Archives: September 2006

Ed Durkin, the director of corporate affairs at the United Brotherhood of Carpenters and who oversees $40 billion pension funds, is a real hero to many of us seeking more democratic corporate governance. When proxy access stalled, Durkin had the vision to push majority vote. The result is that more than 200 US companies have adopted some form of majority voting within the last year and a half, some directly due to shareholder initiatives and some “on their own accord” because of shareholder pressure.

So, it was a pleasure to see Durkin being interviewed by Business Week, who credited him with “convincing 70 corporations that their directors should be reelected by a majority of shareholders — or resign.” (Hitting The Nail On The Head—Lightly, 10/2/06) Personally, I don’t think the other 130 would have happened without his efforts, but the interview was favorable and it was good to see Business Week take an interest is someone who has shown so much leadership in corporate governance.

One thing I couldn’t understand though. Durkin appears upset that Nelson Peltz takes a 5-6% position in Heinz and “ends up with two people on the board.” Whereas, “worker pension funds in this country have trillions of dollars. I don’t mean to say it should all translate into board seats, but maybe we haven’t effectively utilized that to secure a greater say in the governance of these companies.”

Yet, when the interviewer asks why he isn’t pushing “for proxy access — the chance for investors to nominate directors, Durkin answers, “It’s the hedge funds that will use it. Free riding on the company’s proxy is not the next best step in election reform.” Then he ends with a statement that warns against short-termism and notes, “the labor instinct is to be combative, but it’s also one of compromise.”

Trying to understand Durkin’s point seems like an exercise in hermeneutics. Are we to take his words literally or look for the allegoric? Obviously social context must be important. At base, Durkin and his latest mission appears to reflect the symbolism of labor oriented funds possibly helping to gain a veto over board members when there is widespread agreement among shareholders of problems. In rejecting proxy access, is Durkin alluding to the early 1900s split in the labor movement between those seeking worker participation in management vs the collective bargaining model?

While Durkin is right, proxy access would be used mostly by hedge funds, that access will be meaningless unless they can gain the support of larger institutional shareholders, such as the Carpenters and CalPERS. Governance oriented hedge funds like Relational Investors often work in tandem with these larger investors on targeting and reform efforts. I don’t see how proxy access to owners, especially to those that have held a substantial stake for a year or more, can be considered “free riding on the company’s proxy.” If proxy access is not the next best step in proxy reform, what is? I’d love to hear Durkin’s opinion on that subject.

HP Targeted for Proxy Access

Just as I predicted, perfect alignment of a victory with AFSCME v. AIG and troubles at HP, brought four public pension funds together who own about $700 million invested in the firm. They filed a proposal with Hewlett-Packard to let shareholders nominate their own slate of directors at the next annual meeting. Led by the New York State Common Retirement Fund, the pensions included Connecticut Retirement Plans and Trust Funds, the North Carolina Retirement System and the American Federation of State, County and Municipal Employees Pension Funds. (Pension Funds, Subpoenas Target HP, LATimes, 9/26/06) Specifically, the proposal asks HP to changes it bylaws to allow groups that hold 3 percent or more of the company’s stock for at least one year to nominate HP board members.

“Proxy access is critical to insuring shareholder rights. While we wait for the Securities and Exchange Commission to rule on this topic regarding all corporations, we are moving forward on a case-by-case basis to establish what should be a basic right for all shareholders,” said New York State Comptroller Alan G. Hevesi. North Carolina Treasurer Richard Moore added, “the current scandal has hurt stock prices and could significantly weaken the company’s long-term value. Now is the time for real change.” (Congress Subpoenas Trio Tied to HP Boardroom Spying, ECT News, 9/26/06)

Whole Foods

For anyone still concerned about last year’s annual meeting fiasco at Whole Foods, the last day to submit a resolution for next year is fast approaching. Last year the deadline was October 30th. This year, the deadline is Oct. 2, 2006. Investors could send a real message with a bylaw proposal like that submitted at HP.

Footnotes

ADP Group President S. Michael Martone has developed a habit for using the corporate jet, judging by the proxy the company filed earlier today, which notes that Martone spent $257K on his personal use of the corporate jet in 2006, or nearly half of his salary of $542K. That’s not the only perk that Martone received last year: there was also $44K for a country club membership and a $30K tax gross up to cover the cost of that membership and another $24K plus a $19K gross-up to cover moving expenses. Indeed, all of the perks taken together add up to $384K, or nearly as much as Martone’s $412K bonus. (An expensive habit to hick?, Footnoted.org, 9/27/06)

A remarkable story in the New York Times reports on a campaign contribution scheme innovated by the insurance giant AIG. Under New York law, corporations are permitted to give up to $5,000 to a candidate. AIG skirted this limitation by having over a dozen of its subsidiaries make contributions — drawn from the same bank account, using sequential checks. (The Corporate Subsidiary Ruse, Multinational Monitor Editors Blog, 9/19/06)

Support for Research Papers

Authors of proposed papers may apply for a research grant of up to $10,000 to support research required to complete the papers to be presented at an October 2007 conference at Oxford University, co-sponsored by the Yale School of Management’s Center for Corporate Governance and Performance and the University of Oxford’s Saïd Business School. The conference will “re-examine the role of the investor in the corporation under these changed and changing circumstances and ultimately whether these changes have or can impact the advancement of social welfare.

Four primary topics for research include:

(i) Differences between the U.K. and the U.S. law and regulations: Exploration of the legal and regulatory environments of the two countries in order, and identification of how the differences impact governance practices of corporations;

(ii) Consequences of differences in the behavior of investors in the two countries. Assessment of the effects on corporate performance of differences in investor behavior;

(iii) Options for legal and market reforms that might provide a more appropriate level of shareholder activism. Assessment of the feasibility and consequences of alternative forms of law, regulation, disclosure and governance of corporations; and

(iv) Economics of institutional investor activism in corporate governance. Evaluation of the social welfare implications (including on shareholder interests) of existing differences between the two countries, as well as the effect of possible changes to current arrangements.

Submit a one page abstract of your proposed research project that fits into this broad research agenda by November 1, 2006 electronically, as a Word or PDF document, via email to Michele Grammatico. All identifying information should be removed from the abstract. There is no submission fee. Proposals will be reviewed in December 2006 by a panel of Yale and Oxford faculty who will select approximately 10 papers.

CalPERS to Invest in China

CalPERS, the largest U.S. public pension fund, is thinking about investing for the first time in Chinese firms, said chief investment officer Russell Read in an interview with the Financial Times.

The fund could start by investing in Chinese companies with U.S. or international listings through American Depository Receipts and Global Depository Receipts, Read told the newspaper, enabling CalPERS to reap the benefits of China’s rapidly expanding economy. The pension fund’s staff could recommend the strategy to its board in the coming months, Read was reported to have said. (CalPERS eyes Chinese investment opportunities, Reuters, 9/26/06)

Calpers has so far excluded China from its investable markets, but the list is up for reevaluation by the fund’s board in February, while permission to invest in ADRs and GDRs could come sooner.

