October 2008

Bankers Billions

Analysis by Ryan Bubb and Alex Kaufman suggests that “policies that expand the share of mutual firms in markets in which consumer biases cause social costs or undesirable redistribution may be normatively attractive, even if, as some scholars believe, mutual firms tend to operate less efficiently than do for-profits. For example, policies that expand the role of credit unions in mortgage origination may reduce the opportunistic behavior of lenders vis-a-vis unsophisticated borrowers, which Bar-Gill(2008) argues has plagued the subprime mortgage market.” (Consumer Biases and Firm Ownership, 10/29//2008).

The Treasury is injecting $125 billion into nine big banks and making a like amount available for other banks that apply. Those financial giants owed their executives more than $40 billion for past years’ pay and pensions as of the end of 2007, a Wall Street Journal analysis shows. (Banks Owe Billions to Executives, 10/31/08) How much of our $250 billion bailout will go to pay for special executive pensions and deferred compensation, including bonuses?

Will our disgust with those who brought us the financial melt-down lead to an upsurge in mutual banks and credit unions?


Who Will Cure the Boards?

John Schnatter of Papa John’s International asks, Where Were the Boards? (WSJ, 10/25/08). “While the CEOs run their companies’ day-to-day activities, the boards have an obligation to make sure there are enough safeguards in place that the CEOs can’t sink their ships, such as requiring more active oversight of the activities and investments being made by management and assuring that the board has a thorough understanding of the risks, both long term and short term, presented by those activities and investments.”

Schnatter’s editorial doesn’t get to the heart of the matter and neither did SOX. The basic problem is “board capture,” and just exhorting board members to do better doesn’t really solve the problem. In myletter to the editor, I argue once again for proxy access. Next year there is likely to be a proposal, but will it include a provision to allow any group of 100 shareowners to put forward nominees as they can in the UK. Otherwise access will only address large companies with major institutional investors. This won’t be something the Council of Institutional Investors is likely to push. Who will be there to argue for retail investors? It’s a role Carl Icahn and the United Shareholders of America could take. I’m hopeful, but still don’t know if USA is about shareowners or Carl Icahn.

Board Leadership for the Company in Crisis

The extent to which an organization is effective in planning for a crisis will have a large impact on its success in managing that crisis. This complimentary program will share business and legal perspectives on the current financial crisis, with specific focus on the questions and steps board members should be considering right now. Join the NACD for this complimentary webcast today, 10/30/08 at 2:30 EST. Reading materials.

International Review

For international students of corporate governance, and since most of my readers lately are from China and India and I know you’re reading this, there is no better publication than Corporate Governance: An International Review. William Judge points out that scholars are still trying to clarify what the specific dependent variable(s) should be in research. This is a new field with some very interesting career opportunities. Some of the dependent variables explored in the September 2008 volume are as follows:

  • composition of boards of directors. “National cultures can have strong effects on corporate governance and should be considered in any transnational study.”
  • level of nationality diversity of corporate boards. “Governance regime effects are strong, even when controlled for the most relevant company effects… Ironically, the pace at which nationality diversity in corporate boards increases does not depend simply on company characteristics but is also firmly rooted in national institutions such as the governance systems.”
  • issuance of audit opinions. In China, “audit opinions began providing signals of potential default risk only after Qualified Foreign Institutional Investors entered the market; suggesting that in the post-December 2002 period, auditors’ decisions in China became more conservative, and that institutional investors began to play a monitoring role.
  • voluntary disclosure of information. Firms in Ireland with nonexecutive chairman were found to make more voluntary disclosures but no evidence was found that ownership structure is related to voluntary disclosure.
  • cash holdings. “Higher managerial cash holdings tend to reduce cash holdings in old economy firms and higher board independence tend to increase cash holdings in listed new economy firms.”
  • corporate social responsibility. This study of eight companies operating in Lebanon shows a strong relationship between corporate governance and corporate social responsibility.

CEO Pay Still Center Stage

Jackie Cook, the founder of Fund Votes, told SocialFunds.com, “Executive compensation is at the heart of a growing problem between shareholders and management. Corporate structure is supposed to be a system of checks and balances among shareholders, boards of directors, and management. So why does executive pay continue to grow, even in times of economic downturns?” (Executive Pay Comes Under Fire from Activist Shareholders for Contributing to Financial Crisis by Robert Kropp, SocialFunds.com, 10/28/08)

Cook is the best analyst of fund voting I’ve seen. Paul Hodgson, Senior Research Associate, with The Corporate Library is probably doing the best work on CEO pay (see The Corporate Library’s CEO Pay Survey: CEO Pay 2008, October 20, 2008). However, for those who want to get a quick overview of CEO pay at the Dow 30, try looking at a relatively new source, “What Are They Paid?” New West Ventures II says their website is designed for “the private, non-institutional investor who wants to know if the companies he/she is investing in are compensating their directors and management in a way that is fair to the stockholders.”

Microsoft and Dupont are awarded grades of A+ under their scoring system, while United Technologies gets an F-. Reporting is done in a uniform format for easy comparison and is written in a folksy style, which can make reading a little more fun. Here are the summaries for the three companies mentioned above:

  • Microsoft. We’re confident that this is one of the best, if not THE best, executive compensation program we have reviewed. If you don’t believe us, see for yourself. Their proxy statement is the clearest and easiest to read you’ll ever come across. Thank you Microsoft!
  • Dupont. So after toiling over all of the information on DuPont’s compensation program for hours, and hours, and hours, and hours, and hours… (Oh just give ‘em an A already).
  • United Technologies. We feel this compensation program is a joke, but I doubt shareholders will be laughing…

The rest of the analysis presented for each company is also quick and informative. Well worth the read. Their goal is to analyze the executive compensation programs of the top 500 publicly traded companies. We’ve added a link to WHATARETHEYPAID.com to our Links page under the category ofBenefits/Compensation.

Also interesting is a recent paper, Hiring Cheerleaders: Board Appointments Of “Independent” Directors. Their results “challenge the conventional view that appointing independent directors necessarily adds objectivity to the board of a firm.” As I commented on a recent Ichan Report blog:

Of course all the management entrenchment devices Mr. Icahn mentioned are important. However, we are unlikely to prevent “board capture” until shareowners can get access to the corporate proxy.

Sarbanes-Oxley attempts to deal with the board “problem” by requiring several committees composed of “independent” directors. Yet, studies show no correlation between independent directors and performance. “Independence” does not resolve the problem of board capture. Directors are dependent on management, not shareowners, for rewards and reputations. Dissident slates are far less susceptible to capture, since their allegiances lie with shareowners.

