December 2005

SEBI Announcements

The Securities & Exchange Board of India, or SEBI, Friday said it wouldn’t extend the date for complying with Clause 49 of the Listing Agreement, a new guideline which requires listed companies to have at least half of their board members as non-executive directors. To date, only 20 companies of the 5,000 that are listed have complied with norms on corporate governance.

SEBI also approved an increase in the maximum time gap between two board meetings for a listed company to four months from three months; allowed promoters who currently hold over 55% to increase stakes up to 75%, subject to making an open offer; and relaxed disclosure norms for listed companies which plan to approach the capital markets for any subsequent public issue or a rights issue.

Companies which are planning initial public offerings will now have the option to approach credit rating agencies for grading of IPOs. SEBI also said that a unique identification number with biometric impressions will be required for all participants for any market trade over INR0.5 million. Currently, this is applicable for any trade order over INR0.1 million. (India SEBI: Won’t Defer Compliance For New Listing Norm-2, and Sebi clears plan for rating IPOs, The Economic Times, 12/31/2005)

Calvert Foundation Jobs Available

The Calvert Social Investment Foundation, a non-profit organization, channels affordable credit to low-income communities, reversing inequality and creating hope and economic opportunity where it is most needed.  Over the past 10 years, the Foundation has recycled more than $250 million in investments, helping to create more than 125,000 jobs for low income individuals, building or rehabilitating 6,800 affordable homes, and financing more than 7,200 nonprofit facilities. The Foundation currently has openings for a Portfolio Servicing Associate, Investment Officer, Finance & Compliance Associate, and a Sales Manager.

Restatements Rise

Proxy advisor Glass Lewis says 971 public companies restated their earnings in the first 10 months of this year, vs. 619 for all of 2004. The total number of restatements for the year could hit 1,200, says Lynn Turner, managing director of research at Glass Lewis. Reasons for the rise include:

  • Implementation of Section 404 of the Sarbanes-Oxley Act, which requires public companies and their auditors to review all internal financial controls.
  • Greater sensitivity on the definition of “material” differences in earnings.
  • Newfound assertiveness among auditing firms.

According to Glass Lewis, there were 514 restatements in 2003, 330 in 2002 and 270 in 2001. (Restatements of earnings in 2005 to break record, USA Today, 12/29/2005)

Proxy Advisor Proposal

After learning that CalPERS will review self-imposed policies, which prevent it from investing in China because of low marks for human rights, weak legal controls, and other issues, I contacted David Webb in Hong Kong. Webb publishes, which provides independent non-profit commentary primarily focused on Hong Kong’s corporate and economic governance. We discussed CalPERS and concluded there is no easy screening method that will allow them to invest substantial amounts and still honor their labor, environmental, and corporate governance concerns.

Our conversation then moved to Mark Latham’s proxy advisor proposal. Webb suggested the proposal be modified to allow a company’s independent directors to choose a corporate monitoring firm, rather than putting that decision back out to the company’s shareowners. That change would save a year and would increase the likelihood of adoption. While it is true that many “independent” directors are neither independent from management nor dependent on the approval of shareholders, it would be better to have a relatively independent group choose a corporate monitor to provide proxy advice than no one.

I agree. Modifying Latham’s proxy advisor proposal so that shareowners request the company to hire a proxy advisory firm for one year, to be chosen by independent members of the Board of Directors rather than shareowner vote, is much more likely to lead to adoption. Once the resolution is adopted at several companies, we can then further evaluate the selection process to determine if independent directors fail to select the best proxy monitor. At this point in time, it is more important to provide a relatively unbiased independent source of information to individual shareowners so they are more likely to vote in their own interest than it is to hold out for some ideal state where shareowners select the proxy advisory firms themselves.

Go Better With Coke

Broc Romanek’s Blog notes that Coca-Cola adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive’s annual base salary and bonus.

The International Brotherhood of Teamsters General Fund, a Coke shareholder, unsuccessfully proposed a similar policy at Coke’s annual meeting last April. The measure earned support of 41% of shares cast. offers advice on how to handle severance pay in their “Arrangements” Practice Area.

“Coke’s move is a welcome boost in accountability for the company’s top executives and directors. Granted, it may invite boards to play new games with how an executive’s pay and bonus are calculated to avoid shareholder scrutiny. And it won’t necessarily stop severance deals that are locked in as part of an executive’s initial contract. But it will give shareholders some leverage to block deals that keep executives immune from financial risk, unlike everyone else.” (Coke shareholders, unite!, LATimes, 12/27/2005)

Best Practices Self-Assessment Workshop

Learn how your company’s corporate governance stacks up against “best practices” in the field. The Conference Board, in collaboration with the Society of Corporate Secretaries and Governance Professionals, introduces a two day self-assessment workshop (March 21-22, 2006 in New York City). Call Yulia Dorzhyeva at  +1 212 339 0347. Topics covered include:
• Fiduciary duties of the board, including duties of care, loyalty and good faith
• Strategic risk assessments and monitoring corporate performance
• Designing effective ethics and compliance systems
• Monitoring external and internal auditors
• Designing executive pay for performance
• Directors’ and officers’ liability insurance

CalPERS News

Incumbent Charles Valdes handily won another term on the board in a historic runoff election. Valdes received 71% of the vote, outdistancing challenger Robert D. Walton, a recently retired CalPERS executive, who drew 29%. (No new faces on CalPERS board, Sacramento Bee, 12/24/2005)

CalPERS executives and trustees spent 12 days last month touring China’s key financial and government centers. Some trustees and investment experts say the Chinese economy is too big to ignore, despite low marks for human rights, weak legal controls and other issues. The Morgan Stanley Capital International China index saw double-digit percentage annual declines from 2000 to 2002, then surged 81% in 2003. The index was flat in 2004 and is up about 13% this year.

State Treasurer Phil Angelides is concerned that “shareholders do not have rights to protect themselves in China.” (CalPERS takes new look at China, Sacramento Bee, 12/27/2005) My recommendation would be not to write off the entire country but to only invest in companies with a track record of good corporate governance.

SOX Relief

The SEC Advisory Committee on Smaller Public Companies recommends exempting about 80% of public companies (with a market capitalization of $125 million or less) from §404 of the Sarbanes-Oxley Act, a key provision requiring management to test its internal controls and then have an outside auditor attest to the assessment.

