April 2005

Majority Vote on Move

Lowe’s and Dillard’s are likely to allow shareholders to remove Boot out directors who fail to win a majority of shareholder votes. The companies agreed to make the change after the United Brotherhood of Carpenters withdraw shareholder resolutions seeking the new standard. BusinessWeek reports Dillard’s is expected to seek board approval on May 21. Lowe’s is expected to put the policy to a shareholder vote in May, 2006. (The Proxy Is Mightier Than Ever, 5/2/05)

At Marathon Oil, 52% voted for majority elections, 49.5% voted in favor at MeadWestwaco, 42% at Capital One Financial and 30% at Paccar. (ISS Friday Report, 4/29/05)

On a different majority vote issue, seeking to eliminate supermajority voting requirements for certain corporate matters, Lockheed Martin shareholders voted 52% in favor of “Adopt Simple Majority Vote.” The sponsor was John Chevedden. SBC shareholders voted 62% in favor, sponsor was Ray T. Chevedden. A similar proposal won a 68% vote at Citigroup on April 19. Boeing faces a similar vote at their May 2 annual meeting.

Which Way Public Funds?

While California’s Governor Arnold Schwarzenegger has pulled back a proposal to outlaw defined benefit plans for new public employees until he can fix the language to allow continued death and disability benefits for safety employees, West Virginia is considering a move in the opposite direction. An editorial in Pensions & Investments, “DB Reprieve, for Now,” notes that West Virginia closed its defined benefit plan for state teachers in 1991 in favor of a defined contribution plan. Now they are considering a shift back. “The West Virginia rationale, as unlikely as it sounds: to save money.”

“An actuary for the West Virginia State Teachers’ Defined Contribution Plan noted that it has a higher cost to employers than that of the defined benefit plan. A switch back to the DB plan for teachers could save the state 3% of payroll a year.” (4/18/05) However, as we have noted, Schwarzenegger’s move isn’t based on saving taxpayers money. It is about gathering campaign contributions, channeling money to those contributors and doing away with the power of public pension funds as advocates of good corporate governance.

CEO Taxpayers for a Day Bankroll Social Security Privitization

Because Social Security tax payments are capped, most financial industry CEOs pay into the system for only a few days. Seven of the 26 researched pay only for one day, according to a report, entitled “Taxpayers for a Day: The Most to Gain, the Least to Lose” from United for a Fair Economy (UFE) and the Institute for America’s Future (IAF).

“The CEO of Charles Schwab, David Pottruck, finished paying his Social Security taxes before the end of the Rose Bowl on January 1st, 2004,” said Scott Klinger, co-director of UFE’s Responsible Wealth project and a co-author of the report. “That’s $87,900 in a few hours. Most Americans pay all year long without ever reaching the annual cap.”

The report examines the pay structures of 26 CEOs of finance industry companies the authors say are involved in backing privatization efforts. Average compensation for the group in 2004 was $17,712,239. Therefore, the average CEO within this group surpassed the $87,900 earnings cap after 4 days on the job, or at the end of the day on January 4th, after which no Social Security tax would be collected.

While 94% of workers effectively pay 12.4% of their annual income, including employer’s contribution, these CEOs paid an average effective rate of 0.16% of their annual income toward Social Security taxes. The average taxpayer pays an effective rate that is more than 201 times the effective rate of the average CEO in this group.

“Taxpayers for a day” included the CEOs of Bear Stearns, Charles Schwab, Goldman Sachs, Lehman Brothers, Morgan Stanley and Wells Fargo/Strong Financial. “As most Americans worry about their ability to pay their taxes by April 15, they should keep in mind that Social Security would be funded and solvent into the next century if the highest-earning 6% of Americans would pay taxes on their full income, just like everyone else,” concluded Klinger.

Meeting Roundup

Kohl’s approved two non-binding proposals; 64% of shares voted were in favor of requiring all directors to stand for re-election each year. A proposal that would require a shareholder vote for “golden parachute” severance agreements that exceed 2.99 times the executive’s pay won approval by a 53% vote. (Kohl’s shareholders vote for more control, Milwaukee Journal Sentinel, 4/27/05)

Shareholder activist John Chevedden reports that a McGraw-Hill (MHP) shareholder proposal by Nick and Emil Rossi to “Redeem or Vote Poison Pill” won with a 72% yes-vote at their annual meeting. It was reported that the directors won only a 62% vote. Thus, the proposal was more popular than the directors themselves. One reason the directors may have drawn so many negative votes was that they ignored the 68% shareholder vote on this topic in 2004.

Schering-Plough shareholders approved a non-binding shareholder proposal from Charles Miller, “Elect Each Director Annually,” asking that the bylaws be amended to provide for directors to be elected annually. The company didn’t announce the specific voting results but said that the matter would be thoroughly considered by the Board given shareholders’ interest in the matter. Another shareholder proposal pertaining to animal testing was withdrawn based on the company’s commitment to engage in an interactive dialogue with People for the Ethical Treatment of Animals (PETA). (PharmaLive, 4/26/05)

R.H. Donnelley shareholders approved a proposal from Nick Rossi, Redeem or Vote Poison Pill, supported by 55%. Two EDS shareholder proposals passed, both with about 87% of the vote. One, by William Steiner, required annual election of directors, and the other, by Nick Rossi, ended the need for a supermajority to pass certain transactions related to asset sales and mergers.