Les Greenberg, of the Committee of Concerned Shareholders, and I petitioned the SEC in the summer of 2002 for equal access to the corporate ballot for shareowner board nominees. More that six years later, the SEC is still bowing to the Business Roundtable, whose members want to retain CEO dominance.

The SEC will probably take up proxy access once again next year, if it isn’t addressed by Congress. The Council of Institutional Investors appears to have settled on a needed shareowner threshold of 3% to get on the proxy. This might work at larger companies that are mostly owned by institutional investors. However, many of the worst governed companies have few institutional investors. Therefore, it would be nearly impossible for small retail shareholders to meet proposed 3% thresholds.

Key for any future access proposal are provisions allowing any group of 100 shareowners to put forward nominees, as they can in the UK. Mr. Icahn, will United Shareholders of America carry the water in Washington necessary to get this change?

Additionally, there are two important projects being developed to help shareowners vote by “brand.” I’d like to see Icahn announce votes in advance and become a brand on ProxyDemocracy.org. Additionally, I’d like to see his help with isuffrage.org where we are attempting to develop a self-regulated proxy exchange that would allow retail shareholders assign proxies to aggregators, such as Icahn, hedge and mutual funds. Will United Shareholders of America consider accepting voting assignments from retail shareowners? I’d love to see the group involved.

Mutual Fund Voting

Fund Votes, which conducts the most comprehensive source of research on mutual fund voting that I know of, finds that mutual fund support for shareholder-sponsored compensation resolutions is increasing, led by SRI mutual funds. Mainstream fund groups cast an average of 41% of votes (including votes ‘for’, ‘against’, and ‘abstentions’) in support of shareholder-sponsored compensation resolutions in 2008, up from 20% in 2004.

According to their report, 8 out of the 9 financial firms named in the US government bailout plan had been targeted by shareholder activists with a ‘say-on-pay’ resolution in 2008. Several major mutual fund families failed to support those initiatives and actually voted overwhelmingly against increasing oversight on executive compensation. Fund groups that failed to support “say-on-pay” compensation reforms at “bailout” banks include:

Advisors SeriesDavisFidelityRiversource (AXP)Vanguard
AllianceBernsteinDodge & CoxIntegrityState StreetWell Fargo
American CenturyDWS (DWS Scudder)PutnamSteward

Many large fund groups and all of the socially responsible investment groups surveyed supported every such resolution at the eight bail-out banks, these include:

AFSCMECalvertFranklin TempletonNeuberger BermanSchroder
AIMCoventryGreen CenturyParnassusSchwab
AmeritasDominiJanusPaxSierra Club
BridgewayFifth ThirdMMA PraxisRussell (Frank Russell)Walden

SRI funds lead the charge against runaway senior executive compensation at large US corporations, according to Jackie Cook. Singled out, is AFSCME, which filed two new resolutions in 2008. One requests boards not to allow tax gross-up payments to senior management, and another calls for three key principles to be incorporated into contracts with senior management. Both categories did well in their first year, with the former earning 58 percent average support from mainstream fund groups surveyed. (Press release, 10/21/08)

View several new reports at Fund Votes. The Mutual Fund Voting Survey, 2004-2008 finds that support for management resolutions stable at about 90%. In 2008, mainstream mutual fund groups supported governance-related resolutions an average of 45% of the time, up from 37% in 2004. Their support for social and environmental resolutions is also up, averaging 11.5%, instead of 5.7% in 2004.

While most of the trends appear positive, one trend, though small at this time, is disturbing. Abstentions for corporate governance resolutions have risen from 2.3% in 2006 to 3.3% in 2008; for CSR resolutions abstentions have gone from 9% in 2005 to 14.6% in 2008. Most of the growth in abstentions appears to be coming out of what were previously votes against such resolutions. Therefore, it appears that although mutual funds are growing more reluctant to against activist investors, they are not ready to embrace them.

One solution for reluctant mutual funds would be for them to pass through voting rights to beneficial owners. 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). Glyn Holton’sInvestor 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 passing though such rights might be viewed as a breach of fiduciary duty. Also, given “broker votes” and only 5.5% 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? Given the vote on “say on pay” documented by Jackie Cook, retail voters could hardly do worse. (See also Executive Pay Comes Under Fire from Activist Shareholders for Contributing to Financial Crisis by Robert Kropp, SocialFunds.com, 10/28/08)

ACGA 8th Annual Conference, Mumbai

ACGA will hold its 8th Annual Conference, the “Asian Business Dialogue on Corporate Governance 2008”, at the Grand Hyatt Mumbai on Wednesday, November 5, 2008.

More Use of Market Mechanisms in China

The Ecology of Corporate Governance in China, by Donald C. Clarke, finds that while the CSRC is not reluctant to tell listed companies how they should manage their internal affairs, its “enforcement actions, at least insofar as they appear in the public record, suggests that it actually devotes very few resources to ensuring that such internal corporate governance norms are actually put into practice.”

He argues that China could improve its internal management system, becoming a more effective monitor in the companies it dominates or it could rely more on non-state actors. Clarke says China emphases getting the rules right, but would be better served by strengthening second-order institutions—lawyers, accountants, investment bankers, securities analysts, etc.—that are needed for markets to function successfully.

“To be sure, civil society institutions of the type that would promote market ordering in China are indeed weak. But it does not follow that institutions for state ordering can do the job any better. The key issue is that of which types of institutional reforms would yield the most bang for the buck. The policy option of simply allowing civil society institutions to do more is often overlooked in studies of corporate governance in other jurisdictions for the simple reason that few other jurisdictions impose such strict controls. But in the case of China, this area offers a great deal of room for reform.”

With the market melt-down we have, it appears the U.S. should spend more time “getting the rules right.” Maybe if each country goes in the opposite direction, we’ll meet in the middle with greater prosperity.

Asia Rising

Asia to emerge stronger from credit crunch says Rowan Callick. “Risk management, which failed in the US and Europe, is not done better in Asia. But most Chinese and Indian savings remain in conservatively run, state-owned (government-guaranteed) banks.” That should put them in a better position for recovery, since cash is king right now. Perhaps now is the time for China, India and Japan to push for seats on UN security council, G7 and other bodies.

I was a little surprised to learn that “Australia is today the biggest target for Chinese students overseas, and the second biggest, after the US, for Indian students.”

Broadridge, Waiting on E-Proxy

IR magazine thinks it is ironic that Broadridge Financial Solutions is not using ‘notice and access’ as a method for delivering its own 2008 proxy statement because the company in “an industry leading position in e-proxy services.” Of course, they also lead in every other form of delivering proxy statements.

