Archive | June, 2004

June 2004

American Firms Scarce at UN

After going it almost alone in Iraq, with a “coalition of the willing,” both George W. Bush and John Kerry appear to recognize the need to work with the Uited Nations and broad coalitions. When will American corporations learn the same lesson? Just 70 of the 1,500 companies that have signed onto the UN Global Compact, which promotes standards for human rights, labor, environmental and anti-corruption standards. With all the standards American firms are required to follow, one might think they would want to encourage corporations based in other countries to raise their standards.

Companies from about 70 countries have signed on, including 330 French firms and 93 from India. About half are from developing nations. The pact is strictly voluntary and advisory; there are no penalties or enforcement; perhaps that’s the problem.

Twenty major investment companies — including Banco do Brasil, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley — have endorsed “connecting financial markets” to environmental, social and governance criteria, and agreed to bring other actors in the financial world into play on making these factors standard components in the analysis of profitability and investment decision-making.  The 20 companies control $6 trillion in assets.

UN Secretary General Kofi Annan told a recent gathering: “I ask you all to work together – business, civil society, labor and governments – and to work with the United Nationa, so reduce the global risks we all face and to realize the promise of a fairer, more stable world.”  We have to start somewhere.

The Cost of Entrenched Boards

Lucian Bebchuk and Alma Cohen investigated empirically how the value of publicly traded firms is affected by arrangements protecting management from removal. A majority of U.S. public companies have staggered boards that substantially insulate the board from removal via a hostile takeover or a proxy contest. (Program on Corporate Governance, John M. Olin Center for Law, Economics, and Business, Harvard Law School, Olin Paper No. 478) They find that:

  1. Staggered boards are associated with an economically significant reduction in firm value (as measured by Tobin’s Q);
  2. There is evidence consistent with staggered boards’ bringing about, and not merely reflecting, a lower firm value; and
  3. The correlation with reduced firm value is stronger for staggered boards established in the corporate charter (which shareholders cannot amend) than for staggered boards established in company bylaws (which can be amended by shareholders).

More “Independent” Directors = Less Fraud

As the proportion of independent, outside directors on a board and its oversight committees increases, the likelihood of corporate fraud decreases, according to a study of U.S. companies published in the June issue of Financial Analysts Journal, a research publication for investment practitioners worldwide published by CFA Institute. The study also found that companies that had a board compensation committee tended to be more likely to commit or be accused of fraud – although, the fewer ties compensation committee members had with the company and its executives, the less likelihood there was of corporate fraud.

Compared to the non-fraud companies, companies accused of committing fraud:

  • Had a lower percentage of outside directors
  • Had a lower percentage of independent directors
  • Were less likely to have an audit committee of the board
  • Were more likely to have a compensation committee of the board
  • Had a lower level of independence on audit, compensation and nominating committees .

Their results support NYSE and NASDAQ requirements for independent directors and Sarbanes-Oxley Act requirements for audit committees. Regarding their finding that companies accused of fraud were more likely to have a compensation committee, the authors write, “The implication is that compensation committees have been ineffective in evaluating and properly rewarding the performance of top executives. They may also have designed compensation packages with dysfunctional incentives.”

Composition of the compensation committee was a significant mitigating factor. The more independent directors on the committee were of any other business or personal ties with the company, the less likelihood there was of corporate fraud.

The researchers did not find statistically significant differences between the fraud and no-fraud groups when they tested for:

  • board size
  • frequency of board meetings
  • frequency of audit, compensation and nominating committee meetings
  • existence of a nominating committee
  • financial performance of the company
  • the length of time that the CEO had served on the board
  • whether the president or CEO also served as chairman of the board.

The authors conclude that “the influence of the CEO on the board does not detract from its effectiveness in monitoring for fraud.”

AFL-CIO Presses for Expensing Stock Options

After the Enron collapse, ex-CEO Ken Lay, ex-CEO explained to Congress the biggest accounting loophole: not expensing stock options. While regulators have proposed to fix this problem, rich Silicon Valley executives are fighting to keep their stock options off the books. The AFL-CIO is letting its members know, “that’s bad news for the retirement savings of America’s working families who depend on companies having honest accounting.”