Honeywell International shareholders approved proposals to elect directors for one-year terms and eliminate supermajority voting provisions. (Honeywell shareholders OK changes, Northjersey.com, 4/26/05)


The Council for Responsible Public Investment produced a report in May 2004, Beyond CalPERS: Shareholder Responsibility at California’s Other Public Pensions: A Cennsus of California’s 1937 Act County Pension Plans. CalPERS has demonstrated that responsible shareowner practices can play an important role in increasing the accountability of corporations to their owner’s social and environmental concerns. This project attempted to get an overview of responsible shareholder practices at the 20 plans that constitute California’s county pension system. “Collectively, these plans hold assets that represent over $56 billion –14% of California’s total public pensions and 60% of all assets not held in the state system.”

The report is well worth a read. Among a few of the preliminary findings are the following:

  • Social and/or environmental screening of investments is completely absent, with the exception of one ‘trial’ which is being monitored with great interest.
  • Only plans with assets of $3 billion or more maintain proxy voting authority in-house, adhering to formal proxy voting guidelines that average 30 pages in length. All plans smaller than $3 billion outsource proxy voting authority to their investment managers.

Top Issues for CalPERS

CalPERS is more selective this year in choosing its battles, focusing on surging executive pay and requiring majority votes for the election of directors.

Last year, CalPERS took a lot of heat for its stand on auditor independence, voting against directors at 90% of the companies in its portfolio. This year their withholds are down to 22%, according to the Sacramento Bee. They are urging ChevronTexaco Corp. to let shareholders approve golden parachute agreements and they want executive pay tied performance at companies like Lucent Technologies, Weyerhaeuser.

Requiring majority votes for directors is seen by many as fall back to the real issue of allowing shareholders to place nominees on the corporate proxy. However, open access appears to be dead for now and majority vote requirement resolutions are picking up steam. Last year, directors at nine companies were elected with less than 50% of the vote. This year the building trade unions have filed 80 resolutions calling for majority vote. (Boardroom Battleground and CalPERS Gets Choosier About Battles, Sacramento Bee, 4/25/04) Maybe public pension funds, such as CalPERS, should tackle the issue on two fronts by sponsoring legislation in states like California which allow only plurality voting.

Compliance Week reports that “even the Business Roundtable, a staunch opponent of proxy access, is willing to consider supporting a majority vote policy.” The Business Roundtable is working with the American Bar Association Committee to study the issue. “While ensuring that shareholders are able to communicate their positions to directors is vitally important, we also must ensure that this does not become a vehicle for special interests to usurp the board election process.” Additionally, Lowes has reportedly “begun a review of the appropriate process” to transition to majority voting. Shareholders will be given the opportunity to vote on the changes at next year’s meeting. (Companies Leave Door Open To Majority Voting Policies, 4/26/05)

Shareholders will vote on another majority resolution at Safeway’s meeting on 5/25/05.

Newsweek Interviews Webb

Without reform, Hong Kong risks becoming a financial backwater, according to shareholder activist David Webb. 90% of listed companies have 20% blockholders. “Where either a family or a government controls most listed companies, you tend to get abuse in the form of controllers’ engaging in related party transactions, paying themselves excessive salaries as directors and electing independent directors who are not really independent, like old schoolmates [and] golfing buddies.” (Safe Haven? The Slippery Slope, International Edition, 5/2/05)

Weyerhaeuser Meeting Erupts

One attendee called it “the gavel-and-goon show: President/Chairman/CEO Steve Rogel hammering with a gavel to silence anyone that tried to speak, then thick-necked Weyerhaeuser goons going up to anyone being gaveled so as to intimidate them into sitting back down.”

Proponents of resolutions were reportedly the only speakers allowed from the floor and they were tightly controlled. No clarifying questions were taken regarding items up for a vote, and no questions from the floor were allowed during the 15-minute so-called Q&A period, not even points of order (which, by Roberts Rules, take precedent over nearly everything).

The testiness began when David Ortman of the Northwest Corporate Accountability Project, presenting a resolution on Weyerhaeuser’s purchase of federal timber, said he wanted to address other subjects as well. Rogel told him to limit his comments to the resolution.

We understand a great many written questions supposedly submitted by shareholders were apparently ignored, although were are told the company told a Business Week reporter that only 8 had been unanswered. Bruce Herbert, of Newground Social Investment, attempted to raise a question from the floor was physically removed from the room. Then the room erupted, with many shareholders wanting to raise questions, and the meeting was abruptly adjourned without announcing voting results.

Several wanted to talk about a dispute between Weyerhaeuser and the Haida Nation in British Columbia who want more control over the ancient forests off the coast of Vancouver. Sandy McDade, senior vice president of the company’s Canada operations, said these issues are matters between the Haida Nation and the B.C. government.

