News: December 2008

Corporate Governance Alliance Digest

The December 29th issue of The Corporate Governance Alliance Digest is out. Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance, offers up challenges to boards, policymakers, institutional investors, audit professionals, compensation professionals and “everyone.” Lots of excellent advice on disclosure, compensation and other timely concerns. Subscribe to the Digest for free. Bloxham continues to do a great job of “building a bridge of trust between management, board, shareholders and all stakeholders.”

Corporate Governance Standards Board (CGSB)

Ivo Welch, of Brown University, has an interesting post on the Harvard law blog, How to fix one Root Cause of our Economic Crises. Instead of passing more legislation, like Sarbanes-Oxley, which “created large compliance costs and few governance benefits,” establish a board, like the Financial Accounting Standards Board (FASB), to set best practices for corporate governance.

Welch proposes that “boards that follow the official standards should be afforded an additional layer of safe-harbor protection against shareholder lawsuits.” I like the idea. The board’s recommendations could function like the comply or explain system used in the UK. Of course, the main sticking point in creating such a board might be composition. How do we ensure appointees will serve the interests of shareowners and the general public?

E-Proxy Mandatory 2009

Starting January 1, 2009, all public companies must comply with the e-proxy requirements,Shareholder Choice Regarding Proxy Materials, Release No. 34-56135 (July 26, 2007).  Companies conducting proxy solicitations will have to post materials under the “notice and access option,” “full set delivery option,” or a hybrid.

Under “notice and access,” a company can mail a simple “Notice of Internet Availability” and can post the proxy materials on their website. Shareowners must either rely on their electronic connections or request hardcopy proxy materials.

Under the full set delivery option, companies can use existing methods to deliver copies of proxy materials in paper or electronic form but must also post a copy to their website.

Companies can use a hybrid approach where notice and access is used for certain shareowners and the full set delivery option for others.  Of the 634 companies that had implemented the notice and access option by May 31, 2008, approximately 10% used some sort of hybrid approach, according to Broadridge Financial Services, Inc.

Companies are saving substantially on mailing and printing costs but Broadridge reports that voting by retail shareowners dropped from approximately 20.6% to 5.5%, and the number of retail shares voted dropped from 34.3% to 16.7%.

As I have mentioned previously, this is a good time for retail shareowners to get familiar with Proxy Democracy. Enter in your portfolio now and you will start getting automatic e-mails informing you of how respected institutionals are voting. You’ll find it helpful to know how others are voting.


The November 2008 edition of Tone at the Top, published by the Institute of Internal Auditors, reminds readers that whether to conduct an annual self-assessment is not a question for audit committees at companies with securities listed on The New York Stock Exchange. NYSE Listing Standards mandate that audit committee must have a charter which requires self-assessment.

To avoid generating or creating a body of evidence that could be used against the audit committee, the article recommends phrasing evaluation questions so as to elicit helpful suggestions and – at least at the beginning – focusing on work, methods, and processes, rather than on individual members. It is a good guide, with sample questions and additional resources. Download it from the organization’snewsletter sectionTone at the Top is free to the public.

New Tool

Like many, I’ve got a google alert for my name and This morning I noticed a post by an Indian MBA student in finance, Yameen Thara, to authorSTREAM, which provides space for anyone to upload PowerPoint presentations. Thara’s Corporate Governance and Audit Committee, which briefly mentions as one of several resources, might be helpful to others in understanding the requirements of Clause 49. Additionally, authorSTREAM includes an Rss feed, so the site is a good way to share your work with others and get noticed at no cost.

ProxyDemocracy Spotted

Abigail Howell, one of 8,000 “spotters” who scan the globe for smart new business ideas for Springwise, penned a nice introductory article on ProxyDemocracy entitled Voting transparency for individual also looks worthy of checking out. The same issue that alerted readers to ProxyDemocracy also spotted, a site that shares real-time reviews, ratings and salary details about specific jobs for specific employers. The site is also noted at Weekly Wisdom Roundup #10, Simoleon Sense, 12/14/08.



Deutsche Bank has discontinued its corporate governance research service for clients. Added to prior news that JP Morgan and Citigroup cut back their SRI research team leads many to wonder What’s the future for ESG broker research? (RI, 12/22/08) As Responsible Investor notes, “The irony is that the credit crisis and the latest Madoff (see Markopolos letter of complaint to the SEC relating to Madoffposted by Les Greenberg) Ponzi scheme allegations have underscored a need for better, more probing research on governance and the link between social and investment issues such as sub-prime mortgages/credit cards and banking remuneration.”

The article notes the Enhanced Analytics Initiative (EAI), with 30 pension funds, has now merged with the United Nations Principles for Responsible Investment (UNPRI), which will effectively adopt the EAI’s platform for promoting the first of its six principles: to incorporate ESG issues into investment analysis and decisions.

One of the EAI’s major drivers was that members pledged 5% of commissions to recommended brokers to support better ESG research. With dissolution of EAI, former members hope to broaden support for their initiative with the creation of a research database of ESG reports produced by brokers and fund managers. Some questions focus on what type of research will be forthcoming. Environmental issues, especially emissions trading data, have received attention but governance research has not.

Hugh Wheelan calls on the UNPRI to come up with ‘incentives’ to ensure its new database signal banks that ESG research is fundamental to investors doing business with them. Members, he says, need to clarify support for long-term time horizons, evidence from brokers that they are properly funding ESG research and that they are incorporating it.

Satyam Highlights Problems with Indian Corporate Governance

According to a report in the Financial Times, “Franklin Templeton has issued a warning to Indian companies over corporate governance following an aborted attempt by a top outsourcing firm to buy businesses controlled by the chairman’s family without seeking shareholder approval.”

