Archives: August 2006

SDCERS Troubles Continue

A judge in the federal pension fraud case of the San Diego City Employees’ Retirement System (SDCERS) has postponed the February trial date until May 15, 2007, after defense attorneys requested more time to prepare. San Diego city pension officials were indicted 1/6/06 on fraud and conspiracy charges. All pleaded not guilty. The indictment says the defendants deprived citizens and pensioners of their right to honest services by conspiring to illegally obtain enhanced retirement benefits for themselves in exchange for allowing the financially strapped city to underfund the pension system, which now has a $1.43 billion deficit.

Defense lawyers have said the enhanced benefits and the underfunding were not linked, and that votes for benefits took place months before the votes to allow underfunding. Finding prominent lawyers who were not already connected to the far-reaching case has been challenging; one is already on their fourth attorney. Today’s pension deficit is estimated at more than $1.4 billion, though some estimates put it as high as $2 billion.

On another front, A report by consultants from Kroll Inc. accused the city of allowing pension assets to be diverted to pay for retiree health care, a practice that continued in different forms from 1982 to 2005. Such diversions are not allowed under IRS rules and could threaten the fund’s tax-exempt status. San Diego’s Pension Crisis is chronicled by the Union-Tribune. Also informative is The Aguirre Report, a blog by the San Diego City Attorney, who is “attempting to set aside illegal pension benefits under California’s conflict-of-interest Government Code §1090, which prohibits government officials from voting on matters in which they have a financial interest.”

The SDCERS scandals may add fuel to attacks on public pension funds around the country. They add urgency to the need to ensure elected and appointed fiduciaries are of the highest moral character.

SB 1207 Majority Vote Bill Enrolled

California SB 1207 (Alarcon) has moved to enrollment, awaiting the governor’s signature. As I predicted, the bill was recently amended to:

  1. allow a corporation that has retained cumulative voting procedures, which are designed to enhance the voting rights of minority shareholders, the right to retain that system and not to be subject also to majority voting in uncontested elections,
  2. provide that the vote to change the corporate bylaws to majority vote requirements for director elections must be by vote of all outstanding shares rather than by a majority of votes cast, and
  3. grant the board of directors of corporations the authority to reappoint a rejected director if special circumstances, as determined by the board, warrant the retention of the director.

Originally, the bill would have made majority voting requirements the default for California based corporations. While the bill coming out of session has taken several steps back from that hard line, it still represents significant movement in the right direction. For bill language and analysis, look up SB 1207 at The bill was co-sponsored by CalPERS and CalSTRS. I exepect Governor Arnold Schwarzenegger will sign the bill into law.

More Shareholder Nominated Directors

Even without the equal access proposal Les Greenberg and I filed to allow shareholder proposals to elect directors: Petition File No. 4-461 or the SEC’s watered down version, S7-19-03, Julie Connelly reports on seven shareholder suits settled since 1999 where institutional plaintiffs have successfully bargained for the right to nominate one or more directors. (More Shareholders are Nominating DirectorsThe Corporate Board Member, Sept.-Oct., 2006)

“The sample is small, but pay attention to it––it’s likely to get bigger as more outfits come clean on options backdating.” (I don’t think Ms. Connelly’s sample is complete. Additionally, it doesn’t include those using another SEC rule, Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors.)

Connelly writes that “institutional plaintiffs usually remain as shareholders in the company after a suit has been settled, and their lawyers frequently take some part of their fees in shares. So they’re generally not interested in sponsoring anyone who threatens to destroy the value of their investment.” She goes on to recount several examples of turnarounds, ending with, “at a time when many boards are complaining about the difficulty of finding competent candidates, perhaps help from the plaintiffs’ quarter is something they should welcome.”

State Street Conflict

Patrick Jorstad, a former employee at Boston-based State Street, asks shareholders to approve a special meeting on 10/13 to oust Nader Darehshori from its board. State Street considers Darehshori, who serves on the board’s nominating and compensation committees, an independent director. This, even though Darehshori is chairman of Cambium Learning Inc. where State Street CEO Ronald Logue’s brother George is an executive. Jorstad needs the support of 40% of stockholders to force a special. I hope he gets it. Such potential conflicts of interests should be fully disclosed and it seems reasonable to at least discuss associated issues.

Other elements of the dispute read like a soap opera where shareholder rights to ask reasonable questions are minimal. (State Street Shareholder Seeks Special Meeting to Oust Director,, 8/28/06) See Jorstad’s SEC filing.

Reinke Appointed to CalSTRS

Peter Reinke, a third-generation teacher, will join the 12-member CalSTRS board, filling the post vacated by controversial Schwarzenegger adviser David Crane. Crane was ousted last June by Senate Democrats after he refuse to oppose legislation to do away with defined benefit public pension plans.

Reinke, president of Clausen House, a five-campus agency that serves 200 developmentally disabled adults, is on the state board of Common Cause and a former member of the Oakland Public Ethics Commission. (Oakland teacher picked to sit on CalSTRS board, Sacramento Bee, 8/29/06)

Investing in Clean Energy in the Pacific Northwest

Stoel Rives LLP, Nth Power and Northwest Energy Angels, are sponsoring a forum on “Investing in Clean Energy in the Pacific Northwest” on October 4 in Seattle. The event will bring together top authorities on clean energy investment trends and will focus on the intersection of clean energy, private investment and public policy. Keynote speakers include Winston Hickox, a partner with California Strategies, LLC and former portfolio manager for CalPERS; Dan Reicher, president of New Energy Capital and former Assistant Secretary for Energy Efficiency and Renewable Energy at the U.S. Department of Energy; and James Woolsey, vice president of Booz Allen Hamilton and former director of the U.S. Central Intelligence Agency.

Term and Age Limits

According to the Center for Effective Organizations, University of Southern California, 20% of some 200 big companies impose term limits, up from around 8% less than 10 years ago. Lois Gilman, writing for The Corporate Board Member (Term Limits for Directors?, Sept.-Oct., 2006), notes that in 2002 ISS began to award extra rating credits to companies with term limits. They stoped it last year and also dropped extra points for a mandatory retirement age for directors. “There is no research or evidence that the existence of director term limits or retirement ages improves performance,” says Patrick McGurn. “It’s time to kick these crutches aside.”