How much do these execs take home in stock options? A few examples follow:

  • Agilent Technologies, Edward W. Barnholt. $6,256,709
  • Autodesk Inc., Carol A. Bartz. $13,911,205
  • Cisco Systems, John T. Chambers. $214,088,550
  • Dell Computer, Michael S. Dell. $94,589,992
  • Genentech Inc., Arthur D. Levinson. $156,160,901
  • Intel Corp., Craig Barrett. $78,552,300
  • Qualcomm Inc., Irwin Mark Jacobs. $199,344,974
  • Sun Microsystems, Scott G. McNealy. $30,983,520
  • Valero Energy, William E. Greehey. $68,166,865
  • Xilinx Inc., Willem P. Roelandts. $54,732,771

Failure to expense stock options has widened the pay gap between CEOs and workers. Last year, the average CEO made 301 times the average worker’s pay, up from 42 times in 1980. Executives disproportionately benefit from stock options and this cost has been kept off the books. Worse, the failure to expense stock options has artificially boosted profit reports-making some under performing CEOs and companies look robust. Help fix this problem by urging the regulators to make stock option expensing mandatory. Get active.

Berkeley City Council Against Corporate Personhood

The City Council of Berkeley, California last approved a resolution to amend the U.S. Constitution to say that corporations should not enjoy the same constitutional protections and rights that real people enjoy. The resolution also supports amending the U.S. Constitution and the California Constitution to say that the First Amendment free speech protections should not apply to corporate expenditures.

As the resolution notes:

“WHEREAS, under the United States and California Constitutions, all sovereignty resides with “We the People,” such that people hold all inherent political power and government derives its power from the consent of the governed; government is created by the people and for the people for our health, safety, and welfare; our system of government is a representative democracy, through which the people govern; and “We the People” are entitled to inalienable constitutional rights to wield against oppressive governmental regulation; and”

“WHEREAS, “corporation” is not mentioned in the United States Constitution; our founders did not grant corporations rights; rights were reserved for natural people; historically corporations were created as artificial entities, chartered by state governments to serve the public interest, cause no harm, and be subordinate to the sovereign people; and yet by judicial interpretations, corporations gained personhood status, free speech and other protections guaranteed by the Bill of Rightsand the 14th Amendment;”

In approving this resolution, Berkeley becomes the third and largest municipality in the country to pass such a resolution, which is non-binding and only advisory. The other cities to pass similar resolutions are Arcata, California and Point Arena, California. Get active.

Virtual Shareholders Meeting

ICU Medical held its annual shareholders meeting solely online. Even though Delaware law has permitted virtual only meetings since 2000 and Inforte was the first (and only, until ICU) company to do so, Delaware companies have been loath to go that route due to fear of shareholder wrath. Last year, Seibel Systems backed off plans to conduct a virtual only meeting after shareholders saw the proxy materials filed by Seibel and complained. Learn more about virtual meetings atRealCorporateLawyer.com.

Anthem Proposal to Buy WellPoint

California State Insurance Commissioner John Garamendi said Friday that he wouldn’t support Anthem Inc.’s $16-billion acquisition of the parent of Blue Cross of California unless the Indiana company spends hundreds of millions of dollars on healthcare programs for California’s poor.

Garamendi said he believed the compensation figure could hit $600 million when stock options held by WellPoint executives were included — a potential windfall the insurance commissioner called “reprehensible.”

State Treasurer Phil Angelides said that public pension funds representing about $530 million of stock in Wellpoint and Anthem planned to withhold their votes on the transaction. Among the groups are the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the New York State Common Retirement Fund, the New York State Teachers’ Retirement System, the Los Angeles County Employees’ Retirement System and the Illinois State Board of Investment. (Garamendi Questions Costs of Deal to Buy Wellpoint, LATimes, 6/26/04)

Shareholder activist John Chevedden noted that a 19-member board of directors, which the New WellPoint proposes, is considered too large to be an effective board by corporate governance experts. Thus, there there could be a power vacuum which could be filled by powerful and unchecked Chairman of the Board. Additionally, shareholders will not be able to vote on the lavish golden parachutes as a separate ballot item. And there are unanswered questions. What is the preset value of the claimed $2 billion of savings which will not be realized for 10-years compared to the ultimate cost of $4 billion in transaction costs incurred now – which will require interest payments over 30 years? What percent premium will shareholders in the old Well Point will receive?

Investor Disputes Up

According to the National Association of Securities Dealers, investor disputes are on the rise. Last year, the most ever investor disputes were filed — almost 9,000 — and this year could see just as many or more. That’s almost double the number of disputes filed a decade ago.

