Archive | November, 2006

November 2006

Flattery Counts

Examining survey data from a sample of managers and chief executives at Forbes 500 companies, the authors of The Other Pathway to the Boardroom find that managers who flatter, agree with and render favors to their chief executives are far more likely to receive board appointments at other firms where their chief executive serves as a director. This also applies, it is argued, to other companies where the chief executive is indirectly connected through board networks. Interpersonal influence behavior substitutes, to some degree, for the advantages of an elite background or demographic majority status. Findings help explain why norms of director deference to CEOs have persisted despite increased diversity in the corporate elite.

“Paulson” Panel Pushes for Less Regulation

The 152-page Committee on Capital Markets Regulation Report makes 32 recommendations, places an emphasis on principles-based rules, modifying the private litigation system, and cutting back on the burden of regulations to improve the ability of US capital markets to compete with those abroad.

While the committee raises legitimate questions about the level of regulation and litigation, the Council of Institutional Investors thinks it views these issues through “far too narrow a prism, by focusing primarily on the market for initial public offerings.” I agree. In fact, that is the problem with much of our regulatory scheme.

On one of the most fundamental issues, the right of shareowners to be able to place their nominees on the corporate proxy, the Report simply says “the SEC needs to address and resolve, in its upcoming hearings, appropriate access by shareholders to the director nomination process.”

When it comes to protecting management, boards and auditors from liability, the Report is very specific. The trade-off for owners isn’t equal. New York state’s attorney general, Eliot Spitzer, who has taken the lead on several financial service investigations — often outpacing the SEC — lambasted the committee’s recommendation to limit how and when state law-enforcement can pursue cases against financial institutions as “absurd,” according to a report in the Wall Street Journal. (Financial-Rule Overhaul Hits a Nerve, 12/1/06)

Mr. Campos told the Consumer Federation of American annual financial services conference in Washington that the U.S. is losing business such as initial public offerings to foreign markets primarily because of increased competitiveness of foreign markets. Campos suggested a system under which shareholders holding at least 5% of a company’s shares would have the right to include their own director nominations on company ballots. (Campos: Don’t blame SOX for IPO woes, InvestmentNews, 12/1/06) (See also No thanks, Paulson committee, Financial Week,11/30/06)

The New Capitalists

Stephen Davis, on of the authors of our book of the year, The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda, is making the rounds. Interviewed by Forbes.com, he said: “Probably the biggest reform in the cards is the prospect of a real vote by shareholders on executive compensation policy. My own guess is there’s going to be a grand bargain in 2007 between corporations, who want relief from Sarbanes-Oxley red tape, and shareholders, who want more accountability. My sense is there will be some easing of Section 404 of Sarbanes-Oxley in return for giving shareholders more power to elect board members and to have a say in executive compensation.”

Of course, we embrace the vision of The New Capitalists. In Davis’ words, “If companies behaved as if they were owned by everybody, you wouldn’t see the massive CEO pay for failure that we’ve seen. You wouldn’t see companies that are cavalier about environmental irresponsibility. There are still many obstacles to this vision as the authors acknowledge. “Companies don’t behave as if they’re owned by big funds representing millions of ordinary people and ordinary people that entrust their capital to funds don’t consider themselves owners of major corporate assets.” Stock turnover continues to accelerate, DB plans continue to erode, the gap between rich and poor widens.

However, shareholder resolutions related to sustainability received 24.4% of the vote, compared with 18% last year. Companies like GE have discovered they can make billions of dollars by getting into the business of environmental responsibility. Morningstar now has a stewardship rating, so you can try and find out if a mutual fund aligns its money managers’ incentive pay with long-term savers or other interests. Mercer is rating fund managers on how well they’re aligned with citizen savers. In the UK the law recently provided for a ramp up to 50% representation of employees in pensions, as is already required in Australia. Various Canadian provinces led by Manitoba are moving in this direction. 

We need more funds like TIAA-CREF where fund investors elect the board. And we need unions to demand joint administration of 401(k) contribution plans. Working together, we hope to get there.

Hain Celestial’s Executive Compensation Sky-High?

At Hain Celestial’s annual shareholder meeting on Thursday, November 30, CEO Irwin Simon had better hope shareholders drink a big mug of Celestial Seasoning’s Sleepytime Tea before voting on the issues before them.  Although the stock has finally broken out of years of lackluster performance, shareholders will be asked to vote on yet another expansion of stock option benefits for the company’s top executives, further diluting shareholder value. 

Over the last 10 years while sales at the company have increased almost 1,000 percent, the value of each share of underlying stock has only increased one quarter of that amount.  Where has all that value gone?  “Into the pocket of founder and CEO Irwin Simon,” says Julie Goodridge, President of NorthStar Asset Management, Inc., a wealth management company based in Boston.  “We estimate that Simon’s compensation over the last decade has increased 688% and his net worth has increased by at least $75 million,” Goodridge says. “I suspect that the majority of the workers at the company haven’t averaged even a 68% per year increase in salary, bonuses and stock options.”  Worried about the long term impact of excessive executive compensation on shareholder value and employee morale, NorthStar Asset Management, Inc. asked Hain Celestial to review the compensation package of its CEO, Irwin Simon. Hain Celestial agreed to produce that report.

