August 2004

ESOPs Beneficial

Nearly nine out of 10 (88%) companies said creating employee ownership through an ESOP (employee stockownership plan) was “a good decision that has helped the company.” Asked to quantify how the presence of an ESOP improved business performance, 65% of survey respondents indicated a better performance in 2003 relative to 2002, according to the Employee Ownership Foundation’s 13th Annual ESOP Economic Performance Survey.

Looking at other business measures, 70% of the survey sample indicated that revenue increased in 2003, compared to 30% indicating revenue did not increase.  Additionally, 64% indicated that profitability increased, while 36% indicated that profitability did not increase. “Time and time again, the results demonstrate creating employee-owned companies through ESOPs is good business,” said Foundation President, J. Michael Keeling.  “Creating more ownership by employees should be national policy.” The 2004 EPS was distributed to The ESOP Association’s approximately 1,300 company members in June 2004.  The results are based on approximately 375 responses.

Women Make Better Investors

Sex and the City: study shows that the female investor makes more profits than males.

• Women prefer sensible stocks that always provide reliable, if modest, returns. Men prefer more volatile stock, such as the technology stocks.
• Women create balanced portfolios spread across the market that will always give returns somewhere, as opposed to men, who tend to put all their eggs in one basket.
• Woman tend to research their investments carefully, rather than blindly follow hot tips picked up in male bonding circles.
• Women will often pick local companies, sometimes for sentimental reasons, but which will usually provide something in return.
• Women, more used than men to balancing domestic budgets and the cut and thrust of supermarket pricing, understand better the economics of the wider marketplace.

US studies have shown that women also tend to buy and hold longer than men, spending less on expenses.

Corporate Monitoring Project Proposals Gaining

The Corporate Monitoring Project’s proposals received their highest-ever level of shareowner support this year, as disclosed in recent 10-Q filings.

• Voting Leverage Proposal. Won average voting support of 8.2%, quite respectable for an innovative idea on its first time out. It appeared in the proxies of Visteon [VC] and Calpine [CPN].

• Proxy Advisor Proposal. Supported by 20.1% of shares voted at Oregon Steel [OS], breaking its previous record of 17.8%. At USEC [USU] it earned 8% of the vote, for an average this year of 14%, compared with a 6.7% average for previous years.

Mutual Fund Votes to Watch

Beginning on August 31st mutual funds are required to disclose their votes. “To help prepare investors for the new disclosure of fund voting practices, Pax World Funds, home to America’s first socially responsible mutual fund, issued the following list of five key shareholder resolution categories that investors should follow:

• Annual election of directors. Every member of a publicly traded company’s board of directors must stand for re-election. The two most popular approaches to this process are classified boards (with votes on individual directors every three years) and annual election. Directors are the shareholders’ representatives, acting on their behalf in meetings with management. If directors are standing for election each year, it increases their accountability. If a director is not doing his or her job, the individual can be removed more quickly under an annual-election system. This is an issue on which shareholder pressure can make a big difference. Consider the case of Avon: a shareholder resolution filed in 2003 asked for the board to be elected annually. Despite getting 80.5 percent backing from shareholders, management ignored the vote. In 2004, Pax World Funds co-filed the same resolution. Three days before annual meeting, Avon’s board changed course and decided to go with annual elections. Pax World Funds joined Walden Asset Management in withdrawing the resolution and declaring victory for its shareholders. Other recent votes were held at SBC Communications, Gillette Company, and Procter & Gamble.

• Separation of chairman of the board and CEO positions. The CEO is management’s top representative. The chairman of a board is supposed to be the ultimate shareholder representative. So, there is an inherent conflict of interest when the positions are combined. In some smaller corporations, it may be done effectively, but the larger the company, the greater the need for two different people in the jobs. This is an increasingly important and high-visibility issue when it comes to responsiveness to shareholder needs. In 2004, the most famous battle of this sort occurred at Disney, where dissident shareholders convinced the board to strip CEO Michael Eisner of his title of chairman. This division of duty recently also happened at Dell, but it is extremely rare in the absence of intense pressure from shareholders. Such resolutions have been considered recently at Long’s Drug Stores, General Electric, Citigroup, ExxonMobil, and Safeway.

