November 2003

Shorting and News Searches Get Easier

The SEC announced a rule to make it easier for investors to short a stock by eliminating the “uptick” rule, which bans short selling on a stock when the price is falling. The initial rule would apply to 300 companies over a two year period. In an unrelated item, Yahoo! Inc’s finance module has added a news tracking services, allowing users to search 3,000 news sources. (Investor Business Relations, 11/10/03)

Gangs of America

I haven’t gotten a copy yet, but this book by Ted Nace looks fascinating from the short descriptions I’ve seen. It tells the history of how corporations developed, from the Virginia Company’s Jamestown Colony to Thomas Scott, who invented the holding company, and beyond. How the United States of America became a country is familiar to all of us, even if in somewhat mythological terms. In contrast, how the corporate form developed, just isn’t part of our culture. Perhaps Gangs of America will change that, if only just a bit.

SRI Outperforms

The Fall 2003 edition of Business Ethics (one of a very few publications I always read cover to cover) carries an article by Hewson Baltzell, president of Innovest Strategic Value Advisors entitled “Refuting Media Bias Against SRI.” In it, he refutes a July 20 New York Times article by Mark Hulbert, which cited a Wharton School study concluding that social factors could cost investors as much a 30 basis points per month. Baltzell points out the “cost” comes from comparing SRI funds to highly specialized funds (apples to oranges). “In one non-SRI portfolio of 28 funds, for example, 15 are real estate funds and two are electric utility funds. Real estate and electric utilities are similar to bonds, which did very well over the last few years.”

In contrast, as previously reported at CorpGov.Net, Innovest’s October 2002 study found that companies with high environmental ratings (on factors such as energy efficiency) out-performed low-rated companies by 3,400 basis points (34%). More recently, a June 2003 study of four-year stock performance for the paper and forestry sectors, environmentally above-average firms out-performed below-average firms by 43% cumulatively. In food products, the difference was 33%; for computers and peripherals, 19%; and for autos the difference was 50%. Mainstream institutional investors, such as pension funds, are “increasingly aware of the edge environmental overlays provide.” In a final dig at the NYTimes, Baltzell closes, “While the Rip Van Winkle business press remains asleep, sophisticated financial folks are waking up to the potential of SRI.”

Federal Encroachment and S7-19-03

Those concerned with arguments made by the Business Roundtable and others that the SEC would be over-stepping its jurisdiction if it granted shareholder nominees access to the corporate ballot under Security Holder Director Nominations, S7-19-03 should read Mark Roe‘s excellent paper “Delaware’s Competition.” There may be a race to the bottom or to the top with other state’s, but Delaware’s real competition, Roe argues, comes from Congress and the SEC. “State corporate law that federal authorities dislike, they reverse…state power is to jigger the rules in the middle.”

“Arguably the core of corporate law is the shareholders’ vote.” However, in that area SEC regulations virtually dictate the process to be used. According to Roe, Federal authorities stepped in when state’s failed to do anything to cope with abusive practices favoring the solicitation for management. In the 1950s, when state decisions favored insurgents, the Federal authorities responded to management pressure and interevened again.

Here are just a few of the items Roe cites where state laws have been superseded:

  • Insider trading, made illegal in 1933 and 1934 and expanded in the 1960s.
  • Insurgents’ access to shareholder lists (The SEC promulgated rule 14a-7, indicating its intention to end the “expense and delay requestors typically encounter [under state proceedings] in obtaining a securityholder list.”)
  • Unbundling proposals. State law allowed managers to bundle proposals, putting shareholder-friendly proposals, such as a special dividend, with something like management entrenchment. The SEC’s 1992 proxy amendments now require “a separate vote on each matter presented.
  • Mix and match. SEC made it easier to elect minority boards under rule 14a-4(b)
  • SEC rules defining the materiality standard, controlling accountants’ interactions and duties, and a raft of other controls.

Roe points out, Federal authorities don’t just regulate the company, they also regulate shareholders. For example, under ERISA pensions must consider voting an asset. More recently, mutual funds must now disclose their voting policies and, soon, how they vote. Even the tax code comes into play, with regard to golden parachutes, executive compensation and options. Even rule 14a-8 has seen subtle shifts. In the 1990s the SEC required Waste Management to accept a proposal on increasing independent directors. Since then, it has allowed anti-poision pill measures and anti-staggered board precatory votes.

If I read Roe correctly, Security Holder Director Nominations, S7-19-03, can simply be viewed as one more foray into territory otherwise delineated by Delaware’s General Corporation Law, section 141, which says that the business of the corporation is to be managed by the board. It really isn’t all that different than the SEC’s 1992 amendments that eased shareholder communication rules, in part to counter-balance state anti-takeover legislation. In his conclusion, Roe notes that “Deleware may say the words, but they only get to do so when the federal authorities do not take away the microphone.”

Fortune on Phil Angelides

Marc Gunther’s article, “Calpers Rides Again,” in the 12/8/03 edition ofFortune magazine focuses on the growing influence of California Treasurer Phil Angelides and his “controversial new agenda.” He sits on the boards of CalPERS and CalSTRS, the 1st and 3rd largest public pension funds in the US. “That concentrates a quarter of a trillion dollars of investing power in a state not known as business-friendly. How that power will be used by the trustees who run Calpers and Calstrs–all Democrats, many with close ties to unions–is an important question.”