As the article goes on to note, the 650 companies that have chosen e-proxy have saved an estimated $143M but the rate of retail accounts voting has dropped from 21.1% to 5.7%, a 70% decline. The percentage of retail shares voted fell from 34.28% to 16.6%, so larger owners are still more likely to vote.

Is the decline in voting temporary? Many companies are betting it is. Once shareowners get used to e-proxy, more will vote. While I think that is partially true, I wouldn’t count on even getting back to 20% voting anytime soon without additional help. I know I’m more likely to vote proxies that are sitting on the kitchen counter than at the bottom of my of my e-mailbox with the other 3,000 messages. My wife just isn’t likely to get on my case about the e-mails… and sometimes I need a reminder.

Those of you who are like me, will appreciate ProxyDemocracy. I’ll say it over and over again… goProxyDemocracy. Sign up for free email alerts to help you vote in an informed way. They’ll automatically let you know how respected shareholder activists plan to vote at upcoming meetings. I’m sure I’m much more informed than the average retail shareowner, but I love knowing how CalPERS, CBIS, Calvert, Domini, AFSCME and Florida SBA are voting. They hope to add mainstream mutual funds and hedge funds, as well.

Market-Based Solutions

Barron’s Editorial Page Editor Thomas G. Donlan has just come out with a new book, A World of Wealth: How Capitalism Turns Profit into Progress, touting the benefits of free-markets. His timing is not so good, since many attribute the current economic free-fall to a failure to properly regulate markets. While it is important that we not swing too far toward over regulation, Donlan’s book isn’t all that convincing.

His basic philosophy appears in a brief sentence. “The practical solution to the conflict between private interest and public interest is more private interest.” Yes, enclosure of the commons can often improve overall yields, but not all that is held in common should be divided, it takes government to legitimate any such division, and who should reap the benefits is key.

Regarding global warming: “There is no certainty of a payoff from reducing carbon-dioxide emissions – the planet was warming for 10,000 years before there were any industrial emissions.” Better to spend money preventing development of areas likely to flood. He seems to say we should write off Florida and Bangladesh. (See map) Obviously, we need to reduce our carbon footprint and encourage people not to build on the beach.

Donlan advocates the “tax magic” of trickle-down, “if you really want to raise taxes on the rich, you should cut their tax rates the way Congress and President Bush did in 2001, 2002 and 2003… America needs a flat-rate tax, on income or on consumption, with the lowest possible rate and broadest possible base.” Of course, the lowest possible rate would be zero. How long can we borrow from China?

“The antitrust laws are wrong. They are wrong in practice for hardly any monopoles have ever been effective for long except those fostered and protected by a government. They are wrong in intent, for they work against the consumer’s best interests while pretending to provide consumer protection. They are wrong in effect, for they prop up weak competitors and perpetuate their mistakes. And they are wrong in principle, for they deprive owners of the use of their property and interfere with free commerce between free people.” Donlan’s words fail to ring true when taxpayers are bailing out firm after firm because they are “too big to fail.”

On Social Security: “To give low-wage workers a pension that exceeds the economic value of the taxes paid by them and their employers, Social Security dramatically shortchanges higher-income workers.” As if the gap between rich and poor is not wide enough already. Blame it on Bismark.

“Economic booms and busts always have their causes in wrongheaded policies imposed by central bankers and governments trying to control economic forces that are actually too strong for them.” Our Keynesian solution works out to: “Savings bad. Spending good.” While that’s bad long-term advice, I always have a problem with people using the term always. I can’t agree that “government’s job is to stay out of the way of natural economic cycles and let markets work. When governments fight economic cycles, they usually make them worse.” From the tulip crisis to the real estate bubble, sometimes government intervention is necessary to prevent “irrational exuberance.”

I do agree with Donlan that “real capitalists all too often attempt to use the power of government to their advantage, lobbying and bribing to obtain favorable treatment for their business endeavors.” Donlan’s solution is more limited government “foreclosed from absolute power.” That’s seems so 19th century. Herbert Hoover would feel at home.

A better read, which also looks to free-market solutions, is Jonathan R. Macey’s Corporate Governance: Promises Kept, Promises Broken (Princeton University Press). Macey examines various market and regulatory mechanisms to improve corporate governance and concludes that our emphasis on regulations and those that have developed are the result of the fact that shareowners are not well organized into effective political coalitions, while managers are. “Managers will staunchly resist corporate governance reforms that put their jobs in jeopardy or threaten their ability to remain independent…”

Regulators and politicians follow the path of least resistance and satisfy the public’s outcry that they “do something” “by passing laws like Sarbanes-Oxley that increase the power of ‘independent’ directors and like the williams Act that weaken the market for corporate control without upsetting the top managers of public companies or any other well-organized special interest group.”

As a result, the most effective corporate governance mechanism, the market for corporate control, is hampered by excessive regulation, whereas “ineffective institutions, such as administrative agencies, cerdit-rating agencies, and even boards of directors, enjoy regulatory ‘subsidies,’” according to Macey.

Macey is on the right track. Look at what works and what doesn’t in keeping the promises that corporations make. For example, he examines the effectiveness of “independent directors” and notes the problem of “board capture,” which renders “independence” relatively meaningless since directors become reputationally linked to management. He later notes that dissident directors put forward by activist investors are far less likely to be captured by managers, since their allegiance lies with shareowners. Strengthening of board independence hasn’t reduced the incidence of boar capture, he says. Instead, “What the intense focus on boards has done is to increase managerial autonomy and draw attention away from other potentially more effective solutions to the challenge of providing reliable, objective monitoring of corporate management.”

Since the really independent directors come from hedge and private equity funds, that’s where Macey says we must turn for solutions. While he is mostly right, his focus on reviewing existing institutions and what works doesn’t drive him to apply the tool of imagination as much as he could to explore what might work. Are there other ways to have directors be reputationally linked to shareowners? One mechanism would be proxy access. Although he dismisses Bebchuk’s proposal for reimbursing rivals because it exacerbates the “credibility problems” facing challengers, he doesn’t explore other options of using proxy access.

In examining shareowner voting, he notes that while it may pay investors to become well-informed about “generic or market-wide” corporate governance issues like poison pills, since the costs of learning is spread across all public companies in their portfolio, it doesn’t pay for most diversified investors to dig into “firm specific” corporate governance issues, because the cost is greater than the probable reward. Hedge and private equity funds hold larger blocks in fewer companies, so for them firm specific research pays. However, instead of largely dismissing the power of the vote by most investors, I wish Macey had explored other options.

Macey says the core dilemma of corporate governance is that shareowners have “fidelity to the objects of the corporation” (usually maximizing shareowner value), but not the “knowledge by which these things can be best attained.” “While managers and directors, who often (though of course not always) have the knowledge (skill) to run the business, they often lack sufficient commitment to the objectives of the shareholders of the corporation.”