In a speech to the Forum on Corporate Governance in Asia, for the Asian Development Bank on May 11 2002, I said the following: “As governments and market forces institute reforms, CalPERS and other funds will get more sophisticated in their approach. Country ratings should be used in tandem with corporate ratings. Combining the country’s score with a given company’s score would more accurately measure risk. CalPERS would still invest substantially more in countries with transparency, political stability and good labor practices. However, exceptional corporations in difficult environments would not be completely out of bounds. CalPERS practices engagement in the US market; many of us believe it should do the same in emerging markets.” Four years later, CalPERS hired a chief investment officer who is moving in the right direction.

WCCG Conference

The World Council for Corporate Governance believes that we need to broaden the role of corporate governance. It is spearheading a movement in company board rooms to bring stakeholder issues in the mainstream of corporate agenda. We believe that with a fifth of world population below the poverty line the biggest challenge of our times is to make markets work for the poor.

The 2nd Global Conference on Social Responsibility will be held at the Dom Pedro Golf Hotel, Vilamoura, Portugal from 15-17 February 2007. The theme is CSR Plus – Strategies that Enrich the Poor and Build Corporate Brands.

ERISA

ERISA and Directors:  What You Don’t Know Will Hurt You. Free online education for corporate board members, from Directors & Boards, the thought leader in corporate governance.

Sudan Divestment

Gov. Arnold Schwarzenegger signed legislation to end state investments in Sudan in an effort to pressure that nation to stop genocidal violence in its Darfur region. “I grew up in Europe after the Second World War so I remember the dark and heavy shadow cast by the Holocaust,” Schwarzenegger said. “It has become clear to me that we cannot turn a blind eye to any genocide.”

Assembly Bill 2941, carried by Assemblyman Paul Koretz, D-Hollywood, requires that CalPERS and CalSTRS meet with corporate executives whose operations are generating revenue for the Khartoum government or show complicity in the Darfur crisis. If companies refuse to cooperate or pull out of Sudan, the funds would start selling off their holdings.

Assembly Bill 2179, by Assemblyman Tim Leslie, R-Tahoe City, supplies the legal underpinning for UC to carry out its plan to end investments in nine energy and engineering companies that invest in Sudan. (New laws hit Sudan funds, Sacramento Bee, 9/26/06)

Priorities

Australians spend twice as much time working out their football tips each week as they do on retirement planning, according to a Newspoll survey released by Industry Super Funds. The survey found that respondents spent an average 22 minutes a week sweating on their football tips, but only 10 minutes on their financial future. (News Dash, PlanSponsor.com, 9/26/06)

Funding Research

MV Advisors, which hopes to raise a $100 from pension funds for a shareholder activist approach that will address governance, operational, strategic issues at underperforming companies, pledged $1 million to the University of Chicago Graduate School of Business plans to bolster its corporate governance program. MV is looking to “the very smart people of the University of Chicago to quantify and prove the value of corporate governance on (shareholder) performance,” said John Mutch, MV founder and managing partner and a GSB graduate. (University gets grant to boost corporate governance program, Pensions & Investments, 9/25/06)

End to Blind Shareholder Dates

The Dating Game: Do Managers Designate Option Grant Dates to Increase Their Compensation?estimates that the recent stock option backdating scandals may cost shareholders $500M in market value.  However, the study also estimates that the average executive benefit from stock option backdating was only $600K.  The study is the first to quantify the effects on executive compensation and market value of stock option backdating practices.  More than 100 companies are currently under investigation and the U.S. Senate has begun hearings to examine the inappropriate option backdating practices.  Meanwhile, Congress may be considering rolling back the tax deduction on performance-based pay, which many observers believe is the cause of the backdating practices in the first place.

Authors, M. P. Narayanan, and H. Nejat Seyhun, both with the University of Michigan, suggest two variants of the dating game. Back-dating (picking a date in the past with a lower stock price compared to board decision date) if the stock price has been rising prior to the board date, and forward-dating (waiting after the board decision date to observe the stock price behavior) if the stock price has been falling prior to the board date. “Our calculations show that managers can obtain economically significant benefits by playing the dating game.”

“In July of 2006, the SEC voted to approve a major overhaul of executive compensation disclosure rules. As a response to the widespread revelation of dating games in firms, the new rules included a provision that both the grant date and the decision date (the date the board or compensation committee finalized details of the compensation) be disclosed. The new rules also require that the grant date fair value, and the closing market price on the grant date if it is greater than the exercise price of the award, be disclosed. In addition, if the exercise price of an option grant is not the grant date closing market price per share, the rules require a description of the methodology for determining the exercise price. These rules would make it difficult to conceal dating games.”

Rule 452 Amendment Postponed

The NYSE is postponing amendment of broker-voting in order “to allow companies additional time to prepare for implementation,” according to attorney Larry Sonsini, who chaired the Proxy Working Group for the New York Stock Exchange.

“There is good reason for corporations to be nervous about the end of broker voting,” says Stephen Davis, president of Davis Global Advisors, who first broke the news in his newsletter, Global Proxy Watch, as reported by Forbes.com, ‘Broker-Vote’ Break For Companies, 9/22/06.

The rule won’t be changed any earlier than mid-2007 and probably wouldn’t go into effect earlier than 2008, says Forbes. Rule 452 allows brokers to cast votes on “routine” matters for shareholders whose shares are held in street name if the shareholders don’t direct the voting of their shares. Originally designed to guarantee quorums, the “ten day” rule has effectively evolved to give corporate issuers a virtual guarantee that 20% or more of the votes would be cast in their favor.  The committee has decided to shelve its recommendation and asked a subcommittee to investigate further, according to a report published by GMI (In Focus, issue 2006.5) GMI also reports that more than 200 US companies have adopted some form of majority voting within the last year and a half, some directly due to shareholder initiatives and some “on their own accord” because of shareholder pressure.

Another NYSE’s decision on broker votes represents another setback for shareholders who are already holding their breath, pending the outcome of the SEC’s upcoming October. Let’s hope the SEC’s response to the AFSCME v. AIG decision will be less disappointing.

Tipping to London

Mark Gongloff’s “Fixing SOX No Quick Fix” in the 9/22/06 WSJ points to the possibility that capital markets may be shifting to London and may stay there, even with possible changes to Section 404. “Last year, only one of the world’s 25 biggest initial public offerings listed in the U.S. So far in 2006, just one of the 10 biggest IPOs have priced here. Six years ago, in comparison, the U.S. hosted nine of the top 10 IPOs,” writes Gongloff.

