November 2005

Code of Conduct: Windowdressing or Binding?

The International Labor Rights Fund (ILRF) filed a class action in Los Angeles Superior Court on behalf of the employees of Wal-Mart’s overseas suppliers to find out. The ILRF argues Wal-Mart’s “Standards for Suppliers,” which specify wages, hours of labor, and environmental conditions constitutes a binding contract. Wal-Mart is likely to claim it is simply a goal to work toward – an aspiration. An excerpt follows:

As a supplier, you are asked to sign the document for our records. Wal-Mart is required to keep all signed copies of the Supplier Standards for Direct Imports on file. Buyers working directly with suppliers forward all signed copies of the Supplier Standards to the Wal-Mart Vendor Master. Wal-Mart requires that a poster version of the Supplier Standards in the local language and English be placed in each production facility servicing Wal-Mart.

Companies might do well to review any of their own such codes to ensure mere hopes and dreams are clearly labeled as such and real standards are enforced. (Labor Group Holds Wal-Mart To Code Of ConductCorporate Legal Times, November 2005)

Majority Vote: Real Democracy or Illusion?

That’s essentially the question asked by Phyllis Plitch, writing for Dow Jones Newswires in an article entitled Critics Fault Changes to Board Votes (WSJ, 11/29/2005) The common element of the new majority vote policies is that directors will be asked to tender their resignations if they get more “withhold” votes than “yea” votes. This is to avoid the situation where even a vast majority of votes against (withheld) results in their election under plurality voting. The issue being raised is that in many cases these new voluntary guidelines are not legally binding.

Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners of America and the driving force behind the majority vote movement, “thinks having a legally binding “no” vote is important, in part because it will force investors to give serious thought to how they cast a vote.” We would advise doing away with plurality voting. Shareholders should be able to place their nominees on the corporate proxy and elections should be decided by instant run-off voting.

SEC Proposes Proxy Option

The SEC voted in favor of an alternative model by which companies conducting proxy solicitations could satisfy Rule 14a-3 requirements to furnish proxy materials by posting them on an Internet website and providing shareholders with notice of their availability. Companies could potentially save about $500 million a year or more in printing and postage costs. According to the SEC, “other soliciting persons also would be permitted to follow the proposed alternative model.” For further information, contact Raymond Be, Special Counsel, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430. 

Cox said the SEC probably won’t eliminate paper copies. “Some investors will always prefer to avoid computers at any cost,” Cox said. “In a nation of 300 million people, we can’t have a one-size-fits-all approach. But even investors who continue to get their proxy statements mailed to them will benefit from electronic delivery because it’s their money we’ll be saving.” Companies are estimated to spend $5 on printing and mailing each package containing a proxy statement and annual report. The cost of postcards would be small by comparison. Supported by all five commissioners, the proposal, which is now subject to a 60-day public comment period, would not take effect until 2007.

Persons other than the company that are soliciting proxies would be able to rely on the proposed “notice and access” model in substantially the same manner as the company, with appropriate changes in the information required in the Notice. Potentially, that could make it somewhat easier for shareholder activists to reach out to other shareholders. However, activist still face legal challenges and many other expenses.

Similarly, the NYSE proposed to the SEC on Sept. 30 that they eliminate a requirement that listed companies physically distribute annual reports to shareholders if companies make their annual financial statements available on their Web sites. (SEC Considers Proxy Rule Changes To Allow Web Delivery, Compliance Week, 11/29/2005) (SEC may back online proxy posting, Chicago Tribune, 11/29/2005) (SEC press release, 11/29/2005)

Corporate Watchdog Radio

Tune into a new half hour radio show and audio/video podcast, Corporate Watchdog Radio. Hosted by attorney Sanford Lewis and journalist Bill Baue, it originates on the 1st and 3rd Wednesday of the month but you can listen to it anytime. The show seeks a national audience, with a frequent focus on SRI topics. On a recent show, they interviewed SRI investor and author John Harrington (The Challenge to Power: Money, Investing And Democracy). Upcoming shows include Robert Monks on the future of shareholder democracy. Check it out this great resource.

Webb Challenges HK “Reforms”

Under the Hong Kong government’s proposals, 100 of 800 new seats on the expanded Election Committee would go to the industrial, commercial and financial sectors which are dominated by corporate voting.

In almost any democracy, there are strong, well-financed corporate and special-interest lobbies, and depending on the quality of campaign finance laws, they can be very influential on government policy, but the difference is that they are nothing more than lobbyists without a vote of their own, and ultimately those democratically elected governments have to make policies that as a whole are acceptable to the public who elect them by universal suffrage, or they won’t win re-election. By contrast, the HK Government’s mandate, and its support in the Legislative Council, is dependent on just a tiny fraction of the population who control the corporate and special interest votes.