Traditionally, CalPERS focused on board independence, executive pay, and other corporate governance issues. Recently, though, “Calpers and Calstrs have gone beyond governance into social engineering.” Examples of what Gunther terms “social engineering” are:

  • Divestment of tobacco stocks, which subsequently rebounded.
  • Lobbying US firms that reincorporated overseas to “come home to America,” even if that means paying more taxes.
  • Steering investments to inner-city businesses.
  • Green investing.

Gunther acknowledges that CalPERS’ inner-city investments might generate not only direct returns but also indirect benefits because “they curb inequality, reduce the costs of poverty, and create new customers for other companies owned by the fund. Angelides calls this a “double bottom line”–financial returns and social good.” As a long-term investor in, essentially, the entire market, CalPERS has an incentive to look at the entire economy. “I don’t think many companies can be successful in an unsuccessful economy,” Angelides says. Nor can companies thrive, he says, in an economy plagued by environmental woes, health-care costs, or “great divisions between rich and poor that erupt into social tension.”

One of the risks of this strategy, according to Gunther, is that such investments “could be turned into payback for campaign contributors.” “Who is to decide which company’s practices are social or antisocial, good or bad for the overall economy?”

Of course, in this editor’s opinion, that role ultimately falls to members of the system and to taxpayers. Members of the system, who work to protect the environment and public health, don’t want CalPERS to disregard the environmental record of the companies they invest in and they don’t want to encourage California’s youth to take up smoking. Taxpayers are probably more concerned with not having to pick up the tab if the “social engineering” investment strategy doesn’t pay off. However, many also share the values of public empolyees and the financial risks appear to be minimal.

Gunther says Angelides is “brainy and engaging…a Left Coast version of Eliot Spitzer, ready to save capitalism from its worst excesses, and in so doing propel himself to higher office.” “The Greeks gave us democracy, and Angelides wants to deliver nothing less to corporate America,” Gunther writes, noting the current effort by Angelides and other institutional investors to change SEC rules to give shareholders easier access to nominating and electing directors.

What could be more socially responsible than democratic corporate governance? All the evidence we’ve seen indicates is should be a winning strategy. Arnold Schwarzenegger would do well to cooperate with Angelides, a man of visionary ideas.

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Pension Funds at UN to Address Global Warming

Several state treasurers have been raising the issue of global warming, supporting shareholder resolutions demanding companies disclose more environmental information. Companies that are slow to act may get caught flat-footed when emission caps finally are tightened. The nation’s largest industrial companies could face big costs, such as switching their power plants from coal to cleaner-burning natural gas.

California Treasurer Phil Angelides, who as a trustee of the $155 billion CalPERS and the $103 billion CalSTRS, has been meeting recently with investors, environmental-technology entrepreneurs and environmental activists to flesh out how an environmental investment screen in California might work. In New York, whose $109 billion public pension fund is the nation’s second-largest, after CalPERS, Alan Hevesi, the state comptroller, reportedly isn’t considering withholding investments from companies whose environmental performance isn’t adequate. Mr. Hevesi has argued that environmental performance is linked to corporate profits, but divestment is an extraordinary step.

The meeting is being organized by the Coalition for Environmentally Responsible Economies. (State Aides Mull Pension Funds And Environment, WSJ, 11/21/03)

Call for Social Justice Fellowship Applications

Two-year grants offer support for salary, fringe benefits, financial assistance, mentoring, and a professional development account for a promising new leader. The host nonprofit organizations receives a computer to support the work of the Fellow. A defining feature of the program is that the applying nonprofit and its prospective Fellow prepare the application together as a team.

We, at CorpGov.Net, believe at the heart of social justice is the need for democratic corporate governance and we would love to see one of the fellowships go to promoting such work. Let’s get to the core of the issue, instead of concentrating on the symptoms. Applications and eligibility criteria are now available from New Voices. The deadline is January 12, 2004. For additional information or to join the program mailing list, please contact, or by phone at 202-884-8051.

Watchdog Fund to Fight for Corporate Democracy

The Watchdog Fund, a new open-end mutual fund that intends to drive corporate governance improvements in American companies, has been launched. The fund seeks to play a role in strengthening the corporate governance of companies in which it invests. The Watchdog Fund says it will proactively exercise its shareholder rights, including objecting to management and the Board when necessary.

“The need for effective oversight by shareholders has never been clearer,” said Nell Minow, one of the founders of the corporate governance movement, a leading shareholder activist, and Editor of The Corporate Library, an independent investment research firm specializing in corporate governance and board effectiveness. “The tools for effective oversight have never been stronger. The Watchdog Fund’s arrival is well timed and I look forward to seeing them constructively engaged in protecting and enhancing management accountability and shareholder value.” Ms. Minow is not associated with The Watchdog Fund.

The Watchdog Fund will pursue capital appreciation — its primary investment objective –by identifying and investing primarily in U.S.-based small- and mid-cap companies, with market capitalizations ranging from $75 million to $5 billion. The fund may also take positions in the largest U.S. companies. Such companies will be selected on the basis of misalignment between management and shareholder interests. The Watchdog Fund may work with other shareholders or pursue legal action to improve corporate governance, or sell short the shares of companies it believes are poorly governed. In addition, the fund may also invest in companies it believes are examples of good corporate governance.

The investment strategy and process of The Watchdog Fund will be managed by its creator, portfolio manager Howard Horowitz, Chairman and CEO of H Team Capital, LLC, an investment management firm headquartered in New York City. The Fund will treat all shareholders equally and enforce prohibitions on market timing and after-hours trading. The fund imposes a 1.00% fee (short-term trading fee) on fund shares redeemed 30 days or less from the date of purchase and 0.50% for shares that are redeemed after 30 days but less than one year from the date of the purchase. The minimum investment in the fund is $2,500.