NASD’s 1996 blue-ribbon commission on director professionalism suggested that boards recognize that after 10 to 15 years of service, “it may be desirable to promote director turnover to obtain the fresh ideas and critical thinking.” Gilman says they’re keeping that recommendation. Yes, its a relatively painless way to cull the board, but I agree with Jay Lorsch, its a cop-out.

In my own race for the CalPERS Board, I’ve argued that it shouldn’t be a lifetime appointment but that’s the net result if unions, the press, and members remain complacent. When I requested their endorsement in the current CalPERS election, an SEIU Local 1000 official asked if the incumbent “had killed his mother or something.” They weren’t about to switch, unless the incumbent was completely unelectable.

When I asked the Sacramento Bee to consider making an endorsement, they told me the fall elections would “demand our full attention during the political season.” They only had time to focus on elections of importance to their readers. Attitudes like that result in a board where members serve 35 years and longer if they want and there is no real adequate mechanism to hold board members accountable.

Boards shouldn’t impose term or age limits, but without them evaluations become even more critically important… so do watchful shareholders who are ready to make nominations under the SEC ruleDisclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors.

Board Pay on Rise

Pay for corporate directors increased 6.1% in 2005 to $164,637, thanks to rocketing fees for committee chairmanships and bigger equity grants, according to Mercer Human Resource Consulting. Still, that’s less than last year’s median rise of 17.8% a year earlier. (study of 350 large publicly traded companies with revenue in excess of $1 billion from).

A separate study by Steven Hall & Partners LLC study of 181 of the 200 largest U.S. companies found retainers for chairing audit or compensation committees were up 25%, to $15,000 and $10,000, respectively. (Magnified Scrutiny, WSJ, 8/28/06)

“Independent” Boards on Rise

In a New York Times interview, Julie H. Daum, who leads the board practice at the executive search firm Spencer Stuart, reports that 81% of all directors of S&P 500 companies are independent. (The Pros and Cons of Independent Boards, 8/27/06) “Each board has to determine the independence of each director, and they have to declare it in their proxy,” says Ms. Daum. “But there’s independence and then there’s independence. I could be your next-door neighbor and best friend, but I qualify as independent because we don’t have a business relationship. I’m not serving on your board. You’re not setting my compensation. We’re not doing consulting work together. We would meet the stock exchanges’ criteria for independence, but obviously we have a less-than-independent relationship. That’s what you can’t quantify.”

Daum sees a need for greater communication between shareholders and boards. “Boards are starting to talk to the shareholder groups. Before, the CEO did the communication. Now you’re seeing the lead director or the chairman of the nominating committee starting to do it. According to our survey, 22 percent of the S&P 500 reported that their boards had direct contact with shareholder groups. But five years ago, it would have been close to zero.”

While these developments are positive, “independence” is a false goal. We don’t need independent boards; what we need are boards elected by majority votes, open access to the proxy, and shareholders who take the responsibilities of ownership seriously.

Options Advice

Broc Romanek Blog (Practical Guidance on Option Grant Practices, 8/24/06) reports on new firm memos they are posting to their “Timing of Stock Option Grants” Practice Area on “Many of the more recent ones aim to provide practical guidance rather than rehash what is in the mainstream press.” The following comes from consultantKris Veaco:

The grant price will be the closing price on the date of grant, which is very clear and easy to determine. The date of grant is usually the date of the meeting unless it is close to an earnings release or some other significant event, and then the regular practice might be that the grant date will be some period of time following the release of the earnings – 3 business days, 5 business days, 48 hours – something to allow the market to absorb the information and be reflected in the stock price.

If the grants are made via unanimous written consent, then the effective date of grant will be the date the last signature is received unless some other future date is noted in the resolutions. Of course, the minutes should reflect the Committee’s actions and include the list of recipients, and original signatures are required for the minute books for if the consent process is used.

Of course, if there are grants to any Section 16 insiders, then the process has to insiders, then the process has to include advance notice to whoever files the Forms 4 as well as a follow up on the date of the meeting to ensure the numbers or terms did not change.

Buy Low and Spam High

That’s the apparent credo of stock spammers. While the spamers may be making money, those who follow their advice are “losing, on average, 5.25% in the two day period following touting. For the quintile of stocks in our sample that are touted most heavily, this 2-day loss approaches 8%. These estimates are conservative, as they do not account for transaction costs.” Spam Works: Evidence from Stock Touts and Corresponding Market Activity” by Frieder and Zittrain.

Yet, the spamers are simply using a less expensive version of what was once touted on Wall Street Week or the current Mad Money. See evidence from the efects of a Jim Cramer recommendation, Is the Market Mad? Evidence from Mad Money by Engelberg, Sasseville, and Williams. A Cramer recommendation is associated with significant spikes in volume and a short term rise in stock price. “The average cumulative abnormal overnight return for the smallest quartile of recommended stocks is 5.19%, and these returns completely disappear within 12 trading days.” (Thanks and one of his readers.)

Global Warming

Addressing global warming can be smart and profitable for companies that are looking ahead, while those who ignore the problem are as vulnerable as those who think they can ride out a storm like Katrina. (Insurance Companies and Climate Change, ISS Corporate Governance Blog, 8/24/06)

A Ceres report, “From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change,” highlights the insurance industry’s unique, powerful role historically in helping the country grapple and manage emerging risks. Just as the industry asserted its leadership to minimize risks from building fires and earthquakes, it is well positioned today to further society’s understanding of global warming and advance forward-thinking solutions to minimize its impacts. (The insurance industry is the world’s largest industry, with $3.4 trillion in yearly premium revenue.)