We encourage readers to subscribe to David Webb’s informative independent newsletter on corporate and economic governance, business, finance, investment and regulatory affairs in Hong Kong. (Corporate Voting in HK Elections, 11/28/2005)

Focus on Strategy Needed

According to a study by the consultancy Booz Allen Hamilton, of all the value destroyed by the largest US companies between 1999 and 2003 (including Enron, Tyco and friends), just 13 per cent was the result of failures of regulatory compliance or board oversight. Eighty-seven per cent was caused by strategic or operational error. The constant pressure on boards to spend more time on investor relations and meeting regulatory requirements was diverting attention from strategic and operational issues, thus perversely increasing the chances of corporate failure.There are now 273 governance codes in place around the world.

  1. Prescriptions based on it don’t seem to work. ‘Good’ governance according to the codes may or may not prevent fraud (Enron ticked all the boxes at the time).
  2. Share options that were intended to align director interests with shareholders generated perverse incentives for fund managers and executives first to collude in hoisting share prices above their underlying value and then to use any means to keep them there.
  3. Where there is a reported 90% churn of FTSE stockholdings annually, the idea of ownership and the primacy of shareholder rights, the fountainhead of agency theory, simply dissolves. (Compliance, the corporate killer, Guardian Unlimited, 11/27/2005)

Greece Gets Poor Grade

Only 33% of the companies have complied with the Combined Code of corporate governance as compared to 60% in Great Britain, according to a survey by Grant Thornton and the University of Economics of Athens. In over half of the companies, the president of the board was formerly the CEO or currently holds that position too. The survey also found little transparency in announcing the hiring and assigning new BoD members. (Greece: 33% of Companies Adopt Corporate Governance Directive,, 11/25/2005)

Sebi May De-list

The Securities and Exchange Board of India said listed entities could face stiff penalties, including de-listing, if they do not comply with corporate governance norms, such as having at least 50% independent by the year-end. (Sebi may de-list corporate governance defaulters, The Economic Times, 11/25/2005) A study by Business Line last week of the 50 companies that constitute the Nifty shows that just one of the nine PSU companies in the index — BHEL— complies with the requirement. Companies will also have to submit a Compliance Report to the stock exchanges every quarter on the composition of the board, Audit Committee and its functioning and disclosures on related party transactions, subsidiaries, etc. (A Clause that must be enforced, Business Line, 11/27/2005)

Pensions Hedge Bets

Pension plans and other large institutions are expected to invest as much as $300 billion in hedge funds by 2008, up from $5 billion a decade ago, according to a study by the Bank of New York and Casey, Quirk & Associates. Critics wonder whether it makes sense to rely on investments whose returns are hard to predict, managed by private partnerships that disclose little about their operations, and charge the highest fees on Wall Street. (Pension Officers Putting Billions Into Hedge Funds, NYTimes, 11/27/2005)

Lack of Trust in Asian Businesses

An Edelman survey of 131 fund managers in 10 countries found lack of trust as a prime issue.  Only 23% of Asian-based fund managers trust businesses to “do what is rigt.”  Trust was even lower for company executives; 1 in 5 trust businesses to “do what is rigt.”  Nongovernmental bodies were the most trusted organizations, perhaps reflecting the growing importance of socially responsible investing, the environment and worker rights. Governments were the next most trusted organizations, with the media coming in last. (FT, Funds sceptical over Asian businesses, 11/22/2005) At least we can still trust the Financial Times

China Loosens Up

China is going to exempt licensed overseas investors from a capital gains tax and make it easier for them to invest in a number of ways, according to Money Management Executive. Investors will be able to sell holdings after 3 months instead of a year. China is increasing the $4 billion limit it had imposed on foreign investors to $10 billion. China also plans to speed up the application process and lower the minimum asset threshold it now requires of foreign investors. Currently, that is $10 billion in assets and an investment commitment of $50 million.

The Shanghai Composite Index and the Shenzhen Index are down 9.7% and 12% respectively so far this year. (China Seeks to Entice Overseas Investors, 11/21/2005) Will these measures be enough to turn that around. I doubt it. Something is wrong when investors are losing money in one of the world’s fastest growing economies and making it easier to invest doesn’t address more fundamental issues of democratic corporate governance.

ESG Goes Mainstream

Compliance Week reports that Mercer Investment Consulting has begun rating investment managers on their environmental, social and corporate governance (ESG) voting, as well as their success at integrating ESG issues into mainstream investment analysis. No longer a fringe part of the investment community, “a growing number of clients were starting to ask how they can incorporate ESG issues into their investment decision making,” says Jane Ambachtsheer, a principal with Mercer Investment Consulting in Toronto.

