November 2004

Monks Pessimistic on Governance Reforms

In an interview published in the Nov-Dec/2004 issue of The Corporate Board, Robert A.G. Monks, probably the most influential corporate governance leader, expressed his opinion that most of the recent reforms, including Sarbanes-Oxley, have been “box-ticking.” “Genuine change has been persistently obstructed.”

Pressed on Sarbanes-Oxley, Monks did admit it contained two provisions that may turn out to have been important:

  • Whistleblower provisions – A corporate system that conforms to the public must allow “conscientious people” to “invoke cases of abuse without losing their jobs, or facing endless litigation. Under state (corporation) law, that would have never happened.”
  • Audit certification provisions – Companies must now certify statements “fairly represent the financial condition of the company.” According to Monks, they “can no longer simply bully the auditor to accept the numbers – they have to put their necks on the line.”

Regarding the SEC’s proposal to allow shareholders to nominate board candidates, Monks indicated it represented merely the appearance of change because “there has never been a set of circumstances where anybody could comply with the Donaldson proposal.” In frustration, he said that “In every other country, shareholders have an absolute right to call a special meeting of the shareholders, and a majority can discharge any director with or without cause.”

He sees more Enrons and WorldComs as the price we must pay for a “corporatist government” and believes it will change only when those controlling businesses want it to. “Governance reform is like psychotherapy — the patient cannot do it involuntarily.” (Robert A.G. Monks: Turning of the Governance Tide?)

A recent commentary by Michael J. Mandel predicts that “if the current rate of expansion continues, in a mere 10 years China will be the largest economy, followed by the U.S. and India.” (Does if Matter if China Catches up to the U.S.?, BusinessWeek, 12/6/04) Perhaps when that time draws near, corporate CEOs will see the need for greater democracy in American businesses.

It seems more likely that businesses chartered in Delaware increasingly recoginize themselves to be international, not American. As such, many are already in perfect harmony with China’s current form of governance. Cynicism, corruption, and repression abound. Corruption and conflicts of interest undercut our ability to reform governance in either system or even fund basic public services. Institutional mechanisms for resolving corruption and conflicts of interest (such as lawsuits, the press, and government bureaucracies) are increasingly restricted, co-opted, inaccessible, unresponsive, and inadequate. What form will growing resentment and frustration take?

New Corpgov Indexes

The 11/15/04 edition of Pensions & Investments reported that Institutional Shareholder Services and Glass, Lewis & Company plan to launch rival corporate governance indexes soon.

ISS teamed with FTSE Group to create the FTSE ISS Corporate Governance index series covering 4,000 stocks based on FTSE’s governance rating and weighting. Their advisory committee will be chaired by William Crist, a professor at California State University (Stanislaus) and former chair of CalPERS.

Glass Lewis collaborated with Lucian Bebchuk, Alma Cohen and Allen Ferrell of Harvard to create the Glass Lewis Shareholder Rights index (see “Recent Announcements”), which will overweight companies in the S&P 500 with good corporate governance and underweight those with poor governance. (Corporate governance gets place with indexes)

We expect funds based on both indexes to outperform over the long run and believe their experience will be critical in determining just which corporate governance practices best correlate with long-term value.

CalPERS to Fight for Wide Adoption of California Emissions Standards

CalPERS Board President Sean Harrigan and California Controller Steve Westly have written a letter to the board urging it to use its financial clout in order to major auto makers to drop their threat to fight a new California rule forcing the auto industry to build vehicles that emit about 30% lower global-warming emissions by 2016, according to the Wall Street Journal (Calpers to Be Asked to Push Car Makers on Emissions, 11/22/04).

The state’s new emissions standards aim to curb auto emissions of gases such as carbon dioxide. Several Northeastern states, as well as Canada, are considering similar moves.

The letter is aimed specifically at the Alliance of Automobile Manufacturers, a large Washington-based trade group that includes General Motors, Ford Motors, DaimlerChrysler, Toyota, Volkswagen, BMW, Mitsubishi, Porsche and Mazda. CalPERS has over $838 million invested in these companies. The group has argued that the measure would raise the price of automobiles while not actually offsetting worldwide emissions. It also argues that only the federal government has the power to regulate emissions, and thus California is overstepping its bounds. 

If the auto makers don’t accede to the California rule, CalPERS “should prepare to aggressively engage companies on this issue, including enlisting other investors in our efforts and pursuing proxy battles,” Westly and Harrigan write in their letter.

We urge CalPERS to press the issue. What good are earnings from auto companies if global warming creates an environment where insurance rates go through the roof and the world becomes less hospitable? For more on climate risk, see the Investor Network on Climate Risk (INCR).

SRI Dispute Hits Wider Press

Paul Hawken, one of the most respected members of the sustainability movement criticized the socially responsible investment industry. “Either the industry has to reform in toto (or rename itself), or that portion of the industry that wants to maintain credibility must break off from the pretenders and create an association with real standards, enforceability and transparency,” said the Natural Capital Institute (NCI). When Wal-Mart, McDonald’s, Pfizer, and Microsoft are all deemed socially responsible, who’s left to screen out? See Socially Responsible Investing: How the SRI industry has failed to respond to people who want to invest with conscience and what can be done to change it.

