October 2003

Christian Science Monitor Says Proposed SEC Hurdles Too Steep

In a 10/31 commentary entitled Shareholder Power, the CSM recounts the proposed triggers that would allow shareholders to nominate a token member or two to most boards. “One trigger would be if more than 35 percent of shareholders vote to ‘withhold’ approval of a board-approved candidate. Another would occur if at least 1 percent of investors ask for their nominees to be on the ballot the following year and that proposal is then approved by half the shareholders.”

“These are still steep hurdles that don’t give investors enough clout,” says CSM. “In the 2,227 director elections held over the past two years, only about 1.1 percent of the companies had withhold votes that were more than 35 percent. Surely more than 1 percent of companies need a boardroom shake-up. And for companies in immediate need of reform, waiting a year to vote on investor-nominated candidates could lead to no reform at all.”

While alarmed at the minimal impact the rule is likely to have, the editorial doesn’t even contemplate the fact that once the “triggering event” has occurred, shareholders would still be required to gather a 5% group, agree upon a candidate, and hold a modified, though less expensive, proxy campaign. That’s likely to happen only at a small proportion of the 1% where a trigger has been pulled.

The editorial calls on the SEC to ensure that corporate America has “better safety valves for quick internal reform.” While most shareholders support their boards and management, they “would welcome having a bigger stick in the closet to bring a stronger spirit of accountability into corporations. More people would invest in companies if they had faith that their representatives actually represented them.”

CorpGov.Net’s Commentary: One major criticism of the SEC proposal from the business community has been cost. If every corporate election becomes an election contest, management won’t be able to concentrate on earning the profits shareholders seek and companies will needlessly be spending those profits to ensure board nominated candidates win. However, what if we simplified the SEC’s proposal to make it much less expensive?

Instead of the triggers proposed by the SEC, let’s allow any shareholder currently qualified to file a resolution to nominate directors. If more than one shareholder nominates, the company would include only the nominee(s) from the largest shareholder or shareholder group. That would simplify the process for shareholders. In order to keep the expenses of businesses down, filers would have to agree to severely limit their campaign costs; they would not be allowed to hire a proxy solicitor, place ads or even conduct mass mailings (other than via e-mail). Their candidates would rise or fall largely on the basis of their 500 word statement in the proxy and their websites. If the company does not include a statement either opposing the shareholder nominee or supporting their own nominee, than even the 500 word statement could be omitted and their shareholder campaign would largely depend on their website and e-mail.

Many more companies would face some sort of contest, but in the vast majority of cases the costs, in terms of time and money, would be minimal. Only if shareholders were truly dissatisfied with the current board or if the shareholder campaign rang true would there be any contest. In those cases shareholders would be able to invigorate the process and provide real choices.

Democratic Structures, Key to Public Trust

In a national survey of 2,031 adults sponsored by the National Cooperative Business Association (NCBA) and the Consumer Federation of America (CFA), 71% of consumers said they are more likely to buy products or services from a business if they know it to be a cooperative. Respondents believe that companies that allow members to democratically elect the board of directors, and are locally owned and controlled are more trustworthy than profit oriented businesses. Co-ops also rated higher by wide margins on questions of value, quality, price, and commitment to their communities.

“Public trust is the first casualty of corporate accountability scandals,” said CFA Executive Director Stephen Brobeck. “Fortunately, this survey shows there’s a solution to consumer concern about their lack of control. Consumers believe the nation’s more that 40,000 co-ops offer more democratic, accountable options and trustworthy options. And those are options they clearly prefer.”

Perhaps companies that are not cooperatives can also learn something from the survey. If they act a little more like cooperatives, perhaps they can gain back some of that trust and all stakeholders will benefit. It seems to be working for Apria Healthcare. Back in June, they announced they would include in their annual meeting proxy statement information concerning up to two director nominees submitted a stockholder or group of stockholders that have owned beneficially at least 5% of the company’s common stock for two years or more. According to Board Chairman Ralph V. Whitworth, the change was “based on the proposition that shareholders have both a meaningful role to play in corporate governance and a legal right to participate in such governance.”

During the last six months, Apria’s share price has risen about 25%, compared to about 15% for the S&P 500. A legal right to participate in governance might bring shareholders both more power and higher returns. (Disclosure: the editor’s portfolio includes Apria Healthcare and shares in the Sacramento Natural Foods Cooperative.)

More Directors Turning Down Positions

According to Korn/Ferry International’s 30th Annual Board of Directors Study, 23% of Fortune 1000 directors turned down additional board roles in 2002, compared to only 13% the previous year due to the increased liability of serving on corporate boards. Other key findings:

  • American Fortune 1000 boards lead the way in holding executive sessions (87%) without their CEO present. Only 4% of Japanese boards hold such sessions;
  • In the Asian Pacific region, 41% of boards formally evaluate their directors, whereas 29% percent of American boards conducted such reviews (up from 21% last year);
  • 98% of the American boards are in compliance with Sarbanes-Oxley; 63% of French boards report compliance with the Bouton Report; and 66% of UK boards satisfy the Higgs and Smith Reports on the issues of director independence.
  • 92% of Australia/New Zealand directors, 80% of U.S. directors and 71% of French directors say the former CEO should not sit on the board.

To Harvard With Love

Robert A.G. Monks shares his recent letter to Lawrence H. Summers, President of Harvard College, on the 50th anniversary of his graduation from Harvard College. I always learn something whenever I read anything from Bob Monks and this letter was no exception. There are the ever present facts and figures:

  • History will look back on the 1990s as a time when the principal officers of public American corporations transferred from shareholders to themselves approximately $1 trillion — or 10 percent of the market value of public exchanges.
  • At the beginning of the decade roughly 2 percent of the market value of listed companies was represented by options, at the end the figure was up to 12 percent.  
  • Business support for research is Harvard’s second largest revenue line at $518.8 million.