• Risks associated with global warming. Experts agree that global warming is real and that means companies have to start dealing with a host of financial risks associated with climate change. Reinsurers already have indicated that they are not prepared to pay claims related to litigation concerning global warming. Recent regulatory and state legal actions – including carbon rules and lawsuits filed by state attorneys general – also create an uncertain situation in which companies that fail to adopt global warming strategies, including reduced use of fossil fuels, development of cleaner alternative energy sources, etc., put shareholder value at risk. ExxonMobil is just one of more than a dozen large and small energy industry companies that have faced such resolutions in recent years. In a major breakthrough this year, a number of leading U.S. utilities bowed to pressure from shareholders and agreed to take initial steps to address the impact of global warming on shareholders. Look for even wider support for global warming proxy resolutions in 2005 from state treasurers, pension fund managers and other institutional investors, as major players in the market demand. Major resolutions have been filed recently at Ford Motor, General Motors, American Electric Power, TXU, Xcel Energy, Cinergy Corporation, ExxonMobil, Southern Company, Anadarko Petroleum, Unocal, Apache Corporation, and Chubb Corporation.

• Independent auditors. Shareholders need an unbiased party to scrutinize and report on management’s books. With the rise of tax consulting, auditors now find that their loyalties are torn by competitive pressures. The guideline used by Pax World Funds is that if more than 25 percent of revenue from clients at an audit firm comes from non-audit activities, then the independence of the firm is suspect. Investors should be concerned about this issue because the absence of an independence auditor means an important check and balance on management is missing from the system. Resolutions calling for independent auditors have been filed recently at JP Morgan Chase, Lockheed Martin, and American Electric Power.

• Board diversity. The narrowing of perspectives in corporate America can lead to a “groupthink” atmosphere in which major opportunities are missed to avoid problems and to increase shareholder value. The reality is that there are far too few women and minorities represented on the boards of America’s corporations. The board of directors should reflect employees, shareholders, stakeholders and community in which the company is operating. Resolutions calling for enhanced board diversity have been filed recently at FMC Technologies, Danaher Corp, Grant Prideco, Kinder Morgan, North Fork Bancorporation, Skywest, Smith International and Werner Enterprises.

Disclosure of votes is likely to help the growth of socially responsible and corppporate governance funds.

Fiduciary Ranking of Mutual Funds

Morningstar Inc. has debuted a system for ranking mutual funds based on best governance practices. They are starting with 500 funds and will rate about 1,500 more funds in the coming months. Among top-ranked funds using the new fiduciary rating system are the Turner Small Cap Growth Fund, the Weitz Value Fund and the Third Avenue Small-Cap Value Fund.

Morningstar drew on data from public filings, a proprietary Morningstar survey and other research by fund analysts. The grades are meant to be used as a tool, along with other information available to fund investors in making such decisions.

The letter grade assigned to each fund is based on the fund’s score in five key areas.

• Regulatory Issues: They examine each firm’s record to determine if it has run afoul of regulators in the past three years. They look at the gravity of the allegations and the subsequent reforms undertaken. For example, while Strong and AllianceBernstein both get dinged for their role in the fund scandals, Morningstar thinks the latter has done a far better job of addressing its problems than Strong has. As such, AllianceBernstein scores higher than Strong on this factor.

• Board Quality: For far too long, fund boards have looked the other way as investment-management firms have launched lousy funds, hiked expenses, or left underperforming managers on the job. Morningstar thinks boards such as PBHG’s could be doing a better job, since they allowed expenses to be raised at  PBHG Clipper Focus PBFOX, despite sizable growth in assets. They are taking a close look at factors such as the number of funds that directors oversee, the relationships between directors and fund firms, and the performance of trustees in looking after fund shareholders’ interests. Morningstar also examines whether trustees are investing alongside fundholders. For example, all ICAP board members are paid in fund shares.

