March 2008

Friday Humor

Once upon a time there was a shepherd looking after his sheep on the edge of a deserted road. Suddenly a brand new Jeep Cherokee screeches to a halt next to him. The driver, a young man dressed in a Brioni suit, Cerrutti shoes, Ray-Ban glasses, and a YSL tie gets out and says to the shepherd “If I can guess how many sheep you have, will you give me one of them?”

The shepherd looks at the young man, then looks at the grazing sheep “All right.” The young man parks his car, connects his notebook and mobile, enters a NASA site, scans the ground using his GPS, opens a data base and 60 Excel tables filled with algorithms, then prints a 150-page report on his high-tech mini-printer. He then turns to the shepherd and says “You have exactly 1586 sheep here.”

The shepherd answers “That’s correct, you may have your sheep.” The young man picks one and puts in the back of his jeep.

The shepherd looks at him and says “If I guess your profession, will you return my sheep to me?” The young man replies “Yes, why not.”

The shepherd says “You’re a KPMG consultant!” “How on earth did you know?” asks the young man. “Very simple”, answers the shepherd.

“First, you came here uninvited; then, you charged me a sheep to tell me something I already knew; and, worse, you obviously don’t understand anything about what I do, because you took my dog!” (The Shepherd and the Consultant,Consulting Humor, Hugh Latif & Associates) Yes, I updated the name of the consultant to bring the joke up-to-date.

ESG Trends and Rule 14a8

At Blog, Broc Romanek posts on “The Rise of ‘Social’ Proposals.” Support is moving from single to double digits. He cites a recent webcast by Pat McGurn of RiskMetrics and a prior Grant Thornton survey. Two figures that struck me, which I didn’t note when the survey was released were: “72% of respondents believe that government should regulate companies for their effect on the environment and 56 percent said companies should be regulated for their effect on human rights and labor practices.”

While, in some sense, those figures sound high, it makes me wonder about the other 28% and 44%. Do they think companies should be able to dump toxic materials directly into our lakes and rivers? Do they think companies should be able to hire slave labor and children under six? If there were no government regulations, is there any doubt at least some companies would revert to such practices? Why is anarchy so attractive and the role of government so belittled?

On a related note, the March/April edition of The Corporate Board carries a conversation with Stephen Bainbridge, the influential USC law professor who blogs on law, governance and politics. Asked how he would like to see the proxy access issue resolved, Bainbridge responds, “I would like to see companies have the option to opt out of the whole shareholder proposal process. That is one thing the SEC considered when it last looked at this issue in 2003. Why not let companies put into their articles of incorporation that they will not be subject to SEC Rule 14a8? This is an area I would like to see the SEC move on. It would promote flexibility and choice rather than a one-size-fits-all approach.”

While I also oppose a “one-size-fits-all approach,” allowing companies to opt out isn’t the answer. Most shareowner resolutions are advisory. They give management and the board a heads up on important shareowner concerns and also provide a good measure of how widely those concerns are shared by all shareowners who take the time to vote. While I have always encouraged my friends in the SRI community to focus more on the key issue how board members get nominated and elected, there is a continuing role to be played by advisory votes on environmental and social issues.

Where the SEC should get away from a “one-size-fits-all approach” is in the area of proxy access. The next proposal should forgo “triggers” and “thresholds” beyond what are required for other resolutions. Let the resolutions themselves outline the desired procedures. Different companies warrant different approaches to access. Let the shareowners decide.

Nothing Ventured, Nothing Gained

When the Fed bails out a Wall Street bank in danger of collapsing or when government (under the Democrats’ bill) guarantees the price of securities that have an unknown amount of bad debt wrapped up in them, the government should retain a stake. That way, if Bear Stearns stock eventually bounces back, or if JP Morgan shows a big profit on its purchase of Bear, or if buyers of any securities guaranteed by the government make a profit – whatever the upside gain turns out to be — taxpayers that are footing the bill for potential losses get some of that money. And these upside profits cover us in cases where the gamble turns out bad and we’re left holding the bag. (The Biggest Bailout in History: And Why American Taxpayers Should Get Some of the Upside, Robert Reich, 3/24/08)

footnoted is always great entertainment and insightful. Although not as widely read as Gretchen Morgenson, companies still generally want to avoid mention. In recent days, footnoted raised the issue of financial counseling. “While companies often claim to benefit when executives get professional help with personal finances (the theory being that they spend less time fretting about their tax returns and more time fretting about the company’s performance), this would seem equally true if managers paid for the advice out of their own pockets. And then they could spend less time fretting about perk-watching bloggers.”

Steven Loranger of ITT, Manitowoc’s former CEO Terry Growcock, Sanjay Khosla of Kraft Foods, and Dick Parsons of Time Warner are fingered… although I suspect the list could have gone on and on. Other fun facts: Marvel Entertainment directors appear to be better paid than WalMart’s and Nicholas D. Chabraja of General Dynamics is entitled to nearly $8.8 M if he is terminated for cause. Of this figure, $8.3M is “in lieu of corporate aircraft usage, reimbursement for office space and administrative support, reimbursement for moving expenses and applicable tax gross up.” At least it is less than the $66M for termination without cause.

Director of Internal Audits Wanted

Rancho Cordova, CA: Applies knowledge of Sarbanes Oxley and other corporate governance requirements to assist in the Company’s compliance with such requirements as prescribed by the National Association of Insurance Commissioners (NAIC), the Institute of Internal Auditors (IIA), and the American Institute of Certified Public Accountants (AICPA).

Companies Resist Proposals

Issuers had challenged 33% of all governance-related proposals filed this year, compared with just 20% in calendar 2007. Challenges by issuers also are more likely to be successful this year than last. For example, 48% of last year’s requests for no action were granted, while this year’s figure so far stands at 69%, according to RMG’s analysis. (Spike in No-Action Requests Worries Investors, Risk & Governance Blog, 3/26/08)

Another Reason for Directors to Hold Stock

In Schoon v. Smith, the Delaware Supreme Court held that a director who was not also a stockholder lacked standing under Delaware law to assert derivative claims on behalf of the corporation he served. The Court held that derivative standing would be recognized only where necessary “to prevent a complete failure of justice.” (Delaware Supreme Court Denies Director Standing To Sue, Blog, 3/26/08)

CalPERS Seeks Information Officer

The CalPERS Office of Public Affairs is recruiting to fill an Information Officer I (Specialist) position to provide media and communications support for CalPERS investment and corporate governance programs. Typical duties include responding to news reporters; preparing news releases, speeches, newsletter articles, op-eds, marketing materials, publications, and other communications; coordinating press conferences and event planning. Prepares written material pertaining to CalPERS investment program for CalPERS Annual Financial Report, quarterly constituent newsletter, internal employee newsletter, and other publications. Serves as project manager for CalPERS Annual Investment Report on-line. Strong writing, organization, analytical, project management, and communication skills and experience required. At least three to five years’ media experience required. Financial background a plus.