The market for corporate control, hedge funds and dissident directors all bridge the problem.

Right now, several broadly diversified funds, such as CalPERS, also take positions in activists hedge funds that primarily use corporate governance strategies to unlock value. Through such efforts, they not only move the bar of averages, they also improve their return.

Another potential unexplored by Marey is the idea of more robust proxy monitoring services selected by all shareowners, paid with corporate funds that would remove “free-rider” issues involved when one fund, even a hedge fund, has to do all the heavy lifting. Mark Latham has written extensively on this possibility, and the idea of “voting by brand,” an idea that adds some intelligence with minimal effort. See votermedia.org. Building from the power of shareowners coalescing around brands are two other worthwhile projects.

ProxyDemocracy facilitates the ability of users to see how respected shareholder activists, which should include hedge funds at buildout, are voting. This allows retail shareowners to learn from or copy the voting behavior of more knowledgeable investors. Eventually, the site could facilitate direct voting by brand.

A “proxy exchange” proposed by the Investor Suffrage Movement would also facilitate voting by brand by allowing shareowners to assign their proxies to aggregators and ultimately voters, which would include hedge funds and others with firm specific knowledge. Over time, the proxy process would be taken out of the hands of management and would become the responsibility of a self-regulating agency, the proxy exchange. However, what Macey lacks in imagination, he more than makes up for with by explaining existing legal and political problems.

Macey’s Corporate Governance is a seminal work, in terms of actually exploring the various corporate governance devices to determine which ones are working, which don’t, and why we keep focusing too much on those that don’t. As I write this the world’s economies are beginning a meltdown, largely the result of promises broken. Macey’s readers will have a better understanding of how this happened and what can be done so future promises are kept. Listen to a podcast of Macey discussing his book.


Yesterday, I finished monitoring the 5th Annual Executive Compensation Conference put on byTheCorporateCounsel.net and CompensationStandards.com. See my notes below entitled “Compensation Disclosures” on the prior day’s portion. One message I heard over and over again, frequently prompted by Jesse Brill, was that companies should implement a hold until after retirement provision for stock options and other equity awards. Rich Ferlauto has indicated that AFSCME will be introducing a “battery” of resolutions (or was it bylaws amendments?) on this topic so that vesting would occur two years after retirement. There appeared to be near universal agreement that compensation committees, boards, and CEOs should get out in front of this call and institute such changes before shareowners demand it.

The purpose of stock options and equity awards is to provide long-term incentives. As we know, problems have frequently been noticed soon after the CEO departs. Knowing they will have “skin in the game” for years after they retire will reduce the obvious incentives for accounting trickery. (my choice of words) This is a reform I called for about ten years ago. I’m glad to see it finally getting legs.

Of course the major buzz was that CEOs are overpaid (even 94% at the latest NACD said CEO pay is too high, Directors on board with say on pay, other shareholder causes, Financial Week, 10/22/08). According to The Corporate Library’s 2008 Preliminary CEO Pay Survey, four of the top five bonuses this year went to CEOs of financial institutions, including Wachovia, Bank of New York Mellon, Prudential Financial, and American Express. This group was followed by the new CEO of KB Home who received a discretionary bonus of $6 million as the company’s share plummeted and targets were not met. The question was how should directors set and disclose proper incentives in an HD (high definition) period where packages are subject to more scrutiny than ever. (Thanks to Pat McGurn for “HD.” He’s coining as many phrases as Nell Minow.) Here’s just a few of the many tips:

  • Engagement with shareowners is the wave of the future. Show them how what you’re doing will lead to long-term sustainable value.
  • Moving from absolute to relative long-term performance measures. CII says companies should measure value added performance over at least 3-5 years. However, Paul Hodgson, of The Corporate Library, says only about an eight of companies have any real long-term pay/performance measurement plan in place. 90% have some measure that allows for some level of reward if a company underperforms 50% of its peers. Why?
  • Bad contracts. Shareowners are looking, especially at golden parachutes and coffins. They show little sympathy for companies that have not renegotiated existing contracts to remove nonperformance based elements.
  • Disclosure. Shareowners will really be looking for repricing of underwater options, makeup/retention bonuses, resetting the bar. There needs to be a standard way of explaining this in the CD&A. Don’t step around shareowner approval.
  • Internal pay equity. Stressed over and over that if CEO is paid more than 3 times the next highest, a company may not be addressing the need for succession planning. If Moody’s is going to ding your credit rating, shareowers are going to ding your compensation committee and the entire board.
  • Turn off the hose. Shareowners were also concerned with CEO accumulated wealth. Once it reaches a certain level, it is better to spread it around with other employees and shareowners.
  • Change of control provisions will be closely scrutinized. Paul Hodgson said that in the UK, companies need to justify severance provision that go beyond twelve months and severance shouldn’t include any long-term items like stock options grants because they won’t be there to impact the company’s performance. Most guarantee continued payment of salary and bonus even if further employment is found… like a continuation of welfare benefits. Pat McGurn joined in with the call for no accelerated vesting.
  • Perks. Eliminate tax grossups, subsidies for clubs, automobiles, etc. CEOs should pay for their own financial counseling. Hodgson said they were expecting a sea change downward in “all other compensation” but it actually increased by 3% at mid-caps and by 5% at small-caps. McGurn added that 73.8% of RMG clients are willing to vote against the compensation committee for excessive perks alone.
  • Excessive Compensation Consultants, Inc. The Corporate Library has a field naming compensation consultants and will be tracking companies with poorly designed packages. How long will it be before their list of bad consultants is used to short companies?

Minority Boards, Not Execs

A survey, tracking diversity initiatives at the 636 companies that make up the Calvert Social Index, reveals that 83% have at least one woman or minority on their boards, but only 38% have a woman or minority among their five highest paid executives.  That disconnect is one of the many important findings highlighted in Examining the Cracks in the Ceiling: A Survey of Corporate Diversity Practices in the Calvert Social Index®.  The survey shows significant progress and continuing challenges for women and minorities in corporate America.

SRI Issues and Meltdown

Some of the major causes of the crisis—predatory lending, excessive CEO compensation, corporate governance—have been SRI issues for years. I expect the mainstream market will come to embrace long-term investment strategies and stability. Sustainable investing has answers to why the breakdown happened, and lessons for the economic future,” says Joe Keefe, CEO of Pax World. (Sustainable Investment Strategies Earn Respect in Aftermath of the Financial Crisis, SocialFunds.com, 10/17/08)

Compensation Disclosures

I was occasionally monitoring the 3rd Annual Proxy Disclosure Conference put on byTheCorporateCounsel.net and CompensationStandards.com and have to say it is thorough. If you are in any way responsible for putting together CD&A disclosures, you should be there, either live or on the web. The vast quantity of materials they have posted on the web are worth the cost of admission alone.Register for the conference; you’ll still be able to view the archived video and get all the materials.