“The fund will serve as a watchdog for its shareholders, guarding their interests, defending their rights, and fighting for corporate democracy,” said Mr. Horowitz. “It’s an opportunity for concerned citizens to advocate for corporate accountability in a way that matters — with their dollars — while simultaneously seeking to profit from improvements in the stocks.”

Mr. Horowitz noted that The Watchdog Fund’s mission goes beyond investment management. “It’s a way for people disgusted by self-dealing management and boards to rebuild a capital market where owners’ interests come first.” For more complete information on The Watchdog Fund, including fees, expenses and prospectuses, call 1-866-8-WATCHDOG (1-866-892-8243).

SEC Adopts Nomination Disclosure Rules

On 11/19/03 the SEC adopted rules to improve disclosures regarding the nominating committee processes at public companies and the ways shareholders have to communicate with directors. This rule does not provide shareholders with any additional right to access but may provide valuable information for shareholders attempting to influence the nomination process. The new standards require companies to disclose the following regarding a company’s process of nominating directors:

  • whether a company has a separate nominating committee and, if not, the reasons why it does not and who determines nominees for director;
  • whether members of the nominating committee satisfy independence requirements;
  • a company’s process for identifying and evaluating candidates to be nominated as directors;
  • whether a company pays any third party a fee to assist in the process or identifying and evaluating candidates;
  • minimum qualifications and standards that a company seeks for director nominees;
  • whether a company considers candidates for director nominees put forward by shareholders and, if so, its process for considering such candidates; and
  • whether a company has rejected candidates put forward by large, long-term security holders or groups of security holders.

The new disclosure standards also require companies to disclose information regarding shareholder communications with directors, including:

  • whether a company has a process for communications by shareholders to directors and, if not, the reasons why it does not;
  • the procedures for communications by shareholders with directors;
  • whether such communications are screened and, if so, by what process; and
  • the company’s policy regarding director attendance at annual meetings and the number of directors that attended the prior year’s annual meeting..

Chairman William Donaldson said, “The Commission today continued its efforts to improve the proxy process as it relates to the nomination and election of directors. The disclosure required by these new rules will improve the transparency of the director nomination process and means by which shareholders can work with directors at their companies.” The are expected to be available on the Commission’s website within the next few days and will apply to proxy and information statements first sent or given to security holders on or after the date that is 30 days after their publication in the Federal Register.

Q&A Re Security Holder Director Nominations, S7-19-03

John K. S. Wilson, Assistant Director – Socially Responsible Investing atChristian Brothers Investment Services, shares some of the questions he asked SEC staff about the shareholder nomination rulemaking and their responses:

How will disputes over the eligibility of specific nominations be resolved? Will the process be handled in the same manner as under Rule 14 a 8?

Currently, the proposed rule does not outline any manner of resolving such disputes. The Commission has solicited comment on who should be responsible for determining whether nominees should be allowed on or ommitted from ballots.

(Wilson: I consider this important because if the matter is left to companies, it could result in routine and boilerplate ommission of nominees. In my view, nominees should be evaluted by the SEC as of 14a8, but the Commission representative did not indicate whether this was a likely outcome.)

Will the content of communications regarding nominee qualifications, including websites, be regulated?

The content of websites related to shareholder nominees will be regulated under existing restrictions against false and misleading statements. The Commission will enforce this rule as it does currently for shareholder resolutions.

By what procedure will companies determine the outcome of board elections? I.e. how do we know who wins?

Under state law, plurality determines the outcome in most cases. The candidates receiving the highest number of votes for the available seats will be elected. Some companies in some states may choose another process at their discretion, but it is anticipated that this will be the commonly accepted practice.

This raised the question of whether it was possible that shareholder nominees could bring companies out of compliance with Sarbanes-Oxley, for example if a financial expert is defeated by a non-financial expert. 

For instance, say there are six nominees, including one incumbant that is a “financial expert” as defined by S-O and one other that is a shareholder nominee but who is not a financial expert. There are five board seats. If the financial expert receives the least number of “For” votes, that individual will be removed from the board in favor of the shareholder nominee. The board will lack a financial expert as required by the law.The person I spoke to was not exactly clear on how this problem would be avoided. She suggested first that it could be a campaign issue for the company, and later suggested that the company would have to expand the size of the board and appoint a financial expert.

In the case of multiple nominees, how will it be determined which nominee will appear on the ballot?

The shareholder or shareholder group with the largest number of company shares in aggregate (counting only those shares held for over one year) will have first priority for their nominees.

What is the maximum number of shareholders that can form a group to nominate a director?

There is no absolute limit on the number of shareholders that can form a group. However, if the group chooses to solicit publicly for shareholders to join the group, there will be a maximum of 30 shareholders. So for example, ICCR could aggregate the shares of all members to acheive the minimum ownership threshold to nominate a director. However, if ICCR chooses to seek outside support by posting an invitation on the website, it would have to limit involvement to 30 shareholders. There is no requirement that a group must solicit.

For Further Information Contact: Lillian C. Brown or Grace K. Lee, Division of Corporation Finance, at (202) 824-5250, or, with regard to investment companies, John M. Faust, Division of Investment Management, at (202) 942-0721, U.S. SEC, 450 Fifth Street, NW, Washington DC 20549-0402.John K. S. Wilson notes that he found staff to be friendly and responsive, “although it took her about a week to get back to me.” So, don’t leave your questions to the last minute.