According to Fortune’s Marc Gunther, “The fact that the U.S. insurance industry is finally taking up the issue of global warming shouldn’t be surprising; the surprise is that the industry took so long to wake up to the problem.” “It’s past time for the industry that rated vehicle safety and lobbied for building codes to address climate change.” (Insurance companies take on global warming, 8/24/06)

Larry Ellison, Mr. Danger

In 2006, the proxy noted that Oracle spent $1.8 million on what it described as “home-security related costs and expenses.” That was up from the $1.36 million the 2006 proxy reported the company said it spent in fiscal 2005. Yet, the 2005 proxy, which Oracle filed last August shows the company only reported spending $922K on Ellison’s security needs in fiscal 2005, or nearly 50% less than the 2006 proxy says it spent for that year. Why is it so expensive to protect Mr. Ellison and why can’t Oracle get the numbers right? (A strange coincidence?,, 8/24/06)

Single Ballot

In discussing the Trian Partners LP / H.J. Heinz proxy contest (Proxy contests’ limited choice), Barry B. Burr points out that shareholders need a freer hand in voting for directors.

Shareholders couldn’t mix proxy cards. They either had to use the Heinz card, which listed the 12 directors recommended by the board, or the Trian proxy card, which listed its 5 nominees and 7 of the 12 Heinz nominees.

The Securities and Exchange Commission never brought to a vote its proposal to allow shareholders to nominate directors on the corporate proxy ballot. But in proxy contests, where shareholders can nominate directors, albeit on a separate ballot the dissidents sent out, the SEC should find a way to allow shareholders to select from all of the nominees put forth. That would enhance shareholder choice.

I agree with Mr. Burr and the simplest and most efficient way to accomplish his goal is to list all nominees on a single ballot. Burr also notes the contest at Heinz and discussions with CalPERS led to improved corporate governance, “including adopting a majority vote policy to elect directors and appointing two new independent directors.” Think how quickly reforms could be accomplished at all companies if shareholders were always allowed choices. (Pensions & Investments, 8/21/06)

Behavioral Economics

Think about it: When it comes to risk, brains are irrational, writes Terry Burnham in the August 7 edition of Pensions & Investments. When it comes to risk, two anomalies of traditional economics stand out. First, people have an extreme, irrational hatred of losses. This loss aversion is so powerful that investors with mildly negative returns will take risky and ill-advised positions to get back to even. Second, a less well-explored flaw is our inability to deal with low probability events. The estimate of the chances for a market meltdown, for example, goes up dramatically when prices decline. This makes us want to buy downside protection at precisely the time it is most expensive and least needed. People tend to use the recent past to predict future risk, but typically this results in low risk predictions when the risk is actually quite high. People are most comfortable when they should be most scared. Burnham provides practical advice on understanding and embracing “the enemy within,” which allows us to move on with reduced risk.

OAL to Determine Legality of CalPERS Election Rules

Although the CalPERS Board rejected my Draft Petition for Underground Regulations Determination to change rules that put CalPERS members at risk for identity theft, the Office of Administrative Law hasagreed to make a determination as to whether or not the regulations were legally adopted. OAL will make its determination by January 19, 2007.

For years the Board insisted they were exempt from laws, such as the Administrative Procedure Act, because of direct authority granted by California Constitution. However, OAL (based on my prior petition) has determined the Board is not above the law. Continued use of “underground regulations,” especially those which open members to financial risk from identity theft, is a breach of fiduciary duty, undermines the credibility of efforts by CalPERS in the area of corporate governance, and makes the entire system more vulnerable to attack by those who seek to destroy CalPERS.

Yet, the Board continues to enforce underground regulations that place members at risk of identity theft, even after it was brought to their attention. They also approved language in SB 1729 that would have exempted the Board from accountability to members or the public in adopting future regulations. Fortunately, my amendments to protect members were accepted by the Assembly Public Employees, Retirement and Social Security Committee. (CalPERS post carries clout, Sacramento Bee, 8/21/06)

When I helped George Diehr get elected to the CalPERS Board four years ago, we hoped he would make a difference. Now we know, the Board still needs a member who will set the highest ethical standards. If you would like to support McRitchie’s campaign, send a contribution to email via PayPal. In the “Note” section, indicate your name, address, occupation, and employer. Or send a check to Friends of McRitchie for CalPERS, 9295 Yorkship Court, Elk Grove, CA 95758. Again, please indicate your name, address, occupation, and employer.

The Press is Not Powerless

Gretchen Morgenson, of the New York Times, praised Putnam Funds because they “actually voted in its customers’ interests when casting annual proxy votes this spring.” Morgenson also rebukes “the corporate executives who didn’t bother responding to letters from the fund company’s chairman detailing its views.”

Putnam’s trustees opposed directors in 16% of elections and voted against 64% of proposals by these companies to adopt or amend stock option or restricted stock plans for company executives or directors, “regardless of whether the votes jeopardized other money management services, like 401(k) administration.” “If a proposed stock option or restricted share plan would add more than 1.67 percent to a company’s existing shareholder base, they vote against it.”

Until last Thursday, Putnam had yet to receive a single response. Then Morgenson began asking the five companies why they hadn’t responded. Several then responded. Apparently, bad press is much worse than bad relations with shareholders. (Belated Apologies in Proxy Land, NYTimes, 8/20/06)

Majority Vote May Reach Tidal Wave Proportions

“Investors could be looking at a tidal wave of majority vote resolutions in 2007,” says Patrick McGurn,ISS executive vice president. Led by Ed Durkin and the United Brotherhood of Carpenters and Joiners of America (UBCJA), primarily union pensions filed 85 majority election proposals that came to a vote in the first half of 2006. At least another 12 proposals are on corporate ballots during the second half of the year. Majority vote standards or director resignation policies are now in place at 180 companies.

ISS reports, “for the first half of 2006, shareholder support for these majority vote proposals averaged 47.7 percent (compared with 44 percent in the same period last year). The number of proposals that got more than 50 percent support nearly tripled from 13 to 35 this year. In 2004, these proposals averaged less than 12 percent of votes in favor, without a single proposal winning a majority.” As I indicated earlier this year, the consensus among those attending the Corporate Directors Forum in San Diego (called the “Woodstock of corporate governance,” by Nell Minow) was that majority vote standards would quickly become the norm.

Resignation policies recently became more enforceable as a result of Delaware corporate law amendments that went into effect August 1. In addition, the American Bar Association (ABA) in June revised the Model Business Corporation Act, which is the basis for most state corporate laws, to give companies and shareholders a greater ability to adopt director resignation policies and majority vote bylaws. For much more on the companies involved and how the movement is progressing, see theISS Governance Weekly.