A survey by Mercer Investment Consulting released earlier this year found that 73% of 190 regional investment management organizations polled predicted that incorporation of ESG performance indictors will become mainstream within 10 years, and 65% predicted that positive or negative screening will be mainstream within 10 years. Mercer apparently wants to be on the front of that wave. Mercer consults institutional investors, including pension plans, churches, and charities, in 35 countries. (Firm Begins Rating Investment Managers On ESG Issues, 11/22/2005)

Elson Seeks Investor Involvement in Board Nominations

The current issue Directors & Boards (4th Quarter 2005) includes an advice snippet from eleven board members and governance experts. The most responsive was from Charles Elson, Edgar S. Woolard Jr. Chair in corporate Governance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

…”Large investors need to take a more active role in the board nomination process – seeking either director of indirect representation. Directors representing large equity interests tend to be highly motivated and effective management monitors. Rules and norms, both legal and market-based, that restrict such involvement need to be re-examined and reformed to encourage this kind of activity. This is the biggest single change to our governance system that I believe is now necessary to ensure better board functioning.”

Elson is leagues ahead of the others who call for boards to “strengthen the focus on strategy,” “be better informed,” “know what and where all the risks are,” “get passionate about the company’s mission,” etc. Compared to Elson’s response, most sound like answers from Miss America contestants. Charles Elson, you’re at the top of the class.

Runner-up advice came from Greg Taxin, CEO of Glass, Lewis. We need to “encourage more ‘noisy exits.'” “Directors should resign when they detect incorrigible malfeasance on the part of management. This would serve to alert shareholders…it is curious we do not see more noisy exits by independent directors who come to realize they cannot change value-destructive behavior.” One reason just might be that they want to get appointed (there are really no “elections”) to another board. That isn’t likely if they make a noisy exit because boards want team players. Taxin, maybe you’re just too idealistic but its better than calling for a “pull back on the ‘separating roles’ movement.

Dennis A. Johnson

The Corporate Board (November/December 2005) includes a conversation with Dennis A. Johnson, Senior Portfolio Manager for Corporate Governance at CalPERS. Johnson has 24 years of industry experience in investment management and proxy voting policy.

Johnson indicates that executive compensation disclosure and transparency will be at the top of their list of priorities. They’ll be looking for paying continued attention to compensation “paid outside of the bounds of employment contracts, such as those surrounding transactions with accelerated vesting and option bonuses.”

Important secondary issues will include greater transparency and disclosure of corporate environmental liabilities. Johnson also said they would be pursing proxy access to the board ballot and that he is “fortunate to be surrounded with incredible people on our staff. See contents of current issue.

China Looks Past U.S.

Wu Chen argues in “View From China” that the uproar over CNOOC’s failed bid to purchase Unocal and the fiasco in the wake of Hurricane Katrina have eroded Chinese admiration for American capitalism. (, November 2005) Also from, mark your calendar for a free webcast –Good Governance, Smart Performance: Turn Improvements in Your Financial Closing Process into Drivers for Excellent Performance – Sponsored by Cognos. January 17, 2006.

Board Evaluations Up

survey by Corporate Board Member and PricewaterhouseCoopers found that 84% of respondents say their boards conduct formal evaluations; 37% evaluate individual board members. This compares to 33% and 19% respectively in 2002. Individual evaluations were rated “very effective” or “effective” in the 2005 survey, compared with 37% in 2002. Fully 58% of those surveyed got a raise during the year, 73% felt their risk had increased over the same period and the average number of hours per month on board activities has gone from 19 to 22 in the last year.

Although most governance experts believe a separate board chair, lead director or collaborative process should set the board agenda, 74% of survey respondents say primary responsibility should fall to the CEO. Only 53% of boards get information about employee values and job satisfaction. Growing topics of discussion may be their company’s competitive position, strategic planning, and majority vote director elections. CEO compensation will also be up as a topic since 70% of those surveyed admit to having trouble controlling it and shareholder a likely to submit more proposals on this topic than ever. (Research by Nixon Peabody found 42% of Forutne 100 companies increased disclosure of some exec perks in their 2005 proxy statements, according to, 12/2005. Even the October Reader’s Digest carried an article, $54,000 Per Hour) Another topic that begs for attention is crisis planning, since 51% say their boards haven’t even discussed it.

Mutch Joins Governance Game

Peregrine Systems CEO John Mutch plans to launch a $250 million hedge fund to invest in tech firms that need a corporate governance overhaul. “Mutch has first-hand experience with what could happen with poor corporate governance. San Diego-based Peregrine, which makes software businesses use to manage their information-technology assets, got hit by an accounting scandal that resulted in multiple indictments of former executives on fraud charges.” (New hedge fund eyes governance, MarketWatch, 11/18/2005)

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Shareholder Empowerment is Alive and Well

That, according to Sister Pat Wolf, executive director of the Interfaith Center on Corporate Responsibility (ICCR), a shareowner engagement network of more than 275 faith-based institutional investors with assets of about $110 billion. The evidence? William Baue cites the following:

  • Sister Pat is in constant demand as a speaker.
  • The United Brotherhood of Carpenters and Joiners and other unions are re-filing resolutions seeking director elections by majority vote–the resolution recently received 61.2 percent support at KLA-Tencor (ticker: KLAC).
  • Growing number of companies adopting a policy that asks directors who get a majority withhold vote to resign.

