December 2003

Suing is Not the Answer

In October, the SEC proposed a rule that would give shareholders access to company proxy ballots if a majority vote to approve a shareholder-access plan proposed by 1% or more of the company’s shareholders or if 35% of holders withhold votes for one or more board candidates. If either of these triggering events occur, then in the following year shareholders who own 5% or more of the company’s stock for at least two years can place one or two nominees on the corporate proxy. Comments on the rulemaking were due December 22nd. SEC staff are now reviewing more than 12,000 comments and are expected to soon make recommendations concerning any possible amendments.

About half of the initial 12,000 or so commentators used a form letter that says the proposal has the potential to put an end to the “Imperial CEO,” but contains unnecessary barriers, “including high ownership thresholds and a cumbersome two-year process, which would make them difficult for investors to actually use.” Another group of almost 4,000 says the rule should “go much further in providing investors with strengthened rights regarding the nominations and voting process.” This group flatly opposes the triggers and expresses their hope that the SEC will stand by investors, “including individual ones,” which presumably means significantly lower thresholds, since individual investors are highly unlikely to own 5% or even 1% of any company’s shares.

Unfortunately, such letters have received little attention. Instead, the press has focused on Wall Street Journal, for example, singles out a 76-page letter from the Business Roundtable, which represents not the owners of corporations but instead the often entrenched management. The BRT’s comment letter said the proposed rules “will not enhance corporate governance, are rife with unintended consequences,” such as encouraging “involvement by special-interest groups in the director election process.” Increased proxy contests will result in “divisive boards that have difficulty functioning as a team and jeopardizing effective board oversight,” it predicts.

However, those “special interests” would have to be owners and it is doubtful they would convince more than half of all shares to be voted with them unless their interests were shared by most shareholders. The divisive argument is similar to arguments that used to be made against diversity, but now most recognize that differing skills and perspectives strengthen boards, rather than weakening them.

According to Business Roundtable President John J. Castellani, companies should not be governed democratically. “I think the concept that (companies) are somehow a democracy run like a New England town meeting has gotten out there – that’s not really what they are,” he said. While the BRT makes legal arguments and hopes the SEC will table the proposed regulations, relying instead on recent box-ticking reforms, SEC Commissioner Harvey Goldschmid said the agency is confident that it is on firm legal ground. “There should no serious challenge to our power here,” Goldschmid said. “The general counsel’s office has opined that we have full legal authority to move ahead and I completely agree.”

“Suing is not going to help them,” said Paul Lapides, head of the corporate governance center at Kennesaw State University in Georgia. “This is more of the same attitude of ‘I’m in charge and I don’t want anybody else to have power over me.’ ” (Proxy Rule Pits CEOs Vs SEC, Phyllis Plitch, Dow Jones Newswires, 12/26/03; Proxy plan draws more criticism, Bloomberg News, 12/24/03)

Phil Angelides, First Corporate Governance Governor?

Dale Kasler’s recent article, CalPERS again embraces activist agenda, in the Sacramento Bee puts forth the notion that California State Treasurer Phil Angelides is using activism at CalPERS and CalSTRS to further his political ambition.

“Angelides needs to raise his profile,” said political analyst Jack Pitney of Claremont McKenna College. “This is the kind of issue that can gain greater traction than 20 years ago. … Nearly everybody pays some attention to the stock market.”

After a period of keeping a lower profile, California’s giant funds are addressing issues from inner-city development to global warming to human rights; divesting tobacco to nudging a pharmaceutical giant to cut the price of AIDS drugs in poor countries. Last week both funds joined in suing the New York Stock Exchange and seven “specialist” trading firms of defrauding investors out of at least $150 million.

Fortune magazine labeled Angelides “a Left Coast version of Eliot Spitzer, ready to save capitalism from its worst excesses, and in so doing propel himself to higher office.” Yet, Angelides says his gubernatorial aspirations are irrelevant to these developments, “these have been deeply held beliefs that I’ve had for decades.”

As Kasler points out, the suit against the NYSE made a big splash in the national media. Angelides popped up on CNBC and got his picture in the Wall Street Journal. I doubt many Californian’s will remember such publicity if Angelides challenges Arnold Schwarzenegger in 2006. However, if Angelides can build a political career by drawing attention to corporate governance … all the more power to him. If he educates enough Californians, his chances of winning the governor’s office are bound to improve. Angelides has a lot of good ideas on how to address California fiscal crisis. Schwarzenegger’s best chance of staying in office may be to co-opt him.