Treasury Secretary Henry Paulson has suggested SOX went “too far.” We’ll see what a blue-ribbon commission recommends in November. Gongloff, and many others, conclude SOX reforms “won’t necessarily bring foreign listings flooding back to the U.S.”

Bigger factors seem to be the liability system of the U.S., which may answer why IPO fees are about 7% of the cash raised in a deal here and only 3% in European markets. Retail attention is no longer so important, since so much more money is invested by institutions and they are not hindered by investing abroad. As Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations, says, “electronic exchanges are effectively borderless.” $3.3 trillion of U.S. investors’ money is now in non-U.S. companies.

Another factor raised by Noreen Culhane, executive vice president of the Global Corporate Client Group at the New York Stock Exchange, is the requirement to reconcile to GAAP (Generally Accepted Accounting Principles) has a cost associated with it, as parts of the world are moving to IFRS (International Financial Reporting Standards) as their standard.

TIAA-CREF

Responding to longstanding call from Make T-C Ethical and Social Choice for Social Change campaigns, TIAA-CREF, announced its entrance into the microfinance arena with a $100 million commitment to its new Global Microfinance Investment Program (GMIP) over the next four years, dwarfing the recent $1.5 million infusion of Warren Buffet cash from the Bill & Melinda Gates Foundation into Grameen Foundation USA. Almost half this amount–$43 million–is going toward a private equity stake in ProCredit Holding, a leading global microfinance institution (MFI).

Funding for the GMIP investments will come not from the $8 billion CREF Social Choice Account (SCA), but rather from the TIAA Traditional fixed annuity account. In other words, the microfinance commitment is being supported with mainstream funding, not SRI funding. This may be a reflection of the fact that a recent TIAA-CREF survey found a loud call from a broad range of its participants (not just SCA investors) to promote human rights and economic development, which microfinance does. The fact that GMIP is not an isolated SRI initiative may help allay fears expressed by some critics that the new Social and Community Investment Department would function as a self-contained silo.

Neil Wollman, of Social Choice for Social Change, says the announcement “is a good step to take and will certainly do good for many folks looking to earn a living and contribute to their communities. We will be looking for further expansion of their community investment program, be it

a) into the their socially responsible Social Choice Account,

b) into the grassroots and needed CDFI type community investing, and

c) into hundreds of millions of dollars of such investment to fulfill the Social Investment Forum’s ‘at least one per cent in community investment.’ Otherwise, we have just submitted to TIAA-CREF proposals in hopes that when they soon make decisions regarding their enhanced shareholder activism effort, that they will choose the six corporate leaders we have targeted due to their egregious behavior, including Wal-Mart and Coca-Cola.”

Wollman asks those concerned to contact TIAA-CREF to thank them for the microfinancing investment, while urging them to accept the proposal submitted the Coalition to target six companies.

1. Altria/Philip Morris, responsible for Marlboro-the #1 cigarette brand among youth,
2. Nike and
3. Wal-Mart, widely condemned for their use of sweatshop labor (and Wal-Mart for and other bad practices for its impact on domestic labor, sprawl, and local economies),
4. Costco, for its warehouse in Cuernavaca, Mexico, which severely damages an archeological site and abuses human rights,
5. Chevron, for supporting the repressive government in Burma,
6. Coke, for human rights and environmental abuses overseas—and advertising to children in the U.S.

Communicate to CEO Herbert Allison; 800-842-2733; 212-490-9000. Wollman says calls are preferable to e-mail. Strengthen your influence with an additional brief message to trustees@tiaa-cref.org.

CII Discussion on Proxy Access

As reported in ISS’ Governance Weekly, those attending the Council of Institutional Investors’ conference expressed concerns about what the SEC will do with the recent court decision.

“The SEC didn’t act quickly and call a meeting within 24 hours to say ‘good job’” on the decision, Stuart Grant whose firm represented AFSCME said, implying the agency may seek to limit its effects in some way. If the SEC broadens its interpretation of Rule 14a-8(i)(8), it could risk the end to majority vote proposals. 

ExxonMobil Criticized by Royal Society

In an unprecedented step, the Royal Society, Britain’s premier scientific academy, wrote to ExxonMobil demanding the company withdraw support for dozens of groups that have “misrepresented the science of climate change by outright denial of the evidence.”

Groups, such as the US Competitive Enterprise Institute (CEI), whose senior figures have described global warming as a myth, are expected to launch a renewed campaign ahead of a major new climate change report from the UN Intergovernmental Panel on Climate Change (IPCC). The CEI responded to the recent release of Al Gore’s climate change film, An Inconvenient Truth, with adverts that welcomed increased carbon dioxide pollution. (Royal Society tells Exxon: stop funding climate change denial, Guardian, 9/20/06)

GMI Ratings Expand to Emerging Markets

Corporate governance is below par in most emerging countries a new survey examined 321 companies from 25 countries in emerging markets has found. GovernanceMetrics International, the corporate governance research and ratings firm, found the average rating for companies in emerging markets was 4.3, compared to an average rating ranged from 6 to 7.

Only two emerging market companies -Taiwan Semiconductor Manufacturing Co. and Gold Fields Ltd. of South Africa – rated above average at 7.5. The country with more than one surveyed company that had the lowest average score was South Korea, at 2.31, followed by Greece at 2.52, China at 2.94 and Brazil at 3.23. Thirty-eight companies achieved GMI’s highest rating of 10, including Canadian telephone operator BCE, Colgate-Palmolive and food and beverage PepsiCo being amongst the highest rated. (Corporate governance poor in emerging countries, Financial Director, AccountancyAge.com, 9/19/06)

Only 35% of emerging market companies have a majority of independent directors, compared to 75% for companies in industrialized markets. Fully 27% do not disclose the presence an audit committee, compared to only 13% for all industrialized companies. Where audit committees are disclosed among emerging market companies, only 29% are composed solely of independent directors, compared to 70% at all industrialized companies covered by GMI. Further, half of the emerging markets companies have no compensation committee whereas 86% of companies in the developed markets have such committees. Lastly, 22% of the emerging market companies have shares with unequal voting rights, slightly above the 21% in developed markets.

However, not all emerging markets came out poorly. South African companies had better governance practices on average than the average for German, Singapore, Spanish or Swedish firms. (GovernanceMetrics International, press release, 9/18/06)

Pitt on HP

Harvey Pitt offers some good advice in the wake of recent events at HP. Patricia Dunn “forgot the cardinal rule of institutional management–nothing can be done to put a genie back in the bottle. It’s usually best to use the incident of a specific leak as a jumping-off point for discussions on how to prevent future recurrences, rather than trying to affix blame for the leak that’s already occurred.”

