September 2004

Losing? Change the Rules

That appears to be the thinking of Sparton Corporation (SPA). The electronics-manufacturing company held a special meeting on 9/24/04 but when it didn’t get the results it wanted, they decided to abruptly adjourn and postpone the vote for three weeks “to permit the balance of unvoted shareowners to express their votes.” Imagine if federal or state officials decided to hold the polls open beyond their previously scheduled time because they didn’t like the results? Cries of outrage would be heard in every news venue. Yet, this lack of democracy in corporate elections has gotten virtually no coverage by the press.

I did see one article, “Sparton voting issue on hold,” in the 9/25/04 Jackson Citizen Patriot. Are corporate elections of such little consequence that how they are conducted is of little or no consequence to the larger society? Where is the outrage? If there was any doubt about Sparton’s commitment to good governance before this action, there can be no doubt now that changes are needed in both Sparton’s board and in the laws and regulations governing all corporate elections.

Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC, which owns more than 7 percent of Sparton’s common stock.

New Lens Fund Coming

Robert Monks and John Higgins, chief investment officer and chairman of Ram Trust Services, are shifting their focus. Instead to buying shares of poorly managed companies and pressing reform, Lens Governance Fund, will invest in well managed firms. Governance measures will be used as an additional layer of analysis, on top of price, earnings, sales momentum, business cycles and other common measures. Ideally, the fund wants to invest in low-priced stocks of well-managed companies and to short sell high-priced stocks of poorly run firms. They expect to set up a hedge fund in another year after getting more experience with the model using inside funds. (Investors use governance in portfolio, Portland Press Herald(Maine) 9/24/04)

Advise and Consent

In “Advise and Consent: An Alternative Mechanism for Shareholder Participation in the Nomination and Election of Corporate Directors,”Joseph A. Grundfest, Stanford Law professor.Grundfest argues we should look to Article II, Section 2, of the Constitution for answers to the current debate over shareholder access to the ballot. That provision preserves for the Executive the initiative to select cabinet members but guards against appointing unqualified cronies because of the requirement that a majority vote by the Senate is required for confirmation.

Instead of the SEC’s proposed weak rule that would make it easier for large shareholders to nominate a token number of directors if “triggering events” occur, Gundfest recommends that a number of disabilities attach to a director’s service if a majority of shareholders withhold their votes. Disabilities could include not being considered independent, limit indemnification of such directors, and otherwise dissuade them from serving. Delayed effective dates would allow time to “cure” the election by obtaining a minimum percentage of written consents from shareholders who previously withheld votes. Such cures might come by adopting governance reforms or nominating and electing new directors.

To support his argument that shareholders should be limited to identifying suboptimal governance, while incumbent boards and management resolve the problems identified, Grundfest cites examples, such as the case of Dick Grasso at the NYSE, William Webster at the PCAOB, and other CEO replacement.

Grundfest cites the following advantages of the advice and consent model.

  • Reduces probability of election being hijacked by shareholders with a special-interest agenda.
  • Reduces probability of divisive boards.
  • Eliminates need for SEC to define qualified nominees, triggering events and two-election cycle.
  • Would create a federally uniform system not dependent on varied state laws, which may prohibit direct nomination of directors by shareholders.
  • Reduces coordination costs of disaffected shareholders.

Grundfest also lists several disadvantages of his proposed advice and consent model.

  • Special interest agendas can have broad legitimate social support.
  • Shareholders may occasionally pick a preferred candidate that is superior to any compromise acceptable to the incumbent board.
  • No guarantee shareholder and management will reach a consensus.
  • Subset of shareholders that works out a deal may make only smallest possible concessions.

Critique. Grundfest’s idea is a creative compromise. However, his arguments require a real leap in logic. The President is elected by the people (via the electoral college), whereas boards of directors hire CEOs. The cabinet works for the President but the CEO is supposed to work for and be evaluated by the directors. Grundfest’s real world examples are of CEOs, not directors. Now if he wants to propose advise and consent for hiring CEOs, let’s talk.

Howard Dean Speaks Out

According to Howard Dean, if we want more and better jobs, a fair trade policy, better behavior by corporate leaders, more pay equity between those who work and those who lead and better corporate morals, we need to make that happen by doing the following:

  • Insist that Congress stop voting for trade agreements with no enforceable labor or environmental standards.
  • Government contracts should be preferentially given to real American companies, particularly defense contracts.
  • Create stronger federal enforcement of corporate accountability to shareholders.
  • Open the election process for directors of publicly owned corporations so investors can easily nominate and elect outside directors. Public ownership of companies should mean public majorities on the boards – in other words more outside directors that are not hand picked by CEOs.
  • Hold CEOs accountable for what they say. If pay packages for workers are determined by merit and by results, so should the pay packages of corporate leadership. Hypocrisy leads to disrespect, which undermines any organization.

Next Year’s Targets

The following top Fortune 500 companies are a potential focus for 2005 shareholder proposals according to John Chevedden. For links to further information, John Chevedden can be contacted

These companies have one or more of the following poor governance practices:

  • Poison pill
  • Staggered board
  • Super-majority vote

These companies were selected from the top 50 of the 2003 Fortune 500 companies. The Fortune 500 ranking precedes the company name. Shareholder proposals to reverse these practices often receive more than a 50% shareholder approval rate. This information has been provided by Mr. Chevedden and is believed to be correct and current.