Weyerhaeuser reported first-quarter net income of $239 million, or 98 cents a share, up from $121 million, or 54 cents a share, a year ago. Revenues rose 10 percent to $5.5 billion. It also increased the quarterly common-stock dividend by 10 cents a share to 50 cents. Weyerhaeuser stock fell $1.42 a share, to $64, on a day when the markets overall were up. A shareholder resolution calling on Weyerhaeuser to record stock options as expenses was approved by 68 percent of the votes cast. (Shouting drowns out positive Weyerhaeuser report, The Seattle Post Intelligencer. Protesters cut into timber meeting, Tacoma News Tribune, 4/22/05. Managers to Owners: Shut Up, NYTimes, 4/24/05) Weyerhaeuser uses the same law firm as Boeing, Perkins Coie. We can’t help wondering if their May 2 annual meeting in Chicago will be similar.

Majority at Citigroup 42%

According to The Friday Report (4/21/05), an ISS publication, a majority-elections proposal received 42% of the votes cast at the company’s April 19 meeting, according to Shelley Drapkin of the company’s legal department.

Another proposal that gained significant support from Citigroup’s investors was one that seeks to eliminate the company’s supermajority voting requirements for certain corporate matters. That proposal, filed by a Chevedden family trust, received 69% support. John tells me this topic won a 75% yes-vote average at 7 major companies in 2004 and that theCouncil of Institutional Investors formally recommends adoption of this proposal topic. A shareholder proposal that urged the company to prohibit its chairman from taking on management duties, titles or responsibilities was backed by 30% two executive compensation proposals received between 6% and 7% support. A proposal urging Citigroup to prepare a report on its political contributions won 8.7%.

Back to the top

AFSCME to Vote No

According to The Friday Report (4/21/05), an ISS publication, the AFSCME Employees Pension Fund announced will withhold votes from corporate directors at 11 companies during annual shareholder meetings. We intend to send a message to those directors who are not responsive to the needs of shareholders–if you are not doing your job as a board member by representing the interests of investors, you will not get our vote,” Gerald McEntee, chair of the AFSCME pension plan, said in an April 20 statement.

McEntee added, “Its good practice for institutional investors to disclose their no votes when directors are failing shareholders. And going forward we are putting company directors on notice that they will be the focus of our corporate governance efforts. ”

Companies with directors targeted by the AFSCME Pension Plan include: Honeywell (NYSE: HON), Cendant (NYSE: CD), VF Corp. (NYSE: VFC), General Electric (NYSE: GE), Kohls Corp. (NYSE: KSS), Colgate-Palmolive (NYSE: CL), Union Pacific (NYSE: UNP), Qwest (NYSE: Q), Hilton Hotel Corp. (NYSE: HLT), Home Depot (NYSE: HD), and Lowes Companies (NYSE: LOW). (press release, 04/20/05)

Oxley Tops Jet Set

Michael Oxley, a U.S. representative from Ohio best known as one of the authors of the Sarbanes-Oxley law promoting good corporate governance is the most frequent user of company jets among all 535 members of Congress, with at least 41 flights provided by corporations during the past two years. Other high users are House Majority Whip Roy Blunt, Senate Minority Leader Harry Reid of Nevada, the only Democrat in the top 10, Republican Representative Don Young, and House Majority Leader Tom DeLay.

Lawmakers are required to reimburse the companies from their campaign accounts or political action committees at the cost of a first-class airline ticket, but there is a big difference between the cost of ticket and the cost of a private jet, some of which are equipped with showers and exercise bikes.

In the past two years, lawmakers and their staffs reimbursed companies $2.2 million for 1,346 trips on private jets through their political-action and campaign committees, according to an analysis of campaign-finance disclosures by Washington-based PoliticalMoneyLine. (U.S. Congress, Led By Oxley, Flies in Style on Corporate Jets, Bloomberg, 4/21/05)

AIG Tops CalPERS Focus List of Poor Performers:
Weyerhaeuser to Block Shareholder Questions

American International Group (AIG) tops the list following allegations of widespread accounting fraud and other corruption that cost CalPERS more than $240 million in losses. Also on the list are AT&T, Delphi, Novell, and Weyerhaeuser.

“These five companies are now on our radar screen for their poor corporate governance and in many cases poor performance that has economically damaged shareowners,” said Rob Feckner, President of the CalPERS Board. “We will press for needed reforms to restore long-term profitability and investor confidence.”

CalPERS’ Focus List is selected from the pension fund’s investments in more than 1,800 U.S. corporations, and is based on the companies’ long-term stock performance, corporate governance practices, and an economic value-added (EVA ®) evaluation. AIG made CalPERS’ list after its stock dropped more than 21% in the one year period ended March 31, 2005, and investigations began into accounting misstatements, bid-rigging and the use of questionable insurance products.

“Potential fraud and corruption at AIG have cost working families millions of dollars and threatened the security of their pensions,” said Charles Valdes, CalPERS Investment Committee Chair. “We are going to do everything in our power to seek corporate governance improvements to prevent further economic damage. A good start for AIG would be to strengthen the independence of its board.”

The pension fund filed a shareowner proposal requiring an independent Chairperson at AIG and at least two-thirds of the Board be independent directors. While AIG has recently appointed Frank G. Zarb, as Chairman of the Board and Martin J. Sullivan as CEO, CalPERS’ proposal would require a bylaw change to ensure that these changes are permanent.

AT&T is on CalPERS’ list despite SBC’s acquisition announcement to acquire the company earlier this year. The pension fund believes the company and its directors warrant greater attention after change in control agreements were approved that could pay out $41 million in cash to executives and additional millions on the immediate vesting of stock options and restricted stock.