Baue reminds us that Bob Monks pronounced the “death of shareholder democracy” after the SEC allowed ExxonMobil (XOM) to omit his third-year resolution requesting a separation of CEO and chair roles. (Shareowner Empowerment Is Alive and Well: a Preview of the 2006 Proxy Season, 11/16/2005)

But I’m sure Bob would readily admit, we’ve never had shareholder democracy, so it was never born to die. A coalition of CEOs, money market managers, and politicians keeps the machinery of laws and regulations working against us. For example, ADP, the large processor of proxy votes, reported that 23% of the votes in the 2002 proxy season were cast by brokerage firms that lacked instructions from shareholder, and every vote supported mangement.

Bob has tilled the soil and planted many seeds: requiring pension fund fiduciaries to vote soley in the interest of plan beneficiaries, founding ISS to provide advice on how to vote and LENS to show there is money to be made in creating more democratic corporate structures, writing numerous books and articles to awaken generations, convincing the SEC to require disclosure of mutual fund votes and policies…to name just a few. I just hope he lives long enough…I hope I live long enough, to see democratic corporate governance take hold.

Owners Have No Say Over Teflon Directors

Forbes and The Corporate Library found that many who were directors of Enron, WorldCom, Adelphia Communications, Global Crossing, Waste Management, Tyco International and others during periods of fraud and abuse are still overseeing companies.

Many companies don’t make it easy for shareholders to find out where their directors have been. Sprint Nextel’s biography for William E. Conway, for instance, mentions nothing of his stint at Enron. Nor will you find the Global Crossing (nasdaq: GLBC – news – people ) directorship of Eric Hippeau among the listed achievements in his Yahoo! bio. Director biographies on the Web sites of Lockheed, Viacom, Coca-Cola, Avon Products (nyse: AVP – news – people ) and (nasdaq: OSTK – news – people ) also fail to mention service at Enron, Global Crossing or WorldCom. Viacom and Coca-Cola point out that their practice is to mention only current affiliations. notes “This is possible under the current system, in which shareholders only get to withhold votes for, and not vote against, a director. Since boards usually propose only as many nominees as there are available seats, even a single vote could give someone another term.” The fight for more democratic corporate governance still has a long way to go but appears stalled under the Bush administration. (Teflon Directors,, 11/17/2005)

Stausboll Interim CalPERS CIO

Attorney Anne Stausboll has been named as Interim Chief Investment Officer (CIO) at CalPERS, following the recent resignation of the pension fund’s current CIO Mark Anson who will step down in January to become Chief Executive Officer of Hermes.

Stausboll is currently the Assistant Executive Officer of CalPERS Investment Operations. She formerly served in the CalPERS legal office for six years, including two years as Deputy General Counsel. She left in 1999 to become General Counsel for California State Treasurer Phil Angelides, and was later appointed Chief Deputy Treasurer in July 2000. She returned to CalPERS in 2004 to help lead CalPERS investment operations.

CalPERS expects to name a new CIO in the next six to eight months after a global search. (Press Release, 11/16/2005)

KSU Corporate Governance Center Honored

The National Association of Corporate Directors, Atlanta chapter, recently recognized the Kennesaw State University’s Corporate Governance Center, which is celebrating its 10th anniversary this year.

Center Director and professor of management and entrepreneurship Paul Lapides, accounting professor Dr. Dana Hermanson and forensic accountant Bobby Vick, of Vick & Co., were each presented with a plaque recognizing their “pioneering vision and ongoing leadership in the field of corporate governance.”

Founded in 1995, the center is composed of more than 20 professors from 10 universities, and is nationally recognized as one of the leading providers of corporate governance information to directors, CEOs and other senior executives, researchers, professors, advisers and the public. That same year, KSU became the fifth school to offer director-education programs, joining Harvard, Wharton, Stanford and Northwestern. The center’s programs and services promote effective corporate governance for public, private and nonprofit enterprises.

“The vision we had was to become a leading source of information on corporate governance for anyone who might be interested in the field,” Lapides said. “There was, and still is, a tremendous opportunity for directors to improve what they do, and to increase their understanding of what their duties and responsibilities are as directors.” And, true to that vision, over the last 10 years the center has consulted with practitioners, authored relevant research, and provided expert and unbiased analysis to the news media.

“The Kennesaw Governance Center is a jewel in the realm of director education and research institutes,” James Kristie, editor and associate publisher of Directors & Boards, said. We congratulate the Center, especially Paul Lapides, on their 10th anniversary …the same age as CorpGov.Net.

Frank CEO Pay

The Protection Against Executive Compensation Abuse Act, sponsored by Rep. Barney Frank (D-Mass.), takes aim at CEO pay. Frank cited a study showing that in 2003 the top five executives at each US public company received compensation that on average amounted to 10.3% of their employer’s profit, up from 4.8% in 1993.