Switch to E-Proxy May be Gradual

A survey of 482 companies by the National Investor Relations Institute found 56% used or plan to use e-proxies in 2008. Of those, 22% plan a full switch to electronic distribution but nearly a third plan to offer both print and online materials. The rest are undecided. (Pulp Fiction, CFO, 3/1/08)

Cost savings favor e-proxy but they also reduce voting by retail shareowners. Votes have plummeted from 30-40% of retail shareowners to a reported low of about 4%. Those who do vote may be more likely to be activists, in favor of resolutions challenging management. For that reason, I think many companies may hold back on full implementation until a reasonably robust system allowing proxy assignments is in place. (see Fill Empty Votes, Glyn Holton’s, Investor Suffrage Movement, and Mark Latham’s Proxy Voting Brand Competition) The question is, who’s working on it other than me? If you have some facts and figures or ideas in this area, please e-mail James McRitchie.

Bear Stearns Rule Waiver?

Rule 312.03 of the NYSE Manual requires shareowner approval of a 20% acquisition. Yet, JP Morgan is acquiring 39.5% without shareholder approval. Concerned? (NYSE, Bear Stearns and the Concerns About Lax Enforcement,3/25/08)

Dialogue Needed

Pioneering boards are reducing tensions by opening direct channels of dialogue between directors and investors according to a new policy briefing by the Millstein Center for Corporate Governance and Performance at the Yale School of Management. The report proposes that the SEC develop a market-wide safe harbor for board-shareowner communications on corporate governance issues to help save corporates unnecessary legal fees and reduce the risk of sanction under Reg FD.

Talking Governance is co-authored by Stephen Davis, project director of the Millstein Center, and Stephen Alogna, senior manager of Deloitte & Touche LLP Corporate Governance Services and visiting research fellow at the Center. The report outlines methods of interaction that companies are experimenting with, ranging from open shareowner meetings with unfettered access to the board to one-off responses to shareowner inquiries. (Board-Shareholder Communication is Next Frontier in Governance, Sarbanes-Oxley Compliance Journal, 3/24/08)

Women’s Path to Board Seat

Volunteer work, director-training programs, public speaking, networking and getting your name in the business press are common routes to the boardroom. Women held 14.7% of board seats at Fortune 500 companies in 2005, up from 13.6% in 2003 and 6.9% in 1995, according to a report from Catalyst.

Women Corporate Directors, a global New York-based group, runs three to four networking events a year in New York, Boston, Washington, Chicago, Atlanta, and starting this month, London. Though its 200 members are mainly women directors at public and private companies, the group welcomes women who have served as a director on a large nonprofit board, as well as women who are candidates for a board seat at a large nonprofit or public or private company. (Path to the Top: Strategies For Women Seeking a Board Seat, WSJ, 10/12/06)

Corporate Responsibility Facts

94% of company executives think a Corporate Responsibility strategy can deliver real business benefits. 20% of companies with global supply chains have a supply chain labour standards policy. 80% of Japanese companies publish Corporate Responsibility reports, compared with 71% of British, 32% US, 23% Australian and 18% of South African companies. 15% of funds invested in Europe have some kind of ‘Socially Responsible Investment’ (SRI) criteria. It’s around 10% in the United States, where resolutions on social and environmental issues brought by shareholders at AGMs have increased 49% over the last 10 years.

On the flip side, half of all world trade passes through tax havens so that corporations can avoid paying tax. At least $11 trillion of assets are held offshore, over a third of the world’s annual GDP. Revenue losses to developing countries from corporation tax avoidance are at least $50bn, around the same as they receive in annual aid flows. CEOs of large US companies make as much money in a day as an average US worker makes in a year. The top 20 private equity and hedge fund managers pocketed an average $657.5 million each in 2006. (Corporate Responsibility – The Facts, New Internationalist, 12/07)

Screened for Poor Governance

The Co-operative Insurance Society claims to be only the fund management group in the UK to “fully embed” environmental, social and governance issues into its decisions about which stocks to buy and sell. The Guardian reports CIS refused to invest in six major companies last year because of their stance towards corporate governance and has taken a tough line on at least three others over boardroom issues.

Its exclusion list contains retailer French Connection, publisher Euro-money Institutional Investors, home shopping group N Brown, cruise line Carnival, technology company Amstrad and – until recently -Asian miner Kazakhmys. Screening appears most likely where a dominant shareowner pose a threat by precluding discussion with other shareowners. Willingness to engage has come to the top. (Co-op refuses to invest in six companies, 3/24/08)

When Shareholders Attack

“Three things seem certain in 2008: history-making U.S. presidential race featuring either the first female or the first black candidate, an Olympic Games surrounded by pageantry and police-state tensions in Beijing, and some seriously ugly annual shareholder meetings.” That’s the opening sentence from When Shareholders Attack by Jeff Nash in Financial Week, 3/24/08. Nash walks us through what to expect at eight companies that topped experts’ must-see lists of shareowner meetings.

Well written and worth the read. I’ll be rooting for CTW, Ceres, SEIU, and Robert Monks. I’m still not sure about moves by Nelson Peltz, Carl Icahn, Children’s Investment Fund and others. Fortunately, I won’t have to spend a lot of time reading the proxy materials, since I don’t own any of the issues Nash discusses. See also, Trouble at the Top-Proxy Fights 2008, Nightly Business Report, 3/21/08, with several intersting interviews on upcoming proxy fights and the issues involved.