At heart, however, Monks’ letter is an elegant plea; Summers should drop his “ivory tower” approach to investing. “By a simple standard of decency, these representatives of Harvard’s interests should respect the spirit of the law of trusts by becoming more active as investors.” He cites Harvard’s role in founding the Investors’ Responsibility Research Center (IRRC) and later activism at Waste Management and Templeton Mutual Funds. He then address how Harvard should attempt to involve itself as a socially responsible investor not through the traditional SRI mode of divestiture or blacklisting but “by changing companies from within.”

In the UK institutional investors are now required, after the Myners Report, to adopt explicit, written social and environmental policies with respect to their investments. ‘Institutions are now in effect legally required to become activist with respect to investee companies if this is necessary to enhance value.” Monks goes on to note that “no such high-level discussion has yet taken place in the United States, either in the public or private sector.”

Will Harvard take the lead? Let’s hope it doesn’t take another 25 years of corporate governance activism by Bob Monks to get them to do so.

Everything You Wanted to Know About Corporate Governance . . .

That’s the lead title in series of 10/27/03 Wall Street Journal articles. Unfortunately, while shareholders are mentioned, they aren’t central. “Who are the major players in corporate governance?” asks writer Judith Burns. Her answer? “Board members, senior management, outside auditors, states, federal regulatory agencies such as the Securities and Exchange Commission, criminal prosecutors, legislators and the courts all play a role.” But apparently not shareholders. Of course Ms. Burns discusses the SEC’s equal access proposal and shareholders soon gain more than a foothold in her introduction to the subject. However, by leaving them out of the defined “major players in corporate governance,” she consigns shareholders to a role which lacks the appearance of legitimacy.

Comments Start Pouring in to SEC on Equal Access Proposal

The first comment letter was from Stephen F. Gates, Senior Vice President and General Counsel of ConocoPhillips. “In the context of a newly adopted regulatory framework that is already designed to address the issues of board composition and director performance, the adoption of proposals to facilitate election contests is an unwarranted step that offers little apparent benefit while threatening significant harm. We encourage the SEC to weigh these costs against the absence of any clear benefit and reject these proposals.”

The second comment letter was from shareholder, Les Greenberg, Chairman of the Committee of Concerned Shareholders. “The proposed rule, allegedly intended to promote BOD and Management accountability, would limit ‘equal access” to the corporate ballot to only those Shareholders with substantial means. There are 9,000+ corporations with publicly traded securities where the legitimate corporate governance needs of all investors should be protected. Institutional Investors, alone, will not have the interest or the resources to nominate Director-candidates at many of those corporations. Director accountability should be promoted at more than a few corporations. Individual Shareholders should be able to act as their own watchdogs in protecting their investments…The choice is clear: true corporate democracy or continued paternalism by the corporate aristocracy.”

Comments are due by December 22, 2003. Send them electronically torule-comments@sec.gov. Include File No.: S7-19-03 in the subject line of your e-mail. If you attach a document, indicate which software you used (for example, Word Perfect 5.2, MS Word 2000 or ASCII text) at the start of your message. They are now asking not to submit documents in HTML format or PDF, even though several of the posted comments are in HTML.

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Who Should Pay for Contests?

In “Why shareholders must have more power,” which appears in the 10/21/03 Financial Times, Harvard professor Lucian Bebchuk argues the current SEC proposal to grant limited shareholder access doesn’t go far enough. Two additional reforms are needed.

“Under existing corporate law, incumbents’ ‘campaign’ costs are fully covered by the company, which provides a great advantage over outside candidates, who must pay their own way. To enable challengers to make their case to the shareholders, companies should be required to reimburse reasonable costs incurred by such nominees, at least when they draw sufficient support in the ultimate vote.” Personally, I believe there is a much less expensive option that will go a long way to solving this problem.

The SEC needs to either amend or delete section 240.14a-8(i)(8) in order to allow shareholders to hire a proxy monitor to provide independent advice to shareholders, not only on shareholder resolutions but also on elections for directors. I want my pension and mutual funds to be activists, nominating directors wherever warranted, but I don’t want them spending my savings or diluting the value of my shares through expensive proxy battles. If shareholder nominees get 500 words in the proxy materials and if an assessment by an independent proxy monitor, such as ISS, is also included in the proxy materials that endorses those independent nominees, that should be enough. Institutional investors would risk breaching their fiduciary duty by voting against such a recommendation. Money devoted to a proxy campaign would simply be wasted.

Bebchuk’s second recommendation, however, is one I embrace. He points out that, “Incumbent directors are now protected from removal not only by impediments to running outside candidates but also by staggered boards, on which only a third of the members come up for election each year. Most public companies now have such an arrangement. As a result, no matter how dissatisfied shareholders are they must prevail in two annual elections to replace a majority of the incumbents. Requiring or encouraging companies to have all directors stand for election together could contribute significantly to shareholder wealth.”

Yes, we need to do away with staggered boards, but we also need to increase the number of nominations shareholders can make through the SEC’s proposed process. Limiting nominations to one or two is absurd. It would take years and years for shareholders to shape a more responsive board under such conditions. Shareholders should be able to replace one less than half of the board by placing their nominees on the corporate ballot. That protects against short-term speculators and gives time for the current CEO and board to show they are responsive, but it would also ensure that shareholders will see light at the end of the tunnel.