Larger companies — those with a market capitalization of between $125 million and about $750 million and prior-year revenue of no more than $250 million — would also be exempt from hiring an outside auditor to test internal controls under the panel’s recommendations. Executives at larger companies would still be required to submit an annual assessment of the quality of their internal controls. (Smaller Companies Get Sarbanes-Oxley Relief, The Deal, 12-16-2005 via

Asian Country Ratings

Asian Corporate Governance Association (ACGA) country ratings are trended down in 2005 because of more rigorous survey methodology, which has brought to light:

  • Weaknesses in the detail of laws and regulations.
  • Poor implementation of key corporate governance regulations (eg, audit committees).
  • Poor regulatory track record against insider trading and market manipulation.
  • Gap between national accounting and auditing policies and practices.
  • Major CG best practices not gaining traction among listed companies.

Singapore slipped to 70%; one percentage point above Hong Kong at 69%. India and Malaysia retained third and fourth place, respectively, at 61% and 56%. Taiwan’s ranking moved up from sixth to fifth, at 52%. Korea slipped below Taiwan and shares sixth place with Thailand, at 50%. The last three countries were the Philippines (46%), China (44%) and Indonesia (37%).

A recent presentation by ACGA Secretary General Jamie Allen draws the following conclusions:

  • Regulatory reform: Changing rules has only a limited effect (“form over substance”). Enforcement is critical. But enforcement or implementation of weak rules can be counter-productive. Hence, designing sensible rules has to be step one (eg, definitions of “independent director”).
  • Market involvement: A wide range of legal, procedural and sometimes political obstacles to market engagement.Considerable conflicts of interest within financial institutions.
  • Corporate implementation of best practices: Sound “form”reinforces and engenders substance. Not “form vs substance.” Rather “form and substance.” Companies will improve their governance if there are clear incentives from the market. Governance in Asia can be world-class.

Selected Recent Papers

Specific Investment And Corporate Law by Margaret M. Blair and Lynn A. Stout argues the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.

How Independent are Independent Directors? The Case of Italy by Paolo Santella, Giulia Paone, and Carlo Drago find that for two key independence requirements (not to have business relationships with the company and not to have too many concurrent commitments outside of the company) the level of compliance is dramatically low (4% and 16% respectively). Overall, for only 5 out of the 284 directors declared as independent by the Italian blue chips is it possible to verify the respect of all the Italian independence standards (and for only 4 directors with respect to the EC standards). This raises the problem of who should monitor what listed companies declare.

Did New Regulations Target the Relevant Corporate Governance Attributes? by Reena Aggarwal and Rohan G. Williamson found that in the period prior to the adoption of the new regulations a significant positive relationship is found between governance attributes targeted by the new regulations and firm valuation. The results imply that overall the new regulations did address relevant governance attributes that the market perceived to be important. Almost all the governance attributes mandated by regulation were relevant for firm valuation. However, their results suggest that the markets were already doing their job in recognizing firms that had stronger governance. Therefore, it is not clear that mandatory rules were required. It should be recognized that the focus of firm value is only one metric of importance and policymakers may have had other intentions in mandating new regulations.

Shareholder Proposals Post-Enron: What’s Changed, What’s the Same? by Randall S. Thomas and James F. Cotter find that shareholder proposals now target companies with above average market performance, instead of the laggards that used to be the recipients of such initiatives. Contrary to earlier studies, private individuals and private institutions are the most effective in garnering support from other shareholders for their corporate governance proposals. Proposals relating to corporate governance issues receive significantly higher levels of voting support from shareholders than social responsibility proposals. Anti-takeover proposals attract the highest levels of shareholder support. Insider ownership is negatively correlated with shareholder support and institutional ownership is positively correlated with higher levels of favorable votes. Finally, the stock market’s reaction to shareholder proposals is generally negative.

Does the Rolodex Matter? Corporate Elite’s Small World and the Effectiveness of Boards of Directorsby Bang Nguyen-Dang finds that belonging to close social circles does not prevent CEOs from being ousted for poor performance. However, when some of the board members and the CEO belong to the same social circles, the CEO is provided with a double protection. He/she is less likely to be ousted for poor performance and more likely to find a new and good job after a forced departure. Interlocking directorships give CEOs an effective protection against being fired for poor performance and enhance their opportunities to obtain more directorships after good performance. Government ownership and political cycles also determine the CEO turnover sensitivity to firm performance.

Executive Compensation: Is Disclosure Enough? by Rashid Bahar stresses the perverse incentives resulting from a disclosure scheme, ranging from the use of inefficient but opaque forms of remuneration to the ratcheting effect and the norm setting effect of disclosure. To solve these problems and more generally to improve executive compensation, it suggests putting more focus on shareholders through a general meeting vote on compensation policy and explores a few options so that this vote can become an effective check on executive compensation.

Democracy and the Evolution of Corporate Governance by Pierre-Yves Gomez and Harry Kornine finds that corporate governance has indeed evolved to make increasing use of democratic procedures. Viewed over the long-term of two centuries of capitalist development, corporate governance is seen to have successively incorporated enfranchisement, separation of powers and representation. In conclusion, they consider the implications of basing the study of corporate governance on the question of stakeholder consent and the practice of corporate governance on the procedures of democracy.

Can Private Learn from Public Governance? by Bruno S. Frey and Matthias Benz argues that in view of recent corporate scandals, private governance can learn from public governance: (1) Goal-oriented intrinsic motivation of agents should be supported by fixed incomes and an extensive selection process of employees; (2) Extrinsic, but non-monetary incentives (e.g. conferring orders and titles) can be used; (3) The power of actors should be restricted by a clear division of power, appropriate rules of succession and institutionalized competition for positions in firms.

Praise for Hedge Funds

Hedge funds are the driving force behind changes at scores of companies nationwide, including McDonald’s, OfficeMax, and Bally Total Fitness Holding, according to a Chicago Tribune article Hedge funds are getting their way. Activist funds are demanding asset sales, management purges and stock buybacks at companies they regard as undervalued.

In 1990, there were 610 hedge funds with $39 billion in assets. Now, there are 8,532 hedge funds with $1 trillion, according to Hedge Fund Research. Their asset growth is expected to double by 2009 and sextuple, to $6 trillion, by 2015, according to Van Hedge Fund Advisors International.