IROs Fight Short-Termism

A recent survey by National Investor Relations Institute (NIRI) of companies that recently discontinued financial guidance found that 28% stemmed from IRO input. Dean Krehmeyer argues that more companies are engaging in real actions, like postponing R&D—not just accounting tricks—to meet earnings projections. See Breaking the Short-Term Cycle, which he co-authored. Recommendations include:

  1. Reform earnings guidance practices: All groups should reconsider the benefits and consequences of providing and relying upon focused, quarterly earnings guidance and each group’s involvement in the “earnings guidance game.”
  2. Develop long-term incentives across the board: Compensation for corporate executives and asset managers should be structured to achieve long-term strategic and value-creation goals.
  3. Demonstrate leadership in shifting the focus to long-term value creation.
  4. Improve communications and transparency: More meaningful, and potentially more frequent, communications about company strategy and long-term value drivers can lessen the financial community’s dependence on earnings guidance.
  5. Promote broad education of all market participants about the benefits of long-term thinking and the costs of short-term thinking.

See IROs Push to End Guidance, Business Roundtable: Institute for Corporate Ethics

Kowtow to Management

J. Robert Brown reviews Postorivo v. AG Paintball, Civ. Act. No. 2991, Del. Ch., Feb. 29, 2008, and finds straightforward evidence that any real danger of removal comes from management, not shareowners. “Postorivo shows what happens when a director is on the outs with management.  The board removes him.  Moreover, the case illustrates the ability (or inability) to seek recourse.  A director seeking to challenge removal must show that the board lacks independence, a claim unrelated to the alleged offense and one that confronts the usual evidentiary hurdles at the pleading stage.” (Removing a Director and Delaware Law: Postorivo v. AG Paintball, 3/24/08)

Cheers to Mobius

WSJ reports the president of Templeton Asset Management, has been speaking publicly against takeover offers for companies in his portfolio, urging fellow shareholders to demand higher prices and more disclosure with mixed success. “Mobius said investors are handicapped in struggles against management because U.S. law prevents some mutual-fund managers from signing agreements to coordinate action.” (Mobius Plays Activist — and Defense, 3/24/08)

Mobius’ approach is more responsible than most, but also more expensive. Regulators should take whatever steps necessary to encourage such activism in other funds by reducing the cost of coordinated action.

Money, Timing & Roles

I attended the 3/20/08 Silicon Valley Chapter NACD event on Venture Capitalists on Boards, the Implications & Opportunities. It was an interesting discussion between Ron Jankov, CEO of NetLogic Systems, George Pavlov, Partner, Tallwood Ventures, Robin Graham, Partner, ThinkEquity; formerly Managing Director, Needham Investments, and moderator Rich Moran, Partner, Venrock, and board member of the Silicon Valley Chapter of NACD…with plenty of participation from a well-informed audience.

One bit of advice was, “choose your VC partner well.” While you can divorce your spouse, you’re stuck with your business partner. Reverse due diligence is strongly advised. Everyone also agreed the best startup boards have a diverse set of skills in a small group, generally around five board members. Lots of good discussion around building great companies, rather than focusing initially on liquidity. They seemed to have different experience around the issue of “lead director,” with Moran saying he often found the VC with the most money took the lead, while Jankov found the role shifted by topic and Pavlov said in most of their companies the representative from Tallowood Ventures served as chair. One current issue is that VCs have less exit opportunities through IPOs and M&As but they don’t seem to be having any problem raising money for their own funds.

Joe Dues, of Think Equity (pictured on the right), wasn’t on the panel but did a good job of summing up a few salient points in a brief podcast. Of course, another great benefit of such venues is the opportunity to network. This meeting didn’t disappoint. I’m already discussing possible joint activities with Tom Wohlmut of Wohlmut Media Services and Larry Cabaldon, of DHR International.

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CEO Pay: The Power of Disgust

Abstract: “The debate over excessive CEO compensation has roiled scholars, corporations, and the government for a considerable time. This article argues that a singular focus on regulation is mistaken, and contends that an approach based on nonlegal sanctions is the answer. Agencies like the New York Stock Exchange (NYSE) can resort to social sanctions with tools currently at their disposal at a relatively low cost to change the behavior of CEOs and corporate directors. Shame sanctions, as they are called, offer a nonlegal route to curbing exorbitant CEO compensation. Increased disclosure of executives’ compensation agreements will trigger emotions like shame, guilt and embarrassment. This in turn has the potential to influence financial behavior and cause corporations to be more likely to heed the concerns of the public and shareholders vis-à-vis executive pay.”

In Shame Sanctions and Excessive CEO Pay, Delaware Journal of Corporate Law (DJCL), Vol. 32, 2007, Sandeep Gopalan argues, “Legislative attempts ought to be restricted to facilitating the application of social sanctions by creating conditions, primarily in terms of mandating the disclosure of relevant information in a comprehensible format. Shaming can decentralize the enforcement of the norm and facilitate investor protection without the need for regulatory expenditure. There is considerable evidence that greed is viewed unfavorably in financial situations and the deployment of emotions like disgust can achieve constraints on excessive CEO pay.”

Do the Math

Are shareowners math phobic, are companies trying to disguise links between CEO pay and performance or is CEO compensation just inherently complex? These are a few of the questions raised in (New Math) x (SEC Rules) + Proxy=Confusion (WSJ, 3/21/08)

“Can even the executives figure out what they have to do to get these awards?” asks Carol Bowie, head of corporate-governance research at RiskMetrics Group. Scott Zdrazil, director of corporate governance at union-owned Amalgamated Bank, is quoted saying, “If you can clearly understand the algebra involved, it passes.” Give your company’s disclosure the “smell test.” Then be prepared to have compensation committee directors run through the formula at your annual shareowner meeting.

GMI’s Pay Alignment Ranking (PAR)SM is one system that compares compensation changes for the CEO and Total Shareholder Returns within specific market sectors for most of the US companies. One complicated example of compensation in the WSJ article was Applied Materials. GMI’s latest Rating Report for Applied Materials includes a Pay Alignment Ranking of 64.0 for fiscal 2007, which is considered “above average” (PARs range from 0 to 100).  Greater complexity in filings is likely to push sales of such products.

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The Policy Exchange

RiskMetrics created a new initiative. “The Policy Exchange features corporate governance policies and commentary from institutional investors and investor groups, as well as the governance principles of corporate issuers. The exchange breaks down participants’ U.S. policies into six issue areas and more than 100 sub-categories, allowing users to uniformly compare and contrast the views of participants. By enabling access to a diverse range of voices on governance issues, the Policy Exchange provides a unique platform for advancing corporate governance dialogue.”