But what about all those shareholder resolutions and all their contributions to corporate governance? These disputes have been common within the SRI community for years. Now with “Has social investing lost its way?” appearing in The Christian Science Monitor (11/15/04), the dirty laundry is out.

Wider discussion of the issues will lead to better disclosure. Some funds will hold the best environmental performers in each sector. Others will hold 10% in bad actors so they can try to reform them and 25% in microcaps to bet on the future. Let a thousand flowers bloom.

Then we’ll need a rating service, like Morningstar, to help us sort out the differences, not just risk and return but how they are helping. SRI is maturing. We hope to see the day when all funds are SRI. Then disputes can be all about which strategies are most effective in generating wealth in a way that is sustainable for the enviornment and brings dignity to the human endeavor.

Russian Progress Slow

Russian companies have made little progress in improving corporate governance in recent years due in part to a weak judiciary and instability in ownership rights aggravated by the Yukos affair, according to Standard and Poor’s.

An OECD/World Bank report released in 2002 set out 40 recommendations for improving corporate governance in Russia. Of those, “no progress was observed on 17, little progress on 14, some progress on eight and major progress on only one,” Standard and Poor’s said. (Paltry progress in Russian corporate governance, Business Day Newsletters, 11/11/04)

Sarbanes-Oxley Impact

The annual review of board practices by Korn/Ferry finds Sarbanes has had a significant impact. Two years ago, only 41% of American firms said they regularly held meetings of directors without their CEO present; this year the figure was 93%. Yet, progress has been slow in other areas:

  • Separate CEO/Chair. 14% in 2002; 23% in 2004.
  • Staggered Boards. 63% in 2001; 60% in 2003.

According to the Economist, “Anyone who expected the scandals of 2001 to bring about rapid change in the balance of power between managers and owners was, at best, naive.” (Staggering: Things are slow to change in America’s boardrooms, 11/11/04)

Dividing Roles Pays

Merrill Lynch’s Richard Bernstein examined the returns of the 100 largest stocks in the S&P 500 based on market capitalization from 1994 through the second quarter of this year. The portfolio was rebalanced every quarter over the decade. Companies that split the two top executive jobs made up about a fifth of the sample. Those a “split” strategy had average returns of 22% vs 18% for stocks with a single chairman and CEO. The strategy paid off even more for tech stocks. (Outperform with split leadership, The Record, 10/25/04)

During the 2004 proxy season, investors submitted 40 independent chair resolutions, according to ISS data. While no resolution received a majority vote, those proposals received at least 35% of the vote at Allergan Inc., J.P. Morgan Chase & Co., Kroger Co., Louisiana Pacific Corp., PG&E Corp., Sempra Energy, United Technologies Corp. and Verizon Communications Inc. Look for more resolutions in the upcoming proxy season to split roles. (Independent Board Chairs Remain a “Priority,” ISS Friday Report, 10/11/04)

While many CEOs worry that giving up the chairmanship will limit their power, Jack Creighton, currently vice chairman of Unocal, believes that the separation of the two roles offers chief executives tangible advantages: time, valuable advice, and freedom from the need to run meetings, to name just a few. (Splitting chairs: Should CEOs give up the chairman’s role?, McKinsey Quarterly, 11/11/04) How to separate the roles of chairman and CEO

Majority Rules

During the recent International Corporate Governance Networkconference Delaware Vice Chancellor Stephen Lamb recently told institutional investors that Delaware law allows shareholders to enact bylaws requiring majority votes in director elections.

During the 2004 proxy season, shareholders introduced resolutions calling for affirmative majority elections at ChevronTexaco and Bristol-Myers Squibb. ISS opposed the measures, in part, because they could “diminish the likelihood of a successful open access campaign by providing for an increased vote requirement in the election of directors.

With Bush’s reelection and the likelihood that Donaldson will be leaving the SEC, many view the majority vote approach as a possible compromise to open access. The primary proponent of majority voting is Joseph Grundfest, a Stanford law professor and former SEC commissioner. In acomment letter to the SEC, he urged majority voting as an alternative to the proxy access proposal.

Ann Yerger, deputy director of the Council of Institutional Investors, told The Friday Report, “Access reform should be supplemented, but not replaced.” While majority voting would allow investors “to get rid of directors they are dissatisfied with,” it does not alleviate the significant cost and difficulties that investors now face in trying to promote their own directors though a proxy contest.

Richard Ferlauto, director of investment policy at AFSCME, said his pension fund doesn’t plan to introduce any majority-voting resolutions as it files director-nomination proposals at dozens of companies. “We think it is very important that shareholders have the right to nominate directors,” he told The Friday Report. (Majority Elections Proposal Gains Renewed Interest, ISS Friday Report)

We, at CorpGov.Net, believe the SEC’s open access rule is already so compromised that enactment would represent only minor progress. However, it would be a step in the right direction. We should not be sidelined by the majority vote issue, which can be taken up individually at each company and requires no rule change. Sure, Watchdogs Fear Red-State Rollback, but we won’t be going to sleep, just strategizing for the next round. If we have to wait four more years, maybe the changes will be that much greater when they come.

