April 2006

In a historic development for global financial markets, United Nations Secretary-General Kofi Annan was joined by a group of the world’s largest institutional investors, including CalPERS, at the international launch of the Principles for Responsible Investment.

The heads of leading institutions from 16 countries, representing more than $2 trillion in assets owned, officially signed the Principles at a special launch event at the New York Stock Exchange. The Principles were developed during a nearly year-long process convened by the UN Secretary-General and coordinated by the UN Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact. (more)

“These Principles grew out of the understanding that while finance fuels the global economy, investment decision-making does not sufficiently reflect environmental, social and corporate governance considerations – or put another way, the tenets of sustainable development,” the Secretary-General said.

He added: “Developed by leading institutional investors, the Principles provide a framework for achieving better long-term investment returns and more sustainable markets. I invite institutional investors and their financial partners everywhere to adopt these Principles.”

In joining with institutional investors to develop the Principles, the United Nations collaborated with some of the world’s most influential institutions – many of them public pension funds – involved in investment activities worldwide. It is estimated that pension funds alone – public and private – account for up to 35 percent of total global investment.

More than 20 pension funds, foundations and special government funds, backed by a group of 70 experts from around the world, held meetings in Paris, New York, Toronto, London, and Boston over an eight-month period to craft the Principles.

“We are proud to endorse the Principles, which recognize that social and environmental issues can be material to the financial outlook of a company and therefore to the value of our shares in that company,” said Denise Nappier, Treasurer of the State of Connecticut, who is the principal fiduciary of $23 billion in pension fund assets. “Financial markets tend to focus too heavily on short-term results at the expense of long-term and non-traditional financial fitness factors that could affect a company’s bottom line. For many institutional investors it is the long-term that matters and in this context environmental, social and governance issues take on new meaning.”

The six overarching Principles, which are voluntary, are underpinned by a set of 35 possible actions that institutional investors can take to integrate environmental, social and corporate governance (ESG) considerations into their investment activities. These actions relate to a variety of issues, including investment decision-making, active ownership, transparency, collaboration and gaining wider support for these practices from the whole financial services industry.

The Principles for Responsible Investment aim to help integrate consideration of environmental, social and governance (ESG) issues by institutional investors into investment decision-making and ownership practices, and thereby improve long-term returns to beneficiaries.

Implementing the Principles will lead to a more complete understanding of a range of material issues, and this should ultimately result in increased returns and lower risk. Signatories will be part of a network, which creates opportunities to pool resources, lowering the costs of research and active ownership practices. The Principles also allow investors to work together to address a range of systemic problems that, if remedied, may then lead to more stable, accountable and profitable market conditions overall.

The Principles suggest a policy of engagement with companies rather than screening or avoiding stocks based on ESG criteria (although this may be an appropriate approach for some investors).

The six principles are as follows:

1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles.

Monitoring the Monitor

CalPERS creates billions of dollars in wealth for investors while expanding shareholder rights, according to an important new study by Brad Barber of the Graduate School of Management, University of California, Davis.

Barber’s study of what is commonly termed the “CalPERS Effect,” the incremental stock appreciation resulting after placement on CalPERS’ annual “Focus List” of underperforming companies, found short-term benefits of at least $3.1 billion for investors over a 14-year period ($224 million annually).

Barber breaks some ground methodologically, with his construction of a calendar-time portfolio that invests in focus list firms where weights are proportional to each firm’s market capitalization. His primary theoretical contribution lies in the discussion of two agency costs. The first is widely known and recognized, that being the conflicts of interest between shareholders and corporate managers. Corporate managers may pursue projects that benefit themselves, but not shareholders.

“The second agency cost, less widely discussed that the first, is the conflicts of interest between portfolio managers and investors.” “Just as voting power can be used to benefit shareholders through effective monitoring of corporations, the voting power can be abused by advancing the interests of portfolio managers that are different from those of their investors and reduce the value of the portfolio they manage.” He reminds us that portfolio managers and the boards that oversee them may have interests that are not aligned with shareholders or beneficiaries.

Focusing on CalPERS, his primary example of the second form of agency cost is what some would argue was their vote to oust Safeway’s CEO, Steven Burd, from Safeway’s board of directors in May 2004 for his harsh dealing with employee unions. Of course, this second form of agency cost is much more pervasive at mutual funds, which frequently derive substantial income from administering corporate benefit programs and are reluctant to be strong shareholder activists for fear of losing clients.

Barber’s concluding admonition is one which I embrace and have emphasized frequently. “When institutional activism cannot be reasonably expected to maximize shareholder value, the preferences of investors should be given top priority. Institutions must open lines of communication with investors; they must understand how investors stand on moral issues that might affect investment policy.”

Those who invest in SRI mutual funds frequently do so because their values are aligned with those of the portfolio managers. If they turn out to have serious disagreements, they can take their investment funds elsewhere…at least in theory, although it may be impossible to find true alignment anywhere. CalPERS members don’t have the same choice.

Members do have opportunities to directly vote on about half the board members. However, that opportunity comes only as terms expire and factors favoring incumbents make it extremely difficult for challengers. Therefore, Barber’s advice is important. Opening the lines of communication with members could not only reduce agency costs, as Barber suggests, it could serve to educate all parties involved and could help to ward off frequent political attacks.

There is one perception if the president of the board appears to be using his influence to support striking members olf his own union through the use of proxy power; quite another if members demand the system do so. The CalPERS Shareowner Forum could provide a mechanism for member feedback and for debating the issues. Instead, it has the appearance of an elephant graveyard where readers are presented with largely ageing material and no meeting place for open discussion among experts or members. CalPERS should revitalize this “forum,” which could be a gathering place for the exchange of important ideas leading to greater portfolio returns, education, and increased legitimacy for what are sometimes seen as politically motivated investments and votes.

Barber makes one last point, which I believe, is not highlighted enough. Because CalPERS owns only a small fraction of the equities market, members enjoy benefits of only $1.12 million annually of the benefit from the pension fund’s activism. Barber notes long-term benefits from CalPERS activism of as much as $89.5 billion. Of that, only .5% accrue directly to CalPERS. Of course Barber’s figures don’t take into account the deterrent effect and the ability of CalPERS to “drive the herd.” However, his point emphasizes the need for a greater role by organizations such as the Council of Institutional Investorsand the Investors for Director Accountability Foundation so that costs and benefits can be more equitably distributed.

By working more closely with these and other organizations, CalPERS could reduce “free rider” issues where 95.5% of the value they generate goes to others. Funds could, for example, coordinate by using the Council to consider proposing replacement corporate directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. 