“These severance payouts are obscene,” said Valdes. “AT&T’s leaders ran this company into the ground, sold it, and were the architects of compensation plans that will pay many of them millions. CalPERS will strongly consider withholding support for these AT&T directors should they land on the SBC Board or other corporate boards to prevent a repeat of the egregious AT&T severance payouts.”

AT&T’s stock price is down more than 74% for the five-year period ended March 31. A shareowner proposal filed by CalPERS at AT&T’s 2005 annual meeting seeks to require shareowner approval of any severance payout that exceeds 2.99 times the sum of the executive’s base salary and bonus.

CalPERS elevated Novell from its 2004 Monitoring List to its Focus List after the Company’s stock price fell 47% during the one-year period ended March 31, and Novell failed to design a true performance-based executive compensation plan tied to operational performance following months of negotiations with the pension fund.

CalPERS officials believe the Company’s current plan fails to use meaningful operational or capital metrics consistently across top management. Specifically, the plan relies upon weak premium priced options, does not include multiple performance metrics consistent with long-term sustainable operating performance and fails to establish real vesting hurdles.

Delphi and Weyerhaeuser made the list because of their poor response to multiple shareowner proposals that have been approved by shareowners but not implemented by their Boards. CalPERS also put Delphi on the list because the company overstated cash flow from operations by $200 million in 2000 and pretax-income by $61 million in 2001, significant executive turnover, and is the focus of investigations by the Securities and Exchange Commission and FBI.

Proposals to declassify the Delphi Board and change to annual director elections have passed for the last four years, and proposals to redeem the Company’s poison pill have passed for the last five years. Similar proposals to declassify the Weyerhaeuser Board were approved by a majority of shareowners in 2000, 2002 and 2003.

“These directors sat on their hands and ignored the wishes of their owners,” said Feckner.  “They should immediately declassify consistent with the demands of their shareowners.”

CalPERS has filed a shareowner proposal this year seeking to amend Delphi’s bylaws that would ban any current or former director from being re-elected if the director opposed declassifying the Board following last year’s annual meeting. The pension fund has also filed a proposal to declassify the Weyerhaeuser Board at its April 21 annual meeting. (CalPERS press release, 4/20/05)

According to a news item in SocialFunds.com, Weyerhaeuser plans to screen questions at its annual meeting. Damon Silvers, associate general counsel for the AFL-CIO, expressed his concern to Mr. Rogel, the CEO and Chair. “The AFL-CIO urges you to conduct the annual meeting of Weyerhaeuser in a manner consistent with your fiduciary duty to protect the informed exercise of your shareholders’ governance rights,” Mr. Silvers wrote. “In our view that includes protecting your shareholders’ right to speak candidly and without management pre-approval to each other and to the board of Weyerhaeuser at the company’s annual meeting.” (Weyerhaeuser To Screen Shareholder Questions at Annual Meeting Tomorrow, 4/20/05)

I contacted Weyerhaeuser and asked for the company’s rationale for denying owners the right to question board members without prescreening by management but got no response. The “Focus” that CalPERS brings should be welcomed by all shareholders. I hope Weyerhaeuser’s apparent shift to an almost fully staged meeting is not a trend.

Become a Certified Director

The UCLA Anderson School of Management is hosting the Director Training and Certification Program on May 18-20, 2005.  Designed for executives, and officers of private and public companies, the program covers every aspect of being a successful corporate director, including SEC regulations, FASB considerations, NYSE rules, and current best practices in corporate governance.

Directors who complete this course and pass a written examination become “certified directors” and may be eligible for lower rates on D&O insurance. This program is ISS accredited; attendance may increase your ISS governance quotient. For more information contact: 310-825-2001,execed@anderson.ucla.edu.

Back to the top

CalPERS Expands Eligible Markets

CalPERS added Argentina, Sri Lanka, Thailand, and Turkey to its list of permissible emerging equity markets based on a report from pension consultant Wilshire Associates. Wilshire reviewed financial market factors of 27 emerging markets including political stability, transparency, and labor practices. Of 27 countries reviewed, 12 improved their scores, 11 had lower scores, and 4 remain the same. CalPERS, which had approximately $3.9 billion invested in emerging markets at February 28, will not permit equity investments in Colombia, China, Egypt, Morocco, Pakistan, Russia, Venezuela, and Indonesia. (Press Release, 4/18/05)

I continue to believe CalPERS should not entirely write off emerging markets based on such rankings but should combine them with rankings of the corporate governance of individual companies. Meanwhile, CalSTRS is searching for up to six active equity managers to invest about 10% of its international equity portfolio, approximately $3 billion, in emerging markets.

Two Systems of Ownership: Two Types of Fraud

In his recent paper, A Theory of Corporate Scandals: Why the U.S. and Europe Differ, John C. Coffee Jr. of Columbia University Law School threorizes that dispersed ownership creates managerial incentives to manipulate income, while concentrated ownership invites the low-visibility extraction of private benefits.