Cluster Bomb or Smart Bomb?

When the SEC announced its rulemaking to provide very limited ballot access to shareholders, all commissioners were unified in support. Is the support waivering? At the recent NACD 2003 Annual Corporate Governance Conference, Commissioner Cynthia A. Glassman said “I agree with this proposal in theory, but to paraphrase no lesser an authority than Homer Simpson, Communism works . . . in theory.” “While I agree that the rule could have a positive effect on some poorly governed companies, I am concerned that the rule’s reach will not be so limited. To use a military analogy, we may be dropping a cluster bomb when a surgical strike is more appropriate. I am also very concerned about the potential competitive effects the proposal could have, especially for companies that compete in global markets.” (ISS Friday Report, Proxy Access Proposal Reveals Cracks in Governance Juggernaut by Michael P. Bruno, 10/24/03)

Continuing the military analogy, the Commander in Chief reports to a full-time Congress with a full-time staff. As Gary Moreau points out (see “Radical Voices at the Conference Board” below), “The military superior has far less power than the corporate boss.” Sure the Business Roundtable opposes the proposal; they don’t want to lose power. Ms. Glassman, democracy also works in theory, but it will be much more effective if the actual procedures for elections are democratic, as well as the label. And, not to take anything away from Michael Bruno at ISS, but where’s the “governance juggernaut.” If there is a corporate governance force out there aimed at being lord of the world, crushing all in its path, it is the Business Roundtable, not corporate governance advocates who are trying to bring the semblance of democracy to the way corporations are governed.

Lower Expectations

Americans are facing retirement with diminished expectations and an emphasis on protecting their assets, according to two recent studies.

Strong Retirement Plan Services found nearly half of adults currently employed full- or part-time expect to work after retirement, most out of financial necessity. Only one-third of respondents planned to retire early, by age 60. Those who expected to continue to work were evenly split between working in the same career or another. Of those who would switch, almost 20% wanted less stress, while 10% wanted something more in line with their real interests.

A survey by John Hancock Financial Services found that 76% described themselves as more conservative and risk averse than they were a couple of years ago, a finding that was even more pronounced among Baby Boomers nearing retirement age. (Money Management Executive, 10/22/03)

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Computershare to Acquire Georgeson

Australia’s Computershare, a global transfer agent and technology provider for the financial services industry, announced an agreement to acquire New York-based shareholder services firm Georgeson Shareholder Communications for roughly $115 million in cash. Georgeson provides shareholder communications and strategic advisory services to mutual funds and corporations around the world, including corporate proxy solicitation, in which it has an estimated 55% market share. Computershare said it plans to keep the Georgeson name in the U.S. and in its other markets. The deal is expected to close by the end of 2003.

Bits from PlanSponsor.com

A Towers Perrin survey of the 300 Fortune 1000 CFOs with defined benefit plans found that 3/4 are underfunded…14% were concerned the financial condition of their pension plans might impair the company’s ability to pursue business transactions.

Almost 66,000 white collar workers joined the AFL-CIO last year. Educators, health workers and public sector employees are swelling the ranks of unions across the country.

Radical Voices at the Conference Board

Across the Board, the Conference Board’s magazine of ideas and opinions, includes two rather radical voices in its 9-10/03 edition. Gary Moreau, author of the upcoming book Thinking Outside the Boss, and William Greider, author of The Soul of Capitalism: Opening Paths to a Moral Economy, are featured.

In “What the military can teach corporate-governence reformers,” Mr. Moreau compares the board of directors with Congress and points out that being a senator or representative is a full-time job with their own staff. In describing military commanders, he notes they are constrained by specific rules of engagement. “The military superior has far less power than the corporate boss.” Promotions are determined by an independent board of fellow officers, not by the superior officer. “The differences in compensation between ranks are also much smaller in the military,” implying that much of the money paid to CEOs is wasted.

Moreau says corporate-governance reform must include “a greater delineation and compartmentalization of power within the corporation.” He recommends separation of governance and daily operations. “The governance organization should include the traditional service departments of legal, human resources and administration. In most cases, it should also include finance, accounting, customer service, and quality. Ideally, these governance functions should report directly to the board via the chairman, where that position is separate from the CEO, or the lead director, if the CEO and chairman positions are combined.” “If the military seems an unlikely place for corporate-governance leaders to turn for organizational ideas remember that business borrowed its organizational model from the military can change, certainly our armies of commerce can, too.”

Mr. Greider’s focus is, in some ways, even more far-reaching. He is concerned that average Americans have already worked longer hours and have borrowed against their homes. Eventually, they’ll go broke. It isn’t just those on the shop-floor who are alienated, but also middle-managers, chemists, engineers and even doctors. Who controls corporations? Shareholders aren’t really the ultimate-owners; “the owners of property are the people who control its use, who make the fundamental decisions about how it should be used.” “A very small group of insiders: top executives, a handful of large-block investors, maybe some financiers and creditors who plan in intimate role in the management. They have agreed to share their returns with the shareholders – absolutely – but they don’t share power with them, and that is not the proper alignment.”

According to Greider, insiders should include everyone inside the firm, suppliers and their community. We need many perspectives contributing to decision-making. That will yield better decisions. “The history of human progress is people discovering the capacity to alter the system around them, whether it’s political or economic, to realize more of their human capacities.” In the end, “a lot of companies might discover that greater employee ownership – not 60 percent, not even 50 percent, maybe 20 percent for starters – encourages greater workplace participation and cooperation” and we might find that participation leads to greater wealth enhancement for the vast majority.