EBSA Seminar

The US Department of Labor’s Employee Benefits Security Administration (EBSA) regional office in Philadelphia will hold a free seminar May 18 to assist employers, pension plan administrators, and other benefit professionals to comply with federal employee benefits law at the NOAA Science Center in Silver Spring, Maryland. The one-day seminar will offer comprehensive information and one-on-one help on using the Voluntary Fiduciary Correction Program (VFCP) to self-correct potential violations of the Employee Retirement Income Security Act (ERISA). (PlanSponsor.com, 6/24/2006)

Database Being Created

CalPERS and CalSTRS have joined forces and have hired Altura Capital to develop a comprehensive database of emerging managers and emerging financial service provider firms (EMFSP database). Goals include:

• Identify a broad base of emerging financial service firms.
• Help develop a better understanding of the characteristics, trends, capabilities and untapped potential of these emerging firms.
• Promote information transparency in the emerging marketplace, and thus broaden the opportunities for emerging firms to conduct business and add value to the portfolios of institutional investors.
• Provide a greater degree of diversity opportunities within the investment strategies of public and private pension funds.
• Give plan sponsors exposure to a wide gamut of investment opportunities through a largely untapped market of fresh investment talent.
• Create a comprehensive industry reference guide. A summary of this important resource will be available to other plan sponsors, corporations, endowments and institutional investors across the nation.

Read to Head CalPERS Investment Office

Russell Read, former deputy investment chief for Deutsche Asset Management in New York, will join CalPERS on June 1. He replaces Mark Anson who left in January to head London-based Hermes Pensions Management. Read will earn a base salary of $534,000 a year, plus bonuses up to 75%.

According to an article in the Sacramento Bee, Read is already involved in environmental issues. Read apparently planted 10,000 oaks, sugar maples, black cherry trees, elms and chestnuts on 60 acres on his property in Brooks, Maine.

Read earned a doctorate in political economy and master’s degrees in economics and political science from Stanford University. He also received a master’s of business administration in finance and international business and a bachelor’s degree in economic statistics from the University of Chicago. (CalPERS picks money ace, 4/20/06)

Empower Employees

Korn/Ferry International advises that companies may want to stop throwing money at their top executives. Their recent study found that only 5 percent of global executives say that inadequate or inconsistent compensation is the main reason they left their last job. Rather, 33% say lack of challenges or opportunity for career growth was the top reason they left.; 20% pointed to ineffective leadership; and 17% to the attractive job market.

“Executives don’t leave jobs for better money; they leave for better opportunities,” says Jack MacPhail, managing director, Americas, for leadership development solutions at Korn/Ferry. To retain talent, organizations should do more to empower employees to make decisions, focus more on career development and do more to create a better work/life balance. (Executives Leaving? It’s Probably Not the Money, 4/14/2006)

Additional Conflicts of Interest

For Ivan G. Seidenberg, chief executive of Verizon Communications received $19.4 million in salary, bonus, restricted stock and other compensation in 2005, 48% more than in the previous year. Shareholders didn’t do as well, since their stock fell 26%. Verizon reported an earnings decline of 5.5%.

Yet, Verizon’s board compensation committee determined that Seidenberg exceeded “challenging” performance benchmarks devised with the help of an “outside consultant” who reports to the committee.

Reportedly, that consultant is Hewitt Associates. Verizon is one of Hewitt’s biggest customers in the far more profitable businesses of running the company’s employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. According to a former executive of the firm who declined to be identified out of concern about affecting his business, Hewitt has received more than half a billion dollars in revenue from Verizon and its predecessor companies since 1997. (Outside Advice on Boss’s Pay May Not Be So Independent, Wilmingtonstar.com, 4/10/2006)

Class Mobility Stalls

Across the 1990s, about 40% of US families ended the decade in the same income bracket in which they began, versus 36-37% in the 1970s and 1980s. More than half the families at the bottom were still there after 10 years. The best way to get ahead my be to move, if you can afford it. Researchers found that mental health improved greatly when the poor people in the studies moved to better neighborhoods. “Overall, they likened the magnitude of the effect to that found in ‘some of the most effective clinical and pharmacological mental health interventions.’ ” (Overcoming Barriers to Mobility, Brookings, 4/2006)

The Corporate Library Proposes Better Compensation Tables

Shareholder activists, corporate officers, and executive-pay consultants have joined in criticizing SEC proposed changes to the so-called summary compensation table describing what top brass earned the prior year. One of the main concerns raised by critics is that combining the value of yet-to-be-earned equity, as proposed, with hard cash actually paid out the prior year in a single table risks confusing investors.

The Corporate Library has proposed a reasonable alternative. An “earned compensation” table would include salary, perks, annual bonus, vested restricted stock, exercised stock options and other compensation received during the year. A “future compensation” or target compensation table would include, among other things, target annual bonuses, value of restricted stock awards amortized over the vesting period, and grant date value of stock options. “In this way, all the ‘apples’ will be in one table, and all the ‘oranges’ will be in another,” says senor researcher Paul Hodgson. (Activists, firms critique proposed SEC compensation tables, Phyllis Plitch, MarketWatch, 4/20/2006)

CalPERS Announces Focus List

CalPERS, the largest U.S. pension fund, announced six targets for turnaround: Brocade Communications Systems, Cardinal Health, Clear Channel Communications, Mellon Financial, OfficeMax, and Sovereign Bancorp. CalPERS reviewed more than 1,800 U.S. companies in its portfolio before selecting its annual “Focus List.”

All of the companies except Clear Channel require supermajorities to amend their by-laws, all but Sovereign have significantly underperformed their peers over five year and Sovereign has lagged in the past year. CalPERS said Cardinal and Clear Channel grant excessive severance, Clear Channel pays its executives too much, OfficeMax and Sovereign have “excessive” takeover defenses, and Sovereign offers “limited shareowner rights” and grants severance to directors. (CalPERS targets six underperforming US, Reuters, 4/19/2006)

A 1995 study by Steven Nesbitt, of Wilshire Associates, examined the performance of 42 companies targeted by CalPERS. It found the stock price of these companies trailed the S&P 500 Index by 66% in the five year period before CalPERS acted to achieve reforms. The same firms outperformed the Index by 52.5% in the following five years. A similar independent study by Michael P. Smith (Economic Analysis Corporation, Los Angeles) concludes that corporate governance activism increased the value of CalPERS’ holdings in 34 firms over the 1987-93 period by $19 million at a monitoring cost of $3.5 million.