• Manager Incentives: Over the past few months, Morningstar has been asking fund companies to complete a survey detailing the structure of fund managers’ pay as well as the level of their investment in fund shares, since performance incentives can have a strong influence on the way a fund is run. A fund manager who is paid to beat an aggressive benchmark over a one-year period, for example, might be inclined to take much bigger risks than he or she otherwise would. Morningstar also give points to managers who invest in the funds they run. Managers who invest alongside fund shareholders are also more likely to pay much closer attention to issues like expenses and taxes than ones who do not. Morningstar doesn’t think it is a coincidence that firms like Longleaf Partners, which requires that all employees invest in Longleaf’s funds, have shown themselves protective of fund shareholders’ best interests.

• Expenses: The amount that a management company charges fund shareholders often speaks volumes about the priority the firm accords the interests of fund shareholders versus those of company stakeholders. Morningstar has recently been critical of fee hikes at Evergreen. How do a fund’s expenses stack up relative to its peers? Is the firm passing on economies of scale as it grows? The scoring for this factor is within category and within distribution channel because they want to compare apples to apples.

• Corporate Culture: Here, Morningstar looks for tangible evidence that a firm has a deep-rooted understanding of its role as a fiduciary. This is the most subjective component of the grade by virtue of the sheer number of factors that can influence the depth of a firm’s commitment to its fundholders. Analysts examine the quality of shareholder reports, a firm’s willingness to close funds at appropriate asset levels, and the pattern of new fund launches. Do fund companies place the long-term interests of fund shareholders front and center where they belong. Morningstar also looks at a firms’ usage of redemption fees and the ability to retain key personnel. Firms that embody these principles, such as Davis Advisors, score highly, while firms that fall short, such as Van Kampen, score poorly.

Next, they should rate funds based on their votes in corporate election…are they voting in the best interest of long-term shareholders?

Auditors Coming Forward

The Public Company Accounting Oversight Board, established by Congress two years ago to shore up investor confidence, has been receiving anonymous tips from current and former employees of corporations and accounting firms for months. The new system of online filing and a toll-free phone line is designed to be more “user-friendly” and enhance public awareness, said Claudius Modesti, the board’s director of investigations and enforcement. There may be a fair number of problems to report. William J. McDonough, the board’s chairman, told Congress in June that its limited inspections of the so-called Big Four accounting firms uncovered “significant” problems in their audits of companies’ books.

Next Step in Political Reform

California’s Treasurer, Phil Angelides, and CalPERS President, Sean Harrigan, are calling on the SEC to force companies to compile all political contributions by corporations into a single report and make it available to shareholders. Currently, companies report political contributions in separate reports to each state and federal elections office. By making the information more readily available, such contributions would be more open to shareholder scrutiny. Others endorsing the proposal are state treasurers of Oregon, Iowa, New York, Maine, Kentucky, North Carolina, Connecticut and Vermont, and the New York City comptroller. (CalPERS urges unified political-gift disclosure, Sacramento Bee, 8/26/04)

CA Will Seek Return of Money IF Generated by Evil Deeds: Independence Questioned

Computer Associates shareholders rejected a proposal to seek the return of millions of dollars paid to executives driven out of the company in the wake of an accounting scandal, according to preliminary figures. Cornish Hitchcock, representing proponent Amalgamated Bank’s Long View Collective Investment Fund, told those attending the annual meeting the proposal was based on the “simple principle” that “if you didn’t earn it, you shouldn’t keep it” and that “avoidance is not a good strategy.” According to a report in the Wall Street Journal, he was greeted with sustained applause. (CA Holders Vote Not to Seek Cash Of Ex-Executives , 8/26/04)

Chairman Lewis Ranieri told shareholders the board hadn’t yet made a decision but that CA would seek the money back if the board determined it was “generated by evil deeds.” That seems like too high of a standard.