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Business Roundtable Urges SEC To Extend Comment Period On Director Election Rules

Contact: Tita Freeman at (202) 496-3269
Release Date: 11/18/2003
In a letter to the Securities and Exchange Commission, the Business Roundtable this week urged the SEC to extend by 60 days the public comment period on the proposed rules that would permit shareholders to use a company’s proxy statement to nominate directors. The Business Roundtable notes that the short 60-day comment period currently provided for in the SEC’s proposed shareholder access release is insufficient for interested parties to comprehensively review, comment and provide requested information on the proposed rules. In addition, the Roundtable states that the current comment period does not provide adequate opportunity for thorough, well-informed rulemaking as provided for under the Administrative Procedure Act, 5 U.S.C. § 553(c).

“Director nomination is an issue the SEC has been studying for more than 60 years, and the limited 60-day comment period precludes meaningful examination of the current proposal,” said John J. Castellani, President of the Business Roundtable. “The Roundtable is concerned that the current timetable will result in a rule based on limited public participation and insufficient facts.”

The complexity of the proposed director nomination process is apparent in the SEC’s proposed rules. Moreover, the SEC’s proposing release does not include important data or detailed analyses of the potential implications of the proposed rules. Instead, it includes hundreds of questions that effectively shift the burden of data collection, fact-finding and cost estimation to the public.

“Members of the Commission have acknowledged the complexity and significance of these proposed rules. Indeed, they raise questions relating to Commission authority, federalism and the role of state and federal governments in establishing shareholder rights,” said Castellani. “The proposed rules have the potential to alter dramatically the standards and practices of corporate governance,” Castellani continued. “The members of the Business Roundtable believe it is imperative that the SEC extend the current comment period by an additional 60 days to allow the interested public the time it needs to answer the questions the Commission has posed and to ensure the sort of meaningful public participation that is the bedrock of sound rulemaking.”

The Business Roundtable is an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. “The chief executives are committed to advocating public policies that foster vigorous economic growth, a dynamic global economy, and a well-trained andproductive U.S. workforce essential for future competitiveness.” Editor’s Note: Actually, the proposed rules are not much different than what staff proposed in the beginning of May, with changes to limit its applicability. We’ve waited 60 years; now the BRT wants a 60 day extension that could push the start of the proposed regulations out another year.

Dear Mr. Spitzer: (an open letter from Mauren Duffy)

CGFReport commends your outspoken criticism of the SEC’s quick deal with Putnam mutual funds. As you know, CGFR’s position is that monetary settlements in lieu of admissions of blame, and sometimes prison terms, are little more than sanctioned payoffs. Admissions of guilt, shareholder restitution and, where appropriate, imprisonment for those who have violated the public trust and the law are vital as deterrents against future conduct and to the recovery of investor trust.

Maureen Nevin Duffy
Corporate Governance Fund Report
3 Deal Lake Ct
Asbury Park, NJ 07712

62 Majority Votes on Poison Pills

Shareholder activist John Chevedden says the Council of Institutional Investors (CII) tracked 62 majority votes on poison pill proposals submitted in 2003. Only seven have adopted policies terminating their pills or amending their policies.

Arden Realty, CSX and Northrop Grumman amended their pills to expire on or before Dec. 31, 2003. Energy East, which doesn’t have a poison pill, adopted a policy that it won’t adopt a pill unless approved by shareholders. 3M, Hewlett-Packard and JP Morgan Chase, which also don’t have poison pills, re-sponded to the majority votes by approving policies to get shareholder approval before adopting any poison pills. But their policies include a huge loophole giving their boards the right to adopt pills without prior shareholder approval if, as fiduciaries, they decide a pill would be in the best interests of shareholders.

JP Morgan’s policy appears to goes a step beyond the others by requiring any non-pre-approved pills to be submitted to a non-binding vote at the next special or annual meeting.

These clauses effectively render the policies meaningless. And the proponents of the winning shareholder proposals aren’t happy. John Chevedden, sponsor of pill at Hewlett-Packard, called the fiduciary-out policy “as good as a fig leaf.” Nick Rossi, proponent of the proposals at 3M and JP Morgan Chase, said that shareholder pre-approval should always be required.

Investors Link Corporate Responsibility with Reduced Risk, Better Returns

Calvert, the nation’s largest family of socially responsible mutual funds, today announced the results of a Harris Interactive® investor survey, which dramatically highlights investors’ growing concerns about ethical standards at corporations and mutual fund companies. “The survey clearly shows that investors understand that corporate responsibility matters,” said Barbara J. Krumsiek, Calvert’s President & CEO. “It is increasingly clear that investors believe that well-governed, socially responsible companies are better positioned to deliver long-term, sustainable value to their shareholders,” she added.

Conducted by Harris Interactive® for Calvert, the survey found that investors see a definite link between good corporate governance and shareholder value:

  • 84% of investors are more likely to invest in a mutual fund if it engages in ethical business practices in its operations and reporting.
  • 71% of those surveyed said that they either strongly agreed (35%) or somewhat agreed (36%) that companies operating with higher levels of integrity carry lower investment risk.
  • 68% of those surveyed said that they either strongly agreed (31%) or somewhat agreed (37%) that companies operating with higher levels of integrity deliver higher investment returns.

