January 2004

Corporate Monitoring Project

The Corporate Monitoring Project has moved its headquarters from San Francisco to Vancouver, Canada. While broadening its focus to include Canadian companies, CorpMon.com promises to continue their primary emphasis on improving corporate governance in the USA. Their latest newsletter outlines the following developments:

• Three innovative shareowner proposals that have so far been submitted to six companies
• Stock voting leverage website development underway
• ProxyMatters.com voting discussion website launched
• New movie “The Corporation”

If you’re not on the Corporate Monitoring Project’s mailing list, you’re missing some of the most world’s most innovative thinking about developments to better enable shareowners to hold management accountable. The Project hasn’t been on the cover of BusinessWeek but its influences are everywhere. To subscribe, send an e-mail request toMark Latham.

ProxyMatters.com Launched

ProxyMatters.com‘s open forum for shareholders is billed as being a “first-of-its-kind Web site” allowing individual investors to voice opinions and research proxy votes related to publicly-traded equities. Yet, how is it significanly different than the bulletin board I posted in 1995 and later removed, the typical Yahoo! board, or eRaider? Yes, many of us have tried to set up resources for investors to exchange views and discuss proxy voting matters ranging from the election of boards of directors to issues such as the approval of executive compensation. They say the site “will help transition today’s passive investor into an active stakeholder.” We hope so. Take a look. Tell us what you think. Is there finally a forum for intelligent discourse.

Evelyn Y. Davis Establishes Scholarship

PRNewswire via COMTEX carried an item indicating that shareholder activist Evelyn Y. Davis and the Evelyn Y. Davis Foundation have contributed $100,000 to the University of Pennsylvania to endow a scholarship for students pursuing careers in business or political journalism. It appears identical to an earlier scholarship she established at the University of Miami School of Communication.

Davis publishes the influential corporate newsletter “Highlights and Lowlights” and has made a career of defending the interests of shareholders. She attended her first shareholder meeting years ago at IBM and today travels to more than 40 meetings annually, often commanding attention through her probing and challenging questions.

As editor of “Highlights and Lowlights,” Davis has been attending White House press conferences since 1978 and has been recognized by presidents. Her publication offers political analysis and timely business coverage in corporate governance matters for corporate chief executives. Let’s hope these scholarships help push some students to look critically at democracy as practiced in corporate governance.

Democratic Reforms Sought at SK in Korea

Sovereign Asset Management (Sovereign) announced its support of five new independent, non-executive board nominees to the board of SK Corporation (SK) at the forthcoming Annual General Meeting, to be held in March 2004. The candidates have been officially submitted to SK and are as follows:

1. Dr. Dong-sung Cho, Professor of Business Administration, Seoul National University, President-Elect of the Korean Academic Society of Business Administration.
2. Dr. Seung-soo Han, former Cabinet Minister, diplomat and President of the 56th Session of the United Nations General Assembly.
3. Mr. Jin-man Kim, former CEO of KorAm Bank and Hanvit Bank.
4. Dr. Joon-gi Kim, Associate Professor of Law and Executive Director, Hills Governance Center, Yonsei University.
5. Mr. Dae-woo Nam, former outside director of Korea Gas Corporation.

Sovereign also proposed a number of amendments to SK’s current Articles of Incorporation, designed to further enhance corporate governance at the company. James Fitter, CEO of Sovereign, said: “SK Corp is a potentially great company that deserves a fresh start. It is time to break from the past and revitalise the board of directors to ensure sound stewardship for a healthy future.” He added: “These candidates are independent Koreans who demonstrate the highest standards of integrity, transparency, and accountability. Their successful election will be dependent upon receiving the votes of Korean and foreign minority investors alike. We are confident that they will work constructively with the other members of the board to collectively make informed, independent decisions that are in the best interests of the company and are of benefit to all shareholders equally.”