“There’s always some joker willing to risk going to jail to steal $1 billion,” says Vincent DiCarlo, a former Securities and Exchange Commission attorney who now specializes in securities arbitration cases in private practice in Sacramento, CA. “When I was at the commission, it took me a long time to figure out how the system worked; the sanctions imposed didn’t deserve to even be called sanctions, and we were only able to bring a small number of cases.” He says the dysfunction stems mostly from the lack of liability and responsibility accorded to those entrusted with accountability: accounting and law firms.

The failings of auditors, lawyers and Wall Street firms to spot large-scale corporate fraud have been reported ad nauseam. From banking conglomerate Citigroup to auditor Arthur Andersen, huge fines have even been imposed. But what’s curious is the fact that no major reform has taken hold. Sure, there’s the Sarbanes-Oxley Act, which calls for more financial disclosures and accounting oversight for public companies. But those are matters between institutions. When it comes to investors, they’re left to arbitration. (Investors Fending For Themselves – Commentary: Time For Securities-Law Overhaul, CBSMarketWatch.com, 6/14/04)

Candor Correlated With Share Price

A survey of 100 Fortune 500 by andBeyond Communications found a positive correlation between candid communication and superior share-price performance. Top-ranked companies boosted their share prices over a two-year period by 21.5%, while bottom-ranked companies saw only a 7.3% increase. A review of 2003 annual-report letters found that 87% of CEOs failed to candidly report their bottom-line performance. “As companies spend millions of dollars to comply with Sarbanes-Oxley, it is alarming that only 13 percent of the CEOs in our survey met this simple test of forthright investor communication,” said L.J. Rittenhouse, president of andBeyond. “Companies that offer generalities without meaningful and straight-forward explanations will never restore investor trust.” (Link Found Between Candor, Share Prices, CFO.com, 6/15/04)

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Independent Chairs Mandated at Mutual Funds

In an attempt to curb conflicts of interest at mutual funds that resulted in trading and sales scandals at more than 20 companies, the SEC voted 3-2 to require mutual funds to have an independent chair. The move will mean big changes when the rule take effect in 18 months, at least on paper for the $7.5 trillion industry, since an estimated 80% of funds have boards led by insiders. (Independent Chairman at Mutual Funds: SEC Rule, SRI Media, 6/23/04) The question remains, will independent chairs and boards with 3/4 independent majorities really get control of their external money market managers? Putnam Investments’ board is chaired by an outsider. But the company, a unit of insurance broker Marsh & McLennan, was the first charged with fraud for having turned a blind eye to trading abuses.

Fidelity’s 292 funds fall under the purview of a sole board of trustees that has long been run by Edward C. Johnson III, its chairman and chief executive. While Johnson will give up his board of trustees chairmanship, “He will continue to provide day-to-day management oversight of the company,” Loporchio said. “This rule really does not change the way Fidelity Investments is run at all.” (SEC Bars Fund Employees From Serving as Board Chairs, LATimes, 6/23/04) Isn’t that reassuring?

Mercer Bullard, founder and president of Fund Democracy, thinks Chairman William Donaldson “is doing what’s necessary to prevent legislation.”

While requiring independent chairmen is “a good, meaningful step,” Bullard said that there are “much stronger steps” that the SEC may have sidestepped with this move. Those steps include requiring funds to include portfolio costs in expense ratios, to disclose fees in dollar terms in shareholder statements and banning companies from making “back-door” payments to brokers push their funds. Focusing on independent chairmen “is not going to be as transformative, but he (Donaldson) can score a lot of political points,” Bullard said. (Independent fund boards: A good first step, CBS MarketWatch, 6/23/04)

The primary changes are as follows:

  • Independent Composition of the Board. Independent directors will be required to constitute at least 75 percent of the fund’s board. An exception to this 75 percent requirement will allow fund boards with three directors to have all but one director be independent. 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 will 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 will be required to assess its own effectiveness at least once a year. Its assessment will 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 will 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 will 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. (SEC Release, 2004-87)

Quote of the Week

The Corporate Library features a quote of the week. This week’s quote is from Brian Heil, founder and CEO, ProxyMatters.com. ”It is very important for shareholders to vote their proxies. Many people think that it doesn’t matter. But, mathematically, your vote on a proxy is more important than your vote in a presidential election.” Considering the influence of corporations on politics, the quote is doubly true.

Free Bowne IPO Guidebook Available

Bowne Financial Print has released “The Initial Public Offering: A Guidebook for Executives and Boards of Directors” (Second Edition), authored by Patrick J. Schultheis, Christian E. Montegut, Robert G. O’Connor, Shawn J. Lindquist and J. Randall Lewis with the law firm of Wilson Sonsini Goodrich & Rosati.