One thing that was emphasized repeatedly, especially by John White, director of the SEC’s division of corporate finance, is that compensation committees should be meeting with the company’s chief risk officer. The bailout banks must do so, to exclude any incentives in their pay package that include “incentives to take unnecessary and excessive risks” to obtain financial goals. Such advice appears well advised for others as well because if such considerations become a material part of compensation policy or decisions, they would be required to disclose it in the CD&A. White says the SEC would step up reviews and that CD&As continue to lack adequate analysis. (see also, SEC set to ratchet up pressure on exec pay disclosure, Financial Week, 10/21/08 and White’s full speech)

Just as an aside, the Capital Purchase Plan also contains:

  • a requirement to ‘clawback’ and recoup any bonuses, or incentive compensation paid to senior executives based on statements that are later proven to be materially inaccurate.
  • a prohibition on the financial institution from making any golden parachute payment to a senior
    executive based on the Internal Revenue Code provision; and
  • an agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. (PIRC Alerts, 10/21/08)

Some of the most interesting discussions throughout the day were questions concerning how to hide or report perks. While there does seem to be plenty of opportunities to legally exclude or lump expenses, such behavior could easily come back to haunt practitioners, since pay is such a high profile issue. Additionally, we are likely to have legislation next year requiring say on pay for all companies… probably starting in 2010. Mess up in 2009 and your company is sure to be a target in 2010.

Pat McGurn, of RiskMetrics, emphasized the need to simplify (readability, not pet names, more charts), summarize (if layers can be too deep and too much, your plan is probably too complicated), say why (changes to peer, resetting bar, severance summary), and standardize (XBRL). Paul Hodgson, of The Corporate Library) said there is too much duplication, “too much what” and “not enough why.” In real estate the motto is location, location, location. In executive compensation it should be “explanation, explanation, explanation.” I think it was Ken Bertsch, of Morgan Stanley, who said Moodys (his former employer) is suspicious of compensation where the CEO gets more than 3 times other executive officers at a firm. It increases the “key person” risk. They begin to wonder about the depth of the “succession planning bench.”

“AFSCME plans to introduce resolutions at an array of companies that would require top managers to hold all of their stock options and restricted stock awards for two years past their tenure with the company… AFSCME plans to introduce resolutions at an array of companies that would require top managers to hold all of their stock options and restricted stock awards for two years past their tenure with the company.” (Financial crisis fuels corporate reformers, Reuters, 10/17/08)

RMG Reports

RiskMetrics Group has recently released a wealth of information for analyzing the 2008 proxy season and for contemplating where 2009 might take us, including:

These documents should be especially helpful to activist shareowners considering resolutions for 2009. A few more or less random observations follow:

  • According to the policy survey:
    • A majority of both institutional and issuer respondents believe a combined CEO/Chair role is either unacceptable or requires explanation. They differ on what constitutes a good explanation.
    • Both groups consider a director who received more than $10,000 in direct compensation not to be independent.
    • Both found common ground in considerations for compensation – pay relative to peers, internal pay disparity, pay trends and pay relative to performance.
    • 28% of investors indicated they were more likely to vote against directors at companies with problematic governance, given a majority voting standard.
    • 40% of investors would vote against a full board for maintaining multiple takeover defenses.
    • More investors would vote against the whole board (37%) than the audit committee (36%) if a company disclosed material weaknesses in internal controls for more than one year.
    • 35% of investors agreed with RMG’s withhold of support for cumulative voting where a company has both proxy access and majority voting for directors.
    • Investors were generally far more persuaded by dissident platforms emphasizing improving governance practices than arguments to remove existing management or buy back shares.
    • 69% of investors said 10% was an appropriate threshold to hold a special meeting.
    • 73% would vote against the compensation committee for excessive director pay, relative to peer group. 74% for excessive perks.
    • 47% favor non-discrimination   proposals on the basis of gender identity but few appear to support human rights or sustainability board level committees.
  • According to the 2008 Postseason Review, pay issues are huge. E-proxy turnout was problematic. Hedge and sovereign funds are major players. Firms, including directors, are talking with shareowners but taking a firmer stand. 2 in 10 proposals were withdrawn in 2008 vs. 3 in 10 in 2007 and 20% were omitted compared to 13%.
    • It was a record year for proxy contests – 40% ahead of last year (40 vs. 25).
    • Investors were increasingly willing to withhold support from board members in uncontested elections. Directors got 10% opposition at 24 S&P 500 companies, vs. 18 in 2007 and 6 in 2006. Financial and homebuilding firms were hit hard.
    • Proposals on greenhouse gas emissions and product safety fared better.
    • Votes were higher for independent board chair, cumulative voting, majority vote and repeal of classified boards.
    • Investors have claimed 200+ board seats since 2006.
    • More social and environmental proposals were withdrawn, 33% vs. 29%. (more negotiations?)
    • Resolutions seeking review of product toxicity showed increased support (38% at Kroger).
  • Questions and predictions for 2009. Will broker votes go away for directors? Expect a “shareholder’s bill of rights” early in the next administration to address say on pay, ballot access, compensation consultant conflicts and other issues. Expect new momentum on greenhouse gasses, universal healthcare, and human rights. Has e-proxy driven retail shareowners away? Share lending, over votes and empty votes – continuing issues? With nearly 3/4 of S&P 500 boards having some form of majority vote, expect such proposals to float downstream. Expect controversy re repricing/resetting the bar for executive compensation because of downturn. Many predict it is the perfect market environment for “activist” funds, so expect more next year. Hot button topics:
    • Severance and change of control
    • Golden coffins
    • Gross-ups
    • Perks, such as plane use
    • Clawbacks/retention requirements


Failure to Regulate

“The single biggest overlooked issue in the current crisis is the failure of corporate governance,” said J. Robert Brown, professor of securities law at the University of Denver. A Denver Post article points to why regulating the finance industry is difficult. “Both FSMA, which gutted the Glass-Steagal Act limiting bank speculation, and the 2000 Commodity Futures Modernization Act, deregulating derivatives, followed a major lobbying effort by the finance industry… Lawmakers who favored FSMA accepted twice as much industry money at the time as those who opposed it, according to the Center for Responsive Politics.”