The Business Roundtable said it would oppose the measure — although spokeswoman Tita Freeman couldn’t say why until they read the proposal. The bill would require publicly traded companies to:

  • Provide all details about how much executives earn in cash, incentives and perks each year, and submit the packages for shareholder approval.
  • Disclose the full market value of company-paid perks, such as an executive’s personal use of a company jet.
  • Publicly report the specific criteria by which executives earn incentive pay and return any bonuses or incentive pay if their company restates its earnings downward within 18 months of when the award was granted.
  • Tell shareholders “in a clear and simple form” how much the executive officers stand to make on a proposed takeover or acquisition that requires shareholder consent.

The average CEO took home a 91% raise in 2004, according to Corporate Library, even as workers got raises amounting to less than 4% on average. (Bill Targets Executive Compensation, LATimes, 11/11/2005)

Hidden Financial Risk

Hidden Financial Risk: Understanding Off Balance Sheet Accounting by J. Edward Ketz examines the methods that companies use to hide the failings of managers, directors and auditors who allow questionable accounting methods. Here are a few snippets to give you a flavor of the book.


“When a corporation controls the operations of another company, it should consolidate the operations of both. When the parent applies the equity method instead, we can be sure that it is hiding debt.” (p. 70)

“Use of operating lease accounting ‘gains’ the managers an understatement of their firm’s financial structure by 10 to 15 percentage points.” (p. 101)

“Pension expense includes the service cost plus the interest on the projected benefit obligation minus the expected return on plan assets plus the amortization of various unrecognized items, such as the unrecognized prior service cost. The only item found on the balance sheet is the prepaid asset or the accrued pension cost, which in turn equals the pension assets minus the projected benefit obligation minus various unrecognized items.” (p. 123)

Regarding special purpose entities, “consider investing only in those companies that consolidate their SPE debts…Do not invest in those that play games…or those that refuse to recognize the liabilities.” (p. 143)

Boardroom Tea Leaves

Ralph Ward’s Boardroom Insider warns us to look beyond good governance checkboxes. “Half of the current GM board members have ‘retired,’ ‘former,’ or ’emeritus’ in their titles. Further review of this board’s other members (including Karen Katen, president of Pfizer and Ex-Compaq chief Eckard Pfeiffer) raises another concern — none seem to have any experience actually making or marketing cars. In short, the board of General Motors seems shaped not to oversee a growing, dynamic enterprise, but to equitably manage the affairs of a dying one — seemly, workmanlike executors of a corporate estate.”

CCO Errors

Bob Mueller, a contributing editor with the IT Compliance Institute, discusses 7 common errors firms make in their frenzy to hire chief compliance officers or corporate compliance officers (CCOs) or chief governance officers. (Seven Mistakes Companies Make in Hiring a Chief Compliance Officer)

  1. Thinking of compliance as an IT issue. “While CCOs should have the technical savvy to understand IT’s role in the compliance picture, they should generally have a broader business background and knowledge base.”
  2. Hiring someone without industry-specific expertise. “The food and drug industry, for example, functions in an entirely different regulatory environment than, say, banking.”
  3. Failing to set job goals before hiring. “Most companies have never hired a chief compliance officer before, and they haven’t thought through what they expect from a CCO or even what the full scope of compliance is.”
  4. Failing to involve departmental stakeholders in the decision. “Compliance occurs within the major business units.”
  5. Undermining the position’s authority. “Just assigning a compliance officer means nothing if that compliance officer doesn’t have what it takes to get the job done.”
  6. Omitting background checks. “CCOs should be untainted by the sorts of abuses regulations are meant to discourage.”
  7. Low-balling compensation. Pay enough to keep them. “When it comes to compliance leadership, instability introduces risk.”

Effective Board Engagement in Strategy

That’s the subject of a talk by Beverly Behan of Mercer Delta Consulting scheduled for Thursday, December 8, 2005 in Sacramento.

The management and the board need to define a process that draws from and leverages the knowledge and insight around the board table. Those organizations that succeed to effectively engage their boards on strategy will effectively drive the mission. In the absence of effective board engagement, the management runs the risk of moving forward with a strategy neither buys into nor really understands. This is a dangerous combination as it can lead to a lack of support and knee-jerk decision making that may not be in the best interest of the organization or its shareholders. Such a combination can ultimately lead to board action that affects the very involvement of the leaders in the organization.

Join us if you’re in Sacramento. Event sponsored by the Sacramento Subchapter of the Northern California Chapter of the National Association of Corporate Directors. CorpGov.Net’s publisher, James McRitchie, will be there.

Bribes Not at Issue for SEC

According to a 11/8/05 press release by Harrington Investments Inc (HII), the SEC has okayed Monsanto’s right to keep an HII resolution on bribes off the corporate proxy. The resolution requested the Board of Directors to establish an oversight committee of independent directors to insure compliance with the Monsanto Code of Conduct, the Monsanto Pledge, and all federal, state and local government laws, including the Foreign Corrupt Practices Act. Monsanto has apparently admitted bribing Indonesian government officials, violating federal law, and the company code of conduct.