All of a sudden this editor feels like a real moderate; the biggest change I’m pushing for at the moment is simply to allow shareholders to place their nominees on the corporate ballot, without all that trigger nonsense of the current SEC proposal. We don’t need a trigger to activate our right to nominate members of Congress; why should we have to wait the companies we own have been robbed before we can exercise a little corporate democracy?

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Emphasis on Corporate Governance Permanent

Public relations firm Hill & Knowlton commissioned the survey of 257 chief executives at 199 public and 54 private companies in North America, Europe and Asia by ORC International. CEOs overwhelmingly expect the emphasis on increased disclosure, independent directors, increased scrutiny of CEOs and more activist shareholders to be permanent fixtures in the business landscape. Only one in five strongly believe that new corporate governance rules enacted under Sarbanes Oxley will improve ethical behavior. Yet, half the CEOs thought the greatest threat to a company’s reputation, ignoring financial performance, was unethical behavior. (CEOs Split On Corporate Governance Rules,FinancialTimes.com).

Editorials in Pensions & Investements

Two important editorials appear in the 10/13/03 edition of Pensions & Investments. One is entitled “Recall this holy grail as too timid.” While the editorial praises the SEC for its historic proposal that would grant shareholder nominees access to the corporate ballot under specified conditions, the proposal “doesn’t go far enough.” “Problems include the protracted process, over two annual meetings, for the shareholders’ nominee to be placed in the corporate proxy. Among other problems is that the SEC provides only two events to trigger shareholder access. Neither makes for timely nominations for a company in an operational crisis or, worse, under investigation for fraud.” They checked with Patrick McGurn, of ISS, who noted that if the rule had been in place this past proxy season, shareholders probably would not have triggered the nomination process at any company.

A second editorial, by Barry Burr, predicts the growth of a new money management style, “active” management, involving corporate activism. “Fund sponsors will have to join the movement in some form, willingly or not, as developing events push them to activism.” Mr. Burr indicates that “only three corporate activist money market managers have a track record.” He names Relational Investors, Hermes and Lens, but cites the recent formation of H Team Capital as promising. I’m happy to report there are several more such funds, including Andrew E. Shapiro’s Lawndale Capital (where I have some of my investments). The best way to learn about these funds is to subscribe to Maureen Nevin Duffy’s excellent publication, the Corporate Governance Fund Report.

Mr. Burr points to the promise of the SEC’s recently proposed proxy rules. He’s correct that disclosure of mutual fund votes will help researchers design corporate governance investment strategies but such activist investors will have a much better chance of beating the market if they can run for board of director positions under the most recently proposed rule. Most of these corporate governance funds have financial ties to likely nominating funds, such as CalPERS. Unfortunately, the current release prohits such strategies by prohibiting nominees to have financial relationships with nominators. That provision would be a tragic mistake, if included in the final rule. The proposed rules should be amended to encourage such relationships. Shareholdres should be able to call in professionals to help turn boards around; that will put corporate governance on the right path.

Analysis of SEC’s Proposed Rule on Shareholder Nomimations Begins

During the question period of 10/15/03 teleconference sponsored by RR Donnelley and Glasser LegalWorks, David Lynn, who is Chief Counsel for the SEC’s Division of Corporate Finance, indicated the SEC may allow shareholder resolutions of the type AFSCME filed last spring (to allow shareholders to place director nominees on the corporate ballot), even though they don’t come from 1% shareholders.  He indicated they might but referred me to footnote 74 in the current release. As I read that footnote in context, the rule would only allow such resolutions from 1% shareholders. Other interpretations?

I’d like readers to join with me in commenting and supporting the notion that election of directors, as a topic, should no longer be off limits for shareholder resolutions. Even if the SEC requires a 1% shareholder or group to set off a triggering event (I don’t believe we should have to wait for triggering events at all), anyone who can introduce a resolution should be able to introduce nontriggering resolutions on elections. We could ask, for example, that companies adopt policies similar to Apria Healthcare (see SocialFunds.com, 6/24/03). By the votes, at least we could get a feel if it is worth putting together a 1% group the following year.

A second relative obscure point I hope members will join me in opposing is language in the proposal that excludes from nomination by shareholders anyone who has “accepted directly or indirectly any consulting , advisory, or other compensatory fee” from any member of the nominating group. This would exclude people like Ralph Whitworth and Andrew Shapiro who have built solid reputations for turning companies around with minority positions on boards, since it is likely that at least one fund in most nominating groups will have some sort of business relationship with such individuals. This provision should be amended so as not to preclude such nominees.

SEC Posts Ballot Access Rulemaking

The rulemaking the SEC calls Security Holder Director Nominations, File No. S7-19-03, has been posted to the SEC’s Internet site. For those who want to comment first, and perhaps influence the comments of others, the race is on. The rest of us have 60 days from the first date of publication in the Federal Register.

Comments in hardcopy should be submitted in triplicate to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Alternatively, comments may be submitted electronically at the following e-mail address: rule-comments@sec.gov. All comment letters should refer to File No. S7-19-03. This number should be included in the subject line if sent via electronic mail. Electronically submitted comment letters will be posted on the Commission’s Internet website. The SEC does not edit personal information, such as names or electronic mail addresses, from electronic submissions. You should submit only information that you wish to make available publicly. We encourage all who wish to submit comments on this historic rulemaking to do so via e-mail so that your comments can be easily available to others.

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Corporate Recall

Jeff Brown, of the Philadelphia Inquirer and Kathleen Pender of the San Francisco Chronicle made comparisons between the California recall and proposed SEC election reforms and both got it right.

Brown says, “Were the SEC to take the California recall object lesson to heart, it might move more boldly to introduce democracy to America’s corporate boardrooms, where it is badly needed. Unfortunately, the SEC’s latest stab at reforming corporate governance is all but meaningless.”