Like private equity funds, some hedge funds take similar actions, bringing in new board members or even CEOs to increase efficiencies. Instead of doing so after buying the company, hedge funds do so after buying enough to make changes in corporate governance. The question most often raised, however, is whether or not such funds are working in the long-term interests of shareholders or just unlocking value to make a quick buck. Each fund and each situation must be examined on its own merits.

Fund Democracy

Writing for Bloomberg News, Chet Currier warns of the Dangers of democracy in mutual fund world. He discusses the recent revolution at the Clipper Fund. Normally when managers retire they are replaced with another team from under the same corporate umbrella. Instead, the board voted to bring in managers from Davis Selected Advisers, a widely respected rival among value-minded money managers.

Currier says the move “has been rightly hailed as a watershed in the mutual fund business.” “Fund investors need all the help they can get in keeping the power that rightly belongs to them as owners of the funds….power is too easily and too often arrogated by fund managers whose own agenda doesn’t always match the clientele’s best interests.”

Yet, Currier warns “the idea of mutual funds as communes, run directly by the investors, has been tried and found wanting, citing the case of the Yacktman fund where the board tried to oust Donald Yacktman but 90% of shareholders voted to keep him. While I agree with Currier, we don’t boards “dismissing managers willy-nilly because of personality conflicts, ego-driven power struggles or fits of impatience with poor short-term performance,” that certainly doesn’t seem to be the case at the Clipper Fund.

The new principals will invest $50 million of their own money in Clipper, they will continue to run Clipper in the concentrated style the fund was known for, holding only 15 to 25 stocks, and the annual management fee will be cut in half. (Clipper’s Pick to Helm Fund May Rock Boat, LATimes, 11/30/2005) Clearly, there are advantages when boards take charge. For example, in 2002 CalPERS paid an average fee of 8 basis points, totaling $600,000, to each of three managers whose comparable mutual funds paid them 61 basis points and $56 million! (John Bogle, The Ownership of Corporate America — Rights and Responsibilities, 4/11/2005)

Chuck Jaffe points out that recent disclosures found the Yacktman father-son team only put money into Yacktman Focused, not into the Yacktman fund, “which kind of makes you wonder what he is selling people with his other fund.” Jaffe’s article also points to several other problems among mutual funds. See Your Funds Here’s another helping of those winning Lumps of Coal ‘honor.’

In the wake mutual fund scandals, Columbia Law School’s Jack Coffee noted that proposals to make mutual fund boards more independent were akin to putting “rouge on a corpse.” We are a long way from the point where most mutual fund boards are too independent. Currier’s fears are better directed elsewhere. In the meantime, I suggest readers make their annual donation to Mercer Bullard’s Fund Democracy.

Although Bullard’s efforts are significant, mutual funds need a counterpart to the Council of Institutional Investors. It is high time that mutual funds joined public and union counterparts to demand a voice in corporate affairs. Will the Investment Company Institute ever become a forum for funds, as major shareholders, debating the fiduciary issues of corporate governance?

Recent Headlines

Half-A-Gift On CEO PayCorporations paying top executives personal income taxesNo, let me pay: Execs get tax helpExecutives Find Relief on Pay DealsUS: No, let me pay: Execs get tax help. More than half the nation’s largest companies are giving their top executives extra money to pay taxes due on corporate perks such as luxury cars and even on capital gains. Capitulating Capitalists: Top 10 Worst Moments for Free Enterprise in 2005Three Morgan Directors Resign; All Were Allies of Ex-ChiefMake-TIAA-CREF Ethical Coalition Makes It Voice HeardWe’re top of the world, says London market. In 2000, foreign companies raised $16.9 billion in new listings in New York and London, with the U.S. claiming 89% of that total, Citigroup says. This year, London grabbed 88% of that business.Foreign Firms Bailing OutCorporate Governance: Panic in the Boardroom.

Becoming an Activist Owner

You’ve been appointed to the board of a pension fund or to a position as the fund’s corporate governance analyst. You’ve heard that companies with good governance structures reduce risk and enhance portfolio returns. You also know studies have shown that, over time, large companies with at least one 5% or more stockholder outperform similar companies where no one shareholder acts as an owner. You want your fund to be an active owner in order to enhance investment returns. What steps can you take?

Among the most important steps would be joining the Council of Institutional Investors and subscribing to a proxy monitoring service. CII is to be applauded for encouraging pension funds to be active owners. I’d like to see the Investment Company Institute or some other organization do the same for mutual funds. The Council of Institutional Investors posted an excellent paper outlining 22 steps, from basic to more comprehensive actions that funds can take to promote good corporate governance and accountability. (Portfolio Risk Reduction and Performance Enhancement: A Spectrum of Activism Practices for Institutional Investors)

  1. Obtain useful information necessary to make activism decisions.
  2. Commit staff time to implementing an activism strategy.
  3. Adopt proxy voting guidelines that follow or improve upon a recognized corporate governance framework, such as the policies of the Council of Institutional Investors.
  4. Make sure fund proxies are voted by fund staff or by a specialized proxy voting service in accordance with the fund’s proxy voting guidelines.
  5. Adopt a process to handle “No” votes on directors.
  6. Provide for an override mechanism so that the fund can vote individual proxies on a case by case basis, even if voting is otherwise delegated.
  7. Factor into share lending practices a mechanism to retain voting rights on a targeted basis.
  8. Obtain an annual report on the fund’s proxy votes.
  9. Disclose the fund’s proxy voting guidelines on the web site, or alternatively on the Council’s web site.
  10. Consider going public with issues or views on proxy votes.
  11. Develop a methodology and strategy for communicating with portfolio company directors or executives.
  12. Coordinate action with, or support the actions of other shareholders.
  13. Weigh in to improve investors’ legislative and regulatory environment.
  14. Monitor the discretionary voting by its investment managers of shares held for other clients.
  15. File binding and/or precatory shareholder proposals.
  16. Solicit support for shareholder proposals or opposition to management proposals.
  17. Withhold votes from directors of specific companies.
  18. Disclose to the public its shareholder initiatives.
  19. Use contract provisions based on standards of behavior to ensure that financial advisors are responsive to corporate governance principles.
  20. Employ managers and investment consultants who build shareowner value by emphasizing corporate governance reforms as part of their investment strategy.
  21. Use the legal system.
  22. Run a short slate of directors.