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Shamrock Governance Fund LP

Shamrock Holdings Inc., which manages investments for Roy Disney’s family, set up a new corporate governance fund, according to news reports and documents filed with the SEC.

The new fund, based at Roy Disney’s office in Burbank, Calif., filed with the SEC on Oct. 21 under the name Shamrock Governance Fund LP. The filing described the fund as a private partnership “formed to make equity and equity-related investments in the U.S.” The fund said it hopes to attract as much as $1.25 billion and has received $220 million from five investors so far. It is expected the fund will invest in troubled companies and will try to boost performance by pushing for improved management and board oversight. (Roy Disney builds fund on Eisner fight, Bloomberg News, 11/11/04)

CalSTRS Says No to Torture

California’s Controller Steve Westly, a CalSTRS trustee, called on the giant pension fund to ban investing in companies that suborn torture or hide their employees’ role in it. The measure was adopted and sent a clear signal to defense contractor CACI International Inc. A U.S. Army report in August found that three CACI employees working as prison interrogators were involved in prisoner abuses at Abu Ghraib prison. (CalSTRS takes anti-torture stand, Sacramento Bee, 11/5/04)

Bloated CEO Pay

California’s Treasurer Phil Angelides warned four U.S. companies, “It’s time to stop the big egregious payouts to executives.” “Too often we see executives pulling down big pay packages while their (company) stock is going down.” Angelides, a likely candidate for governor in 2006, its on the boards of both CalPERS and CalSTRS, which have combined assets of $286 billion. Together, the funds own about 1% of outstanding shares in four targeted companies:

  • UnitedGlobalCom Inc., a Denver broadcasting and cable television company with extensive overseas operations. Last year, the top five executives received $42.5 million in compensation and 89% of the company’s stock options. The company’s stock is down 11.9% over the past five years.
  • UnumProvident of Chattanooga, Tenn., paid $28.4 million and issued 83% of options to executives. The stock is down nearly 70%.
  • AES Corp., a utility based in Arlington, Va. It paid $9.7 million to top executives and issued 62% of equity options to them. Share prices are off 60.2%.
  • Omnicare Inc., a pharmaceutical supplier based in Covington, Ky., which paid $42.8 million to executives and gave them 59% of options. While the stock has risen 19% in the past five years, it has trailed competitors by 52%.

As we have reported before, executive pay is likely to be among the biggest issues during the coming proxy season. (Angelides warns 4 firms to curb CEO pay, Sacramento Bee, 11/10/04)

“Independent directors are the cornerstones of corporate governance. But excessive remunerations paid to them has made a mockery of their independence. An analysis of 2004 compensation data showed independent directors of top 200 companies are being paid £97000 for barely 7 days work in a year. Would you expect such directors to give independent and unbiased advice?” asked Dr Madhav Mehra in his keynote address at the ASEAN Round Table 2004 organised by Singapore’s prestigious Institute of South East Asian Studies. (Keynote address by Dr Madhav Mehra at the ASEAN Round Table 2004)

Benchmarks On The Way

The Open Compliance and Ethics Group, a nonprofit focused on providing universal guidelines for integrated compliance and ethics programs, announced it would administer an extensive benchmarking study regarding corporate governance, compliance, and ethics programs. The study will analyzing over 125 attributes, including organizational structure, processes, program metrics, planning, and budgeting information. Once released, the survey will enable companies to compare their own practices to industry standards. (Comparables Hard To Find, But That May Change, Compliance Week, 11/9/04)

The OCEEG is headed by Scott L. Mitchell and its advisory board includes an impressive list of senior leaders from the corporate and academic communities. The OCEG draft Framework is designed to enhance organizational value by providing universal guidelines for integrated compliance and ethics programs that:

  • enhance the integrity and ethical culture of an organization
  • incorporate effective governance, compliance, risk management, and integrity into all business practices
  • measure effectiveness and performance both internally and against an objective, external benchmark

The guidelines address the full lifecycle of planning, implementing, managing, evaluating, and improving integrated compliance and ethics programs. By establishing guidelines, rather than standards, OCEG provides a tool for each company to use as it sees fit, given its size, scope, structure, industry and other factors that create individualized needs.

National Green Pages

Co-op America’s National Green Pages has just been released. Billed as “America’s premier directory of qualified green companies — companies with demonstrated commitments to social and environmental responsibility,” all companies in the Green Pages have been screened and approved by Co-op America as operating in ways that solve — rather than cause — environmental and social problems. These business adopt principles, policies and practices that improve the quality of life for their customers, employees, communities, and the planet.

This is an important source of information to locate resources such as theSocial Investment Forum, which focuses on national policy issues that strengthen shareholder rights and empower socially responsible investors. The program also serves as a clearinghouse and networking hub on social shareholder advocacy, and works to protect the shareholder resolution process as an effective tool for corporate accountability. The program educates and mobilizes financial professionals and investors around key SRI policy initiatives, offers an active listserv for shareholder and SRI policy advocates, and alerts investors to emerging regulatory issues.