Against the backdrop of two years of corporate scandals, the Calvert survey clearly found that investors are more interested in knowing how the companies they invest in conduct their business. According to the survey, compared to two years ago, investors said they now:

  • want their financial advisors to investigate the ethical as well as financial performance of investments before making recommendations—92%.
  • are more interested in how corporations are governed—79%
  • are seeking more financial and accounting information about their investments—68%
  • are less confident about the trustworthiness of corporate management—77%
  • are less confident about the safety of financial markets—59%
  • are less confident about mutual fund integrity—45%

Finally, the survey showed that investors were generally in favor of a wide range of corporate reforms that might encourage ethical behavior. Here are the percentages of survey respondents who felt that the following reforms are either essential or very important:

  • Open and honest reporting – 90%
  • Having a Board of Directors that is independent from management – 71%
  • Setting reasonable executive compensation – 67%
  • Encouraging greater shareholder voting on key issues – 61%
  • Diversity in the Board of Directors – 56%

The Calvert survey was based on telephone interviews with 600 respondents with primary or shared decision making about financial investments, who have not worked in the investment or securities industry, and who currently own at least one mutual fund outside of their 401(k) investments.

NASD Dissidents Launch Contested Election for Board of Governors

The NASD Dissidents’ Grassroots Movement (NDGM) announced an historic challenge of recent Board of Governors nominees. Read theirpetition and the press release. NDGM has nominated Dan Roberts for the Industry Governor seat. For the three Public Governor seats, NDGM has nominated Raymond Gambel and Les Greenberg, Esq.; they also cross-endorsed one of the NASD’s nominees: Joel Seligman, Esq.

The NDGM and nominees “seek reform on Wall Street that prevents investor fraud and promulgates effective regulations. We seek ways to put America back to work. We seek ways to once again raise capital for local businesses and jump-start our economic recovery. But most importantly, we believe that it’s time for investor advocates and the small and mid-sized brokerage firms of the United States to unite and regain what has been stripped from them by years of ineffective regulation and wasteful bureaucracy.”

Let’s Fix the Corporate Election Process

Imagine going to the polls to vote, but the ballot only gives you two options. Vote for the candidates of one party, or withhold your vote. No matter how many vote against the slate, it still wins. Theoretically you can nominate other candidates, but to do so requires millions of dollars in legal, mailing and other expenses for a separate ballot, while the one-party slate is also authorized to spend your money in any contest; so why bother? Does this sound like an election or a dictatorship?

Yet, this is the current situation that shareholders of public companies face. Whether you personally vote your proxies or delegate that task to a mutual or pension fund, it is vitally important that we change this system, not only to avoid future Enrons and restore investor confidence, but also so that corporations better reflect one or our most fundamental values, democracy. Corporations, far more than government, determine how we spend our most productive hours, what we eat and even the quality of air we breathe. If they aren’t governed democratically, can we really be said to be living in a democracy?

Last year, Les Greenberg and I petitioned the SEC to provide equal access on the corporate ballot for directors nominated by shareholders. Last spring, a report by the $3 trillion Council of Institutional Investorsindicated that petition had “re-energized” the “debate over shareholder access.” Last month the SEC proposed a rule to address the issue. Dozens of people have congratulated me and I’m getting lots of press calls. However, like many good ideas from the grassroots, something got lost in translation.

Instead of equal access, the SEC is proposing to allow shareholders to nominate a token board member or two at an estimated 0.3% of companies – and the nominating process may take two years. That’s like getting permission to install an alarm in your house after it has been burgled.

Three-years of corporate scandals and continuing excesses in CEO pay highlight the major flaw in current corporate governance – allowing CEOs and incumbent boards to not only hand-pick director candidates, but to also exclude all other candidates from the ballot that gets mailed to all 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 for that to happen.

Generally speaking, the purpose of the Securities Act of 1933 and the Securities Exchange Act of 1934 is to protect the investing public from the improper acts of boards of directors and corporate managers. Their purpose is not to protect directors and CEOs from shareholders. The Commission needs to be reminded they work on behalf of shareholders, not the Business Roundtable, which represents CEOs. You can do this simply by sending a comment e-mail to the SEC using our suggested language. Please join us in asking for important amendments to this significant proposal.

Below is a summary of the SEC’s proposal and how it can be fixed.


As proposed, the SEC 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:

  • 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 shareholders or 50% of the votes cast favor such access.
  • When 35% or more of votes cast on one or more director nominees are “withhold” votes.

CorpGov.Net Recommends:

Triggering requirements should be eliminated. Requiring such events simply adds a one-year delay to needed action by shareholders. The corporation may bleed to death before shareholders can place their nominees on the board.

If the SEC is compelled to require triggering events, they should be broadly expanded to include a demand for proxy access by any shareholder owning at least $2,000 of company stock for at least a year or if any of the following events occur:

  • Bankruptcy
  • Restatement of earnings
  • Share value declines by 25% over any one year period
  • Fines or penalties by government agencies total $250,000 in any one year period.

Limit on Shareholder Nominees

As proposed by the SEC, 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).

CorpGov.Net Recommends:

The number of shareholder nominees should only be limited to 1 less than half the board seats in any given election cycle. 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, those directors could easily be isolated. Allowing shareholders to replace one less than half of the board protects against short-term speculators, but it would also ensures that shareholders will see light at the end of the tunnel.

Nominating Shareholders

As proposed by the SEC, 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 security holder groups would be limited to 30 members.

CorpGov.Net Recommends:

No trigger should be required. A two tier structure should apply to nominating shareholders.

  • Any shareholder owning at least $2,000 of company stock for at least two years who intends to continue to hold for at least a year after the next annual meeting should be able to nominate. If more than one slate is nominated, the slate of the nominator with the largest number of shares should be included on the corporate proxy. Filers under this option 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 would be omitted from the proxy materials and the shareholder campaign would largely depend on websites and e-mail.
  • Any shareholder or group of shareholders (no limit on numbers) owning at least 3% of company stock for at least two years, who intends to continue to hold such stock for at least a year after the next annual meeting, should be able to nominate candidates without restriction as to campaign expenditures. If more than one slate is nominated, the slate of the nominator with the largest percentage of shares would be included on the corporate proxy.