Into the Grave

Government prosecutors plan to pursue Ken Lay into the grave and will fight his attorney’s plans to let death clear his name, reports At stake is $43.5 million in restitution that Lay was ordered to pay for his conviction on fraud and conspiracy charges linked to Enron’s collapse. If U.S. District Judge Sim Lake clears Lay’s record, the government will suddenly be unable to recover the money.

If his indictment is overturned, Lay’s $5 million bond, which is backed by his children’s homes, also would be canceled, reported AP. In addition, if his conviction is vacated, the government will be unable to seize Lay’s property. (Lay Innocent? No Way, Feds Say,, 8/18/06)

Heinz May Have Been Shaken

A group of dissident investors may have enough votes to put one or two of its nominees on the H.J. Heinz Co. board. Billionaire investor Nelson Peltz and his Trian Group hoped to win up to five seats on the company’s 12-member board as part of a plan to streamline the company, invest in marketing and boost shareholder returns.

Some 60 million votes were cast at Wednesday’s meeting, which was attended by about 1,000 people. Votes were expected for about 280 million, or 85 percent, of the company’s roughly 330 million shares outstanding. (Heinz: Dissident investors may have won 1 or 2 seats on board, The Sentinel, 8/16/06)

Another Reason to Keep Public Pension Funds

As I have chronicled elsewhere, the attempt to convert California’s public pension funds like CalPERS and CalSTRS, from defined benefit plans (DB) to defined contribution (DC) plans, would have caused an aggregate $10 billion reduction in income and a $5 billion increase in management fees per year. Now comes evidence that “only the major public pension funds seem to be effective monitors” of corporate mergers. In other words, public pension funds are not only good for public employees, they are good for the economy as a whole because their active monitoring discourages value-destroying acquisitions but encourages those that are likely to add value. In contrast, mutual funds, where typical DC plans are invested, were found to be the least effective monitors.

Brown University’s Lily Xiaoli Qiu, studied 2,022 merger events from 1993 to 2000 and found that when the stake in a company held by its largest public pension fund investor increased 1%, the frequency of mergers declined 4% at the company. That 1% increase also corresponded to an 8% reduction in value-destroying acquisitions, or, as Gretchen Morgenson so colorfully phrases them, “those vanity projects that chief executives pursue simply to ‘buy’ earnings or revenue growth rather than generate growth internally and organically.” The net result is that a 1% increase in public pension fund ownership corresponded with an increase of 0.4% to 3% in subsequent 12-month performance.

Qui writes, “the evidence suggests that for firms suffering the most agency conflicts, more mutual fund ownership may insulate the management from more scrutiny and actually encourage more bad M&A.” Morgenson’s interpretation: There is “a tendency among mutual funds to hear-no-evil-see-no-evil, at least in mergers. One reason for that willing suspension of disbelief may be that large mutual fund concerns have too much to lose by battling with the same companies whose 401(k) business, money management services and trust operations they oversee or seek.” (Mutual Funds Are Failing As Deal Police, NYTimes, 8/13/06)

The takeaway: Elminating public pension funds would not only cost billions in lost earnings and increased expenses for public employees, all investors would suffer an aggregate net loss of additional billions of dollars because these large public pension funds, which are the only funds that substantively hold management accountable, would no longer be there to monitor mergers and aquisitions.

Workforce Planning Beyond the Gap

An aging workforce and an emerging “baby boom” retirement wave are driving companies toward “strategic workforce planning.” The idea is to ensure the right people are in the right places at the right time and at the right price to execute its business strategy. A prototypical workforce planning effort might consist of the following:

1. Collecting data about organization’s workforce needs.
2. Analyze data and project who is likely to be leaving.
3. Analyze the gap between project supply and demand
4. Develop a plan to close the gap.

However, a new report from The Conference BoardStrategic Workforce Planning, finds many additional drivers for workforce planning.

  • Globalization
  • Growing use of a contingent, flexible workforce
  • Need to leverage human capital to enhance return
  • Mergers and acquisitions
  • Evolution of technology and tools

By reviewing a cross-section of case studies, analyzing best practices and differentiated needs, the study provides an excellent overview, highlights challenges, and yields recommendations. Although the report claims the crux of workforce planning is a conversation and inquiry process, rather than detailed charts crammed with numbers, it may be the power of computing that has enabled much of the progress to date.

Just as the Human Genome Project set out to map human genetic composition in fine detail, computers have allowed businesses to chart skills inventories, mapping the DNA of their workforce. One of the biggest hurdles is establishing a common language to describe skills, experience, jobs, and competencies. Optimizing internal talent may be the “Holy Grail.” “The company will be able to mine employee data to locate talent anywhere in the organization, woo passive job candidates and find the ‘best and highest use’ for each employee.”

An Invitation to Promote Ethical Corporate Behavior Through TIAA-CREF Investments

by Jaime Lagunez Ph.D. and Neil Wollman Ph.D.

TIAA-CREF has become one of the most important pension funds in the world, with stock and other assets of around $400 billion. Because many members of the academic community are the final owners of such stocks, we hope they wish to be better informed about the actions taken by corporations managed by the fund.

It is most unfortunate that some companies in TIAA-CREF’s portfolios, in their pursuit of higher earnings, have been willing to market products or engage in activities that damage the health of consumers, compromise the quality of life for thousands, or promote the violation of human rights. There now exists a coalition of advocacy groups and concerned college personnel who, disturbed by such abuse, feel that it is possible to monitor that the money invested in the fund not be harmful to society.

By offering this information, we are also hoping to recruit conscientious members of the academic community to participate in our effort. This would be to hold TIAA-CREF accountable for what it invests in and to use its historical and considerable shareholder advocacy skills to make individual companies behave ethically.

In 2005, TIAA-CREF decided to apply its long history of corporate governance activism to issues of social responsibility. It is significant that doing so is also consistent with statements in its Policy Statement on Corporate Governance, its tag-line of “Financial Services for the Greater Good,” and its advertisements that the company is “mindful of social responsibilities.” The academic community is asking TIAA-CREF to hold to its words.