PERA Proposes to Close Deficit

The state of Colorado’s public pension plan has released a sweeping reform package that cuts benefits for future workers and seeks additional taxpayer funding to help pay for current benefits. The $34 billion Colorado Public Employees’ Retirement Association (PERA), which has been grappling with a $12.8 billion funding deficit, announced the legislative proposal Monday, creating a new tier of benefits and contribution levels for employees hired in 2007 and beyond.

Future hires would receive 2.1% of their highest average salary for each year of service instead of the 2.5% that current members earn. Highest average salaries will be based on the highest five years of pay rather than three years. New workers will not receive guaranteed cost-of-living increases, compared with the required 3.5% bump in benefits each year to which current members are entitled. The new “Tier 2” plan will shift a larger share of its investment risk to workers. Contributions from employers and employees would accelerate at 0.5 percent a year between 2008 and 2011 rather than the 0.4 percent increase now in place. Employer contributions would top out at 13.65 percent of workers’ pay in 2012 rather than the 13.15 percent cap proposed last year.

Board Pay: What’s Too Much?

Standard & Poor’s 500-stock index directors were paid an average of $139,090 in 2004, a 19% rise from the $116,853 in 2002, says San Mateo pay tracking firm, Equilar. According to the Corporate Library, Google paid Ann Mather, former finance chief of Pixar, $2.36 million in stock and options as an initial grant when she joined the board last month. Shirley Tilghman, president of Princeton University, who joined in October, got stock and options worth $3.24 million. They joined the CEO of Intel, Paul Otellini, whose Google options are worth about $24.2 million, more than his Intel stake.

Yes, directors have more responsibilities since Sarbanes-Oxley and these directors will probably do more than just participate in four board meetings a year but how much is too much? Robert Daines, a professor of law and business at the Stanford Law School, is quoted in ‘Google Effect’ Means Directors Get Millions as saying “One threat from high pay is that board members may be too reliant on their position as a director, and people wonder whether this compromises their independence.” “You might be loath to stir the pot.” (E Commerce Times, 12/20/2005) We agree. Is Google’s board really independent? When so much money is involved, why risk not being asked back?

SEC Roundtable 12/20/2005

Past Chairmen Roundtable at Noon – 1:30 p.m. Eastern Time. Listen to webcast. Led by Chairman Christopher Cox, other panelists include: Panelists include:

  • Richard C. Breeden, 1989-93, Chairman of Richard C. Breeden & Co.
  • G. Bradford Cook, 1973-73, Chairman and General Counsel of Empower IT, Inc.
  • William H. Donaldson, 2003-05, Chairman, Donaldson Enterprises
  • Roderick M. Hills, 1975-77, Partner, Hills and Stern LLP.
  • Harvey L. Pitt, 2001-03, CEO and Founder of Kalorama Partners
  • David S. Ruder, 1987-89, William W. Gurley Memorial Professor of Law at Northwestern School of Law
  • Harold M. Williams, 1977-81, President Emeritus of the J. Paul Getty Trust

Bush Fed Up With Exec Pay

Broc Romanek’s always informative Blog at, brought our attention to an article in the St. Petersberg Times that Florida Governor Jeb Bush and two other state leaders ordered Florida’s public pension fund to take a leading role nationally to push for corporate governance reform. They specifically want to target “outrageous” executive compensation and “undemocratic” proxy voting at public companies. (Gov. Jeb Bush Fed Up with Lack of Pay-for-Performance, 12/19/2005)

One of the keys is linking a chief executive’s salary and benefits to the company’s bottom line. They also want companies to adopt majority-voting policies that make it easier for stockholders to block a director’s appointment to a corporate board.

Florida’s pension fund could adopt a “focus list” of companies deemed to pay their executives too much or give shareholders too little say on who serves on the board of directors. The Florida fund, the nation’s fourth largest public pension plan with $116-billion in assets, is running a $9-billion surplus.

“I think the shareholders and the retirees that rely on the pension are equally outraged as I am and it’s appropriate for us to vote our shares and for us to say we want pay be tied to results,” Bush said. “It’s just that simple.” (State demands corporate reform, 12/14/2005) Will Jeb Bush be joining the fight to give shareholders the right to proxy access for the purpose of nominating directors?

100 Resolutions on Majority Elections

According to The Friday Report from ISS (12/16/2005), the United Brotherhood of Carpenters and Joiners has filed 66 non-binding resolutions for the 2006 proxy season, asking companies to provide for the election of directors by a majority of votes cast. AFSCME and the Sheet Metal Workers International Association (SMWIA) have also filed majority election resolutions for next year. “The number of majority election resolutions filed likely will exceed 100 in 2006, as compared to 62 proposals that came to a vote this year.”

Rewarding Virtue: New Guidance for Corporate Boards

A new UK report provides guidance for effective board action on corporate responsibility. Both the Combined Code on Corporate Governance and the new Company Law Reform Bill give directors duties related to corporate responsibility but provide little detail on how to do so. The report, entitled “Rewarding Virtue – Effective Board Action and Corporate Responsibility” was produced by Business in the CommunityFTSE Group and Insight Investment. It follows consultation with 40 directors and company secretaries of Britain’s biggest companies on the question: “What should boards do to ensure companies behave responsibly, and why?”


I have been familiar with the report’s lead author, Craig Mackenzie, since the middle 1990s when he wrote the classic Shareholder Action Handbook. Mackenzie now heads investor responsibility at Insight Investment, which manages funds for institutional and retail clients worth £84 billion.

The new report looks at corporate responsibility in its broadest context, including ethical principles that shape legislation and regulatory guidelines, as well as voluntary actions that go well beyond legal requirements. Companies have little difficulty behaving responsibly when markets reward them for doing so, but the absence of competition, unequal information between companies and customers, and externalized costs or benefits are mentioned as potential sources of market failure. The report recommends boards:

  • Set values and standards for the business. Be clear about the terms of the corporate responsibility contract, set explicit standards and values for the business.
  • Think strategically about corporate responsibility in the context of market pressures. Understand the problems in your markets, and design a business model that avoids them.
  • Be constructive about regulation, delivering self-regulation and supporting government intervention to correct market failure.
  • Align performance management, rewarding responsible success over the long-term. Reward responsible success over the long-term, and not just meet financial targets over the short-term.
  • Create a culture of integrity, setting the right tone at the top and cultivating the right values in the corporate culture.
  • Use internal control to secure responsibility, safeguarding standards with robust audit and control systems.

