must be limited to shareholders holding a significant position — anywhere from 1% to 5% or more of the company’s outstanding shares. However, a shareholder or group owning such a significant stake can easily afford the cost of a proxy solicitation. By way of example, a 1% interest in ExxonMobil would represent almost 6.7 million shares with a market value at current prices of approximately $2.5 billion.”

In 1977 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.” The memo noted such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” Yet, after Enron, Global Crossing, WorldCom and too many others to count, the BRT now argues such amendments “may result in the nomination and election of directors that will cause the company to violate federal law or fail to comply with SEC, NYSE or NASDAQ requirements.”

John C. Wilcox, of Georgeson Shareholder Communications Inc. advised, “We do not believe that shareholders should have the power to unilaterally use a company’s proxy statement for director nominations.” Instead, he propose that boards open the nominating process to a nominations advisor chosen by a “qualified shareholder or group representing 10% or more of a company’s outstanding shares owned for no less than three years. If more than one shareholder or group qualified, the one representing the most outstanding shares would prevail. The ‘qualified shareholder representative’ would work directly with the nominating committee of the board in proposing nominees, negotiating for the selection of favored candidates and commenting on the qualifications and suitability of incumbents.”

Robert A.G. Monks advocates a Shareholder Advisory Committee, authorized by a by-law amendment, that “would consist of three paid representatives elected by the company’s largest institutional shareholders; it would be funded with a penny a share by the company itself, and have a right to meet with the company, propose candidates for director and publish its views annually in the proxy statement.”

Proxy advisor Institutional Shareholders Services noted “Any democracy is only as robust as its electoral process. Elections at U.S. corporations lack several attributes of any good democratic system. Most nominees run unopposed. Challengers to the incumbent directors lack any meaningful opportunity to place their names on the ballot.” “Qualifying significant shareholdings should vary with the size of the issuer. At the very largest public companies, holdings of as little as 3 percent to 5 percent of the outstanding shares should suffice. At smaller companies, however, qualifying holdings of 10 percent or more may be prudent.”

Not surprisingly, investors and those who act as pension fund and mutual fund fiduciaries almost universally support shareholder access to the corporate ballot. The California Public Employee Retirement System (CalPERS) and the Council of Institutional Investors (CII) suggest a five percent threshold. The AFL-CIO favors a three percent threshold, as does the Nathan Cummings Foundation, Domini Social Investments, Walden Asset Management and the American Federation of State, County and Municipal Employees’ Pension Plan (AFSCME), which filed the Citigroup resolution and has published a white paper on the equal access issue. The Social Investment Forum (SIF) and Responsible Wealth, which represents “a network of hundreds of affluent Americans,” advocate a one percent threshold. Jerome L. Dodson of Parnassus Investments seeks a lower threshold of $100,000 and advocates elections incorporate instant runoff voting.

Nell Minow, Editor of The Corporate Library stated that “While there has been a lot of focus on “independent” directors in the Sarbanes-Oxley legislation and the proposed listing standards, there really can be no meaningful independence as long as the nomination process is a self-perpetuating closed loop. The Commission should develop a procedure along the lines of that announced by Apria Healthcare this week to permit shareholders to submit candidates to be included on the proxy circulated to all of the shareholders by management.”

Stephen Davis, President of Davis Global Advisors, Inc. pointed out that “in virtually every other market in the world, with the exception of Canada, shareowners have the ability to cast their vote against directors. If a majority votes No, the director fails to be elected. At the core of any system of accountability is the right of stakeholders to hire and fire their agents. DGA endorses the position taken by the Council of Institutional Investors and the AFL-CIO advocating prudent measures to enable investors with significant stakes to nominate directors. Contested elections, under controlled circumstances, could spur boards further in advancing shareowner interests.”

