May 2004

Buy Side Managers Favor SEC Proposal

Despite opposition from the Business Roundtable, nearly 80% of the 120 buy side portfolio managers and research professionals surveyed by Broadgate Consultants, Inc., believe the SEC’s proposals to give shareholders more power to nominate corporate board directors is a good step toward better governance. About three-quarters of respondents believed that the board structures of mutual funds are in need of reform.

Just over half of the respondents — 53% — believed that the Sarbanes- Oxley Act has been effective in promoting better corporate governance and protecting investors. (Press Release, 5/27/04)

Wake-up Call for Safeway

The company said 33.2% of shareholders supported a proposal that the chairman of the board be an independent director – a proposal that would remove the CEO from the chairmanship and against which Safeway management had recommended. Later in the meeting, Safeway said the final tally of shareholder votes withholding support of CEO Steven Burd’s re-election to the board of directors was 17%.

Credibility GAAP?

Should Generally Accepted Accounting Principles be set by the Financial Accounting Standards Board (FASB)? Anyone who has been awake for the last ten years knows the answer. As Liz Fender of the Financial Accounting Coalition for Truthful Statements (FACTS) said recently, “Congress interfered with FASB about 10 years ago and with all of the recent events that have shaken the public’s trust in the financial markets, we are surprised that they are once again contemplating such a move.”

Join with Facts, a broad coalition of 30 pension funds, consumer/investor groups and labor unions… urge Congress to stay out of the FASB’s process for considering a proposed rule requiring companies to expense all stock options. The coalition believes that accounting rules are best decided not by Congress but by FASB, an independent body charged with setting accounting standards. FASB has the expertise to fully evaluate accounting issues. It has an open, independent process for considering new accounting standards.

Less than two years have passed since the Sarbanes-Oxley Act of 2002 established a mechanism ensuring that FASB would be independently funded and free from any pressures from special interest groups. HR 3574 S. 1890, “The Stock Option Accounting Reform Act,” undermines this important reform by allowing Congress to succumb to pressure from special interests and override FASB’s independence. These bills would inject Congress directly into the accounting standard-setting process by mandating which stock compensation should be expensed and by what methodology, as well as establishing special exemptions for small businesses. Please let your representatives know you oppose HR 3574 and S. 1890.

Record at Alaska?

Four Alaska Air (ALK) shareholder proposals each exceed a 60% vote at their May 18, 2004 meeting. Could it be a record – 4 proposals each exceeding 60% at one meeting? Here’s the run-down per Steve Nieman, shareholder.

  • Proposal 3: Establish Simple-Majority–69.9% in favor
  • Proposal 4: Stockholder Rights Plan–69.3% in favor
  • Proposal 5: Shares Not Voted Not Counted–17.5% in favor
  • Proposal 6: Higher Standards for Lead Independent Director–25.3 % in favor
  • Proposal 7: Independent Board Chairman–31.7% in favor
  • Proposal 8: Establish Confidential voting–61.2% in favor
  • Proposal 9: Reporting Employee Stock Ownership–5% in favor
  • Proposal 10: Establish Cumulative Voting–62.4% in favor

How High Net-worth Individuals Can Improve Corporate Governance

1. Write to Mr. Jonathan G. Katz, Secretary, SEC supporting their rulemaking, Security Holder Director Nominations, S7-19-03. Let them know that instead of raising trigger levels, they should get rid of them altogether. True, the public comment period is over, but the SEC is still listening.

2. Let Maureen Nevin Duffy know you will subscribe to The Corporate Governance Fund Report if she restarts her publication. Duffy’s newsletter was primarily aimed at institutional investors “pushing back.” However, individual investors also found it was the best source for learning of the actions of activist funds, such as Herb Denton’s Providence Capital,Highfields CapitalWyser-Pratte Management, etc. Add your name to her mailing list.

3. Invest in governance funds. For example, I have investments with Andrew Shapiro who runs Lawndale Capital. Robert Monks is planning to launch a dedicated corporate governance hedge fund with John Higgins of Ram Trust Services. There are others.