UK Funds Join Call for Investor Nominated Directors

According to Reuters, Britain’s biggest financial institutions will comment on the SEC rulemaking, Security Holder Director Nominations, S7-19-03, recommending that shareholders have a greater say in the boardroom. “The letter reflects the non-U.S. experience in removing and appointing directors and that it is a lot easier in the UK than it is in the US,” Daniel Summerfield, who is leading the lobbying campaign for the University Superannuation Scheme (USS), was quoted as saying.

The USS, the UK’s third-largest pension fund, along with other large institutional investors, want UK-style voting rights, including the right to call extraordinary general meetings to oust directors in order to protect a growing proportion of their assets held in U.S. shares. (UK investors call for more rights in US-paper, 12/11/03)

Governance Books for Christmas

A few of the books we recommend are the following: Corporate Goverance by Monks and Minow, Corporate Governance and Risk by Shaw; The Recurrent Crisis in Corporate Governance by MacAvoy and Millstein; Back to the Drawing Board: Designing Corporate Boards for a Complex World by Colin B. Carter; Jay W. Lorsch, Corporate Governance: The McGraw-Hill Executive MBA Series by John L. Colley; Blueprint for Corporate Governance: A Strategy, Accountability, and the Preservation of Shareholder Value by Fred R. Kaen; Corporate Governance and Capital Flows in a Global Economy by Peter Cornelius, Bruce Mitchel Kogut; Corporate Governance at the Crossroads: A Book of Readings by Stuart L. Gillan; Convergence and Persistence in Corporate Governanceby Jeffrey N. Gordon and Mark J. Roe; Institutional Investors and Corporate Governance by Theodor Baums; The Divine Right of Capital: Dethroning the Corporate Aristocracy by Marjorie Kelly; Saving the Corporate Board: Why Boards Fail and How to Fix Them by Ralph D. Ward.

Companies Find More Fraud

According to a new KPMG survey, 75% of executives said they have uncovered fraud in their organizations in the last year, compared with 62% of executives responding to a similar survey in 1998. Employee fraud was the most prevalent, reported the executives, but financial reporting and medical/insurance fraud were much more costly. Reporting of financial fraud more than doubled, to 7% percent in 2003, up from 3% in 1998. The average cost was more than $250 million per episode. 36% of companies reported $1 million or more in costs due to fraud in 2003, compared with 21% in 1998. Internal controls are being used by 77% of companies, up from 51% in 1998. Companies are also taking more-decisive action when they detect fraud. For example, 64% brought civil or criminal charges, compared with just 37% five years ago, and 64% percent notified a regulatory or law enforcement agency, compared with 34% previously. (Companies Look Harder, Find More Fraud,, 12/2/03)

Tunrbull Offers Innovative Course

Macquarie University Graduate School of Business in Sydney Australia. Shann Turnbull’s “meta” level 40 hour course covers theories of governance; corporate director practices; comparative legal and organizational structures; role of shareholders/members; maximizing sustainable performance; ethics, corporatization, privatization, public/private/partnerships; regulatory frameworks and bench-marking governance. The next course will be over the five days of February 13, 14, 15, 21 & 22 in 2004. External students visiting Sydney for 10 days are welcome. Offered again on July 30, 31, August 1, 21 & 22. Dr. Turnbullwould welcome exporting the program to any institution that might be interested in co-presenting the course.

Last Few Days for Comment Letters

Comments on the SEC rulemaking, Security Holder Director Nominations, S7-19-03, are due 12/22/03. Roughly 225 individual comments have been sent via e-mail, with about 200 favorable and 25 against. Almost 7,000 form letters have been sent, with the vast majority in support. We encourage you to support the SEC’s rulemaking. However, we stronglyencourage readers to suggest amendments to make the proposal more usable for shareholders. See our suggested sample e-mail.

Shareholder Influence Poised to Grow

A recent survey by Lieberman Research Worldwide found that most investors believe the influence of institutional investors on board decisions will increase over the next few years. A clear majority of shareholders believe the law should allow all shareholders to “nominate an agreed minimum number of independent directors” (62%) and “vote directly on company decisions that could affect shareholder value” (59%). (Shareholders Want Boards of Directors to Wake up, Shake up and Shape up,, 12/10/03)

First Use of Shareholder Access Rules?

Public pension funds have told Marsh & McLennan they plan to nominate their own candidates for the board of its mutual fund group Putnam Investments when the SEC proposal granting proxy access takes effect. Marsh could become the first firm in history to face a “binding proxy access proposal” that would trigger shareholder nominations. Marsh criticized the funds for giving their opinions in a press release, rather than working directly with the company.

Filing the action are AFSCME Employees Pension Plan, New York State Common Retirement Fund, California Public Employees’ Retirement System and the California State Teachers’ Retirement System. Together they hold 6.85 million shares, worth $306,000,000 or about 1.3% of the company.