The failed deal by Satyam Computer Services led them to quickly announce a share buy-back to try to restore investor confidence after Satyam’s ADRs plunged more than 50%. The article goes on to say the Satyam case has highlighted corporate governance weaknesses in India, citing a study by AT Kearney, AZB & Partners and Hunt Partners, which found that in 90% of companies it surveyed in 2005-2006 independent directors were appointed using referrals from the chief executive or chairman. (Templeton warns Indian groups over governance,, 12/22/08)

It appears that, like in the US, “independent” directors can be drawn from the CEO’s circle of friends, as long as they are not family members or do not receive much income from the company. I’m always hesitant to offer commentary on the Indian governance situation because I know so little about it. However, I see that about 25% of our readers are from India, so I am hoping some of those readers will enlighten me. I understand the Indian system allows for director nominees to be put forward by financial or investment institutions. Does India have provisions similar to the UK, where shareowners with 5% of the stock or 100 owners can place their nominees on the corporate proxy?

If so, that would seem a powerful tool. Perhaps India has the legal framework but too little enforcement? Or, perhaps families are still such a dominate force that directors feel little accountability to minority shareowners? I’d like to hear directly from readers in India.

Good Recommendations Abound

Malcolm Salter and Bill George of Harvard offer some recommendations to improve corporate governance in their WSJ article, Since Enron, Little Has Changed (12/15/08). Noting that CEO financial incentives are critical, they recommend that contracts include provisions for rescinding bonuses if companies revise their past performance and that stock grants should require extended holding periods so that executives don’t benefit from short-term stock price fluctuations.

Regarding directors, they should only be selected if they “have the time to serve effectively” and they must be required to “put more of their wealth at risk through investments in company shares,” with a holding period of ten years or until retirement. They also make a pitch for separating the roles of board governance and management but appear to settle for lead directors, rather than split CEO/chair.

CII sent a letter to Speaker of the House Nancy Pelosi on December 2nd outlining a number of key corporate governance improvements that should be considered by the 111th Congress. The following eight are highlighted:

  1. Majority Voting for Directors: Directors in uncontested elections should be elected by a majority of the votes cast.
  2. Shareowner Access to the Proxy: A long-term investor or group of long-term investors should have access to management proxy materials to nominate directors.
  3. Broker Voting Restrictions: Broker non-votes and abstentions should be counted only for purposes of a quorum.
  4. Independent Board Chair: The board should be chaired by an independent director.
  5. Independent Compensation Advisers: Compensation advisers and their firms should be independent of the client company, its executives and directors, and should report solely to the compensation committee.
  6. Advisory Shareowner Vote on Executive Pay: All companies should provide annually for advisory shareowner votes on the compensation of senior executives.
  7. Stronger Clawback Provisions: At a minimum, senior executives should be required to return unearned bonus and incentive payments that were awarded due to fraudulent activity or incorrectly stated financial results.
  8. Severance Pay Limitations: Executives should not be entitled to severance payments in the event of termination for poor performance.

These are all great recommendations and I hope they will be taken up. Of course, the devil is in the details and, as I have mentioned repeatedly, I hope any proxy access proposal includes a provision to allow any group of 100 shareowners (meeting the submission rules for resolutions) to place short-slate directors nominees on corporate proxies.

The Social Investment Forum sent another important letter on December 18th letter to Bradford P. Campbell, Assistant Secretary, Employee Benefit Security Administration, United States Department of Labor. The letter criticizes two recent bulletins that could discourage fiduciaries from considering environmental, social and governance factors in investment decisions. Although the bulletins say the basic foundation underlying fiduciary principles (of protecting the financial interests of the pension fund beneficiary) remains intact, their ambiguous language could discourage prudent decision making by trustees in the area of investment policies, proxy voting and shareholder engagement with companies.

The letter goes on to cite specific examples of confusion and studies that show that incorporating ESG factors into investing practices result in outperformance. I think the letter’s closing is worth repeating here. “In closing, it is important to note that these recent bulletins appear to have been prompted by a letter from the Chamber of Commerce seeking to curtail actions by the AFL-CIO. The Department has refrained from doing so. However, any objective reader of these releases must conclude that their apparent departures from prior guidance and established legal principles was motivated by political considerations. Beneficiaries deserve better. The wide discretion afforded to fiduciaries in managing plan assets must be protected from such influence.”


CorpGov Bites

According to, a number of energy companies are now filing Powerpoint presentations as 8Ks. (Energy companies ramp up the slideshows…, 12/12/08)

Co-op America Names Top Corporate Scrooges (12/19/08). The four CEOs who made the list this year “had to have a decidedly negative impact in a year in which the greed of corporate managers helped create a severe downward economic spiral.” Named were Charles Prince, the former CEO of Citigroup; John J. Harris, chairman and CEO of Nestle Waters; Bruce Williamson, CEO of Dynegy; and Rick Wagoner, chairman and CEO of General Motors. On the flip side, WSJ has some ideas for who were the best. (Who Are the Best CEOs of 2008?, 12/18/08)

The Wages of Social Responsibility, this year’s 2008 Moskowitz Prize winning paper by Meir Statman and Denys Glushkov finds that overweighting portfolios toward stocks of companies with high scores on social responsibility characteristics such as community, employee relations and the environment yielded “a return advantage relative to conventional investors.” However, shunning stocks of companies associated with tobacco, alcohol, gambling, firearms, military, and nuclear operations yielded a return disadvantage relative to conventional investors. If SRI investors take a best of class approach, tilting toward stocks of companies with high scores on social responsibility characteristics, but refraining from shunning “sin” stocks, they are likely to beat the traditional indexes.

Stausboll Heads CalPERS

Anne Stausboll is the pension fund’s new Chief Executive Officer (CEO). As CEO, she will oversee the System’s operations which includes 2,300 employees, a budget of more than $332 million, and programs spanning investments, health and retirement benefits administration, actuarial and employer services, supplemental retirement programs, a long-term care program, government affairs, stakeholder relations, and numerous support functions.