The guidebook offers readers a practical view of the IPO process and provides helpful advice on how to conduct a successful IPO in today’s environment. It provides an overview of the legal framework governing the IPO process, including what issues to consider when contemplating going public, how to assemble the IPO team, how to prepare and file the registration statement, and what to do after a company has gone public.

This new second edition addresses a business, financial and legal landscape that has changed dramatically since the first edition’s publication in 1998. It also includes listing requirements of the NYSE and NASDAQ, a sample IPO timeline and a compliance calendar, as well as a summary of selected post-Sarbanes-Oxley SEC rules and analysis.

A printed copy of is available from Bowne or can be downloaded for free athttp://www.bowne.com/.

Anti-Corporate Quotes

The Alliance for Democracy, an advocacy group, is considering the following for protest banners:

  • President Grover Cleveland worried in 1888 that: “Corporations, which should be carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters.”
  • Thomas Jefferson: “The end of democracy and the defeat of the American Revolution will occur when the government falls into the hands of banking institutions and monied incorporations.”
  • Henry David Thoreau:  “There are a thousand fighting the branches of evil for every one who is hacking at the root of it.”
  • Frances Moore Lappe: “Growing up in America, we were taught that we inherited a democracy. No one told us that we ourselves had to create one.”
  • Supreme Court Justice Louis Brandeis: “We can have a democratic society or we can have great concentrated wealth in the hands of a few. We cannot have both.”
  • Riane Eisler: “Control over possessions and other humans is a substitute for the emotional and spiritual fulfillment missing from a system rooted in fear and force.”
  • Arundhati Roy : “It’s funny how the interests of American corporations are so often, so successfully, and so deliberately confused with the interests of the world economy.”
  • Molly Rush: “It is necessary to go back to some fundamentals in our history to understand how the modern corporations, initially a creature of the state, has managed to turn things around so that the state is a creature of the corporations.”
  • Janie Rezner: “Corporate power is the essence of  patriarchy with it’s ultimate goal of controlling everything in the world unencumbered by integrity or justice or compassion, or concern for life . . . .   with only greed and power as a guiding light.”

Frankly, I like the book cover quote of Monks and Minow: “Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.” Creating structures to ensure accountability isn’t “anti-corporate;” it is pro-sustainability.

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ESOPs Popular

Out of 108 million people in the US who work in the private-sector, 21% own stock in the company they work for, showing the importance of employee stock ownership programs. Among unionized employees that level is even higher at almost 28%. The median value of the employees’ employer stock ownership is over one-fifth of annual pay. Ownership ranged from a high of nearly 60% of employees in computer services to a low of nearly 14% in agriculture/mining/construction, with percentages for durable manufacturing, wholesale, utilities, non-durable manufacturing coming in at approximately 30%, 23%, 55%, and 30% respectively.

In total, there are approximately 10,000 ESOPs in the US, covering 8 million employees (8% of the private sector workforce). These employees draw in excess of 3% of their total compensation from ESOP contributions. 10% – are in publicly traded companies. However, these companies employ approximately 50% of the nation’s 8 million employee owners. (Survey Confirms Employee Ownership is Wide Spread in America, Washington, DC, 6/17/04)

The ten largest ESOPS ranked by the numbers of participants are as follows:

  • Proctor and Gamble
  • Lifetouch, Inc.
  • Anheuser-Busch Companies
  • Amsted Industries
  • Parsons Corporation
  • Brookshire Brothers
  • JELD-WEN
  • Ruddick Corporation
  • Ferrell Companies
  • W.L. Gore Associates

Proxy Season Comparisons

ISS issued a summary of the proxy season to date and one result has been a flurry of analyses by the usual pundits. Keith L. Johnson of SWIBis quoted by Barry Burr in Pensions & Investments (All Investor Eyes on Busy Proxy Season, 6/14/04) saying, “There are a lot more shareholder resolutions.” Similarly, “It is probably the busiest we’ve ever seen in terms of shareholder resolutions and activism, ” according to Charles Elson, of the Center for Corporate Governance. ISS’ own Patrick McGurn calls this year “the end of the routine proxy season.”

Yet, Stephen Taub, of CFO.com, looks at the same data and writes “Proxy Season Quieter in 2004, Says ISS.” (6/18/04) In 2003, the ISS recommended that votes be withheld from audit-committee members at several hundred companies because the audit firms were permitted to conduct non-audit work. For that reason, ISS recommended that clients vote against ratification of the outside audit firm for 7% of companies in 2003, but for only 4% of companies in the 2004 proxy season. The 2004 figures total fewer than 75 companies, including only three in the Standard and Poor’s 500, according to the ISS.