“Shareholders can’t nominate Monsanto directors and can’t vote against corporate self-nominated directors. Corporate directors can be elected by one “yes” vote. Moreover, this shareholder resolution that the SEC is allowing Monsanto to keep off the ballot is advisory only. Even if the shareholders voted to support independent director oversight, it would not require the company to comply. Stalin would love this system,” said John Harrington, President and CEO of HII. “Clearly, the SEC leadership under Christopher Cox, who was on the corporate dole while in Congress, cannot be relied upon to protect the interest of shareholders, the legal owners of publicly-traded corporations.”

The press release goes on with a list of complaints, crimes, and fines. Corporate democracy at work. Are we disgusted yet?

Nappier Vows End to “Scavenger” Hunts on CEO Pay

Connecticut’s State Treasurer Denise Nappier is focusing on six companies and may introduce resolutions next year to bring CEO pay under control. Patrick McGurn, of Institutional Shareholder Services thinks “this is going to be the breakout year” as shareholder express their growing frustration.

According to The Corporate Library, CEO pay growth doubled last year, with a median increase of 30% compared with 15% the year before and 9.5% in 2002. Median total compensation at the largest companies is nearly $6 million. Companies, such as Merck, have failed to tie pay to perfomance. They awarded then-CEO Raymond Gilmartin a $1.38 million bonus after the earnings collapse brought on by the failure of Vioxx. And that was on top of $34.8 million from exercising stock options and a new grant of 250,000 options.

Total compensation for James Bagley, CEO of Lam Research Corporation, increased by 7,440%, triggered by over $31 million in stock option profits. According to the survey, six of the ten companies whose CEOs received the highest increases in Total Compensation underperformed their peers in stock price appreciation over the previous five years. (press release)

Even the usually guarded Charles Elson, of the Weinberg Center for Corporate Governance, says “I think the excesses have just gotten to the point opposition has reached critical mass.” Nappier will urge companies to clearly disclose their executive compensation in one place on the proxy statement. “As investors, we should not have to engage in a scavenger hunt.” (Executive pay sparks ire of institutional investors, Newsday, 11/8/05)

UN Fails to Follow Own Guidance

Bloomberg reports, the United Nations often ignores its own “Global Compact” when investing its own fund. Apparently, fighting anti-pollution, labor rights and other standards of corporate responsibility, isn’t so important that it stops the UN from business as usual. (UN Ignores Own Standards in Investing $29 Billion Pension Fund, 10/31/2005)

Fiduciaries Should Include ESG Factors

According to Bill Baue’s article, Fiduciary Duty Redefined to Allow (and Sometimes Require) Environmental, Social and Governance Considerations, “The longstanding conventional wisdom that fiduciary duty precludes environmental, social, or governance (ESG) considerations in institutional investment decisions was overturned by a report released at the United Nations Environment Programme Finance Initiative (UNEP FI) Global Roundtable.” While I doubt all objections to ESG considerations will immediately be dropped, the worldwide scope of the report and the reputational strength of its authors, London-based Freshfields Bruckhaus Deringer, should add increased credibility to inclusion of such factors.

Here is a short excerpt from the portion of the report dealing with the United States:

While there continues to be a debate about the exact parameters of the duty, there appears to be a consensus that, so long as ESG considerations are assessed within the context of a prudent investment plan, ESG considerations can (and, where they affect estimates of value, risk and return, should) form part of the investment decision-making process. Some state laws go further. For instance, Connecticut state law expressly permits the state pension fund industry (the Treasurer) to consider the social, economic, and environmental implications of its investments.

There appears to be no bar to integrating ESG considerations into the day-to-day process of fund management. Indeed, this would seem to follow inexorably from the acceptance of modern portfolio theory and the discretion that gives trustees to fashion diverse investment strategies – provided the focus is always on the purposes or beneficiaries of the trust and not on securing unrelated objectives. Although the Department of Labor has on occasion appeared to support an investment-by-investment approach to decision-making, case law and the weight of commentary indicates that US courts would almost certainly apply the modern portfolio approach in evaluating challenges to investment decisions. That is, while not entirely free from doubt, it appears that the bare profit maximisation of individual investments has not survived the modern prudent investor rule.

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Ratings May Vary

In Spotting the next Tyco, Marc Gunther highlights the differences among rating firms the Corporate Library, Institutional Shareholder Services (ISS), and Governance Metrics International. While the Corporate Library gives Home Depot, Lucent, Wells Fargo, and Viacom grades of F, only Viacom get low grades from each of the services.

Gunther notes “The Corporate Library gives subpar grades of D or F to 162 of the FORTUNE 500, including such blue chips as Wal-Mart Stores, Exxon Mobil, GE, Chevron, Citigroup and Time Warner. With that many companies tagged, the odds of picking up one or two cases to brag about are pretty good.”