The compensation review, requested by NorthStar through a shareholder proposal, was made available to shareholders in July 2006.  The shareholder proposal asked specifically for data comparing the highest and lowest paid workers and an analysis of that data over time. In addition, the proposal sought a discussion of whether Hain Celestial’s executive pay was excessive and in need of modification. Further, the company was asked to explain whether the pay of highest or lowest paid workers should be adjusted to more reasonable and justifiable levels.

But according to NorthStar, the results of the report cannot be released to the public.  “The company would not release the report to us until we agreed not to discuss the findings with anyone,” said Goodridge.  “Given this year’s request by the Board to issue additional shares of Hain Celestial to further augment executive pay, we wonder if the Board has even read the Executive Compensation Review.  We plan to attend the annual meeting tomorrow to ask Hain Celestial to release the report to the investing public.  We feel that potential investors and members of the Board need to understand the impact of these excesses now, before shareholder value and employee morale plummet.” (unedited press release from NorthStar Asset Management, Inc., contact: Margaret J. Covert. Disclosure: CorpGov.Net’s publisher, James McRitchie, is a Hain Celestial shareowner.)

R&D on Rise in India

According to a report in Corporate Governance: International Journal for Enhancing Board Performance, India’s innovation basket is set to swell with the country drawing 25% of fresh global investments in R&D units outside the US or Europe. In the last few years, over 200 global companies have set up R&D hubs in India. According to Evalueserve, the value of R&D work done in India will touch $27.5 billion in 2010, despite an acute manpower shortage in candidates with advanced degrees. (India now draws 25% of global R&D spend, volume 6, number 4, 2006)

WSJ Pans “Shareholder Democracy”

The Wall Street Journal calls on the SEC to require better disclosure and to tweak the proxy process to get more shareholders involved rather than allowing direct proxy access. “Shareholder democracy,” they write, is “a costly, divisive and deeply unfair proposal that would force many companies to bend to special-interests.” What WSJ doesn’t mention is that shareholder democracy would only require companies to bow to “special interests” is if owners of a majority of shares support the proposals. In that case, how can they be called special interests?

“Shareholders who feel a company is underperforming already have the ultimate “vote,” which is to sell their stock,” writes WSJ. “DuPont was asked to link executive pay to social criteria. General Electric was asked to report on the feasibility of ending its nuclear energy business. Merck was supposed to adopt a drug-price restraint policy, and Pepsi to report its political contributions in newspapers. Most of these proposals are rejected by shareholders who understand they have little to do with achieving higher returns on their investment. Yet companies are still required to spend shareholder money to address each proposal.”

Of course, if shareholders could place their own nominees on the proxy, maybe they would concentrate their efforts on electing board members who would represent them, rather than trying to govern by what amounts to initiatives. If WSJ is really concerned that union-based pension funds will dominate shareholder access nominations, they should advocate the process be open to a broader group of shareholders, rather than only those holding 5% or more. (Board Games, 11/27)

CorpGov Bits

80% of S&P 100 companies dedicate webspace to sharing information on their social and environmental policies and performance; up from 34% last year. (Random Numbers, FinancialWeek, 10/16//06)

The number of directors who held more than two directorships at S&P 500 companies fell 13% between 2002 and last year. More than other board members, these facilitator of new ideas — both good and bad. (The Mighty 15: Directors spread ideas like virus, FinancialWeek, 11/13/06)

Women continue to make slow progress. From 0.6% of CEOs in 2000 to 2% in 2006. These numbers are expected to grow to 4.9% in 2010 and 6.2% by 2016, according to a study quoted inBusinessWeek. (Corner Office Crawl, 12/4/06) According to Critical Mass at Wellesley, women directors, who still hold less than 15% of Fortune 500 seats, make three distinctive types of contributions that men are less likely to make. They broaden boards’ discussions to include the concerns of a wider set of stakeholders, including shareholders, employees, customers, and the community at large; they are more persistent than male directors in pursuing answers to difficult questions; and they often bring a more collaborative approach to leadership, which improves communication among directors and between the board and management. (see also Women on Board, for Better Governance, The Motley Fool, 11/24/06)

Nationwide, the 30-year tab for government employee health-care costs in retirement could hit $600 to $1.3 trillion, according to a JPMorgan benefits specialist, under newly required GASB standards. (A Shock To The System, BusinessWeek, 12/4/06) From a corporate governance standpoint, it appears likely to put pressure on to convert funds such as CalPERS from DB to DC plans. On the other hand, many governments are likely to substantially increase funds into these activist funds to pay for future benefits.