PLANSPONSOR.com reports that ISS urged clients to withhold voting support for director nominees at only 32% of companies this year, compared to 38% last year and 52% in 2002. Not only were there fewer recommended director vote withholdings, the 2004 season saw a 5%+ drop in shareholder proposals making it to the ballot and a 66% reduction in proxy fights compared to the more contentious 2003 season. (6/16/04)

Ralph D. Ward, publisher of online newsletter Boardroom INSIDER, sums up the proxy season in the succinct style which fans his growing reputation. He says the U.S. proxy season 2004 was “the most explosive in memory” — but the real investor victories happened far from the spring’s noisy annual meetings. “The season kicked off in March with Walt Disney CEO Michael Eisner drawing a shocking 45% ‘no’ vote on his board reelection. Then, activist megafund CalPERS, as a governance protest, ‘withheld its votes to reelect directors at 90% of the companies in its portfolio,’ the most famous being Warren Buffett on the board of Coca-Cola. At Safeway Stores, angry investors fought the reelection of chairman Steven Burd, and a record 200 proxy proposals on executive pay were filed at other corporations.”

Those were the noisy events widely reported in the press. “Yet for all the heat of these battles, almost all failed. Eisner has held on at the Magic Kingdom, CalPERS took major criticism for spreading itself too thin, Burd was easily reelected, and the handful of proxy issues that actually won a majority were ignored by management.” The real results, notes Ward, happened outside the annual meeting spotlight, “with backchannel pressure bringing many corporate surrenders on adding independent directors, expensing options, and rolling back poison pill defenses. Ward compares the 2004 proxy wars to the trench warfare of WW1.” “You have massive, bloody battles that seem to bring nothing but stalemate, while the real changes are triggered behind the scenes back home — through negotiation, political turmoil, and even revolution.”

New exchange listing standards have provided a “Rule Book” for companies and their investors. ISS points out that many of their withholds in 2002 and 2003 were levied at companies that were still in the corporate governance Dark Ages. “They lacked basic best practice ingredients like independent key committees and, in the case of many boards at small- and mid-cap firms, had no key panels in place at all. Additionally behavioral changes taking place within U.S. company boardrooms. Whether it is viewed as directors more diligently accepting their responsibilities to shareholders or, the threat of ballot access, good boards stopped ignoring majority votes on shareholder proposals and started voluntarily implementing positive change.

John Connolly, president and chief executive officer of ISS, added, “The ‘shareholders gone wild’ scenario fails to hold water with respect to ISS or the general proxy voting trends. The indicators tell a different story — a story of increasing constructive dialogue, awareness and understanding between companies and their shareholders. (Institutional Shareholder Services Releases Preliminary Proxy Season Review, 6/20/04) More companies that ever paying attention to ISS and availing themselves of resources such at TheCorporateCounsel.net’s 2004 Proxy Season Resource Center in order to be prepared.

Yet, investor votes continue to be ignored or circumvented by boards. True, Walt Disney directors took the chairmanship away from Eisner but they chose Eisner ally, ex-Sen. George Mitchell, as chairman, over the objections of several big institutional holders. At Gillette, 68% of the votes cast favored ending staggered board elections. “When a vote like that is ignored, you have to say governance isn’t working,” says Robert Monks. (see Experiments in Corporate Governance, WSJ, 6/21/04)

Behind the whole season has been the specter of the SEC’s rulemaking,Security Holder Director Nominations, S7-19-03. If that disappears or gets compromised into nothing worthwhile, the likelihood of a costly “revolution” would rise. It is obvious The Corporation is in need of reform. Either its owners start addressing issues, such as sustainability and fairness, or we will all pay a heavy price down the road.

FASB To Hold Public Roundtables On Option Expensing

The Financial Accounting Standards Board will hold public roundtables on its proposed stock-option expensing rule. The first meeting will be held on 6/24 at the Sheraton Hotel in Palo Alto, CA; the second will be held on 6/29 at the FASB headquarters in Norwalk, CT. The comment period ends on 6/30. (see Share-Based Payment—an amendment of FASB Statements No. 123 and 95) Both roundtables will be available via Webcast and will run from 9 a.m. to 1 p.m. (Compliance Week, 6/15)

Unfortunately, the Financial Services Committee of the House of Representatives voted 45-13 recently to restrict the option-expensing standard proposed by the FASB.