Improvements could be made in the program by raising the System’s stakes in targeted firms before putting out press releases. Firms that follow CalPERS recommendations will usually be rewarded with higher shareholder prices. CalPERS should take more advantage of that impact. Where firms refuse, CalPERS should consider selling their shares short and encouraging its members to boycott their products/services.

The CalPERS internet site should not only include how CalPERS intends to vote, it should facilitate the ability of members to e-mail the corporations about their concerns. (Disclosure: James McRitchie, the publisher of CorpGov.net, is a recently declared candidate for the CalPERS Board of Administration)

SARs Spreads

CFO.com reports that with FAS 123R making stock options increasingly unpopular, a growing number of companies are resurrecting an old form of incentives known as stock appreciation rights, or SARs. Like options, SARs reward employees based on the increase between a set strike price and current market price. The compensation vehicle gives the right to the monetary equivalent of the appreciation of share price over a specified time, but no stock or options are actually granted at the time the right is offered. Since they cover only the marginal gain, however, SARs can be fulfilled using cash or fewer shares of stock than options require, reducing dilution.

“They’re no more open to abuse than stock options or restricted stock,” says Paul Hodgson, senior research associate at The Corporate Library. However, he adds, “the problem with both restricted stock and SARs is that they are no more related to performance over the long term than options are.” (Taking Stock of SARs, 4/1/2006) (see also Beyond Stock Options)

Cheaper Drugs Could Increase Profits for Universal Investors Like CalPERS

Trillium Asset Management and the Interfaith Center on Corporate Responsibility have collaborated on a draft research paper, “Why Lower Drug Prices Benefit Institutional Investors.”

The paper finds that lower pharmaceutical company profits resulting from price cuts would be largely if not fully offset by a combination of health plan cost-savings and increases in consumer spending power. Furthermore, falling drug prices benefit investors through the dynamic benefits of a healthier workforce with greater access to prescription drugs. They conclude that from the perspective of broadly diversified “universal investors,” support for lower drug prices is consistent with a fiduciary duty to seek attractive long-term returns at the portfolio level.

While the paper has a specific focus on pharmaceutical pricing, it also provides a case study that is broadly applicable to many other environmental and social issues. It provides a model to consider fiduciary duty at the portfolio level rather than at each individual holding in isolation, which may lead investors to support measures that could hurt individual holdings but lead to higher total returns across their portfolio.

SOX Costs Decrease for Large Firms

Large U.S. companies spent less than expected to comply with the Sarbanes-Oxley corporate governance law last year, according to a study commissioned by the four largest accounting firms.

The study, by consulting firm CRA International, found that the average costs for the nation’s largest publicly traded companies dropped 44% in 2005, to $4.8 million. The biggest reason for the decline was the “learning curve effect,” said Gregory Bell, a group vice president at CRA. “This is the second year with Sarbanes-Oxley, so there were significant efficiencies from doing it the second time.”

The CRA study found that costs for smaller companies weren’t falling as steeply. Total compliance costs for companies with market capitalizations of $75 million to $700 million dropped 31%, to $860,000. (Sarbanes-Oxley Costs Down, WashingtonPost.com, 4/19/2006)

Indian Armed Forces to the Rescue

Corporations in India are having a difficult time finding 3,000-4,000 independent directors to meet the new revised clause of SEBI for public companies. Now, it appears the armed forces is coming to their rescue. Army officers will be trained in a two week course in corporate governance by Bombay Chartered Accountants Society and the SP Jain Institute of Management Research.

The program will include lessons in corporate governance, aspects of audit committee, risk management of companies and corporate governance in practice (with a case study on Infosys). (Governance training for ex-army men, Business Standard, 4/17/06)

And American companies are having difficulty finding “qualified” directors. Phil Johnston blogs that he has spent the last four-and-one-half decades sitting on five public and 16 non-public boards. “I never once saw a board member being proposed by the nominating committee. Typically, one director alone along with the CEO, or the CEO alone proposed nominees. The nominating committee merely vetted. (Sing It Again, Frank … That’s Life, Corporate Governance Leadership Blog, 4/17/20060) Time for changes.

Blame Mutual Funds for High CEO Pay, Says Bogle

John Bogle, the founder of Vanguard, says the compensation packages of mutual fund managers should be more transparent. Pay disclosure is scant, because many fund management companies are private or are subsidiaries of large organizations, and the fund executives are not necessarily among their companies’ five highest-paid people.

According to Bogle, runaway executive pay isn’t the fault of grasping corporate managers alone; it’s also the fault of the many mutual fund managers who have done little to stop the diversion of shareholder money to excessive compensation. Index managers should be especially active since, if they can’t sell the stock, being active is the only way they can raise value. Yet, when it comes to executive pay, only Amalgamated Bank’s LongView Funds filed a comment letter with the SEC on its pay disclosure proposal. (Fund Managers May Have Some Pay Secrets, Too, NYTimes, 4/16/06)

Widespread Vote Manipulation in Corporate Elections

Mark Hulbert’s article on vote borrowing (One Borrowed Share, but One Very Real Vote, NYTimes, 4/16/2006) overlooked a related problem, Wall Street’s failure to keep adequate tabs on shares that can easily be loaned repeatedly for the same election, allowing three or four owners to cast votes based on the same holdings. According to Thomas Montrone, of Registrar & Transfer Co., which oversees shareholder elections says “a lot of the time we have no idea who’s entitled to vote and who isn’t.”  The Hazlet, a New Jersey–based group for stock transfer agents, reviewed 341 shareholder votes in corporate contests in 2005. It found evidence of overvoting—the submission of too many ballots—in all 341 cases. (Corporate Voting Charade, Bloomberg Markets, April 2006)

Unfortunately, the arrival of millions of duplicate ballots in a corporate elections is not obvious because up to half of all stockholders don’t participate. Too many feel there is no point because although corporate elections are shrouded in terms of democracy, they are widely recognized as a sham. That failure to vote leaves plenty of leeway for brokerages to permit voting of borrowed shares without going over the maximum number of eligible votes.

In 2002, Les Greenberg and I petitioned the SEC to allow stockholders to place their director nominees on corporate proxies. The SEC floated their own muddled proposal in 2003, which was killed by the Business Roundtable and the U.S. Chamber of Commerce. When shareholders have real power to govern the companies they own they will demand and end to vote borrowing and that voting rights be carefully tracked. 

As usual, Broc Romanek, editor of TheCorporateCounsel.net, is about a year ahead of most of us. See his informative interview, Inside Track with Julie: Broc Romanek on Understanding Overvoting. (4/25/05) Also of interest, Inside Track with Broc: Rich Koppes on Investors Placing Directors on Boards. (3/29/06)

Letters Support Corporate Governance

Allan Murry’s Corporate-Governance Concerns Are Spreading, and Companies Should Take Heed(WSJ, 4/12/06 — subscription required) is followed up with The Math on Corporate Boards (WSJ, 4/15/06) letters, mostly supportive of greater attention to corporate governance.