Governance ratings differ. (Corporate governance report cards prove tricky, Reuters, 11/24/06)

Compliance with constantly evolving corporate governance rules has become the top priority for in-house company lawyers. Much of the anxiety has been driven by the Sarbanes-Oxley investor-protection law. Yet two out of three private companies do not purchase fiduciary liability insurance, according to research commissioned by the Chubb Group. (Corporate governance tops list of concerns for in-house counsel, Chicago Tribune, 11/7/06)

My fondness for Gretchen Morgenson, the NYT’s prominent business columnist and reporter, apparently isn’t shared by everyone. (Evaluating Gretchen Morgenson, Ideoblog, 11/26/06)

Of new issues over $100 million this year, LSE-listed stocks are up only 11%, vs. 20% for NYSE stocks, a reversal of 2005 results, according to Dealogic. The share prices of NASDAQ issues of at least $100 million beat those on London’s AIM, rising 5.5%, vs. a 0.5% drop this year, and 35.2% vs. 12.3% in 2005. (A Thanksgiving Holiday of Stock Exchange Cheer, My Daily Fatwa, 11/25/06)

55-60% of the errors triggering recent misstatements were “simple misapplications of [generally accepted accounting principles] or books and records problems, ” according to Scott Taub, deputy chief accountant of the Securities and Exchange Commission. “In 50 percent of the restatements, there was no information about how the company found the errors,” Taub said of his findings. When they restate, companies would do well to disclose how they found the triggering errors, he added. (Restatements: Stupid Human Tricks?, CFO.com, 11/27/06)

ETFs LLC, has an application for actively managed exchange-traded funds pending at the Securities and Exchange Commission, TheStreet.com reports. And the American Stock Exchange is working on creating one. (Firms Getting Closer to Actively Managed ETFs, MMExecutive, 11/27/06)

Governance Players Predict: “The Next 30,” Directors & Boards, 4th quarter 2006

John J. Castellani, president of the Business Roundtable, writes that “boards must reform investors,” using “their new political skills to remind investors that our economy is the envy of the world because of companies that are run by trained managers who focus on long-term performance.” If they faill, boards “may be forced to pick the specific investors or the specific agendas to which they want to respond.”

The most thoughtful predictions came from John Wilcox, head of Corporate Governance of TIAA-CREF:

  1. Majority voting and the right of shareholders to vote against directors will become the norm, replacing the plurality vote standard in U.S. director elections.
  2. Executive compensation will be brought into line by a combination of factors: enhanced SEC disclosure requirements, an advisory shareholder vote on compensation committee reports, and recognition of the need for internal pay equity.
  3. Separating the roles of chairman and CEO will become more common at U.S. companies, encouraging boards to worry less about preserving power and more about developing and incentivizing the best executive talent.
  4. The model of the imperial, celebrity CEO will be replaced by the stewardship model, with Reginald Jones unseating Jack Welch as the role model.
  5. Sustainability and corporate social responsibility, formerly relegated to gadflies and special interest groups, will be recognized as key corporate governance responsibilities for which directors should be held accountable.
  6. Shareholder communications and proxy voting systems will be revamped by the SEC to make better use of technology, reduce costs, increase efficiency, and improve a board’s ability to identify and communicate with shareholders.
  7. Shareholder resolutions will be overtaken by other forms of constructive engagement, and shareholder activism will become less confrontational, more responsible–and more effective.
  8. The definition of beneficial ownership will become more complicated and problematic as stock lending and derivative investment strategies enable investors to separate voting rights from any economic interest in the underlying stock.
  9. The spotlight will shift from the governance of companies to the governance of institutional investors, with a focus on how institutions should best fulfill their conflicting duties to maximize returns while acting as responsible owners.
  10. Companies will come to recognize that corporate governance is not just a matter of regulatory compliance and accountability but a strategic means to lower the cost of capital, reduce risk, create value, and strengthen the long-term performance of the corporate enterprise.

Jamie Heard, of ISS, predicts the system will “continue to flourish if CEOs prove willing to share power; if boards of directors establish true independence from management; if major institutional investors act like real owners; and if all take seriously the public’s demands that profit-making be pursued in an ethical and responsible way.”

Lawrence M. Benveniste, of Enory University, sees “fewer sitting CEOs and more retired CEOs” on corporate boards who will increasingly search for specific skill sets.

Consultants John and Miriam Carver think “governance will be recognized as a discrete discipline,” rather than an add on. Boards will become the authentic voice of shareholders, rather than management.

Stephanie R. Joseph, president of The Directors’ Newtork, Inc., believes investors “will be used to having much more of a voice in the selection of directors.” Domination of institutional investors will prevail and the imperial CEO will be extinct. Directors will be educated in programs akin to today’s MBA programs and will be rated/graded.

Michael Rhodes, of Citrin Cooperman LLC, says “boards of the future will rely less on information packets sent weeks before meetings. Instead, they’ll pull regularly updated information from company intranets. Pending actions of the board will be discussed, debated, and questioned via postings to the internet…”

Richard M. Steinberg, of Steinberg Governance Advisors, thinks we’ll see global accounting and financial reporting standards but they “will never be truly principles-base but rather principles supported by rules.” Legislators will move toward the European “comply or explain” approach. Shareholders will have greater say in who sits on companies’ boards but the result will be “less effective boards with less value added.” CEOs will turn to advisory boards to serve as sounding boards. Shareholder-selected directors will demand greater alignment of pay from performance “but they will never be able to figure out which performance measures to use.” “The effects of extreme global warming, worldwide terrorism, or widing dispartiy between the haves and have-nots could change everything.”

Kurt N. Schacht, of CFA Centre for Financial Market Integrity, also thinks shareholders will gain a larger voice in executive compensation decisions, shareholder access “may even resurface,” and shareowner pressure for robust governance may push companies to incorporate outside Delaware because they believe the business judgement rule protects unethical but legal self-dealing and “effectively neuters any claim of corporate waste.”