She will become the first female CEO to lead the pension fund in its 77-year history.  “Anne is a stellar public servant and natural leader for our fund,” said Rob Feckner, President of the CalPERS Board of Administration. “Her leadership and government policy experience in all facets of her career will serve our members, employers, and staff very well.”

Stausboll re-joined CalPERS four years ago as the System’s Chief Investment Operating Officer working closely with CalPERS senior investment officers to implement investment strategies for the System’s real estate, alternative investment and public market portfolios, including the development of portfolio trade and management systems. She also has oversight of the search process for external managers, advisors and pension consultants, coordinated internal investment policy, and represented CalPERS on investment-related legislation at both the State and federal level. (press release)

I first met Stausboll when she served as Deputy General Counsel and had to defend the actions of the General Counsel and President in an election appeal.  Although I lost the appeal, she did a great job and the action led to several changes in CalPERS election rules that provide more information to voters and require directors to be elected by a majority vote. CalPERS currently faces a very difficult situation, with steep losses to a portfolio that has dropped in value to $182.6 billion from a high of $247.7 billion on June 30, 2007. but I believe they made the right pick.

Mary Schapiro SEC Chief

Reports from several sources are that President-elect Barack Obama is expected to name Mary Schapiro to head the SEC. Schapiro is a past Commissioner and is currently the chief executive of the Financial Industry Regulatory Authority, the largest non-governmental regulator for all securities firms doing business in the United States. Here’s a link to the text of a speech she made last February. Schapiro covers a lot of ground but gives no clue concerning her policy leanings.

A little more can be gleaned from an earlier 2005 interview by Kenneth Durr for the SEC Historical Society, where she discusses the connection between the derivative markets and the stock markets and her stint at the SEC where she “was very interested in enforcement and administrative process.” In that interview, she also noted “the SEC has responsibility for oversight [of credit rating agencies] yet did very, very little to really understand—particularly in those days—how credit rating agencies operated, what kinds of conflicts they faced, what other services were they providing to issuers.” She expressed a second concern: “it’s a very, very valuable moniker to be a nationally recognized statistical rating organization under SEC rules. And we had a lot of concerns about our process for designating a rating agency.”

In that interview, she goes on to note she dissented on the issue of severely limiting proxy resolutions via the ordinary business rule but then notes that her views have “changed” over the years. I read that to mean she now wouldn’t have chosen to be a dissenting voice.

Open Proxy

I was delighted to see a guest post from Phillip Goldstein (Change the Rules for Proxy Voting, 12/16/08) on The Ichan Report. I have to hand it to Ichan; he is attracting some real quality guest posts. Goldstein argues the fundamental problem is that “it is difficult for stockholders to hold management accountable for its misdeeds.”

Les Greenberg and I renewed the call for proxy access by petitioning the SEC for a rulemaking in the summer of 2002. Proxy access has been repeatedly raised as an issue since the SEC was created. After our petition, the SEC put forth two proposals to finally grant shareholder access to the proxy for the purpose of nominating directors. Unfortunately, they failed to follow the advice of thousands of shareowners. Instead, the first time out they proposed high threshold “triggers” and a lengthy process before resolutions seeking access could even be considered at individual companies. The second time out, they required disclosures of resolution proponents that are greater than those for parties involved in a proxy contest.

Goldstein suggests simply banning “one party” proxy cards. “Such a proxy card frustrates the free exercise of voting rights, since it results in the ‘election’ of directors who might not otherwise have been elected if shareholders received a proxy card that listed all bona fide nominees.”

He advises the Commission to look to the federal standards for electing officers of labor unions and simply substitute the words “shareholder” for “member” and “corporate” for “labor.” That would yield the following rule:

Every shareholder in good standing shall be eligible to be a candidate and to hold office (subject to . . . reasonable qualifications uniformly imposed) and shall have the right to vote for or otherwise support the candidate or candidates of his choice, without being subject to penalty, discipline, or improper interference or reprisal of any kind by such [corporate] organization or any member thereof.”

According to Goldstein, “Implementing this reform will not cure the sorry state of management accountability to shareholders because millions of dispersed investors are still no match for a well organized and highly motivated corporate lobby. But it is a start.

I’m glad to see Goldstein’s proposal get some attention through Ichan’s blog. There is no organization really looking out for retail shareowners in the US. CII has long played a watchdog role for institutional investors. When proxy access is raised again as an issue at the SEC, they will be there advocating for a 3% threshold. But that ignores the rights of small investors, especially at small companies where institutional investors aren’t there to guard their rights. Perhaps Ichan’s USA can fulfill that role.

To the substance of Goldstein’s proposal, it seems like it could lead to several “bona fide” candidates being on the listed on the proxy. Wouldn’t it be more practical to use the UK requirement of nomination by 100 shareowners? Goldstein came back with an e-mail suggesting a threshold of “something like $100,000 worth of stock — for any company.  I like the idea of putting up a bond of say $10,000 which would be refundable if a minimum vote threshold is reached, to keep out fringe candidates.”

In any case, I hope we eventually have more than one candidate for many board positions. If we get more than two, I would propose using instant runoff voting (IRV) where candidates are ranked by preference. This would ensure directors have majority support, without the need to have a runoff election.

I’ve been pushing IRV at CalPERS for years for their own board elections. After we were able to get the rules changed to require majority vote, CalPERS had several runoffs, each costing about $1M.  I think it is simply now a matter of time before CalPERS adopts IRV. The Secretary of State has to certify potential IRV ballot counting systems. There’s at least one in the works. Once CalPERS adopts IRV, I’m hoping they will push the system to corporate elections.