“Independent director, ” Walter P. Schuetze, was paid $125,000 in “additional director fees” for “his extraordinary services in connection with the audit committee investigation concerning the company’s prior revenue recognition practices.” According to a recent article in the New York Times, Schuetze was a partner at KPMG for more than 20 years, then a chief accountant at the SEC. Before joining the CA board in 2002, he served as a consultant to the company on financial matters and received $100,584 in fees and expenses in fiscal 2002.

Last summer, with prosecutors investigating CA accounting practices, the company authorized the audit committee of its board to conduct an “independent investigation.”

The NYTimes article goes on to note, “Typically, when there is an internal investigation, a board hires independent experts to conduct it. Since Mr. Schuetze led the one at Computer Associates, he then, as chairman of the audit committee, had to review the adequacy of his own inquiry. That presents a potentially glaring conflict…Investors, meanwhile, are left to wonder if the independence that they need from their directors is the independence they are getting.” (Just a Friendly Group of ‘Independent’ Directors, 8/29/04)

In our opinion, “independent directors” should be nominated by shareholders.

Director Compensation Up 19%

Companies increased their total director compensation by 19% in 2003 (median total comp was $140,350) and paid more to lead directors ($27,160) and audit committee members (62%), according to a recent survey of director pay trends by Towers Perrin. Six percent of companies eliminated meeting fees in favor of a single cash retainer, while the number of companies paying board meeting payments decreased from 70% to 66%. Companies are decreasing their use of stock options, with only 54% of companies in the study using them in fiscal 2003 compared to 63% in fiscal 2002. Additionally, 12% of companies eliminated their annual stock option grant and 30% of companies increased the full-value share portion of their total annual/recurring stock. The percent of companies awarding restricted stock to their directors jumped six percentage points to 28%, with 68% of companies giving some form of full-value shares (restricted, common or deferred) to their directors in fiscal 2003 – up from 63% in 2002.

GovernanceMetrics Acquired

State Street Global Alliance, LLC, has acquired a minority interest in GovernanceMetrics International (GMI), a New York-based global corporate governance research and ratings firm that publishes corporate governance ratings on more than 2600 companies in 21 markets. State Street Global Alliance is a strategic venturing partnership jointly-owned by State Street Global Advisors (SSgA) and the Dutch pension fund ABP.

CalPERS Should Add An Ounce of Prevention By Surveying Members

CalPERS, the biggest pension fund in the US, should take a page from its own guidelines and open a dialogue with its members on large issues. This will ensure the board doesn’t stray too far from the will of its members, will help the Board solidify its base, and will better guard against political backlash.

As I wondered the halls of the Capitol in Sacramento during the recent budget crisis, I heard suggestions from several members of the Legislature that CalPERS had outlived its usefulness, that public employees should be weaned away from a defined benefit plan. Legislators were sure such an action would help the State balance its budget. They were little concerned with the fact that defined contribution plans don’t often provide adequate benefits or that they are not cost effective.

CalPERS has come under attack in the press from the Republican Party, the Business Roundtable, and the U.S. Chamber of Commerce for its corporate governance activism. They have charged that “It’s the Union, Stupid!” CalPERS’ corporate governance reform ideas are driven, by unions, according to its naysayers and CalPERS should be put down.

We have survived the latest budget crisis but, unless care is taken, the great power CalPERS wields can create a political backlash that could undo one of the greatest forces for working people in America and a dependable source for a dignified retirement for over one million members and beneficiaries.

Most members of the System applaud the Board’s activism and many of the stands they have taken to advance more democratic forms of corporate governance. Additionally, we are delighted that the System’s top performing portfolio during the past year was its investment in activist corporate governance funds, which earned 53.5%. However, just as CalPERS has acknowledged, in adopting its Governance Guidelines, that stimulating a healthy debate is important for the development of good corporate governance, a healthy debate could strengthen CalPERS itself. Let CalPERS, once again, set an example to be emulated by other pension funds and mutual funds by educating and dialoguing with its members.

Under “Shareholder Rights,” CalPERS’ Governance Guidelines indicate that:
• No board should enact nor amend a poison pill except with shareowner approval.
• All equity based compensation plans should be shareowner approved. All material changes to existing equity based compensation plans, including repricings of any form, should be shareowner approved.

