September 2008

Abstentions Grow

In a response to Ram Trust Services to a letter about 13 years earlier, Harvey Pitt, former head of the SEC, noted, “An investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with its fiduciary duties under federal and state law to act in the best interests of its clients.” (Letter from Harvey Pitt to John P.M. Higgins, President, Ram Trust Services, February 12, 2002.) Finally, on 1/23/03 the SEC ruled that proxy votes made by investment advisors and mutual funds must be disclosed. Now virtually all shares held by institutions are voted. Probably no one has looked at votes by mutual funds more carefully than Jackie Cook, who recently released a “mini survey” on 2008 mutual fund votes, downloadable at Fund Votes.

“Mainstream fund groups support management resolutions far more than they support shareholder-sponsored resolutions. SRI groups tend to support shareholder sponsored resolutions to a greater extent.” Cook notes, “Interestingly, opposition to CSR resolutions by mainstream fund groups (votes cast ‘against’ CSR shareholder resolutions) has fallen by a full 13 percent over the five year period, from 85 percent in 2004 to 72 percent in 2008. This corresponds with a large and sustained increase in abstentions by mainstream funds on CSR resolutions over the five year period from 10 percent in 2004 to 16 percent in 2008.”

In a followup e-mail, Cook says she is “interested why they (abstentions) are increasing consistently from year to year.  It seems that most new abstentions are being drawn from previous years’ votes against since opposition is declining, yet support has not.”  We both wonder if mutual funds anticipating some future regulatory change that would absolve them of the responsibility of voting shareholder resolutions, particularly CSR resolutions. Up until the last week, McCain has consistently argued for more deregulation, so perhaps repeal of such a requirement might follow on a McCain victory? I certainly hope not.

The increasing number of abstentions by mainstream funds is a copout but I am wondering if that might eventually be turned into a positive. Mark Latham has long favored the idea of mutual funds passing through voting rights. (see ” Passing Through Voting Rights” in The Internet Will Drive Corporate Monitoring, 1999) and Glyn Holton’s Investor Suffrage Movement (2006) also anticipates mutual funds passing through voting rights to the true beneficial owners. I’ve always thought they can’t or shouldn’t be able to do so, given that voting rights are assets and passiing though such rights might be viewed as a breach of fiduciary duty. Also, given “broker votes” and only 5% of retail shareowners voting under e-proxy, passing through votes seems all the more absurd.

However, if mechanisms, such as the “proxy exchange” proposed by Glyn Holton, can be developed to facilitate Latham’s proposed easy voting by “brand,” (Proxy Voting Brand Competition, 2007) maybe some mutual funds would be more than delighted to pass through votes… ridding themselves of what they may think of as a growing headache. If it happens, will the votes by retail shareowners be “better” than those of mainstream funds?


It is my understanding that both House and Senate versions of the bailout bill now contain some provisions for a say on pay vote and shareholder access to the proxy of the public companies involved in creating this debacle. The shareholder access provisions of the draft I saw had a 3% threshold, with no provision for a large number of shareowners, typically 100, without meeting that 3% threshold. Of course that kind of provision may be less important for these financial institutions, since most are large. Barney Frank will be a guest on Corporate Watchdog Radio. It will be intresting to hear his take on the mess. I expect it will be posted by the evening of 9/23/08.

For a good list of articles covering the meltdown and bailout, see Broc Romanek’s post, Dear Treasury: Will $700 Billion Cover It?, on Blog. Frankly, I liked a couple he didn’t include. Sue Them, Jail Them, Make Them Pay for Meltdown by Ann Woolner (Bloomberg, 9/22/08) and Nell Minow’s Blame boards of directors for financial mess, CNN, 9/18/08.


Crossfire: Shareholder Activist vs. Corporate Counsel
Shareholder Activists – Value Creators or Value Destroyers?
October 16, 2008
Time: 7:00 a.m. – 9:30 a.m.
Location: Wilson Sonsini Goodrich & Rosati, 950 Page Mill Road, Palo Alto
$50 – Members $75 – Non-Members

There were more proxy battles fought in 2007 than in any year in the past ten years. Companies such as Yahoo and Napster, and many small cap companies have been challenged by organized groups of activist investors who form temporary alliances and cause dramatic changes to companies, including removing the Board of Directors and forcing a sale or liquidation of the company.