The Exchange promises to be a great on-stop shop to compare “best practices” and policies adopted by leading players in corporate governance. At its start, the Exchange only has five participants. (CalPERS, Connecticut Retirement, Domini, Morgan Stanley, and TIAA-CREF)

For years, we attempted to keep lists of online policies. It was relatively easy in 1995 but we largely gave up as Internet postings exploded. We now point readers to other compilations. (see Articles, Documents and Papers Online) We’re delighted to add The Policy Exchange and hope we can eventually suspend our own occasional scouring of the web for such documents altogether.

Shareowner Activist Promotion

Eric Jackson, the consummate “new media” shareowner activist, is interviewed in Eric Jackson: shareholder activist talks up social media. (, 03/19/2008) His new fund, Ironfire Capital LLC, was new to me. He explains that “the quality of ideas matter more to other shareholders than the quantity of shares owned.” .Hard costs for his “Plan B” for Yahoo! were a $30 webcam and a couple of JetBlue tickets to California. He is critical of a “color by numbers” approach. “No matter the company, their solution is: (a) put the company up for sale, (b) do a dividend to shareholders, or (c) do a stock buyback.”

“The best activists — and the ones who will do well in this environment and moving forward — will come up with recommendations that suit the situation and obviously promise to deliver value.” His next target is GeoEye Inc. More on that move at his blog. I wonder, would other activists like Andrew ShapiroRichard BreedonCarl Icahn, or evenWarren Buffet do better if they honed their YouTube and wiki skills?

Let’s See if We Get Caught: An Unworthy Strategy for CalPERS

The Office of Administrative Law determined several CalPERS election rules were unenforceable “underground regulations.” (see 2007 OAL Determination No. 1) In response, CalPERS now proposes a rule to authorize setting the number of signatures required in nomination petitions “at a noticed public meeting,” rather than through the legally required APA process. Staff advised the new language would give the Board “flexibility.” The legality of the process used in changing the number of signatures required in future elections could be addressed after the fact, if and when objections are raised. See McRitchie’s March 18, 2008 comments.

Of course, it is also possible that CalPERS could get caught early. The Office of Administrative Law must now review and approve the rulemaking. They should reject it because CalPERS has no legal authority to exempt future changes, such as the number of nomination signatures required, from the legally required rulemaking process.

It wasn’t a total loss. In response to comments by James McRitchie and other PERSwatch members (testimony and prior written comments), CalPERS pulled back on proposed rules that would have put CalPERS members at risk for identity theft by requiring members to include up to eight digits of their Social Security Number on nomination petitions. Only 4 digits will be required in future elections. See proposed election rules.

However, essentially waiting to see if they get caught isn’t a good governance strategy, especially for a fund that has been so Instrumental in raising corporate governance standards. Years ago, the courts ruled CalPERS must comply with the Administrative Procedure Act. It’s the law; CalPERS should follow it.

Money, Timing & Roles: VC’s on Boards, the Implications & Opportunities

Thursday, March 20, 2008
Time: 7:30 – 9:30AM
Location: WSGR
The role of all corporate directors is complex.  A board with venture capitalists on it can create even more complexity and delicate dynamics.  Are the VC’s only focused on early liquidity and not building the company for the long-term?  Does a VC who sits on a dozen boards have time to be an effective director? Does a VC only represent his investment partnership or all of the shareholders, including the common shareholders who don’t enjoy the preferences that the “money” investors do who hold preferred stock?   As “powerful” directors, do they play fairly?  Do they prefer merge-outs rather than IPOs because their shares enjoy a multiple of cash-in as a preference?  Does the role of a VC director change when the company goes public? De facto if not de jure?  These and other issues will be exploered by an experienced panel at this Silicon Valley NACD event.

Shareowner Forum on Verizon Communications

On March 27 in New York City, the New York Society of Security Analysts (“NYSSA”) will host a shareowner’s forum “Finding Out How Verizon Executives Are Placing Their Bets,” focusing on Verizon’s controversial “FiOS” strategy – investing $20+ billion in a fiber-optics system as a foundation for competitive advantage. A panel of experts in telecom industry analysis and executive compensation will guide meeting participants through the process of obtaining the information they need to find out whether the company’s managers are betting their own money alongside shareholders. For more information and to make the required reservation, see Gary Lutin’s site, Highly recommended!

Shareowner Victory in Germany May Contribute to Rule Change

TUI, Europe’s biggest travel company, will yield to John Fredriksen, a Norwegian shipping tycoon, and Guy Wyser-Pratte, an American investor, who both demanded the separation of Hapag-Lloyd, its container-shipping division, from the rest of the firm. However, The Economist reports, “Corporate Germany is fighting back. Big companies are pressing the government in Berlin and BaFin, the financial watchdog, to strengthen their defences by sharpening the definition of “acting in concert” in Germany’s takeover law. The clause stipulates that if shareholders accounting for more than 30% of the voting rights are found to act in concert to push their agenda, they are required to launch a full takeover of the company or face a fine. (Raising their voices, 3/19/08)

Spitzer’s Fall Coincidental to Bailout?

Corporate Watchdog Radio features investigative journalist Greg Palast, who notes the coincidental timing of revelations of former New York Governor Eliot Spitzer’s hiring of a prostitute on the eve of Federal Reserve Chairman Ben Bernanke’s $200 billion bailout of banks implicated in the subprime meltdown. While Spitzer was paying an ‘escort’ $4,300, Federal Reserve Board Chairman, Ben Bernanke, was handing over $200 billion in a tryst with mortgage bank industry speculators.

According to Palast, Spitzer was set to unveil plans to pursue prosecution of the banks for predatory lending that is illegal under New York State law, where most of the banks are headquartered, according to Palast. So instead of being busted by Spitzer for illegal lending practices, the banks behind the subprime mess were rewarded with a fifth of a trillion dollars, printed by the US government.

My question, If Palast is correct, why haven’t we heard anything about David Paterson New York’s new governor, taking up the charge. See also, Eliot’s Mess, 3/14/08.

Most Director Pay at Reasonable Levels

The Corporate Library, reports that publicly traded companies in the U.S. on average spent just over $1 million to compensate all its board members in 2006. Nearly a third of the 3,059 companies in the study paid out less than $500,000 in compensation for the full board. The payments to directors included cash, equity awards and changes in the value of pension and non-qualified deferred compensation amounts.