The report is not prescriptive, but rather provides a flexible guide for directors in developing constructive debate and corporate-specific solutions. A large number of case studies are included.

Auditors Seek Liability Limits

Ernst & Young LLP and KPMG LLP failed to get liability waivers from Congress, so are now requiring companies they audit to limit their right to sue. According to a report by Bloomberg, five federal banking agencies say the provisions may lead to less rigorous audits, and are preparing to bar large banks from agreeing to them. Shareholders, including public-employee pension funds in Ohio and Florida, say the agreements may presage a push by the firms to curb investors’ right to sue.

The AFL-CIO and the Council of Institutional Investors have complained to the SEC and the Public Company Accounting Oversight Board. At issue is whether the waivers violate SEC rules designed to prevent auditors from being too close to their clients. “These provisions are in the self-interest of the accounting industry, but they are very much not in the interest of shareholders,” says AFL-CIO’s Michael Garland. “They are in conflict with the spirit, if not the letter, of existing auditor-independence regulation.” (Ernst, KPMG Liability Caps Draw Fire From Regulators, Investors, 12/12/2005)

Medicine Relieves Corporate Governance Stress

One pharmaceutical company is actually promoting one of its medicines as relieving the type of stress faced as a result of the impending Clause 49 deadline, which will require Indian firms to have appointed nearly 15,000 new independent directors by December 31, 2005. (The new breed of independent directors, DNA India, 12/08/2005)

World Bank Advises Indian Investors

Michael Carter, the World Bank’s India country director, speaking at a recent seminar on the Role of Institutional Investors in the Governance of their Portfolio Companies suggested institutional investors should enhance disclosure of their corporate governance and voting policies and voting records. “Also, they should not hesitate in disclosure of conflicts of interests which may affect the exercise of key ownership rights in their portfolio companies,” he said, adding disclosing this information was critical for institutional investors acting in a fiduciary capacity like mutual funds and insurance companies who had responsibility to protect their participants. (Monitor corporate governance of institutional investors: WB, The Statesman, 12/17/2005)

Back to the top

Tyco Settlement Funds Educational Program

New Hampshire will use funds from a $5 million securities settlement with Tyco International to finance a major initiative aimed at teaching corporate governance and investor protection. Former CNN financial editor Myron Kandel will lead the initiative to educate future business leaders about the appropriate standards of conduct and keep alive the national debate about sound corporate governance. Initial plans are to create discussions throughout the state’s colleges and universities and to press presidential candidates to address the issues during primaries.

Kandel intends to bring the past four chairmen of the federal Securities and Exchange Commission, business and media leaders into the state for discussions at the state’s private and public colleges. The Investor Protection Trust, a Washington, D.C., based organization funded by multistate settlements, has also committed money toward the project. (N.H. to use Tyco settlement for ethics training programFoster’s Online, 12/15/2005)

Political/Corporate Reform

Each year corporations spend billions on lobbying and contributions to political campaigns. Individual corporations are caught in an arms race, none can disarm until the rules are changed. The California state assembly will soon consider legislation that may just be a bigninning and could eventually start cleaning up California politics, reducing corporate expenditures and improving returns at CalPERS and CalSTRS.

The bill, AB 583, called the California Clean Money and Fair Elections Act, would reduce the pay-to-play atmosphere that pervades by giving people an opportunity to run for assembly, senate, and statewide offices without having to raise money from private contributors. Those who qualify by showing a broad base of support by collecting a set number of $5 contributions would be awarded a public grant to run for office on the condition they take no more private money. The system has been up and running in Arizona and Maine where it has received tremendous support.

Consider joining with the California Clean Money Campaign by signing a petition of support to Governor Schwarzenegger and the Legislature. It is time to stop endless campaign fund-raising and conflicts of interest.

Bovespa Moving Brazil Forward

December’s NYSE Magazine carries a point of view article from Jose Carlos Grubisich, CEO of Braskem S.A., Latin America’s largest petrochemical company. Grubisich sings the praises of the Sao Paulo Stock Exchange (Bovespa), which has stimulated Brazilian companies to adopt good practices by defining three distinct levels of corporate governance. Brazil has the third largest number of American Depositary Receipts traded on the NYSE. (Emerging Markets, Solid Standards)

A study released earlier this year by Antonio Gledson de Carvalho and George G. Pennacchi found that migration to premium segments of the Bovespa “brings positive abnormal returns to non-voting shares, a reduction in the voting (control) premium, and an increase in trading volume. These results suggest that domestic premium markets can substitute for cross-listing on a U.S. exchange as a mechanism for committing to improved corporate behavior.” (Can Voluntary Market Reforms Promote Efficient Corporate Governance?)

SEC Proxy Posting Rule

The SEC has started posting comments on its proposed rule “Internet Availability of Proxy Materials,” Release No.: IC-27182, File No.: S7-10-05. Comments received are available online. The SEC provides an online form for submission of comments, which are due on or before February 13, 2006. The comment submission form allows attachments. One of the more thoughtful comment letters thusfar is from Les Greenberg who writes in part:

The SEC should visit the entire issue of Shareholder communications for proxy solicitation purposes and not limit itself to Internet posting privileges. For such a communication system to operate fairly, it is essential that corporations be required to PROMPTLY provide dissident candidates with ALL of the corporation’s shareholder contact information, e.g. email addresses, which it possesses, at minimal cost.

A fair proxy solicitation process is essential to Director accountability. A cornerstone of that process is the ability of Shareholders to communicate effectively with one another. The proposed rule does not assure that ability. It is not fair when Shareholders only hear the messages of corporate sponsored Directors seeking to be elected or re-elected. Such is not conducive to Director accountability.