Panelists: David J. Berger is a partner in the litigation department of Wilson Sonsini Goodrich & Rosati. He is a leader in the firm’s corporate governance group and heads its mergers and acquisitions litigation practice. Bryant R. Riley is founder and Managing Member of Riley Investment Management LLC, an investment advisor which provides investment management services. He also is founder and Chairman of B. Riley & Co., LLC, a Southern California-based brokerage firm providing research and trading ideas primarily to institutional investors.

Unfortunately, I missed the last meeting of the Silicon Valley Chapter of the National Association of Corporate Directors and their program, Advice for Directors Managing the M&A Process. See theInterview with Deborah J Ludewig, Founder and Legal Counsel, DJL Corporate Law. Those attending were divided into six boards, made decisions on how to move forward, and were then critiqued by the panel.

Worth Reading provides a roadmap to Reg FD compliance, especially important to both companies and investors since, under recent SEC guidance, corporate sites can be a “recognized channel of distribution” and can constitute “broad dissemination” if they take steps to market their websites and disclosure practices and they post information timely in an accessible manner. The issue also includes an interview with long-time independent inspector of elections, Carl Hagberg (who also edits the Shareholder Service Optimizer). Learn more about how the recent vote tabulation snafu at Yahoo’s annual shareholders’ meeting could possibly have been avoided. Very enlightening, and just another reason of many to renew your subscription.

Nomi Prins’ article, As Wall Street Collapses, Will Washington Get a Clue? (AlterNet, 9/17/08), raises the need to resurrect the Glass-Steagall Act. NPR’s Terry Gross interviews Michael Greenberg on her program Fresh Air (9/17/08). It includes a great discussion of AIG’s roll in reinsurance and points to the critical fact that neither McCain or Obama are explicitly addressing the fundamental source of the current economic crisis. The Bush administration continues a system which privatizes profits and leaves taxpayers at risk for substantial losses. Greenberg compares current administration measures with better equipping cowboys charged with rounding up horses after they run out of an open barn, rather than closing the door.

We are likely to see a further acceleration of information governance regulations as a response to the events of the sub-prime crisis, says Mike Lynch, founder and CEO of Autonomy. (Information governance – more than a guiding force?, 9/16/08). continues to provide excellent analysis of a large number of issues, from the SEC’s apparent violation of the APA to the need for transparency of AIG, now a sovereign wealth fund, and to how the recent failures point to a greater need for proxy access.

Andy Eggers blogs about the addition of the AFSCME pension plan and the Florida State Board of Administration to the Proxy Democracy database. Both systems have long taken a leadership role. Now, by announcing their votes in advance of annual meetings on Proxy Democracy, their impact will continue to increase as retail shareowners begin to follow their lead. I continue my efforts to help Andy recruit more funds to disclose their votes in advance. Contact me if your fund might be interested or if you’ll help me perk their interest.

The Investor Suffrage Movement has launched its Field Agent program. This network of volunteers, who perform simple tasks like reading a shareowner proposal at a local annual meeting on behalf of the proponent and the Investor Suffrage Movement, will make a substantial contribution to owners getting control over their corporations, improving performance and making them more sustainable. Glyn Holton and I will be touring the West next month talking with potential candidates. If you’re interested in the program and live in Eastern USA, please contact Ben Collins of KLD. Anyone outside that general geographic area, including internationally, can feel free to contact me, James McRitchie.

The Corporate Library has been running a sale on research reports for AIG, Lehman Brothers, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Fannie Mae and Freddie Mac. Their “Predicting Securities Litigation – Second Quarter 2008 Update” from a year ago is now available for free. I would also remind IR officers, if you haven’t obtained a free copy of The Corporate Library’s governance ratings report for your company, you’re not effectively doing your job.