Ironic Perks

Michelle Leder’s Footnoted.org reports on recently disclosed and sometimes ironic perks (Perk Watch, 4/12/2006):

• Room service: While $12,000 a year may not be a lot of money in the greater scheme of things, it’s still curious that the CEO of 1-800 Contacts (CTAC), Jeff Coon, got the company to ante up for what yesterday’s proxy describes as “domestic services.” Now Coon only made $209K last year and didn’t get a bonus because the stock is down sharply. But it’s still unclear why investors are paying for Coon’s nanny or, perhaps, maid.
• Good planning: One would hope that the top executives at a bank would already have good financial skills. But the proxy filed by WSFS Financial (WSFS) notes that the company provides financial planning services as a perk “to encourage strong personal financial habits.” It’s not clear from the proxy how much the bank spent of providing this perk. But the irony here is pretty rich.
• Charge it!: Executives at Federated Department Stores (FED) get something called an “executive discount on merchandise purchases.” It’s not clear how much the discount is — non-executive employees typically get 25% off — but Vice Chairman Ronald Tysoe clearly took advantage last year, ringing up $105K worth of the discount. Only Thomas Cody, another Vice Chairman — the preliminary proxy actually lists five with the same title — came close. Cody’s executive discount was $94K.

Google Shouldn’t Be Corporate Governance Outlier

The Bricklayers & Trowel International Pension Fund, which owns 4,735 shares of Google filed a proposal seeking to dismantle its two-class stock structure. It has no chance of passing, since co-founders Sergey Brin and Larry Page and CEO Eric Schmidt control 70% of the voting control.

Google has two classes of stock. The class B shares held by the three executives count as 10 votes for every share, compared to one vote for every share of class A stock held by most other shareholders. The proposal will be voted on during Google’s annual shareholder meeting on May 11.

Jake McIntyre, who represents the Bricklayers, argues that Google may be fine now but “people become corrupted, or the founders pass away and leave the company to heirs. They could be ne’er-do-wells. At that point, it becomes apparent why you wanted to have more direct shareholder control.”

Charles Elson, director of the Center for Corporate Governance at the University of Delaware, agrees. “Any time you separate economic interest from voting interests, it leads to all kinds of problems. It lessens the accountability. I haven’t heard of any good reason for dual-class stock. I think the proposal will strike a chord with a lot of people.”

I couldn’t agree more. Brin, Page, and Schmidt wouldn’t be in any danger of loosing control if all shares carried the same voting power, as long as Google continues to perform. Furthermore, it shouldn’t be up to these three or their heirs to determine when they have become corrupted or incompetent. Few people readily acknowledge their own failings. Shareholders should support the resolution. (Google shareholder wants two-tiered stock structure dismantled, San Jose Mercury News, 4/12/2006)

Public Employees Face Shortfalls

The Colorado Coalition for Retirement Security, a new group representing more than 100,000 Colorado public workers, has been formed to oppose any structure that would pay future hires lower pension benefits than current workers. The Colorado Public Employees Retirement Association (PERA), which covers 370,000 members, backs a bill that would funnel a portion of contributions from future hires to overcome an $11.3-billion shortfall.

Despite a $14.1 billion return on investments, falling interest rates and increasing numbers of retirees are to blame for the shortfall at the Ontario Teachers’ Pension Plan.  In 1990 there were four working teachers per pension recipient; now there are only 1.6 working teachers per pensioner.

Plan CEO, Claude Lamoureux, is calling for benefit cuts and a hike in member contributions to prevent the shortfall from getting even worse, according to the Reporter.  The plan paid out $3.6 billion in benefits last year, while contributions (from active teachers, the Ontario government and other employers) totaled $1.6 billion. OTF president, Marilies Rettig, said in a news report that a contribution increase will be necessary, but the OTF does not plan to decrease benefits at this time. (Canadian Teachers’ Pension Shortfall Balloons to $31.9B, PlanSponsor.com, 4/14//2006)

Best-Performing Strategies

The Wall Street Journal reports a study by ISS of more than 300 institutional investors finds corporate governance concerns are on the rise. 63% of those surveyed believe corporate governance will be even more important to their firms over the next three years than it has been over the past three years.

Investors are recognizing that attention to corporate governance increases the value of their investments. 59% said monitoring corporate governance of companies they invest in enhances investor returns.

Chinese investors give the strongest endorsement to corporate governance, with 90% of them saying it was either “important” or “very important.” But those investors are concerned with achieving basic levels of board accountability and transparency in Chinese companies already common elsewhere. Japanese investors put primary emphasis on eliminating poison pills and other measures designed to prevent takeovers, which can boost shareholder returns.

Dennis Johnson, a senior portfolio manager at CalPERS, says his they have invested $4 billion with activist managers who focus on different corporate-governance measures in different markets with great success. “It’s one of the best-performing strategies in all of equity investing for CalPERS,” he says. (Corporate Governance Concerns Are Spreading, and Companies Should Take Heed, 4/12/2006)

Chevedden Report

Look at the sour-grapes way Goodyear reported the 73% yes-vote for simple majority voting (Shareholder proposal #5): 76 million yes-votes vs. 28 million no-votes.

“A shareholder proposal requesting the adoption of a simple majority vote standard for all issues subject to shareholder vote failed to get a majority of votes outstanding.” (Goodyear Directors Re-Elected at 2006 Annual Meeting, 4/11/2006)

This may be an all-time record high vote percentage for a shareholder proposal submitted to Goodyear. (Publisher: But aparently not, if you count those who didn’t vote.)

Moody’s Criticizes Coke Director Pay Plan

Moody”s Investors Service published a negative response to use of incentive pay for outside members of boards of directors. Moody’s views the programs with skepticism, says Moody’s Managing Director Kenneth Bertsch, an author of the report. “Incentive pay for directors based on performance metrics can undermine director independence when setting executive compensation and providing oversight of financial reporting. Further, it introduces a risk that the board’s attention will shift to short-term shareholder-oriented performance,” says Bertsch.

In Coca-Cola’s case, the company is replacing director pay and non-contingent annual retainers of $50,000 in cash plus $75,000 in share units with an award of $175,000 in share units for each of its outside members. The award may pay out (or be deferred) after three years if the company meets pre-defined earnings per share targets. If not met, director fees are forfeited.