Brown favors laws requiring that directors not only receive information, they must also evaluate risk. (Lessons from the crisis, 10/19/08) Brown is currently running a series on the Inspector General of the SEC’s report titled “Failure to Vigorously Enforce Action Against W. Holding and Bear Stearns at the Miami Regional Office.” (Bear Stearns and the SEC: The Enforcement Proceeding that Never Was,theRacetotheBottom, 10/20/08)

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Chamber and DoL Provide Direction

Last year the U.S. Chamber of Commerce wrote to the U.S. Department of Labor’s Employee Benefits Standards Administration (EBSA) seeking to restrain unions from leveraging their influence on pension funds.  The Bush Administration then issued a “clarification” of existing policies that ERISA didn’t allow the expenditure of retirement funds for political purpose. Nothing new, but the Chamber took credit for restraining what it called labor “abuse.” (see their press releases of January 3rd and June 26th) In what appears to be another rather hollow victory in the waning days of the Bush administration, DoL has now issued two new interpretive bulletins.

One bulletin on Relating to Investing in Economically Targeted Investments says that plan fiduciaries may never increase expenses, sacrifice investment returns, or reduce the security of plan benefits to promote legislative, regulatory, or public policy goals with no connection to the payment of benefits or plan administrative expenses. “Fiduciary consideration of non-economic factors should be rare and, when considered, must comply with ERISA’s rigorous fiduciary standards.”

The second bulletin concerns the application of ERISA’s fiduciary standards to Relating to Exercise of Shareholder Rights. “In creating an investment policy, a fiduciary shall consider only factors that relate to the economic interest of participants and their beneficiaries in plan assets, and shall not use an investment policy to promote myriad public policy preferences.” “For example, the likelihood that the adoption of a proxy resolution or proposal requiring corporate directors and officers to disclose their personal political contributions would enhance the economic value of a plan’s investment in the corporation appears sufficiently remote that the expenditure of plan assets to further such a resolution or proposal clearly raises compliance issues.” In other words, a company can reduce its direct campaign contributions and simply funnel the money through their executives without fear that shareowners will be able to introduce a resolution that requests such disclosure.

In 1998, DoL said that ERISA fiduciary standards “do not preclude consideration of collateral benefits, such as those offered by a ‘socially-responsible fund’” so long as such investments are “expected to provide an investment return commensurate to alternative investments having similar risks.”  Such investment decisions “may not be influenced by non-economic factors unless the investment ultimately chosen for the plan, when judged solely on the basis of its economic value, would be equal to or superior to alternative available investments.”  In other words, a fiduciary may choose “socially responsible” or “economically targeted” investments, but only on the basis of “economic factors” and not on the basis of “non-economic factors.” Nothing in these new bulletin appears to negate that previous advice. However, many will sound the alarm that it does, especially the Chamber. (Chamber Hails DOL Limitations on Improper Shareholder Activism, 10/17/08)

DoL’s “just show me the money” measuring stick has already broken under the weight of the banking crisis and as a result of deregulation and self deception.  DoL seems to mandate investments in predatory and subprime lending, as long as that’s where the most money can be made. Are pension funds required to time the market and shift funds from subprime loans and coal-fired plants to safer long-term options only when the Chamber gives the okay?

The Interfaith Center on Corporate Responsibility’s “Statement on the Financial Market Failure” makes more sense. If DoL is concerned about the influence of politics on pension funds, they should start by reviewing how their own policies are determined. “For the time being, we’ll have to agree to disagree with the Chamber of Commerce on who has been playing ‘political roulette’ with retirement dollars, as the voters are about to weigh in and this election will likely have a profound influence on the future course of public policy in this area.” says Joe Keefe, President and CEO of Pax World Mutual Funds. (private e-mail)

Shareowner Disclosure Requirement (updated 10/20/08)

Sara Lee “now requires shareholders who submit proxy proposals to disclose what transactions they have entered into to increase or decrease their economic power in Sara Lee to enable other shareholders to judge the economic interest of the proponent. This disclosure would include shares bought or sold or other types of positions in the company.” This according to P&I. (Crisis is opportunity to push reform agenda: Sara Lee exec details corporate changes, P&I, 10/13/08)

While it would be a plus to know if a shareholder is shorting the stock, for example, I was concerned about just what level of detail Sara Lee requires and how it meshes with SEC regulations concerning proposal submissions. The bylaw appears to be in response to CSX Corporation v. The Children’s Investment Fund Management (UK) LLP, where the U.S. District Court for the Southern District of New York ruled that:

  • a hedge fund that entered into cash-settled total return equity swaps (“TRSs”) as the total return receiver, or “long party,” should be deemed the “beneficial owner” of the underlying common stock under Rule 13d-3(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) because, on the facts of the case, the court determined that the fund used the TRSs as part of a plan or scheme to evade the reporting requirements of the Exchange Act to which it would have been subject had it bought the stock outright; and
  • two hedge funds formed a “group” for purposes of Section 13(d) of the Exchange Act earlier than they reported, based on a long-standing informal relationship, exchanges of views regarding the issuer of the stock, purchases of stock following meetings between their representatives, and parallel preparations for a proxy fight.

In checking with Sara Lee, the provision referred to is contained in Article II, Section 10 of Sara Lee’s Bylaws. The provision states that:

A stockholder’s notice to be proper must set forth  … (iii) as to the stockholder giving the notice and any Stockholder Associated Person,  … (C) whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares) has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, such stockholder or any such Stockholder Associated Person with respect to any share of stock of the Corporation…

Update: The provision applies to (1) nominations for election to the Board of Directors AND (2) other business to be properly brought before an annual meeting by a stockholder.  So it applies to stockholder proposals dealing with any topic, including social and environmental issues. I don’t think the provision will prove much of a barrier to filing resolutions and it would be good to know if a proponent is, for example, shorting the stock.


Federal prosecutors have broadened the scope of a long-running case against five former members of the city of San Diego’s retirement system. Prosecutors now allege the five defendants took a wider variety of actions and received a wider variety of benefits when they decided in 2002 to put less money into the pension system than was required. The five schemed to pass the reduced funding plan so one could get an additional retirement benefit as a union president and so the other four could “maintain their positions within the City of San Diego and (the pension program), and seek new employment opportunities.” (Charges added in pension fund case, San Diego Union-Tribune, 10/16/08)

Crossfire at SVNACD

SVNACD held another great event – this time on the question, “Shareholder Activists – Value Creators or Value Destroyers?” The panel consisted of:

  • David J. Berger, a partner in the litigation department of Wilson Sonsini Goodrich & Rosati.
  • Andrew Shapiro, President of Lawndale Capital Management.

Christine Russell, EVP Business Development at Virage Logic, introduced, moderated and provided many thought-provoking questions and insights.