Bailout for Auto Companies

In my opinion, the car companies mostly brought this disaster upon themselves. Where were the boards? Even if they eventually get a bailout, will they really be able to compete against the coming wave of exports from China? Already, China’s BYD, in part backed by Warren Buffett, has started selling a mass-produced plug-in hybrid that goes 62 miles before the gas powered generator kicks in. (BYD Adds Plug-In as China Gets Edge on Toyota, GM, Bloomberg, 12/15/08) That’s 50% further than the Chevy Volt, which is expected to cost 50% more than the BYD… and, from what I understand, GM only plans to initially sell the Volt in very limited numbers. Still, bailing out Wall Street but not main street sends an anti-worker, anti-union message that I don’t agree with.

Clawbacks and Corporate Governance According to Accountants

After discussing two clawback cases that were resolved in French courts, an editorial in the influential UK based publication, Governance, says “Shareholders and directors should ensure, as the inevitable remuneration reviews are undertaken over the coming months, that revisions to incentive plans will prevent excessive and unjustified payments. Even where the award has been earned, the payment of it should be deferred and made conditional on continuing performance thus making the focus of the beneficiaries truly long-term and providing an easier route to clawback than is the case once the money or shares have changed hands.”

In a related article in the same December 2008 issue, the Association of Certified Chartered Accountants (ACCA) issued a discussion paper that reportedly blames the current financial crisis in part on “inadequate risk management and remuneration incentives which influenced behaviour without due consideration of risk leading to the failure of companies which should have been run prudently and sustainably.” The ACCA goes on to outline what it believes are the three main purposes of corporate governance. I thought them worth repeating here, since boards everywhere are grappling with these issues:

  1. ensuring the board protects resources and allocates them to make planned progress towards a defined purpose;
  2. ensuring appropriate accountability by those governing and managing an organisation towards its stakeholders;
  3. and ensuring shareholders and where appropriate other stakeholders can hold boards to account.

FAIR Canada is Hiring

The newly established, non-profit Canadian Foundation for Advancement of Investor Rights (FAIR Canada) is seeking applicants for a Deputy Executive Director and Associate Director. The deadline to apply is December 31. Details: Email

“While regulators and government policy makers receive input from industry, listed issuers, financial institutions and their legal and other advisors, too often they have limited input from investors, particularly retail investors who lack the necessary legal, accounting and financial resources that are available to other stakeholders to advance their interests” said Mr. Pascutto, FAIR’s initial Executive Director.

Osgoode Hall Law School has agreed to provide FAIR with physical premises and other support for three years, as part of the school’s ongoing efforts to engage on issues at the intersection of law, business and public policy. Fair Canada will seek to advance the interests of investors and the integrity and fairness of Canadian capital markets by:

  • making submissions to securities regulators, stock exchanges, government and other bodies on priorities, policy, legislative change and enforcement to advance the interests of investors;
  • proactively identifying emerging issues that affect investors and seeking reform to mitigate harm to investors; and identifying actual conduct by issuers, registered persons and other market persons that is, or may be detrimental to, investors and where appropriate encouraging action to enhance investor rights and protections.

During its first year of start-up activities, the Foundation will focus on:

  • building an organization staffed with individuals with expertise in investor rights issues;
  • establishing relationships with investor rights, corporate governance and consumer organizations to help identify the issues which are of greatest concern to them;
  • developing a web site and establishing other processes to facilitate dialogue and communication between investors and the Foundation; and
  • creating ties with law and business law schools across Canada with the objective of involving them in developing educational programs on investor rights. (see prior press release)


Canada’s Shareholder Association for Research and Education published a comprehensive toolkit that helps pension funds, foundations and endowments understand and learn to implement responsible investment. They maintain a comprehensive database of Canadian Shareowner resolutions from 2000 to 2009. From January 25-30 SHARE will hold a Pension Investment & Governance Basics course for newly appointed or soon-to-be appointed trustees, pension advisory committee members, union executives, and staff with responsibility for pension matters. They published a holiday reading list. Even more announcements and news in their newsletter. Sign up under SHARE e-News.

New SIF Directors

The Social Investment Forum (SIF), a nonprofit membership association for the socially responsible investment (SRI) industry, added five new board members who well serve from January 1, 2009 through December 31, 2011. They: Sarah Cleveland, senior consultant and financial services manager at Rogerscasey, Inc.; Amy O’Brien, director of social investing, TIAA-CREF; David Sand, president and chief investment officer, Access Capital Strategies; David Wood, director, Institute for Responsible Investment; and Betsy Zeidman, director, Center for Emerging Domestic Markets, and research fellow, Milken Institute. (press release, 12/15/08) SIF is a great source for news, action and networking. I urge readers to join.

ESRC Call for Papers

Corporate Governance and Banking Institutions is the theme of the next Economic and Social Research Council (ESRC) Corporate Governance, Regulation and Development Seminar Series, which will take place on Friday 20th February, 2009 at Oriel College, Oxford. Submissions are welcomed on: (i) the role played by banks in the governance of industrial firms; (ii) the corporate governance of banking institutions; (iii) the role and governance of the ‘shadow banking’ sector (that is, institutions providing credit but not regulated as banks). Theoretical and empirical submissions are welcomed from a range of disciplinary perspectives, and may relate to either developed or developing markets. Seeannouncement for details.

Questions Developing on Compensation

The Shareholder Forum, spearheaded by Gary Lutin, is starting with the model of TIAA-CREF’s “Ten Questions” discussed at the recent Forum meeting addressing “Say on Pay,” with the objective of defining some variation that can be used to:

  • obtain the information most investors will need for the kind of company-specific analysis that demands more than a “box-ticking” review of compliance with general guidelines, and
  • satisfy the needs of a sufficiently broad range of investors that will justify corporate-initiated reporting of responses in public filings, as suggested by a company representative at the Forum meeting.

To participate in a survey on the subject, click here. See also Executive Pay Limits May Prove Toothless (Washington Post, 12/15/08) Although the law limits executive compensation, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, so a loophole renders enforcement void. Senators on the Finance Committee have expressed concern to Paulson and are now considering whether they should amend the law to apply the enforcement mechanism to all firms participating in the bailout.