Enron and WorldCom are the iconic examples of fraud in dispersed ownership regimes typical of the US and UK. Governance protections that work in one system may fail in the other. The U.S./U.K. system of dispersed ownership is vulnerable to gatekeepers not detecting inflated earnings, and concentrated ownership systems fail to the extent that gatekeepers miss (or at least fail to report) the expropriation of private benefits. European and emerging market are more prone to private benefits being siphoned off to controlling shareholders through related party transactions.

In companies with dispersed ownership, auditors should report to an independent audit committee. In companies where there is concentrated ownership, the auditor should be selected by and should report to minority shareholders.

Vermont Senator Challenges Funds

Sen. Mark Shepard, R-Bennington introduced a joint Senate resolution, JRS 26, requiring approval of the Legislature before pension boards make decisions based on criteria other than those intended to maximize the rate of pension returns. He is concerned with a recent decision by trustees of the Vermont State Teachers’ Retirement System to make it harder for investment firms that support the privatization of Social Security to manage money in the teachers’ fund.

Shepard said the trustees’ resolution was a political statement because it undermines President George W. Bush’s Social Security reforms. Vermont State Treasurer Jeb Spaulding, a member of the trustees who voted in favor of the resolution, disagreed. He said in a statement the vote was “entirely appropriate” and that the pension plan, which provides retirement benefits to roughly 3,400 former Vermont educators, is well-managed and will make secure retirements possible for members. “If all else were equal, why wouldn’t we consider their involvement in an effort we believe will undermine retirement security for the members and beneficiaries of our retirement plan?” (Control of state pensions at issue, Bennington Banner, 4/18/05)

Downsizing the CEO

According to Business Week,”directors, auditors, and lawyers are more powerful than ever. That shift has fundamentally altered relations between CEOs and the advisers they depend on. At their best, these supposed guardians of shareholder value, chosen for their ability to complement the CEO and provide specific areas of expertise, were trusted advisers. At their worst, they were little more than bag carriers and sycophants. Either way, these advisers — who were always supposed to work for the shareholders, not the CEO — usually exercised their power as watchdogs only in moments of genuine crisis. But now the chumminess and banter have given way to a more adversarial attitude…Even CEOs who don’t lose their jobs are finding that their ability to impose their will, whether it’s in setting strategy or hiring a successor, has been severely curtailed.”

David Henry, Mike France and Louis Lavelle argue “the new rules may initially go too far and create their own distinctive set of problems.” Candid conversarions are gone. CEOs are being micromanaged by boards and now seek safe strategies rather than risk confrontations. Pay for performance is the new standard. Board independence makes it harder for CEOs to put together boards that compensate for their weaknesses. CEOs are being bullied by boards, auditors and attorneys. “The downsizing of the CEO has led, to a certain extent, to the supersizing of the advisers. That’s not necessarily a cure for everything that ails Corporate America. It is a clue that successful CEOs will have to be consensus builders in the future. And should be a warning to CEOs everywhere: The age of the absolute corporate monarch, such as AIG’s Greenberg, is over.” (The Boss On The Sidelines, 4/25/05)

Really? CEOs still seem to have the power to block the SEC from finalizing its “equal access rule.” True, they are less likely to be out and out crooks and that’s certainly a step in the right direction. See Here It Comes: The Sarbanes-Oxley Backlash in the New York Times, 4/17/05, which notes the backlash is striking, “given that it comes against a backdrop of continuing revelations of potential fraud, criminal prosecution of fraud and convictions on fraud charges.”

AFSCME Keeps Pressure on AIG

Eliot Spitzer, recently attacked Maurice (Hank) Greenberg, the ousted CEO of American International Group (AIG), on national television, saying “the evidence is overwhelming” that a series of transactions completed by the company under Greenberg’s watch constituted “fraud,” and that Greenberg could face criminal charges. His transfer of more than $2 billion worth of AIG shares to his wife three days before Greenberg stepped down as AIG’s chief executive probably would not survive a court challenge.

On April 15th the American Federation of State, County and Municipal Employees Pension Plan (the “Plan”) urged the SEC not to grant relief to the American International Group (“AIG”) if it seeks to use Form S-3, commonly referred to as shelf registration, to register new securities. In light of the recent financial scandal and the delay in filing its 10-K disclosure, Gerald W. McEntee — the AFSCME Pension Plan chairman — sent a letter to Alan Beller director, Division of Corporation Finance at the SEC, urging them to require AIG to use the longer, more complete disclosures in Form S-1 and not the abbreviated shelf registration filing.

“In light of AIG’s admitted past disclosure deficiencies, it is particularly important for purchasers of securities offered by AIG in any offering in the next year to have the more complete disclosure provided pursuant to Form S-1. … Due diligence takes on heightened importance with respect to AIG because of the fluid nature of the situation and the possibility that more improper accounting or other problems will be uncovered in the course of AIG’s own investigation or those being conducted by regulators.” “The company has lost more than 28 percent of its value in the past two months, and has already missed its required annual filing deadline twice,” said McEntee.

