Archive | February, 2009

February 2009 Special News Supplement: Corporate Governance Roundup 2009

Yippee-i-o-ki-ay! From the conference flyer, I half expected Will Pryor, Director of the IAFF Local 10Ehnes14 and conference “go-to” guy, to show up in chaps, especially with his e-mail encouraging attendees to dress casually. Well, maybe next year. Suits and jackets prevailed in the fashion arena but there was little in the way of pretense as funds from all over California and beyond shared mostly proxy strategies. The conference was also well attended by consultants, service providers and investment advisors. Jack Ehnes (right) was the emcee and set the tone for moderators by keeping everyone on track and additing insights, without dominating the conversation.

Session One

The fist panel was composed of Bill McGrew of CalPERS, Ann Sheehan of CalSTRS (left), and John Wilson of TIAA-CREF, ASheehanmoderated by Ralph Whitworth of Relational Investors. I was a little surprised to learn that TIAA-CREF, with more than twice the assets of CalPERS, has about half as many staff working on corporate governance issues. (6 vs 11) Maybe the bigger you are, the less you need to spend to influence outcomes. Each discussed their fund’s proxy policies and initiatives. Since I live near Sacramento and am more familiar with CalPERS and CalSTRS, I paid more attention to Wilson discussing TIAA-CREF’s collaborative approach.

They don’t look at themselves as “activists” but as moderates, engaging in private dialogue, using a non-prescriptive approach but having influence behind the scenes. With holdings in about 7,000 companies, they view themselves as universal owners and all that entails, focusing more on driving changes in the market vs at individual companies. Their efforts can largely be broken into three areas: proxy voting, corporate engagement, and thought leadership. Wilson made one of the stronger arguments at the conference that divestment simply allows companies to profit from genocide in Sudan, for example, by selling shares to investors who don’t care. TIAA-CREF emphasizes reputational risk to companies in situations where they aren’t open to other arguments. (Although in the case of the Sudan, it is now mostly Asian companies that continue operating there.)

All three giant funds emphasized their relationship with CII, ICGN, global reporting initiative and other national and international organizations. All are concerned with executive pay and agreed the problem is more the rationale of the pay package, not so much the size. Pay needs to be structured in a way that it can’t be gamed. It should encourage sustainable development of the company. All support proxy access, as did just about everyone at the event.

Session Two

This was a short session with two panelists: Ann Yeger of CII (below, right) and Allen MacDougal of PIRC, HKimmoderated by Hank Kim of NCPERS (left). Is your public pension fund under attack? See Lies, Lies and More Attacks on Pension Plans, as well as other publications from NCPERS.

Yerger discussed CII’s efforts and involvement in economic reforms. For example, the Investors’ Working Group (IWG), led by William Donaldson, and Arthur Levitt Jr., both former SEC chairs. The non-partisan panel of experts is co-sponsored by CII and
the CFA Institute Centre for Financial Market Integrity. An initial report and
recommendations are expected by late spring. In April, CII expects to release a white paper commissioned by their credit rating
agencies subcommittee. I liked this phrase from a handout: “The ability to attract capital and investors, not just listings, is what makes markets competitive… investor interests should always come first.” Top concerns for CII were identified as:Yerger

  • majority voting for directors
  • proxy access
  • broker voting eliminated
  • independent board chairs
  • independent compensation consultants
  • say on pay
  • clawback provisions for unearned bonuses
  • no pay for failure – termination for poor performance

MacDougal (below left), from PIRC went on to discuss “a way out of the crisis.” He brought up the need for asset managers to be subordinate to fund trustees and the need for trustees to get involved in market reform. He also mentioned the United Kingdom Shareholders Association (known as “UKSA”), formed in 1992 to support and to represent the views of private (ie. non institutional) shareholders. UKSA provides investment education and conveys the views of investors to the boards of British companies, to the MacDougallGovernment, to the Stock Exchange, to the media and to other bodies. Wouldn’t it be grand to have something like this in the US?

He also brought up an organization that arose to help get qualified independent directors on boards. ProNed was established in 1981 by the Bank of England, following a series of banking crises in the 1970s. Yes, somewhat similar to what we now face in 2009. With proxy access likely to be granted soon, it would be great to see a clearinghouse like this in the US. Shareowner groups seem much more likely to take action if they can easily coalesce around director candidates already vetted by shareowners. There’s a ProNed in Australia. I’m not sure how involved shareowners are in it, or even how involved they were in the original.

A few of MacDougal’s other ideas involved independence of compensation and audit consultants, collective funding by investors of the effects of incentives on behavior (with regards pay), employee representatives on boards would provide another avenue of oversight (as in European countries), additional investor representation is needed in government commissions and regulatory bodies, and he favors mandatory voting disclosure for all fund managers. “We need to be radical AND practical,” he said. I say, we need to get more speakers, like MacDougal, from outside the US with a fresh perspective. I’m glad he made the long trip for the event.