Out of 14,484 public companies filing periodic reports with the SEC, the SEC release estimates the proposed access rule would be triggered at 73 companies and in 45 of these companies a security holder would make a nomination. The SEC is considering further limiting even this small dose of democracy to “accelerated filers,” an estimated 3,159 companies. Yet, I believe that far more than 0.3% of companies could benefit from having shareholder nominees and smaller companies would be more likely to benefit, given that they have a lower proportion of independent directors.

It took ten huge funds, including CalPERS and CalSTRS, to come up with 1.6% of the shares at Unocal to sign a letter asking them to divest risky investments in Myanmar. Clearly it will be extremely difficult for shareholders to put together and maintain investor groups for something as complex as nominating directors or even creating a triggering event.

Under the two-tier approach I recommend, many more companies would face some sort of contest. However, 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. However, in those cases shareholders would be able to invigorate the process by forcing debate on the issues and providing real choices.

Independence of Nominees

As proposed by the SEC, 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.

CorpGov.Net Recommends:

Shareholder nominees must be independent of the company but no such prohibition should apply to the nominating shareholder. 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.


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?

A shift toward more democratic elections seems to be working for Apria Healthcare. In June, they announced their proxy would include information concerning up to two director nominees submitted by 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, this small change has helped propel Apria’s share price about 30%, compared to less than 15% for the S&P 500. A legal right to participate in governance should bring shareholders both more power and higher returns.

While the SEC’s proposed 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. The interests of directors would still be far more aligned with those of management than with shareholders.

Shareholders want their directors to be proactive. My recommendations would allow that to happen by giving us the tools we need to monitor and democratically govern the corporations we own. The result would be more efficient, effective and responsive corporations. Join us! Comments are due 12/12/03.

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CalPERS to Express Concerns With SEC Access Rule

CalPERS apparently intends to express somewhat similar concers to those I expressed above. Their draft letter outlines four specific areas they feel can be enhanced. The four areas are as follows:


CalPERS believes strongly that the rule should include a trigger based on non-implementation of a shareholder proposal that passes by majority vote. We believe there is no more direct link than the one between the non-implementation of a shareowner proposal and the Commission’s rationale for the proposed rule – providing a mechanism for long-term shareowners to influence companies where there are indications that the proxy process has been ineffective or when there is dissatisfaction with the proxy process. If a shareowner proposal passes but is not implemented – often times year after year – obviously the proxy process is ineffective.

We also support additional triggers based on material restatements, SEC enforcement actions and significant under-performance. Each of these criteria is consistent with cases where shareowners have reason to be dissatisfied with the existing board or management. While shareowners will certainly not choose to take action under the nominating procedure in many of the cases that these triggers would permit, this is the proper universe to which this rule should apply.

In regards to the two triggers in the proposed rule, we are supportive of these mechanisms, and we feel that they are appropriate triggers. However, we believe that the withhold threshold in the first trigger should be lowered from the proposed 35% to 20%. This still represents a significant hurdle for a withhold campaign, and certainly demonstrates dissatisfaction of the owners. On the other hand, it is also a high enough hurdle that there will not likely be a large number of companies that will have the nominating procedure triggered due to this event. We also seek to remove the proposed criteria that any shareowner proposal to implement the access procedure would need to be sponsored by a 1% holder or group. We feel that it is irrelevant who sponsors the proposal. Rather, the important issue to focus on is that the proposal will need to be passed by a majority vote. We feel that the 1% requirement is unnecessary.

Number of Nominees

CalPERS is advocating that the number of permitted nominees should never be less than two. We suggest that the rule permit two nominees or up to 35% of the seats on the board, whichever is larger. In our experience, it is very difficult for a single director to effect change or have an effective voice. Limiting the number of nominees to one in any circumstance would impair the proposed rule form achieving its stated goal of providing a mechanism for dissatisfied owners to seek greater representation. While we agree that this rule should not permit security holders to seek control, we view the proposed limitations on the number of nominees as too constrictive. Clearly, any number of seats that remain less than a majority will avoid such concerns. Again, given the fact that any nominees would still be required to obtain a majority vote to be elected, owners will have the ultimate control and would not elect a slate if they thought it was too large relative to the particular board.

Time Period for Application of the Rule

CalPERS is advocating that the rule, once triggered, should remain operative for a period of five years. The proposed time period it would remain in effect of two years is simply too short to permit owners the ability to monitor performance and responsiveness and react accordingly. In one sense, the shorter time period might force investors to nominate candidates in situations when they might otherwise be willing to give incumbent boards some time to address concerns without nominating new or additional directors.

Nominee Independence Standards

CalPERS is supportive of the concept of requiring that nominees under this rule be independent of the company. We are also generally supportive of independence standards that would be applied to the relationship between the nominee and the nominating holder or group. However, we have serious concerns that the broad application of the proposed independence standards will inhibit significant holders from seeking seats on boards as part of actively managed governance strategies. For example, CalPERS has significant resources dedicated to actively managed strategies in the governance arena. Under these strategies, external managers such as Relational Investors may seek board representation in an effort to build long-term equity value in a company. As such, these individuals conduct rigorous fundamental research and take significant equity positions. These individuals are perhaps the most desired type of director because they are independent, extremely well aligned with the owners, and very well prepared with an in-depth understanding of the company that other directors typically do not posses.