Coke is not the only company to undertake such a program. Others that pay a portion of outside director pay based on meeting corporate performance hurdles (based on either internally-generated financial targets or share price performance) include Chubb Corporation, National City Corporation, Sovereign Bancorp, Inc. and SPX Corporation (which is modifying director pay this year). Capital One Financial Corporation and Progress Energy Inc. had incentive-based director pay but now have clearly ended that practice. Altogether, Moody’s believes that only about 1% or less of Moody’s-rated U.S. public companies use such an approach. Coca-Cola’s market leadership, however, suggests incentive pay structures could gain renewed consideration by other boards, says Moody’s. Moody’s also has criticized use of stock options for outside directors, which is a widespread practice in the US market.

“We believe a central function of the board of directors is to provide a check on management. Alignment of executive and outside director incentives, other than through long-term share ownership, detracts from our confidence in that function,” says Bertsch.

Compensation tied to specific corporate performance metrics – including earnings per share (EPS) or total return to shareholders (TRS) in particular – can encourage share repurchases and other decisions on company leverage that may not be in the interests of bondholders, says Moody’s.

One potential consequence of incentive pay for outside directors at some companies could be lack of rigor in setting performance thresholds for management, says Moody’s. “We question the ability of compensation committees to set tough performance hurdles if their own rewards are dependent on the hurdles that are established,” Bertsch says.

Incentive-based board pay will of particular concern to the extent that any directors appear to be significantly dependent on their director retainer for income, and will heighten Moody’s attention on the apparent personal wealth of members of a board, says Moody’s.

Until now incentive pay for outside directors has been unusual at U.S. companies, except for use of stock options and payment in shares or their equivalents. Moreover, the recent trend has been away from use of stock options to compensate directors (although a substantial number of companies still make use of options).

While Moody’s believes that most of the largest and most prestigious US companies do demonstrate proper care in their oversight of financial reporting, “We remain concerned that, should the use of director incentive pay based on the EPS metric become widespread, some boards would be less vigilant in regulating earnings management, and that gaming around this metric could cloud investors” understanding of financial strength.”

CalSTRS Seeks Majority Election Default

The California Teachers’ Retirement Board will join CalPERS in sponsoring California State Senate Bill 1207 (Archon). The Board also voted to officially support the provisions in Congressional Bill H.R. 4291 (Frank).

SB 1207 sets as a default policy that uncontested nominees to the board of directors of a California-registered public company must receive a majority of votes from the shareholders represented and voting in order to be elected, instead of the current plurality standard that allows a director to be elected with the positive vote of one share.

SB 1207 is permissive and would allow companies to adopt plurality voting standard if they chose to do so. According to a press release from CalSTRS, this legislation aims to put the ultimate power over the election in the hands of the shareholders, and helps California corporations set the standard of best practices in voting. The bill was referred to the state Senate Committee on Business, Professions and Economic Development. (see Leginfo)

H.R. 4291 would require company disclosure of executive compensation plans in its annual reports and proxy statements, as well as requiring a separate vote for general equity compensation plans and so-called Change-in-control severance agreements.

Additionally, H.R. 4291 provides shareholders the protection of a clawback policy. The clawback provision would require companies to adopt policies in which all principal executives return compensation to corporations. The clawback policy would also apply to compensation for performance that does not meet stated measures, compensation as a result of fraud and unearned performance-based compensation as a result of restatement. The bill is in the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

“We have been working for decades to improve transparency at the board level and have fought tirelessly to make our voice as shareholders heard,” said Jack Ehnes, CalSTRS CEO. “While we have made great strides in engaging companies directly on these issues, these bills lend a strong and consistent legal framework.” (California State Teachers’ Board Supports Corporate Governance Legislation; Bills Ensure Shareholder Democracy and Performance-Based Executive Compensation, 4/11/2006)

In other news the board re-elected Carolyn Widener as Chair and Dana Dillon as Vice-Chair for the 2006 term. (CalSTRS Board Elects Chair and Vice-Chair for 2006 Term, 4/7/2006) They also announced Tuesday an agreement to build a new $176 million to $186 million headquarters office tower at Raley’s Landing in West Sacramento, bringing a high-profile investor to the commercial, retail and residential complex along the Sacramento River. That will put CalPERS and CalSTRS within a few blocks of each other. (CalSTRS HQ to anchor West Sac waterfront development, 4/11/2006)

H.R. 4291 would require full disclosure of a company’s compensation plan for principal executive officers in their annual report and proxy statements. The Frank bill would also require separate shareholder approval for any compensation plan, including “golden parachute” packages.
With a $142 billion investment portfolio, CalSTRS is the second-largest public pension fund in the United States. It provides retirement, disability and survivor benefits to California’s 776,000 public school educators from kindergarten through community college.

Independent Directors Bring Higher Mutual Fund Returns

The most recent study (and the study that uses the most comprehensive dataset) was presented at the AFA this January in Boston. This paper by Drs. Ding and Wermers sheds light on the current controversy about the independence of mutual funds boards. This is what they have to say:

“When we examine the role of boards, we find that higher numbers of independent directors predict both better future performance and a higher likelihood of underperforming manager replacement, which indicates that the structure of the board is an important determinant of governance quality.” (Independent directors on mutual fund boards: Part 2, Corporate Govrnance Watch, 4/11/2006)

Outside Advisors Pay Dependent

Gretchen Morgenson’s excellent article in the NYTimes (Outside Advice on Boss’s Pay May Not Be So Independent, 4/10/2006) points to the fact that many “outside” advisors on executive pay are dependent on those executives for a substantial part of their business. Hewitt Associates, for example, not only reportedly advises Verizon on Ivan G. Seidenberg’s pay package but also on running the company’s employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. Morgenson also notes that SEC rules do not require companies to disclose the names of pay consultants or their conflicting relationships.

The SEC has proposed rules on compensation disclosure that would require compensation consultants to be identified. But the rules would not force companies to disclose details of other services provided by the consulting firm or its affiliates.

The Conference Board issued a report in January suggesting, among other practices, that boards hire their own compensation consultants, who have not done work for the company or its current management.

John W. Snow, secretary of the Treasury, characterized executive pay this way: “In an aggregate sense, it reflects the marginal productivity of C.E.O.’s.” Mr. Snow added that he trusted the marketplace to reward executives. Mr. Snow was a member of the Verizon board from 2000 to 2002 and on its compensation committee in 2001.

An increasingly common practice of consultants is to use the same performance benchmark to generate both short-term and long-term pay. This arrangement rewards executives twice for a single achievementnoted Paul Hodgson, senior research associate at The Corporate Library.