The AFL-CIO’s John J. Sweeney says “boards of the future should be made up of people with a long-term strategic focus and who have the ability to say no – both to the CEO who wants an excessive pay package and to the hedge fund or greenmailer who wants the company to eat its seed corn.”

Masquerade

Forbes.com carried a rant by Peter J. Wallison, a resident fellow at the conservative American Enterprise Institute calling on the SEC to reaffirm its policy that contests for board seats should be carried on only through proxy solicitations, and that companies be allowed to exclude by-laws or other devices that seek to allow shareholder nominees to be included in corporate proxy statements. (Shareholder Activists: Premature Elation?, 11/16/06)

Wallison criticizes AFSCME’s effort at AIG since it is clearly a “proxy access proposal masquerading as a by-law amendment.” He completely misses the point of the court in the AFSCME v AIG decision. The original intent of the SEC’s rule was to prohibit the use of the resolution process to support specific candidates in a current election, not to ban the use of that process in deciding how future elections would be conducted. That “intent” only changed when it appeared shareholders would actually be turning corporate elections into contests. It will be interesting to see what distorted logic the SEC comes up with at their December meeting.

Free Seminar on Fiduciary Responsibilities

Getting It Right – Know Your Fiduciary Responsibilities, a compliance assistance seminar sponsored by the US Department of Labor’s Employee Benefits Security Administration (EBSA), will take place in Sacramento, California, on December 5. The free seminar is part of EBSA’s national fiduciary education campaign to increase awareness and understanding about basic fiduciary responsibilities associated with operating private-sector retirement plans. Register by 11/27/06.

Book of the Year

In their book, The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda, Davis, Lukomnik, and Pitt-Watson build upon and extend the work of Peter Drucker (The Unseen Revolution) as well as James P. Hawley and Andrew T. Williams (The Rise of Fiduciary Capitalism). Although the transfer of ownership to middle and working class Americans predicted by Drucker has largely occurred, there has been a lag in the accountability of managers to these new citizen owners who want corporations to pursue sustainable development that does not depend on shifting expenses, such a pollution, to society in order to profit.

The “new capitalist” model hangs on a premise of near “universal owners.” That is, most citizens are shareowners and are highly diversified in their investments. Through investments in pension, mutual, and other collective funds, they hold a tiny share in thousands of companies around the world. In essence, ownership of corporations has shifted from a few wealthy individuals to society at-large, the “new capitalists.”

With corporate ownership so broadly based, it no longer makes sense for shareowners to encourage corporations to profit by polluting the environment, because these same owner citizens will have to pay for the cleanup and the cost of cleanup is generally more expensive than the cost of avoidance. With society and shareowners becoming one and the same, Davis, Lukomnik, and Pitt-Watson (DLP) offer ten rules, which they term the new “capitalist manifesto,” to guide corporate boards in creating harmony within the circle of accountability between the corporation, shareowners and other stakeholders:

  1. Be profitable — create value.
  2. Grow only where you can create value.
  3. Pay people fairly to do the right things.
  4. Don’t waste capital.
  5. Focus where your skills are strongest.
  6. Renew the organization.
  7. Treat customers, suppliers, workers and communities fairly.
  8. Seek regulations that ensure your operations do not cause collateral damage and your competitors do no gain unfair advantage.
  9. Stay clear of partisan politics.
  10. Communicate what you are doing and be accountable for it.

In discussing corporate boards, DLP point to the lack of information, the influence of management and incompetence. The Corporate Library, GovernanceMetrics International, Institutional Shareholder Services and BoardEx have sprung up to analyze how well board members represent owners, facilitating their mobilization. “Contested elections” in the US are something of an irony, DLP point out, “as if elections by right should be unanimous.” There is a “spreading consensus that directors should be appointed and removed by owners, much the way members of parliament or Congress are chosen, and removed, by citizens.”

However, the book is not just concerned with the accountability of corporations. It also examines how well institutional investors perform in the role of overseeing the corporations in which they have invested. Mutual and pension funds generally get paid based on how much they manage, not what they earn. “Free-rider” problems reduce their incentive to behave as owners, since most of the gains from activism will go to others. Pay structures incentivize short-term performance and trading, rather than owning strategies.

Activist funds, such as Relational and Hermes, which charge performance fees based on returns, address some of these issues. Rating agencies, such as Morningstar’s “Fiduciary Grade,” help funds evaluate board independence and assess alignment of manager pay with fund performance. TIAA-CREF and CalPERS are held up as examples where conflicts of interest are reduced by allowing at least some trustees to be elected directly by members.

More than others before them, the authors spell out an agenda to help clear the obstacles to accountability between corporate boards, executives, and investors, as well as governments and regulators, civil society groups, and information providers. Thirty pages of “action memos” are included to managers and directors; institutional investors; individual investors and beneficiaries; analysts, advisors, and auditors; civil economy groups; politicians and policy makers; and economists and researchers. Each “memo” contains sound advice.

