A study by Cotter, Shivdasani and Zenner, reported in the November issue of Directorship, found that returns to a target firm’s stockholders were 20% higher when their board was independent than when a majority of directors were insiders or outsiders with ties. The same issue also carries an article by Robert Heidrick on making director evaluations work.
According to recent estimates by NCEO, there are now 8.7 million participants in ESOPs with $213 billion in assets. In addition 2 million participate in 401(k) plans investing primarily in employer stock (totaling $250 billion) and another 5 million employees have stock options. In the same Nov/Dec issue of the Employee Ownership Report, China is moving swiftly to employee ownership through privatization of state industries. In addition, a case study of Whole Foods finds employees own 19% of the company, employee decision-making power is high using a team approach, and no one in the company can make a salary of more than 10 times the average wage. Maybe these factors help account for the firm’s phenomenal growth?
A new study by Georgeson & Co finds companies with poison pills receive higher premiums. (see Businesswire) “Georgeson noted that support for shareholder-sponsored proposals to rescind poison pills (typically they also ask to put rights plans to binding votes) has been increasing gradually for the last 11 years, despite a series of studies demonstrating that poison pills are associated with increases in shareholder value in binding contests. (The ISS Friday Report, 11/21)
The IRRC’s report “Disclosure of Environmental Information about S&P 500 Companies’ Non-U.S. Operations” by Alison Cassady is available on their internet site.
Litman/Gregory set up a fund run by 6 fund managers where each manager was limited to 15 stocks. Masters Select Equityhas outperformed each of the individual funds run by its managers. Year to date returns as of the end of November are 27.8%. Writing on the results, Roger Lowenstein indicates “over-diversification is a sign of a manager investing so as to minimize short-term volatility at the expense of long-term results.” (WSJ, 11/20, p. C1) Now, what if the fund shifted the expense which would normally go to more stock picking and instead focused on monitoring, acting as an owner?
The NACD released its 1997 Corporate governance Survey. Among the findings: 84% agreed majority of boards should be independent, about half of the CEOs would consider formal limitations on outside board participation, the number of firms with mandatory retirement for directors fell from 53% to 43%. Copies of the survey are available by calling 202-775-0509. The Corporate Governance Forum of Japan released its report on reform calling for cutting the number of directors, reduce conflicts of interest and establish renumeration, audit and nomination committees with a majority of independent directors. Copis of the report can be obtained from Ariyoshi Okumura at [email protected]. (IRRC’s CG Highlights 11/7/97)
Repricing underwater options is the major issue for State of Wisconsin Investment Board this year, according to a report by IRRC. IRRC analyzed 326 new exec stock option plans and found about 1/3 allowed repricing. IRRC also announced a partnership with Russell Reynolds Associates to produce a series of reports on global governance practices. (IRRC’s CG Highlights 10/31/97)
At the conference commemorating the 25th anniversary of IRRC, Stephen Davis of Davis Global Advisors, noted that France and South Africa have recently adopted corporate governance codes and Spain, Belgium and India will soon follow. “He noted that 40% of the shares of French public companies are held by U.S. investors; 40% in the Netherlands; 40% in Sweden and 16% in Britain. Jella Benner-Heinacher of the German shareholder group Deutsche Schutzvereingung fur Wertpapierbesitz noted they are struggling to reduce the number of members on supervisory boards and barring directors from sitting on supervisory boards at competing companies. (Investor Relations Business, 11/17/97, e-mail:[email protected])
Corporate Reputation Watch, a recent study by Yankelovich Partners for Hill & Knowlton, found employee and internal communications (37%) was the top mission of corporate communication programs. Audience/constituency information and outreach was cited second (32.5%) and managing corporate reputation third (22%). (Investor Relations Business, 11/3/97, e-mail: [email protected])
Accountability of individual board members promises to be the major corporate governance issue next year, according an article in the December 8, 1997 issue of Business Week. The name of the game is “CIAO;” commitment, independence, attendance, and ownership. The Teamsters publish an annual list of the worst directors; the Council of Institutional Investors (CII) has its list of “director turkeys.” According to Patrick McGurn of ISS, 3 years ago, roughly 60% of companies handed out pensions to directors. “Today, because of activists and investors who believe pensions discourage directors from challenging management, that number has dropped to about 15%.” Attendance, conflicts of interest, and owning a significant amount of stock will be among the tests for the coming “just vote no” campaigns.
In the same issue Disney, AT&T, H.J. Heinz and Archer Daniels Midland have won the dubious distinction of being named the worst boards in America in BW’s second annual analysis of the state of corporate governance. Kudos went to Campbell, General Electric, Compaq Computer, and IBM. “The best 25 boards in BW’s 1997 ranking boasted annual total shareholder returns of 27.6% over the past five years.” “The 25 worst boards earned average annual returns of only 5.9%.” In addition, Terence Gallagher tells us what a VP of Corporate Governance does.