Proposed Amendments to the Articles of Incorporation include:

1. Approval of Related Party Transactions
   Unanimous approval by a newly created Related Party Transactions Committee should be required for all major related party transactions.
2. Term of Office of Directors
   Directors’ terms should be reduced from 3 years to 1 year. There should be provisions for automatic termination of office in the event of criminal conviction carrying a prison sentence.
3. Method of Electing Directors
   The current prohibition of cumulative voting should be removed.
4. Election of Directors
   The total number of directors should be at least five, but no more than 10, with at least half being outside directors. The authority of the board to determine the number of outside directors is removed.
5. Compensation of Directors
   The compensation of directors should be determined by a newly created Director Compensation Committee and approved at the General Shareholders Meeting.
6. Written Voting and Electronic Voting
   Shareholders should be permitted to exercise their voting rights by submitting votes either in writing or electronically.
7. Notice of Meetings
   The notice period for convening a General Shareholders Meeting should be increased to at least three weeks from the current two-week period.

A toll-free telephone information helpline, with Korean and English language services, has been set up so SK shareholders can call for assistance with the voting process. For those calling within Korea, the number is: 00798-612-1093. For those calling outside Korea, the number is: +61-2-9240-7469.

Director Trends

We have added Corporate Board Member magazine to our growing list of “stakeholders,” leading authorities in explaining movements and motives in the field of corporate governance. The most recent issue, “What Directors Think,” discusses the fact that reforms are increasing pressures and workload in the boardroom, with noticeable changes in directors’ opinions during 2003.

Greater scrutiny and reporting requirements have significantly increased board members’ workloads. Three-quarters of survey respondents are devoting more time to their director duties in 2003 than in 2002 – an average of 19.2 hours a month, up from 14%. The percentage of directors who reported board meetings lasting more than five hours increased sevenfold from 7% in 2002 to 50% in 2003.

With increased pressures, workload and time commitment, most directors believe an increase in pay should follow, especially for committee chairs. Of survey respondents, 81% said audit committee chairs deserve better pay, compared to 54% in 2002. Fully 80% of respondents said they are not paid enough for their board duties.

However, reforms have had a positive impact – 73% of directors now think they are less likely to be sued in a securities case thanks to better governance compared to 66% in 2002. In addition, more than 60% of survey respondents said good governance practices mean lower premiums and better coverage by directors’ and officers’ insurance, compared to 51% in 2002. Moreover, 86% of the 2003 survey participants believe good governance practices improve a company’s image, and 46.7% believe it benefits a company’s stock price. Clearly, the message is getting through.

UCLA Corporate Governance Conference

The Seventh Annual Corporate Governance and Equity Offerings Conference will be presented by the UCLA Anderson School of Management in cooperation with the Nasdaq and the National Venture Capital Association. This event opens with the Directors Networking Dinner on February 26th and continues on February 27th with a one-day conference and the Sixth Annual NVCA Los Angeles Networking Luncheon. The conferenced will feature top-level speakers addressing various board-level issues focusing on the best practices and emerging trends in corporate governance and the issuance of equity. They include Ralph V. Whitworth, Jamie Heard, Jay W. Lorsch and others. This conference will be held at the UCLA Anderson School at 110 Westwood Plaza, Los Angeles, CA. For questions about the conference, e-mail Simone B. Heald at sheald@anderson.ucla.edu or call (310) 825-1795.

Davos Leaders and OECD Contrast on Tougher Regulation

According to a 1/25/04 report by Reuters, business leaders at the World Economic Forum in Davos Switzerland “shunned calls for tougher regulation in the wake of a raft of corporate scandals, saying more rules would prove ineffective and cumbersome.” Despite the billions of dollars gone missing from the accounts of Italian food group Parmalat in Europe, from U.S. energy trader Enron, and numerous others, the Davos attendees said a higher sense of moral responsibility at the boardroom level would be more effective than a rules clampdown.

The US introduced stiffer corporate governance rules under the Sarbanes-Oxley Act and in Europe, the Parmalat scandal has intensified calls for regulators to follow suit. “Checking boxes and signing things won’t solve integrity problems,” said Daniel Vasella, Chief Executive Officer of Swiss drugs firm Novartis. James Schiro, chief executive officer of insurer Zurich Financial Services, said “ethical behaviour cannot be regulated, it cannot be imposed by legislation.”

“There have been huge failures in corporate governance,” said, Nina Mitz, chief executive of public relations firm Financial Dynamics. “Companies have to be managed better and then the level of transparency has to be improved, and then afterward, this message has to be taken out to the public,” she said.