Boards, for example, are advised to allow “shareowners to both elect and remove directors by majority rule, and to influence the nomination of candidates for the board.” Institutional investors should “practice what you preach” with regard to transparency. One recommended model is the International Governance Network’s Statement on Institutional Shareholder Responsibilities.

Individual investors and beneficiaries are warned to “lobby for meaningful investor representation” and to “select funds based on their readiness to pledge real allegiance to you.” Auditors are advised to measure contingent liabilities within a range of probabilities, rather than exact numbers, since the exact number chosen for low-probability but high-impact events, like an oil spill, is often zero.

They call for a grassroots network of shareowners to push shareowner-friendly legislation and regulations and to lobby mutual fund boards. Empowered owners are seen as an “antidote to public alienation from globalization as a distant and unaccountable force.” Their position appears consistent throughout. Accountability is best obtained through principles of economic democracy. Auditors should be responsible to fund/plan members, not management. Fund trustees, like corporate board members, should be elected by employees/savers/shareowners themselves. It’s a powerful vision of a sustainable civic economy based on democratic accountability.

The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda is our choice for book of the year 2006.

Political Contributions Yield Over-Size Returns

A study of corporate contributions to U.S. political campaigns from 1979 to 2004 finds the more candidates a firm supports, the higher are its next year’s raw and abnormal returns. The average firm participating in the political donation process contributes to 73 candidates over any five year period, 53 of which go on to win their elections.

The number of supported candidates has a statistically significant positive relation with the cross-section of future returns for firms which contribute to candidates. In fact, within our sample, the effect of firm contributions is more important than many of the established predictors of the cross-section of returns (more important than book-to-market and capitalization) and is about as important as a momentum variable.

A one standard deviation change in the number of supported candidates corresponds to about a 50 basis point per month increase in returns, implying that if a firm increases the number of supported candidates by about 96 candidates, it will experience an increase in annual returns of approximately 6%. The contribution effect appears to increase for firms that have longer relationships with candidates, support more home candidates, and support more powerful candidates.

Republican candidates typically receive higher total dollar contributions than Democrats and Republican candidate contributions come from a larger number of supporting firms than do Democrat candidates’ contributions. Despite the fact that Republicans receive more contributions than Democrats, the effect is stronger for firm contributions to Democratic candidates, although contributions to Republican candidates also result in statistically significant increases in firm returns.

Changes in ROE are strongly related to the number of supported candidates and other measures of contributions. Greater political contribution effects are found for industries with a smaller number of firms, more heavily concentrated sales, and a higher percentage of unionized employees. Contribution effects are “rational” to the extent they are linked to real increases in firm profitability and is stronger within industries which may be more likely to benefit from political connections. However, the authors indicate the effect is “irrational” from the high rate of return, in general, to political contributions, given the annual return on investment from a portfolio weighted by the total-number-of-supported-candidates to be an absurdly high 654,836%. (Corporate Political Contributions and Stock Returns, Cooper, Gulen and Ovtchinnikov, 10/24/06)

The paper extends the work of others who have found there are positive shareholder wealth effects to being connected and the value of being connected is greater in more corrupt countries. Those who advocate that companies to forgo political contributions, myself included, must do so through regulations, since companies who continue the culture of corruption would appear to have an unfair advantage unless mutual disarmament can be assured.

And another current example: “When workers confront globalization, they are told to adapt, take their pink slips and go to night school. It is the harsh downside of an integrated world economy that has on balance significantly enriched the country. When financiers feel the pinch from competition in Hong Kong and London, they run to the Bush administration for rule changes.” (The Corporate End Run, NYTimes editorial, 11/12/06)

Women Directors Add Value

Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance was based on interviews with 12 CEOs, 50 women directors, and seven corporate secretaries of Fortune 1000 companies. The study found that women impact board governance in at least the following three ways:

  1. by bringing different perspectives into boardroom discussions, including the perspectives of multiple stakeholders,
  2. raising difficult issues–that is the study found that difficult problems are less likely to be ignored when women are in the board room, and
  3. by altering the dynamics in the board room to create more open and collaborative discussions, thereby allowing management to hear board concerns without feeling defensive.

SICA Questioned

Les Greenberg, who decided approximately 50 securities arbitration awards in the past 15 years and who practiced for more than 30 years as a securities lawyer, obtained Securities Industry Conference on Arbitration (SICA) minutes dating back to 2004 that point to troublesome issues. They revealed an intended “survey” to show how public investors feel that mandatory securities arbitration before groups owned by securities firms is fair.  However, if the survey fails to support such a finding, it appears that it may not see the light of day.  Greenberg contends, “pharmaceutical companies could take a lesson from SICA on how to rig surveys.  It is most shocking that 4 to 6 SEC representatives attend SICA meetings and raise no concern whatsoever.”

Additionally, Greenberg has complained to the Office of the Inspector General of the SEC that the SEC was using SICA as an “advisory committee,” yet not adhering to the dictates of the Federal Advisory Committee Act.  That statute requires SICA to publish notice of its meetings, conduct public meetings, and permit public access to its minutes, records, and reports.

For more information, see SICA “Survey” and Minutes of SICA Meetings Obtained A Through Freedom of Information Act Request Meeting Minutes.