Exec Pay Concerns Surveyed

Ninety percent of institutional investors said the pay models of US firms results in some executives being “dramatically overpaid,” according to the survey of 55 institutions which manage $800 billion in assets by Watson Wyatt. Investors are particularly bothered by the steep severance packages firms award to many business leaders. (Excess compensation: Institutional investors say U.S. execs are overpaid, MarketWatch, 12/13/2005)

CalPERS Grows

The California Public Employees’ Retirement System (CalPERS), the nation’s most influential fund on corporate governance issues, announced that its assets now exceed $200 billion. CalPERS reached its peak fund size on November 21, 2005, with a net asset value of $200.1 billion. When the System began operations in 1932, its assets were valued at $800,000, crossing the $100 billion mark on May 14, 1996. CalPERS says that about 80% of current assets are generated by investment returns, while the remainder comes from employer and employee contributions.

“It took 64 years to break $100 billion, but only nine years to double those assets,” said Rob Feckner, President of CalPERS Board of Administration. “We’re gaining momentum, year by year. And every dollar earned is a dollar saved for our 1.4 million members and their employers.”

The System earned a 12.7 percent return on investments for the 12-month period that ended June 30, 2005, compared with 16.7 percent in the previous fiscal year. Approximately 66 percent of CalPERS assets are allocated to equities – U.S. stocks, international stocks, and private equity investments. About 26 percent of assets are in fixed income (bond) instruments, and 8 percent is invested in real estate. (press release, 12/12/2005)

As of 2004, CalPERS was 87.3 percent funded, compared with 85 percent in 1994. Nationwide, the average is 83 percent, according to Wilshire Associates, a Los Angeles investment consulting firm. Today, U.S. and international stocks and private equity investments account for two-thirds of CalPERS’ portfolio, followed by bonds at 26 percent and real estate, 8 percent. CalPERS strategy has included investments in hedge funds and emerging clean technology companies. (CalPERS’ assets reach milestone as fund tops $200 billion mark, Sacramento Bee, 12/13/2005)

According to another report in the Sacramento Bee, “It may be the worst-kept secret in town. The State Teachers Retirement System is going to put up a new headquarters building at the Raley’s Landing area along the West Sacramento riverfront.” CalSTRS has assets of about $132 billion. With the two giants separated only by a river and a few block, we would expect to see even greater cooperation between the funds on corporate governance and other policy issues.

CalPERS’ Investment Committee recently approved the plan that includes establishing a pool of consultants that specialize in diversity in the investment industry, and compiling a database of emerging investment managers and brokers.  The pension fund will also move forward on a planned conference on the topic on April 24-25 in San Jose, California. For registration information about the CalPERS/CalSTRS diversity conference, interested parties can email contact information to MaryAnn Burford.

Public Sector Health Time Bomb: Risk and Opportunitiy

The Governmental Accounting Standards Board, issued Statement No. 45 in June 2004, known widely as GASB 45, which will require large public governments to start reporting their overall health care obligations in 2007, with smaller governments reporting two years later. Most states and cities use a pay-as-you-go system, so the new accounting treatment, which requires them to disclose how they will meet their funding obligations over the next 30 years, is expected to prompt many to discover they have obligated more than they will be able to pay. Credit ratings will fall and some will face bankruptcy.

Only one in 20 companies still offers retiree health benefits. Will public employees soon join them or will they take a more innovative approach?

Alaska, finding its combined obligations for pensions and retiree health care underfunded by $5.7 billion last year, decided to charge new state employees a high-deductible and provide them with “health savings accounts.” One example of a more innovative approach is Ohio, which has now accumulated $12 billion in a health care trust fund to cover at least part of its promises. Workers contribute 4% of their salary fund. The NYTimes reports that investment income from the fund pays most current retiree health costs. (The Next Retirement Time Bomb, NYTimes, 12/11/2005)

The Ohio approach is more likely to provide higher benefits for less overall cost. Additionally, the Ohio fund facilitates the ability of employees to combine their strength, positively impacting corporate earnings and behavior through an active corporate governance program, something individuals are much less likely to do on their own.

A Limited Dose of Democracy

Writing for the New York Times, Floyd Norris, goes through the litany of recent corporate governance reforms and notes that “one change that seemed likely – an increase in shareholder power – has not been realized.” Donaldson’s rulemaking, S7-19-03, is essentially dead and Cox is unlikely to revive it. Norris suggests “it might be wise to act now, rather than after abuses create another stampede for change.

He cites a forthcoming article by Leo E. Strine Jr. to appear in The Harvard Law Review. The idea, which Strine is careful not to endorse, is one of compromise. State laws could be amended to allow contested short slates every three years. Insurgent candidates would appear on the corporate ballot and be reimbursed for some expenses if they get 35% or more of the vote. In return, shareholders would give up the right to propose nonbinding resolutions.

Norris concludes, The risk now is that reforms have freed boards from domination by chief executives without creating any other controls, other than the courts, over directors. A limited dose of democracy might help to ensure we are not entering the era of the imperial board of directors. (Do Companies Need a Little Democracy?, 12/9/2005)

There is little chance of “imperial boards” as long as CEOs chair them, set the agenda, and hand out the perks. As for democracy, why does Floyd Norris call for only a limited dose? What’s wrong with allowing shareholders the normal rights we expect in any democracy to run for office on the same ballot as incumbents and exercise meaningful votes?  Shareholders shouldn’t give away their right to propose nonbinding resolutions for a small dose of democracy every three years. Strine’s article will be worth reading but shareholders should be working to shape the next administration in Washington.

CalSTRS Opposes Destruction of DB Plans

The California State Teachers’ Retirement System voted to oppose the latest measure by Assemblyman Keith Richman, R-Northridge to end defined benefit plans for California public employees. His latest plan, ACA 23, attempts to create a hybrid pension system that opponents argue could lead to administrative headaches for hundreds of school districts and create a divisive two-tier retirement program for teachers.

Six trustees voted to oppose the plan, five abstained, including four appointees of Gov. Arnold Schwarzenegger. A fifth Schwarzenegger appointee was absent.