The best way to minimize leaks is to foster a climate of collegiality, “inculcating the belief that concerns, disagreements or grievances will be dealt with honestly, fairly, seriously and without recrimination, ” writes Pitt. “If there had been a general consensus on HP’s board that the leaker should be identified, the simplest approach would have been to ask all directors, again at a face-to-face meeting, to make their telephone and e-mail records available to a third party investigator.”

“Running a modern-day multi-national corporation is no easy task. It takes smarts, hard work, diplomacy and common sense. Unfortunately, in the zeal to identify those who wrongfully proffered corporate deliberations to the media, reliance on these critical traits was suspended,” he concludes. (Looking For Leaks In All The Wrong Places, Forbes.com, 9/19/06)

The Ponemon Institute claims that 85% of 226 directors responding to a survey place a higher priority on corporate confidentiality than shielding their personal information from prying eyes. Just over half of the surveyed directors said they have served on corporate boards that have authorized the use of “aggressive” surveillance techniques to address a potential leak, according to a press release regarding the survey, taken just days after Hewlett-Packard confirmed details of a corporate investigation into apparent leaks from their board. Half the surveyed directors said they would endorse a ruse similar to the one used by HP’s detectives to obtain phone records, as long as the deceptive tactics aren’t deemed illegal. (PlanSponsor.com, NewsDash, 9/20/06)

I find those results disappointing, especially given that directors should know that pretending to be someone you aren’t, while trying to obtain phone records, is illegal.

AFSCME v. AIG

Nice article by Bill Baue posted to SocialFunds.com, September 14, 2006, Court Affirms Shareowner Right to File Resolutions on Proxy Access for Nominating Directors. Baue covers the usual groundwork in his unusually succinct way and then points to a footnote in which “Judge Wesley notes the irony that the existing mechanism for filing resolutions seeking proxy access for nominating directors upheld by the court is less restrictive than the 2003 proposal, which stipulates shareowners must hold over one percent of a company’s stock. In other words, the mere $2,000 threshold of share-ownership required for filing resolutions under the standard process upheld in the court’s decision makes it much easier to gain shareowner access to the proxy for nominating directors than through the 2003 proposal.”

Because of that, it appears Rich Ferlauto, director of pension and benefit policy at AFSCME, isn’t all that eager to have the SEC revisit their “access” proposal at their October 18 meeting, or to take any other action to address the court’s decision. “We and other institutional shareholders are prepared to move ahead and use shareholder resolutions to create proxy access at companies that are deserving–we’re not going to wait for the SEC one way or the other,” said Mr. Ferlauto. “We would welcome the SEC revisiting the proposed rule that’s languished on the table for three years, but it’s not necessary in order to enforce on a national basis the decision of the Second Circuit, since that is where securities issues are litigated and its decisions traditionally become the precedent nationally.”

Yes, leave it alone. If the SEC let’s the decision of the court stand, shareholders will be able to address the specific needs of each company. One size doesn’t fit all but in all cases shareholders should have the right to recommend through resolutions, or require through bylaws, access to the proxy for their nominees. That’s exactly what the court decided, turning the clock back to the way the SEC read their own rule prior to 1990. Let it stand.

McRitchie Petitions CalPERS to Limit Gifts, Campaign Contributions and Comply With Governance Standards

On September 18, 2006, CorpGov.Net publisher James McRitchie petitioned the CalPERS Board to adopt regulations similar to those proposed by CalSTRS limiting gifts and campaign contributions. Additionally, the petition requests CalPERS to set forth in regulations requirements that members of the board of administration comply with the same governance standards CalPERS attempts to impose on corporate boards.

For example, CalPERS prefers corporate directors serve on no more than 6 other company boards. Yet, one CalPERS director also sits on the board of 13 mutual funds, according to recent filings. It is hypocritical of CalPERS board members to call on corporate directors to limit the number of boards they serve on, while violating such guidelines themselves.

Those who have pushed to convert defined benefit plans for public employees to defined contribution plans have been motivated mostly by political ambition, the prospect of increased money management fees, and a wish to end the influence of public pension funds on corporate CEOs and boards of directors who do not wish to be held accountable by shareholders. However, these same forces frequently use real or perceived conflicts of interest by CalPERS board members as justification for their proposals.

Let’s not give those who seek to do away with public pension funds any reason to attack the funds on the basis of the possible influences of “pay to play” or possible conflicts of interest. By enacting regulations at least as stringent as those announced by CalSTRS and by complying with the governance standards it seeks to impose on others, CalPERS can ensure against any perception that gifts or campaign contributions will be rewarded by access to the nation’s largest pension fund or that CalPERS does not live up to its own standards. (CalPERS Petitioned on Gifts Campaign Contributions and Governance) Compare with previously rejected petition, filed on 8/5/98. See also, State disclosure laws should apply to all seeking office, DailyBreeze.com, 8/19/06.

Board Facts

Being a director harder than it used to be, San Francisco Chronicle, 9/17/2006. Excerpts:

In 2002, the year the Sarbanes-Oxley Act took effect, 13 percent of those invited to serve on boards declined, according to an annual survey of directors conducted by recruitment firm Korn/Ferry. Two years later, that had more than doubled to 29 percent. In 2005, it almost doubled again, as 59 percent of those surveyed had turned down a board position… most board members (62 percent) devote 16 to 20 hours a month to board matters, while 16 percent spend more than 25 hours a month.

According to a study by Stanford’s Klausner, out of hundreds of shareholder securities lawsuits filed since 1980, only 13 have resulted in directors having to pay out-of-pocket costs for settlement or legal fees — and those 13 included Enron, WorldCom and Tyco, all egregious cases of directorial misconduct.

Directors at Fortune 1,000 companies reported an annual average retainer and per-meeting fee that totaled $76,707 this year, up 35 percent from 2004, according to Korn/Ferry. Directors at companies with revenue of more than $20 billion made an average $115,375, a 43 percent increase. The figures do not include equity compensation.

Thirteen years ago, Grundfest co-founded a three-day executive education seminar for directors at Stanford. It started with 40 participants. This year the Directors’ College at Stanford Law School drew 400 people for seminars such as crisis control, how to run an audit committee, CEO retention and succession, and best and worst ideas in corporate governance.

Executive Sessions

NYSE’s Rule 303A.03 provides that in order “to empower nonmanagement directors to serve as a more effective check on management, the nonmanagement directors of each listed company must meet at regularly scheduled executive sessions without management.” According to Koppes and Rodman,” The requirement that boards meet in executive session, without management, may emerge as the reform that most shifts the power in the boardroom away from management and to the directors, consistent with the corporate stewardship concepts rooted in state corporation law.”

In Running effective executive sessions, Richard H. Koppes and Heith D. Rodman, ask “When should they be held? How long should they be? Who should lead them? These are among the questions boards must consider to make their executive sessions successful.” Koppes and Rodman provide answers.

Corporate Clown

This Clown Sure Can Set a Benchmark, Scott Adams via TheCorporateCounsel.net Blog.