According to Morgenson, even though stock exchange regulations require compensation committee members to be independent of the executives whose remuneration they oversee, their connections with those people can run deep. Verizon’s compensation committee, for example, consists entirely of chief executives or former chief executives. Three of the four members sit on other boards with Mr. Seidenberg. You scratch my back; I’ll scratch yours. That’s independence according to the current rules.

As I have noted repeatedly, what we need are directors who are not only independent of management but dependent on shareholders. I urge shareholders to consider proposing replacement directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. 

Will Cox Step Up?

That’s Mercer Bullard’s question after learning of the US Court of Appeals for the District of Columbia decision that rules requiring at least 75% of mutual fund directors to be independent could be set aside in 90 days, largely because the SEC incorrectly followed procedures when estimating the costs of the rulemaking. The SEC could maintain the rules by allowing more public comment, depending on how Cox and other commissioners choose to act. The plaintiff in the case was the US Chamber of Commerce, which said it filed the appeal on behalf of mutual-fund-company members it declined to identify. (Court stalls SEC rule fought by Fidelity, Boston Globe, 4/8/06) Will Cox protect investors or will he side with those who do not want to be held accountable by independent directors?

CEO Golden Years

While more and more companies switch from defined benefit to defined contribution retirement plans, CEOs continue not only with DB plans but also with additional perks. According to the AFL-CIO, 69% of Fortune 1,000 CEOs are covered by traditional DB plans, while only 21% of private-sector workers are covered by such plans.

CEO Golden Years: The Top 25 Largest CEO Pensions, a report by the AFL-CIO and The Corporate Library, reveals Pfizer Chief Executive Hank McKinnell will get an annual pension of $6.5 million (or a lump-sum pension check of $83 million), ExxonMobil’s ex-CEO Lee Raymond is also at $6.5 million (or a lump-sum payment of $81 million), and AT&T’s Edward Whitacre ranked comes in third with a pension valued at $5.5 million a year. (AFL-CIO puts big CEO pensions under scope, USA Today, 4/7/06)

Westly’s Campaign Contributions Scrutinized

The Los Angeles Times took a closer look at State Controller and gubernatorial candidate Steve Westly campaign contribution, writing that he “steered California’s giant pension system to invest in a fledgling venture capital fund whose politically connected partners helped him raise campaign cash.” “Before Westly’s involvement, the pension board’s outside advisors had rejected the fund as ill-suited for its portfolio. After the investment was made, one of the partners became enmeshed in an unrelated pension-fund scandal in Illinois, pleading guilty to attempted extortion.” (Funding for Westly Followed Investment, 4/6/06)

Disclosure of Political Contributions Gets Traction

The Wall Street Journal reports that the campaign for corporate disclosure is gaining momentum. ISS is, for the first time, recommending passage of a shareholder resolution requiring more oversight and disclosure of political giving.

The unprecedented recommendation involves Washington Mutual Inc., a fast-growing Seattle thrift. According to Alan Gulick, a company spokesman, Washington Mutual opposes the resolution on grounds that information on the thrift’s donations, roughly $50,000 in the past election cycle, are already available to the public. In addition, Washington Mutual executives argue the cost of implementing a new policy may well exceed the company’s relatively modest political giving.

A recent survey of investors by Mason-Dixon Polling & Research, commissioned by the Center for Political Accountability, provides support. More than 90% of respondents backed more disclosure and 84% wanted board oversight and approval of such giving. Nearly three-quarters of respondents agreed that corporate giving is often aimed at advancing the private interests of executives rather than the company’s interest.

Sixty resolutions are pending this year and 41 are scheduled for votes. ISS says resolutions will be evaluated on a company-by-company basis and largely will hinge on whether a firm already has high-level oversight of donations and a policy explaining its criteria for giving. (Investors Seek Clarity on Campaign Giving, WSJ, 4/5/06)

Coke Board’s Pay Plan No Model

The Coca-Cola Company announced an innovative plan for paying outside directors: Coca-Cola’s $175,000 annual director payments, issued as stock, will be payable only if the company meets a compound earnings growth target of 8% over the next three years. If earnings per share do not rise fast enough over the three-year period, directors will receive nothing. But they will get a significant raise if earnings perform as expected.

The idea was enthusiastically supported by Warren E. Buffett, the chairman of Berkshire Hathaway and a Coca-Cola director who is stepping down from the board and will not be eligible for the payments. (Coke’s Board to Get Bonus or Nothing, New York Times, 4/6/06)

This publisher tends to side with an analysis by PROXY Governance. “It’s hard to envision directors like Barry Diller, Peter Uberroth or James Robinson III risking their reputations by getting involved in earnings shenanigans to ensure their Coca-Cola director payments,” Managing Director for Policy at PROXY Governance Scott Fenn said. “But there are several good reasons why we don’t view this as a particularly useful model for Corporate America,” he added, “and creating a strong incentive for directors to look the other way if management plays games with earnings is high on the list.”

• Directors at smaller companies, who often are not independently wealthy, might face pressures to cooperate with management in earnings or financial statement manipulation to meet all-or-nothing performance targets;
• Earnings per share, the sole performance metric utilized in the Coca-Cola plan, is among the measures most easily subject to manipulation;
• Linking director pay so closely with earnings targets might subtly persuade directors to lower expectations for overall corporate performance, preventing them from setting “stretch” goals for management;
• Ambiguities or struggles over who sets performance targets for directors’ pay, and what the right targets are, could distract from directors’ primary responsibility to ensure that management is focused on the creation of long-term shareholder value.
  

Chevedden Report

The April 4 management proposal 5 for certain simple majority voting provisions was approved by shareholders (Source: Morgan Stanley From 8–K). Plus the related shareholder proposal 7 for 100% simple majority vote won 59% of shareholders’ yes and no votes. John Chevedden, proxy for sponsor Emil Rossi. 40% of votes cast backed a proposal by AFSCME calling for majority voting in board elections. Morgan Stanley had already changed its corporate governance policy to ask any board nominee who gets more “withhold” votes than “for” votes to tender his or her resignation. Additionally, 55.5% of shares were voted to support to a proposal by the LongView Collective Investment Fund calling for executive severance packages that exceed 2.99 times the sum of the executive’s base salary plus cash bonus be subject to shareholder approval.

Shareholder proposal triggers NiSource Inc. (NI) company proposal. The Ray T. Chevedden rule 14a-8 shareholder proposal for annual election of each director submitted for the 2006 NiSource annual meeting ballot triggered a company proposal on the same topic (Per April 3, 2006 definitive proxy).