He points out the SEC triggers and other hurdles “are meant to prevent election of candidates beholden to ‘special interests,’ which presumably refers to folks like environmentalists or union activists. Imagine if there were 20 candidates for each seat – any nut could be elected with a tiny plurality.” But, Brown points out that a better way to assure candidates have broad backing to win would be to use an instant runoff system (IRV), where voters rank each candidate. That’s the same mechanism that Les Greenberg and I have called on the SEC to use in amendments to our proposal. Don’t limit nomination to gigantic shareholders (who can well afford a full proxy battle) and use IRV to ensure majority support.

Pender wrote, “an actor who had never held office was elected governor of California after getting his name on the ballot by paying $3,500 and submitting 65 signatures of registered voters.” California is the world’s 5th largest economy in the world. Approximately 36 million Californians are dependent on Mr. Schwarzenegger decision-making abilities. “Yet it’s almost impossible,” writes Pender, “for shareholders of public companies to run for a seat on the board of directors.”

Although Sean Harrigan, president of CalPERS, called it a good first step, Pender writes, “That’s like saying a moldy crust of bread is a good first meal when you haven’t eaten in a month.”

“What really concerns the SEC is the heavy pressure it is receiving from corporate executives and powerful business groups that oppose true boardroom democracy,” writes Brown, the same insiders who have been “rewarding themselves extraordinary pay and perks.”

Why should the SEC be trying to balance the advice of the Business Roundtable with those of the Council of Institutional Investors, CalPERS, or small shareholders? But then why did Congress listen to the BRT, instead of the Financial Accounting Standards Bureau when it came to the question of wether or not to expense options? Shouldn’t the owners of corporations have more say in the rules governing corporate elections than the hired help? I thought the primary mission of the SEC was to protect investors.

Unfortunately, money talks and BRT members spend a lot more of it buying influence with government decision-makers than do shareholders or their fiduciaries. The recent California elections may have been a circus, but corporate elections are much more sinister and will remain essentially self-perpetuating oligarchic dictatorships, even if the proposed SEC reforms are enacted. (Corporate democracy has to happen, Philly.com, 10/12/03; Recall didn’t change bad state credit, SFChronicle,10/9/03)

Early Retirement Trend Reversing?

The trend toward earlier and earlier retirement has slowed and, perhaps, even reversed. A host of explanations are possible: the elimination of mandatory retirement, the cessation of the expansion of Social Security, the reduction of retirement incentives within Social Security, and the changing nature of the private pension system. One explaination is the shift in coverage from defined benefit to defined contribution plans. According to a new brief from the Center for Retirement Research at Boston College, workers covered by 401(k) plans stay in the labor force longer than if they had traditional pension plans. The authors find that a typical worker with a 401(k) plan would be expected to retire fifteen months later than a worker with traditional pension coverage.

TIAA-CREF Faces Resolution

TIAA-CREF, the world’s largest retirement fund has long professed to be a “concerned” investor and a leader in corporate governance. Yet, TIAA-CREF does not appear to practice itself many of the same good corporate governance practices it advocates publicly, such as transparency and accountability.

For years, member-participants have requested CREF to disclose how it has advanced its claim of promoting good governance in portfolio companies. Yet, CREF has consistently kept them and the public in the dark. Their stated response to requests for more open and accountable communications has been “it’s not required.”

Read the rest of this formal statement by Curtis C. Verschoor and Stephen Viederman, as well as the full text of their important resolution. The fund faces several resolutions seeking to bring its governance practices in alignment with the corporate governance practices it advocates. See the proxy statement. More coverage atSocialFunds.com.

Financial Disclosure: Best Practices in Financial Accounting & Reporting for Canadian and U.S. Companies

November 13 & 14, 2003 – Calgary — November 17 & 18, 2003 – Montreal
Highly publicized accounting failures highlighted the need for accounting transparency in the minds of investors, regulators and preparers. Regulations issued by the SEC, Canadian securities regulators and the stock exchanges and ongoing legislation continue to impact the role of corporate governance in today’s business world. Attend this conferenceand find out what Canadian and U.S. companies need to be doing to meet the unprecedented demands being placed on them.

To register or for further information, call Mary at 1-888-864-5658 or register online.

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SEC Announces Historic Rulemaking on Access

The SEC released an historic rulemaking on 10/8/03 that would allow shareholders to place their own nominees for director seats in corporate proxies during the subsequent two years if one of the following two “trigger” events occurs after 1/1/2004:

  • When a demand for proxy access is made by a shareholder, or group of shareholders, owning at least 1% of voting shares outstanding for at least a year, and a subsequent favorable vote on the demand by more than 50% of the votes cast.
  • When 35% or more of votes cast on one or more director nominees were “withhold” votes.

The number of shareholder nominees a company would have to place in the corporate proxy would be limited to 1 for a board with 8 or fewer directors (<50% of existing boards); 2 for a board with 9-19 directors (>50% of existing boards); and 3 for a board with 20 or more directors (a very few existing boards).

If a trigger is tripped, the company would have to open its proxy to a shareholder nominee only if the nominating shareholder or group of shareholders has owned more than 5% of the outstanding shares for two or more years and intends to hold its stake through the next annual meeting. Nominating shareholders also would have to show through SEC 13G filings that they don’t intend to take over the company. In addition, the shareholder nominee would have to be independent from those making the nomination and from the company. Candidates can’t be employed by the nominating shareholders or affiliated with them in any way.