7. ConocoPhillips (COP) – Poison pill, Staggered board
16. McKesson Corp (MCK) – Poison pill, Staggered board
17. Cardinal Health (CAH) – Staggered board
19. Kroger (KR) – Poison pill, Staggered board
21. Boeing (BA) – Staggered board
22. AmerisourceBergen (ABC) – Poison pill, Staggered board
23. Target (TGT) – Poison pill, Staggered board
27. Time Warner (TWX) – Super-majority vote
28. Procter & Gamble (PG) – Super-majority vote, Staggered board
29. Costco (COST) – Staggered board
31. Dell (DELL) – Poison pill
32. Sears – Staggered board
33. SBC Communications (SBC) – Super-majority vote
34. Valero Energy (VLO) – Poison pill, Staggered board, Super-majority vote
35. Marathon Oil (MRO) – Staggered board, Super-majority vote
36. MetLife (MET) – Staggered board, Super-majority vote
37. Safeway (SWY) – Staggered board
38. Albertson’s (ABS) – Poison pill, Staggered board, Super-majority vote
39. Morgan Stanely (MWD) – Poison pill, Staggered board, Super-majority vote
40. AT&T (T) – Super-majority vote
41. Medco Health Solutions (MHS) – Staggered board, Super-majority vote
43. J.C. Penney (JCP) – Poison pill, Staggered board, Super-majority vote
44. Dow Chemical (DOW) – Staggered board, Super-majority vote
45. Walgreen (WAG) – Poison pill, Super-majority vote
46. Microsoft (MSFT) – Super-majority vote
47. Allstate (ALL) – Super-majority vote
48. Lockheed Martin (LMT) – Super-majority vote
50. Lowe’s (LOW) – Poison pill, Staggered board, Super-majority vote

Governance Settlements Growing Trend

Applied Micro Circuits Corp. is the latest company to agree to corporate governance changes as part of an overall settlement of a shareholder lawsuit. After three years of negotiations, the company agreed to add two new independent directors to its board, a requirement that two-thirds of the board and all board committees be composed of truly independent directors and a separation of the positions of chairman and chief executive officer in order to ensure that these positions will be held by different individuals.

The September issue of Compliance Week carries an interesting article on Darren Robbins who also successfully completed deals that called for governance changes at more than a half-dozen companies, including Sprint, Occidental Petroleum, E-Trade, JDN Realty, Prison Realty and Hanover Compressor. (Lerach Coughlin’s Robbins Plays Hardball With Governance Weapon) Robbins works closely with Robert Monks, The Corporate Library and Richard Bennett to identify the source of each company’s governance failures. Lerach is currently litigating with Massey Energy over board independence and environmental failures.

Compliance Week subscribers can download the complaint against Applied Micro Circuits, as well as the Hanover Compressor complaint and settlement, which has become something of a model.

High Ratings Correlate

Twenty-six companies – 20 American, five Canadian, and one Australian – out of 2,588 global companies monitored by GovernanceMetrics International (GMI) received top corporate governance marks.  As a group, these companies outperformed the S&P 500 Index for each of the last one (4.9%), three (8.3%) and five year periods (10.0%), as of August 31, 2004. (See Good Governance Has Upside on Stock Price, 9/7/04,

Teslik To Leave CII

Sarah Ball Teslik is the new Chief Executive Officer of the Certified Financial Planner Board of Standards Inc. After serving for 16 years as the executive director of the powerful Council of Institutional Investors, Teslik will step into her new position at the CFP Board no later than January 1, 2005. (Head of Council of Institutional Investors is Named New CEO of CFP Board, 9/21/04,

CII said the petition Les Greenberg and I filed (Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors: SEC Rulemaking Petition File No. 4-461) “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” Teslik’s leadership was vital to moving CII’s forward on shareholder access to the proxy. I hope she will carry that issue with her to the CFP Board.

SEC Offers Guidance On Shareholder Proposals

On 9/15/04 the SEC’s Division of Corporation Finance published its third legal bulletin on the topic of shareholder proposals. The bulletin focuses primarily on parts of Rule 14a-8, which addresses when a company must include a shareholder’s proposal in its proxy statement. Companies can seek staff concurrence to modify or exclude statements where:

  • Statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation;
  • The company demonstrates objectively that a factual statement is materially false or misleading;
  • The resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires—this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result; and
  • Substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote.

Companies bear the burden of demonstrating that a proposal or statement may be excluded. (SEC Staff Updates Guidance On Shareholder Proposals, Complance Week, 9/21/04)

ISS Joins Opposition to Sparton

Institutional Shareholder Services, has joined Lawndale Capital Management, LLC and Glass Lewis & Co. in recommending against a Sparton Corp. (SPA) proposal at a special shareholder meeting to held on 9/24 to eliminate cumulative voting. Lawndale holds a 7.6% stake in Sparton, believes the ISS analysis is material information which should be provided to Sparton shareholders. Lawndale also noted that ISS’ analysis was critical of Sparton’s new shareholder communication policy, that Sparton’s corporate governance quotient rating was near the lower third of its peers. Lawndale said it may nominate its own director candidate at the annual meeting if the firm can’t resolve its corporate governance concerns. (Lawndale: ISS Recommends Voting Against One Sparton Proxy Proposals, DJ Newswires, 9/13/04)

In an era requiring improved governance and shareholder representation on corporate boards, Sparton’s call to remove cumulative voting rights from shareholders and tighten shareholder notice requirements for shareholders to nominate director candidates is the wrong move. 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. An amended 13D filing with the SEC can be found at real-time EDGAR providers or directly in SEC’s Edgar database.