This is particularly advantageous for shareholders because the company proposal requires only a 51% vote of shares outstanding. Plus each director will then stand for a one-year term at the 2007 annual meeting and thereafter. “Each director whose term would not have otherwise expired at the annual meeting in 2007 will tender his or her resignation to be effective at the annual meeting in 2007.” Mr. Chevedden’s 2005 proposal on this same topic won 74% of the yes and no votes at NiSource.

ISS Governance Weekly notes one of the upcoming meetings to watch is PG&E’s on April 19, 2006. John Chevedden (on behalf of the on behalf of the Ray T. Chevedden & Veronica G. Chevedden Family Trust) has introduced a proposal to require the company to submit future “poison pills” to a shareholder vote within four months. The company notes that it has terminated its poison pill plan in February 2004 and adopted a policy to seek shareholder approval within 12 months of adopting such a defense. A proposal by Nick Rossi asks the board to require an independent chair. The company claims it has a high level of board independence and a lead director to ensure independent oversight of management and sound policymaking.

Cavanagh Predicts

Forbes.com interviewed Richard Cavanagh, who’s stepping down after 10 years as chief executive of the Conference Board. On when women will be CEOs, “I think it’ll be in the next three to five years.” Regarding proposed SEC executive-pay disclosure rules, “better disclosure has a good chance of raising pay rather than limiting it. In Lake Wobegon, we are all above average and need to be paid above average.”

On big corporate governance issues a few years down the road, shareholders don’t act like shareholders because they don’t hold for the long-term. In Switzerland, shareholders who hold securities for 10 or 12 years pay virtually no capital gains. “And guess what: They get a lot of people holding onto them. So I think that’s the real crux of it.” (Diversity, Governance, Executive Pay, 04/06/06)

Majority Vote Seminar

The Weinberg Center for Corporate Governance at the University of Delaware will hold a panel discussion on Majority Voting and Director Contest Reimbursement as part of the Seminar in Corporate Governance taught by Charles M. Elson, Edgar S. Woolard, Jr., Chair in Corporate Governance. That’s Tuesday, April 25, 2006 between 9:30 am and 11:30 am at 125 Alfred Lerner Hall. Call 302-831-6157. 

Guest panelists include:

• Frank Balotti, Partner, Richards, Layton & Finger
• Lucian Bebchuk, William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance, Harvard Law SchoolRichard Ferlauto, Director, Pension and Investment Policy, AFSCME
• Peter Langerman, President and CEO, Franklin Mutual Advisers
• Joann Lublin, Staff Reporter, Wall Street Journal
• Giovanni Prezioso, Former General Counsel, Securities & Exchange Commission
• Gil Sparks, Partner, Morris, Nichols, Arsht & Tunnell
• The Honorable Leo Strine, Vice Chancellor, Court of Chancery
• Theodore Ullyot, Executive Vice President & General Counsel, ESL Investments

Marching Under the Bylaws Banner

WSJ points out that frustrated shareholders are now starting to make more frequent use of binding bylaw resolutions. Eighteen of 1,056 shareholder proposals submitted last year were binding, according to Institutional Shareholder Services; by the end of March this year, 10 of 890 submitted were binding. Failure to win open access to the proxy for investor nominated directors has yielded a new burst of creative strategies.

Lucian Bebchuk (see Letting Shareholders Set the Rules) has targeted eight companies with bylaw amendments this year. Mr. Bebchuk’s proposals would require companies to reimburse shareholders for expenses incurred in initiating and promoting successful resolutions and amendments, up to the amount the companies themselves spent to defeat them. Three companies — American International Group Inc., Bristol-Myers Squibb Co. and Time Warner Inc. — have already accepted his proposals or variants. Five others are opposing his proposals, so shareholders will vote on them this spring. The article also discusses proposals by CalPERS and AFSCME. (Stock Activism’s Latest Weapon, 4/4/06)

Jackie Cook’s Blog and Site

Jackie Cook, a Senior Research Associate at The Corporate Library, has a blog and an ambitious site worth bookmarking and checking frequently.

Governance Map offers “a window into the network of corporate decision makers.” A current news item discusses the fact that at least 49 resolutions calling for a majority vote threshold to be applied to director elections have been published in US public company proxies already this year (up to 31 March 2006).

Her internet site is The Directormap Project, which publishes results of director elections. Here, for example, you can see a chart of the largest spread between least supported board nominee and average of other nominees (with more than 30% difference). Her online resources section is a work in progress but, when built out, will put my little stone-age links page to shame. When I look at her work, I feel so 20th century, but also in love with what the 21st century is bringing. I feel certain that with these tools shareholders and society will be able to unlock the true wealth generating potential of corporations, while ensuring a sustainable future.

Short-Tremism Revisited

Conference Board report, Revisiting Stock Market Short-Termism, finds that short-termism has many negative effects including focusing investor and corporate attention on near-term quarterly earnings to the possible detriment of longer-term corporate growth. Among the key factors compelling change:

1. Both the business and investor communities, now more than ever, recognize the need to restore investors’ confidence and the credibility of the international capital markets, which have been undermined by the recent wave of corporate scandals.
2. Institutional investors, including large public and private pension funds and certain asset managers, have been taking unprecedented steps to monitor the management of their portfolio companies. They have done so by advocating accountability, the enforcement of shareholders’ rights, and the adoption of higher standards of business integrity, as well as by investigating the possibility of directing assets toward investments with a greater long-term focus.
3. Institutional investors are now, more than ever, revisiting the “pay-for-performance” issue, and encouraging companies to devise compensation schemes based on a more balanced combination of financial and extra-financial indicators of performance.
4. There has been an unparalleled process of international convergence of accounting principles, especially with regard to initiatives to design a new model of corporate reporting based on true value drivers and inclusive of extra-financial measures of performance (i.e. data on customer satisfaction and registered patents, indicators of employees’ professional development, and other intangible assets used by businesses to pursue their strategic goals).
5. Major empirical research projects have recently reported results supporting the linkage between sustainability (i.e. environmental, social and corporate governance) factors and improved stock prices and shareholder value.
6. Regulators, intermediaries and institutional investors have undertaken unprecedented efforts to focus financial sell-side research on long-term corporate value. In addition, for the first time, a major group of institutional investors in the Enhanced Analytics project have agreed to allocate a minimum of broker commissions to long-term securities analysis that effectively incorporates extra-financial measures of performance and corporate intangible measures of success.