Gabriel P. Caprio, Chief Executive Officer, Amalgamated Bank suggested a three percent threshold for three reasons. “First, that is the current level of support that is required for resubmission of a shareholder proposal in a subsequent year. Second, it is the figure that the Commission itself proposed five years ago in the rulemaking proposal that resulted in the current version of Rule 14a-8, when the Commission proposed (but did not adopt) a proposal to give shareholders the right to override the exclusions in Rule 14a-8(i) if at least three percent of the shareholders supported a particular resolution. We note in this regard that a one-year holding period is in line with current requirements and makes it more likely that any shareholder proponents are long-term holders. Third, and to be practical about it, a three percent threshold will be a significant barrier at many publicly-traded companies. As a result, it is likely that nominees put forth by a group of shareholders holding that large a percentage of outstanding shares will reflect a level of dissatisfaction that warrants inclusion of the candidates in the company-prepared proxy materials.

Mark Latham of the Corporate Monitoring Project suggests amending rule 14a-8(i)(8) to explicitly allow binding shareowner resolutions on director elections. Defining several standardized levels of access for nominees in the proxy, without actually imposing them as a regulation, could facilitate experimentation and learning. It would enable the investment community to try opening access to the proxy at, for example, $2,000, 1% or 5% thresholds (my numbers) and allow us to learn the pros and cons of a variety of scenarios, rather than requiring that one standard apply to all.

Bartlett Naylor of Capital Strategies said “By opening the proxy to shareholder-nominated directors, this Commission would sign an emancipation proclamation, ending the enslavement of shareholders to management-controlled directors.”

Holy Grail, Emancipation Proclamation or Magna Carta, clearly allowing shareholders to place their nominees on the corporate ballot would be a huge leap forward for the rights of shareholders. Robert Monks was right last year when he said “The so-called elections of corporate boards are mostly a sham, and will remain so until dissidents can get access to the company proxy statement to challenge the management slates.”

His partner in several ventures, Nell Minow, is correct in her assessment that “independent” directors, as defined in the Sarbanes-Oxley legislation and the proposed listing standards, is not really meaningful. One route to try to restore market confidence is to put an SEC cop on every block to police corporate wrong. That’s an expensive notion and bound for failure. Yes, we might catch managers self-dealing but my guess is that far more agency costs are due to mismanagement.

The other option is to empower the owners of corporations to monitor management. Let those who own the companies elect directors who will be accountable to them. Instead of sham elections, allow shareholders to turn directors who are not doing their jobs out of office though fair elections. Then we will ensure our corporations and our financial markets are the most efficient and productive in the world. It is high time the SEC quit meddling in the free enterprise system by restricting the rights of shareholders to manage their own affairs.

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Executive MSc in Corporate Governance Offered at NIMBAS

Given the recent high profile failures in corporate governance in a wide range of different businesses, NIMBAS Graduate School of Managementin the Netherlands, in association with Bradford University School of Management (UK) have developed an MSc in Corporate Governance that builds on an existing MBA degree in a one-year, part-time Executive program.

The aim of this program is to enable international participants from various functional backgrounds to identify and understand the ways in which corporate governance processes impact on their organizations. Understanding these processes and ensuring principles of corporate fairness, transparency and accountability are becoming essential for today’s business leaders.

Those already holding an MBA degree will have a substantial advantage in that many of the areas under study will have formed part of their MBA curriculum. However, this programme will provide a structure and a focus for the main themes involved:

  • The theory and practice of corporate governance itself.
  • Corporate reporting and its regulation
  • Business ethics
  • Internal management control
  • Corporate tax management
  • Best practice management
  • The legal framework surrounding corporate governance

For further information, please contact Joy Kearney, International Relations Manager, NIMBAS Graduate School of Management.

CalPERS Attacks Fat-Cat Pay

CalPERS will go after 10 to 15 companies with the worst pay practices in the next proxy season, as it currently does by listing underperforming companies.

The giant pension fund will oppose repricing “underwater” stock options, “evergreen” stock-option plans that are replenished without shareholder approval, executive pay plans that don’t tie pay to performance, or that don’t require executives to vest their stock compensation over at least four years. CalPERS will also oppose any option plan where the top five executives pocket more than 5 percent of the stock or options granted in a single year.

According to the San Jose Mercury News (CalPERS assails exorbitant executive pay, 6/18/03) “CalPERS standards could be tough hurdles for Silicon Valley companies. For example, at least 120 of the valley’s 150 largest companies dole out more than 5 percent of their options to the top five executives. Topping that list is Media Arts Group, which reserved 94 percent of its options for top bosses in 2002. Intel, Hewlett-Packard, Siebel Systems, Intuit and Cisco Systems were among the few local companies that hand out at least 95 percent of their options to the remaining workers.”