Out of thousands TIAA-CREF invests in, our effort focuses on six particular companies and one financial institution. We direct ourselves to leaders in their industries so that our influence will be greater. We are requesting that the fund lobby for (A) Philip-Morris/Altria to stop advertising to youth and to stop interfering with adoption of the global tobacco treaty now under consideration; (B) Costco to close a warehouse in Cuernavaca, Mexico. This company is responsible for human rights and environmental abuses documented by the UN; (C) Wal-Mart to amend its policies promoting urban sprawl, hurting local businesses, and allowing abusive labor practices – and to close an illegally built warehouse in Mexico; (D) Nike to be more forthcoming on its wage scales and collective bargaining agreements in other countries, given long standing sweatshop abuses; (E) Coca-Cola to end complicity with human rights abuses in its Colombia plants, end marketing to children, and end its usurping of water resources, particularly in India and other poverty stricken nations; and (F) Chevron to no longer support the Burmese government, one of the most violent in the world. We also find that previous divestment from World Bank Bonds by TIAA-CREF is positive because the Bank’s practices contribute to economic hardship globally, particularly for the poor. As a final request, we ask for TIAA-CREF to pledge to keep this appropriate stance of not investing in those bonds.

It should be emphasized that we are also lobbying for TIAA-CREF investment in projects which raise the quality of life: community investment in low-income areas, and venture capital in socially and environmentally responsible products and services. Though we are making some progress with them on those concerns, we have met resistance there, as well. For more information about the coalition, we invite you to visit our web site and to then contact Neil Wollman directly to receive periodic campaign updates (write “send MTCE updates in the subject line”).

Also see Social Choice for Social Change as regards our effort for community investment and venture capital. You can get periodic updates for this effort as well by sending to Neil Wollman and say “send SCSC updates” in the subject line. We have been endorsed by over two dozen national academic and activist groups. And our previous efforts led to the establishment of TIAA-CREF’s socially responsible fund, as well as further changes since that time. We hope that you can join us now to both keep informed and to consider placing energies in a project dealing directly with your money which can be beneficial to our generation and those to come.

Jaime Lagunez, Ph.D. is a scientist and activist in favor of the protection of cultural heritage and civil rights in Mexico. Member of the Frente Civico, which is the organization that received the Mendez Arceo Human Rights Award in 2004. 52(55)54163064 cell.
Neil Wollman, Ph.D., is a long-time TIAA-CREF participant who for over twenty years has successfully lobbied the pension system to be more responsible in its investing. He is Senior Fellow, Peace Studies Institute; Professor of Psychology; Manchester College, North Manchester, IN 46962. 260-982-5346; fax 260-982-5043.

Guardians Must Touch Base with Shareholders

For thirty years, those writing for Directors & Boards have been giving mostly excellent advice to its board member readers. The third quarter 2006 issue is no exception. In “There are no shareholders anymore” Gary Sutton observes the average shareholder is holding for just over 400 days, with the average institutional shareholder holding for a year. “So directors today don’t work for shareholders, since they no longer exist. What we do have are sharetraders.”

What’s a director to do? Ignore the “current wailing about stock options.” He then gives advice that is very similar to that of permanent shareholders. Grant options on the same day each year after annual results have been announced, vest them over 5 year periods, let execs sell 20% a year, and incentivize boards similarly. Never reprice options. Existing CalPERS policy is that equity grants should vest over a period of at least three years. Staff have proposed adding: “Expected equity grant issue dates should be pre-established, set, and disclosed by the compensation committee. Realized grant dates should be publicly disclosed at the latest on the day following the date of grant. The rationale for any amendment to pre-established grant dates should be disclosed with justification describing how the amendment benefits shareowners.” The advice is good but even pretending to ignore shareholders doesn’t sit well with me.

In a somewhat similar vein, Doug Raymond (The new guardians?) questions wether or not shareholders will take the reigns. He gives a nod to changing ownership patterns that could well lead them to flex their muscles. “In 1950, individual households – the general public – owned more than 90 percent of all publicly trades equity securities. Today, they directly own just 32 percent. ” “America’s 100 largest money mangers alone now hold 58 percent of all stocks.”

Raymond then points to the conflicted nature of many money managers whose compensation is often based on short-term returns and who are often compromised by personal or business relationships with corporate managers. How can we be sure they are reflecting the interests of the ultimate owner? In the end, he points to no solutions but his opening paragraph may hold the keys.

The stockholders are at a substantial disadvantage in election and other governance duties because of management’s control of the proxy machinery, the forces of inertia, and the isolation of individual stockholders from each other.

Obvious solutions to the first disadvantage are majority voting, requiring the firm to pay a portion of shareholder election costs if they achieve a minimum threshold, greater use of Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, and ultimately some form of equal access to the proxy for the purpose of nominating directors.

The forces of inertia were somewhat addressed with recent rules requiring that mutual funds and money managers must disclose votes and voting policies. Inertia could be further broken by lawsuits against fund managers who vote against the interest of shareholders because their voting was compromised due to personal or business relations. Obviously, those lawsuits will have to be carefully chosen and crafted.

With regard to isolation, that job has largely fallen to organizations of institutional investors, such as the Council of Institutional Investors and the International Corporate Governance Network, with a much more limited role for service providers such as Institutional Shareholder ServicesGlass, Lewis, and Board Analyst. The 100 largest shareholders may control 58% of all stocks but they need to consult with the ultimate owners. Part of their fiduciary duty must become ensuring that their policies reflect the wishes of the ultimate owners.

TIAA-CREF recently led the way in this area by releasing the results of a comprehensive survey of participants on issues related to socially responsible investing. CalPERS, CalSTRS and other large public pension funds should do similar surveys of their members and the public but should not limit them to “socially responsible investing.” They should go right to the heart of the beast. Should 160 members of the Business Roundtable be allowed to prevent the SEC from enacting rules that would allow millions of shareholders a real voice in shaping corporate proxies? The answer is likelly to be a resounding NO!! Public pension funds could play a real role in educating the public about management’s control of the proxy machinery…how that influences corporate elections and accountability. Real corporate social responsiblity begins more democratic corporate elections.

Majority Voting, Here to Stay

Claudia H. Allen, partner and chair of the Corporate Governance Practice Group of Neal Gerber Eisenberg, has prepared a Study of Majority Voting in Director Elections.