In contrast, the Organization for Economic Cooperation and Development (OECD), made up of 30 member countries, including the US, UK and working relationships with more than 70 other countries, unveiled a draft revision of its “Principles of Corporate Governance” that was adopted by member governments in 1999. Although they are non-binding, the principles provide guidance for national legislation and regulation, as well as guidance for stock exchanges. Among the proposals:

• Granting investors the right to nominate company directors, as well as a more forceful role in electing them.
• Providing shareholders with a voice in the compensation policy for board members and executives, and giving them the ability to submit questions to auditors.
• Mandating that institutional investors disclose their overall voting policies and how they manage material conflicts of interest that may affect the way they exercise key ownership functions, such as voting.
• Identifying the need for effective protection of creditor rights and an efficient system for dealing with corporate insolvency.
• Directing rating agencies, brokers and other providers of information that could influence investor decisions to disclose conflicts of interest, and how the conflicts are being managed.
• Mandating board members to be more rigorous in disclosing related party transactions and protecting so-called “whistle blowers” by providing employees with confidential access to a board level contact.

Officials expect to submit a final revised version of the “Principles” to OECD governments for approval at the annual meeting of the group’s Council at Ministerial Level on 5/13-14/2004. OECD Invites Comment on Draft Revision of its Corporate Governance Principles.

Share Lending Practices Surveyed

The ISS Friday Report of 1/23/04 included an article on the International Corporate Governance Network’s survey to learn more about the practice of institutional share lending and its impact on proxy voting. Theconfidential survey is intended for pension funds, mutual funds, investment trusts, insurance companies, and other asset managers. If your institution is involved in lending shares or has ever been frustrated in its attempt to recall shares to vote them, I highly recommend that you fill out the survey so that ICGN can aggregate data and recommend action. They are seeking responses by the end of February. The article said, “those interested in completing the form are advised first to read the accompanying cover letter,” but I didn’t see a letter. I’ll ask them to post it.

Shareholder Nominated Directors

First, Hanover Compressor settled a shareholder lawsuit, agreeing to allow shareholders to nominate two independent directors. More recently,Pensions&Investments (1/12/04) reported that HealthSouth agreed to a settlement with the Louisiana Teachers’ Retirement System. The fund will name eight nominees to the HealthSouth board including the following luminaries:

• Richard H. Koppes, formerly with CalPERS, currently Jones Day Reavis & Pogue, with projects too numerous to list;
• Charles M. Elson, law professor at the University of Delaware, Newark, and director of its Weinberg Center for Corporate Governance;
• John C. Coffee Jr., professor and director of Center on Corporate Governance at Columbia University Law School, New York; and
• Margaret M. Foran, vice president-corporate governance and secretary at Pfizer Inc., New York.

In addition, the Louisiana fund created a mechanism to gather more nominees from other institutional investors.

The SEC is currently in the process of developing a relatively toothless plan that would give shareholders the right to nominate board candidates under extremely limited circumstances. If the regulations are enacted as proposed, we may see more changes through shareholder lawsuits than through the new rules.

Now HealthSouth is back in the news after identifying $2.5 billion in fraudulent accounting entries and millions more in aggressive maneuvers, adding up to between $3.8 billion and $4.6 billion in bookkeeping irregularities. They hope to hire a new management team by June 2004 and to release restated financial statements by the first quarter of 2005. The company’s former chief executive, Richard M. Scrushy, is scheduled to go to trial on 85 counts of fraud and money laundering this summer. How much shareholder value has been lost that could have been avoided if any significant shareholder could have placed director nominees on the corporate proxy?

CBS.MarketWatch.com (1/21/04) reports the SEC is planning a forum on the proposal for late February or early March. It’s unclear when the commission will formally consider the proposal. Staff is reportedly still going through more than 12,000 comments, the vast majority of which called for shareholder access to the corporate proxy for their director nominees. Let’s keep the pressure on.

SEC Proposes Mutual Fund Governance Requirements

The Commission proposed amendments to its rules to enhance fund boards’ independence and effectiveness and to improve their ability to protect the interests of the funds and fund shareholders they serve. The amendments are designed to strengthen the hand of independent directors when dealing with fund management.