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DC = Poor

survey by Mercer Investment Consulting finds defined contribution pension plans rising, but the rates of contribution are well below published estimates of the savings level needed for a comfortable retirement. Plan sponsors in both Canada and the US are increasingly offering a greater range of investment vehicles, most notably of which are “pre-mixed” funds that target risk through asset allocation and specific-year payouts through lifecycle funds. Some 63% of US plan sponsors now offer these types of vehicles, up from 25% in 2000. Only 45% of Canadian plan sponsors offer pre-mixed funds. (Mixed Up,, 9/15/04)

GAO and DOL: Opposing Views

The Government Accountability Office GAO) released a report in August that is getting a lot of buzz entitled Pension Plans: Additional Transparency and Other Actions Needed in Connection with Proxy Voting GAO-04-749, August 10, 2004.

Its recommendations are as follows: If the Congress wishes to better protect the interest of plan participants and increase the transparency of proxy voting practices by plan fiduciaries, it should amend ERISA to::

  • require fiduciaries develop and maintain written proxy-voting guidelines;
  • include language in voting guidelines on what actions the fiduciaries will take in the event of a conflict of interest; and
  • annually disclose votes as well as voting guidelines to plan participants, beneficiaries, and possibly also to the public.
  • give the Secretary of Labor the authority to assess monetary penalties against fiduciaries for failure to comply with applicable requirements.
  • amend ERISA to require that, at a minimum, an independent fiduciary be used when the fiduciary is required to cast a proxy vote on contested issues or make tender offer decisions in connection with company stock held in the company’s own pension plan.

The report also recommends the Assistant Secretary of the Employee Benefits Security Administration (EBSA):

  • conduct another enforcement study and/or take other appropriate action to more regularly assess the level of compliance by plan fiduciaries and external asset managers with proxy voting requirements. Such action should include examining votes, supporting analysis, and guidelines to determine whether fiduciaries are voting solely in the interest of participants and beneficiaries, and
  • enhance coordination of enforcement strategies in this area with the SEC.

I didn’t find anything earth-shaking in the recommendations. The GAO offered a reasoned incremental approach. However, what was amazing was DOL’s response to the report. It certainly got Robert AG Monks fired up. The former Administrator of the Office of Pension and Welfare Benefit Programs had the following to say:

The arguments are familiar to any first year law student: there is no problem; there is no reason to find out if there were problems; even if there were a problem DOL doesn’t have legal authority to deal with it; even if Congress provides the authority DOL should not investigate. Beyond all this, DOL looked into the problem in 1986. The whole world knows of the financial disaster for pensioners since then except for DOL which finds “…the diversion of needed resources to an enforcement study that we have no reason to believe will find significant non-compliance with ERISA would be an inappropriate use of resources.”

And there’s more at RAGM.COM. DOL may not have reason to believe they will find non-compliance, but we do. In DOL’s most recent report (issued in 1986), only 3 of the investment managers (out of 12) surveyed automatically reported votes to their clients. “The managers who did not send their reports indicated that few clients ever requested a written report.” Only 35% of the plans could provide evidence that they performed substantive monitoring of their delegated authority. Only one of the investment managers reviewed appeared to have been engaged in anything like prudent shareholder activism.

As I wrote on in 1996, “the incentive of earning higher returns does not appear to outweigh the fear many pension fund trustees probably have that such involvement (in active shareholder voting) will alienate the members of the corporate and political communities to which they often owe their positions.” DOL has still never taken an enforcement action for a pension fund that failed to vote in the interest of beneficiaries.

Yet, the head of the mutual fund industry’s main lobby group said he supported calls for pension funds to disclose how they cast their proxy votes. “If pension funds had to do this, it would eliminate some of the concerns the industry had about this,” Paul Schott Stevens, president of the Investment Company Institute told journalists in Boston, according to Reuters. If mutual funds have to report how they voted, why not pension funds? Maybe they will help force the issue.

Fighting Terrorism By Adopting the Tactics of Terrorists

Three cheers to Barry B. Burr of Pensions&Investments for his article “Misleading Methods” in the 9/6/04 edition of that vital publication. has long called on public pension funds to investigate their investments to ensure they are either minimizing investments in companies doing business in countries linked to terrorism or using their governance clout to make changes. However, we decry the reported tactics of the Center for Security Policy in Washington.

The Center’s mid-August report, “The Terrorism Investments of the 50 States,” was based on research gathered, at least in part, by Bryan Auchterlonie who identified himself as a graduate student when soliciting information from funds, instead of his connection to the Center. Burr’s article raises questions as to Mr. Auchterlonie’s student status, his employment status with the Center and more. According to Gary W. Findlay, of the Missouri State Employees Retirement System,

First we received a request for information from someone who maintains that he is “a graduate student at Johns Hopkins University studying socially responsible state and local pension investing.” We provide the information requested and excerpts from it are later presented in a report with a highly prejudicial title prepared by an alleged think tank.