4. Invest directly in companies with activist board members who are working to turn companies around. For example, I invested several years ago in Apria Healthcare and more recently in Valeant Pharmaceuticals International based on my confidence in the ideas of Ralph  V. Whitworth and Richard Koppes.

5. Join advocacy groups like Responsible Wealth, a national network of affluent Americans concerned about deepening economic inequality. While one of their main focuses is on tax reform, they are also very active in corporate governance.

6. Submit your own shareholder resolutions. I’m particularly fond of those submitted by the Corporate Monitoring Project. The premise of their proposals is that individuals often to not take the time to vote their proxies in their own best interests. Their resolutions are designed to use competing intermediaries — such as proxy advisors — to provide individual shareholders more widespread advice on proxy issues. These proposals fit nicely with the multi-year process contemplated by the SEC’s rulemaking, Security Holder Director Nominations, S7-19-03.

7. Encourage your mutual funds and pension funds to adopt policies to strengthen corporate governance. See, for example, the policies of CalPERS, which are now a bit dated but still a good place to start.

Separation of CEO and Chairs on Rise

Seagate Technology has joined the growing number of companies to separate the roles of the chairman and CEO. Earlier this year, Walt Disney Co., Dell Inc., and Oracle Corp. separated their top positions. According toInstitutional Shareholder Services, the percentage of companies that have separated the positions of chairman and chief executive officer increased from 45% in 2001 to 50.4% in 2003. But the biggest increases were in the small-cap sector; the S&P 500 and S&P 400 showed only incremental increases. According to the Corporate Library, 377 CEOs in the S&P 500 chair their own boards, compared with 394 last year.

Is CalPERS doing its real job or pursuing side agendas?

That’s the title of a recent piece in the Sacramento Bee by columnist Dan Walters who writes that CalPERS is part of a larger, nationwide effort by labor unions to gain leverage with corporations by wielding the investment power of public pension funds. Walters points to CalPERS President Sean Harrigan, who is also a high-level official with the UFCW, and the fund’s dispute with Safeway.

According to Walters, “The overriding issue is this: Should those who control public pension funds concentrate on improving investment returns and thus serve the interests of pensioners and taxpayers, or should they pursue other agendas that have little or nothing to do with their primary duties?”

Contrary to Dan Walters, there is no conflict between CalPERS serving the interests of members and fighting for worker rights.

Walters thinks that if Safeway were to continue to pay good wages, their “profits would plummet.” But CalPERS is looking to Costco as a model, not Wal-Mart’s Sam’s Club with which it competes. Costco pays workers 40 percent more and gives them better benefits. Their annual sales last year were about equal but Costco has one-third fewer employees. Six percent of Costco’s employees leave each year compared to 21 percent of Sam’s. Costco’s operating income was higher, as was their operating profit per hourly employee and sales per square foot.

Most CalPERS members are struggling to make the world a better place through public service. If CalPERS can earn good returns with collateral benefits, that’s a plus. Real estate loans to members have earned about 20% a year since the early 1990s. Is that a “side agenda” or smart growth? Safeway said they had to demand draconian cuts because of the competitive challenge posed by Wal-Mart. Yet, Costco shows companies can earn more while doing good. That’s a model CalPERS should continue to encourage. (disclosure: the publisher of is a shareowner of Costco)

This Week in Governance

Patrick McGurn of Institutional Shareholder Services gives out midterm grades on post-Enron reforms. Click here to listen to this audio report-card. A great new service from ISS.

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Gold’s 8 Rules for Board Accountability

In a recent speech to the Society of American Business Editors and Writers, Stanley P. Gold of Shamrock Holdings, Inc. provided this agenda for corporate governance reform:irectors must remember that their first duty is to speak for the owners of the enterprise – the shareholders, and that the CEO works for them, as the owners’ representatives, not the other way round. Despite encouraging steps in this direction there is still a long way to go to democratize boardrooms…but we must be sure we are going in the right direction.