According to the study, 73% of S&P 500 companies reported director stock ownership guidelines in proxy statements filed by November 2007. Typically, guidelines call for directors to hold a multiple of their annual retainers as company stock. Most companies require directors hold stock valued at three to five times their annual retainer. The guidelines usually include a specified amount of time for the directors to amass a certain number of shares.(Directors’ cut a lot lower than executives’ pay, survey reveals, Financial Week, 3/18/08)

Mission-Related Investing Guide

Rockefeller Philanthropy Advisors has published “a comprehensive, practical guide that translates the concepts, ideas and philosophy of Mission-Related Investing (MRI) into useable policies and practices for foundation trustees.”

“Foundations in the United States have $600 billion in their endowments and can unleash more of their resources to positively change societies today. As a result, mission-related investing is an idea whose time has come,” said Doug Bauer, senior vice president of Rockefeller Philanthropy Advisors and a co-author of the guide with Steven Godeke, a noted expert in the field. “Our goal is to provide the knowledge and tools that enable foundation trustees and executives to be energized by the opportunities and outcomes that MRI makes possible, and to move philanthropy into a new leadership position for effecting change,” says Godeke.

Broadly defined, mission-related investing encompasses any investment activity designed to generate a positive social or environmental impact in addition to providing a financial return. Philanthropy’s New Passing Gear: Mission Related Investing outlines how foundations can:

  • Ground a strategy within their values and mission;
  • Understand various catalysts for MRI;
  • Structure a policy discussion in the boardroom;
  • Integrate MRI into existing program and investment processes;
  • Link investment asset allocation with program goals;
  • Determine the appropriate MRI investment tools and strategies;
  • Select program and investment consultants;
  • Organize their board, staff and consultants to find, evaluate, approve and execute MRI investments;
  • Monitor investment performance of an MRI portfolio; and ultimately,
  • Integrate social returns into the ongoing investments and program decisions of the foundation.

Third Party Liability

With highly specialized consulting firms starting up with increasing regularity, many companies depend on relationships with third parties to achieve their business objectives.

But these relationships expose an organization to risk in the areas of corporate ethics and compliance. How do companies deal with extending ethics and compliance requirements to third parties? The Conference Board released a new report entitled “Finding the Right Balance: The Risks and Rewards of Third Party Ethics Programs,” based on a survey of 169 companies conducted by The Conference Board and the Ethics and Compliance Officer Association.

Sustainable Certification

Companies that pride themselves on being sustainable have a new badge they can present to show their commitment to the environment, society, and corporate governance. B Labs, a non-profit based in Berwyn, PA, has created a third-party certification for “B Corporations.” More than just supplying a sustainable product or service, B Corporations “create a public benefit” as an integral core of their business plan. (B Corporations: Verified Sustainability,, 3/13/08)

Whole Foods Proposals Gain Momentum

Shareowners of Whole Foods Market Inc. rejected a proposal separate roles of chairman and CEO by a vote of 27% in favor, 73% opposed. That’s 7% more in favor than a similar proposal last year. Share price has 47% in 2006 and 2007, and about another 16% this year. “The advisory proposal by the board of pensions of the United Methodist Church wouldn’t have necessarily stripped Mackey of either job — it called for the duties to be separated whenever possible but not if that meant breaking contracts, said the WSJ.

Proxy Governance and ISS recommended in favor of the split, noting that Mackey appeared to be overly dominant. The vote on my resolution to require a majority vote for directors received 12% for and 88%against, a significant vote even though the company had already adopted most of the substance of the proposal through a bylaws change. (Disclosure: James McRitchie, publisher of is a shareowner in Whold Foods.)

CalPERS Openings

CalPERS is recruiting for an Investment Officer III to develop and assist with the implementation of a strategic plan that puts into effect best practices for the governance of both developed and emerging market exchanges. Salary: $7,794 – $9,023/mo. Information. They are also looking for an Office Technician to assist with administrative functions within the Corporate Governance Program…a good entry level position while finishing up university coursework. Salary: $2,686 – $3,264/mo. Information.

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2008 Proxy Season Preview Webcast

RiskMetrics (ISS) has been holding a series of webcasts, What You Need to Know for 2008. Click here for to replay the 2008 North American Proxy Season Preview, their latest in this excellent series. ISS identifies four top influences as the Credit Crisis, 2008 Election Year Impact, Global Convergence of Standards, and Director Election Reforms. The top 10, presented in reverse David Letterman style, were as follows:

  • #10 New Governance Issues on the Horizon: credit crisis, reimbursement of expenses, succession planning
  • #9 New Social & Environmental Issues Loom: product safety, healthcare principles, Burma/Sudan
  • #8 Calls For Independent Chair May Increase: ISS raised the bar a little higher on lead director alternative
  • #7 Compensation Disclosure Sheds Light on Poor Pay Practices: driven in part by SEC report cards
  • #6 Key ESG Issues Gaining Traction: climate change, political contributions, EEO, sustainability. Resolutions are getting higher votes and more engagement
  • #5 Accountability Is Taking Hold: classified boards, poison pills, right to call meetings, M&A, activism and proxy fights
  • #4 Post-Election Landscape To Shape Coming Years: changes under any of the top candidates
  • #3 “Say On Pay” Will Continue to Gain Momentum: proposed legislation, global influences. This is a real battle, since 67% of investors support, while 90% of directors do not
  • #2 Growing Support For Pay For Performance Reform: spotlight on pay panels, independent pay consultants, influence of options backdating scandal. New for 2008: 10b5-1, Gross-ups, Hedging, Buybacks, Contracts and pay disparity, SERPs
  • #1 Far Reaching Implications of Majority Voting & Director Elections: Majority threshold vote takes hold with over 2/3rds of S&P 500 adding. As Patrick McGurn noted, “This is the straw that stirs the drink.” With proxy access denied, majority vote takes on the key role in the distribution of power.

See also the RiskMetrics Group “Knowledge Center” and “Policy Gateway.” Disclosure: the publisher of is a RiskMetrics Group shareowner.

Review: Managing for Stakeholders

Managing for Stakeholders: Survival, Reputation, and Success by R. Edward Freeman, Jeffrey S. Harrison, and Andrew C. Wicks. Generally, I am suspicious of any book touting a stakeholder model over one grounded on shareowners. The problem is one of identification. Without a clear party in control, the CEO and board can rationalize just about any position based on balancing “stakeholder” interests.