AIG had announced that the filing of its 2004 Form 10-K would be delayed beyond the March 31, 2005, extended due date because the company is continuing to review its accounting treatment of certain items, including transactions that are the subject of investigations by the Commission and the Office of the Attorney General for the state of New York. With limited exceptions, a registrant’s failure to file in a timely manner any periodic report, including a Form 10-K, makes the registrant ineligible to use Form S-3 to register securities for a period of one year after the due date for the report. (Pension to SEC: Tell AIG File Full Form, Reuters, 4/15/05)

Speaking of AFSCME, the March 2005 edition of Institutional Investor has an interesting article on Richard Ferlauto, who they credit as being the driving force behind major governance concessions by Circut City, Marsh & McLennan and Ryder System, as well as getting the SEC to propose its rulemaking that would have allowed shareholders to place their director nominees on a very limited number of corporate proxies. It’s a good little biography of how Ferlauto became one of the top corporate governance innovators.

From growing up in a “moderate Republican” household in an upper-middle-class town in New Jersey and reading The North Will Rise Again,to working for a nonprofit to help displaced tenants, then the Center for Policy Alternatives, Institutional Shareholder Services, and finally joining AFSCME. “My whole life I have been looking for creative ways that markets can be used to generate jobs and economic opportunity and return economic benefits to the community,” he explains. “It’s a social orientation and an economic orientation.” (Labor of Love)

Corporate Monitors in Dynegy Settlement

Dynegy Inc., a power producer, agreed to pay $468 million to settle accusations by lead plaintiff University of California that the company violated U.S. securities laws with misleading accounting and fake natural-gas trades that inflated revenue. Dynegy also agreed to elect two new directors from a list of not less than five candidates submitted by the University of California. (Dynegy Agrees to Settlement of Suit by Its Shareholders, NYTimes, 4/16/05) Board members selected (at least in part) by shareholders, what a novel convept. Dynergy now joins Worldcom, Homestore, Broadcom, Ashland, Hanover Compressor, Micorotune and perhaps others whose settlements contained similar provisions. (Ashland Will Allow Investors to Nominate DirectorsBroadcom Pledges Director Nomination and Other Reforms to Settle Suit, ISS)

Back to the top

Caterpillar and Gannett Votes; Majority Rules…Almost

Meeting results at Caterpillar found corporate governance resolutions generally getting much higher levels of support than those targeting social concerns. While the shareholder resolution on Sale of Equipment to Israel by Sisters of Loretto got most of the press because of protestors at the meeting, the measure only 3% of the vote. The resolution by the Church of the Brethren Benefit Trust did better getting 6%.

The United Brotherhood of Carpenters Pension Fund’s proposal “switch from plurality to majority voting in electing directors” got 38% of the vote and John Cheveddan’s resolution to Redeem or Vote Poison Pill got 51%. “If we are at 38% with Caterpillar, we’re going to be looking at near-majority votes as we work through the season,” said Ed Durkin, the union’s director of corporate affairs. “It will gain some momentum, that’s been our experience with other votes.” (Caterpillar shareholders reject majority voting, MarketWatch, 4/13/05)

In fact, a similar proposal at Gannett got 48%. With CalPERS endorsing majority vote election procedures last month and the Council of Institutional Investors endorsing it this month, we can expect such resolutions to start getting majority votes this season. The ISS Friday Report quotes CalPERS president, Rob Feckner, “Majority vote will give shareowners the power to hold directors accountable for their actions and their performance, and elect the best person for the job.”

Members the Council of Institutional Investors approved a new policy in favor of majority voting for director elections. The new policy reads:

Director Elections: When permissible under state law, companies’ charters and by-laws should provide that directors are to be elected by a majority of the votes cast. If state law requires plurality voting (or prohibits majority voting) for directors, boards should adopt policies asking that directors tender their resignations if the number of votes withheld from the candidate exceeds the votes for the candidate, and providing that such directors will not be re-nominated after expiration of their current term in the event they fail to tender such resignation.

“The results at Caterpillar and Gannett exceed all expectations. It now appears that a significant number of the plurality-to-majority resolutions should receive majority support this season. I guess that quite a few boards are regretting their decisions to turn down invitations to join the group of issuers that will sit down to discuss this issue with the proponents. This also raises the chances that we’ll see a binding bylaw offered on this topic before too long,” Patrick McGurn, ISS Executive VP told The Friday Report. The 4/15 issue also contains an interesting interview with Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters & Joiners, and the man most responsible for initiating the majority-voting proposals filed by the building trades unions this year. (See also IRRC’s All Eyes on Caterpillar and Majority-vote measure loses, Chicago Tribune, 4/14/05)

My personal opinion is that these are the most important initiatives of the season. We would prefer an open ballot but this appears to be the most productive road towards democratic corporate governance in these times. Way to go Ed!


The AFL-CIO significantly updated its Executive PayWatch site. “Every year, shareholders and America’s workers learn of new jaw-dropping executive compensation packages that seemingly defy rational explanation. In 2004, the average CEO of a major company received $9.84 million in total compensation, according to The New York Times.” High on their list are Yahoo, Apple, Coach, TXU, Occidental petroleum, NVR, KB Homes, Toll Brothers, Allegheny Energy and Motorola.

Responsible Voting

I recent study by the Social Investment Forum Foundation found that SRI funds are “stronger Corporate Governance proponents than Conventional funds. SRI funds as a category support more shareholder-proposed corporate governance resolutions and “Vote No” campaigns than their conventional peers by a 2-to-1 margin. They also tend to support more controversial governance resolutions, like separating the CEO and Chair positions, or limiting nonaudit services by auditors. SRI funds are also more consistent in their support of popular ‘plain vanilla’ governance issues we examined (poison pills, expensing stock options, golden parachutes, and declassifying the board)— totaling 90% support for these four issues, opposed to72% support by Conventional funds.”