  1. Each director should have to pass a reasonable proficiency test.

    I wasn’t surprised to learn that the majority of sitting directors cannot pass a simple exam on the meaning and impact of a balance sheet and profit and loss statement. Directors who are unable to effectively question assumptions, performance or strategies can easily be bamboozled and managed by the people they are supposed to oversee. If doctors, lawyers, and taxi drivers need licenses certifying their competency, then directors certainly do too. They should take proficiency tests as a prerequisite for eligibility to serve as directors of public companies.

  2. Directors should be required to have continuing education.

    Beyond basic proficiency to serve on public boards, directors should also have to annually attend further education classes to keep up to speed with new legislation, corporate law, marketing and management trends and relevant industry developments. Continuing education is a requirement of every licensed profession; it should be a requirement for every director of a public company.

  3. Each director should have to stand separately.

    Each and every director should be personally accountable for his or her performance and provide, in the proxy statement, a personal statement… in their own words…of what they have done and what they intend to achieve. Each director, one-by-one, should address shareholders at each corporate annual meeting and answer specific questions from the floor. We should not permit directors to hide behind the rubric of “the board.”

  4. Shareholders should be able to call for an extraordinary general meeting.

    This is a practice that works well in the UK… any meeting of the shareholders other than the scheduled annual general meeting is known as an extraordinary general meeting. The ability of the shareholders to call to account directors when they have acted improperly will be a significant deterrent against such conduct. The length of notice depends on the nature of the resolutions being put to the meeting. Such a mechanism provides shareholders with the ability to convene a meeting of the shareholders on matters they consider to be of pressing important to shareholder interests; they can use such an extraordinary meeting to oust one or more directors they deem inadequate. It usually requires the consent of between 5 to 10 percent to convene such a meeting.

  5. Shareholders need to be encouraged to be long-term investors.

    Tax policy should be used to craft economic policy. Capital gains tax laws, for example, should be amended to encourage longer-term holding of shares. A sliding scale that reduces the amount to tax over time will encourage shareholder/directors to think strategically about the longer-term outlook of the company, instead of focusing on the quarter-to-quarter results. More stability in the capital markets is good for all of us.

  6. Real world experience for directors.

    Directors are usually isolated from the business…they hang together in a corporate cocoon and hear only what management tells them. The independent directors should be required to meet twice a year with the largest shareholders without senior management present. This is what six large public pension funds are asking of the Disney board. Such interchanges should be institutionalized. The exchange of views and information would be valuable and illuminating for both parties and provide directors with an independent perspective on the business… as befits their independent role.

    They should also meet regularly with operational management to learn about the business first hand. This would also be a tremendous morale booster internally. General electric has shown the way here…they have mandated that each of their outside directors regularly visit the company’s operating centers, without senior management present.

    Even more helpful would be a visit to customers. Directors can place some reliance on expert studies, but without direct, personal experience of the business and the issues involved, they are shortchanging the shareholders. It would be of great help to directors to know what the company’s customers think of their products and services.

  7. Public directors.

    I think it would be helpful if boards of public companies included a couple of public directors, selected from an approved list compiled by the SEC or some other appropriate state or federal agency. This would bring a much-needed extra dimension to the boardroom in terms of the greater social purpose of a company; such public directors could voice the concerns of numerous stakeholders.

  8. There ought to be a limit on what the company can spend on the re-election of its directors.

    In a recent Disney “withhold campaign”, the Roy E. Disney family spent between $3-5 million. My best guess is that the walt Disney company spent over $35 million to re-elect michael eisner and george mitchell, as well as the other directors. They spent this out of the corporate treasury thereby using the shareholders’ funds to defeat the will of the owners. No where else in American life is the playing field so skewered toward the incumbent. To prevent this in the future, there ought to be strict spending limits on the use of corporate funds by incumbent directors.