The State Constitution requires directors to be responsible fiduciaries, focusing on good investment returns, not the personal aspirations of its directors. Given the 53.5% return CalPERS gained on active corporate governance funds last year, the Board should have no problem justifying its actions. However, an ounce of prevention wouldn’t hurt.

Just as CalPERS recommends that certain corporate governance changes should be put to the vote of shareholders, CalPERS itself should at least check in with its members from time to time, either with formal votes or informal surveys. If they had done so on several recent hot-button issues, they might be facing a loss hostile environment today. Additionally, by doing so, they educate members and set a positive example that could help move markets.

Let’s look at a few items that could have benefited by such attention. Prior to this proxy season CalPERS approved new proxy voting guidelines that included voting against any director who approved non-audit work by the company’s auditors. This is a common conflict of interest. Had the Board put this out for healthy debate among members, surely many would have asked about the consequences of such a position.

If they were told the policy would lead CalPERS to vote against directors at almost all of the roughly 1,800 companies in which it owned shares, the policy may have been reformulated. What about allowing only tax consultation non-audit work? How much would that have narrowed the field? Members are proud of the stands CalPERS has taken; but most would rather save their fund’s clout for battles it has a possibility of winning, instead of ceremoniously withholding votes from investment luminaries such as Warren Buffett.

Additionally, criticism of its attempt to oust Safeway’s Steven Burd might have been significantly muted if CalPERS had asked members if it should be withholding votes from the CEOs and directors of companies that have underperformed peers over the last several years, especially if they suffered substantial labor strife or other factors that mitigate against quick turnaround. (Safeway’s stock had declined 66% at a time when the average blue-chip stock was down about 17%.)

Since CalPERS recently voted to place more of its money in a modified index, the Board might have also asked members if they thought it was better to invest in the Wal-Mart model of severe cost cutting, including labor expenses, or to invest disproportionately in companies like Costco, which pay employees higher wages, have less turnover and sell more product per square foot of store space.

I’m convinced the vast majority of CalPERS members, who are union members themselves, would vote to support the Costco model, if the fundamentals are good. Such investments are likely to provide not only good returns to members as beneficiaries but also higher tax revenue to the State and possibly higher salaries to public employees while they are working. The Pension Welfare Benefits Administration, which regulates pension funds, has emphasized since 1988 that such collateral benefits may be considered, if the investment is otherwise “equal or superior to alternative investments available to the plan.”

Another issue I’d like to see surveyed on this short list would be expensing stock options. Nearly every activist US institutional investor favors proposed Financial Accounting Standards Board rules that would compel corporations to count stock options as an expense.

Expensing options can help tame runaway executive pay, usher in international accounting standards and bolster the integrity of financial reporting. Executive option grants dilute holdings. Boards often react to drops in stock price by lowering the exercise price of grants, thus severing the link between pay and performance. Pay inequality generated by options often leads to less cooperative work environments, higher turnover and lower product quality.

Yet, CalPERS remains silent on the issue, probably due to the need of ex-officio members of the Board to raise campaign contributions in Silicon Valley. While members can certainly appreciate the need for politicians to raise money, that individual need should not interfere with doing what’s right for the long-run. Board members have a fiduciary duty to support expensing stock options.

Such surveys can also be a means of educating members about the fact that CalPERS is a universal owner. As such, their fiduciary duty becomes not just one of monitoring individual firms but also portfolio-wide effects. Seen from the owner of just one firm, for example, externalizing costs onto society through pollution or minimizing health care to employees is consistent with wealth maximization.

However, a universal owner experiences the full impact of these societal costs on its portfolio and has a responsibility, derived from the duty of care, to oppose policies that create negative externalities. That’s why CalPERS must take an interest in acting as a “socially responsible investor.”