The following are the report’s suggestions for future action:

To Unlock the Corporate Link:

• Widespread adoption of an enterprise risk management (ERM) framework should be encouraged as an effective process to assess and respond to strategic and operating risks, not only to bring clarity to the long-term strategic direction a business should take but also to clearly communicate such long-term strategy to the market.
• Further studies should be undertaken regarding the deployment of “intangible assets” (such as quality, customer and employee satisfaction, environmental compliance). Research should be diversified by type of industry and geographical region, so as to develop a set of sector-specific financial and extra-financial performance metrics.
• Proposed disclosure frameworks to enhance corporate transparency on intangible assets and extra-financial measures of performance should be supported by empirical research on their application.
• Research on intangible assets and extra-financial measures of performance should be based on voluntary trial programs where, in addition to filing their regular annual reports, participating companies provide financial analysts and large investors with a more comprehensive set of information on their value drivers.

To Unlock the Investor Link:

• Pension fund trustees should develop internal governance practices consistent with a long-term investment outlook.
• The transition from antagonism to engagement of certain long-term investors — especially regarding long-term strategic discussions — should be fully explored. Cases should be identified where companies have successfully discussed their long-term strategies with investors and where those investors have acted to support these long-term strategies by eschewing the lure of short-term price fluctuations.
• Additional legal research would help understand the extent to which an investment manager may push for a long-term strategic agenda consistent with observing his fiduciary duties. The motivations for the activism of hedge funds and other alternative investment vehicles should be investigated to ensure that their impact on certain market trends (i.e. short-termism versus long-termism) is fully understood.

To Unlock the Analyst Link:

• Studies should be promoted to identify a viable business model to profit from the sale of high-quality investment analysis regarding how to build a durable, long-term portfolio.
• Bold efforts undertaken to enhance disclosure and long-term analysis by organizations such as United Nations Environment Programme Finance Initiative (UNEP FI), the Enhanced Analytics Initiative (EAI) and the American Institute of Certified Public Accountants (AICPA) should be reinforced to develop a new cadre of securities analysts and financial intermediaries focused on long-term corporate valuation.
• Enterprise risk management (ERM) frameworks should include a set of enterprise-wide procedures to better communicate extra-financial indicators of performance to the investment research community.

Vote on Severance Pay at Morgan Stanley

Morgan Stanley shareholders vote on Amalgamated Bank’s LongView funds proposal, which appears as Item #8 in the proxy statement, to seek shareholder approval for executive severance agreements that provide at least three times an executive’s base pay plus bonus.

In 2005, Morgan Stanley entered into agreements, often known as “golden parachutes,” with Chairman and CEO Philip Purcell and Co-President of 3.5 months Stephen Crawford, under which they would receive severance packages valued at $44 million and $32 million, respectively. Both executives then left the Company. 

“Morgan Stanley’s 2005 executive severance payouts came at a high cost to shareholders and in our opinion reflected poorly on decision-making by the board,” said Julie Gozan, Director of Corporate Governance for Amalgamated Bank. “Our proposal, if adopted, would give our current directors a policy to follow to ensure best practices. Hopefully, the policy would encourage restraint when the company negotiates awards in the future, and it would allow for shareholder oversight of any very large golden parachutes.”

In addition to base compensation, executive severance plans may include lump sum payment of annual bonuses; payment of long-term incentive awards; immediate vesting and lapse of all restrictions on restricted stock; the right to exercise outstanding stock options; and continuing coverage under the company’s benefit plans. In 2005, proposals seeking to limit or provide oversight for very large executive golden parachutes received, on average, a majority of shareholder votes cast on the issue.

I wonder how Morgan Stanley’s own fund groups will vote. A recent study by AFSCME and The Corporate Library identified Morgan Stanley Funds as “pay enablers,” saying they used their substantial voting strength to foil attempts by other investors to rein in runaway executive pay.

Signs of Shareholder Revolution Continue

Gretchen Morgenson continues to brings the readers of the New York Times news about the struggle for more democratic corporate governance in “One Share, One Vote: One Big Test.” (4/2/06, subscription required)

LongView Funds, a family of mutual funds run by the labor-union-owned Amalgamated Bank, submitted a proposal to CA Inc., formerly known as Computer Associates, asking its shareholders to vote to remove two directors at its coming meeting: Alfonse M. D’Amato, a former senator from New York, and Lewis S. Ranieri, a former vice chairman of Salomon Brothers and the chairman of CA’s board.

“We deem it important to replace those directors who served during the period of misconduct,” the proposal states, “who continued on the board during the board’s failure to effectively investigate accounting issues that were raised in 2001 newspaper reports and government investigations, and whose initial response was merely to demote the C.E.O. and offer a $10 million payment to end the law enforcement inquiries.” The company made the $10 million offer in 2004, notes Morgenson.

The article recalls the fascinating history of CA’s “spectacular implosion.” From the many earnings restatements, indictments and guilt pleas to fraud, and cooking the books to lavish lifestyles.

“The beauty of the LongView proposal,” according to Morgenson, “is its simplicity. It does not require an expensive shareholder campaign to unseat a director in favor of another candidate. Nor does it ask the S.E.C. to create any new rights for CA shareholders. It simply asks that CA shareholders be allowed to remove directors by a majority vote of the shares outstanding — something they are entitled to do under the laws of Delaware, where the company is incorporated.”

For more information, see the Forum for Shareholders of Computer Associates International (“CA”). We anticipate the SEC will issue a no action letter allowing CA to withhold the resolution from the proxy based on Rule 14a-8(i)(8) – Relates to election: If the proposal relates to an election for membership on the company’s board of directors or analogous governing body. However, the SEC could get religion. Afterall, their mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” How does denying shareholders the right to proposals relating to elections “protect” investors?

I would urge LongView Funds to also consider proposed directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. 

The Corporate Library informs me the rule has been invoked at least twice. At Office Max, Monte R. Haymon was recommended by K Capital.tw and his nomination was accepted by the board. He was elected. More interestingly, at Gateway Energy, shareholder Chauncey J. Gundelfinger, Jr. nominated himself and Steven C. Scheler to be considered for election to the Board of Directors. From Gateway Energy’s proxy:

The Board of Directors (editor’s note: perhaps they meant the Nominating Committee?) considered the nominations of Mr. Gundelfinger and Mr. Scheler, and determined not to recommend them for election to the Board of Directors. The Board’s determination was based upon its view that the Company’s best interests will be served by electing a Board consisting of individuals with industry related experience or experience with the Company. While the Board recognizes that Mr. Gundelfinger and Mr. Scheler have valuable business experience, it does not believe that their particular experience meets the criteria desired by the Board.

Both were elected by shareholders, despite the Board’s recommendation.

Back to the top