These may be tough reforms for Silicon Valley firms but this editor is convinced that those who comply with the new standards will be rewarded by greater productivity from employees. Certainly, the top five executives are important but in too many firms their pay is wildly out of proportion to their actual contribution. Additionally, the CalPERS policy will be much more effective for all concerned than the one originally threatened by California State Treasurer Phil Angelides who, last month said, “Maybe it would be a good idea to dump stock in companies with excessive CEO packages-it would send a strong message.” Using its voting power will send a stronger and certainly a longer lasting message. Let’s hope companies are responsive. (see Agenda Item 7c)

Outside Directors, Are They Independent?

The New York Times ran an article by Mark Hulbert asserting that researchers have found little evidence that companies improve their performance by raising the number of independent directors on their boards. (Outside Directors Don’t Mean Outsize Returns, 6/15/03) The problem is in what constitutes “independent.” Just because directors are neither employees nor officers of the company, and they have no business or personal relationships with it, that doesn’t make them independent.

To be truly independent, directors must have their own constituency. They need to be elected and accountable to shareholders who can remove them from office through the election process if they are not doing their job. In the case of The Business Roundtable v. SEC (905 F.2d 406, D.C.Cir. 1990), the court indicated the “goal of federal proxy regulation was to improve those communications (with shareholders) and thereby enable proxy voters to control the corporation as effectively as they might have by attending a shareholder meeting.” Nominating and electing directors will give them just that kind of power.

See “Inside Track with Broc: Jim McRitchie and Les Greenberg on Shareholder Access for Retail Investors,” an interview posted at thethecorporatecounsel.net. (6/10/03)

Corporate Governance Challenges for Emerging Economies

“More than ever before, the economies of the world, and the jobs and business that depend upon economic activity, are being shaped by the force and speed of globalization by such an environment that the need for timely, true and fair financial reporting, underpinned by the highest standards of corporate governance is increasingly critical.

“This year’s World Council for Corporate Governance’s International Conference is particularly important because market and public confidence is still so fragile after a series of high profile corporate failures in which the absence of effective governance was a major factor,” said Patricia Hewitt, MP, Secretary of State for Trade & Industry (UK) in her message to the 4th International Conference on Corporate Governance in London.

Earlier Derek Higgs the UK banker who headed the review of the role of non-executive directors stated, “Corporate Governance has become a key issue for driving today’s business. Our greatest challenge is to ensure that not only the wealth created is sustainable but also that the benefits accrue to everyone.”

Dr. William Halal, Professor of Management at George Washington University in his opening address asserted, “the issues of Corporate Governance in emerging economies are even more challenging. Ethics has to be the key issue to restore public confidence in the market economy.”

In his keynote address Prof. Avinash Persaud, Managing Director, State Street Bank asserted that “Contrary to common belief, the biggest owners of capital are public employees pension funds and ordinary insurance policy holders. If pensioners in developed markets had a greater exposure to the risks of emerging economies, it would be good for emerging economies, it would be good for the long-run returns of those pension funds and it would create a powerful lobby for the global economy, something that is sorely lacking today. “

In his theme address Dr. Madhav Mehra, the President of World Council for Corporate Governance, which organised the Conference asserted, “the box ticking model of Corporate Governance was inappropriate for the emerging economies.” He added, “unbridled greed poses the biggest threat to capitalism. The storm that has been raised even by a mild report on corporate governance reform by Derek Higgs is indicative of how the system defends itself against any change. For corporate governance to succeed we have to change our metaphors of success from ‘winner takes all’ and ‘success at all costs’ and develop an inner value system which prides on ethics, morality, equity, transparency and above all the courage to own failures.”

While chairing the session on “Improving the Effectiveness of Corporate Boards”, Mr. Michael Foot, Managing Director of FSA stated “the Boards of 21st Century have enormous challenges and their success will depend on their ability to tackle the stakeholders’ issues effectively.”

Representatives from eighteen countries participated in the Conference which was highly rated by participants.