The proof may be in how well funds do that use the ratings as an investment strategy. According to Gunther, “Monk and Minow have seeded two small funds (assets: about $100,000 each) that buy shares of firms with better ratings and short low-rated ones.” That doesn’t sound like much of a gamble. “ISS, meanwhile, has formed a partnership with the FTSE Group to create six investable indexes, each of which eliminates companies with the lowest governance scores.” For more information on the FTSE Group/ISS effort, see FTSE ISS Corporate Governance Index Series. So far, no mutual fund families have implemented such an approach, but that time is coming.

$10,000 Award Offered for Testing Turbo Democracy

The Problem, according to, is that uninformed voters elect poor leaders in governments and corporations, resulting in waste, pollution, war, and numerous other problems that many of us are all too familiar with. The Solution is TurboDemocracy, which empowers voters by letting them pay news media with public (or corporate) funds. This allows the news media to provide better coverage. Their reimbursement can fluctuate based on the usefulness of the information they provide, as determined directly by voters. More informed voters will elect better leaders. To test that theory, is offering $10,000 to a university student council willing to implement the idea on an experimental basis. Contact: Mark Latham.

TurboDemocracy is an outgrowth of Latham’s proposal that shareholders join together to hire a corporate monitoring firm to provide unbiased advice on corporate election issues. We hope a demonstration of TurboDemocracy will reinforce and reinvigorate the efforts of the Corporate Monitoring Project as well.

New Valley

The Special Committee of the Board of Directors of New Valley Corporation (NASDAQ: NVAL) has recommended New Valley stockholders reject Vector Group Ltd.’s (NYSE: VGR) exchange offer to purchase the outstanding shares of common stock of New Valley that it does not already own.  As set forth in the Committee’s press release (abbreviated by GorpGov.Net), below, the Committee found Vector’s offer of 0.461 Vector shares per share of New Valley to be “inadequate and not in the best interests of the holders of the shares of Common Stock, other than Vector and its affiliates”.

This recommendation concurs with the views already expressed by New Valley’s largest independent shareholder, Lawndale Capital Management,  in its October 18, 2005 13-D filing with the SEC. The Special Committee has authorized its financial advisor, The Blackstone Group, L.P., to continue discussions with Vector’s financial advisors. At a fair and appropriate valuation for NVAL, Lawndale supports a combination of the two companies, which would reduce or eliminate both the inherent conflicts of interest and operational inefficiencies that have existed between New Valley and Vector.

A full account of Vector’s offer and subsequent proceedings may be found in New Valley’s form 14D-9 Recommendation Statement filed with the SEC on November 2, 2005.

Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC.

The Special Committee of the Board of Directors of New Valley Corporation  (NASDAQ: NVAL) today announced that it has recommended to stockholders of New Valley that they reject the previously announced exchange offer made by Vector Group Ltd. (NYSE: VGR) to purchase all of the outstanding shares of common stock of New Valley that it does not already own. Vector commenced its offer on October 20, 2005 and the offer is currently expected to expire at 5:00 P.M. on December 1, 2005. In response to the offer, after careful consideration, including a thorough review of the offer with the Special Committee’s independent financial advisor and independent legal counsel, the Special Committee has determined on behalf of the board of directors of New Valley that the offer is inadequate and not in the best interests of the holders of the shares of common stock of New Valley, other than Vector and its affiliates. Accordingly, the Special Committee recommends that holders of shares of common stock of New Valley reject the offer and not tender their shares of common stock of New Valley pursuant to the offer. In accordance with the federal securities laws, the Special Committee filed with the Securities and Exchange Commission on behalf of New Valley a Solicitation/Recommendation Statement on Schedule 14D-9 stating this recommendation.

Kirkland & Ellis LLP
Stephen Fraidin, 212-446-4840

Consultant Wanted

The Russia Banking Sector Corporate Governance project, an initiative launched by IFC with support from the Swiss State Secretariat for Economic Affairs, aims to improve the corporate governance practices of Russian banks. Project activities include training and consultations on corporate governance for banks as well as work on legislative reform. For two separate legislative reform initiatives in Russia, one in the area of corporate registrars and another in the area of corporate reorganizations, the project is looking for proposals from: Consultants (firm or individual) specialized in either

  • legal issues related to corporate registrars, or
  • legal issues related to corporate reorganization

The Consultant is required to:

  1. Deliver a written position paper on corporate registrars (or corporate reorganizations), drawing on experiences from international best practices;
  2. Submit amendments and/or a draft law on corporate registrars (or corporate reorganization); and
  3. Attend working group meetings in Russia to present the position paper and to discuss further reform initiatives.

Liability Issues Abound

From an article in 10/31/05 issue of Pensions & Investments, it appears that liability issues may abound at both DB and DC plans. An article entitled “Fiduciary lapses more harmful that scandals, consultant says” reports on two studies by Mercer Human Resources Consulting. One looked at 200 plans and found “as many as 90%” of the DB plans had errors in calculating vesting, while “70% had miscalculations in benefits.” At DC plans, “85% filed to correctly determine eligibility and contributions.” While most errors involved calculations, they also found problems such as “failure to deposit employee contributions in a timely fashion.”