If more than one slate of candidates in nominated by more than one nominator or nominating group, the slate of the nominator with the largest percentage of shares would be included on the corporate proxy.

The commissioners voted 5-0 to open the proposed rules to public comment for 60 days. The proposal was crafted to avoid the election of “special-interest” directors beholden to the shareholder groups that nominated them and by requiring evidence of significant investor dissatisfaction with the company. (Listen to 10/8/03 webcast)

“This is a proud and historic day at the commission. We’re in the process of shifting the balance of power between corporate managements and shareholders. No longer will managements be able to ignore dissatisfied majorities of shareholders,” said SEC Commissioner Harvey Goldschmid.

Corporate lobbyists are resisting the SEC proposal as potentially divisive and costly. The Business Roundtable, representing CEOs at the largest corporations, says the move would bring chaos in the boardroom, give special interests undue influence over company policy and force companies that govern themselves stringently into board takeover contests. Henry McKinnell, chairman and CEO of Pfizer Inc. and Business Roundtable co-chairman, said Wednesday the SEC plan “will not enhance corporate governance. Instead, the proposals present the possibility of special-interest groups hijacking the director election process.” “”The unintended consequences of the SEC’s shareholder access amendments coupled with the SEC’s failure to perform necessary preliminary research concerning the amendments’ impact may stifle business innovation, decrease productivity and stall economic growth.” (See press release) Earlier they said such a rule “would undercut the role of the board and its nominating committee.” “Certain shareholders may nominate directors for self-serving reasons, such as personal gain or to further a political agenda …”

Investor activists want it to go even further, arguing shareholders need more clout to wrest control from managers of rubber-stamp boards. Managers of the largest U.S. pension funds, which control more than $640 billion in eight states, say the proposal as written heavily favors company management. “We are troubled that this opportunity for meaningful and lasting reform may be squandered,” officials of the funds recently told Donaldson in a letter. “Our understanding of the current proposal is that it is excessively restrictive, going well beyond deterring frivolous nominations and preventing abuse by corporate raiders.”

The Council of Institutional Investors (representing $3 trillion in investments) commended the SEC for releasing the proposal saying it is “an important step toward reforming the fundamental weakness in the current U.S. corporate governance model — the fact that investors have few, if any, meaningful and cost-effective ways to influence who actually sits on corporate boards and represents shareholders.” However, the Council expressed concern with the proposed triggers. “Not only do the triggers create at least a year delay before shareholders can place a candidate for director on management’s proxy card, but they also reflect a continued misperception that shareholders should have to overcome various barriers before they can exercise their rights to elect directors at annual meetings.” (See press release)

“The rules proposed today adopt the basic principle of giving long-term investors a say in the election of directors. However, the proposed rules also contain triggering requirements that would make it difficult for even the largest investors to use them, and impossible to do so in a timely manner,” AFL-CIO president John Sweeney said. American Federation of State, County and Municipal Employees (AFSCME) President Gerald McEntee recommended the SEC add other “triggers” to the list such as bankruptcy, a series of financial restatements or formal investigation by the SEC.

For sources and additional coverage see (SEC Proposal Weighs Giving Shareholders More Power To Nominate, Elect Directors, WSJ, 10/8/03), (SEC Rules To Ease Appointment of Shareholder Directors, Newsday.com, 10/8/03), (SEC Pries Open Boardroom to Shareholders, msnMoney, 10/8/03), SocialFunds.com, 10/9/03.

Editor’s Initial Comments (without the benefit of having read the text of the proposed rules):

  • The two year trigging event will often mean the corporation has done a lot of bleeding before shareholders can place their nominees on the board. According to Phil Angelides, “It’s like telling a homeowner that they can’t install a home alarm until after their home has been burgled.” Shareholders should be able to use the nomination process to point to nascent problems, not just obvious plundering. 
  • The 1% and 5% thresholds are too high. I like an example used by Les Greenberg of the Committee of Concerned Shareholders. It took ten huge funds, including CalPERS and CalSTRS, to come up with 1.6% of the shares at Unocal to raise a simple issue. Clearly it will be extremely difficult, if not impossible, for shareholders to put together and maintain investor groups for something as complex as nominating directors or even creating a triggering event. If we are going to require triggering events, something I oppose, one of them should allow shareholders with $2,000 in stock (same as for resolutions) to place a triggering proposal on the ballot. Keep in mind, it would still take a majority vote to activate the trigger. 
  • The limit on the number of nominees is too low. In close to half of all companies listed, the SEC would limit shareholder nominees to one single candidate. I’ve served on boards and believe that one member would likely be a voice in the wilderness, easily ignored. Even in the majority of firms, where two shareholder nominees would be allowed, directors could easily be largely isolated. If we’re going to limit the number of shareholder nominated directors in any given year, it should be simply a minority of the board. 
  • The prohibition against candidates employed by or affiliated with nominating shareholders is far too restrictive. Shareholders should be able to nominate activist shareholders such a Ralph Whitworth of Relational Investors or Andrew Shapiro of Lawndale Capital Management. When they spot trouble on the horizon, shareholders will want experienced turnaround experts on the board to communicate with them and to generate the pressure needed to make necessary changes. A major issue would be trust and such individuals have often gained the trust of major institutional investors and shareholder activists through their affiliations with them. For excellent coverage of such funds, see the Corporate Governance Fund Report.

In summary, while the rulemaking would set in place a groundbreaking mechanism for shareholder access to the corporate ballot for the purpose of nominating directors, it falls far short of providing shareholders with the power to hold directors accountable. There would be no real shift in the balance of power. The interests of directors would still be far more aligned with those of management than with shareholders.