The study indicates that a clear majority of companies that have taken definitive action have adopted policies rather than bylaws. Of 179 companies listed in the study, 135 (76%) adopted policies, 31 (17%) adopted bylaws (of which four (2%) were Plurality-Plus Bylaws) and 13 (7%) adopted both a policy and bylaw (or, in two cases, majority policies which complement pre-existing majority vote charter provisions). An additional ten companies listed in the study have publicly announced an intention to adopt some form of majority voting. Examined from a different perspective, of the 179 companies, 139 (78%) retained a plurality election standard, but added a discretionary policy addressing the status of nominees who receive a majority withhold vote, while 40 (22%) adopted a true majority election standard.

The most recent developments in majority voting have involved a limited number of companies seeking stockholder approval of board-recommended charter amendments, which provide for a majority vote standard. ISS referred to the amendment proposed by Progress Energy Inc., and subsequently approved by its stockholders, as “the new gold standard.”

To date, at least 28% of the companies in the S&P 500 and over 25% of the companies in the Fortune 500 have adopted a majority vote policy, bylaw and/or charter provision. Of the 148 policies reflected in the study, 143 (97%) are based upon a majority of votes cast standard.

Of the 148 policies described in the study, 131 (89%) contain a carve-out for contested elections, with the terms of two announced, but as yet unpublished policies not being clear enough to make a determination. As to bylaws, 31 of the 40 (78%) majority vote bylaw provisions described in the study (which numbers exclude the four Plurality-Plus Bylaws) contain a carve-out for contested elections providing that directors will be elected by a plurality vote in such situations.

More than 140 majority vote proposals were filed for the 2006 proxy season (including at least 66 from the United Brotherhood of Carpenters and Joiners of America). As the 2006 proxy season hit full stride, certain trends began to appear: proposals tended to be defeated at companies which had adopted majority voting policies (although the proposals generally received material support) and proposals often passed at companies which had not adopted a majority vote provision.

Majority voting has not come to the fore alone. Combined with: the successful on-going movements to declassify boards, thereby forcing all directors to stand for election annually, and to eliminate other takeover deterrents, such as poison pills and supermajority stockholder approval requirements, and the New York Stock Exchange’s review of the broker-vote rule (Rule 452), which has generally allowed brokers to vote uninstructed client shares in favor of management’s slate in uncontested elections, a “perfect storm” is brewing which could shift the balance of power toward stockholders.

The author concludes, “majority voting, in one of its forms, is here to stay.”

First Conversion

The board of First Trust Value Line Dividend Fund and First Trust Value Line & Ibbotson Equity Allocation Fund has approved a move to convert the closed-end funds into exchange-traded funds. If shareholders approve the conversion at a meeting on or before Dec. 15, it will be a first. Philip Goldstein, a principal of Bulldog Investors hedge funds and a long-time shareholder activist, is quoted in WSJ saying: “It’s a very creative attempt to deal with the discount. I’m hopeful that it will work.”

WSJ reports that more such conversions are likely; PowerShares Capital Management LLC, which specializes in ETFs, has filed for a patent on a process to enable a closed-end fund, if approved, to automatically convert into an ETF after trading at a persistent discount. (Closed-End to Exchange-Traded?, 8/8/06)

More Hedge Fund Activism Predicted

A Morgan Joseph report, Management in an era of shareholder activism, looked at 94 campaigns conducted by 29 hedge funds over the past two years and found they had “surprising success,” with more than 35% of campaigns resulting in their winning board representatives. Unlike corporate raiders of old, who employed unsolicited tender offers, the new funds purchase of an influential block of stock that serves as the rallying point for proposals to effect change.

“As activist funds continue to enjoy success and healthy profits compared to other hedge fund investment strategies, their ranks will expand,” the report states. The report concluded that activist demands tend to be concentrated around the following initiatives:

  • Changing the capital structure
  • Altering a company’s M&A decisions, forcing a sale of all or part of the company
  • Replacing management or modifying a board’s composition, often to include the fund’s nominees
  • Returning cash to shareholders through either a dividend or a stock repurchase program

Morgan Joseph will host a conference call for corporate managements on Wednesday, August 16, 2006, from 2:00 p.m. to 3:00 p.m. EST to discuss the study and address issues driving growth in shareholder activism, what companies can expect in typical activist campaigns, and how to deal with them. Register.

Good Governance Pays

A study by Andrew Gray, head of Quantitative Research at Goldman Sachs JBWere, using governance ratings of Australian companies provided by Corporate Governance International (CGI), found:

  • Investing long in top-rated companies and selling short in bottom-rated companies resulted in significant alpha in several governance categories
  • Top-rated companies reported positive earnings surprises versus earnings disappointments for bottom-rated companies
  • Using low governance scores to screen out companies with low ratings would have increased returns on the test portfolio. (More Evidence That Good Governance Equals Better Returns, ISS Corporate Governance Blog, 8/2/06)

1952 Explanation of the Stock Market

In case you missed the post on Blog, this cartoon from 1952 from the NYSE – “What Makes Us Tick,” promotes the stock market as the engine of America’s prosperity. (go to Google Videos and search “What Makes Us Tick.”

Support California’s SB 1207

SB 1207 is far from the Holy Grail that Les Greenberg and I hoped for when we petitioned the SEC for an “equal access” rule in the summer of 2002, but it does provide at least some mechanism for shareholders to be able to hold directors accountable by facilitating the use of majority vote requirements for directors of publicly-traded California companies in uncontested elections.

The bill is currently on the floor of the Assembly. I urge readers, especially those in California, to write letters of support for SB 1207 (example) to its author, Senator Richard Alarcón. His address is: State Capitol, Room 4035, Sacramento, CA 95814. His phone number is (916) 651-4020. You can also send an e-mail to him using the “Your Feedback” link on Senator Alarcón’s website (click Senators, then Richard Alarcón). Those who live in California should also write to their Assembly member, urging that they vote in favor of this important measure.