In Blank Check for Banks, Pink Slips for Detroit (NYTimes, 12/14/08), Gretchen Morgenson provides the latest evidence of unfairness in our “Bailout Nation.”

Majority Voting

The Corporate Library’s latest report, “Majority Voting For Director Elections – It Is Not Yet Standard Practice,” examines majority voting for director elections, concluding that despite progress in this area, shareowners still do not have a meaningful role in director elections at a large number of publicly-owned companies in the U.S. The report is written by Annalisa Barrett and Beth Young, both experienced Senior Research Associates.

While less than a third of Fortune 500 companies still use straight plurality voting, “nearly three-quarters (74.9 percent) of the companies in the Russell 3000, still use a straight plurality voting standard for director elections.”

Shareownership Down

Risk tolerance has decreased among both younger and older households since 2001. This decrease in willingness to take risks appears to be related to the stock-market turbulence in the bear market of 2000-2002 and appears to have played a role in the decrease in ownership rates in recent years, from a peak of 57 percent of households in 2001 to 47 percent in 2008. (see Equity and Bond Ownership in America, 2008, ICI & SIFMA)

Recommended Reading

Walden Asset Management has a great December newsletter covering not only their own proxy initiatives but also the idea of a social investment scorecard, the Investor Network on Climate Risk, cutting edge companies and much more. Download it from their home page.

KLD 20th Anniversary Retrospective is also a very informative read, with a timeline and several interviews with some of the thought leaders who have helped to shape SRI.

Dan Swanson, a 26-year internal audit veteran who was director of professional practices at the Institute of Internal Auditors. Prior to the IIA and an independent management consultant for more than 10 years, writes of Twenty Questions For Directors To Ask Internal Auditors. “A robust internal audit function strengthens corporate performance and provides assurance to the audit committee and the board that the organization is doing all the things it should be doing.”

Responsible Investment Reading List

2009 Current developments for directors, a comprehensive guide from PriceWatershouseCoopers. Some of the key issues that stand out in 2009 for directors: Implications of the economic crisis; Governance and risk management; Changing regulatory landscape; Trends in governance scrutiny; Taxes: What’s on the horizon?; IFRS: A reality for US business?; Why care about sustainability?

SEC Under Goldschmid

Harvey Goldschmid, a former Securities and Exchange Commission member who is frequently mentioned as a possible successor to chairman Christopher Cox, is calling for major changes at the agency, including regulation of hedge funds and a merger with the Commodity Futures Trading Commission (CFTC) that would preserve the SEC as the dominant securities regulator. (Goldschmid Calls for ‘Dramatic Rethinking’ of SEC,, 12/15/08)

Advice for Obama

President-elect Barack Obama can help to avoid future market disruptions and also pave the way for a sustainable economy if he protects and strengthens investors’ rights to use the shareholder resolution process to highlight corporate risk factors and press for needed remedies, according to a joint lettersubmitted today by over 60 leading institutional investors, investment firms and investor groups representing approximately $300 billion in assets. As the publisher of, I was delighted to be one of the signatories.

The letter President-Elect Obama to act within the first 100 days of his administration to reverse a five-year “pattern” at the SEC of blocking shareholders using proxy resolutions to request better disclosure of identified financial risks from marketplace, social, or environmental concerns.

Signatories represent a diverse group, including the Office of the Comptroller of the City of New York; Robert A.G. Monks, Amy L. Domini, John Harrington, Peter Kinder, Calvert Group, Domini Social Investments, Trillium Asset Management Corporation, Boston Common Asset Management, Catholic Healthcare West, the Investor Network on Climate Risk, the Investor Environmental Health Network, Ceres, and the Interfaith Center on Corporate Responsibility.

The letter points out that investors are in a “unique position to monitor the companies in their portfolios, and to guard against certain risks to stock price, and to society, by encouraging responsible decision-making by management.” Resolutions have been an important tool in that effort but “the SEC has gradually been closing the door to important shareholder concerns. Shareholder proxy requests that had been allowed in previous years asking for better disclosure of financial risks to companies have been stymied.”

As the letter explains: “We recognize that in the early days of your administration you will be focused on shoring up the economy and helping to restore consumer confidence. As part of your strategy we urge that you help us to correct decisions that have undermined our ability to use the shareholder resolution process to probe these issues on a company by company basis.”

Calvert Senior Vice President for Social Research and Policy Bennett Freeman said: “The President-elect has made it clear that addressing climate change will be a top priority… A change in SEC rules on risk evaluation will make us even more effective partners in this effort.”

“We view shareholder resolutions as an essential part of our tool kit as a fiduciary. The SEC’s withdrawal of our right to use resolutions to probe risks that concern us has hampered our ability to monitor and enhance corporate performance and responsibility,” said Lauren Compere, director of shareholder advocacy at Boston Common Asset Management.

Sanford Lewis, counsel to the Investor Environmental Health Network noted: “With recent product toxicity issues, such as lead in toys, many companies knew about the potent financial risks posed by chemicals in their product lines. Even though they omitted these disclosures in their financial reports, shareholder resolutions to seek better disclosure of these risks through the proxy process were also being obstructed by the SEC.”

Obama’s campaign recognized the strength of grassroots organizing. His career path demonstrates a commitment to empowering people to solve their own problems. The current economic debacle was primarily the result of risky corporate strategies that now need to be addressed before confidence can be restored. We just can’t continue to throw money at the problem. Regulations need to be revamped, we may need a “car czar,” but we can’t design regulations or appoint a government official to oversee every important decision in the economy. That’s where shareowners come in.

Shareowners represent a much broader cross section of society than managers, especially “universal owners,” such as the CalPERS, CalSTRS and TIAA-CREF. Universal owners out of necessity and SRI funds by choice have a particular interest in issues that affect the economy as a whole. While owners of a specific firm may seek to increase gains by externalizing costs, by polluting the environment, or paying workers so little they are dependent on public welfare, universal owners are largely dependent on a rising market. Issues such as fiscal policy, infrastructure, education, and worker health, and safety standards that generate a positive environment work in their favor. Their returns – and their ability to meet their fiduciary duties – more often depend on how well state, national, and increasingly international economies perform. Shareowner resolutions have been an important tool. I hope Obama will also move on granting “proxy access” so that shareowners can police our own companies.