H.R. 3574, the Stock Option Accounting Reform Act, would require an economic impact study before FASB would be permitted to implement its proposed rule. In addition, the bill would require companies to expense only stock options granted to the top five officers. Small businesses would be entirely exempt from FASB’s rule; newly public companies could forgo expensing for three years.

FASB, which is expected to issue a final rule by the end of this year, backed off a similar proposal in 1994 under opposition led by theBusiness Roundtable. Don’t let it happen again. The bill next faces a vote in the full House, where, as of last month, the measure had 107 co-sponsors.

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CACI TACT on Hot Seat in California

CACI International Inc. (CAI) is facing growing pressure over its role in the Abu Ghraib prison scandal from California pension funds that own large stakes in the company, according to the Washington Post. Directors of CalPERS plan to meet today to discuss concerns about management controls, training, and legal procedures at CACI, while CalSTRS planning to discuss the issue at its July 7 meeting. CACI employs Steven Stefanowicz, an interrogator in Iraq who has been implicated in an Army report on prisoner abuses at the infamous prison. CACI’s stock has shed 16% since that connection was reported. (PlanSponsor.com, 6/14/04)

CalPERS Targets Disney, Maytag and Others for Reform

CalPERS said Maytag’s board refused to implement shareowner proposals backed by majority votes. CalPERS said it wants Maytag to declassify its board by the 2005 annual meeting, seek shareowner approval of a poison-pill provision and adopt formal equity ownership requirements for its directors.

At the 2004 Maytag annual meeting Ray T. Chevedden sponsored a shareholder proposal to declassify its board. Nick Rossi sponsored a shareholder proposal to seek shareowner approval of a poison-pill provision.

The 2004 annual meeting marked the 6th consecutive year that the declassify proposal topic won more than 50% of the yes and no votes cast. This meeting also marked the 4th consecutive year the poison pill proposal topic won more than 50% of the yes and no votes cast. (Contact: John Chevedden, 310-371-7872)

SEC Caves to CEOs

The Wall Street Journal reports that Donaldson wants a compromise and he wants some access to be accomplished but he has “already agreed to eliminate another controversial provision that would have empowered small groups of shareholders to force votes on proposals to allow shareholders to nominate directors.”

“Mr. Donaldson is exploring a plan supported by some in the business community and at least one Republican commissioner that would give boards a chance to fix their problems before allowing voting shareholders to include their own nominees on corporate proxies, the ballots used in votes on company matters. Under the proposal, if more than 50% of cast votes are withheld from a board member, the board’s nominating committee could name a replacement. The plan may require companies to consult with shareholders about the replacement. Under one scenario, if more than 50% of the votes at the next annual meeting are withheld for the replacement, the company would have to include a shareholder-backed nominee on the ballot the following year.”

The alternate plan is apparently known internally as the “cure” proposal, because it gives companies time to cure their problems. Under the cure, shareholders would have a three year wait to effect even a minor change. The Business Roundtable appears to be in control. That is totally unacceptable to shareholders we have been in contact with. (SEC May Dilute Plan to Increase Holders’ Power: Under Pressure From Businesses And Resistance From Democrats, Donaldson Considers Alternative, 6/8/04)

2004 EDS Annual Shareholders Meeting

For proposal 3 — Shareholder proposal regarding classified board 340,292,471 shares were voted For this proposal, representing 88% of the votes cast, and 46,457,898 shares were voted Against this proposal or Abstained from voting, representing 12% of the votes cast.

For proposal 4 — Shareholder proposal regarding Rights Plans, 329,490,426 shares were voted For this proposal, representing 85% of the votes cast, and 57,260,039 shares were voted Against this proposal or Abstained from voting, representing 15% of the votes cast.

For proposal 5 — Shareholder proposal regarding Majority Vote, 345,397,692 shares were voted For this proposal, representing 89% of the votes cast, and 41,352,780 shares were voted Against this proposal or Abstained from voting, representing 11% of the votes cast.

Baker Hughes Shareholders “Win” Again

At the company’s annual meeting April 28, 90% of the shareholders attending backed proposal by Harold Mathis to make all its directors stand for re-election each year. Last year, his proposal got 85% of the vote. A majority of shareholders voted for it in each of the two previous years as well. Yet Baker Hughes still staggers its board elections, saying it is in investors’ best interest. (He’s big on democracy, even if corporations aren’tHouston Chronicle, 5/29/04)

Join Australian Corporate Governance Debate Online June 7

Shareholders will have more power over executive perks under corporate law changes proposed by Labor. Opposition corporate governance spokesman Stephen Conroy released Labor’s response to the CLERP (Corporate Law Economic Reform Program) Bill number 9, which is being examined by a parliamentary inquiry.