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Launched: Amsterdam Research Centre for Corporate Governance Regulation

ARCCGOR is located within the Department of Political Science at the Vrije Universiteit Amsterdam (Free University Amsterdam). The Research Centre provides a forum for academic interaction between scholars from various institutions and should enhance the visibility of research on corporate governance regulation to the wider public.

Three PhD projects seek to explain the current transformations of corporate governance regulation from a political economy perspective. The 3 projects focus on:

  • The transformation of corporate governance regulation in the European Union.
  • The effects of external factors on the development of corporate governance structures in Central and Eastern Europe.
  • The global regulation of corporate governance standards by private actors and in particular the latter’s role in setting accounting standards.

De-Stagger: Raytheon Says Yes, Boeing Says No

From activist John Chevedden:

At approximately the same time that a Raytheon November 2, 2004 press release announced that Raytheon would take steps to de-stagger its board (one-year term for all directors), Boeing said it would not de-stagger its board in a November 1, 2004 letter.

The Boeing announcement followed 4 majority shareholder votes supporting this topic.

Year Rate of Support (based on yes and no votes cast)
1999 51%
2002 50.5%
2003 56%
2004 59%

The Council of Institutional investors recommends adoption of any shareholder proposal which wins but one majority shareholder vote. Boeing apparently feels that 4-times this threshold is not enough.

World Bank Debunking Myths

Myth 1: Poor countries are necessarily corrupt, while the rich world is a model of integrity. This Myth, in turn is linked to the following related myths:

Myth 1a: For a transaction to be corrupt, it necessarily ought to be illegal.
Myth 1b: The measurement of corruption ought to focus on the extent of bribery, in the public sector.
Myth 1c: Multinationals headquartered in rich OECD countries do not bribe abroad.

In the governance chapter of the just released Global Competitiveness Report of the World Economic Forum, these notions are challenged. Based on a very recent enterprise survey of 8,000 firms in over 100 countries, it addresses a number of governance challenges afflicting not just emerging economies, but wealthier countries as well. It extends the conventional measures of corruption to also measure the prevalence of ‘legal corruption’ (challenging the common focus on merely equating corruption with illegality and/or bribery). On this new measure, some rich countries appear to be rather challenged, rating below the tigers of East Asia, for instance. Further, the current conventional wisdom on practices of multinationals abroad is also challenged.
These findings have implications for defining, measuring, and interpreting corruption indices, as well as for the importance of complementing particular legal initiatives (such as adoptions of international conventions) with concrete follow-through mechanisms.

The new work is entitled “Corruption, Governance and Security: Challenges for the Rich Countries and the World.” Reactions and feedback welcome, as well as suggested additional ‘Myths’ for this series.

CorpGov Job Opening

F&C is looking to recruit a senior corporate governance specialist to join its 13 strong Corporate Governance and SRI team. The successful applicant would be responsible for implementing F&C’s voting and engagement policy with respect to governance and SRI across global holdings. Key priorities would be corporate governance voting, company consultations and reporting to clients. Interested parties should send a CV to by 12th November 2004.

F&C is also looking to recruit an Analyst for a corporate governance voting and SRI research role. The ideal candidate will have two years relevant work experience and strong skills in research, analysis and the written word. Fluency in one or more foreign languages is an additional advantage. For a full job description and details of the application procedure, please e-mail by 22nd November.

Both positions are based in London.

F&C Asset Management is an institutional asset management company based in London, United Kingdom, with offices in Amsterdam, Boston, Dublin, Edinburgh, Frankfurt, Lisbon and Paris. F&C serves the insurance, pension fund and retail markets and manages approximately £118 billion (as at 31/08/04).

The Best Defense

The best defense may be a good offense. Following recent news reports about directors and officers at large companies having questionable conflicts of interests, Mark Anson, Chief Investment Officer, sent a letter to Fortune 100 CEOs asking for the following specific information:

The name of any entity in which any present director or member of senior management has an economic interest that has done any business with the company;

The nature of the business relationship; and

Any policies or procedures that the company has in place governing these transactions.

Conflicts of interest can affect decision making and threaten shareowners interests and the long-term viability of public corporations,” said Anson. “Corporate directors and senior management have a duty of loyalty to the corporations they serve. Personal economic interests of a director or senior management should not influence in any way their corporate decisions.”

Donaldson’s Legacy

SEC Chairman William H. Donaldson has been a true reformer. He took the reigns of a demoralized agency in February 2003, after the well-publicized resignation of Harvey Pitt amid political controversy. Under his leadership, the SEC has hired hundreds of new accountants and attorneys, with more still being added.

Donaldson’s legacy to date includes four dozen rules on issues ranging from mutual fund governance and disclosure to requiring hedge funds to open their books to the SEC. Now that Bush has been reelected, the question remains, will he finish the job?

His most far-reaching proposal clearly was the Security Holder Director Nominations, S7-19-03, which the Business Roundtable, the U.S. Chamber of Commerce, and the administration oppose and just about all investors support. On 11/8/04 Donaldson will give a speech entitled “The New Imperative for Good Governance” at the CEO Track and CEO Summit. Will shareholder access to the corporate proxy for the purpose of nominating directors still be the new imperative…or will it be a quick resignation? One simple vote could finally move the rights of shareholders forward on this most important issue, originally raised by the SEC in 1942.