The think tank shares a mailing addressed with an organization (Conflict Securities Advisory Group) that has been desperately attempting to market a product they maintain is useful in assessing terrorism risk in non-U.S. investments. Just before the CSP report is issued, a U.S. senator sends letters to the directors of the funds included in the CSP report, reminding them of the need to avoid investing in companies that may be supporting terrorism….When I was contacted by the CSAG about possibly subscribing to their service, they told me that they “are not arsonists who are in the fire extinguisher business” (their words not mine).

The story only gets worse and is well worth reading. The tactics of CSP and CSAG, who share the same office suite, certainly appear to undermine the credibility of their research and services. That’s too bad, especially given the importance of the subject.

Position Available: Sr. Research Associate, Corporate Governance

The Conference Board seeks a Senior Research Associate to design, conduct & present research studies on corporate governance & institutional investment trends for senior executivess at major U.S. and global companies. Requires a graduate degree in related field along with 5-7 years research experience, strong computer skills & an ability to work independently while being part of a research team. Salary $80,000 plus benefits package. Equal Opportunity Employer.  Contact Chris Plath ( at the The Conference Board’s Global Corporate Governance Research Center with resume and salary history.Founded in 1993 and now a core division of The Conference Board, the Governance Center is committed to helping corporations enhance their governance processes, inspire market confidence, and facilitate capital formation in today’s globally competitive marketplace.

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AFL-CIO Reports on Mutual Fund Voting

The AFL-CIO Report, Behind the Curtain: How the 10 Largest Mutual Fund Families Voted when Presented with 12 Opportunities to Curb CEO Pay Abuse in 2004, examines proxy vote reports by the nation’s mutual fund companies. Mutual fund companies reported on 8/31/04 for the first time how they cast their proxy votes at the public companies in which they invest on behalf of their mutual fund shareholders. Because mutual funds own 22% of all U.S. corporate stock, their proxy votes on such issues as CEO pay and director elections can be decisive. The scores ranged from a high of 100% for American Century to a low of 20% for Putnam.

Fidelity, the nation’s largest fund family and the most vocal opponent to proxy vote disclosure, ranked 9th out of 10, with a 25% score. Vanguard, the other leading opponent to proxy vote disclosure, ranked 2nd in the survey with a 75% score. Although the SEC rule does not require mutual funds to disclose business relationships with portfolio companies, research indicates that, of the 120 proxy voting decisions in this survey, 25 involved a mutual fund advisor that has a business relationship with the portfolio company. These widespread conflicts of interest not only underline the importance of transparent proxy voting by mutual funds, but also point to the need to enhance the SEC rule to require mutual fund advisors to disclose business relationships with portfolio companies. Key Findings:

  • When it comes to voting proxies on proposals involving CEO pay abuses, there is significant variation among fund families. The scores in our survey ranged from a high of 100% for American Century to a low of 20% for Putnam. Putnam was also the only fund that failed to cast a vote at a portfolio company included in this survey (Putnam did not vote on a CSX shareholder proposal to rein in golden parachutes or on any other issue subject to a vote at CSX’s 2004 annual meeting).
  • The survey results indicate that the SEC rule requiring mutual fund proxy vote disclosure appears to have had a significant impact on the voting practices of some fund families. In the 1990s, mutual funds reflexively voted with management, regardless of the best interests of their mutual fund investors. While this still appears to be the case at some fund families, others appear to be increasingly willing to oppose management when necessary to protect long-term shareholder value.
  • Fidelity, the nation’s largest fund family and the most vocal opponent to proxy vote disclosure, ranked 9th out of 10 in our survey with a 25% score. Fidelity voted against all eight shareholder proposals to rein in runaway CEO pay, but also opposed three of the four management proposals.
  • Vanguard, the other leading opponent to proxy vote disclosure, ranked 2nd in the survey with a 75% score. Vanguard was one of only two mutual fund families that voted against all four management proposals seeking excessive executive compensation (American Century was the other).
  • There was only one proposal for which all of the mutual fund families holding the stock voted in the same way. Nine fund families voted against a management proposal seeking to renew the Stock Incentive Plan at Broadcom (American Funds did not hold the stock). This is perhaps no surprise, since an overwhelming majority (89 percent) of Class A shares voted against the plan. As The New York Times observed about Broadcom, “just when you thought you had seen the most outrageous transfer of shareholder wealth to executives through stock options, along comes a company that tops them all.” Unfortunately, the proposal passed over the objection of outside shareholders because the company’s dual class stock structure gives insiders disproportionate voting power.
  • One shortcoming of the SEC rule is that it does not allow investors to determine whether a conflict of interest compromised their mutual fund’s proxy vote at a particular company, since the rule does not require mutual funds to disclose their business relationships with the portfolio companies. Research indicates that, of the 120 proxy voting decisions reported in this survey, 25 involved a mutual fund advisor that has a business relationship with the portfolio company. Fidelity maintained the most business relationships (8), followed by Capital Research and Management (as advisor to the American Funds) (5), and Vanguard (4).
  • These widespread conflicts of interest not only underline the importance of transparent proxy voting by mutual funds, but also point to the need to enhance the SEC rule to require mutual fund companies to disclose business relationships with portfolio companies.