Limited Seating

The early registration deadline for the Corporate Directors Forum 2009 is December 23rd. Registration after that date will cost more and space won’t be guaranteed, so register soon and please mention This is a great opportunity for directors to get 12.5 credit hours accredidation through the ISS/RiskMetrics preferred Boardroom Education Program. Attending can boost your company’s ISS Corporate Governance Quotient™ scores. Likewise, attorneys can get 12.5 MCLE credits with the State Bar of California and public accountants get 12.5 CPE credits. All are sure to gain insights at this conference where attendance is limited to about 250 and there will be about 50 presentors in a very intimate setting.

Take a quick look at the Keynote Speakers and the Agenda, you’ll see top corporate CEOs, directors, investors, regulators and commentators. I’ve also signed up for the pre-conference sessions presented by the Corporate Governance Institute at San Diego State University. Let me know in advance if you’re going, I’d love to meet with readers at one of my favorite venues.

Looking Ahead

Ted Allen, of the RiskMetrics Group, provides a fairly comprehensive look at the upcoming proxy season in A Look Ahead to 2009 Proposals.

Among the more creative are the following:

  • Extending TARP requirements. Laborers’ International Union of North America, International Brotherhood of Teamsters, and the United Brotherhood of Carpenters and Joiners.
  • Extend the minimum period that senior executives must hold onto shares obtained through equity awards. AFL-CIO, the Connecticut Retirement Plans and Trust Funds, and AFSCME. As I’ve mentioned before, AFSCME’s proposal would extend two years beyond the executive’s employment termination or retirement. That is good insurance against short-term gimmicks.
  • Say on “golden coffins.” Teamsters, UNITE HERE, AFSCME, and the Amalgamated Bank’s LongView fund.
  • Eliminate excise tax gross-ups for senior executives. AFSCME.
  • Reincorporate in North Dakota. Several of us working with John Chevedden.

Stephen M. Davis and Jon Lukomnik provide their thoughts on The SEC’s Fate Under Obama Administration in Compliance Week. (12/9/08) Pay attention to the small things like:

  • Enforcement, which they argue is nearly invisible under the Bush Administration relative to the financial crisis. Implication: Obama could hardly do less.
  • Regulation of financial institutions. “Regulation of the financial system has been removed from the SEC’s hands and placed into those of the Federal Reserve or the Treasury Department.” They also cite other issues, including the SEC’s “ham-handed effort to address investor access to the proxy statement, diminishing the agency’s reputation still more.”

The options, as Davis and Lukomnik see it, are repair the current structure; tinker with a minor redesign, sending some enforcement staff to the Fed; or third, rationalize the fractured enforcement landscape. They also discuss Rosenzweig’s challenge to Broadridge with Mediant Communications, which “promises to give institutional investors an audit trail to prove that their votes were cast” and for corporations to push to know who their retail shareowners are.

As I’ve indicated before, if corporations can communicate directly with retail shareowners, ESG issues are likely to suffer, unless they can be convinced to increase voting by “brand” through mechanisms like Proxy Democracy.

With a post that appeared both on The Ichan Report and The Harvard Corporate Governance Blog, Carl Ichan argues “the theory of the public corporation is not bankrupt, the practice is.” Part of the solution he is pushing is to allow shareowners to decide where companies should incorporate. “With true competition for board seats, accountability can be restored and managers would be compelled to work for value maximization on behalf of shareholders.”

“Currently, the best opportunity for shareholders is to sell their shares and stand by while, in many cases, the same management team that ran their companies into the ground reap additional millions for a job poorly done.” And, of course, he ends with a plea to join his United Shareholders of America. I like what he writes. I just wonder how democratic the United Shareholders of America is and what Ichan will do with all that contact information.

Delaware Revelations

The International Corporate Governance Network seminar in Wilmington, Delaware provided “an extraordinary event,” since a panel consisting of a majority of the members of the Delaware Supreme Court and the Delaware Chancery Court answered questions. Luckily for those of us unable to attend, Francis G.X. Pileggi took notes and provides them in Delaware Corporate Governance–Views from the Bench. I urge you to read it, but here are a few observations:

Regarding the business judgment rule, risk and the economic crisis, Vice Chancelor Strine says the director monitoring function may come into play more prominently. (I should hope so.) Regarding balance, he says, our corporate law is primarily contractual in nature, as opposed, to environmental law which is mostly regulatory. (I prefer Kent Greenfield’s book The Failure of Corporate Law: Fundamental Flaws & Progressive Possibilities, which posits that corporation law shouldn’t be thought of as “private” law but as “public” law, such as constitutional, tax, or environmental law. Corporations are sanctioned by the state and our goals for them should include more than just maximizing profits for shareowners.)

Vice Chancelor Lamb asserted that shareholders ultimately decide to come to Delaware or stay here. (Perhaps in theory, but in reality the state of incorporation is decided before shareowners become owners and getting corporations to reincorporate in another state is extremely difficult… even RiskMetrics appears to be opposing initiatives to move companies to North Dakota.)

Re director liability, Vice Chancelor Parsons says boards must have monitoring systems in place that are likely to detect problems and must provide for a way to deal promptly with problems once detected. (By that measure, their appears to be great potential for lawsuits around the current financial crisis.)


The same day Forbes carried The Billionaire Bloggers (12/2/08), which included the Ichan Report, I got a note from James Kristie, Editor and Associate Publisher, Directors & Boards, letting me know he is also blogging. I Kristie gave a PR class he teaches the assignment of creating a blog — so he decided to practice what he preaches. See Boards at Their Best. As I write this, his latest blog discusses the expression “The world is awash in liquidity,” which he first heard in a presentation by a hotshot financier from Bankers Trust in 1988. His observations are often humorous and always insightful.