During Russell’s introductory remarks, Berger interrupted to emphasize that while directors are concerned with the company, products, employees, vendors and customers, shareowner activists are mostly just concerned with stock price. It was the first of many interruptions in a very spontaneous discussion. One thing I always enjoy about SVNACD is the quality of discussion and examples that always comes from the audience as well. You know you’re in a room with some of the top corporate talent in America.

Russell noted that most targets of proxy battles are under about a $5 billion cap. Battles have been increasing but are recently in decline with the market turmoil. The consensus I heard was that activists are simply waiting for markets to settle… although financing may also be an issue. Clearly, activists have not gone away. Several battles were discussed and many interesting points were made, including:

  • Companies with a higher proportion of institutional investors are more likely targets because such investors have a fiduciary duty to vote; retail shareowners don’t.
  • The direct cost of fighting an activist can easily be $2 million but an even higher price is often paid due to the distraction of management and board, as well as employees and customers who may begin looking elsewhere.
  • Suing the activist opens the company to discovery. Even if the company wins, the remedies are often not worth the price.
  • Among the worst mistakes is hiring unsophisticated counsel and hunkering down… instead of opening a dialogue.
  • Activists joining the board often bring a wealth of comparative data with them.

During the course of discussion, Berger opined that we are moving from a board-centric to a shareowner-centric model. I think this reflects a growing consensus perhaps best described in the book Entrepreneurs and Democracy: A Political Theory of Corporate Governance by Pierre-Yves Gomez and Harry Korine. According to Gomez and Korine, we are entering a new corporate governance paradigm where “investors” are focused on the value of a portfolio of investments. They trade to optimize their portfolio and care little about the fate of any single company.


“Shareowners” focus on individual corporations. Both are interested in profit maximization but shareowners may also be interested in the firm’s specific role in defending jobs, securing credit, consolidating business relationships, preventing ecological risk or increasing share price through shareowner intervention.

In this new paradigm, management becomes the executor of choices determined primarily by financial markets, driven by investors and shareowners. Where shares are highly dispersed and markets liquid, investors hold sway. In the opposite case, shareowners play the more a critical role. Public opinion is quickly becoming the real counterweight to the direction of entrepreneurial force provided by investors and shareowners. Managers and boards who ignore shareowner activists do so at their own peril.


If you missed the program, check out the podcast page on the SVNACD site where a post-session interview with Shapiro will be soon be posted. (Disclosure: James McRitchie, publisher of CorpGov.net, is an investor in a vehicle managed by Shapiro’s Lawndale Capital. Lawndale Capital has employed the services of David Berger. It’s a small world.)

CII Highlights

Chairman Joe Dear, who is also executive directors of the Washington State Investment Board said the financial crisis presents a real opportunity to push corporate governance reforms on proxy access, CEO pay, and regulatory improvements. (Crisis is opportunity to push reform agenda, P&I, 10/13/08)

Both former SEC chairs, Breeden and Pitt “blamed poor design of incentives in executive compensation programs for contributing to overleverage. Both support fair-value accounting (which the $700 billion bailout package enacted Oct. 3 allows the SEC to suspend) and endorsed proxy access, according to P&I reports. Pitt said he believes executive compensation should be divided into two parts: an annual amount for living expenses with the rest going to an interest-bearing account until the end of the term of the performance objectives. If the goals are met, the executive receives the compensation; if not, the money goes to shareholders. (I say delay the rest for another 3-5 years to make sure performance objectives are really met without creative accounting.) (More from CII: Regulation is not keeping up, former SEC chair says, P&I, 10/13/08)

Clueless Directors

According to a survey of 1000 directors by PricewaterhouseCoopers and Corporate Board Member, more than half of directors said there is a scarcity of qualified directors. 37% said they had difficulty finding directors with financial expertise. Three-quarters of those surveyed do not believe that corporate governance is a factor in a company’s stock price.

Another interesting point in the article was that Gamco Investors is considering conducting director searches for those who might be interested in serving on the boards of the companies Gamco invests in. (Board members with finance chops still hard to find: survey, Financial Week, 10/14/08)

According to a new report from Ernst & Young LLP. Forty-one percent of respondents say their Board of Directors either never formally reviews the companies’ HR risk profiles or only reviews them on an ad hoc basis (with only 39% communicating results from the HR risk management team into the corporate risk management process). (HR Risk Not Properly Monitored in Organizations, PlanSponsor, 10/14/08)

It appears nomination committees still haven’t fully recognized their need to expand the circle of those they review well beyond CEOs and board members in general still haven’t made the connection between good governance and good returns. A lot of work remains.

Give RiskMetrics Your Input

RiskMetrics Group announced a comment period for their 2009 proxy voting policies, which runs through October 31.They expect to release their final 2009 U.S. and International policy updates on November 20 and December 18 respectively. I’d like to see them openly endorse proposals to reincorporate in shareowner friendly North Dakota.


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Stakeholders May Benefit From Proxy Exchange

While we may finally be pulling our financial system out of the mud, we still need to institute many reforms. Everyone knows that in Chinese terminology the two characters for crisis and opportunity are used together. Kent Greenfield’s “Saving the World With Corporate Law?” makes a compelling case for some form of stakeholder theory. Now, we may have an opportunity to move in that direction.

I’ve always been intrigued with various stakeholder-type theories, especially the human capital portion of that mix as expressed in the work of Margaret Blair, Lynn A. Stout, Marleen O’Connor and others. Greenfield shows how boards act as a production team, outlines the failures of shareholder primacy, and counters the arguments against a broader use of corporate law to further the goals of society. For example, Greenfield argues that expanding the circle of people who benefit from fiduciary duties “will make it more difficult for managers to violate those duties” because “more corporate stakeholders will have an interest in monitoring and remedying managerial misconduct.” “A shareholder primacy rule makes it more difficult for these other stakeholders to depend on management, which raises the stakeholders’ agency costs.”

He argues that building the interests of non-equity investors into the firm is more efficient that relying completely on external regulation. “Change the definition of wealth within corporate law to mean the wealth of all the stakeholder rather than just the shareholders” and “improve the corporation’s structure by diversifying the board to include representatives of stakeholders other than shareholders.”

How? “The specifics will be difficult but not impossible: employees could elect a proportion of the board; communities in which the company employs a significant percentage of the workforce could be asked to propose a representative for the board; long-term business partners and creditors could be represented as well. The specifics do not matter as much as does the notion that the board itself should be a place where more than just a shareholder perspective would be heard.”