Corporate Governance Key to Malaysian Plans

Prime Minister, Dato’ Seri Abdullah Haji Ahmad Badwi masterplan to make integrity the cornerstone of his administration includes corporate governance. (see Malaysia Launched The National Integrity Plan and The Malaysian Integrity Institute, ASRIA, 7/19/04) The plan outlined 5 objectives:

  1. To continuously and effectively combat and reduce incidence of corruption, malpractices and abuse of power;
  2. To enhance efficiency in the delivery system of the civil service and to reduce unnecessary bureaucracy;
  3. To improve corporate governance and business ethics;
  4. To strengthen the family institution; and
  5. To improve the quality of life and the well-being of the society.

US Tops Governance Survey

GovernanceMetrics International said its latest survey data on 2,588 global companies found that 26 companies receiving the highest score of 10.0 outperformed the Standard & Poor’s 500 stock index total return by 10% over the last five years.

Over a three-year period the companies outperformed by 8.3% and over one year they outperformed by 4.9%. The 26 companies included 20 American companies, five Canadian and one Australian. GMI said the companies also outperformed when measured against the Morgan Stanley Capital International World Index.

“This suggests a correlation between corporate governance practices and portfolio returns when measured across a number of variables and across a multi-year period,” GMI Chief Executive Gavin Anderson said in a statement.

Anderson said that U.S. companies as a group had improved ratings over the past two years, with the average rating rising to 7.2 from 6.5. He attributed the better showing in part to the Sarbanes-Oxley Act, a U.S. law that required a series of accounting and corporate governance reforms.

Comparing nations, U.S. companies had the highest overall average rating, 7.23. Canada was second with a 7.19 score, followed by the UK with a 7.12 rating and Australia with 6.73. Greek companies had the worst overall average rating, 2.93, followed by Japan, with 3.57.

Examples of the 26 companies with the highest rating included Eastman Kodak in the United States, Suncor Energy in Canada and Westpac Banking in Australia. (Study links governance and stock price, Reuters, 9/7/04)

Corporate Governance Law Courses Increase

The Wall Street Journal reported that “In recent years, business schools have added or revamped courses on ethics in response to the wave of corporate scandals. Now, law schools are getting into the game, particularly as third-year students who began studies shortly after Enron Inc.’s (ENRNQ) collapse seek instruction on the proper role of a corporate lawyer.” Demand is heavy at the following:

  • Tulane University
  • Seattle University
  • Duke University
  • Ave Maria School of Law in Ann Arbor, Michigan
  • Rutgers University School of Law at Camden
  • American University
  • Seattle University law school’s newly created Center on Corporations, Law & Society

We would be interested in hearing from students and these and other law schools. What’s good and what’s missing from your program? Any thoughts on recent developments? (At Law Schools, Students Flock To Governance Courses, 8/27/04)

Renewed Call for Corporate Disclosure of Political Contributions

The San Jose Mercury News has joined those calling on the SEC to require publicly traded companies to disclose all their contributions in corporate filings. “Last year, the Department of Labor required unions to provide more detailed disclosures about their political donations and lobbying activities. As a result, rank-and-file members know which politicians and causes are benefiting from their union dues. It’s a basic right that shareholders in America’s corporations ought to enjoy too.”

If you are a stockholder consider this, the Center for Responsive Politics says that in this election cycle alone, corporations have given more than $54 million to “527 organizations” like, Swift Boat Veterans for Truth, and others. Shouldn’t you know where your money is going? (see Stockholders are giving — but to whom? 9/5/04, editorial)

See Which Funds Contribute to Global Warming

The nonprofit Results For America will hold a live phone-based news conference on September 8, 2004 to unveil a powerful Web site at (viewable beginning 1:30 PM 9/8/04) where investors in America’s top 24 equity mutual funds can see if their funds are “endangered by financial risks associated with global warming.” The research data contained in Web site is provided by KLD Research & Analytics (KLD), “the country’s premier provider of third-party corporate social research.”

The Web site will display key KLD research findings on the largest holdings of Fidelity, Vanguard, American Funds, Dodge & Cox, and others.  The company-specific findings will show which top mutual fund holdings may put shareholder wealth in jeopardy due to global warming financial risks, as well as those companies that have taken progressive actions to deal with climate change issues.

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SEC Should Look to Europe

David F. Morrison’s editorial in the August issue of Insights:The Corporate and Securities Law Advisor reminds us that “In business, if not in our politics, America should have the open-mindedness to realize that the actions we take will have effects outside our borders, and that there are lessons to be learned from experience other than our own.” In “Shareholder Proxy Access — America Should Not Go It Alone Again,” Morrison joins those asking the SEC to delay its rule on shareholder access to the proxy for the nominating directors. However, Morrison’s plea is not for a perpetual delay, like the BRT, but is an intelligent call to study “real world experience in other countries, the optimal balance between that process, shareholder voting rules (majority versus plurality voting) and proxy access.”

Morrison notes recent changes – 1) stock exchange listing standards requiring a nominating committee composed entirely of independent directors and 2) SEC rules that require shareholders to be informed of the criteria the nominating committee uses to select candidates. “Reports are that nominating committees and shareholders are communicating, that there is a new dialogue and that the old system of the CEO dominated nomination process has been changed for good.” (Of course, one reason for this is the pending access rule.)