California Republican Party Criticizes CalPERS

“Like Donald Trump after a long day of watching tycoon wannabes struggle to gain his approval, CalPERS board members are trying to hand out pink slips to the directors at 90% of the companies in which the fund owns shares,” begins an article posted on the Republican Party’s website entitled “CalPERS Puts Social Agenda Ahead of Profit.”

“In next year’s state budget, taxpayers will subsidize CalPERS to the tune of an estimated $2.6 billion, due in part to the fund underperforming the last three years. Given that CalPERS is responsible for providing retirement and health benefits to 1.4 million public employees, retirees and their families, you’d think getting a better return on their investment would be a top priority. Not quite.”

“The theory behind CalPERS’ attack on corporate boards is that directors should focus solely on maximizing returns. Yet CalPERS has invested billions in ‘economically targeted investments’ aimed at providing ‘collateral benefits to targeted geographic areas, groups of people or sectors while providing pension funds with prudent investments.’ If such investments fall short, of course, California’s taxpayers can be forced to pick up the tab.” (Forbes, May 10, 2004)

“How unfortunate that the 1.4 million people served by CalPERS – not to mention taxpayers – can’t sit across the table from the recalcitrant CalPERS board and shout, ‘You’re fired!'”

Yet, the article fails to provide any evidence that CalPERS members are unhappy with the strategy pursued by the Board. Far from viewing their Board as disobedient, I suspect that most members find their strategy of investments aimed at providing collateral benefits refreshing. As public employees, many CalPERS members spend their entire careers promoting environmental protection, health, and public welfare. If our pension fund can help make the world a better place, while earning good returns, why should we object? As I told a reporter from Investor’s Business Daily, “they take a long time frame. It doesn’t do any good after 20 years to have a good return if we’re all frying.” (Calpers Activism Hits Even Healthy Firms, 5/4/04)

Sure, CalPERS has been “underperforming the last three years.” They lost 7.2% in 2001, 5.9% in 2002 and gained 3.9% in 2003. However, the S&P 500 lost approximately 15% of its value during the last three years. Regarding economically targeted investments, CalPERS couldn’t tell me the record for all such investments but they could tell me that their real estate loans to members (which certainly has popular collateral benefits to members) have earned about 20% a year since the early 1990s.

Investments are going to have ups and downs. That would be true even if Republicans ran the CalPERS Board…but they aren’t likely to get that chance anytime soon, even with Arnold Schwarzenegger in the governor’s office.

French Shareowners Flex Muscle

While the SEC debates action on its access rule,” French shareowners in the bankrupt Eurotunnel gathered proxies for 60% of the equity and threw out the whole board. Unlike votes on directors at US corporations, French ones are binding. The new board has split the roles of chairman and chief executive. It remains to be if their measures can rescue value but at least there is no question shareowners have a voice. (, LIGHT AT THE END OF EUROTUNNEL AN ON-COMING TRAIN?)

OECD Governments Ratify Governance Code

According to a report by, the 30 member-governments of the Organization for Economic Co-operation and Development (OECD) have ratified – with modest changes – a controversial code of corporate governance that would give shareholders stronger rights in most of the member countries. When the draft was circulated in January its call for shareholders to be able directly to nominate directors sparked opposition.

The draft suggested, “Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the principles above, subject tosome possible exceptions to prevent abuse.” (emphasis added). The words “some possible” were dropped from the final text. Provisions to protect whistle-blowers, a call on institutional investors to disclose their voting policies and steps to reduce conflicts of interest throughout the investment process remain intact.

However, the code is only a recommendation. Donald Nordberg, reminds his readers “the previous OECD code, from 1999, was used mainly in developing countries outside the OECD area. But this code goes beyond many of the measures adopted in the major industrial powers that belong to the organization, even codes put in place after the Enron and WorldCom affairs sparked global interest in governance.” (GOVERNMENTS RATIFY TOUGH OECD GOVERNANCE CODE, WITH MINOR CHANGES, 4/22/04)

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