CalPERS is advocating for a narrow exception to the proposed independence standards that would permit holders of at least 2% to nominate principles of the fund. We believe that this threshold would ensure that the nominating holder is a very significant investor. We also have ultimate confidence in the election process and once again point out that the nominee still must be elected by a majority. We are fully supportive of disclosure requirements that would require the nominee to disclose their holdings, qualifications and affiliation with the nominating holder. With this information, it is appropriate to let the owners decide if a significant equity owner should be elected to the board to represent shareowners.

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Message of Impotence

The headlines read “Institutions Tightening the Screws of Their Own Proxy Voting Guidelines.” Yet, Les Greenberg of the Committee of Concerned Shareholders says that institutional investors provide a false sense of security to the investing public when they only “withhold” their votes. The real message is a message of impotence.

One recent example should suffice. “An influential adviser to institutions (Institutional Shareholder Services) is urging its clients to oppose the re-election of the directors of Texas Instruments, including Thomas J. Engibous, the company’s chairman and chief executive. The adviser … is angered by the disclosure that the Texas Instruments board adopted a costly stock option plan without obtaining shareholders’ approval. It is recommending that stockholders withhold their votes for the eight directors who can stand for re-election. … Institutional shareholders own 68.7 percent of Texas Instruments’ shares outstanding, while officers and directors own 0.83 percent.” (NY Times, 3/29/03, “Texas Instruments Directors Come Under Fire”) “Campaigns to withhold votes from directors cannot oust the directors….” (NY Times, 4/4/03, “Will S.E.C. Allow Shareholder Democracy?”)

Greenberg points out that even if the entire 68.7% of the stock owned by institutional investors were voted to “withhold,” when the 0.83% vote to re-elect themselves, the BOD of Texas Instruments will continue “business as usual.”

The only effective means of assuring accountability of Directors is to field opposition candidates and/or to support candidates nominated by others. Accountability through embarrassment is a myth.

Labor Sharpens Its Pension Sword

That’s the title of an article in the 11/24/03 edition of BusinessWeek. “Spearheaded by the AFL-CIO Office of Investments, labor has become one of the country’s strongest voices for corporate reform, demanding independent boards of directors, mutual-fund accountability, and curbs on runaway CEO pay. But now a number of unions are upping the ante, using their pension holdings to pressure companies on bread-and-butter labor issues as well. Combining old-fashioned tactics such as picketing with their clout in the boardroom, unions are attacking employers on everything from health-care benefits to job outsourcing.”

While some worry that shareholder activism will hurt the AFL-CIO many, if not most, would agree with William B. Patterson, the head of the AFL-CIO Office of Investment. “Other shareholders will vote no [on labor-sponsored proxy resolutions] if they think our demands are not in their interest.” Vanderbilt University law professor Randall S. Thomas says the danger is that they can be accused of exceeding their duties as pension fund fiduciaries. But should the concept of fiduciary interest be limited to maximizing short-run returns? If a short-term investment strategy puts union members out of their jobs, that doesn’t make sense. Of course labor funds should take the long view, but so should all pension funds, since they hold stocks for about 7 years on average.

SEC Reforms Starting to Work

2003 may go down in history as the year the SEC created the three most important reforms since its creation. In January the SEC announced two related rule changes. One directed mutual funds to make the policies and procedures related to proxy votes public this year and requires that in 2004 they must disclosed how they voted. The other rule applied a similar standard to investment advisors. Of course the third rule is the currentSecurity Holder Director Nominations, S7-19-03, which would open the corporate proxy to shareholder nominees for directors. From a recent report in BusinessWeek entitled “Tossing Out The Rubber Stamp,” it appears the first of the rules are starting to work. According to the article:

Vanguard Group Inc. typically used to rubber-stamp 9 out of every 10 slates of directors put up for election by companies in which it held stakes. But this year it decided there was no sense in supporting directors it disagreed with. So it ratified only 29% of the slates, withholding votes from at least one nominee in an eye-popping 71% of the cases…Money managers using their voting power more aggressively would add clout to a corporate-accountability movement that has been led by labor-union and state-employee pension funds.

Vanguard apparently now routinely votes against directors on audit, nominating or compensation committees, if they aren’t independent of management. If the third rule is adopted later this year opening up proxy access, even just a bit, such votes of no confidence may take on even more significance. Additionally, WSJ (11/10/03) reports that “Vanguard Gives Corporate Chiefs a Report Card.” “Vanguard approved 79% of its companies’ auditors, down from 100% last year. And the firm voted in favor of just 36% of employee-option plans, the same number as last year.” 164 shareholder resolutions on everything from staggered boards to takeover defenses to executive compensation earned majorities this year.

Family Companies Earn More

In “Family, Inc.” BusinessWeek (11/10/03) reports “Suprise! One-third of the S&P 500 companies have founding families involved in management. An those are usually the best performers.” Family firms that maintain a presence in senior management returned an average of 15.6% to shareholders per year, compared to 11.2% for nonfamily companies. Return on assets averaged 5.4% vs 4.1% for nonfamily companies; revenue growth was 23.4% vs 10.8%; income growth 21.1% vs 12.6%. No suprise to us. The companies tend to be younger, the families have invested patient capital, the large investment provides a powerful incentive to monitor. Independence isn’t the issue either in management or among directors, what matters is that someone or some group has the incentive to monitor and the ability to hold management accountable. That could be a family or it could be other involved shareholders. The SEC proposal,Security Holder Director Nominations, S7-19-03, could be a start, especially if modified to eliminate the triggers and lower the thresholds.