Unlike critics of shareholder access, Morrison suggests take a at Europe. The director nomination process in the US now assures a nomination process controlled by independent directors. (Although, as we have often seen, independence doesn’t preclude the CEO’s college roomates or golfing buddies.) In some European countries nominating committees are recommended, but neither the Combined Code in the United Kingdom, nor the Bouton report in France, recommend full independence. “The Bouton report in fact recommends that the CEO be actively involved in the work of the nominating committee.”

Plurality vs. Majority Voting.
Grundfest, Veasey and Millstein made quite a splash by recommending that instead of access to the proxy, directors should be elected by majority vote and that withhold votes should be counted as no votes. The UK has long had this approach. France, Germany and various other European jurisdictions are no different. “In each of the three countries, shareholders can vote for or against a nominee, and election requires that the yes votes outnumber the no votes.”

Proxy Access. Proxy access

  • “In the UK, 100 or more shareholders holding shares representing on average GBP 100 of paid in capital, or shareholders with 5 percent or more of the voting rights, can require a company to circulate a resolution for discussion at a shareholders’ meeting.
  • In France, shareholders holding a specified percentage of shares (which is calculated on a degressive scale and would approximate 1.4 percent of the share capital of a company with Euro 100 million of share capital) and certain qualified shareholders associations that have held their shares in registered form for two years and who hold 1 percent or more of the shares can send proposals to the board which must be included in the resolutions submitted to shareholder vote.
  • In Germany, shareholders can submit counter proposals to the company until two weeks before the date of the annual meeting.

In each of the three countries the shareholder proposals can include a nominee for a director.”

Morrison notes that “it is astounding that, in the avalanche of commentary and discussion that has been triggered by the proxy access proposal, the experience in other countries is given such short shrift,” being mentioned only twice during the full day of roundtable discussions.

Clearly, our adventure in Iraq must give us pause. Perhaps it is better to listen closely to our allies. If we can set similar standards, business, and perhaps politics, can be run more smoothly.

Cintas and Walden Settle Suit

Cintas (CTAS) dropped a controversial defamation lawsuit filed againstWalden Asset Management and Senior Vice President Tim Smith. When the lawsuit was first filed in January, it sent a chill through the activist investor community, including some board members of CalPERS, who feared it would open the floodgates for litigation against shareholders speaking their minds at company meetings.

As part of the settlement, Smith acknowledged that accusations that a Haitian vendor used by Cintas was a “poster child for sweatshops” apparently were not an accurate reflection of the situation at the facility. Smith, had relied on outside research. “As I am sure you can understand,” Smith wrote, “Walden is not in a position to monitor directly the workplace conditions of companies or their suppliers.”

As part of the settlement, Walden provided Cintas with a copy of materials containing the allegations, though officials would not describe the origin of the information.In his letter, Smith said he was “pleased to learn” that allegations he made about the facility “do not present an accurate profile of working conditions at this plant or of Cintas’ commitment to and compliance with its code of conduct and supplier monitoring program.”

By next Aug. 31, Cintas said it would post on its Web site a summary of supplier audits for the previous year, corrective actions requested by the company, supplier response and a summary of terminations because of noncompliance. (Cintas plans labor report on suppliers, The Cincinnati Enquirer, 9/3/04; Cintas Settles Defamation Lawsuit Vs. Walden Asset Mgmt, WSJ, 9/3/04)

U.S. Chamber Challenges SEC

The U.S. Chamber of Commerce on filed a lawsuit seeking to overturn the SEC’s rule requiring mutual fund boards of directors to have an independent chair. The rule also requires 75% of the directors to be independent. The rule takes effect Sept. 9, but funds have until December 2005 to comply. The suit was filed in both the District of Columbia’s U.S. District Court and U.S. Court of Appeals. The rule is/was(?) projected to knock about 80% of sitting chairmen off of the fund boards they lead. Trust the Chamber to speak out in favor of continuing conflicts of interest.

Virtual Meetings

Without little publicity, several states have joined Delaware to allow companies to hold their annual meetings solely online. In 2001, the Michigan Corporate Statute was amended to provide for shareholder meetings to be held “solely by means of remote communication” unless otherwise restricted by the articles or bylaws (see MCLA Sections 450.1405(3) and (4). Oklahoma also amended Section 1056 of its Corporations Code in 2001 to permit a meeting consisting solely of remote attendance. Both of these provisions are essentially the same as Section 211 of the Delaware General Corporation Law.

Maryland also now allows for meetings by remote communication, but with a twist. Maryland law provides that the board shall provide a physical place for a meeting of the shareholders at the request of a shareholder (see §2-503 Corporations and Association Article, Annotated Code of Maryland. In contrast, Delaware’s §211 gives the board sole discretion and doesn’t provide a right of shareholders to request a physical meeting site.

Highlighted by the fact that companies are required to disclosure the nature of director attendence at their meetings, holding a pure online meeting continues to be dangerous from an IR perspective. (Update on Ability to Hold Online Annual Meetings, Broc’s Daily Blog, 8/31/04, We need a national policy set down by the exchanges and the SEC, not this patch-work of state statutes.

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CEO Pay Linked to Outsourcing and Political Donations

CEOs at companies that outsource the most US jobs are rewarded with bigger paychecks, according to a new report, “Executive Excess 2004: Campaign Contributions, Outsourcing, Unexpensed Stock Options and Rising CEO Pay.”