• Independent Composition of the Board. Independent directors would be required to constitute at least 75% of each fund’s board. This requirement is designed to strengthen the presence of independent directors and improve their ability to negotiate lower advisory fees and other important matters on behalf of the fund.

• Independent Chairman. The board would be required to appoint a chairman who is an independent director. The board’s chairman typically controls the board’s agenda and can have a strong influence on the board’s deliberations.

• Annual Self-Assessment. The board would be required to assess its own effectiveness at least once a year. Its assessment would have to include consideration of the board’s committee structure and the number of funds on whose boards the directors serve.

• Separate Meetings of Independent Directors. The independent directors would be required to meet in separate sessions at least once a quarter. This requirement could provide independent directors the opportunity for candid discussions about management’s performance, and could help improve collegiality.

• Independent Director Staff. The fund would be required to authorize the independent directors to hire their own staff. This requirement is designed to help independent directors deal with matters on which they need outside assistance.

Comments on the proposed rule amendments should be received by the Commission within 45 days of publication in the Federal Register. New York Comptroller Alan Hevesi, California Treasurer Phil Angelides and North Carolina Treasurer Richard Moore outlined additional measures they want funds to adopt:

• Provide shareholders with an at least annual, customized statement of the charges, expressed in dollars, for management and other expenses they’ve paid to a fund. The industry has opposed personalized breakdowns as too difficult to develop, and the SEC has not pursued them.

• Reveal the rationale behind a fund’s fee structure, and they want to make sure that if funds disclose their portfolio holdings to a third-party, that the same information be made public.

The nation’s two largest mutual fund groups, Fidelity Investments and Vanguard Group, have already come out in opposition to the requirement that chairmen of mutual fund boards be independent.

Ending the Recurrent Crisis

The Recurrent Crisis in Corporate Governance pushes the edge of mainstream thought in this growing discipline. Authors Paul W. MacAvoy and Ira M. Millstein, giants in the field, have well deserved reputations as practitioners and scholars. This thin volume will quickly guide the course for progressive board members concerned with building solid companies, rather than future Enrons.

Although MacAvoy and Millstein stop short of urging direct nomination of directors by shareholders, the author’s do recognize the real benefit of boards being truly independent from the CEO. “The independent and professional board is the ‘grain in the balance’ of survival in the long run.”

Directors who are unwilling to grow should look elsewhere. “Directors on the verge of quitting because of increasing responsibility and liability are not the ‘productive’ directors and, by leaving, imply an average increase in the quality of boards.” This book is for those who choose to stay and focus on what the author’s consider the real target, maximizing the generation of wealth and the return of profit to investors.

The recurrent crisis referenced in the title is primarily the “incapacity to deliver in practice on heightened expectations for governance. There is a void of capability (on corporate boards) which, if not filled will culminate again in misleading and inadequate reported financial results and large managerial extractions of wealth from failing companies.”

In a few brief chapters, the authors review recurrent themes during the last thirty years, from failure of the Penn Central Railroad to the decision by the General Motors board to publish governance guidelines after discharging its CEO, an act once widely acclaimed as a virtual Magna Carta for directors. They also discuss significant initiatives by public pension funds and court decisions that have affirmed the responsibility of directors to review and approve long-term goals and strategies. Yet, even with significant reforms, systemic flaws remain that will result in a continuing cycle of crisis and reform. However, the frequency and severity of such cycles can be significantly reduced through recommendation actions.

Their central theme is the need for independent directors, not just as defined by recent exchange reforms, but real independence, citing for example, studies like that of Shivdasani and Yermack who found that CEO involvement in the selection of directors negatively affected the quality and independence of nominees. P.33 Of course, one of the most significant studies in this area is one which MacAvoy and Millstein published in 1997. Examining data from 154 US companies, they found a positive correlation between active/independent boards and Economic Value Added.

Consistent with those findings, we cannot expect a CEO who is also chairman of the board to prepare the board to adequately evaluate their own lapses or those of senior staff. Therefore, the first and most important reform recommended by the authors is to end that dual role. “Ideally, the board’s chairman should be an independent director.”