In their report, “Equal Access – What is It?,” (see bottom of page 1) the Council of Institutional Investors said, “the debate over shareholder access to management proxy cards to nominate directors and raise other issues has been re-energized with a rulemaking petition filed by the Committee of Concerned Shareholders and James McRitchie.” (see also my subsequent comments 1 and 2) The current SEC rulemaking falls far short of the ideal we initially expressed.

True, the rulemaking would provide a small deterrent effect. Directors would know that two years down the line, one or two of them just might be thrown out of office if they fail to serve the long-term interests of shareholders. But “governance by embarrassment” is not enough and “just-in-time-governance” is likely to be too late. Shareholders want their directors to be proactive; this proposal throws up too many barriers.

Yes, CEOs and their organizations will object to any real shift in power. However, the primary mission of the SEC is to “protect investors,” not incumbent CEOs and directors. Will the SEC continue to try to police corporations through expensive box ticking procedures, such as many of those set up by Sarbanes-Oxley, or will it give investors the tools we need to look after our own interests? If enough shareholders take an interest in the rulemaking, we’ll get those tools and maybe the SEC will be able to reduce their enforcement budget.

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Putting Investors First

Putting Investors First: Real Solutions for Better Corporate Governance, by Scott C. Newquist and Max B. Russell offers a great guide to CEOs, directors, shareholders and their fiduciaries. From pay for performance, based primarily on options, to the accounting games and how they are played, Newquist and Russell step their readers through a lack of checks, balances and accountability, that have had serious consequences.

Central to their argument is that CEOs have “circumvented governance mechanisms by supplying the board with information that is incomplete, inaccurate, or incomprehensible.” For many shareholders, their most effective action would be to sell but to properly evaluate their options they need complete and accurate information. “The ultimate fix is up to boards of directors. They must reassert their power and accept fully their responsibilities and obligations to protect shareholders’ interests.”

Newquist and Russell see through the limited promise of box ticking guidelines, including most of those recently enacted in Sarbanes-Oxley. Enron would have all but loans to officers. They seek to move us away from “just-in-time-governance” and “governance by embarrassment” to principles, “supported by mechanisms that stress accountability, disclosure, performance measurement, and checks and balances. “Principles-based governance benefits from scrutiny, debate, and most of all, transparency.”

Among the recommended mechanisms are:

  • Requiring directors to also sign off on financial statements, with a “to the best of my knowledge” qualifier.
  • An annual meeting between independent directors and institutional investors webcast to all.
  • Disclosure of dissenting opinions on important issues and board votes as soon as practical.
  • Split CEO and chair or a strong independent director with an out “if the CEO is the only insider on the board and is totally committed to transparency and accountability.” (An out I would likely question)
  • Independent information sources and analytical capability for board members.

There are many more excellent suggestions. However, I did express one serious reservation. Read what became an exchange with Scott Newquist.


Scott McNealy, CEO of Sun Microsystems, apologized in a letter to SEC chairman William Donaldson for a speech in which he criticized actions by the commission and others as “absolutely wacko.” In the speech, McNealy also described the Sarbanes-Oxley Act as a “disaster” and compared Alan Greenspan, chairman of the Federal Reserve Board, to Chauncey Gardner, the slow-witted character in the movie “Being There,” starring Peter Sellers, who is mistaken by Washington politicians for an expert in economics and foreign policy. (Is SEC ‘wacko’? Sun chief apologizes, International Herald Tribune, 10/7/03, Tuesday, October 7, 2003

Get Ready for the Next Proxy Season

“For well over half a century, the Securities and Exchange Commission (SEC) has had a rule, now Rule 14a-8, that has provided shareholders with the right to include proposals in a company’s proxy materials. The shareholder proposal rule provides shareholders with a vehicle for expressing their views to management and other shareholders on matters that are important to them. This process is a relatively inexpensive alternative for shareholders when compared to the means available to raise shareholder concerns, such as tender offers and proxy contests.”

That’s from the introduction to Romanek and Young’s ShareholderProposals.com, the most comprehensive site I’ve seen on shareholder resolutions. Use it in combination with “What Is A Shareholder Resolution? Step-by-Step” and Bart Naylor’s Self-help guide to Shareholder Activism.

Pension Funds Want More Than Token Authority Over Directors

The rules to be announced by the SEC next week would set up a two-year process for selecting new board members. In the first year, a triggering event must occur, like a vote by a majority of shareholders to open an election, or a sizable percentage of shareholders withholding votes for the board’s own nominees. In the second year, large shareholders would then be able to nominate 1-3 directors, depending on the size of the board. Those nominees would need to certify that they have no conflicts of interest and, here’s the kicker, no financial relationship with or special ties to the investors who nominate them.

In a New York Times article, Phil Angelides, the state treasurer of California is quoted saying, “Under these rules, you can only run a new slate at WorldCom after the meltdown occurred. It’s like telling a homeowner that they can’t install a home alarm until after their home has been burgled.”

At a Congressional hearing earlier this week, William H. Donaldson, the chairman of the commission, said “There is a trade-off between the efficiency and effectiveness of the board, working in the best interests of the corporation, as opposed to members with separate agendas, constituency interests if you will, which can be divisive to the board.”

I like the home alarm analogy. The process should require no triggering event. Shareholders should be able to nominate up to half the board at any company. Then, future “trigger events,” defined by shareholders themselves, could lead to a change in control. As for Donaldson’s argument regarding constituent interests with separate agendas, if they can convince a majority of shareholders to vote for their candidate, then by definition the issues they raise do not simply reflect narrow interests, but rather the will of the majority. There is no conflict of interest in such cases. Let’s hope that by the time the proposal is adopted, it is simplified to be much closer to the simple language which Les Greenberg, of theCommittee of Concerned Shareholders, and I proposed in our August 1, 2002 petition to the SEC. (NYTimes, Big Pension Funds Object to Proposal on Proxy Rules, 10/3/03)

October 8th, Mark Your Calendar!