I’m also concerned with a book on ethics sponsored by the Business Roundtable, since that organization has a long history of ill-founded opposition to shareowner interests, such as expensing stock options and proxy access. Despite these reservations, I can honestly recommend Freeman’s book. The corporate form exists for more than simply maximizing shareowner wealth. A stakeholder approach is appropriate in most day-to-day decisions, and this small volume offers good advice.

Any executive or board can benefit by more thoroughly examining their corporation’s community of interest. As the authors posit, companies which “find a way to create value for conflicting stakeholder interests will be the winners.” Engagement often leads to value-creation. Even when it does not, a few simple cooperative steps can often diffuse what might otherwise be a damaging situation. “Unilateral action increases the risk of conflict escalation.”

The book lacks ex ante rules for deriving a hierarchy of stakeholders but, instead, takes a more organic approach. More discussion of the fundamental tension between the expectation for substantive debate over disagreements with stakeholders and the reality of our common preference for social cohesion and conflict avoidance would have added value. In Hearing the Other Side: Deliberative versus Participatory Democracy, for example, Diana C. Mutz, reports finding that the degree of cross-cutting discussion decreases as levels of income and education increase. This helps explains why so few corporations make an adequate effort to communicate with stakeholders. Rather than limiting active engagement to the like-minded or withdrawing, Mutz argues for “weak ties” that foster loose engagement and build tolerance.

I would have also liked more of a conceptual framework. For example, readers might have benefited from a discussion of the “rights” of stakeholders using Wesley Hohfeld’s fundamental legal concepts of a claim against, a liberty or privilege, an authority or power, and an immunity. Such a discussion would be helpful in framing expectations around stakeholder engagement.

While readers are warned the book is “written for executives, not for academics,” and “we are in the process of creating a separate book that will contain all the academic support,” this reader would have benefited from more science and a more rigorous conceptual framework. Instead, the authors appear to argue that management is still more art than science.

Still, I liked the discussions on the principles of ethical leadership and on leadership by choice, which emphasizes that people must have adequate knowledge of alternatives and at least some options before they truly engage in a genuine choice to follow. Pack the book for your next flight and you’ll probably find a reasonable amount of grist for meaningful reflection.

Another useful tool for identifying at least some of your company’s stakeholders is Try it out by entering the name of your company or its URL to visually portray your firm’s 6 degrees of separation in cyberspace.

Ban Could Cost Billions

CalSTRS estimates it could have to forgo $1.5 billion in revenue in the next five years from its investments in Apollo Management and the Carlyle Group alone if California enacts AB 1967, bar it and CalPERS from investing with private-equity firms that are partly or fully owned by government investment funds. (Calstrs Says Cost of California SWF Bill Would Be Billions, WSJ Deal Journal, 3/5/08)


NACD Northern California, The Proxy Advisory Services Industry. Panel moderated by Richard Koppes, JonesDay: Abe Friedman, Barclays Global Investors; Cary Klafter, Intel Corporation; Robert McCormick, Glass Lewis; Patrick McGurn, RiskMetrics Group; Marie Oh Huber, Agilent Technologies. March 12, 2008, 5:30 – 7:30 pm at JonesDay, San Francisco.

The OECD Global Forum on International Investment (GFI) is the annual meeting of a global network of policy makers, academics, business leaders, labour representatives, and members of civil society dealing with the policy challenges of international investment. The theme of this year’s conference is “Best practices in promoting investment for development”. The meeting will take place on 27-28 March 2008 at the new OECD Conference Centre in Paris France. UNCTAD is a co-sponsor of this event.

CII will hold its 2008 Spring Meeting in Washington, DC on April 9 – 11, 2008.

Ceres Conference 2008: Building Leadership, Creating Solutions, April 29 – 30, 2008 – Boston, MA.

The first meeting of the OECD Global Network on Privatisation and Corporate Governance of State-Owned Assets will take place on 6 and 7 May 2008 in Cape Town, South Africa.  This meeting will address a number of high priority issues for the region including the establishment and composition of effective boards, and the role and structure of state ownership entities.  The meeting will also provide an opportunity to discuss the OECD’s recentGlobal Network meeting on transparency and accountability, which was instrumental in the finalisation of the OECD’s Implementation Guide to Ensure Accountability and Transparency in State Ownership.

OECD Asian Roundtable on Corporate Governance, 13-14 May 2008 in in Hong Kong.

The World Council for Corporate Governance will hold Proactive – A Holistic Response to Climate Change Eco-Investors Forum dealing with Renewable Energy Markets, Bio-Fuel Bazar, Carbon Trading on 30 May -1 June 2008, in Palampur, Himachal, India.

ICGN’s 13th Annual Conference and AGM will take place in Seoul, South Korea, from 18-20 June 2008.

More Climate Change Resolutions

A record number of global warming resolutions are being filed with U.S. companies. In fact, fifty-four resolutions have been filed, double two years ago, across several industries including electric power companies, oil and coal producers, airlines, homebuilders and other businesses that investors believe are not adequately dealing with potential climate-related business impacts.

Thus far, fourteen of the 54 resolutions were withdrawn by investors after the companies agreed to disclose potential impacts from emerging climate regulations and strategies for reducing greenhouse gas emissions.

Resolutions seeking greater disclosure from companies on their responses to climate change, including greenhouse gas (GHG) reduction and renewable and energy efficiency strategies, were filed by some of the nation’s largest public pension funds, as well as labor, foundation, religious and other institutional investors. Many of the investors are part of the Investor Network on Climate Risk (INCR), an alliance of 60 institutional investors with collective assets totaling more than $5 trillion. (ceres press release, 3/6/08)

Pension Funds Too Enamored with Liquidity

Pension funds should think more ‘clearly and creatively’ on governance issues and be ‘brave’ when evaluating investment opportunities, according to Arno Kitts, head of institutional business at Henderson Global Investors. He said schemes should consider taking a bolder approach to evaluating potential investment opportunities, pointing to emerging, but still largely unexplored avenues such as agricultural land and film rights. Kitts said pension funds could ‘harvest the illiquidity premium’ if they could ‘wean themselves off this obsession with liquidity.’ (Pension funds must be ‘brave’ on alternatives, ‘creative’ on governance – Kitts, Thomson, 3/6/08)

News Bites

Nearly two-thirds of the 100 CFOs surveyed “personally feel shareholders should have a say on executive compensation plans.” (BDO Seidman press release, 2/19/08)

Apple has been a market darling over the past 18 months, so some observers are surprised that a majority of the firm’s shareholders have voted against the board for a say in the firm’s executive pay practices. Dominic Jones speculates, I think correctly, the vote resulted from Apple’s use of an e-proxy defaullt. “Only about 4% of retail shareholders have gone online to vote in response to companies’ mailings. And retail investors hold about 30% of Apple’s shares, according to Thomson Financial.” (Did e-proxy figure in Apple’s surprise say-on-pay loss?,, 3/5/08) This is typical, according to Broadridge. “Retail vote goes down dramatically using e-proxy (based on 61 meeting results); number of retail accounts voting drops from 18.3% to 4.4% (over a 75% drop) and number of retail shares voting drops from 28.8% to 12.6% (over a 55% drop).” While Jones sees this as evidence of the need for stepped up investor relations, I see it as a factor that might drive “proxy assignments.” See Fill Empty Votes.