Average CEO compensation at the 50 firms outsourcing the most service jobs increased by 46% in 2003, compared to a 9% average increase for all CEOs at the 365 large companies surveyed by Business Week.  Top outsourcers earned an average of $10.4 million in 2003, 28% more than the average CEO compensation of $8.1 million. From 2001 to 2003, the top 50 outsourcing CEOs earned $2.2 billion while sending an estimated 200,000 jobs overseas.

Political contributions also appear to pay off.  CEOs of the 69 companies that sponsored this summer’s Democratic and Republican National Conventions saw their pay jump 52% in 2003, far outpacing the 9% raise for the average large company CEO. Similarly, the 38 CEOs who have personally raised at least $100,000 for either the Bush or Kerry presidential campaigns earned an average of $15.2 million in 2003, 88% more than the average large company CEO.

One sign of the political clout of corporate leaders is the current effort in Congress to block new rules that would require corporations to report all stock option grants as expenses in their financial statements.  Current accounting rules have encouraged lavish options grants to executives.  The report calculates that corporations have claimed an estimated $3.9 billion in tax deductions related to stock options exercised by 350 leading CEOs since 1997.

After two years of narrowing, the CEO-to-worker wage gap is rising again. The CEO pay to worker pay ratio reached 301:1 in 2003, up from 282:1 in 2002.  If the minimum wage had increased as quickly as CEO pay since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.

One rationale for high CEO pay is that CEOs bear tremendous risks and responsibilities for their companies, yet the report found that CEOs are far more financially secure than those risking their lives in war.  Average CEO pay is 56 times more than the pay for a US Army general with 20 years experience ($144,932) and 634 times more than the pay for a starting U.S. soldier ($12,776).

The good news is that public pressure is beginning to have an impact. More investors than ever have demanded greater accountability from CEOs at shareholder meetings.  Richard Grasso, CEO of the New York Stock Exchange, was forced to resign due to public outrage over his $140 million pay package.  A number of companies and CEOs, including seven detailed in the report, have voluntarily supported fairer pay plans.  The report also includes recommendations on how tax and corporate governance regulations could be reformed to help narrow the pay gap.

“Executive Excess 2004” profiles the CEO pay practices and political contributions for the 15 companies that outsourced the most US service jobs: United Technologies, Citigroup, Oracle, Bank of America, Cognizant Technology Solutions, Morgan Stanley, Intuit, SBC Communications, Conseco, JP Morgan Chase, Sprint, Bank of New York, Time Warner, General Electric, and American Express.

Bank of America, for example, cut nearly 5,000 US jobs while outsourcing up to 1,100 jobs to India in 2003.  In July 2004, the firm announced that it planned to cut another 12,500 U.S. jobs in the next two years.  Meanwhile, CEO Kenneth Lewis received $37.9 million in compensation in 2003, nearly 110 percent more than in 2002. Bank of America’s PAC has made $576,319 in contributions in the 2003-2004 election cycle.

The outsourcing of service jobs to low-wage countries has further widened the pay gap between workers and their bosses.  Currently, the pay gap between U.S. CEOs and American call center workers is 400:1, while the gap between U.S. CEOs and Indian call center workers is 3,348:1.

While the authors do not assert a direct cause and effect relationship between outsourcing or political donations and higher pay, the correlations are troubling.The study was authored by Sarah Anderson, John Cavanagh, Chris Hartman, Scott Klinger, and Stacey Chan. “Executive Excess 2004” is the eleventh annual CEO pay study by the Institute for Policy Studies and United for a Fair Economy.  The Institute for Policy Studies is an independent center for progressive research and education in Washington, DC. United for a Fair Economy is a national organization based in Boston that spotlights growing economic inequality. The authors conclude with several excellent recommendations for change:

  • End the Tax Breaks for Excessive CEO Pay
    • Limit the deductibility of executive compensation that exceeds a certain multiple of average worker pay.
    • Eliminate the deductibility of executive pension, health, insurance and other perks not broadly available to other employees.
    • Require that options be expensed.
  • Give shareholders and workers more authority and more information on executive compensation.
    • Require shareholder approval of executive severance plans that exceed more than one year salary and bonus.
    • Give shareholders the right to nominate directors directly.
    • Institute European executive pay controls.
    • Tighten reporting requirements on executive pay.
  • The report also outlines a number of voluntary actions businesses have taken.
    • John Chambers, Cisco Systems, lowered his annual salary to $1 with no bonus when Cisco was facing layoffs of 8,500 employees. (Disclosure: the publisher of CorpGov.Net owns stock in Cisco)
    • Aaron Feuerstein, Malden Mills, kept workers on the payroll after their plant burned down and saw dramatic productivity increases after rebuilding.
    • John Mackey, Whole Foods Market, eschews executive-suite perks and limits his salary to no more than 14 times the pay of the average frontline employee. All employees can qualify for stock options, and 94% go to nonexecutive staff. (Disclosure: the publisher of CorpGov.Net owns stock in Whole Foods)
    • James Sinegal, Costco Wholesale, has a simple partition separating his work area from his co-workers. He fields his own incoming calls and receives $350,000 in salary, about eight and a half times as much as a fulltime checkout clerk and roughly double the salary of a Costco warehouse manager. (Disclosure: the publisher of CorpGov.Net owns stock in Costco)

For hard copies or to set up interviews with the co-authors, call 617-423-2148 x13 or e-mail

Sell Side Corporate Governance Analysis Moves Market

According to the Wall Street Journal, Goldman Sachs released a report titled “A Look Within Corporate Governance,” grading 14 technology companies. Companies that got poor marks from Goldman Sachs appear to have immediately moved to improve their disclosure practices. “The quick response to the Goldman report…has sparked debate over whether equity analysts should spend more time on corporate governance, a broad term that basically boils down to running an efficient, profitable business that’s accountable — and forthcoming — to investors.”