CalPERS Calls for Full Hearing on Proxy Access

In response to the AFSCME court victory on shareholder access and the subsequent announcement by the SEC an announcement by the SEC to hold a public hearing on 10/18/06, CalPERS’ Board President, Rob Feckner sent a letter urging the SEC to fully consider investor views about access to the proxy to nominate corporate directors.

I understand that a Commission meeting has been scheduled to discuss a recommendation by the Division of Corporation Finance to amend Rule 14a-8 in response to the AFSCME litigation. Instead of simply responding to this litigation by adopting a stopgap rule, CalPERS asks that the Commission give the proxy access issue its full consideration.

AFSCME v. AIG

Because of the importance of this landmark case, we reproduce a 9/13/06 e-mail alert from Grant & Eisenhofer below. (there is some variation in format from the original)

CLIENT ALERT 2006-2
Significant Victory on Proxy Access: SEC to Hold Public Hearing on 10/18/06

In this client alert we bring to your attention a significant judicial ruling in favor of shareholders, and notify you that the Securities and Exchange Commission (the “SEC”) recently scheduled a hearing where they may seek to rescind the pro-shareholder outcome of the ruling.

On September 5, 2006, the United States Court of Appeals for the Second Circuit held that, under the existing proxy rules, companies may not exclude shareholder proposals urging the adoption of bylaws that would require the company to place the names of director candidates nominated by shareholders on management’s proxy. American Federation of State, County and Municipal Employees, Employees Pension Plan v. American International Group, Inc., No. 05-2825-cv, 2006 WL 2557941 (2nd Cir., Sept. 5, 2006). This holding, in a case prosecuted by Grant & Eisenhofer, P.A. on behalf of the American Federation of State County and Municipal Employees (“AFSCME”), represents a very significant step forward for shareholder rights.

However, less than 24 hours after the court’s decision became public, the SEC announced that it would conduct an open meeting on October 18, 2006, to consider amendments to the rules governing the submission of shareholder proposals. Although the SEC stated that the purpose anticipated revisions would be to “assure consistent nationwide application” of the rules following the Second Circuit’s decision, we are concerned that the revisions, in fact, would adopt the anti-shareholder position that has been advocated by the SEC’s Division of Corporation Finance and which was specifically rejected in the Second Circuit’s holding.

A. History of The Proxy Access Debate

“Proxy access” – the ability of shareholders to have the names of shareholder-nominated director candidates listed on management’s proxy – has long been a primary goal of the corporate governance movement. Under the SEC’s current interpretation of its rules, the only way shareholders can have alternative candidates considered for election would be to launch an independent proxy solicitation, which can be prohibitively expensive. Giving shareholder-nominated candidates access to corporate proxy ballots, therefore, has been considered the ultimate goal of corporate election reform, because it would provide shareholders with meaningful choice without forcing them to incur the expense of launching an independent proxy solicitation.

For years, shareholders seeking election reform have pressed for proxy access through both SEC rulemaking and efforts to amend corporate bylaws through the SEC’s “town hall” proxy rules, whereby shareholders can have proposals published in corporate proxy materials. Since at least 2004, however, efforts to adopt a formal rule making proxy access uniform at all publicly traded companies have been stalled at the SEC. And since the 1990’s, the SEC’s Division of Corporation Finance generally has permitted companies to exclude shareholder proposals advocating the adoption of proxy access bylaws at specific companies.

B. G&E Files Suit On Behalf Of AFSCME To Force The Inclusion Of Proxy Access Proposals.

In 2005, AFSCME, with Grant & Eisenhofer representing them, determined to open up a new front in the “proxy access” debate by seeking a judicial order declaring that, under the existing proxy rules, the exclusion of proxy access proposals was illegal. To this end, in February 2005, AFSCME submitted a proxy access proposal to American International Group, Inc. (“AIG”) to be considered by the shareholders at the insurance giant’s 2005 annual meeting. Not surprisingly, AIG asked for, and received, a “no action” letter from the SEC’s Division of Corporation Finance, giving it permission to exclude AFSCME’s proposal from the company’s 2005 proxy statement.

The Division’s decision in this regard was consistent with a position it adopted in or about 1990 regarding an interpretation of SEC Rule 14a-8(i), which lists particular circumstances under which a company may decline to publish a shareholder proposal. Specifically, under SEC Rule 14a-8(i)(8), a company can exclude a shareholder proposal if it “relates to an election on the company’s board of directors or analogous governing body.” 17 C.F.R. § 240.14a-8(i)(8). According to the Division’s interpretation, a company could exclude a “proxy access” proposal under this rule not because the proposal related to corporate elections in general, but because the proxy access proposal could somehow promote what the Division called “contested elections” at corporations.

In April of last year, AFSCME filed a lawsuit against AIG in federal court in New York (where AIG is headquartered) seeking an order compelling AIG to include AFSCME’s proxy access proposal in the company’s 2005 proxy statement. AFSCME argued that, despite the Division’s post-1990 interpretation, the phrase “relates to an election” in the relevant rule did not permit the exclusion of shareholder proposals merely because they might make “contested elections” at American corporations more or less likely. Rule 14a-8(i)(8), we pointed out, does not bar proposals that merely relate to the subject matter of elections generally – indeed, corporations routinely are required to place shareholder proposals on its proxy for a variety of election-related subjects, such as director qualifications and majority voting. Because a proxy access proposal would merely establish election procedures, and would not affect a particular election, we argued, it does not relate to “an” election within the meaning of the rule.

Last spring, however, the district court, in perfunctory fashion, sided with AIG and the Division of Corporation Finance, finding that AFSCME’s proposal “on its face ‘relates to an election.’ Indeed, it relates to nothing else.” Am. Fed’n of State, County & Mun. Employees Pension Plan v. Am. Int’l Group, 361 F. Supp. 2d 344, 346 (S.D.N.Y.2005). AFSCME appealed.

C. The Second Circuit Rejects The Division’s Analysis And Holds That Proxy Access Proposals May NOT Be Excluded From Corporate Proxy Materials.

On September 5, 2006, the United States Court of Appeals for the Second Circuit reversed the district court’s decision and remanded the case with instructions to enter judgment in favor of AFSCME. Relying on a statement published by the SEC in 1976, the Court of Appeals determined that when Rule 14a-8(i)(8) originally was adopted it was not intended to bar proxy access proposals. The Court the proceeded to observe that, despite the Division’s post-1990 interpretation, the SEC had failed to offer any rational basis to exclude shareholder proposals advocating the adoption of proxy access bylaws. “Accordingly,” the Court held, “a shareholder proposal that seeks to amend the corporate bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot does not relate to an election within the meaning of the Rule and therefore cannot be excluded from corporate proxy materials under that regulation.” 2006 WL 2557941 at *1 (emphasis supplied).