Senator Conroy said the government’s Bill failed in two main areas.

“It fails to sufficiently hold boards accountable and fails to sufficiently empower shareholders.”

He said corporate scandals such as HIH, Ansett and One-Tel, high salary packages to executives and termination payments in spite of poor performance, and the perceived failure of audit committees had outraged shareholders, employees and retirees.

Labor’s amendments would include prohibiting limited-recourse loans to directors and key executives and banning the payment of options, bonus payments and other retirement benefits (other than statutory superannuation) to non-executive directors. They would also require shareholder approval of termination payments which exceed one year’s salary and ensure the disclosure of the duration of contracts and equity value protection schemes.

“To further toughen the Bill, Labor will also move amendments in relation to audit reform, financial reporting, enforcement, shareholder activism, conflicts of interest and analyst independence,” Senator Conroy said. “We believe that there needs to be a greater balance where shareholders are able to take these things into their own hands and stop the sort of excessive corporate payouts, particularly when companies have failed.”

Online debate of possible reforms is being organized by the Australian Public Policy Research Network, moderated by its co-founder Dr. Richard Curtin. Anyone in the world can participate free of charge by registering on the APPRN web page. All participants are invited to vote on the importance of 14 suggested agenda items for reform that are presented in the discussion paper on ‘Agendas for reforming Corporate Governance, Capitalism and Democracy‘ prepared by Shann Turnbull.

SEC Vote Delayed

Fearing a 3/2 split vote might harm the SEC’s authority, the Commission’s has again delayed reforming boardroom elections. The Financial Timesreports to expect a vote in late June at the earliest, perhaps as late as August.

A second controversial reform is in the area of mutual fund governance, mandating independence of fund chairmen. “That plan is bitterly opposed by some of the largest fund groups in the US and some of the SEC’s Republican commissioners. A third controversial area is a plan to force hedge funds to register with the SEC. The SEC’s draft plans on boardroom elections are likely to be modified before they become formal regulations.” (SEC split delays vote on board election rules, 5/31/04)

Shell Governance Questioned

Sir Philip B. Watts, former chairman of Royal Dutch/Shell, was awarded a pay and option package worth more than $10.7 million in 2003, reports theNew York Times. Proven annual reserves were overstated by about one-fifth in each of the last six years.

The picture that has emerged is one of “an institution with lax controls and struggling to keep promises made to markets and investors, particularly in its exploration and production department.” (Shell Discloses a Large Pay Package for Its Former Chairman, 5/29/04)

Alfred Donovan goes much further, accusing Shell of hiring undercover operatives to deliberately intimidate shareholders. See Shell2004.com.

Little Guy?

A 5/24/04 Op-Ed article by former SEC chairman Arthur Levitt in the New York Times supports the SEC proposal to give qualified shareholders limited ability to place a director’s name on ballot for company’s board. Noting concerns of the Business Roundtable that a small number of shareholders would pursue narrow agendas at expense of most other investors, Levitt counters their pressure would be mitigated by the economic incentives of profitability and efficiency. Finally, they would have to win majority support for their candidate.

The SEC estimates the proposal would trigger nominations at only 43 of 14,484 public companies. Why so few? Because the SEC has proposed to limit nominations to shareholders with 5% of the company’s stock. Someone at the Times improperly entitled Levitt’s article “Let the Little Guy in the Boardroom.” What “little guy” holds 5% of a coproration’s stock? The largest public pension fund in the country rarely holds more than about 1%. Yet, CalPERS is typically referred to as the 800 pound gorilla (Google lists 101 such citations) not the “little guy.” More fact checking is needed at the Times.

It is also good to see Amy Borrus of BusinessWeek endorsing the SEC’s proposal (see Stick to Your Guns, Mr. Donaldson, 5/24/04). However, let’s not be mistaken, the proposal would do nothing for the “little guy.” It’s like the British offering the top ten landholders in the American colonies one seat in Parliament, if they can agree together on who to nominate. That’s hardly democracy…but it might be enough to postpone the revolution.