According to a report in the Washington Post,

Among the arguments for quick action is the makeup of the SEC itself. The term of Democrat Harvey J. Goldschmid, one of the strongest voices for shareholder reform at the SEC, expired months ago. Officials at Columbia University, where he has long taught, have said they expect him back in the classroom no later than August 2005.

Friends say it is unlikely that Goldschmid would agree to forfeit his tenured position at the law school to remain at the SEC past that date, unless he were to become the agency’s chairman — which is no longer an option with Sen. John F. Kerry’s presidential election loss. Presidents traditionally appoint a chairman from their own party.

“It’s absolutely critical for us to get it done before [Goldschmid] leaves, because he’s been the voice of reason,” said Patricia K. Macht, a spokeswoman for the California Public Employees’ Retirement System, which supports the director-nomination proposal. “I couldn’t think of any rational reason why this issue should be strung out for another 12 months, or even another nine months.” (Election Puts Time Crunch on SEC, 11/4/04)

Speculation is rising; see, for example, Will There Be a Shift at the SEC?(Los Angeles Times, 11/4/04) The consensus is that “Bush’s reelection and the prospect of a more business-friendly successor to Donaldson suggest a drift back to the SEC’s pre-Enron agenda, with a focus on less-controversial reforms, such as streamlining disclosure requirements.”

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New Proxy Service: Backbone?

PROXY Governance, a wholly-owned subsidiary of FOLIOfn, says it will be fully operational by 1/1/05, for the 2005 proxy season. Initially, it will provide proxy recommendations and voting services for approximately 700 companies, including all the S&P 500 and all publicly-traded companies in the Fortune 500, accounting for more than 85% of total U.S. equity market capitalization. For the 2006 season, PROXY Governance will expand its coverage to include all companies in the Russell 3000 Index.

Instead of reviewing proxies and recommending votes on an issue-by-issue basis (one-size-fits-all), PROXY Governance will conduct its analysis and provide recommendations on an “issue-by-company” basis. It will view proxy issues in the context of company-specific factors, taking into account various factors, such as an individual company’s financial performance relative to its industry, its business environment, the strength of its management and corporate strategy, and the quality of its corporate governance, among other factors. PROXY Governance believes this approach is most effective in supporting the growth of corporate value, which is the ultimate basis for shareholder wealth.

Another unusual feature is that PROXY Governance is structured to “ensure that its policies and voting recommendations are free from all conflict.” The firm’s policy and analysis staff is “responsible to” PROXY Governance’s independent Policy Council, made up of prominent individuals from outside the company with extensive experience in corporate governance. This accountability is designed to ensure that staff support the mission of building long-term shareholder value. The Policy Council also serves as an appeals panel with the authority to hear appeals from companies and other issue proponents who wish to question PROXY Governance’s recommendations. The Policy Council can recommend reversal of a given proxy recommendation if it believes the recommendation is not in the best interests of increasing long-term shareholder value.

We, at CorpGov.Net, believe PROXY Governance holds great potential. Will it be realized? Much will depend on the independent Policy Council composed of the following:

  • Dennis R. Beresford, a professor of accounting at the University of Georgia. From January 1987 through June 1997, he was Chairman of the Financial Accounting Standards Board.
  • Scott A. Fenn, former President and CEO of the Investor Responsibility Research Center.
  • James K. Glassman, resident fellow at the American Enterprise Institute, recently launched Investors Action, which aims represent investor interests in the public-policy arena.
  • Joseph Hinsey, IV is a professor emeritus at Harvard. He was Consultant to the American Law Institute’s Corporate Governance Project — a fifteen-year undertaking that culminated in the 1993 publication of a two-volume work titled Principles of Corporate Governance.
  • Robert E. Litan is Vice President for Research and Policy of the Kauffman Foundation, and Senior Fellow, Economic Studies, of The Brookings Institution.
  • Erik R. Sirri is a professor of finance at Babson College. He was previously the Chief Economist of the U.S. Securities and Exchange Commission.
  • William C. Steere, Jr. is Chairman of the Board, Emeritus, of Pfizer, Inc. He has been a member of the Pfizer, Inc. Board of Directors since 1987.

According to a report in Pensions&Investments, a bulk subscription for members of the Business Roundtable (BRT) enabled the firm to become operational a year before previously expected. Although PROXY Governance has structured itself to avoid conflicts of interest, a representative of ISS points out the initial funding from the BRT could be considered just such a conflict, since the organizations 160 CEO members are by invitation only. According to Gregory P. Taxin, CEO of Glass Lewis, although ISS has conflicts of interest (by selling services to corporations), those at PROXY Governance “may top them by selling to CEOs. They are financing his business. They paid for a service before there was a product, before there was a staff or anything, and call that buying. I’d call it investing.” “If the investor backers and customers are CEOs, it will be difficult to provide objective advice to shareholders on how to negotiate with CEOs. BRT acknowledges buying the subscriptions but denies any ownership or creditor interest. (Ex-SEC commissioner’s firm joins proxy-voting service fray, 11/1/04)

Early dependence on the BRT may, indeed, lead PROXY Governance to be reluctant to speak out. I interviewed Mr. Ron Kuykendall, Vice President of Corporate Communications. Unlike ISS, whose representatives have called shareholder access to the proxy (to nominate directors) the Holy Grail, PROXY Governance has no plans to take a position on the issue. The BRT is one of the proposal most ardent opponents. We hope PROXY Governance will provide leadership in this area and others, rather than simply providing cover for mutual funds and investment advisors who must now disclose and justify their votes. We hope they will be both profitable and an important addition to the dialogue on how to achieve good governance and better investment returns.