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Creative Solutions Offered SEC by Mark Latham

Mark Latham’s suggestions to the SEC regarding possible rule changes to encourage democracy should win an award for creativity, as well as serious consideration. Here is a summary of a few of the suggestions he included in his comment letter.

  1. Branding. Comparing the quality of one director candidate to another is a complex task. The majority of individuals lack the time and expertise to make detailed decisions on their proxies. Even ISS (Institutional Shareholder Services) probably spends only about four hours of analysis per proxy. The solution, according to Latham is brand reputation, allowing individuals to, for example, vote the same way as CalPERS, Domini Social Investments or any other institutional investor that announces their intended votes in advance. The Commission could promote this possibility by:
    • Developing an internet brand voting system as a pilot program.
    • Encouraging others to develop an internet brand voting system.
    • Clarifying regulations that may affect such a system, such as proxy solicitation rules.
    • Funding system development.
  2. Company Specific Rules Established by Shareowner Resolutions. Amend rule 14a-8(i)(8) to explicitly allow binding shareowner resolutions on director elections. Defining several standardized levels of access for nominees in the proxy, without actually imposing them as a regulation, could facilitate experimentation and learning. It would enable the investment community to try opening access to the proxy at, for example, $2,000, 1% or 5% thresholds (my numbers) and allow us to learn the pros and cons of a variety of scenerios, rather than requiring that one standard apply to all.
  3. Instant run-off voting. Since candidates with the most votes may actually not be preferred by a majority of voters if there are more than two candidates, require or at least encourage instant run-off voting.

While I would prefer the SEC adopt my own recommendations, Latham’s are far preferable to instituting a 5% threshold across the board or limiting the number of shareowner director nominees to one or two per board. Latham would basically empower the shareowners of each company to come up with their own framework to ensure democratic corporate governance, a reasonable approach.

More Press as Comment Period Nears End

The Washington Post carried an article on 6/12, SEC Ponders Broadening Proxy Access; Agency Seeks Input On Board Election Idea. It reported that the Business Roundtable, an organization that represents chief executives at the largest companies, is polling its members and won’t comment until the survey is complete. However, comments are due 6/13. Following are highlights from the Post article:

  • The fear among chief executives, securities lawyer Howard Schiffman said, is that the proposal would make it harder for them to run their companies. “The problem is that there could be so much democracy on the board that the board becomes another alternative management,” he said. “There can’t be two CEOs. At some point you have to have a CEO who can make decisions.
  • Corporations also try to have a mix on boards, including individuals with different expertise and a balance of women and minorities, executives said. Challenges by shareholder groups could disrupt such a mix and also lead to the election of directors with limited agendas, executives said.
  • The threat of a challenge could make directors more likely to challenge chief executives on such matters as pay and complex deals, Schiffman said. SEC actions should foster “something between a board that is totally passive and one that is an alternative government,” he said.
  • One idea the SEC staff is considering would require companies to pay to include in proxy material the names of candidates nominated by shareholders holding a significant amount of stock — say, 2 or 3 percent of outstanding shares. Discussions so far would limit shareholders to one nominee.
  • Shareholders want board seats for different reasons than they did during the hostile corporate-takeover days of the 1980s. “This is not for control, this is for a spot at the table,” an SEC official said.

I have no reason to believe shareholders won’t seek directors that are any less diverse than those proposed by current nominating committees. Considering the small numbers of women, minorities and the lack of diversity of opinions held by current board members, shareholders could hardly do worse. I hope the SEC does not limit shareholder nominees to one per board. That would virtually guarantee failure, since one board member can easily be ignored and isolated. We need more than a spot at the table. We need boards who reflect the values of shareholders and can be held accountable by shareholders. Tokenism is not democracy.

Contrast the Wahington Post’s coverage to that of SocialFunds.com, which starts “The question is not whether shareowners should have access to the proxy to nominate directors, but what percentage of stock ownership qualifies shareowners to make nominations.”

Apria Healthcare Sets New Governance Standard

Apria Healthcare Group Inc. filed proxy materials (see especially exhibit A) which included allowing stockholders to nominate candidates for election to the Board of Directors at future annual meetings and to have those nominees listed in the company’s proxy materials.