Goldman claims that 2/3s of companies cited in its report approached the firm’s analysts with plans for improved disclosure. Best scoring companies in the report were EMC, IBM, Dell, and Veritas. Lowest scoring firms were QLogic, Lexmark International, Sun Microsystems, Emulex, and Brocade Communications. Perhaps we will soon be talking about the “Goldman-Effect.” (On Governance, Wall Street May Carry Big Stick, 8/31/04)

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Other People’s Money Conference (update: cancelled)

Fiduciary responsibility may well be the missing link in modern day corporate governance practices, with so much wealth concentrated in the hands of so few Trustees, who nevertheless remain, with rare exception, passive owners.

In addition to a powerful slate of speakers that includes some of today’s most prominent and important thinkers on the subject, the OPM conference will immerse attendees in a challenging hypothetical case study that will serve to highlight and illuminate the key issues facings today’s Fund Managers and Trustees.

This looks like an excellent opportunity to network with others concerned with the fiduciary responsibilities and standards of pension fund managers/directors and mutual fund managers/directors in an intimate setting.

Have lunch with Ann L. Combs, Assistant Secretary of the Employee Benefits Security Administration, who heads an agency that oversees approximately 700,000 pension plans with nearly $5 trillion in assets and another 6 million health and welfare benefits plans. Have dinner with Sean Harrigan, President of CalPERS (California Public Employees’ Retirement System), the largest public pension fund in the US and one of the most important forces in advancing corporate governance for decades. Be entertained by Andy Borowitz, winner of two 2003 Dot Comedy Awards for Best Overall Humor and Best Satirical News. I loved his book, Who Moved My Soap?: The CEO’s Guide to Surviving in Prison.

October 6-8 in colorful Portland Maine, hosted by The Corporate Libraryand the University of Southern Maine School of BusinessLearn More.Register.

Labor Seminar

The US Department of Labor’s Employee Benefits Security Administration (EBSA) will hold its first seminars to assist employers, pension plan administrators, and other benefit professionals comply with federal employee benefits law. The one-day seminar will offer information and one-on-one help on how to utilize the Voluntary Fiduciary Correction Program (VFCP) to self-correct potential violations of the Employee Retirement Income Security Act (ERISA). The seminar will be held on September 20, 2004, at The Curtis Center in Philadelphia, and is open to employers, accountants, plan fiduciaries, third party administrators, attorneys, and anyone with concerns about their responsibilities in administering employee benefit plans. Reservations are on a first-come, first-served basis. For MORE information contact Gerald Weslosky of the EBSA Philadelphia office by phone at (215) 861-5318 by fax at (215) 861-5347, or e-mail to (, 8/31/04)

Failure to Disclose in Germany

Only nine of Germany’s top 30 listed firms disclose how much they pay, individually, their top executives, even though all 30 signed up two years ago to a corporate-governance code that strongly recommends such a pay breakdown. Brigitte Zypries, Germany’s justice minister, has threatened to put the requirement for individual disclosure into law if the big 30 firms do not comply by next summer. (Keeping stumm, 8/19/04, The Economist)

The Secret is Out

Your mutual funds have been voting against your best interest in many cases. As of now, they will have to think twice about doing so because they have to file form N-PX with the US Securities and Exchange Commission (SEC), disclosing how they voted the proxy ballots of the companies held in their portfolios. For all but a few SRI funds, this will be the first time they are revealing their proxy voting records. Try finding their voting policies though.

For coverage, see As Mutual Funds Prepare to Reveal Proxy Votes, Guideline Disclosure Acts as Acid Test,, 8/31/04); The right to know, Boston Globe, 8//31/04); Funds reveal their votes, San Francisco Chronicle, 8/31/04).

Open-end and closed-end fund advisors must file the new form N-PX annually with the SEC, detailing all of the votes made (and not made) over the past 12 months ending June 30. Investors can request the information and advisors must make it available. The easiest way to do so would be to post the information to their Web site, but many, including Vanguard, have not done so. The N-PX form requires advisors to give a brief description of each proposal for voting, the date of the meeting, whether the proposal was from management or a shareholder, and the fund’s vote or abstention. Funds must also include in each prospectus a statement of additional information regarding the policies, procedures and guidelines that fund management uses to vote these corporate proxies.

Now we need someone to compile all this data into an easily usable format that facilitates fund holder communications to fund advisors and managers.

Asian Business Dialogue on Corporate Governance 2004

The Asian Corporate Governance Association will hold its Fourth Annual Conference–the “Asian Business Dialogue on Corporate Governance 2004“–in Shanghai on Thursday, October 28, 2004.

The theme of this year’s event is “Strengthening Asian Capital Markets through Better Governance,” with a special focus on China. Topics to be discussed include:
1. SOE governance: the changing role of the state as dominant shareholder
2. Institutional investors: creating a catalyst for good governance in China
3. Independent directors: how to be effective in China
4. Privatisation and public offerings: instilling good governance early.

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