The Icahn Report, as described by Forbes, “is packed full of news and diatribes, mostly aimed at the scourge of inept business executives. Recent guest contributors include Dylan Ratigan of CNBC and corporate watchdog experts,” including Nell Minow. As I write this, he is raging against tax gross-ups, especially those applying to golden parachutes.

Mark Latham, a long-time advocate of voter funded media for improving the governance of democracies and corporations, has several blogs. One of his newest is the VoterMedia Finance Blog. Andy Eggers has ProxyDemocracy Blog. I’ve written many news items on their efforts over the years. To see them, use the “search hints” button to the left.

I added the Icahn Report some time ago to our list of Blogs & Blog-Like links on our Links page. Now, I have added the blogs discussed above as well.

There was also an interesting post at Truth on the Market about Whole Foods Market filing a lawsuit against the Federal Trade Commission. Whole Foods compares the FTC to the Queen, maintaining that the FTC’s conduct in its challenge to the Whole Foods/Wild Oats merger has deprived Whole Foods of its due process rights by “pre-judging” the case that it is now to adjudicate. It also accuses of the FTC of “rushing to trial.” (Whole Foods Brings It, 12/9/08) (Note: The publisher of is a shareowner in Whole Foods and has filed a resolution requesting they reincorporate in North Dakota so that shareowners obtain additional rights such as split chair/CEO, annual board elections, and the right of 5% shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures. (see also Shareholders Ponder North Dakota Law, WSJ, 12/8/08)

Internal Auditors Seek Voice

On the heels of an audit repot from the U.S. Government Accountability Office recommending that the Treasury Department develop internal controls to ensure appropriate use of $700 billion in taxpayer bailout relief for the U.S. economy, the standard-setting body of the internal audit profession is taking steps to determine what role internal auditing should play in helping solve the global financial crisis. In a survey conducted last week of The Institute of Internal Auditors’ (IIA’s) global leadership – who work in top internal auditing positions in public, private and government organizations throughout the world – more than half indicated they feel that internal auditors need to be involved in the bail-out disbursements.

IIA will hold an online summit to determine key strategies to ensure internal auditors are involved in the process to help fix the global financial crisis. (IIA press release, 12/5/08)

Back to the top


Going Concern

UK directors have to make “going concern” opinions in their annual reports, signed off by auditors, that indicate if the company will be viable for at least the next 12 months. Of course, in a down economy such judgements get more difficult.

According to a report in FT, “Key issues are likely to centre on the company’s ability to cover its expenses if it cannot renew its credit facilities or if revenues fall 10, 20 or even 30 per cent below what is already likely to be a sharply reduced forecast.” (Directors seek ‘going concern’ legal advice, 12/5/08)

“Auditors are aware that if they are too harsh in their “going concern” assessment in the annual report, they risk pushing a client over the edge. Be too lenient and certify a struggling company as clean, and they face litigation if it does collapse.” (Annual ritual now fraught with danger,, 12/05/08).

It would be interesting to see such disclosures at US companies. I’m filing it away with ideas for future resolutions.

An update for directors of listed companies; going concern and liquidity risk was published in November 2008 by the UK’s Financial Reporting Council. “The update brings together the requirements on directors to comment on going concern and liquidity risk in annual reports and accounts, in the light of the significant economic difficulties that were being experienced in the latter half of 2008. The update addresses the requirements of International Financial Reporting Standards, UK Generally Accepted Accounting Principles, the Listing rules of the Financial Services Authority, the 1994 Guidance for directors, The Companies Act 2006 and its requirements about the content of a Business Review in relation to December 2008 year ends. The update may also be useful for directors of unlisted companies.” (see Going Concern and Financial Reporting)

California Public Funds Governance Event

Los Angeles Pension Trustees are sponsoring Governance Round Up for 2009. This an opportunity for pension fund staff/trustees, interest groups and investment managers to present their governance programs for 2009.  These may include corporate shareholder programs, private equity and hedge fund policy positions, ESG initiatives or international governance positions. Several of the largest funds in California are participating.

It looks like a great opportunity to get in front of funds with hundreds of billions of dollars of investments, to network, and/or to learn what’s coming. Jack Ehnes, CalSTRS CEO, will be the Emcee. February 23, 2009 9am to 4pm, at the Sheraton Gateway, with a shuttle to LAX.

Giant Database of ESG Reports

Investor signatories to the United Nations Principles for Responsible Investment (UNPRI), with assets totalling about $18 trillion, will soon be able to access what should quickly become the largest independent database of environmental, social and governance (ESG) reports produced by sell-side brokerage research houses, as the first step of the recently announced merger between the UNPRI and the Enhanced Analytics Initiative (EAI). (PRI launches ESG broker research database, responsible investor, 12/4/08)

SEC Focus on Credit Raters

The SEC “approved a series of measures to increase transparency and accountability at credit rating agencies, and ensure that firms provide more meaningful ratings and greater disclosure to investors… The SEC’s actions were informed by the agency’s extensive 10-month examination of three major credit rating agencies that found significant weaknesses in ratings practices.” (press release, 12/3/08)

Of course, these agencies have come under severe criticism around the globe for what is perceived as their negligent

ratings of residential mortgage-backed securities backed by subprime mortgage loans and of collateralized debt obligations linked to subprime loans, which contributed to the recent turmoil in the credit markets… and that’s putting it mildly. My understanding is that the new rules:

  • Prohibit providing both rating advice and advice as to how to structure securities at the same time.
  • Bar those who evaluate debt from discussing fees.
  • Limit gifts from underwriters.
  • Require annual reports detailing rating upgrades and downgrades by asset class over 1, 3, and 10 year periods.