Ralph Whitworth, Apria’s Chairman stated, “It has become painfully obvious over the past few years that corporate America must improve board room dynamics. This has to start with a robust and inclusive process for determining board composition. Apria’s new policy will allow our shareholders to participate in that process without the cumbersome and expensive undertaking of filing and distributing a separate proxy statement.”

The policy allows one or more stockholders who own beneficially at least 5% of Apria’s common stock as of the record date of the applicable annual meeting, and who have maintained that ownership level for at least two years, to submit nominations for the Board of Directors and to require the inclusion of information concerning their nominees in Apria’s proxy materials. A maximum of two stockholder nominations are permitted for each individual Board seat.

One condition they didn’t mention in the press release I saw was that any Nominating Stockholder nominee who does not receive at least 25% of the votes cast in the related election of directors will be prohibited from serving as a Nominating Stockholder nominee for four years from the date of the annual meeting in question. So, it is unlikely that such a candidate will be able to gradually build a reputation with shareholders. They would need to win at least be a real contestant from the start.

Additionally, Directors of Apria will now have stock ownership requirements for Directors similar to the requirements established for senior management earlier this year. Under the new requirements, each of the company’s eight non-employee Directors must own $150,000 worth of Apria stock within the next five years. Target ownership levels for senior management are expressed as multiples of salary, ranging from one and one-half to three times.

In 2001 and 2002, BusinessWeek magazine named Apria’s Board of Directors among the best boards in corporate America and, in 2000, Institutional Shareholders Services (ISS) named Apria as the best governed company in North America.

Apria provides home respiratory therapy, home infusion and home medical equipment through more than 410 branches serving patients in 50 states. In 2002, Apria received HME News’ HME Excellence Award as Best Respiratory Provider in the United States. With over $1.25 billion in annual revenues, it is the nation’s leading homecare company. (Disclosure: the Editor of CorpGov.Net is an investor in Apria)

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Canadian Coalition for Good Governance

The Canadian Coalition for Good Governance represents Canadian institutional shareholders by promoting the best corporate governance practices and working to align the interests of boards and management with those of the shareholder.

Objectives Include:

  • Ensuring that all public corporations have highly qualified boards of directors who understand that they are accountable only to the shareholders in the carrying out of their fiduciary duties.
  • Ensuring that boards of directors insist on excellent and ethical management.
  • Ensuring that that the board of directors supervise management proactively.
  • Ensuring that all committees of the board of directors are independent from management and highly qualified.
  • Ensuring that external auditors follow policies of transparent accounting, reporting directly to the audit committee thereby ensuring independence from the management of the company.
  • Supporting compensation schemes that reward employees for superior performance.
  • Developing a common position on acceptable accounting standards and financial disclosure through input with the various regulators and standard setting organizations.

The 19 founding members of the coalition manage about 350 billion Canadian dollars, or about $260 billion; an additional 35 institutions, managing 250 billion Canadian dollars, have signed on as observers. The chairman is Michael Wilson, a former finance minister of Canada who heads the Canadian arm of UBS Global Asset Management.

Coalition members plan to monitor the composition and performance of corporate boards and to swap information on board candidates to recommend to nominating committees. They also aim to develop common positions on accounting standards and financial disclosure. (see Conscience of Canada Inc., NYTimes, 6/8/03.

According to Corporate Governance Review (Fairvest Securities Corp.) The CCGG will start with a budget of about $1 million. the board will be chaired by former finance minister Michael wilson and operations will be managed by David Beatty (director of Bank of Montreal). The coalition will actively lobby for legislative changes.

Another Attempt at a Corporate Governance Mutual Fund

The ABC fund will invest in companies it sees as undervalued and will try to make money by pushing for improvements in corporate governance, according to the fund’s manager, H Team Capital. It will talk to management, agitate for new leadership or board members, mounting proxy fights, or encouraging takeovers.

The fund’s manager, Howard Horowitz, a lawyer and former merger-arbitrage analyst for the now defunct Lipper & Co. investment firm, has no public record as a solo mutual fund manager. He co-managed the Lipper Merger Fund, which folded after company head Kenneth Lipper shut down his hedge funds amid heavy losses and a discovery that securities in the portfolios had been mispriced.