The other study looked at a subsample of 30 governance reviews. It found that 28 of the 30 “had no up-to-date governance committee charter and 27 of them suffered from deficiencies in committee processes. These findings regarding governance raise a question. How can the fiduciaries demonstrate their decisions are “in the best interest of plan participants,” when the vast majority have inconsistencies (25 out of 30) and neither charters or processes are up-to-date? How are they avoiding personal liability? It looks like trouble on the horizon.

To help plans address these issues, Mercer developed what they pitch as Mercer Fiduciary Management Diagnostic, or Mercer Fiduciary MD.

Stong Companies, Weak Countries

The OECD is inviting public comment on a draft risk management tool for investors in weak governance zones, designed to help companies manage their operations with integrity.

A weak governance zone is a place where government is not working – public officials are unable or unwilling to assume their roles in protecting rights, enforcing the law and providing basic social services. About 14 per cent of the world’s people live in such areas, notably in sub-Saharan Africa. For international business, they represent some of the most difficult investment environments in the world. Challenges include endemic crime and violence, extortion, solicitation and human rights abuses.

We encourage not only businesses to comment but also investment funds. CalPERS, for example, has essentially black-listed investments in such zones. Can they use the OECD guidelines to help them make investments in strong companies in weak zones? Draft text for public consultation. Comments may be sent to Kathryn Gordon, Senior Economist, OECD Investment by 10/23/2005. 

ISS Increases M&A Service

Institutional Shareholder Services (ISS) has expanded its research offerings to include in-depth and independent reports on high-profile mergers and acquisitions as well as proxy contests. The new offering, called M&A Insight, is designed specifically for investment professionals who want to evaluate the merits of a transaction through a combined financial and corporate governance lens.

Global Boards

The Wall Street Journal carried an article recently entitled “Globalizing the Boardroom” (10/31/2005). The essential message was that companies world-wide are adding foreign directors, but boards in the US have been slow to follow.

“A 2005 survey by recruiters Spencer Stuart found that only 35% of 149 large U.S. businesses have at least one non-American director, a modest rise from 31% in 1999. By contrast, about 90% of Europe’s largest concerns by market capitalization boast one or more directors from outside their home country. At about 49% of those 99 companies, there is at least one American on the board, up from about 35% in 1999.”

This puts US firms at a disadvantage in the global market. Many problematic examples are cited, from Disney and Hewlett-Packard to Wal-Mart. Yet, too often we here the same tired refrain. H-P’s Robert Sherbin is quoted saying that big U.S. companies are all competing for the same “small pool” of foreign candidates. Other excuse American firms because of the cost and inconvenience of travel. But Board members don’t all have to be CEOs and with teleconferencing, travel impediments are no excuse. Plasma screens and computerized agendas can facilitate participation that is as close to being there in person as is practical. We’ve run out of excuses.

ICI Releases Report on Ownership

The Investment Company Institute released a report on fundamentals of ownership. An estimated 53.7 million households and 91.3 million individual investors own mutual funds in 2005, according to an ICI press release.  Almost 36 million households own mutual funds inside an employer-sponsored retirement plan, while 39 million own funds outside of employer-sponsored plans. Household ownership peaked in 2001 at 52% and gradually slipped to 47.5% in 2005. 

ICI notes that “mutual funds continue to be largely a middle-class investment product: More than half of U.S. households that own mutual funds in 2005 have incomes between $25,000 and $74,999.” Yet, looking at their published tables, it is obvious that mutual fund ownership is disproportionate in favor of households earning more than $50,000.

Chevedden Report: Anti-Poison Pill votes

The redeem or vote poison pill topic won 84% at Sun Microsystems and 66% at Sara Lee on October 27 based on yes and no votes. The 84% vote at Sun even exceeded the vote for at least one of the directors who received a paltry 76% vote. William Steiner was the proponent at both companies.


The November Highlights and Commentary at FundAlarm opens with a discussion of a disturbing practice among some mutual funds that build histories as “incubator funds.” Delaware Small Cap Core is cited as using “one of the industry’s most cynical, most deceptive, entirely legal, and still largely unregulated practices…..For the first six-and-a-half years of its existence, Small Cap Core was in ‘limited distribution.'” The limited distribution funds that do poorly are dumped; those that perform well are offered to the public.

“During most of the incubation period, the fund had a different name, different managers, a different style of investing, a more concentrated portfolio, a small and stable asset base, a lower expense ratio, and it didn’t extract a 12b-1 fee…..In other words, the current fund is essentially new, yet it’s being marketed with a track record that was carefully cultivated under totally artificial conditions.”

“Delaware isn’t alone in this practice. Since 1999, Putnam’s board acknowledges that the firm has incubated 16 funds, only one of which made it to market. Yes, Putnam’s board is in on it, the entity that’s supposed to represent investor interests.” I’m wondering how widespread this practice is and why it hasn’t been made illegal?  It sounds like something the industry should deal with before the practice gives the industry a bad name.

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