The importance of the Second Circuit’s decision cannot be overstated. While many shareholders and corporate governance observers considered the issue of proxy access virtually dead following the SEC’s failure to adopt the proposed rule in 2004, the decision in AFSCME v. AIG not only renews the debate but grants shareholders the very right they have been seeking all along – the right to determine for themselves whether a proxy access regime should be installed at their particular companies. The Second Circuit’s decision will permit shareholders interested in promoting real corporate democracy to install proxy access bylaws on a company by company basis, tailored to meet the needs of each particular company. Although technically only binding on AIG and other companies subject to the jurisdiction of the courts of the Second Circuit (which includes New York, Connecticut and Vermont), the Second Circuit’s holding has far-reaching implications. As the financial hub of the country, most publicly traded corporations have at least a presence in New York, and the Second Circuit’s holding will be considered very persuasive authority to other courts called upon to address this issue.

D. The Fight Continues: The SEC Schedules A Public Hearing To Address Proxy Access.

Whether the Second Circuit’s holding will be allowed to stand, however, remains in doubt. As stated above, the Second Circuit based its decision that Rule 14a-8(i)(8) was not intended to bar shareholder proposals that establish general election-related procedures on an interpretative release published by the SEC in 1976. In its opinion, the Second Circuit made the following observation: “[I]f the SEC determines that the interpretation of the election exclusion embodied in its 1976 Statement would result in a decrease in necessary disclosures or any other undesirable outcome, it can certainly change its interpretation of the election exclusion, provided that it explains its reasons for doing so.”

Less than 24 hours after the Second Circuit’s decision became public, the SEC announced that it would be conducting a public meeting on October 18, 2006, to consider amendments to Rule 14a-8 “to address issues raised by a decision of the U.S. Court of Appeals for the Second Circuit on Tuesday, which disagreed with the Commission’s staff’s longstanding interpretation of Rule 14a-8.” Quoting SEC Chairman Christopher Cox, the Commission’s press release continued:

‘Rule 14a-8, the shareholder proposal rule, provides shareholders important rights in the proxy process,’ said Chairman Christopher Cox in announcing the calendaring of the proposed amendment. ‘These rights are best secured under consistent national application of Rule 14a-8 to shareholder proposals. Therefore, to provide certainty with regard to shareholder proposals in every judicial circuit, I have directed the staff to prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application. Following the publication of a proposed amendment and the opportunity for public comment, a final proposal will be considered at an open meeting of the Commission that will be scheduled to allow a final rule to go into effect in time for the 2007 proxy season.’

A copy of the Commission’s press release is available on the SEC’s website.

It is unclear, at this point, what specific amendments to Rule 14a-8 will be proposed. If the proposed amendments will be to change the language of Rule 14a-8(i)(8) to specifically permit the exclusion of “proxy access” proposals, this will mark a huge step backwards. Not only would such amendments deprive shareholders of the needed opportunity to adopt rules that would ensure true corporate democracy at their corporations, but they would signal a disturbing anti-shareholder stance being taken by the SEC itself. As former SEC Chief Accountant Lynn Turner recently commented, the SEC’s meeting on October 18, 2006, notably timed before the November elections, “will give investors a clear cut statement as to whether this Commission is still ‘The Investors’ Advocate’ as then Chairman Douglas stated, or has evolved into another role.”

We strongly urge you to contact the SEC to make known your feelings on “proxy access.” As noted above, the SEC has scheduled a public meeting for October 18, 2006. Details regarding the location and agenda will be released during the week of October 9. We urge you to make every effort to attend. In the meantime, you can contact the SEC directly to voice your opinion on this very important issue.

Hon. Christopher Cox, Chairman
chairmanoffice@sec.gov

Hon. Paul S. Atkins
atkinsp@sec.gov

Hon. Roel C. Campos
camposr@sec.gov

Hon. Annette L. Nazareth
nazaretha@sec.gov

Hon. Kathleen L. Casey
caseyk@sec.gov

Ira Millstein at YCCGP

The Corporate Board conducted a conversation with Ira Millstein about the Yale Center for Corporate Governance and Performance (YCCGP). Funded through a $20 million endowment, the YCCGP will focus research and education on ways corporations can better serve society. Millstein says the YCCGP won’t be training directors, like the Stanford program, but will be looking more broadly at the role of the corporation in society.

For example, they “will be bringing together CEO’s and directors to ask questions like how they define aggreate welfare — is it customers society, the environment — and what they have done to address it.” YCCGP will be taking an international flavor and is already working on joint ventures with the OECD, ICGN and Oxford University in the UK.

Pension Activism

A worldwide survey of 100 pension funds with $2 trillion in assets by Global Pensions found shareholder activism is not seen as a fiduciary responsibility by most, with more than a third believing it is only a side issue. While 46% of panelists said shareholder activism was “very important”, 37% said it was “only a side issue”. A minority (13%) viewed it as “top priority” and a fiduciary responsibility, while 4% answered that it was “of no consequence at all”.

However, a combined total of 59% saw it as a fiduciary responsibility or regarded it as very important. Darren Check, director of institutional relations at Schiffrin & Barroway, claimed attitudes were changing: “46% in the very important column is impressive and encouraging. Had this survey been taken five years ago, I think you would have had maybe 5% giving it top priority and 20% saying it is very important. (Shareholder activism seen as low priority, GlobalPensions.com, 8/9/06)

HP Deadline Looms

John Chevedden would remind readers the September 27th deadline for 2007 shareholder proposals at HP is fast approaching.

In her blog, Martha Carter, ISS’ Managing Director of Corporate Governance, writes that “when the results of the investigation were reviewed by the board last May, Director Keyworth was asked to resign. He refused, but he won’t be renominated. In at least one respect, Keyworth got it right. In his refusal to resign, he said that he was elected by shareholders. Does the H-P nominating committee deserve a withhold vote for their swift refusal to renominate Keyworth?” (Federal prosecutors looking at HP board scandal, San Jose Mercury News, 9/11/06)

My own opinion is that with scandals brewing and the U.S. 2nd Circuit Court of Appeals ruling that shareholders should be able to consider proposals to allow them to put their nominees on the corporate proxy, the stars seem to be in perfect alignment for such a proposal at HP.

Funds Should Limit Gifts and Campaign Contributions

Clamping down on “pay-to-play” practices, trustees of the California State Teachers’ Retirement System moved to rein in political contributions and gifts from investment managers who do business with the giant fund.