As expected, SRI funds also supported social issues much more frequently 84.6% (and 3.9% abstaining) compared to Conventional funds’ support of 15.1% (and 18% abstaining). (SRI Funds Vote Proxies More Conscientiously Than Conventional Funds on Corporate Governance, CSRwire, 4/13/05)

LSE More Efficient than NYSE

The London Stock Exchange (LSE) has kicked off an aggressive marketing campaign to lure emerging markets India, China and Russia by undertaking a broad range of interaction with companies across sectors so as to facilitate their listings in the exchange for tapping international finance to fuel their growth. LSE listed 423 new companies in 2004, in which 293 were IPOs (49 international companies), whereas NYSE had 131 IPOs out of which 11 were international listings in the last year. Comparing the US and UK approaches to regulation of companies listed in their exchanges, James Woodley, manager, Business Development, LSE said, “LSE is more flexible as it is based on sound principles and effective codes, whereas in the US it is prescriptive, costly and expensive.” (London Exchange woos Indian firms, News Today, 4/9/05) The LSE appears to offer better corporate governance protections for minority shareholders at lower cost.

Financial Literacy Pays

Corporations whose audit committees were composed of board members who are financially literate had stocks that performed better in a study by Roman L. Weil, Douglas J. Coates and M. Laurentius Marais. The professors developed a classification scheme and researched corporate audit committees based on listing requirements of the NYSE, promulgated late in 1999, the ability of committee members to understand transactions by the company, the accounting issues involved in those transactions, the choices by management, and the implications of those choices for potential manipulation of financial reports.

Executives with clear accounting experience received the highest score of four; financial executives scored a three; nonfinancial executives scored a two; and nonbusiness executives, like university presidents or politicians, scored a one.

They scored the audit committees of 300 large companies in 2000 and 2004, and of a subsample in 1996 as well. Scores did not change significantly between 1996 and 2000, but improved companies began implementing financial literacy requirements. Companies who improved their financial literacy experienced superior stock market returns enjoying excess annual returns of 4.6% more than those which did not improve.

They also surveyed committees on how companies assess the financial literacy of audit members. They received 27 responses, 25 from audit committee chairs and 2 from CFOs. None of the respondents reported a formal process to assess the financial literacy of audit committee members. The majority report that the someone else screens candidates before nominating them. Two-thirds reviewed background experience. “Not one of the respondents indicated that their board had any formal process to increase financial literacy of the audit committee members.” “We found neither evidence of formal training nor systematic steps taken by the firm to increase the literacy of the audit committee members.”

They conclude, “Shareholders appear to benefit from the company’s having a more literate audit committee and the magnitude of the return dwarfs the costs of increasing that literacy.” (The Better the Audit Panel, the Higher the Stock Price, New York Times, 4/9/05 and Audit Committee Financial Literacy: A Work in Progress, SSRN, March 11, 2005) Why not give them a test?

Bosses Still Unaccountable to Owners

The Economist discusses recent trails and tribulations of several American CEOs and says many will believe recent history points to the same, welcome conclusion: “that the imbalance in corporate power of the late 1990s, when many bosses were allowed to behave like absolute monarchs, has been corrected. Alas, appearances can be deceptive. While each of these recent tales of chief-executive woe is a sign of progress, none provides much evidence that the crisis in American corporate governance is yet over. In fact, each of these cases is an example of failed, not successful, governance.”

Sarbanes-Oxley is imposing heavy costs but “whether these are exceeded by any benefits is the subject of fierce debate and may not be known for years.” The 4/7/05 article, Bossing the Bosses, concludes with the following:

Give shareholder democracy a chance

How much better it would be, then, if the owners of corporate America were to play a more active role in policing the bosses who run their firms. Alas, the institutional shareholders which, on paper, are big enough to do this job are rarely inclined to do so. On the face of it, this looks like just the kind of failure of fiduciary responsibility that Mr. Spitzer likes to pursue. But there is one big problem with demanding more activism from shareholders: their votes in America are still largely worthless, as this season’s proxy season, which has just begun, will show once again.

Despite all the talk in America about shareholder democracy and ownership, shareholder resolutions, even if backed by a majority, are rarely binding on management. In many cases, managers can even stop a resolution from being put to a vote. The Securities and Exchange Commission recently proposed a tiny rule change to make it slightly easier for shareholders to nominate candidates for election to boards of directors. Lobbyists representing America’s top bosses easily and unceremoniously killed the proposal. Look no further to see where the real power still resides in corporate America.

A recent survey of institutional investors by Pensions & Investments found the most important corporate governance issue in the future will be executive compensation. (Survey finds executive comp key issue for institutional investors, 4/4/05) Widely discussed solutions include long-term cash-based incentives or restricted stock. The next biggest concerns are “director accountability” and the “accuracy and transparency of financial reporting.” Much further down the line in importance as an issue was “shareholder access to director nominations” but we view that not so much as an issue as a solution. Once shareholders can hold board members accountable board members can much more easily tailor solutions to the other issues specific to each company.