Upcoming Events

Corporate Governance Japan will hold its 179th Executive Luncheon Meeting at the Hotel Okura on June 17, 2004 from 12:00 p.m. – 2:00 p.m. Register directly with the Hotel Okura.
Speaker: Dr. Gregory Jackson, Fellow, Research Institute of Economy, Trade and Industry
“Japanese Corporate Governance in Transition: Toward a New Paradigm?”
The Atlantic Room (Main Building, first floor)

Institute of Governance, Public Policy and Social Research
Governing the Corporation: Mapping the Loci of Power in Corporate Governance Design
20-21 September 2004

How to Manage Corporate Responsibility in China
2-Day conference, New York, October 5 – 6 2004
Contact: Peter Carkeek, Conference Director:
Tel: +44 (0) 20 73 75 7160 / 1800 814 3459 ext 282
How to Manage Corporate Responsibility in Asia
2-Day conference, Hong Kong, October 14 – 15 2004
Contact: Peter Carkeek, Conference Director:
Tel: +44 (0) 20 73 75 7160 / 1800 814 3459 ext 282

Asian Corporate Governance Association
Fourth Annual Conference 2004
Shanghai, October 28th
Strengthening Asian Capital Markets through Corporate Governance
Highlights from Third Annual Conference

Random Bits

Broc Romanek, of TheCorporateCounsel.net noted that May 20th was the height of the proxy season with more meetings scheduled on that day than any other. His blog is an important source for anyone trying to keep up with SEC rules and guidance. They got everything from a pdf file of Spitzer’s complaint against Grasso (106 pages) to interviews with John Wilcox on Weaknesses in the Proxy Process and David Thornquist on Electronic Due Diligence in M&A. If you don’t subscribe, try the No-Risk Trial.

ISS’ Friday Report indicates the 61% withhold from 4 directors at Federated Department Sotres may have been the highest proportion of the season — and without an organized vote-no campaign. The result was probably a combination of ignoring previous majority votes on resolutions and the high proportion of institutional ownership. Subscribe.

CSR Academy, sponsored by UK Dept. of Trade and Industry, seeks partners for educational program. Contact[email protected].

Common thread to Ralph Ward’s Boardroom INSIDER this month… Boards are becoming more active in setting and approving the CEO’s strategy, in laying out the benchmarks of his performance, and making the job a truly “at will” position. Ward provides advice on defining the job, succession, and more.

Booz Allen Hamilton study of the world’s 2,500 largest publicly traded corporations finds companies that split CEO and Chairman roles have about 4-5% worse returns. Forced turnover of CEOs who were hired from outside the company reached striking levels in 2003; In North America, 55% of outsiders who left were forced to resign; in Europe, 70% left involuntarily. CEOs who had previously led other companies delivered returns for investors 3.7% per year lower than first-timers from inside the company. Get those succession plans ready! See summer 2004 issue ofstrategy+business magazine.

Tim Leech covers the Four Pillars of SOX 302, 404 and 906 in the 5/25 edition of Compliance Week. Companies must demonstrate conclusively that they have four “pillars” in place:
1. Macro Level Anti-Fraud Analysis;
2. Macro Level Assessment Against A Control Model;
3. Sufficiency Of IT General Controls; and
4. Reliable 10-K, 10-Q Accounts, Notes And Supplemental Disclosures.

A recent survey of more than 200 senior financial services executives by PricewaterhouseCoopers suggests that recent changes in corporate governance were driven by the desire to comply with regulations, rather than to improve institutions’ management tools, and that companies aren’t reaping the potential benefits. They “do not appear to have improved the quality of their dialogue with the stakeholders they picked out as critical — customers and shareholders and 43% did not regard their employees as critical stakeholders! See Accounting Today.

The Canadian Institute of Corporate Directors (ICD) is in the final stages of a central directors register that will be a one-stop shop for corporations and search firms looking for board members. If everything goes as planned, it should be up and running by Sept. 1.

Investigators have dismissed 80% of the 156 whistle-blower claims examined under Sarbanes-Oxley. Of 43 cases resolved on appeal, plaintiffs have prevailed only twice. According to Tamara Loomis, plaintiffs and their lawyers are still “testing the margins” by learning, for example, the statute does not apply retroactively. See Corporate Counsel, Whistle While You Work, 6/04.

More than 1/3 of S&P 500 companies are family controlled. See Corporate Board MemberThe Lucky Genes Club, 5-6/04.

A Time Magazine survey referenced by David Brooks in the New York Times (“The Triumph of Hope Over Self-Interest,” 12/03) may help to explain recent tax cuts.  The survey asked people if they are in the top 1% of earners.  Nineteen percent said they were.  A further 20% said they expected to be someday.  [Not only are all the inhabitants of Lake Wobegon above average – they are way, way above average.]

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