Ohio May Increase In-State Investments

According to, having come under fierce attacks for their performance and spending habits, Ohio’s public pension funds may have yet another obstacle to overcome if HB 227 is enacted. That legislation attempts to increase oversight of Ohio’s five pension systems and would also require that:

  • 50% of the money invested externally must be placed with a firm that has its headquarters in Ohio or has at least three offices employing 15 or more people in the state.
  • 70% of stock or bond trades would need to be made with firms that are either based in Ohio or have officers in the state.
  • Another 10% above the above designations must be placed with minority firms that also meet the foregoing Ohio-centric criteria.

Neil Toth, Director of Investments for the $56 billion Ohio Public Employees Retirement System noted that just four of the top 100 US money managers are headquartered in Ohio, while only fifteen or so of the top 100 money management firms would meet the criteria of having three separate offices in Ohio employing a total of fifteen persons.  Toth noted that “…preliminary estimates of the cost to OPERS of complying with the investment provisions of HB 227 range from $40 million to $100 million annually.”  The Ohio State Teachers Retirement System, with assets of $50.5 billion, said its costs would rise up to $40 million more a year, while the Ohio School Employees Retirement System said that fund’s costs “conservatively” would be at least $11 million.   

Weighing in against the proposal were both the Council of Institutional Investors, which characterized the constraints on investment activity as “a hidden tax,” and the National Association of State Retirement Administrators (NASRA), which in a letter to Ohio Governor Bob Taft obtained by, said that “…HB 227 would actually hinder the ability of public retirement plan trustees in Ohio to carry out their fiduciary responsibilities, which require them to operate solely in the best interests of the plans’ participants—working and retired public employees.”

NASRA President David Bergstrom went on to note that, “Although this measure may be intended as a way to increase the profits of locally based firms, the advantage given to a few businesses would likely come at a very expensive price tag to millions of state taxpayers, public employees, and retirees, who must make up shortfalls in the funds’ performance.”  Editor’s response: Maybe this approach won’t work well in Ohio, but would it work in New York or California?

Should We Trust TIAA-CREF?

A statement by Curtis C. Verschoor and Stephen Viederman: Although the mutual fund scandals have not yet reached TIAA-CREF, there are disturbing signs of lack of transparency and accountability, the hallmarks of good governance, for which TIAA-CREF says it stands. TIAA-CREF Chairman, President, and CEO Herb Allison asserts that trust is its competitive advantage, yet his actions seem contradictory and at variance with his commitment to strong governance. Our participants&Mac226; proposal and several others calling for CREF to improve its governance were all opposed by management and the Board (almost all either finance professors or finance professionals).

Our proposal recommends the Board be responsible for “overseeing ethics in the organization to assure the appropriate culture is established and maintained.” CREF says they oppose it, although NYSE and NASDAQ both now require disclosure of a code of business conduct. Does this mean that CREF officers and employees have no ethical guidelines to follow when considering issues of market timing and late trading? Why is Chairman, President, and CEO Herb Allison silent on these and other matters of critical importance to participants, the mutual fund industry, and the public? TIAA-CREF seems to disclose only the bare minimum legally required.

TIAA-CREF Spin #1: In a Business Week interview, Allison promised to reveal management salaries in the 2003 proxy and “adopt the same standards of the public companies we invest in” and “issue a press release.”

FACT: 2003 proxy contains no management salary information. No press release was issued. CREF has no compensation committee, hence no compensation committee report on how compensation is determined. Readers cannot judge accountability.

TIAA-CREF Spin #2: An October 2002 press release states Herbert Allison, Jr. had been appointed the new Chairman, President and CEO of TIAA-CREF. Allison has been referred to as Chairman, President, and CEO in numerous publications by TIAA-CREF and others during the year.

FACT: 2003 proxy states that Vice Chair Martin Leibowitz had been promoted to the Chairmanship without previous notice and Allison is not even a Trustee of CREF let alone the chair. Is this transparency?

TIAA-CREF Spin #3: 2003 proxy states that CREF board decided “to appoint an independent trustee as “presiding trustee.”

FACT: 2003 proxy does not state the identity of this individual, if actually named, or his/her duties. This is another lack of transparency.

TIAA-CREF Spin #4: 2002 proxy promised to “continue to provide participants with meaningful information about CREF&Mac226;s proxy voting policies and processes.”

FACT: CREF has not held itself accountable on this issue, as well as many other dealing with its own governance.


  1. Not clear how total compensation from TIAA-CREF group can be less than amount paid by CREF alone.
  2. Not clear how several directors can be responsible for oversight of the management of 53 other funds, yet have not have any other stated directorship responsibilities (presumably beyond CREF).
  3. Selection of independent auditor not put to a vote at annual meeting.
  4. An audit committee written charter is mentioned, but its text is omitted from the proxy statement. It may be requested, but no indication is made from whom.
  5. No report of the audit committee is included, so readers have little idea what its responsibilities are and cannot judge accountability.

Curtis C. Verschoor: I have just received a personal telephone call from Laverne Jones, Corporate Secretary of TIAA-CREF, who informed me that they have postponed their annual meeting and will be sending revised proxy materials. She said the reasoning was because too few people had received the materials in time to vote, but I wonder if it is because of the defects in the proxy statement and voting card that we pointed out, since they are revising the proxy statement and “increasing the amount of disclosure” as well as correcting the errors they had found. So hopefully we will see improved governance. (Editor’s note: see also formalstatement by Curtis C. Verschoor and Stephen Viederman. See the proxy statement. More coverage at

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