The chairman of the International Corporate Governance Network (ICGN) has spoken out against regulation to restrict sovereign wealth funds’ investments and has urged pension funds and other investors to view their emergence as an opportunity for cooperation. (Governance group ICGN lambasts restrictions for sovereign wealth funds, Thomsan, 3/5/08)

While say on pay and proxy access loom large in the minds of directors heading into this annual meeting season, the real challenge may be actually getting board members to discuss these thorny topics with shareholders. Stephen Davis argues the cost of such communications could diminish if the SEC were to issue market-wide guidance “affirming circumstances under which board dialogue with shareowners on governance issues gains a safe harbor from risks of sanction or litigation under Reg FD.” (Cone of silence? Reg FD concerns muzzling directors too, Financial Week, 3/4/08)

The impact of the banking crisis on economic activity has been dramatically underestimated, according to Catherine Macleod, economist at BDO Stoy Hayward Investment Management. If the structural decline in the dollar continues, she believes there may be a return to the gold standard. (INTERVIEW Impact of banking crisis on economy has been underestimated, Thomson, 3/5/08)

Donnelley Offers References

RR Donnelley offers several free reference publications to help make it easier for you to meet SEC filing requirements.

The Three Chairmen

First the Three Tenors, now the Three Ex-SEC Chairmen: Richard C. Breeden, William Donaldson, and Harvey Pitt – brought to us by Directorship. Although recorded on December 11, 2007, their insights on the challenges to directors remain mostly fresh. Pitt says, if shareholders have a right under state law, such as proxy access, the SEC shouldn’t be taking those rights away. Breeden emphasized the need for nonexecutive board chairs. All decried the current era of short-termism, although Pitt, for one, didn’t think government could regulate that approach away.

Re-emerence from Bankruptcy

The Weinberg Center for Corporate Governance at the University of Delaware will have an interesting seminar in Corporate Governance and Corporate Re-emergence from Bankruptcy taught by Charles M. Elson. Tuesday, April 15, 2008 from 9:30 am to 11:30 am at 125 Alfred Lerner Hall. Guests include:

  • The Honorable Tom Ambro, United States Court of Appeals for the Third Circuit
  • Stephen Brown, Director & Senior Counsel, Corporate Governance & Business Affairs, TIAA-CREF
  • Howard Cosgrove, Former Chairman and CEO, Delmarva Power & Light Company
  • Julie Daum, Practice Leader for the North American Board Services Practice, Spencer Stuart
  • John Lacey, Former CEO, Alderwoods Inc.
  • Sharon Manewitz, Managing Director, Distressed Investments, TIAA-CREF
  • Bob May, CEO, Calpine, Corporation
  • David Skeel, S. Samuel Arsht Professor of Corporate Law, University of Pennsylvania Law School
  • Nate VanDuzer, Director, Restructuring & Legal Affairs, Fidelity Investments

Delaware CLE Credits available. If you would like to attend, please confirm space availability in advance with Alba Bates.

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Delaware Dominance

An article in The News Journal speculates that a populist backlash against corporate misdeeds could prompt Congress to pass a federal incorporations law that would put at risk one third of the State’s budget.

  • 61% of the Fortune 500 incorporate in Delaware.
  • 55% of US companies on the NYSE and Nasdaq incorporate in Delaware.
  • Since January 2003, 81% of all US IPOs were by companies incorporated in Delaware.
  • Taxes and fees paid by these corporations, as well as money from abandoned property, represented $1.06 billion of the state’s $3.3 billion general fund in fiscal 2007.
  • 40% of Delaware’s revenue is tied to the the industry.

Senators Obama and Clinton both favor giving shareowners an advisory vote on executive compensation. Should Delaware preempt such a move? Charles Elson is calling for Delaware to change its corporate law to make it easier for stockholders to elect directors, silencing claims that Delaware is too favorable to management.

“It’s not what Delaware does, it’s what it doesn’t do. The federal government comes in when there’s a vacuum,” says Mel Eisenberg, a law professor at the University of California School of Law, Berkeley. (Delaware’s corporate dominance threatened, 3/2/08)

J. Robert Brown, posting at [Delaware Judges, Shareholder Rights, and the Appearance of Bias (Part 1), 3/4/08] detects “a clear and unmistakable anti-shareholder bias” in a paper by Judge Leo E. Strine of the Delaware Court of Chancery entitled, “Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance.” While Brown writes such an approach would be “perhaps understandable for academics or attorneys practicing in the area” but he implies it is not for “a judge who has a central role in adjudicating governance disputes among parties and presumably purports to approach issues in a neutral fashion.”

RiskMetrics on Whole Foods Markets

RiskMetrics (ISS) recommends a withhold for director John Mackey, a vote in favor of requiring an independent board chair, and a vote against my proposal to require a majority vote for the election of directors.

“ISS looks for detailed disclosure of significant events of the past year in a company’s proxy materials, as these are the documents most readily available to shareholders through mailings prior to the annual meeting.” Yet, the materials didn’t mention the online postings by Mackey, the internal review by the Special Committee, or the results turned over to the SEC. “Shareholders should have been given an immediate response to the highly-publicized blogging situation…Mr. Mackey’s errors in judgment over a period of seven years placed Whole Foods at unnecessary risk; a situation that certainly qualifies as egregious and warrants action on a standalone basis. The content of certain of Mr. Mackey’s online postings are directly at odds with Whole Foods’ core values, which emphasize transparency and stewardship.”