Dan Culloton of Morningstar.com says “investors should stay wary of the fund until it proves it’s a serious corporate avenger and not a clever attempt to exploit the public’s preoccupation with corporate malfeasance.” He also warns the fund will have to gather sizable assets if it’s to have meaningful pull with companies or it will need to win over such funds to vote with them. (New Fund Seeks Gains Via Corporate Change, 6/6/03)

eRaider attempted such a fund with an elaborate internet affiliate designed to enhance value as a brand name and to work with other shareholders in an attempt to move companies. I proposed such a fund in 1996. I definitely think it can work, although I’d build it around a modified index fund that holds hundreds of companies and focuses corporate governance initiatives only at a few at a time. It will be interesting to see how they do.

Linda E. Scott to Head TIAA-CREF Corporate Governance Post

TIAA-CREF named Linda E. Scott to be Director, Corporate Governance. Scott leaves the Office of the New York State Comptroller, where she served as Director of Investor Affairs for the New York State Common Retirement Fund. Previously, she was Deputy Director of Communications for the New York State Comptroller and Special Assistant to the President of the Board of Education of New York City. She received her BA from Trinity College in Hartford and an MA from Yale University.

When interviewed about New York State Retirement Fund target companies in 1996, she implied that making the list has little to do with governance. “It’s all bottom line,” she said. “It’s ‘How much money did you make for us this past year?’ We’re not here to make sure that boards are composed of good directors. We’re here to make sure boards make money for us.” I assume she recognized the correlation then and hope she’ll bring TIAA-CREF to join those asking the SEC to allow shareholder access to the corporate ballot for the purpose of nominating directors. (see BusinessWeek, 11/25/1996).

Burden of Proof Shifting to Incumbent Boards

In a recent interview with a New York Times reporter, Patrick McGurn, a senior vice president with Institutional Shareholder Services said the burden of proof used to be on the dissidents to prove their case for change when waging a proxy fight, but his company and many others in the investment community have become increasingly skeptical of the ability of existing managements and boards to make significant changes. “You saw time and time again that incumbent boards weren’t taking care of shareholder interests.”

The subject of the report was the endorsement by ISS of a new slate of directors for the El Paso Corporation. “A ‘clean slate’ with a fresh start, unencumbered by the legacy of past mistakes, can help move the company forward,” Institutional Shareholder Services, which advises more than 700 large investors, concluded in its report on El Paso.

While ISS acknowledges the current board deserves credit for recent actions, it also believes they deserve much of the blame for El Paso’s troubles. “This board, and all members of this board, by their own acknowledgments, drank the Kool-Aid,” said McGurn. Strong words from an influential shareholder advisor. (see An Investment Adviser Urges That El Paso Board Be Ousted, by Reed Abelson, 6/4/03)

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Webcast on Open Access

Last month TheCorporateCounsel.net held a groundbreaking webcast onShareholder Access to the Ballot. Participants included:

  • Andrew Brownstein, Partner, Wachtell Lipton Rosen & Katz
  • Richard Ferlauto, Director of Pension and Benefit Policy, AFSCME
  • Lawrence Hamermesh, Professor, Widener University
  • Richard Koppes, Of Counsel, Jones Day
  • Ted White, Director of Corporate Governance, CalPERS
  • Beth Young, Senior Research Analyst, TheCorporateLibrary.com and Corporate Governance Consultant

Broad topics of discussion included: Why Investors are upset, Availability of Shareholder Nominees and Who Selects Such Nominees, More Disclosure as a Possible Solution, the Importance of Board Collegiality, Use of “Short Slates,” Number of Candidates and Disclosure Framework, and Ideal Frameworks for SEC’s Consideration.

While the webcast was innovative and very informative, it might have benefited by having someone there to represent individual shareholders and/or socially responsible mutual funds. However, if you want to know what the key thinking on this issue is among those representing large businesses and large public pension funds, you probably won’t find a better read.