“Investors have pulled more than $32 billion dollars in assets out of Marsh’s Putnam subsidiary due to its involvement in this terrible mutual fund scandal, and Marsh’s stock price is down about 10 percent,” said Alan G. Hevesi, New York State Comptroller and sole trustee of the New York State Common Retirement Fund. “I can’t think of a stronger case worthy of shareholder involvement, and I have no doubt, that given the chance, shareholders will respond favorably to our initiative.”

“We haven’t identified particular people,” according to Richard Ferlauto, director of pension-investment strategy for AFSCME. “If this resolution received a majority vote, then we would work on identifying candidates and the slots they should fill.” (Marsh & McLennan Faces Criticism, WSJ, 12/9/03)

Pay Higher for Top Brass

The Conference Board’s annual study reports manufacturing, median total compensation for outside directors is now $69,620, up from $55,700 in 2002. The financial sector increased from $41,450 to $55,000. Service was $60,000 this year, up from $48,400 last year. Total compensation includes all fees and retainers, annual, one-time or periodic grants of stock, restricted stock grants, and the value of option grants. The mix of fees, retainers and committee pay is also up in all three industry sectors. Manufacturing increased from $39,000 to $45,000, financial services from $31,600 to $43,000, and service from $35,700 to $40,000.

CEO pay was also up. Total CEO compensation was highest in financial services at $2,512,000. It was lowest in wholesale trade at $893,000. Total current compensation (salary plus bonus) was also highest in financial services at $1,524,000 and lowest in computer services at $656,000. Communications paid the highest median salary – $625,000. Lowest was computer services, which paid $400,000. (CEO Pay Rises In Most Industries, Outside Director Pay Also Up in All Industries, NewsAlert, 12/10/03)

GTCR Being Watched

SEIU set up an internet site called “GTCR Golder Rauner manages billions in private equity investments for public employee retirement systems. But GTCR doesn’t uphold the type of corporate governance standards most fiscally responsible institutional investors rightly demand from their managers.” “GTCR’s corporate governance record should raise concerns for public pension funds that are considering an investment in a GTCR limited partnership, and for the investing public at large.”

Bush Bubble

George Soros, the prominent financier, argues the Bush Administration’s supremacist ideology is built on two pillars: the United States will do everything in its power to maintain unquestioned military supremacy and we won’t hesitate to take pre-emptive action. The war on terrorism has been used to curtail civil liberties at home and to exert our might abroad. Yet, attempting to impose our values on others endangers our security by engendering a vicious circle of escalating violence. This is the opposite of the “open society” approach that Soros has long advocated and that is central to democratic governance (at corporate, national and international levels).

We could have treated 911 as a crime against humanity, responding with police action supported by the international community. We certainly had that support after 911. Instead, we went to war against states harboring terrorists. Soros argues that terrorism will never disappear but will continue to provide a pretext for America’s need to maintain supremacy. We have become the pigs of George Orwell’s Animal Farm: “all animals are equal, but some are more equal than others.” Terrorists set exactly that agenda and we have played directly into their hands. The war against terrorism is bound to generate a continuous flow of innocent victims whose resentment feeds the growth of terrorist perpetrators.

Like the high-tech bubble, Bush has deceived the American public and “the gap between the Administration’s expectations and the actual state or affairs could not be wider.” A recent Council on Foreign Relations publication sketches three strategies:

  • Bush doctrine of pre-emptive military action advocated by neoconservatives.
  • Deterrence and containment advocated by Colin Powell.
  • Preventive action in cooperation with other nations.

Of course all three strategies may be necessary, but let’s hope it isn’t too late to place our greatest emphasis on the third option. “We cannot just do anything we want, as the Iraqi situation demonstrates, but nothing much can be done in the way of international cooperation without the leadership – or at least the participation – of the United States.” Increased foreign aid through international channels and fairer trade rules would provide a good start. International cooperation, of the kind the Bush Administration has largely rejected, is the key. (see “The Bubble of American Supremacy,” in December’s The Atlantic Monthly) Just as participation by shareholders in nominating and electing directors will result in a more profitable long-term strategy for corporate governance, the best way to combat terrorism over the long run is for the United States to work cooperatively with other nations to meet common goals.

Women Gaining Board Positions….Slooooowly

Women now hold 13.6% of all board seats in the Fortune 500, according to Catalyst, a nonprofit research and advisory organization. That’s up from 12.4% in 2001 and 9.6% in 1995 when Catalyst began tracking women on boards. At that pace, 20 years from now women still won’t make up 25% of board members.

Golden West Financial Corp., Avon Products Inc., WellPoint Health Networks and TIAA-CREF are again among those with the highest percentage of female board members. Golden West placed first with five out of nine directors. (Getting on Board: Women Take Charge,, 12/7/03)

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