Trustees agreed to craft rules or legislation that would place strict limits on donations — campaign contributions of no more than $250 and meals and gifts valued at no more than $50 — for not only the 12-member board but also the governor and gubernatorial candidates. (CalSTRS looks to restrict gifts, Sacramento Bee, 9/8/06; Limits on Firms’ Donations to California Pension Panel Eyed, LATimes, 9/8/06)

CalPERS should follow the example set by CalSTRS in clamping down on “pay-to-play.” I was among those pushing CalPERS to adopt more stringent limits in the late nineties. As reported, when they did adopt policies they did not go through the legally required rulemaking process. CalPERS argued the Board did not have to comply with the Administrative Procedure Act, which requires public notice, response to comment, etc.

When I sought and obtained a determination from the Office of Administrative Law that the CalPERS policies were illegal, I did so not to repeal the underground regulations but in order to have them formally adopted into law through regulations. I also hoped to move the rules from mostly increased reporting to the type of strict prohibitions now being considered by CalSTRS.

Unfortunately, since both the LATimes and Sacramento Bee had concluded their investigatory articles on “pay to play” and gift taking by CalPERS board members at the time of the court decision and OAL’s determination, the Board simply repealed the illegally adopted policies and fell back to the relatively ambiguous language of Government Code section 19990.

That law prohibits gifts “under circumstances from which it reasonably could be substantiated that the gift was intended to influence the officer or employee in his or her official duties or was intended as a reward for any official actions performed by the officer or employee.” Of course, it is extremely difficult to substantiate “pay to play.” Board members frequently argue no gift of any value can sway them in their decisions.

The CalPERS Board should introduce limitations on gifts at least as stringent as those adopted by CalSTRS. Trustees should be of the highest moral character and should not, in general, be accepting gifts from individuals or firms where there is any possible conflict of interest. Let’s not give those who seek to do away with public pension funds any reason to attack the funds on the basis of the possible influences of “pay to play.”

Mutual Neglect

Gretchen Morgenson continues a series of articles in the New York Times railing against mutual funds that are failing to vote proxies in the best interest of shareholders. After looking at major funds, their potential conflicts of interest, and how they voted at Pfizer, she singles out Putnam as “in the minority when it comes to acting like owners.” Many others voted to support Pfizers’ directors even though doing so was against the recommendations of Glass Lewis and ISS.

It is thanks to this kind of large-shareholder passivity that we have seen the biggest transfer of wealth from owners to managers in the history of corporate America. And it is this kind of inertia that allows continued corporate wrongdoing. The fact is, too many fund companies have supported practices that betray shareholders but benefit corporate executives as well as the funds themselves. Only fund shareholders can stop this.

She concludes by asking her readers to check out the proxy votes of the mutual funds they hold. “See how many times they voted your shares to support corporate managers and entrenched boards. Examine the issues they backed them on. If you think they are not serving your interests, fire them. Otherwise, you will be enabling the enablers.” (How to Find A Fund’s True Colors, 9/10/06)

Open Access Revived: Shareholders Prepare for October SEC Meeting

In what could be the most significant victory in the corporate governance movement in recent years, the U.S. 2nd Circuit Court of Appeals ruled that shareholders should be able to consider proposals to allow them to put their nominees on the corporate proxy. The case was brought by the American Federation of State, County and Municipal Employees (AFSCME) against the American International Group Inc. (AIG) insurance company.

AFSCME’s resolution was modeled after the SEC’s 2003 draft rule, abandoned due to opposition from the Business Roundtable, even though almost all the 13,000 public comments supported the
proposed rule The resolution sought to amend AIG’s bylaws to include director candidates nominated by 3% shareholder groups who have held for at least one year.

The SEC allowed AIG to exclude the resolution based on SEC Rule 14a-8(i)(8), which allows proposals to be omitted if they “relate to an election of directors.” The appeals court held instead that “a shareholder proposal that seeks to amend the corporate bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot does not relate to anelection within the meaning of [Rule 14a-8(i)(8)] and therefore cannot be excluded from corporate proxy materials.” (editor’s emphasis)

The SEC has issued conflicting opinions on what proposals are excludable. In a 1976 guidance the SEC gave he go ahead to proposals establishing procedural rules governing elections, like that proposed by AFSCME. However, since 1990, the SEC has allowed companies to exclude such proposals but never explained why, the court stated.

“Although the SEC has substantial discretion to adopt new interpretations of its own regulations in light of, for example, changes in the capital markets or even simply because of a shift in the Commission’s regulatory approach, it nevertheless has a ‘duty to explain its departure from prior norms,’ ” Judge Richard Wesley wrote in the court’s opinion.

SEC Chairman Christopher Cox said the commission will “prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application,” and that any final rule would take effect in advance of the 2007 proxy season. The commission will consider the proposed rule change at an open meeting scheduled for 10/18/06. (see press release)

“The importance of the Second Circuit’s decision cannot be overstated,” said Jay Eisenhofer, managing partner of Grant & Eisenhofer. “Proxy access has been the number one priority for shareholders seeking to impose real democracy at their companies, but for years their efforts have been blocked by the policy adopted by the SEC’s Division of Corporation Finance to permit companies to exclude such proposals from corporate proxy materials. The Second Circuit’s opinion confirms what shareholders have been saying all along – that the Division’s interpretation of the law was just wrong and completely unjustified.”

AFSCME’s Gerald McEntee explained: “The Second Circuit decision is hugely significant for shareholders. We have always argued that you can’t have a true election when only one party is empowered to put a name on the ballot. This ruling can give shareholders a meaningful voice in board elections by opening up the director nominating process.” Confirming the importance of the ruling, he continued, “It will make directors think twice before they put their own interests above those of their shareholders.”

Rich Ferlauto, also with AFSCME, told CorpGov.net, “In light continuing corporate scandals such as options backdating and the SEC close examination of the issue during rule making, we would hope that Chairman Cox will embrace the Second Circuit’s decision in future Commission deliberations.”

“This can make a significant difference in the process of corporate elections, making them somewhat more real than they have been in the past,” said Lucian Bebchuck, a Harvard professor who specializes in corporate governance issues. “It makes it possible to remove directors without expending huge costs.” (Court Ruling Favors Proxy Access, ISS Governance Weekly, Appeals Court Revives Proxy-Access Issue, CFO.com, 9/7/06)

The original rulemaking petition that I filed with Les Greenberg in 2002 simply opened up the resolution process to include placing nominees on the corporate proxy. It was much simpler, and I believe more workable than the SEC’s subsequent proposal.

When the SEC meets, they could address the court’s ruling by revisiting our proposal, their own proposal, or by simply finding and clarifying that shareholders are barred from making such nominations by rule 14a-8. Of course, I hope they will seriously consider some mechanism to allow shareholders to place nominees on the corporate proxy.

Current SEC rules provide for recommendations by shareholders. See SEC rule, Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors. However, requiring companies to formally respond to recommendations isn’t enough; they should be required to allow resolutions seeking something akin to equal access.