Recent postings to the blog provided by Keith Bishop and Marte Castanos (The “Skinny” on the California Bill Amendments, 7/25/06; Cumulative Voting and California’s Majority Vote Bill: CalPERS’ Perspective, 8/1/06; and Last Word: Cumulative Voting and Majority Voting, 8/2/06) have helped to heighten awareness of the measure. However, Bishop’s “last word” may have left readers with the wrong impression. Marte Castanos, Senior Staff Counsel at CalPERS (the bill is co-sponsored by CalPERS and CalSTRS), says Bishop’s point is overstated.

It is true that if an individual negotiates a spot on a Board based on the individual’s ability to gain a seat using cumulative voting, then that person must be willing to accept the risk of not receiving a majority vote.

Since the candidate will presumably be receiving the nomination and recommendation of the Board as well as a promise to vote the Company’s/insider’s shares in favor of the candidacy, I would assume that the candidate will accept the risk to avoid the costs of running a dissident campaign.

There is speculation in the Capitol that Alarcón may make two more amendments in the hope of removing any remaining opposition. The bill could be amended to allow majority voting to be adopted by a majority of all outstanding shares, rather than a majority of those cast. That would certainly make enactment of such changes more difficult but not impossible, given the increasing momentum of the majority vote movement. Additionally, the bill could be amended to allow boards to reappoint board members who have lost a majority vote. The would eliminate arguments from the Bar about it applicability in very unusual cases and circumstances. I can imagine that any board that would make such an appointment, if the bill is enacted, would face harsh criticism in the press and in the market unless the circumstances were, indeed, very unusual.

Given that the original bill, which was moving through the Democratic controlled Legislature very nicely, would have made majority vote requirements the default, there is a good chance opponents may finally back off if such amendments are offered. Better to accept a bill that is essentially similar to what was enacted in Delaware than to kill it and perhaps get the bill back in its original form next year, when it is possible that California will have a new governor.

Most troublesome in these and other posts on the topic is ISS’ apparent willingness to trade off cumulative voting, which gives shareholders real power in affirmatively proposing and electing candidates, for majority voting, which simply provides a much more effective tool for a withhold campaign. The stated rationale for this policy is “to provide an incentive mechanism (the carrot) for companies to move toward a majority voting standard for electing its directors.” (Does Cumulative Voting Compliment Majority Voting?, 7/31/06)

I wonder if Glass Lewis is more progressive. In meetings I have attended recently, the consensus of those attending is that majority voting requirements will replace the current plurality voting standard within the next several years. Consultants are advising firms not to fight resolutions on majority voting.

Andrew Shapiro, President, Lawndale Capital Management, LLC, says it well in his response to the ISS Corporate Governance Blog:

I think ISS has got the trade off all wrong. Cumulative voting is a much more valuable accountability and oversight measure to exercise on recalcitrant boards than majority voting. We all know a withhold vote in a plurality system is entirely symbolic. Yes, majority voting gives some teeth to a withhold vote campaign. However, it only gives shareowners rejection power of a board’s nominee. That board then gets to replace the original bad nominee with another nominee OF THE VERY SAME BOARD’S choosing .

Majority voting is simply a veto action rather than the affirmative placement action that easier shareholder access (via cumulative voting or one day direct shareholder nomination on company proxies) provides.

Board’s that are bad enough to warrant a majority withhold vote are the very same companies that want to keep shareholder nominees out of the board room at all costs, often using the red herring label of representing “special” interests, (which I am disappointed to see ISS continue to swallow hook line and sinker). ISS ought always favor cumulative voting and it never should be thought of as mutually exclusive with having majority voting. Majority voting limited to instances of uncontested elections can exist while cumulative voting remains in place for contested contests allowing less expensive election of minority short slates.

Instead of moving shareholder rights backwards, ISS should be supporting both majority and cumulative voting. Additionally, they should be publicizing a much underutilized tool in the shareholder arsenal. SEC rules that took effect on January 1, 2004, Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, require corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. Shareholders should be invoking this rule much more frequently than they are. If their nominees get placed on the proxy, they have won the opportunity for a very inexpensive campaign. If their nominees get rejected, shareholders have additional statistics for the next open access proposal.

Elson Predicts

“To compensate them (CEOs) with entrepreneurial style returns without having them take entrepreneurial style risks is inappropriate.” Below are some observations by Charles Elson, one of my favorites in the field, which appear in an interview with Michael Connor, Executive Editor of Business Ethics (Who’s Watching the Store?, summer 2006):

  • you’re going to see movement toward putting people on compensation committees with a great deal more independence and stock in the company…being advised by compensation consultants who are not conflicted
  • greater disclosure to the shareholders of CEO compensation, compensation actually went up quite a bit rather than going down (in a cited Canadian study) – the idea being everyone was publicly aware of what everyone else was making and that created upward pressure on comp rates.
  • the idea of the management-created slate of directors, beholden to management, is these days considered obsolete…proposals regarding majority voting and… corporate reimbursement of board election campaigns will do a great deal to open up the election process (order a copy of the magazine)

Moody’s Reports on Non-Exec Chairs and Lead Directors

Over 60% of S&P 500 companies had a lead or presiding director in 2005, up from 26% in 2003. To play a meaningful role, Moody’s says a presiding or lead director must, among other duties, have the authority to call for meetings of the independent directors, help set agenda items at all board meetings, and also take responsibility for coordinating the response of outside directors to any crisis.

The impetus to create board leaders arises not from investors, Moody’s notes, but from stock exchange requirements, recommendation of governance thought leaders on panels of The Conference Board and the National Association of Corporate Directors, and the boards themselves. (Cynical Comment: Of course the impetus wouldn’t come from shareholders…we’re powerless.)

There has been less enthusiasm in the US about having separate chair and CEO roles than for appointing a presiding director. Moody’s points out that even the 15% figure for the percentage of S&P 500 companies with non-executive chairs overstates the prevalence of independent chairs, since about half of non-executive chairs are either former CEOs of the company, former CEOs of entities the company has taken over, or do not qualify as independent for other reasons. (Board Leadership: A Positive View on Non-executive Chairs and Lead Director,, (search title or author Ken Bertsch), 8/2/06)

Executive Compensation

On July 26th the SEC voted to adopt changes to the rules requiring disclosure of executive and director compensation, related person transactions, director independence and other corporate governance matters, and security ownership of officers and directors. “With more than 20,000 comments, and counting, it is now official that no issue in the 72 years of the Commission’s history has generated such interest,” said SEC Chairman Christopher Cox.