Shareholders to Shareowners

According to the UK’s National Association of Pension Funds (NAPF) (see press release), as reported by PIRC Alert (9/16/08), engagement by pension funds is increasing. More shareholders are taking on the role of shareowners

Funds report changes as a result of their activities in the following areas:20072008
Board membership67%74%
Company strategy59%69%
Pay policies74%79%
Social/Environmental policies51%68%

A majority of pension funds’ Statements of Investment Principles now refer to the ISC Principles (45%) or expect to do so in the next two years (34%). Two-thirds of pension funds said that corporate social responsibility considerations influence the selection of investment managers and consultants now (32%) or expect it to in the future (34%).


New York Times columnist David Brooks’ op-ed on the current presidential race may apply equally to corporate governance. As we have witnessed with the Bush administration, it turns out that governance “requires acquired skills. Most of all, it requires prudence.”

What is prudence? It is the ability to grasp the unique pattern of a specific situation. It is the ability to absorb the vast flow of information and still discern the essential current of events — the things that go together and the things that will never go together. It is the ability to engage in complex deliberations and feel which arguments have the most weight.

“Democracy is not average people selecting average leaders. It is average people with the wisdom to select the best prepared.” (Why Experience Matters, 9/15/08) Unfortunately, in the case of corporate governance, average shareowners have no say in selecting corporate leaders, prepared or not.

Nominating/Governance Committee

Deloitte’s Center for Corporate Governance recently added to its material on theNominating/Corporate Governance Committee. This committee often includes the following:
• Director recruitment
• CEO succession planning
• Monitor governance processes
• Oversee board and committee evaluations/assessments
• Take the lead on information about director orientation and ongoing education
• Respond to investors on proxy issues/maintain knowledge of investor viewpoints
• Familiarity with company governance ratings

Thanks to Dan Swanson for informing me of this important resource.

Back to the top

Opacity Hurts

Founders, Heirs, and Corporate Opacity in the U.S., a study by Ronald Anderson, Augustine Duru, and David Reeb found that both founder and heir ownership companies were less transparent. Only those founder or heir firms characterized as transparent receive performance or valuation premiums. As corporate opacity increases, founder or heir ownership bears an increasingly negative relation to firm performance. Their findings support the notion that in opaque environments, these controlling shareholders extract firm resources to their private benefit and thereby negatively affect firm performance.

Their results indicate that dual-class share structures and disproportionate founder or heir representation on boards of directors, in and of themselves, appear not to be value-destroying devices. In transparent founder or heir firms, they find that dual-class shares and board representation actually appear to be associated with better firm performance. However, in opaque environments, controlling shareholders use these mechanisms as a tool to provide additional influence and power in extracting firm resources. They also found that professional-manager CEOs perform better than founder CEOs, who perform better than heir CEOs; with all types of founder or heir firms performing better than diffuse shareholder firms.

Founder or heir firms however, irrespective of CEO type, perform worse than diffuse shareholder firms in opaque environments. Overall, Their analysis suggests that founder or heir ownership can be an effective organizational structure in environments where investors have both robust legal safeguards and high levels of corporate transparency. Yet, the results also indicate that corporate opacity leads to severe conflicts of interests between founder or heir owners and minority shareholders even in markets with well developed legal protections for investors.

Webcast on Issue of Independent Chairs

RiskMetrics Group will hold a one-hour webcast on September 16 at 2 p.m. (Eastern U.S. time) to look at where the debate stands on independent chair vs. lead director. Shareholder votes show that the issue of independent chairs has been gaining momentum, and some investor activists say they will focus on it next year. Moderated by Patrick McGurn, panelists include:

  • Bonnie Hill, lead director at Home Depot
  • Dr. Curtis Crawford, a director at DuPont and CEO of the firm XCEO
  • Michael Garland, from Change to Win Federation, a coalition of American labor unions

RiskMetrics also launched a Governance Leadership Council (GLC) headed by former SEC Chair Arthur Levitt, to provide an open forum for governance experts. Members were appointed to two-year terms. The group will meet three times a year and will not be compensated for their services. GLC members include:

  • Mark Anson, president, Nuveen Investments
  • Peggy Foran, general counsel and corporate secretary, Sara Lee
  • Charles Elson, director of the John L. Weinberg Center for Corporate Governance, University of Delaware
  • John F. Olson, partner, Gibson Dunn & Crutcher, and professor, Georgetown University Law Center
  • Harvey Goldschmid, former SEC Commissioner, senior counsel to Weil Gotschal & Manges, and Columbia University Law School professor
  • David Hirschmann, president and CEO, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
  • Dana Mead, chairman, MIT Corp
  • James Robinson, III, former chairman and CEO, American Express
  • Reuben Mark, chairman, Colgate-Palmolive
  • Peter Clapman, former corporate governance head at TIAA-CREF, and partner at Governance for Owners
  • Stephen Kaufman, senior lecturer, Harvard Business School

GAO Issues Report on Hedge Funds

To ensure that all plan fiduciaries can better assess their ability to invest in hedge funds and private equity, and to ensure that those that choose to make such investments are better prepared to meet these challenges, the GAO recommends that the Secretary of Labor provide guidance on investing in hedge funds and private equity specifically designed for qualified plans under ERISA.

This guidance should include such things as (1) an outline of the unique challenges of investing in hedge funds and private equity; (2) a description of steps that plans should take to address these challenges and help meet ERISA requirements; and (3) an explanation of the implications of these challenges and steps for smaller plans. (Defined Benefit Plans: Guidance Needed to Better Inform Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity)

SBA Takes Proxy Disclosure Lead

In an on-going effort to improve voting transparency, the Florida State Board of Administration (SBA)has recently enhanced the disclosure of proxy voting decisions and has partnered withProxyDemocracy and RiskMetrics Group to provide robust voting and peer benchmarking analytics. The SBA’s proxy voting records can now be viewed in real-time as voting decisions are being made.  Viewers can compare SBA voting decisions to those of other funds and can even choose to receive, by email, future voting decisions.

A key attribute of the ProxyDemocracy portal is that it allows all investors to review voting decisions for meetings before they actually occur and compare SBA’s ProxyDemocracy voting profile with other funds and . Along with the disclosure of real-time voting information at ProxyDemocracy and on SBA’s own site, SBA’s profile and benchmarking have been added to RiskMetrics Group’s Policy Exchange, an extensive online database of proxy voting policies. A key attribute of the Policy Exchange portal is that it allows users to do side-by-side comparisons of the technical aspects of voting guidelines across the entire range of ballot items.

These enhancements are designed to improve the timeliness, content, and value of the SBA’s corporate governance and proxy voting activities. This information covers every proxy vote made within discretionary portfolios – including approximately 3,700 meetings covering every U.S. company (via the Russell 3000 index) as well as many non-U.S. firms (primarily large-cap, developed markets).

SBA has now taken the lead among pension funds, as far as disclosure of proxy voting and policies in a format that allows ready comparison. We applaud this step taken by Michael McCauley, Senior Corporate Governance Officer, and other officials of SBA. We encourage other funds to make similar disclosures. Please provide feedback to SBA on their pathbreaking disclosures.

SBA’s disclosures will accelerate proxy voting reforms by other pension funds and will encourage retail shareowners to use ProxyDemocracy to research voting issues. We hope it will lead to morevoting by brand, since retail shareowners can now easily set up alerts for each of their stocks at ProxyDemocracy to be notified when funds, such as SBA, announce their votes.

Florida is also taking the lead on climate change with Chief Financial Officer Alex Sink announcing that Florida will formally analyze investments for the financial impacts of climate change. In an effort to better protect the Treasury portfolio from emerging risks. CFO Sink has launched a semi-annual review process to assess how public fund managers incorporate climate risk in portfolio holdings as part of prudent investment management. Ever get that sinking feeling… like maybe they will eventually have to avoid investments in Florida?

ProxyDemocracy Update

ProxyDemocracy is now collecting and publishing upcoming votes from AFSCME and Florida’s pension fund. Two funds that had not previously published upcoming votes apparently started doing so, at least in part, in order to be featured on the site. To see an example of a meeting with votes from the new sources, see this week’s shareholder meeting at H&R Block (link). I hope to see even more funds opting to disclose votes in advance of annual meetings. This will be a very important step toward voting by brand.

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