Increasing its dialogue with members on these major issues and others may just add an ounce of prevention when CalPERS directors are accused of putting their own political or personal considerations ahead of their fiduciary mandate. Of course, directors risk not getting the answers they want but reformulating a few policies will hone their skills and will ensure more wide-spread support. Having over a million members and beneficiaries supporting the Board’s actions can’t hurt.

CalPERS May Disclosure Proxy Discussions

Board members called for a study into a rule that would require public disclosure of talks between trustees and investment officers over proxy decisions. The move was sparked by state Controller Steve Westly, a former eBay executive, after questions arose about whether he had a role in the fund’s June proxy vote for an eBay stock option plan that gave 9% of the company’s stock options to its top five executives – a move inconsistent with a board policy that sets a 5% limit. Officials said Westly did not influence their decision.

State Treasurer Phil Angelides said he was dismayed by the position and wondered if their decision was influenced by outside sources. Westly said a disclosure policy would answer critics who contend CalPERS’ proxy decisions have been motivated by politics. “We need to bring more sunshine to CalPERS,” Westly said. “I want to make sure staff is doing the right thing without undue influence.”

A proposed policy could be ready for review in October. (Sacramento Bee, 8/17/04)

CalPERS Investments Get High Value for Dollars Spent

CalPERS added more value to its investment portfolio at less risk and at a lower cost than other large public pension funds over the five-year period that ended December 31, 2003. Cost Effectiveness Measurement, Inc. (CEM), an information and advisory company, reported that CalPERS saved $144 million compared with its peers by paying less for consulting, custodial, and active investment management services. It cost $413.2 million to run the pension fund’s portfolio in 2003, compared with a peer benchmark of $557.1 million.

“Vote No” Study Results

Do Board Members Pay Attention When Institutional Investors ‘Just Vote No’? by Diane Del Guercio, Laura Wallis, and Tracie Woidtke (August 2004), appears to have been motivated in part by the debate around the SEC’s proxy access rule (Security Holder Director Nominations, S7-19-03). According to a recent note from Del Guercio to the publisher, “what the debate seems to lack is large sample evidence on whether existing tools available to shareholders are sufficient in prodding boards to be accountable to shareholders.” The study examines 150 ‘vote no’ or ‘withhold the vote’ campaigns from 1990 to 2003.

They examined directly some of the assumptions behind common arguments of both proponents and critics of the rule change. For example, they examine whether vote no campaigns appear to be motivated by ‘special interests’ with agendas inconsistent with maximizing shareholder value. They found that vote no campaigns do not appear to be motivated by special interests, but rather, by poor prior performance and board resistance to shareholder proposals receiving majority shareholder vote support.

Additionally, they find that campaigns appear to be ineffective in eliciting pro-shareholder board and governance changes at target firms. In fact, we find evidence that these firms are more likely to add management friendly charter provisions and takeover defenses following a campaign. Overall, we conclude that shareholders require a more potent tool to prod resistant boards to respond.

Take-away for pension funds and unions (according to CorpGov.Net).

1. Since “vote no” targets subsequently add management entrenchment devices, they should be more selective in targeting.
2. Since proxy advisors got significantly higher votes in their campaigns (and also with proposals by others which they endorse) and since these campaigns resulted in the highest percentage of significant subsequent actions, CalPERS and others would be advised to negotiate endorsement by such advisors prior to going ahead.

Changes at Hermes

According a report in the Financial Times, Peter Butler and Steve Brown left their posts at Hermes Focus Asset Management (HFAM) after Hermes Pensions Management CEO Tony Watson decided to limit HFAM’s independence. Butler and Brown are the founding directors of HFAM.

Hermes, a high-profile corporate governance activist, often used its £40 billion of assets to lobby for boardroom changes.  Last year, HFAM’s First Focus fund grew by 48%. Butler and Brown are believed to be considering setting up a new fund management operation once the details of the departure are sorted out, according to FT.

Where’s Our MoveOn.org?

In a powerful essay (Politics and money: a volatile mix, Financial Times 8/9/04) Stephen Davis, of Davis Global Advisors, calls on shareowners to form “an investor-class version of MoveOn.org, the powerful, web-based mobiliser of grassroots political activism. Without it, director election reform is jammed at the SEC.”