Mr. Greenberg and I have both requested the SEC to reconsider our original petition filed in 2002. (Reconsideration requests from Greenberg and McRitchie) I hope all shareholders will join us in petitioning the SEC to finally open up the proxy to shareholder nominees. The SEC can’t post a cop at every company. They need to give shareholders the tools to be their own watchdogs…to hold board members accountable by nominating and electing replacements when necessary. Paraphrasing Lucian Bebchuk, we don’t need “independent” directors as much as we need directors who are dependent on the will and the vote of shareholders. Equal or open access to the proxy would be the most efficient way to accomplish that goal.

Chevedden Report

John Chevedden and his associates are keeping the pressure on this year. What follows is a report on votes at 29 companies, all involving the simple majority vote topic.

Co. Proposal Passed means that a shareholder proposal was submitted and then the company put the same Simple Majority Vote topic on the annual meeting ballot as a binding management proposal and it then passed – the best possible outcome.

The proposals with low votes, like ALK with 27%, were due to shareholders giving their support to the binding company proposal in preference to the non-binding shareholder proposal. At ALK the company gave a last-minute notice of the company binding proposal and the shareholder proposal was not withdrawn because their was too little time.

Paper Finds Board Oversight of Corporate Lobbying is Rare

Best Practice in Internal Oversight of Lobbying Practice by Robert Repetto makes a case for rapid adoption of best practices in corporate governance of corporate lobbying activities. According to the author, “best practice requires oversight and approval of significant lobbying activities, expenditures and positions by a standing board committee of independent directors. Leading companies on this issue have recognized that lobbying on public policies requires board oversight because it involves significant shareholder interests and can be intrinsic to the outcome of business strategy. Nonetheless, only a small fraction of U.S. corporations now have such a system of board oversight in place, despite the potential sensitivity of lobbying activities.

Repetto provides many examples that many corporate lobbying activities may be harmful to shareholders in their capacities of workers, consumers, taxpayers, citizens and investors. For example, most energy-dependent corporations and their business associations have lobbied against government regulations or taxes to limit greenhouse gases. The author finds that corporations and thier trade associations have taken lobbying positions that are not consistent with their own financial interests and the narrowest definition of shareholder interest.

From the report: In 2005, only 13.6 percent of companies in the S&P 500 have a standing board committee on public policy or social and corporate responsibility. This percentage has actually declined from a figure of 17.9 percent in 2001. In 2004, the Center for Political Accountability, a non-profit organization concerned with lobbying issues, reviewed 120 company websites in 2004. It found that only 2 stated that their boards exercised oversight over corporate lobbying expenditures. Another recent survey of multinational companies sponsored by F&C Asset Management found that few companies even had explicit policies on lobbying, let alone board oversight. Moreover, of the 77 companies reporting on the Global Reporting Initiative questionnaire on corporate governance issues, only three companies (AMD, Alcoa and GE) reported that they have a process for board approval of lobbying on public policy issues.

It is no wonder that investors as well as public interest groups have been calling for greater accountability and transparency in corporate lobbying. CalPERS and other large institutional investors have written to the SEC urging mandatory and comprehensive corporate disclosure of lobbying expenditures and political contributions.

PROXY Governance on CA

PROXY Governance recommends CA shareholders withhold votes for D’Amato as director and reject poison pill proposal. PROXY Governance, believes it best that the company be able to start fresh with directors that weren’t on the board when the bulk of the troubles occurred. For that reason it believes it’s best that former Senator D’Amato not continue with the CA board.

Separately, PROXY Governance recommended rejection of a bylaw proposal by Harvard Law Professor Lucian Bebchuk to require “unanimous” board consent to adopt or extend a poison pill not approved by shareholders. Any such pill would sunset after one year and any change to the bylaw would similarly require “unanimous” board approval. CA’s pill is scheduled to expire in November.

PROXY Governance believes this proposal is really bad governance, pure and simple. The unanimity mandate would give veto power to a single director—including the CEO—over the adoption of a critical takeover defense. As noted in an April article by lawyers Martin Lipton and Mark Gordon, the provision not only has questionable legality but also could lead to a “tyranny of one.”

Executive Compensation: Backdating to the Future

The US Senate Finance Committee meeting will hear witnesses beginning at 10:00 am on 9/6/06 on Executive Compensation: Backdating to the Future/Oversight of current issues regarding executive compensation including backdating of stock options; and tax treatment of executive compensation, retirement and benefits. Witnesses will include Nell Minow, Lucian A. Bebchuk, Charles M. Elson, and others.

A paper to be published in The Michigan Law Review next year, analyzed thousands of stock option grants at 48 companies that announced they were under investigation as of the end of June, and measured the maximum gains for those executives if their options were backdated over a 90-day period as well as the drop in value at those 48 companies in the 10 days before and after news of a backdating inquiry was released.

It appears that “backdating stock options between 2000 and 2004 helped sweeten the average executive’s pay by more than 1.25 percent, or about $600,000. But the fallout from the recent options investigations has caused those executives’ companies to fall in market value by an average of 8 percent, or $500 million each,” as reported in the New York Times. (Report Estimates the Costs of a Stock Options Scandal, 9/6/06) On top of those costs, may be additional payouts to settle class-action lawsuits.

Researchers assumed stock prices of the 48 companies won’t recover. On the other hand, the stock option scandal has widened considerably beyond the 48 companies studied. Federal tax auditors are stepping up scrutiny of executive compensation plans and could seek to reclaim millions in back taxes. (Executive Pay Practices Under Scrutiny, BusinessWeek, 9/5/06)

All this news is expected to push up attendance at “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now.” Many of you are making the trek to Washington DC – and even more are will be taking in the Conference online (either live on September 11-12th or by archive).

Evidence That DB Beats DC

Pension coverage in the private sector has shifted from defined benefit plans where professionals manage the money to 401(k) plans where participants invest their own accounts. The supposition is that individuals are not very good at investing their own money. The question is whether the supposition is borne out by the facts. That is, are returns on 401(k) plans markedly lower than those on traditional defined benefit plans?

Researchers at the Center for Retirement Research at Boston College found that over the period 1988-2004 defined benefit plans outperformed 401(k) plans by one percentage point. This outcome occurred despite the fact that 401(k) plans held a higher portion of their assets in equities during the bull market of the 1990s. Part of the explanation may rest with higher fees, which are deducted before returns are reported to participants. But the one percentage point shortfall understates the investment problem in 401(k) plans, since an aggregate number does not reflect the fact that more than half of participants in 401(k) plans do not follow the prudent investment strategy of diversifying their holdings. Finally, the available data suggest that IRAs produce even lower returns than 401(k) plans, which, if true, implies trouble ahead given the massive amount of money that is being rolled over into these accounts. (Investment Returns: Defined Benefit vs. 401(k) Plans by Alicia H. Munnell, Mauricio Soto, Jerilyn Libby, and John Prinzivalli, September 2006)