Free Seminar on Fiduciary Responsibilities

Getting it Right: Know Your Fiduciary Responsibilities, a compliance assistance seminar sponsored by the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA), will take place in Brookfield, Wisconsin, on November 8. The free seminar is part of EBSA’s national fiduciary education campaign to increase awareness and understanding about basic fiduciary responsibilities associated with operating private-sector retirement plans.

Research Report on Corporate Elections from The Corporate Library

Director Elections: Impact of Regulatory Changes and Shareholder Activism on the Market for Corporate Leadership ($495). The market for corporate leadership refers to the collection of mechanisms through which board positions are allocated among those willing to serve as corporate directors. In a well-functioning market there would be strong competition among willing candidates to provide this service and strong competition among boards for the best candidates. Lack of competition in the market for corporate leadership undermines the credible threat of replacement of board members for poor performance. Without the credible threat of replacement individual directors are able to ignore shareholder wishes. The formal mechanism through which board seats are allocated is director elections. In the 14-page report, Senior Research Associate Jackie Cook addresses meaningful director elections as a crucial component of good governance of public corporations, and explores the recent regulatory and shareholder initiatives that are shaping director elections in the US, and the likely impact of these on the market for corporate leadership. The Corporate Library.

Toward Democracy

John Connolly, CEO of Institutional Shareholder Services, told those attending Directorshipmagazine’s Agenda 07 Boardroom Forum in New York the number of majority voting resolutions next year will hit 450, up from 140 in 2006 and just 89 in 2005.

Another push will be staggered terms. 53% of publicly traded companies in the United States are now declassified. In 2006, there were 94 proposals that came before US company boards of directors to declassify their boards.” Many of them won 80% to 90% support from shareholders. This year we can expect more.

After discussing the AFSCME v. AIG court case, Forbes.com notes that a Democratic win of one house of Congress could persuade the SEC to support some or all of what AFSCME is after (the ability of shareholders to place their nominees on the corporate proxy). If it does, and if majority voting and declassification trends continue as expected, “companies in 2007 will for the first time taste what shareholder democracy is all about. Buckle up those seat belts.” (The Other Elections, Forbes.com, 11/06/06)

Some Republicans Push DC Plans

According to a report in Pensions & Investments (Candidates spar on DB vs. DC, 10/30/06), Republican candidates in several states have taken the lead in touting defined contribution plans this year.

In New York and Massachusetts, Republican gubernatorial candidates John Faso and Kerry Healey have called for new public employees to be enrolled in defined contribution plans. Ron Saxton, the Republican nominee for governor in Oregon, and Anne McCarthy, the GOP candidate for Maryland’s comptroller, say that idea should be studied.

In Illinois, Republican challenger and state Treasurer Judy Baar Topinka has also mentioned the need to study a defined contribution plan option. There’s no clear momentum in favor of dumping DB plans at the moment but that could change as regulatory changes force states and cities to clearly disclose what they owe in benefits.

Changes in federal laws governing pension plans, accounting modifications and funding shortfalls signal the demise of defined-benefit plans, said Robert Pozen, chairman of MFS Investment Management of Boston. Today, the number of defined-benefit plans stands at about 30,000, down from 114,000 in 1985.

While 401(k)s were first offered as supplements to traditional pensions, the latest data shows that 90% of 401(k) plans are the only retirement plan offered by that employer. In 2002, some 350,000 employers offered 401(k) plans as their sole retirement plans. Three-fifths of those stand-alone plans were started in 1995 or later. Mutual funds account for roughly half of the assets in 401(k) plans. (401(k) Plans: A 25-Year Retrospective, Investment Company Institute)

ETF Managers Invest Elsewhere

According to the most recent SEC filings available from State Street Global Advisors and Barclays Global Investors — two companies that together manage about 85% of ETF assets overall — managers had invested their personal money in only about six of the 100 or so ETFs they managed at the time of those filings. By comparison, an August study by researchers at the Georgia Institute of Technology, London Business School and the University of South Florida showed that 43% of managers of traditional mutual funds in a sample of 1,400 funds had invested in the funds they ran through the end of 2004. (ETF managers go elsewhere to invest, Pittsburgh Post-Gazette, 11/3/06)

Optomistic Projections

Below is a list of ten board trends from John Wilcox, Head of Corporate Governance of TIAA-CREF, from a recent article in the Directors & Boards e-Briefing followed by ten optomistic rules for corporate boards (“A Capitalist Manifesto”) from the book The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda by Stephen Davis, Jon Lukonmik and David Pitt-Watson:

  1. Majority voting and the right of shareholders to vote against directors will become the norm, replacing the plurality vote standard in U.S. director elections.
  2. Executive compensation will be brought into line by a combination of factors: enhanced SEC disclosure requirements, an advisory shareholder vote on compensation committee reports, and recognition of the need for internal pay equity.
  3. Separating the roles of chairman and CEO will become more common at U.S. companies, encouraging boards to worry less about preserving power and more about developing and incentivizing the best executive talent.
  4. The model of the imperial, celebrity CEO will be replaced by the stewardship model, with Reginald Jones unseating Jack Welch as the role model.
  5. Sustainability and corporate social responsibility, formerly relegated to gadflies and special interest groups, will be recognized as key corporate governance responsibilities for which directors should be held accountable.
  6. Shareholder communications and proxy voting systems will be revamped by the SEC to make better use of technology, reduce costs, increase efficiency, and improve a board’s ability to identify and communicate with shareholders.
  7. Shareholder resolutions will be overtaken by other forms of constructive engagement, and shareholder activism will become less confrontational, more responsible–and more effective.
  8. The definition of beneficial ownership will become more complicated and problematic as stock lending and derivative investment strategies enable investors to separate voting rights from any economic interest in the underlying stock.
  9. The spotlight will shift from the governance of companies to the governance of institutional investors, with a focus on how institutions should best fulfill their conflicting duties to maximize returns while acting as responsible owners.
  10. Companies will come to recognize that corporate governance is not just a matter of regulatory compliance and accountability but a strategic means to lower the cost of capital, reduce risk, create value, and strengthen the long-term performance of the corporate enterprise. (What’s Next for Boards? Ten Landscape-Altering Trends, Directors & Boards, 11/23/06)

A Capitalist Manifesto (more on The New Capitalists later this month in CorpGov.net but read afavorable review in P&I now)

  1. Be profitable — create value.
  2. Grow only where you can create value.
  3. Pay people fairly to do the right things.
  4. Don’t waste capital.
  5. Focus where your skills are strongest.
  6. Renew the organization.
  7. Treat customers, suppliers, workers and communities fairly.
  8. Seek regulations that ensure your operations do not cause collateral damage and your competitors do no gain unfair advantage.
  9. Stay clear of partisan politics.
  10. Communicate what you are doing and be accountable for it.

Funds Seek Disclosure of Pay Consultant Conflicts

Retirement systems, which control nearly $850 billion in assets, have asked the 25 biggest U.S. companies by market value to disclose more about the consultants that advise their boards on executive compensation. The funds want to know if the consultants receive other business from the companies, possibly influencing their compensation recommendations.

“Multiple business relationships within a company may compromise the independence of a recommendation to the compensation committee and may jeopardize shareholder confidence,” the funds wrote in their letter. The funds ask the companies to answer two main questions: Does their compensation consultant provide other services? Do they have a policy prohibiting this?

In the next round of pay disclosures, companies must name their consultants and describe their compensation-related work, said Paul Hodgson, senior research associate with The Corporate Library, but they’re not required to disclose their fees or other services they provide the company. (Watchdogs targeting pay consultants, The Charlotte Observer, 11/4/06)

Investors Seek Access

According to ISS’ Governance Weekly, a group of 16 institutional investors from six countries with some $3.4 trillion in assets under management sent a letter to the SEC urging them to allow proxy access proposals on corporate ballots next season.

The international investors noted that experience in other countries has shown that boards whose members can be removed by shareholders are more sensitive to investors’ opinion and are more likely to engage in a meaningful dialogue. “Experience in those markets has been that the rights of shareholders to reject nominees, to propose a nominee to the board, and to call an extraordinary general meeting to vote upon change in board composition do not destabilize companies, nor do they lead to contested elections.” “On the contrary, they help to stabilize potentially volatile situations because directors and managements are more likely to take their shareholders’ concerns seriously.” (International Investors Weigh in on Proxy Access, 11/3/06)

Governance Leadership May Pass to CalSTRS

CalPERS has long been considered the undisputed leader in advocating good corporate governance. However, the latest move may put their cross-town rival ahead, at least in terms of moral authority, since CalSTRS has taken the lead in applying good governance principles to their own operations. However, by failing to adopt many of the policies into regulations, the authenticity of their commitment could be called into question, as well as the enforceability of the policies.

CalSTRS will crack down on “pay-to-play” with a series of policies and regulations. The policy changes, which will be effective January 1, 2007, include:

  • A pledge that confirms board member independence and understanding of fiduciary duty;
  • Rigorous conflict of interest language to avoid nepotism or the appearance of nepotism;
  • Increased disclosure of communications between board members and third parties regarding investment transactions;
  • Full disclosure of communication initiated by a board member to a staff member or consultant if the communication could reasonably be interpreted as an attempt to influence a specified outcome regarding an investment transaction;
  • Provisions for investigating undue influence claims;
  • Disclosure of placement agent relationships and payments;
  • Requires 12-month recusal from any decision involving a campaign contributor or gift maker where the amount exceeds $250 to a board member; and
  • Provides a $250 ceiling on the giving of a charitable contribution at the request of a board member and a $360 ceiling on gifts to a board member in any given year.

Additionally, other policy changes were approved that must proceed through the Administrative Procedure Act (APA) rulemaking process and could take up to one year to implement. Those changes would:

  • Restrict campaign contributions to board members, including the Governor or candidates for governor, to no more than $1,000 in any year; and
  • Provide financial penalties for violation of the campaign contribution and gift limits.

Any violation of the contribution and gift limits will lead to disqualification from doing new business with CalSTRS for two years. Once the regulations are in effect, those with existing business relationships with CalSTRS shall be subject to a fine of $10,000 or the amount equal to the value of the impermissible campaign contribution, whichever is greater.