According to Davis, “the only meaningful currency of federal politics, as any K Street lobbyist knows, is the ability to deliver one or both of two staples: votes or campaign contributions.” The Business Roundtable has delivered the money and “proxy access” is probably dead unless Kerry wins in November.

“The shareowner community has vast potential to rally votes or generate mass targeted contributions, since funds represent the interests of tens of millions of American citizen-savers. But the closest equivalent to the Business Roundtable is the Council of Institutional Investors, which has neither a mandate nor an ambition to serve as a populist tribune of the investor class. Instead, it is mainly a networking vehicle for fund officials.”

So where’s our MoveOn.org?

ProxyMatters.com allows shareholders to research and discuss pending proxy votes but doesn’t appear ready to take on the task of getting out political votes based on shareholder rights. The Social Investment Forumhas done a great job of rallying the SRI community to support proxy access by facilitating the composition and delivery of supporting e-mail and letters but they also appear unlikely to get out the vote for Kerry based on his endorsement of proxy access. Any nominations to embrace this task? Who is ready to start a corporate governance political action committee to run issue ads on bringing democracy to corporate elections?

Dalton to Head Indiana University’s Institute for Corporate Governance

BusinessWeek hail’s Dan Dalton as a “debunker of conventional wisdom” (A Different Kind Of Governance Guru, 8/9/04) because he suggests that many favored governance reforms don’t lead to better financial performance. What doesn’t work? According to Dalton:

• Separation of CEO and board chair
• Equity holdings by CEOs and directors
• Independent directors
• Small boards

Many of Dalton’s findings come as no surprise to many in the movement to improve corporate governance. “Independent directors,” as defined by the current rules aren’t really independent…they aren’t nominated and elected by shareholders and many owe their position to entrenched boards and managements.

Dalton’s real talent may be overstating the position of corporate governance advocates and then undercutting their supposed positions. For example, in Institutional Investor Activism: Follow the Leaders? (1996)Dalton appears to argue that a company’s financial performance is more important than its governance practices. No rational person would argue otherwise but that does not mean governance practices cannot make a difference.

Dalton’s research in the area has made a significant contribution to the ongoing debate. Although he sees no correlation between “independence” and performance, he does advocate that boards have their own resources and budgets to hire outside counsel. So, he obviously believes true independence can make a difference. We welcome Indiana University’s new Institute for Corporate Governance and look forward to providing information to our readers on their efforts.

Amalgamated Punches Holes in Golden Parachute

Corning Incorporated announced it will seek shareholder approval for future senior executive severance packages that exceed certain limits. The change was in response to a proposal brought by Amalgamated Bank’s LongView Collective Investment Fund, which won 65% of the votes cast at the April 29th annual meeting.

LongView’s proposal asked for shareholder review of future senior executive severance agreements, commonly known as “golden parachutes.” Corning’s compensation committee and board of directors adopted the policy on July 21, 2004. The shareholder review process will occur for any new senior executive severance agreement with benefits that exceed 2.99 times annual compensation of base salary plus bonus. LongView filed the proposal at Corning following the 2002 award of a $10 million severance package to a former CEO. Corning is the fifth company to adopt LongView’s parachute proposal since 2003. NSTAR adopted a reform prior to its annual shareholder meeting, prompting the Funds to withdraw the resolution. In 2003, Union Pacific, Sprint, and AK Steel adopted similar LongView proposals.

Sparton Does the Opposite

In an era requiring improved governance and shareholder representation on corporate boards, Sparton Corp. (N-SPA) has called a special meeting on short notice (record date 8/9/04) attempting to remove cumulative voting rights from shareholders and also to tighten shareholder notice requirements for shareholders to nominate director candidates. I urge readers to vote AGAINST these proposals.

Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC. Lawndale and its affiliates own over 7.5% of Sparton.

7/30/04 Preliminary Proxy for September 24, 2004 special meeting

Direct link to all Sparton filings