The least painful time to make this transition is upon succession, which now often occurs every few years. Because a “lead” director is “still just another director subject to the influence if not dominance of the singular CEO/chairman, we have no confidence in that role as more than a temporary step on the road to separation.”

Other recommendations for boards from the book include the need to:

• Determine that management has appropriate processes in place to meet certification required by Sarbanes-Oxley
• Take responsibility for the company’s strategy, risk management and financial reporting
• Reward extraordinary, not market, performance
• Assure themselves of the integrity of management.

“The board cannot function without leadership separate from the management it is supposed to monitor.” It has the legal responsibility to do so. “Now it must be empowered with the opportunity to fulfill this responsibility.”

MacAvoy and Millstein end with the following: “Perhaps with these reforms, the recurring crises in governance will take place with less frequency and intensity.” Without these actions, shareholders, and maybe even the great unwashed masses, will be storming the corporate gates demanding much more in the way of a shift in power. The SEC’s latest proposal to allow up to three shareholder nominees could be just the beginning.

Directors should be shaking in their boots. From the January 19, 2004 BusinessWeek – “Lucent Technologies is asking shareholders to scrap its staggered board elections, a takeover defense despised by governance gurus. Allstate ditched its poison-pill takeover defense, citing ‘shareholder sentiment.’ And Alcoa is putting ‘golden parachute’ payments to a shareholder vote. In each case, the action followed a majority shareholder vote at the last annual meeting. Says Patrick McGurn, special counsel at proxy adviser Institutional Shareholder Services: ‘The only way you can explain the difference in behavior is the threat that proxy access may be available.’”

The board that MacAvoy and Millstein envision may be independent from the CEO, but it still is not directly accountable to shareholders. Although not my ideal, it would be a significant step in the right direction for most corporations and might just head off further reforms radical democrats like me have been calling for.

Mutual Fund Summit

The nation’s leading experts from industry, government and academia will meet on January 24, 2003 in Oxford, Mississippi to discuss the fallout from the recent mutual fund scandals regarding fees and improper trading, as well as the future of the fund industry. The “mutual fund summit,” hosted by Fund Democracy and the University of Mississippi School of Law, is open to the news media. The summit is being sponsored by the Zero Alpha Group (ZAG), the National Association of Personal Financial Advisors and the Financial Planning Association.

Separately, ZAG will hold on Wednesday, January 21, 2004 a phone-based telenews conference to release a major new study from Wake Forest University and the University of Florida on mutual fund industry brokerage commissions. For more information about the upcoming phone-based news conference, contact Stephanie Kendall, for the Zero Alpha Group, at (703) 276-3254.

Participants at the mutual fund summit will include: Mercer Bullard (moderator), founder and president of Fund Democracy and assistant professor of law, University of Mississippi School of Law; Barry Barbash, Shearman & Sterling; John Bogle, founder of The Vanguard Group; Harvey Goldschmidt, commissioner of the U.S. Securities and Exchange Commission; Paul Haaga, chairman of the Investment Company Institute and executive vice president and director of Capital Research and Management Company; Don Phillips, managing director of Morningstar; Linda Dallas Rich, senior counsel of the Financial Services Committee of the U.S. House of Representatives; John Rogers, chairman and chief executive officer of Ariel Capital Management; Barbara Roper, director of investor protection of the Consumer Federation of America; Paul Roye, director of the Division of Investment Management of the U.S. Securities and Exchange Commission; Erik Sirri, Walter H. Carpenter professor of finance at Babson College; and Craig Tyle, general counsel of the Investment Company Institute.

The Mutual Fund Summit will be held from 10am to noon on Saturday, January 24, 2004 in the Moot Court Room at the University of Mississippi Law School in Oxford, MS. Register. There will be a live Webcast of the Summit available at for those who are unable to attend. Zero Alpha Group (ZAG) will host a streaming audio replay starting Tuesday, January 27, 2004.

Mutual Funds and CalPERS

SEC chief William Donaldson didn’t hold back in his recent speech to the Mutual Fund Directors Forum. “We (the SEC) cannot be in the boardroom when investors’ interests may be compromised,” Donaldson said. “Investors are depending on you to stand up for them.” Investigators are “carefully looking at the role that independent directors played” in abuses. “We are asking whether the directors were aware of these abuses, and whether there were red flags that were ignored.”