According to Financial Times, the SEC decided not to vote on a measure to require agencies to differentiate ratings on structured finance products from traditional corporate bonds or to reduce investor reliance on ratings by dropping explicit references them in SEC rules. (SEC to crack down on credit rating agencies, 12/4/08.

Attention Fellow Canadians

The Corporate Library’s latest report, Governance Practices at TSX 60 Companies, follows release of their third annual Governance Practices Report in October. According to TCL, “the differences between the findings of the Canadian governance practices study and the earlier U.S. report are intriguing.” The 10-page report includes findings on a broad range of governance practices including ownership structure, outside auditors, board size and meetings, CEO age and tenure, and board leadership.” The report is available for $55.00 at The Corporate Library’s online store. Relatively cheap, eh?


WorldBlu plans a new website to include the incorporation of news feeds, videos, democratic workplaces employment opportunities, and podcast interviews. The site will also help connect people with new technologies and tools to help design democratic organizations. “We are working on creating a marketplace that can connect people with the tools and technologies that are being developed to create the systems and processes necessary to run a company democratically,” says Fenton. WorldBlu envisions the new website to include a map of the world with democratic organizations listed so people can click on each to learn more. (Axiom News, 11/14/08)

Financial Darwinism

Just as global climate change has increasingly brought us more frequent “once in a century” weather events, increased competition and economic globalization have resulted in lower margins, increased commodification, and increased risk – leading to a similar pattern of economic volatility centered around our financial institutions.

Leo M. Tilman’s Financial Darwinism: Create Value or Self-Destruct in a World of Risk paints a rather bleak picture. He sees systemic financial crises as a “permanent feature of the dynamic new world.” This isn’t a book for those looking for ideas aimed at governments attempting to reregulate the financial industry, although they would certainly benefit from the reading. Instead, the book offers very practical advice to bankers, institutional investors, and other businesses on how to build risk analysis into strategic decision-making.

In the old paradigm, the risk manager was brought in after major strategic decisions had already been made. In the new paradigm, “risk management becomes the very language of enterprise-wide strategic decisions going forward and that the chief risk officer becomes an executive who gets an equal seat at the table where corporate strategy is decided.”

Tillman identifies at least ten forces contributing to this shift, including:

  • Globalization
  • Inflation targeting and control by central banks
  • Disintermediation
  • Greater availability of information
  • Greater financial market efficiency
  • Alternative investment vehicles
  • Financial deregulation
  • Convergence of traditional financial businesses
  • Increasingly complex instruments, such as derivatives and structured products
  • Advances in technology, financial theory, analytics and risk management

In the simplest formulaic terms we have gone from: Economic performance = return on assets – cost of liabilities + fees – expenses – cost of capital

To: Economic performance = balance sheet arbitrage + principal investments + systematic risks + fees – expenses – cost of capital

Of course, that’s just the beginning of the complexity. Tilman does an excellent job of explaining this paradigm shift, how we got here, what factors need to be examined going forward, and how they can be understood in relatively simple formulaic terms.

Financial Darwinism recognizes that our growing toolbox includes leverage, product design debt management, capital structure, M&A, insurance, securitization, hedging, asset strategies, etc. Each tool must be considered in developing and implementing strategy.

As the world places increasing emphasis on fair valuation, risk-based financial disclosure and risk-focused regulation, Tilman’s guide becomes more important for CEOs, directors and fiduciaries who must build risk evaluation into all fundamental decisions. For another perspective, download Putting risk in the comfort zone: Nine principles for building the Risk Intelligent Enterprise™ from Deloitte. See also Prudent Practices in a Bad Economy, advice from David B. Gail, Mary R. Korby and Michael A. Saslaw for corporate boards.

Concentrated Ownership

According to a study by Sanjiv Sabherwal and Stephen D. Smith (Concentrated Shareholders as Substitutes for Outside AnalystsCorporate Governance: An International Review, Vol. 16, Issue 6, pp. 562-577, November 2008), outsiders with larger stakes in a firm are more likely to produce its own in-house information for monitoring the firm’s manager and avoid both the cost and moral hazard problems associated with analysts.

Using an ownership dataset with a sample of 3,115 firm-year observations for U.S. firms and regression techniques that address any potential endogeneity, they find that analyst following is negatively related to the concentration of outsider and insider shareholdings. Additionally, if senior managers hold large stakes in the firm, there is a greater likelihood that managerial incentives will be aligned with those of other shareholders.

This is just one of many important studies in the current addition of Corporate Governance: An International Review. I love their recent shift to a standardized abstract with the following headings: Manuscript Type, Research Question/Issue, Research Findings/Results, Theoretical Implications, Practical Implications. Also of note, the Review has added another layer of “screening editors” to help them get through submitted manuscripts. Volume is likely to hit 350 this year, compared to slightly over 260 in 2006. As a result, their publishing standards are ramping up.

Democratic Workplaces

Semco employees have plenty of freedom but are also under peer pressure to perform. Staff set their own wages with the consent of their workgroups, which also hire and fire. Now the person who started a company without traditional bosses is starting a school without traditional teachers and an ecotourism resort run by local villagers. See a 14 minute film on the Semco business model.

WL Gore’s success is profiled in The Chaos Theory of Leadership (FT, 12/2/08). “Leaders emerge through a democratic process rather than being appointed from the top, and peer appraisal is crucial to both salary levels and career advancement… We vote with our feet. If you call a meeting, and people show up, you’re a leader.”

Think your company deserves attention for being a democratic workplace? If so, I encourage you to apply for the WorldBlu List of Most Democratic Workplaces.™ If your company isn’t eligible to be listed, you might want to check out What is the Value of Organizational Democracy. Better yet, read a copy of the classic Workplace Democratization–Its Internal Dynamics by Paul Bernstein. Another great source of information is the National Center for Employee Ownership. See also How Cisco’s CEO John Chambers is Turning the Tech Giant Socialist, Fast Company.


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