After a similar vote earlier this year, Schwarzenegger removed four appointees who voted to oppose the initial pension proposal. In what Gilbert Chan, writing for the Sacramento Bee, terms “a political payback,” the Democrat-led state Senate rejected the nomination of the governor’s fifth CalSTRS appointee. (Split CalSTRS board votes to oppose dual pension plans, 12/9/2005)

In other CalSTRS news, the fund will seek proposals to identify managers who can spearhead a groundbreaking green investment strategy for a portion of its $133 billion in assets. CalSTRS and the CalPERS have already pledged to invest about $1 billion in clean technology companies and have joined a coalition of 26 pension funds globally to pressure corporate executives to report to shareholders the financial risks that global climate change poses to their companies. (CalSTRS to go for the green, Sacramento Bee, 12/8/2005)

AFSCME Resolutions for 2006

AFSCME outlined an innovative program of shareholder proposals for company annual meetings in spring 2006 (press release, 12/7/2005

  • Shareholder Advisory Votes On Executive Pay: To approve or reject the company compensation committee report. Already required in the United Kingdom and Australia. Proposals have been submitted at US Bancorp, Merrill Lynch, Bank of America, Home Depot and Countrywide Financial.
  • Majority Vote Standard for Seating Directors: Binding bylaw proposals submitted at United Technologies, Honeywell, Wells Fargo, and Qwest, and a non-binding proposal was filed at Morgan Stanley.
  • Solicitation Expenses: Management can use the company treasury to campaign in support of the candidate nominated by the incumbent board, but a shareholders must bear the cost of a solicitation for their own candidate, even if they win. AFSCME proposes that in short slate contests, shareholder can recoup their solicitation costs if their candidate(s) receives a certain threshold percentage of the vote. Proposals submitted at the Bank of New York, Citigroup, and American Express.
  • Equity Compensation Holding Policy: Proposals at FMC Technologies and Amgen that executives must maintain a percentage of after-tax shares provided to them under the company’s equity compensation plan, so that an executive who exercises stock options also increases their overall share ownership.
  • Performance-based Restricted Stock: Asks companies to add performance-based vesting measures to restricted stock to make restricted stock awards contingent upon objective performance criteria, instead of simply based on the length of time served. Submitted at Bristol-Myers Squibb, JP Morgan Chase, and Time Warner.
  • Limits on Executive Severance: Limits the amount of compensation a senior executives can receive in the event of a change-in- control and/or involuntary termination
  • Board Declassification: Hopes to reach the tipping point where the majority of S&P companies have annual elections. Submitted at SunTrust Banks, Wachovia, Mellon Financial, Washington Mutual, and 3M.

Fraud on Rise

Reported incidents of fraud increased 22% in the last two years, according to a new Big Four survey companies around the world. Layers of new controls don’t seem to be doing the job.

Fraud was detected by 45% of the companies polled, which is up from 37% in 2003. In North America, 60% of those committing fraud were company employees, almost 25 percent were senior managers. The study also found that companies with a larger number of controls could better determine the full impact of the fraud, uncovering three times as many losses as companies with fewer controls. (Corporate Fraud Still Widespread, Difficult to Detect,, 12/5/2005)

Bonus for Doing What the Law Requires

Greg Taxin, chief executive of Glass Lewis, raised an interesting point during an interview by Gretchen Morgenson’s article Owners Vote. Will a Board Take Notice? (NYTimes, 12/8/2005). The title of the article references the fact the 53% of Saks shares were voted against staggered boards last year, yet the board took no action. This year, with accounting irregularities and an SEC investigation in progress, will they again ignore shareholder votes on annual elections and majority vote requirements?

However, the quote from Taxin addresses even greater rot. R. Brad Martin, Saks’ chief executive, received salary of $1.05 million in 2004 and stock awards worth at least $6.2 million. “With Saks’ history of restatements, federal investigations and late filings, I can see how the board might think Mr. Martin needs a little extra push,” Taxin said. “But should shareholders really be forced to pay a bonus to the C.E.O. merely for complying with our basic accounting and securities laws? I would have thought Mr. Martin’s million-dollar-plus salary would have covered that.”

Director’s who authorize a bonus for breaking the law should be fired, but authorizing a bonus for simply complying with the law doesn’t make sense either.

Mindless Socialism?

Michael J. Clowes, paying tribute to Peter F. Drucker in Pensions & Investments, writes that “because employees have more sense of ownership of their 401(k) and other DC plans assets, and more involvement in the investment decisions, Mr. Drucker would probably argue that his thesis of pension fund socialism in the U.S. is more true now than when he wrote his book in 1978.”

The number of defined benefit plans has declined from to just over 40,000 from more than 150,000 in 1980, according to the Employee Benefit Research Institute. During the same period, the number of defined contribution plans has increased to more than 600,000 from just under half that number. A key question is, what role will those DC plans take in corporate governance? Writing on DB plans, Drucker warned that “they have no business trying to ‘manage’ companies they invest in.” Clowes points out that Drucker also believed passivity “is clearly intolerable.” Drucker placed his hope in the development of “professional directors.”

Individual shareholders need three important tools to avoid what I’ll term “mindless socialism.”

  1. We need to know how mutual funds vote in corporate elections – a reform we won recently.
  2. We need the ability to place our director nominees on the corporate proxy. Only then, will directors be truly independent from management. A very limited version of this reform is stalled at the SEC and will probably not get pushed through until we have a new president.
  3. 401(k) holders and direct shareholders need “infomediaries” to advise them on how shares should be voted. People generally don’t have the time to monitor corporate governance issues and apply them to elections. We need trusted sources free of conflicts of interests to advise us. (see Democracy and Infomediaries by Mark Latham, Corporate Governance: An International Review 11, 91-101, April 2003.)

Tom Named to CalPERS Board

Asian American political veteran Maeley Tom earned a seat the influential CalPERS board of directors. Ms. Tom is something of godmother figure to hundreds of Asian Pacific Americans in California state service. She has lots of people experience around the Capitol and many owe her a well-deserved favors for her advice and help in building their careers.  Her involvement in ousting Harrigan doesn’t seem to have hurt her reputation with state employees or the CalPERS Board as far as is being reported. I expect her to be an important addition and to play a significant role. (Capitol veteran will join board of CalPERS, Sacramento Bee, 12/7/2005)

Chevedden Report: Sempra Update

Sempra Energy (SRE) said on Wednesday that it would seek shareholder approval to declassify the board and said its shareholder rights plan was being terminated.

Shareholder proposals on these two topics each won more than 66%-support at Sempra’s 2005 “flying-circus” meeting in London. They were sponsored by Chris Rossi and Ray T. Chevedden. As mentioned below, John Chevedden had to hustle to obtain representation for these measures at the meeting.