What Directors Think

Corporate Board Member, with PricewaterhouseCoopers, released their third annual “What Directors Think” study with 1,279 directors of public companies sharing their thoughts on pressing boardroom issues. A few of the highlights:

  • As boards’ time demands continue to increase, the unofficial title of “professional director” in which individuals sit on six or more boards is quickly fading. In 2003, only 33% of CEOs and 16% of outside directors were limited to additional board seats, compared to 43% and 29%, respectively, in the 2004 survey findings. The survey asked if there should be limits on the number of outside boards on which directors could serve; 71% said yes.
  • Board evaluations are becoming more commonplace. In the 2004 survey, 73% of respondents said their boards were formally evaluated, compared to 50% in 2003 and only 33% in 2002. In addition, 35% of respondents said their boards evaluate individual directors on a regular basis, compared to only 23% that did so in 2002.
  • Even with Section 404 looming, confidence is increasing – 82% of directors believe their company is prepared to implement Section 404 on internal control reporting. However, only 50% of directors surveyed think Section 404 internal control reporting requirements will make a difference in the quality of their company’s financial statements; and less than half (44%) think Section 302 certification of financial statements by the CEO and CFO will make a difference.
  • More than three-fourths (77%) of directors surveyed think the Sarbanes-Oxley Act should be revisited by Congress to correct some of the unintended consequences.
  • The average director spends 19 hours per month on board matters, up from 14.1 in 2002.

In addition to survey results, the issue also includes dozens, perhaps hundreds, of comments on crucial issues of the day. For example, regarding the open access proposal from the SEC, D. Pike Aloian, Managing Director of Rothschild Realty, says “Very few people I know, myself included, would want to stand for election to a board if there is a chance they would not be elected….market forces are suggicient to encourage boards to respond appropriately to their shareholders….”  Timely issues and information from Corporate Board Member.

Plan Sponsors Wary of Conflicts of Interest

According to a survey by Plansponsor, more than 85% of plan sponsors want advisers to be free of conflicts when they recommend which asset managers, including mutual-fund companies, should run the retirement plans’ money. The other 15% say some conflicts are acceptable, as long as they are disclosed.

Good Times for Corporate Tax Cheats

The IRS is conducting fewer corporate audits this year and recommending that audited companies pay less in additional taxes, according to IRS data examined by Syracuse University’s Transactional Records Access Clearinghouse (TRAC).

Despite public statements by IRS Commissioner Mark W. Everson that the agency would get tougher on corporate tax cheats, the pace of corporate audits is running substantially below the record-low levels registered in fiscal year 2003.

TRAC compared data for fiscal 2003 with the annual rate for the first six months of fiscal 2004 (ending March 31 of this year). It found that this year, the IRS was conducting 26% fewer audits and spending 30% fewer hours examining corporate tax returns. Not surprisingly, the additional taxes recommended as a result of those audits are 36% lower this year than last — a total of more than $4.3 billion less for the first half of fiscal 2004.

Smaller corporations, with up to $10 million in assets, are being treated even more leniently by the IRS. The number of small-company audits is down 45% this year — though the time for each of these audits has increased 17%.

The IRS Oversight Board — an independent body established by Congress to maintain watch over the policies and practices of the agency — said flatly in its fourth annual report that the decline in enforcement programs aimed at business was a “serious and ongoing problem that threatens the very integrity of our tax administration.”

Another Wild Proxy Season? Forecast for 2005

When: Wednesday, November 3, 2004, 4:00 – 5:15 pm, eastern time
Record levels of “withheld” votes against directors. Lots of majority votes on shareholder proposals. More proxy fights than ever before. The 2004 proxy season campaign was the wildest proxy season ever – and the outlook for next year is “more of the same.” This webcast will recap what transpired during the 2004 proxy season – and predict what to expect next year. Join these experts:

  • David Drake, Senior Managing Director, Georgeson Shareholder Communications
  • Pat McGurn, Sr. Vice President and Special Counsel, Institutional Shareholder Services
  • Greg Taxin, Chief Executive Officer, Glass Lewis & Co.

Among the topics of this program are:

  • Hot topics for investors in 2005. What will be the influence of shareholder access?
  • Influence of “just vote no” campaigns. How did shareholders vote on shareholder proposals?
  • How will the new mutual fund disclosure rules impact mutual fund votes?
  • New areas addressed by ISS and Glass Lewis in their 2005 voting guidelines.