Donaldson said directors should serve as “independent watchdogs” for investors because almost all such funds are operated by money-management firms that want to maximize profits through fees but those fees also reduce investors’ returns. That relationship creates inherent conflicts of interests and potential for abuse. He admonished directors to ask themselves whether “directors are too passive, sit on too many boards, lack the knowledge to keep apprised of a fund’s activities, and are paid too much.”

The SEC is reportedly considering the following:

• Requiring an independent chairman on all boards.
• Increasing the percentage of independent directors under SEC rules from 51% to 75%.
• Allowing independent directors to hire staff so they don’t have to use fund advisers.
• Requiring directors to submit annual self-evaluations, including whether they sit on too many fund boards.
• Requiring directors to keep a paper trail of the information they used to determine that the fund managers were charging reasonable fees for management, advertising and administrative costs.

Most readers have seen the widespread reports of investigations by New York Attorney General Eliot Spitzer, the Securities and Exchange Commission and others.

Less reported have been investigations by CalPERS, which has already fired Putnam and placed Alliance Capital Management on its watch list. Now staff are investigating Franklin, parent of Franklin Templeton Investments, which has received subpoenas from New York Attorney General Eliot Spitzer, Massachusetts Secretary of State William Galvin and California Attorney General Bill Lockyer. Investigators are looking into the propriety of payments made to Morgan Stanley to promote its funds and the possibility that a Franklin salesman helped Prudential Securities evade market-timing restrictions.

CalPERS plans to discuss whether to terminate its contract with Franklin at its investment meeting next month. “Franklin will be subjected to the same scrutiny as Putnam and Alliance, ” said Christy Wood, a senior investment officer for CalPERS. (see SEC Wants Mutual Fund Fees Explained, Washington Post, 1/8/04 and CalPERS money firms queried: Regulators have contacted 15 of 60 companies, SFGate, 1/7/04)

Given this turn of events, isn’t it about time that Robert F. Carlson either resigned his seat on the CalPERS Board or his seats on 12 Investment trusts of the Franklin Fund? I’m certainly not alleging any impropriety on Mr. Carlson’s part, but I am concerned about more than just appearances. How can a man, even one as brilliant as Carlson, serve adequately on so many boards? Additionally, CalPERS corporate governance principlesdefine independent directors as “not affiliated with a significant customer or supplier of the Company.” Can Mr. Carlson be considered an independent director at CalPERS when Franklin manages $780 million in U.S. stocks for the pension fund?

TIAA-CREF to Establish SRI Fund?

A coalition of groups and individuals have worked together for several years to help promote social responsibility and corporate governance reform within TIAA-CREF. They certainly got the attention of the press at the last annual meeting. Stories appeared in Barons, Dow Jones NS, Wall Street Journal, Corporate Social Responsibility New Service, Bloomberg NS, New York Daily News, NY Post, Investor Relations web, NY Times, Newsday, WFUV in NYC, Voice of America, and Investor Relations.

Representatives of TIAA-CREF have now agreed to meet with Social Choice for Social Change: Campaign for a New TIAA-CREF to discuss their proposal for a new socially responsible fund. To maintain our momentum and insure that the meeting is productive, the Campaign asks supporters to “make one call to TC in the next two weeks endorsing such a meeting, and requesting that at this meeting our ideas are fully explored.” Call CEO Herbert Allison at 1-800- 842-2733; 212-490-9000.

Public Funds File More Suits

A new study by PricewaterhouseCoopers reveals that public pension funds are increasingly joining class action lawsuits – a trend the study tracks back to a record $2.8 billion settlement won by the California Public Employees’ Retirement System and the New York State Retirement Fund in 1999. That year 18 cases had public pension funds as lead plaintiffs, while in 2000 there were 19 such cases. However, that jumped to 31 and 56 in 2001 and 2002, respectively, according to Dow Jones. In fact, two-thirds of all cases with public pension funds as lead plaintiffs have been filed in the past three years. (Suits With Pensions as Lead Plaintiff Rake In Bucks, PlanSponsor.com, 1/7/04)