Sempra’s board is now backing a measure that would require all 11 members to stand for election annually, beginning in 2007. Currently, they are elected to staggered three-year terms. The measure is subject to approval by voters holding at least two-thirds of Sempra shares. The measure for annual election won 67 percent approval this year, 64 percent in 2004 and 56 percent in 2003. Shareholder activist John Chevedden of Redondo Beach, who worked on both measures, said both annual elections and stripping away so-called “poison pill” takeover defenses make management more accountable.

The poison pill is “just like a management protection program,” John Chevedden said. “They know they can afford to mismanage the company.” (Sempra drops opposition to shareholder measures, San Jose Mercury News, 12/7/2005

Shareholder Activism Handbook

The Shareholder Activism Handbook, by Jay Eisenhofer and Michael Barry is the most comprehensive guide to shareholder activism that I have ever seen. Yes, the book provides a fairly comprehensive chapter on filing shareholder resolutions – discussing the history and evolution of rule 14a-8, how to file, what types of resolutions can be excluded, no action letters, cases, proxy solicitation, communications between shareholders, bylaws amendments, etc. Yet, that’s only one chapter out of 16.

The book starts with an analytical overview…a chapter on the principles of corporate governance, which discusses the concept of corporate governance and provides an overview of research linking good corporate governance to increased share price. Other chapters discuss the balance of power between owners and management as well the history of shareholder activism.

The Handbook then quickly get into the nuts and bolts of creating a shareholder-run corporate governance program, which covers many of the issues a mutual or pension fund would need to address – everything from screening, targeting, contacting, to issuing press releases, a more comprehensive section on the benefits of improved corporate governance, as well as anticipated costs. Chapter 5 discusses contacts with management and board. Chapter 6 deals with the rights of shareholders to inspect books and records, “proper purpose,” the “scope” of inspection, confidentiality, privilege, etc. and provides a handy table of legislation by state.

Chapter 8 surveys annual meeting requirements by state and discusses procedural norms regarding conduct of the meeting as well as recent developments, many of which will be somewhat familiar to readers of CorpGov.Net. For example, we covered Sempra Energy’s decision to hold its shareholder meeting in London. While shareholders in the California-based company could cast ballots by mail, those with resolutions on the ballot were required to attend in person or have someone else speak on their behalf. Activists like John Chevedden, who had two measures, really had to scramble. Another issue covered by the Handbook is the “virtual meeting,” which have not yet caught on as some of us feared.

Chapter 9 discusses shareholder voting rights, including broker votes, judicial review of elections, ESOPs, vote no campaigns, and the recent movement for majority requirements for election. Additional chapters cover mergers and tender offers, appraisal rights, derivative actions, direct actions, the history of claims under the securities acts, serving as lead plaintiff, and bondholder rights.

The best book in this category up until now has been Craig MacKenzie’s The Shareholder Action Handbook: Using Shares to Make Companies Accountable, and that was published in 1993. While it isn’t likely to level the corporate governance playing field, active shareholders, legal counsel, consultants and fund managers will find themselves referring to the Shareholder Activism Handbookover and over again. The looseleaf format and automatic supplementation promise to keep the volume current.

Dubai to get Corporate Governance Institute

Dr Omar bin Sulaiman, director-general of the Dubai International Financial Centre (DIFC) announced the establishment of a Regional Corporate Governance Institute. “Until transparency and governance practice in the region are enhanced, there will remain a major barrier to foreign direct investment which is critical to the success of the entrepreneur,” said Dr Omar bin Sulaiman. “Transparency and governance is critical in delivering the knowledge, capital, and skills that will enable the region to diversify its economies away from oil and gas, and to grow the wealth of its people, which will lead to political and social stability. 

The DIFC is an onshore hub for global finance, which bridges the time gap between the financial centres of Hong Kong and London and services a region with the largest untapped emerging market for financial services. (Corporate governance institute set up, TradeArabia News Service, 12/05/2005)

Back to the top

Congress to Investigate Consultants

Representatives George Miller and Edward J. Markey asked the research arm of Congress to investigate whether federal agencies have failed to police the consultants and money managers who help decide how pension funds are invested.

Recent attention has aimed at closing loopholes to ensure companies put enough money into their pension funds, not how the money is invested after that. The Aircraft Mechanics Fraternal Association, which represents some United Airlines employees, previously asked federal regulators to look into whether United’s pension consultant had been acting solely in the interests of the plan participants, as the law requires, or had been steering blocks of pension money to certain money managers for business reasons. Unfortunately, the Pension Benefit Guaranty Corporation, which guarantees company pensions, has to date declined to undertake a forensic audit.

An 18-month review by the SEC, found that more than half the pension consultants in the SEC’s sample were being paid by money management firms, even as they claimed to be screening and selecting money managers objectively on behalf of their pension fund clients. The Congressmen explained that they “are not aware of any plans by the PBGC to systematically assess whether pension consultant conflicts of interest or undisclosed financial relationships existed at any of the terminated plans now under its control.”

The pension guaranty corporation has taken over nearly 4,000 defunct pension plans in the last three years, digging itself into a $23 billion hole. (Lawmakers Seek Inquiry on Pensions, NYTimes, 12/1/2005)

Similar problems have been festering for years. Note a 10/3/1995 response from the Pension and Welfare Benefits Administration to my inquiry. “As of this date, no enforcement actions have been taken by PWBA against a plan fiduciary for voting a proxy contrary to the best interests of plan participants and beneficiaries.” “You also asked whether PWBA has ever taken action against a plan sponsor for failure to monitor the voting decisions of outside managers tainted by conflict of interest. Although such potential issues have been reviewed by PWBA in some situations, to date no enforcement action has been brought by the Department.” This, despite the fact that only 35% of plans could provide sufficient evidence to PWBA that they performed substantive monitoring of their delegated authority.

Fooling Themselves

Investors are no longer pessimistic, according to a survey of 1,535 investors by Sanford Bernstein. But that confidence is leading many to overestimate their own acumen. The average investor reported a 9.6% increase in their domestic equity portfolio over the past 12 months, which is improbable since the S& P 500 benchmark index gained only 5.5%. Many said they believed stocks would do better than real estate over the upcoming five years. (Investors’ Confidence in Equities Returns, MMExecutive, 12/1/2005)

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