How to access the webcast program:  Visit and click the link on the webcast. You need either Real Player or Windows Media to listen to the webcast. An audio archive of the webcast will be posted immediately after the program. A transcript will be posted several days after the webcast. Cost: Free to TheCorporateCounsel.netsubscribers. The cost for non-subscribers is $295. However, if you are not a subscriber and are interested in the program, take advantage of their no-risk trial by sending them an email at – or calling 925.685.5111.

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Risk Of Not Disclosing Environmental Risk Rises

Writing in the November 2nd edition of Compliance Week, Karen M. Kroll argues that several events may signal a sea change in the way corporate executives report environmental liabilities in their SEC filings. She mentions the SEC’s new interpretation of “triggering events” that require an 8-K filing, and the FASB’s issuance of guidance concerning FAS 143, as well as the push from institutional investor members of the Investor Network on Climate Risk.

Effective 8/23, the definition of a “triggering event” changed to include several environmental liabilities, such as disposing of idle property that required sanitization. If the cost of the clean up would be material, management would have to issue an 8-K. FASB changed how contingencies are to be accounted for, “if you’ll have to incur costs upon the retirement of a long-lived asset, you have to estimate the cost now and present it on the financial statements”…even if there is no pending regulatory enforcement.

Instrumental in raising the bar has been the Rose Foundation for Communities and the Environment, especially their report “Fooling Investors and Fooling Themselves.” (New Regulations, Compliance Week, Standards Influencing Environmental Disclosures, 11/2/04. Clickhere to subscribe.)

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GRI Guidelines Set Sustainability Reporting Standards

Risk & Opportunity: Best Practice in Non-Financial Reporting,” from SustainAbility, the United Nations Environment Program, finds that only three reports of the Top 50 assess the balance sheet implications of key environmental and social risks, despite this information being increasingly important to analysts, investors, lenders, insurers and re-insurers.

The sixth international review of corporate environmental and sustainability reports is the first in partnership with Standard & Poor’s – and the first to explore the link between credit ratings and the quality of companies’ governance and disclosure of non-financial risks. Over 350 reports were submitted and 50 were selected by an international independent expert committee for a full analysis. The top three overall are Co-operative Financial Services (UK), Novo Nordisk (Denmark) and BP (UK). 47 out of the 50 top reporters are using the Global Reporting Initiative (GRI) Guidelines. (Companies Fail to Identify Key Environmental and Social Risks,, 11/2/04)

Researcher Advocates Director Understudies

Dr. Mark Tregoning’s research, Corporate Governance: Directors’ Characteristics and Performance and Diversity in Australian Boards, covered the 114 of the largest public companies in Australia and suggests boards should look outside traditional venues for new directors, including nonprofit organizations.

The study focused on the relationship between directors and financial performance, changes in board demographics and the level of diversity among directors. He found that 40% of directors were retired CEOs but found no correlation between a retired CEOs previous success and their ability to add value as a director.

Tregoning concluded that there may be a tendency for boards to “window dress,” by appointing “qualified” directors that would be acceptable to the market. “Second, there may also be a tendency for former CEOs not to place alternative views and strategies on the table should the company’s managing director be a peer.” However, contrary to popular opinion about boardrooms being homogenous “old boys’ clubs,” Tregoning found a significant level of variety.

Diversity, however, was no guarantee for maximizing a board’s abilities. The “one size fits all” “best practice” approach of recommending a majority of independent directors could actually hamper a company’s performance. In the end, he advocates that those outside the narrow sectors of accounting, finance and general management not be overlooked. Another suggestion was to establish trainee boards, where potential future directors, such as senior employees, would work with sitting directors in an almost understudy capacity. (Boardrooms need the right mix: study, The Sydney Morning Herald, 11/1/04)

Businesses Can Learn From Government

In their recent article, Running business like government, Bryane Michael and Randy Gross argue that listed companies could learn plenty about transparency and accountability from public sector reformins. In their study of Tempe’s governance, they identified several points which have a bearing on the study of corporate governance:

  • A city council (akin to the board of directors) has resources separate from the city manager (the CEO). While the city manager hires almost all city personnel, the council hires the manager, city attorney, city clerk and judge. Councils have their own administrative aides, so they are capable of getting independent advice. In the hierarchical firm, the CEO often exercises leverage over employees, stakeholders, and board members.
  • The dichotomy between hyper-competitive business and sluggish government is not as true as some commentators portray. Over 80,000 local governments in the US are in competition to attract businesses, financing, and residents. While businesses often operate in a highly competitive environment, many operate in stable niche markets, ‘cash cow’ industries, and in oligopolistic markets.
  • Transparency can work, even in a competitive environment. City council meetings are open to the public, available on the internet, and minutes are made publicly available. Individuals have extensive rights to address the city government. Such access extends to financial transparency, where all public accounts are available online.
  • Stockholders who vote for corporate board members have a few select paragraphs of information. Council members, by contrast, stand in a competitive election, hold a detailed record up for scrutiny, and are generally accessible.
  • The lowest salary for a city employee is approximately $25,000 for a custodian. The highest salary is approximately $150,000 for the city manager – a ratio of 6:1. In the US corporate world, the ratio of highest to lowest paid is closer to 500:1.