Back to the top

Schwarzenegger Spares Public Pensions… For Now

With law enforcement officers and firefighters all around, it was clear an announcement would be forthcoming. Sure enough, at a surprise news conference on the morning of 4/7/05 California’s Governor announced he is withdrawing his support of an initiative that would have outlawed defined benefit pension plans for all public employees in California.

Opinion polls had first shown overwhelming support for the plan. According to a poll by the Public Policy Institute of California, 61% favored his plan, while 25% opposed it. However, when voters began learning that the initiative would have eliminated death and disability benefits, images of disabled police and firefighters, as well as their widows, drew hundreds of protestors to Schwarzenegger’s fund raisers and his polls dropped to below 50% approval.

Requiring two systems during a forty-year phase-out wouldn’t have saved taxpayers money and would have resulted in lower retirement benefits for the vast majority of new public employees. According to the San Francisco Chronicle, the median defined contribution plan (DC) plan return from 1990 through 2002 was 6.86%. For the same time period, CalPERS’ rate of return was 8.9%. So why the proposal?

One obvious reason is that some want to feed at taxpayer expense. It costs 0.37% to administer the CalPERS defined benefit (DB) plan, but will probably cost more than 1.5% per year as a defined contribution (DC) plan, with no death/disability benefits or inflation protection. If California funds have assets of approximately $500 billion (CalPERS and CalSTRS alone have over $300 billion), the yield to money managers will be an extra $5.65 billion every year while earning $10.2 billion less for public employee retirements every year.

Second, Schwarzenegger raised more than $23 million in political donations in 2004, using the money for initiative campaigns, travel, and fund raising. The DB to DC initiative would have helped him raise a fortune – at least $50 million to fund his 2005 initiatives and another $50 million for his reelection campaign. And the amount to be raised for initiatives may be understated, since these are not subject to the reelection campaign limits of $22,300 per donor. Schwarzenegger would have raised more money than all candidates but the President.

However, another huge reason for the initiative was the role CalPERS, CalSTRS, and other public funds have taken in corporate governance. Jon Coupal, of the Howard Jarvis Taxpayers Association that was collecting signatures to put the initiative on the ballot, said the proposal seeks to end “the social engineering and corporate governance agenda” of CalPERS. Why do powerful forces want to end traditional pension funds, especially public pension funds? Because pension funds are the primary check on the power and greed of corporate CEOs who don’t want the pay linked to their performance and don’t want to be evaluated by board members that can be held accountable by shareholders. CalPERS has been a leader in the effort to bring accountability to corporate boardrooms. In November 2004 they announced their next major target – CEO pay. Could that have something to do with the attack?

The withdrawal of the pension initiative marks the first major defeat for the Republican Schwarzenegger.

As he said in the movie, “The Terminator,” “I’ll be back.” The Governor said “misconceptions” among firefighters and police officers that privatization would strip them of death and disability benefits had come to dominate the issue. “I have decided to work together with leaders in local government and public safety to craft new initiative language that makes it absolutely clear that the families of every cop, firefighter and public safety professional lost in the line of duty are protected in our pension reform plan,” said Schwarzenegger. Then he can put the revised language to the voters in June 2006. “Let’s pull it back and do it better,” said Schwarzenegger. (see Full Text of Governor Schwarzenegger’s Pension Reform Announcement – April 7, 2005)

Sempra Energy’s London Meeting

Sempra held its annual meeting in London because it wanted to raise its profile with its European investors. However, reports are that Sempra’s large London-based shareholders, Barclays Global Investors and UBS Asset Management, didn’t attend. Only 50 people attended and half were Sempra officers.

Shareholder won the following proposals: annual election of Sempra directors passed with 67% vote, expensing of stock options won with 62%, repeal a poison pill passed with 72%. A proposal to link the award of stock options with corporate performance targets was defeated, winning only 23% of the vote.

John Chevedden’s spokeperson at the meeting, Neil Millar-Robinson of the Manifest Voting Agency, noted that firms based in the United Kingdom aren’t allowed to hold annual meetings abroad without making them available for Internet broadcast. Good advice for companies like Sempra, seeking to hide from their shareholders. (Sempra’s half-hour in London, 4/6/05, San Diego Union Tribune)

Investments Don’t Govern Themselves; Active Ownership is the Answer

That’s what we’ve been writing for ten years and it is also the subtitle of an article reporting on the work of Joachim Heel and Conor Kehoe. They looked at a sample of five or six deals at eleven leading private equity firms, factoring out market or sector increases, and found that active ownership pays. Add to the growing pile of evidence. That’s great but Heel and Kehoe go an important step further. They report their “research reveals a strong correlation between five steps that private equity firms can take” to outperform.

  1. Secure privileged knowledge before committing.
  2. Institute focused performance incentives for top management and require their substantial investment.
  3. Craft and execute better value creation plans. The key may be an independently researched plan to critically review management’s plan and then to subject the new plan to continual review and revision.
  4. Front-loading by spending almost each of the first 100 days with top execs.
  5. Changing management? Do it early.

The author’s end with “A standard active-ownership process that applies and develops best practices is the next step for the private equity industry.” See Why some private equity firms do better than others in The McKinsey Quarterly, 2005 Number 1.

Comments are closed.

Powered by WordPress. Designed by WooThemes