I would add that Mackey’s performance at the 2006 shareowners meeting, where he refused to allow resolutions to be presented during the business portion of the meeting, was at odds with WFMI’s “Declaration of Interdependence,” which “requires listening compassionately, thinking carefully and acting with integrity. Any conflicts must be mediated and win-win solutions found.”

While ISS’ analysis is critical of Mackey’s behavior, they recognize he “offers valuable insight and leadership to the company,” However, “without a Chairman independent from management, the board may be unwilling or unable to effectively scrutinize the CEO and other officers. Therefore, ISS recommends that shareholders WITHHOLD votes from John Mackey as Chairman. We advocate that Mr. Mackey step down as Chairman of a Board and that a new, independent Chairman be appointed.”

Additionally, ISS points to poor performance relative to peers for the past several years, an average tenure of 11 years for board members that may compromise independence from management, and they call for the independent chairman to be “selected from the ranks of candidates outside the current Whole Foods board” in order to bring a fresh perspective. “ISS believes that such a fresh outlook and unaffiliated dedication to enhancing shareholder value is long overdue at Whole Foods.”

These are good calls. However, regarding my majority vote resolution, ISS notes, “The majority voting election standard (in uncontested situation) coupled with a post-election ‘director resignation policy’ has emerged as the current state of the art: shareholders have a clear, legally significant vote, and the board retains the ability to address the situation of ‘holdover’ directors to accommodate both shareholder concerns and the needs for stability and continuity of the board.” Since WFMI has adopted a majority vote standard and a resignation policy in its bylaws, ISS recommends against the resolution.

Yes, their bylaw amendments call for resignations but they give the Board discretion “as to whether to accept or reject the resignation” within 90 days after vote certification based on “any factors it deems relevant.” (my emphasis) I still believe the bylaws should allow only a short-term holdover period of 90-120 days to insure all applicable laws are met and that an appropriate replacement can be found.  Cisco, PG&E, Union Pacific Microsoft and others have such provisions; WFMI should, as well. Please vote in favor of my majority vote resolution.

Disclosure: James McRitchie, the publisher of, is a shareholder of Whole Foods and RiskMetrics.

From Ownership to Members-Only Society

According to Naomi Klein, “The idea was simple: if working-class people owned a small piece of the market–a home mortgage, a stock portfolio, a private pension–they would cease to identify as workers and start to see themselves as owners, with the same interests as their bosses. That meant they could vote for politicians promising to improve stock performance rather than job conditions. Class consciousness would be a relic.” Layoffs would send voters to the phone, “calling their brokers with instructions to buy, ” instead of identifying with those who lost their jobs and protesting the policies that led to the layoffs.

Then came the, Enron and subprime busts. Whereas in 1988 only 26% of Americans thought there was a divide between “haves” and “have-nots,” now 48% think that describes society and fully 45% see themselves in the “have-nots.”

“To avoid regulatory scrutiny, the new trend is away from publicly traded stocks and toward private equity. In November Nasdaq joined forces with several private banks, including Goldman Sachs, to form Portal Alliance, a private equity stock market open only to investors with assets upward of $100 million. In short order yesterday’s ownership society has morphed into today’s members-only society…The free-market ideologues have lost an extremely potent psychological tool–and progressives have gained one. Now that John Edwards is out of the presidential race, the question is, will anyone dare to use it?” (Disowned by the Ownership Society, The Nation, 2/18/08)

Increased Reporting of Political Contributions

For many many years my mentor in corporate governance, Robert Monks, has been calling on corporations to: 1) obey the law; 2) fully disclose in their financial reporting what they know or strongly suspect regarding the costs imposed by their firms on the function of society; and 3) minimize their involvement in political processes. Progress has been slow.

US companies are banned from contributing to congressional and presidential candidates, but donations to state and local candidates continue to increase. Additionally, much of corporate political spending is funneled through trade associations and other interest groups whose positions often conflict with those of their shareowners.

American Express, Xerox, Washington Mutual, Capital One and Texas Instruments now will join 38 companies already reporting payments to these groups as well as to candidates. (Companies to disclose political aid, FT, 2/27/08) Another one of my heros, Pete Seeger, reminds us that “step by step the longest march can be won… drops of water turn a mill.” At least these disclosures move us in the right direction.

Public Pensions Fail to Save for Healthcare

The Government Accountability Office (GAO) reviewed 70 public retirement systems and found that many states have been failing to set aside enough money for the pensions they owe public workers, especially for retiree health costs. (summaryhighlightsreport) About half are setting aside less than their required yearly amounts for pensions. The NYTimes speculates that New Jersey, Illinois, Pennsylvania and Kentucky lag. California and New York, public employees have successfully sued to force governors and legislatures to appropriate the required amounts.

The larger problem is healthcare. Unlike pensions, which are funded in advance and are paid largely by earnings from inverstments, healthcare is handled on a pay-as-you-go basis. With health costs rising much faster than the general inflation rate and baby-boomers retiring, health costs could start to snowball, causing “daunting fiscal challenges.” (Report to Senators Says Many States Are Lax in Funding Their Pension Plans, 2/29/08) Tthe total unfunded actuarial accrued liability for state and local governments is between $600 billion and $1.6 trillion. (GAO Reports Serious Retiree Health Plan Underfunding,, 2/28/08)

Over the long term, prefunding healthcare liabilities would allow investment earnings to pay the bulk of healthcare costs, just as they currently pay the bulk of pension costs. However, to do so governments must create new healthcare benefit obligations into the future that typically do not formally exist today. They do so, by essentially suing themselves in court, creating a scheduled liability of future fixed costs, rather than a liability that can be adjusted during periods of fiscal stress.

My understanding is that local governments can issue bonds to fund all or a portion of their plan’s unfunded liability. Investment returns on the retiree medical plan trust funds will often exceed the interest expense on the bonds and can be used to reduce current or future costs. Of course, if they don’t, future plan expenses will be higher than actuarial estimates.

Although local governments can go through this type of court validation process, my understanding is that state governments are not eligible to do so. Legal changes are necessary but I didn’t see anything on that in my brief look at the GAO report.


Broc Romanek has several informative posts at Blog on the unfolding subprime crisis. (How the SEC is Tackling the Subprime Crisis, 2/29/08)

If you get a chance, Harpers: The next bubble: Priming the markets for tomorrow’s big crash,“ is also well worth the read. Here are a few excerpts:

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle…

The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices…

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers…

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria…There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. (see also The Bubble Bursts)

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