New Resource: The Corporate Governance Institute (ICG)

The ICG at the Indiana University’s Kelley School of Business posted their Internet site. The ICG is dedicated to the study, dissemination, and application of best-in-class corporate governance principles. “We at the ICG firmly believe that effective, responsive corporate governance establishes and maintains practices designed to enhance the profitability of the enterprise, increase long-term stakeholder value, reflect the principles of independence, link compensation to performance, and assure transparency in its transactions. Corporate governance, at its best, is a sustainable competitive advantage…While many issues in corporate governance remain controversial, the objective of the ICG’s program is to acquaint participants with their governance options, their implementation, best practices, and their consequences.” So far, the site has minimal substantive content.

EU Convergence

The European Commission has set up a European Corporate Governance Forum to examine best practices in Member States with a view to enhancing the convergence of national corporate governance codes and providing advice to the Commission. The Forum comprises fifteen senior experts from various professional backgrounds (issuers, investors, academics, regulators, auditors, etc.) whose experience and knowledge of corporate governance are widely recognized at European level.

Internal Market Commissioner Frits Bolkestein said: “The more national corporate governance codes converge towards best practice, the easier it will be to restore confidence in capital markets in the wake of the scandals that have shaken trust in some European companies, including traditional “blue chips.” Broad convergence not only strengthens shareholders’ rights and the protection of third parties, such as creditors and employees, it makes it easier for investors to compare investment opportunities. That leads to a more efficient allocation of capital, which matters to everyone because it is the basis for creating growth and jobs. The time is ripe for this initiative, as many Member States are reviewing their own corporate governance codes. The Forum with its distinguished membership, will be well placed to help build consensus on key issues. This work is not a precursor for a European corporate governance code, but it is a drive to raise standards across the board. The Forum will help us achieve this without bulldozing national traditions or forcing anything down anyone’s throat.”

Donald Nordberg, of EDGEvantage, says speeches by the officials were rather general, but from the floor there was a determination to prevent the Sarbanes-Oxley Act from intruding too far into European practice. So far, the wave of concern over corporate governance worldwide has seen soul-searching and box-ticking in the boardroom. Dutch finance minister, Gerrit Zalm, predicted that the spotlight will now shift from directors to shareholders. “I think that we will witness a shift of emphasis in the codes from rules of behaviour for board members to rules of behaviour for shareholders, especially large institutional investors, like pension funds and mutual funds.”

Not, perhaps, a stunningly prescient remark, according to Nordberg, in view of how the problems in the fund management industry have turned the tables on some institutional shareholders. But if this presages regulatory activity in Europe akin to the widening shareholder access to the boardroom or greater transparency of funds towards their beneficial holders, that might be more important. Zalm welcomed the Forum’s mission to promote greater convergence of governance codes around the European Union, though he argued it is still a matter for national governments. (speech)

CEO Pay Continues as Major Issue

Average pay for top American CEOs and board chairmen has soared from $479,000 to $8.1 million in the last quarter century, as measured in annual surveys by Business Week magazine, the only source that goes back that far. The pay of average (non-management) workers over that time, as measured by the U.S. Bureau of Labor Statistics, hasn’t even kept up with inflation.

If average worker pay, which is now $26,899, had risen like CEO pay, it would exceed $184,000. If the minimum wage had risen at the same rate, it would now be almost $45 an hour. A 2002 Harris Poll found that 87% of respondents felt that executives “had gotten rich at the expense of ordinary workers.”

“There’s such a gap between what the CEO makes and the top five people under him. And what about the other employees who are far under that? It demoralizes them,” said Roger Raber, CEO and president of the National Association of Corporate Directors. “There’s a big difference between athletes, movie stars, rock stars and CEOs,” Minow said. “CEOs are the only ones who pick the people who set their pay. The other categories are the ultimate in pay for performance.”

Even the Business Roundtable, an organization of the country’s top 150 companies, said last year that it shares the public perception that “some executives have reaped substantial financial rewards in the face of declining stock prices and staggering losses to employees and stockholders.”

A 2003 survey of some 1,000 directors by Towers Perrin found that at 80% of companies, management was involved in hiring the compensation consultant that would recommend their pay level – an automatic conflict of interest.

The Corporate Library, in its March 2004 analysis, found that 377 of the S&P 500 companies were led by a CEO who was also the board chairman. Most of the other board members, the report found, had a business relationship with the CEO. Yet, by exchange definitions, most directors are now “independent.”

The Catholic Fund is launching at least 10 shareholder challenges a year. Last year, one of their targets was Alcoa Inc., whose chief executive officer, A.J. Belda, they determined had earned $14.6 million in 2002. They proposed the Pittsburgh-based aluminum manufacturer do a 10-year study of how executive and average worker pay at the company has changed. The board of directors voted down the proposal last year and again this year. However, the company did lower the pay for its CEO by some $5 million. We predict many more such proposals next year. (In a generation, gap separating compensation of chiefs, others widens, Milwaukee Journal Sentinel, 10/9/04)

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