Hanover Compressor Settlement Adds Fuel to Open Ballot Fire

Thanks to the team of William Lerach and Robert Monks, a recent Milberg Weiss shareholder settlement allows shareholders holding more than 1% of Hanover’s outstanding shares to nominate directors. Hanover’s Nominating and Governance committee will then select two of those individuals to be placed on the ballot. After these shareholder-nominated directors have served a one-year term, the board then is only obligated to nominate one shareholder-nominated director in the future. The settlement also includes a number of other governance restrictions, such as shareholder approval for new executive option plans and repricing of stock options and rotation of the independent auditor every five years. (see This Settlement Raises the Governance Bar, BusinessWeek, 5/14/03; see also Will Boye’s article on the ISS siteHanover Settlement Seen as “Breakthrough” for Equal Access)

BusinessWeek Endorses Open Ballot Concept

“Democracy in the boardroom could lead to more effective corporate governance by forcing directors to be more accountable — something recent reforms have done with only limited success. Allowing shareholder nominees on proxies could ensure that those who shirk their duties would face real consequences…In one bold stroke, his agency can give greater voice to America’s frustrated investors and improve accountability in the boardroom.” (Louis Lavelle, with Mike McNamee and Amy Borrus,Commentary: A Fighting Chance for Boardroom Democracy, 6/9/03)

Plea From TIAA-CREF Activists

In the 1980s, TIAA-CREF participants lobbied for five years to set up a socially responsible fund. Now they’re pushing for that fund to invest in particularly responsible companies and in low-income area housing and business, as well as engaging in shareholder advocacy. These are becoming more standard in socially responsible investing and are quite viable financially. Endorsements include the National Women’s Studies Association and United for a Fair Economy, Benjamin Barber, Dennis Brutus, Noam Chomsky, Sandi Cooper, Ursula Goodenough, and Howard Zinn.

Last year, TIAA-CREF’s then-CEO John Biggs told the New York Times he would support setting up a new fund that moves in this direction if there was sufficient financial interest. Proponents have now gathered over $16 million in pledges from over 600 individuals who have committed to transfer retirement assets should the fund materialize! At TIAA-CREF’s annual meeting officials said they would consider the proposal. You can help through the following actions:

  1. Contact TIAA-CREF to voice support for the proposed fund, even if you have called before. Let them know about your TIAA-CREF membership, money pledge (if you did), and affiliation,. Call CEO Herbert Allison at 800-842-2733; 212-490-9000 (ask for him and leave a message with his assistant).
  2. Visit TIAA-CREF: Out of the Bad and Into the Good to learn more about the proposed fund and to make a pledge.
  3. Forward this message with a short personal endorsement to listservs, organizations, and your colleagues nationally.
  4. Contact Neil Wollman and Abby Fuller to receive campaign updates about every two weeks. And let them know of any actions you take.

Directors and General Counsel See Ethics As Key to Reform

A recent survey of more that 600 corporate directors and general counsel at public corporations co-sponsored by the American Corporate Counsel Association and the National Association of Corporate Directors found that 90% believe CEOs and senior management bear a great deal of responsibility for recent scandals at companies like Enron and WorldCom.

Their solution? Corporate directors, by 70%, and general counsel, by 82%, both agree that senior management’s commitment to creating and sustaining an ethical business culture is the single most important measure in improving corporate governance. About a third of both groups believe corporate governance reforms will create a more adversarial relationship between senior management and boards; 40% see recent scandals restricting risk-taking and entrepreneurship.

Editor: It’s hard to argue against promoting ethics but isn’t their recommendation a little like saying that we’d have less theft if those with the opportunity to steal would demonstrate a greater commitment to ethical conduct? A more systemic solution would be to allow shareholders to place director nominees on the corporate ballot. Shareholder directors could then monitor and changes in actual behavior would be more likely to occur.

The NACD was recently running an informal survey on their site that mentions the SEC’s possible proposal to allowing shareholder nominees on corporate ballots. 38% of respondants think there is room for shareholder input in the existing process, 19% believe only directors should nominate directors but 40% of survey respondants think shareholders should be able to nominate directors and place those names on the corporate ballot. That’s a high number, considering that most visiting the NACD site are probably members. Maybe some directors are tired of not having the “independence” of their own direct constituency.

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