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The Detroit News’ fourth annual Corporate Report Card for putting shareholders first gave the nod to Lear Corp. of Southfield and MCN. “The best public companies delivered strong financial performance and stock growth while practicing a corporate creed that enriched shareholders before executives and directors.” They also list the worst MI firms and include includes a primer on what to look for in corporate proxy statements and annual reports. (detnews.com)
U.S. Trust Company’s survey of senior corporate executives finds their three biggest worries are that “too much of their net worth is tied up in company stock; too much pressure is on them to hold large quantities of it; and too much of their pay is linked to its price.” (SF Business Times, 11/24)
SEC to meet with American Bar Assn, AFL-CIO, American Society of Corporate Secretaries, Business Roundtable and the Interfaith Center on Corporate Responsibility, among other in NYC on 12/1 to try to nail proxy rule revisions. (LA Times, 11/27)
The SEC backed off proposed regulations to make it more difficult for shareholder resolutions to be put to a vote. According to WSJ the pressure came from a private meeting between Sweeney and Levitt as well as the coalition, organized by the Council of Institutional Investors and the Social Investment Forum. As I understand the issues, WSJ characterized them realistically as they are viewed by each side. However, they end the article with, “under the new proposals, the agency would open the door to shareholder resolutions on such issues as hiring policies in foreign factories and adoption of Labor department recommendations on worker-friendly practices. Even so, the coalition says it doesn’t go far enough.”
I believe many in the coalition would disagree with this characterization. The SEC “proposes to narrow and clarify the operation of rule 14a-8(c)(5), which is often called the ‘relevance’ exclusion.” They do so, in part by removing the current exception for “otherwise significantly related” proposals. The SEC indicates this exception “frequently overshadows the 5% standard.” Yes, the SEC proposes to lower the 5% standard to “the lesser of either $10 million in gross revenues or total costs (whichever is appropriate), or 3% of gross revenues or total assets (whichever is higher).” However, since the “otherwise significantly related” exception has overshadowed the 5% standard on the very proposals of concern, the removal of this current exception would “overshadow” the proposed 3% formula. I don’t think it is reasonable to assume the proposal doesn’t “go far enough.” For the coalition, the proposal is a reversal, not a too small step in the right direction.
Independent reports from the coalition indicate the request for extension of the comment period to Jan. 2nd came from the corporate side. Ira Millstein and Harvey Goldschmid have been asked to “help moderate a possible compromise.” Yet, except for the reversal of Cracker Barrel, anything else contained in the proposal that might become part of new regulations would be a net loss to shareholders. While everyone might have the greatest respect for the team’s mediating skills, it’s hard to see how a compromise will be reached.
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The AFL-CIO released tough new Proxy Voting Guidelines. Voting fiduciaries “must consider” factors such as independence, excessive compensation, attendance, etc. the basic dilution cap is set at 10% but the guidelines allow further dilution if plans are broad-based. Importantly, it urges funds to insist that managers who have been delegated voting authority “fully disclose and report their voting records” on every proxy cast on behalf of the trustees, providing written justification on controversial proposals. An ISS report expects increased “withhold” votes, “higher votes for shareholder proposals seeking cutting-edge boardroom reforms, more robust opposition to stock option plans, and higher voting support for a number of social issues.”
We’ve added a review of M. Blair and L. Stout’s innovative “A Theory of Corporation Law as a Response to Contracting Problems in Team Production” to our Bibliography. The paper argues that the corporation is best seen “not as a nexus of implicit and explicit contracts, but as a decisionmaking process to which many and varied individuals submit themselves by giving up control over their firm-specific investments to an independent third party in hopes of sharing in the economic rents that can flow from team production.”
Tobacco opponents filed to win approval of a resolution urging CREF to divest its $1.8 billion in tobacco investments. CREF is the $119 billion variable annuity component of the $211 billion TIAA-CREF pension system. 27.2% voted for the resolution, 67.4% against, and 5.4% abstained.
Graef Crystal says envision a scenario where Michael Ovitz was driving home after being fired from Disney. The back seat is stuffed with $80 million in severance pay. “The car phone rings and Michael Eisner is on the line. He says: ‘Come back. I need you after all. We’ll sign a brand new contract and you can keep the $80 million.’ Well, for all practical purposes, that’s the deal Oxy’s board seems to have made.” (see Triangle Business Journal)
A Wall Street Journal article indicates ISS’s influence is growing. It cites the battle for ITT Corp. and “pilgrimages” made to Bethesda by Hilton’s CEO Stephen Bollenbach, Starwood Lodging’s Barry Sternlicht, ITT’s Robert Bowman and others. ISS was also credited with helping topple the board of Student Loan Marketing Association in the summer and influencing the outcome at Rexene Corp., Great Western Financial Corp., and Kansas City Power & Light Co. Started in the 1980s by shareholder activist Robert Monks, ISS provides record-keeping and/or proxy advise to 400 institutional investors.
ISS has released its “The 1997 Proxy Season: The Year in Review” which contains 66 pages summarizing the trends: growing ranks in shareholder activism, a surge in proxy contests, renewed focus on directors and boards, continued interest in executive and director compensation, binding bylaw amendments and an increased use of shareholder activism by socially conscious investors. To obtain a copy call Joseph Sargent at (301) 718-2255 or e-mail: [email protected].
Director’s Monthly, NACD’s publication contains a fascinating article by Dorothy K. Light on the changing role of the corporate secretary under “empowered boards.” What a study in contrasts! The September issue also reports on a study by Harvard professors Kotter and Heskett which found that firms with a strong corporate culture outperformed a control group. Revenue grew 4 times faster, job creation 7 times higher, and stock price 12 times faster.
According to IRRC, 34 shareholder resolutions opposed by management won majority votes this year, up from 23 last year and 22 in 1995. The two most popular measures were anti-pill and repealing classified boards. Despite wins last year, most of the targeted companies have not implemented changes; this is expected to lead to more binding bylaw amendments next year.
The European Bank for Reconstruction and Development (EBRD) released its Transition Report for 1997 calling on governments across the former communist world to create new laws and market institutions that boost competition and crack down on corruption. Shareholders must be allowed to press for changes — including the sacking of its managers. (see Radio Free Europe)