But of course the specifics do matter and those who benefit from the current system can be expected to opposed changes in the law. With part of the bailout involving the government taking equity stakes in several banks, advocates of a stakeholder approach could lobby to legislate changes, at least in those corporations. Additionally, they might further their cause by lending efforts to the development of a Proxy Exchange. A Proxy Exchange (Exchange) wouldn’t immediately change the shareholder primacy model but it could facilitate introducing broader values to corporations and facilitate the ability of employees, nonprofits, and communities to nominate and elect board members.

The Exchange would do this by allowing shareowners to assign their proxy rights to anyone willing to accept them, including unions, nonprofits and communities. Of course, these groups would have to convince other shareowners to join them but, especially if corporations provide for cumulative voting and proxy access, through the Exchange they could have a voice on the board.

Glyn Holton and I had a successful trip around California last week discussing the Investor Suffrage Movement and recruiting several field agents. This year’s goal is to run a series of trials where shareowners assign proxies to the Exchange which makes them available to advocates to write resolutions, compatible with the values of the individual shareowners. The resolutions will then be presented at the annual shareowner’s meetings by field agents. Within a few years, I expect the number and quality of resolutions to rise. In the meantime we will test the mechanics of the new system we are gradually building. I hope those advocating a broader mandate for corporations will join our effort.

Back in the USA

Billionaire investor Carl Icahn announced the launching of United Shareholders to push legislators to pass more investor-friendly laws. According to reports, United Shareholders would promote legislation that blocks big pay packages for executives at underperforming companies and will push for legislation to make anti-shareholder bylaws like poison pills and staggered boards illegal. United Shareholders will advocate for changes to make it easier to incorporate companies in more shareholder friendly states beyond Delaware and will pres institutional shareholder to be more active in companies they own. (Icahn to launch lobbying group, MarketWatch, 10/6/08)

In 1986, T. Boone Pickens founded the United Shareholders Association (USA), which tackled an assortment of corporate governance issues. USA gathered substantial support, with up to 65,000. During its eight-year existence, it generated substantial progress with its annual “Target 50” list of non-responsive companies. Let’s hope the new United Shareholders takes a more grassroots approach in helping shareholders act like shareowners. Unfortunately, organizations like the American Association of Individual Investors and BetterInvesting haven’t done a good job in that area.

One good start would be to begin filing resolutions to reincorporate in North Dakota, like the resolution I’m filing this year at Whole Foods Market in cooperation with John Chevedden. Such proposals bring up several issues that could be the subject of negotiations. Among the most significant features of North Dakota law are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

CalPERS: Still Looking

“We’re looking for a first-class corporate governance expert and leader to drive our global agenda, “said Anne Stausboll, Interim Chief Investment Officer. “An experienced, resourceful visionary could help us bring about substantial improvements in corporate governance practices leading to greater performance and shareowner value.”

The position represents CalPERS on corporate governance issues at conferences, seminars, and company meetings; directs proxy votes and collaboration with regulatory agencies to strengthen financial markets; and oversees investments with partners who use corporate governance strategies to earn value for the fund by turning around ailing companies. They are also is responsible for the process of identifying, communicating with, recommending companies for the System’s annual Focus List program and monitoring their performance; and for reporting governance matters to the CalPERS Board.

CalPERS is seeking candidates who have experience in corporate governance and public policy issues with regulatory agencies such as the U.S. Securities and Exchange Commission and shareowner entities such as the Council of Institutional Investors. The ideal candidate will have knowledge and experience within institutional equity portfolio management along with an MBA, law degree, or other advanced degree.

Individuals interested in this opportunity should apply through Korn/Ferry International. Please visit ekornferry.com, opportunity code RT997. CalPERS is the nation’s largest public pension fund with more than $210 billion in market assets. It provides retirement and health benefits to more than 1.6 million public employees, retirees, and their families.

If you’re in the field of corporate governance, this is an opportunity to be near the top of the heap with an organization that really makes a difference. I’d love to collaborate more with whoever gets the job.


When the 1997 credit crisis hit Asia, “the U.S. mantra was for them to bear the economic pain and restructure the banking sector along strict liberal market lines. Yet when the same crisis hits the U.S., the policy is to print money and socialize credit and risk. Hypocrisy does not command respect.” …

“Increasing economic nationalism will make the operating environment for private corporations, particularly foreign-owned ones, more difficult and less conducive to earning profits, particularly in sectors where local insiders are permitted to earn unjustified economic rents.” (Another Empire Bites the Dust, David Roche, Far Easter Economic Review, 0/3/08)

Say on Auditor

Most companies submit their choice of auditor to a non-binding vote by shareowners… but some don’t. CalSTRS has petitioned the SEC to make such votes mandatory. CalSTRS says such votes will “strengthen auditor independence and integrity.” (Forget say on pay—how about say on auditor?, Financial Week, 9/25/08) I agree, and would go a step further. Let shareowners make the preliminary choice from a list of qualified auditors.

According to the CalSTRS petition, file 4-570, “Request for rulemaking under the Securities Exchange Act of 1934 to amend Rule 10A-3 to require that issuers submit their choice of auditor to a non-binding vote of shareholders for ratification,” submitted by CIO Christopher Ailman on 9/23/08, less than 6% of the firm’s held in their portfolio with a market cap of $10 billion or more fail to submit their choice of auditor to a vote. However, almost 28% of companies capitalized at below $250 million choose to hold such votes.

Ailman cites the Treasury Department Advisory Committee on the Auditing Profession’s recommendation that public companies adopt shareowner ratification of public company auditors, since “ratification allows shareholders to voice a view on the audit committe’s work, including the reasonableness of audit fees and apparent conflicts of interest.” He also addresses objections by laying out a series of options that can be followed when shareowners fail to ratify.

The SEC should take this approach a step further and allow shareowners to choose the auditor, subject to review and final approval by the audit committee, if necessary to comply with Sarbanes Oxley. Companies would have the choice of either:

(a) following the CalSTRS proposed standards for ratification of an auditor chosen by the audit committee; OR
(b) choosing the auditor by competitive shareowner vote.

Under my alternative proposal (borrowed straight from Mark Latham), shareowners would choose (by vote) among several auditing firms competing for the position. This would encourage auditors to build their reputations in the eyes of investors, rather than in the eyes of management, creating new pressure for higher standards. See section 5 of Latham’s Proxy Voting Brand Competition, Journal of Investment Management, First Quarter 2007 and his comments to a previous rulemaking on auditor independence, File S7-13-00.

Please review the CalSTRS rulemaking proposal, along with my comments, and send your own recommendation to Nancy M. Morris, Secretary of the Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-0609 or by e-mail to: rule-comments@sec.gov. Be sure to put “Rulemaking Petition – File Number 4-570” in the subject line.

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