Previously, most of the firms were limited only by state campaign finance rules, which in an election year allow individuals and companies to give up to $44,600 to a candidate for governor and $11,200 to treasurer and controller candidates. Financial firms, including investment banks, venture capitalists, hedge funds and financial advisory services, gave at least $27 million this year to the governor, Treasurer Phil Angelides and Controller Steve Westly.

CEO, Jack Ehnes indicates, “These rules are modeled after those set forth in 1993 by the SEC for the municipal securities sector which have proven effective in curbing conflict of interest issues. Our new board governance policy is the toughest set of standards in the nation on ethics, putting CalSTRS in a very select group among our industry peers. It’s a matter of public trust and it’s time to take action.” “This will start a rally through the pension industry,” he said “you can guarantee that.”

“Our goal is to make sure we don’t make investment decisions based on the political contributions people give,” said Anne Sheehan, who represents Gov. Arnold Schwarzenegger on the board and led the push for the ban.

The issue flared up again this spring during the Democratic gubernatorial primary between state Treasurer Phil Angelides and Controller Steve Westly, trustees of CalSTRS and CalPERS, the nation’s two largest public funds with combined assets of about $370 billion. (Pension fund won’t invest in big donors, LATimes, 11/4/06) (CalSTRS beefs up limits on donors, SacBee, 11/4/06)

Eight years ago, CalPERS adopted limitations, but they were overturn because they weren’t adopted as regulations, which can be enforced as law. From the breadth of the proposed policies, CalSTRS may face a similar challenge.

According to the APA, “regulation” means every rule, regulation, order, or standard of general application or the amendment, supplement, or revision of any rule, regulation, order or standard adopted by any state agency to implement, interpret, or make specific the law enforced or administered by it, or to govern its procedure. (Government Code section 11342.600) There is an exception that applies to internal policies that affect only employees of the issuing agency and does not address a matter of serious consequence involving an important public interest. (What is a Regulation?)

It seems clear that many of the policies adopted by CalSTRS involve “a matter of serious consequence involving an important public interest.” It would be a shame if CalSTRS rules are also overturned because they fail to adopt them through the required process. While I applaud CalSTRS for their bold move, I fail to understand their reluctance to go through the rulemaking process which offers many important protections, including enforceability.

Action-Oriented Guide

The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social and Environmental Success, by Andrew W. Savitz with Karl Weber, focuses on how companies can be more profitable by “doing the right thing.”

Savitz believes we are entering an “age of accountability,” something we at CorpGov.Net have been pushing for more than a decade. Customers, workers, neighbors and shareholders all demand a voice in how businesses are run. If politics is inescapable, engagement is a better long-term strategy than retreating to the corporate bunker. “Will you take on this challenge consciously and willingly, using the full array of tools, techniques, and strategies available to you? Or will you do it grudgingly, semi-intentionally, and probably ineffectively?”

But The Triple Bottom Line isn’t focused on just reacting to criticism. Instead, it provides advice and many high definition examples on finding the sustainability “sweet spot” between business and social interests; that area where stakeholder and corporate interests overlap.

Certainly most companies are beginning to accept that sustainable approaches can protect them from environmental, social and ultimately financial risks, but the sweet spot also points to greater efficiencies, new products and services, improved reputation and higher employee morale.

The International Organization for Standardization (ISO) plans to issue guidelines for social responsibility in 2008, similar to those for quality (ISO 9000) and environmental management (ISO 14001). The sustainability movement appears to be reaching critical mass. Hopefully, it will do so in time to avert the worst effects of global warming, which unlike AIDS and poverty, seems to strike a cord with the American middle class. “Natural disasters” are increasingly hard to ignore.

Savitz says he “wrote the book for millions of mangers who need to know what this is (the triple bottom line), why it is important to their company, how it relates to their job and how to get going if they are so inclined. And they can read cover to cover on the plane from New York to California.” (I read it while flying from Sacramento to Hilo, Hawaii.)

“It’s full of easy to grasp stories, simple but I hope useful constructs, and some sound-bites and phrases that may stick. These folks hold the key to the castle on this and I am hoping this book will provide a map to the treasure,” says Savitz.

When I told Savitz the book seemed like mom and apple pie, he responded: “Finding the sweet spot is mom and apple pie, but it isn’t always easy. Some of the companies get the pie in their face when they flunk sustainability 101, starting in Chapter One with Hershey of all companies.”

His approach is a good one. He tells informative stories of how others have gained by searching for and finding the “sweet spot.” Then he offers very practical advice such as starting small, looking at customer needs, working with supply chains, starting with current skill sets, anticipating change, empowering individuals, integrating sustainability into operations, creating virtual communities, stakeholder mapping and partnering. He also points readers to powerful tools, such as the Global Reporting Initiative (GRI) self-assessment guides.

The appendix provides framework of key action steps, useful in other endeavors as well triple bottom line efforts.

If airport bookstores around the globe will stock The Triple Bottom Line, passengers might find their own sweet spot between another mindless movie and putting out another fire at work. Protecting the environment and strengthening the social fabric while making a profit; who can argue with that? Savitz provides a useful map of just how you can benefit from the experience of others who have already found the treasure.

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
[email protected]

Hon. Paul S. Atkins
[email protected]

Continue Reading ·

Powered by WordPress. Designed by WooThemes