Although that is more comments than their foiled “open access” proposal got, providing shareholders additional information without the tools to do something about it isn’t likely to lead to a real slowdown in CEO pay or more control by boards. In my opinion, the additional information is certainly a plus but it will also serve to increase shareholder frustration.

The best discussion of the rules can probably be found on, with portions included on Blog. Anyone trying to interpret or implement the new rules should probably also attend “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” September 11-12, 2006 in Washington DC and Via Nationwide Live Video/Audio Webconference.

What follows is a very small segment of what is posted to the blog.

The key differences between the proposed and final rules are as follows:

  • a new Compensation Committee Report has been added to supplement the Compensation Discussion and Analysis (CD&A);
  • the Performance Graph has been retained, although it will be included in a company’s glossy annual report (and not as part of its executive compensation disclosure in the proxy statement);
  • only above-market or preferential earnings (rather than all earnings) on NQDC will be included in the Summary Compensation Table;
  • the annual pension benefit change and above-market earnings on NQDC will be excluded from total compensation in determining a company’s most highly-compensated executive officers;
  • the proposed Grants of Performance-Based Awards Table and Grants of All Other Equity Awards Table have been consolidated into a single Grants of Plan-Based Awards Table;
  • the required defined benefit pension plan disclosure will be limited to the actuarial present value of a Named Executive Officer’s accumulated benefits;
  • the required disclosure of potential severance and change-in-control payments will be computed assuming that benefits were triggered as of the end of the last completed fiscal year; and
  • the proposed requirement to disclose the total compensation of up to three non-executive employees has been scaled back and will be reproposed.

Pay Projections

Buck Consultants “Compensation Planning for 2007” survey of employers said target increases for the current fiscal year is between 3.7% and 3.8% for employees, 4% for CEOs are 4% for the current and next fiscal years and 7.8% for directors. Targeted spending on short-term incentive plans range from a median of 5% of base pay for non-exempt employees to 15% for managers and 40% for executives – unchanged from prior years. Targeted spending on CEO short-term incentive plans also remain the same at 80% of base pay.

56% of survey respondents offer hiring and/or retention bonuses – Information technology is the corporate function most likely to trigger such a bonus. Hiring bonuses range from a median of 5% of base pay for non-exempt and professional employees to 20% for the CEO, while retention bonuses range from 5.5% of pay for non-exempt employees to 18% for executives. (Buck Survey Reveals Planned Comp Increase for 2007,, 8/1/06)

Delaware First

Delaware, the first state, is also the most important state for corporate governance, since more than half of America’s publicly traded businesses are incorporated there and must live by its statutes. Additionally, states that want to keep up, frequently adopt Delaware rules. The Delaware Court of Chancery produced a 180-page tome with the legal opinion it rendered last year in the Disney case.

An article entitled Delaware Rules in (8/1/06) gives us a glimpse of what Chancellor William B. Chandler III sees as questions the court will face in upcoming cases. For example, can shareholders adopt bylaws that trump board decisions? If they do, can the board then turnaround and negate their decision? “That issue has never been directly faced or answered in Delaware,” says Chandler, “but I think it’s inevitable that it will be decided.”

The author of the article, Roy Harris, believes that “what Chancery rulings say in the near future could establish standards that rival anything that Sarbanes-Oxley and the Securities and Exchange Commission have offered.” To back that up, he quotes Charles Elson. While the court must wait for cases to be brought before it — “ultimately the Delaware Chancery Court will have a significant role in changing governance,” he says. Elson adds, “Traditionally, the court’s view was that shareholders were not sophisticated and needed to be protected from their own foolishness,” he says. “Today what they need to be protected from is managerial overreaching.” Signs of new directions:

  • director independence – Beth I. Z. Boland, a partner in the Boston law firm of Bingham McCutchen LLP, believes the court will now “look beyond quantifiable measures to go into soft issues” in determining who is independent.”
  • liability – Chandler says, “my view is that our law doesn’t expect different standards to be applied to different directors based on their expertise, their skill, or their training.”
  • directors are agents – Chandler argues that it “would be a strange thing to invoke your fiduciary duties as a sword to break a contract that you had made with shareholders.”
  • compensation – “The board is ultimately going to have to decide compensation for executives,” Chandler says, “but could shareholders adopt bylaws that place limitations or constraints in either the scope or magnitude of that compensation, or on the procedures that boards must follow before it awards compensation to a particular executive?”

Charles Elson provides insight into the way the Court of Chancery works. “Delaware doesn’t get its jollies holding people liable,” he says. “Its message is that ‘the next time I see this conduct, I’m likely to rule differently.’ It’s a delayed impact that defines the parameters of behavior.” Good discussion of the issues plus one sentence summaries of two decades of important cases.

13D Genre

It isn’t often I read of corporate governance and 13D filings in the New Yorker, but sure enough Ben McGrath has posted an entertaining column in the 8/7/06 issue, Babel Dept: 13D. It seems Robert L. Chapman, Jr. of Chapman Capital (a hedge fund), no relation to the late Roget’s Thesaurus lexicographer Robert L. Chapman, also has a penchant for words. McGrath found the following in Chapman’s recent correspondence: “pretermit,” “fustigation,” “macerate,” “ablated,” “accretive,” “remora,” “phlebotomizing,” and “gasconade.”

McGrath notes that Chapman is a shareholder activist whose “literary genre is that of Schedule 13D, a form that investors are required to submit upon acquiring a five-per-cent ownership stake in any public company.” “Chapman’s contributions stand out,” writes McGrath, “with a baroque style that is reminiscent of David Foster Wallace: heavy on footnotes (there are fourteen in one paragraph of a recent filing) and on wordplay (no alliteration is too much: “expeditious exercise,” “tutelary tactics,” “insidious ink”).”

See also Management Beware—ChapCap’s Back,, 6/19/06. For an actual example, see Chapman’s July 7, 2006 letter to John C. Lewis of Vitesse Semiconductor.

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