An understated announcement on October 1st indicates the SEC will hold an open meeting on Wednesday, October 8. One of the subjects will be the following:

  • The Commission will consider whether to propose amendments to certain Rules, Schedules and Forms under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 that would require companies, under certain circumstances, to include in their proxy materials security holder nominees for election as director. For further information, please contact Lillian Cummins Brown at (202) 942-2900.

Sixty-three years after the Commission originally proposed giving shareholders access to the proxy to nominate directors, it appears they are ready to try again, essentially taking up the petition Les Greenberg and I submitted in the summer of 2002. Let’s hope nothing as distracting as World War II gets in the way this time.

The Business Roundtable is certainly giving distraction and further postponement a try. Their letter of October 1st suggests “the SEC undertake additional research into the impact of various triggers and thresholds before proceeding with proposed rules concerning shareholder access.” (my emphasis) The BRT is “concerned that some of the triggering events in the Report will result in the application of shareholder access to most, if not all, companies rather than only companies where there has not been an effective proxy process.”

The SEC has indicated their rule may propose a 3% threshold for shareholders. However, the BRT said a stock ownership threshold of 25% should be required to justify “the costs and disruption” of board elections. Additionally, they point out that “proxy voting guidelines of many institutional investors and the voting recommendations of proxy advisory services are likely to be revised to support shareholder access proposals at all companies, if for no other reason than to make shareholder access available in case a company is not responsive to shareholders in the future.” Instead, the BRT wants at least a two year window, and that’s for a rule that would only allow shareholders to nominate a few, certainly less than half, of the board members.

Will the SEC listen to the BRT, an association representing the CEOs of corporations with a combined workforce of 10 million employees and $3.7 trillion in annual revenues, or will they listen to CII, an organization that represents the owners of over $2 trillion in such companies, the AFL-CIO, which represents more than 13 million working men and women, as well as the vast majority of investors who sent in comments in response to the SEC’s Solicitation of Public Views Regarding Possible Changes to the Proxy Rules? Watch for coverage in the Dow Jones newsletter Corporate Governance, (see complimentary subscription offer for readers of CorpGov.Net), ISS Friday Report and other timely publications.

Symposium on Corporate Elections

The Program on Corporate Governance at the John M. Olin Center for Law, Economics, and Business, Harvard Law School will symposium on corporate elections. The symposium, which will take place on October 3 at Harvard Law School, will focus on the proposals for shareholder nomination of directors currently under SEC consideration. The symposium will bring together SEC officials, CEOs, directors, institutional shareholders, investors, large shareholder activists, lawyers, judges, and academics to examine this important issue. A video and a transcript of all the conference sessions will be available shortly after the conference on the program’s web site:

The symposium will include many important players, including Martin Lipton, Lucian Bebchuk, Mark Roe, John Castellani, Ralph Whitworth, Jay Lorsch, Sarah Teslik, Jamie Heard, Robert Monks, Damon Silvers, John Wilcox, John Coffee, Joseph Grundfest, Harvey Goldschmid, and many others. We only wish they had included advocates for smaller shareholders and for “socially responsible” mutual funds, who are often denied participation in such discussions.

Should CEOs Allow Shareholders to Nominate Board Candidates?

Chief Executive, which bills itself as “the only magazine written strictly for CEOs and their peers,” includes an article entitled “Shareholder Democracy” in its October issue. “As the leading source of intelligence for and about CEOs,” Chief Executive “provides ideas, strategies and tactics for top executive leaders seeking to build more effective organizations.”

Should CEOs take democracy seriously? Readers of Chief Executive are likely to conclude they should. Author Gregory J. Millman states, “When staunch members of the financial establishment start speaking the same language as labor unions and reform groups, it suggests that CEOs face a Hobson’s choice: share power voluntarily or see it taken away.”

The article begins with “traitor to his class,” Robert A.G. Monks, “pinching himself, almost afraid to believe that the cause he’s championed for so long is now gaining steam.” Millman then describes MCI, where former SEC Chairman Richard Breeden as court monitor published 78 recommendations, including that “CEOs consider…allowing shareholders to nominate board candidates.” That seems to this editor to be a telling quote. If the SEC goes forward with its rulemaking, will it be because CEOs allowed it?

Near the end of the article Bob Monks predicts that CEOs will do all they can to defend the status quo. “One would think that the first place opponents would turn would be the White House,” he says, adding that, based on recent history, they would likely find a sympathetic ear. He also believes the Business Roundtable might bring a suit, claiming the SEC has exceeded its authority.

Normally, I love a story that gives me the last word, but in this case it simply reflects realism and the relatively minor impact the groundbreaking SEC rule is likely to have initially. “As shareholder advocate Jim McRitchie, editor of CorpGov.net, notes, that (the rule) would effectively require shareholders to form broad, unwieldy coalitions just to muster a nominating quorum, because even the largest institutional investor rarely owns 3 percent. He and others also believe that allowing shareholders to nominate candidates only after such a ‘triggering event’ would mean closing the barn door after the horse had already run away.”

If we’re lucky, adoption of an SEC rule will trigger enough additional future reforms to make boards responsible to shareholders, instead of CEOs. CEOs shouldn’t be in a position of allowing or prohibiting shareholder access to the ballot; that’s a decision that should be left to shareholders themselves.

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