Session Three

Ralph Whitworth, of Relational Investors, Denis Johnson, of Shamrock Capital, Scott Zdrazil of Amalgamated Bank and Mike Ibarra of Landon Butler presented their investment opportunities, proxy strategies and practices. Dan Pedrotty of the AFL-CIO moderated. Relational Investors and Shamrock take stakes in just a few companies. Relational focuses on:

  • business strategy (long-term value, mitigating risk),
  • capital allocation to maximize return,
  • capital structure (optimal use of debt/equity),
  • governance (transparent, responsive, accountable),
  • board composition (diverse, independent, engaged),
  • compensation (LT alignment, reinforce strategy and risk mgt.),
  • communication (timely, accurate, consistent, realistic)

During thDenis Johnsone Q&A, Whitworth said he doesn’t favor more rights for long-term investors. I haven’t heard anyone from these types of funds who does. I suppose when a fund makes a commitment of time and effort, they want to be heard right away, not ignored for the first few years.

Shamrock’s strategy was similar, although Johnson (left) placed more emphasis on removing anti-takeover provisions and providing shareowners the ability to call a special meeting. Shareowners need to accept more responsibility for removing ineffective directors. Withhold votes should have been greater in the past. Shamrock will help ensure such votes will be higher in the future. Proxy voting policies should place a greater emphasis on poor relative stock performance, he says.

Scott Zdrazil, of Amalgamated Bank, emphasized their resolutions for 2009. They’ve been using resolutions to try to “move the market” since 1992. This year they have over thirty. Zdrazil highlighted the following:

  • majority vote standard for director elections
  • annual election of all directors
  • separation of CEO and chair
  • oversight and disclosure of political contributions
  • curtailing “golden coffins”
  • clawbacks for unearned compensation
  • say on pay
  • double trigger change in control provisions – to kick in, must be change of control and termination of CEO
  • ban gross-up – let CEOs pay their own taxes
  • golden parachutes
  • healthcare reforms – adopt universal principles for national healthcare reform
  • adopt ILO labor standards

Mike Ibarra, of Landon Butler, emphasized the history of their Multi-Employer Property Trust (MEPT) funded mostly by building trade unions and pensions. He described their Responsible Property Investing as comprehensive in terms of environmental, social and governance, to preserve and enhance economic returns. The MEPT claims to have created 52 million jobs through 2006 and has played a key role in revitalization and historic preservation. They’re beating the comparable indexes, so you can do well by doing good.

Session Four

After a nice lunch, we heard from the AFL-CIO, CTW/SEIU, AFSCME and LIUNA, moderated by Carolyn Widener, of CalSTRS. Dan Pedrotty, of the AFL-CIO said they will shortly issue a rating for registered investment advisors, discussed the need to reregulate capital markets, focus more on risk management, and push for greater disclosure. He then talked about some of their new proposals:

  • golden coffins
  • hold past retirement – retain 75% of comp shares until two years after termination
  • healthcare initiative – universal, continuous, affordable, high quality

Rich Clayton then discussed the focus of Change to Win and SEIU. The focus was broader than most, with initial emphasis on the Investor and Employee Free Choice Act, which is critical to ensuring that higher productivity leads to improved paychecks. He had plenty of graphs to demonstrate our new gilded age and how the increasing disparity on income and benefits has helped fuel our problems and the financial crisis. The proportion of workers wanting to join a union has risen substantially during the last 10 years but intimidation has kept them from doing so. Clayton also touched on the 2009 resolutions being introduced by SEIU’s Capital Stewardship Program. These include:

  • say on pay
  • climate risk and greenhouse emission targets
  • labor standards / ILO compliance
  • regulatory reforms
    • proxy access
    • say on pay, and other exec compensation reforms
    • ending broker votes
    • ESG disclosure and clarification of fiduciary standards
    • reinvigorating long-term ownership discussions

Scott Adams described AFSCME’s top three governance priorities as say on pay, proxy access and vote no or withhold campaigns on directors. They will continue pushing majority vote requirements, board declassification, anti-gross ups, and in attempting provisions to recover solicitation expenses. New initiatives this year are requirements to hold equity shares for several years in escrow and to delete golden coffins. They are also working on reforms to reconstruct bond rating agencies.

Richard Metcalf then described LIUNA’s program. They seem to make more of an effort than most (TIAA-CREF in this bunch excepted) to engage companies before filing. They are using a questionnaire to determine if companies have done adequate succession planning. Turnover of CEOs has increased and there is a growing trend of looking to the outside (presumably for a savior). We’ve seen high exposure misfires, such as at Home Depot. They’re also disturbed by conflicts of interest among executive compensation consultants. LIUNA is seeking annual performance reviews by the board, development of criteria for internal candidates, planning three years in advance and annual disclosures on succession planning. He also described efforts to limit the SEC’s “ordinary business” exclusion, which has been used to exclude proposals like those submitted by LIUNA in 2006 seeking evaluation of risk at mortgage lending by home builders. Others thrown out sought to draw attention to credit rating conflicts, succession planning and evaluation of risk. He quoted former SEC Chairman Harvey Pitt, “It is impossible for the SEC to determine what the ordinary business of a corporation really is.”

Session Five

The final session saw brief presentations from Glass Lewis, Corpgov.net, ICCR, and the RiskMetrics Group. Bob McCormick of Glass Lewis led off with a comprehensive presentation that touched on the credit crisis, executive compensation, majority vote for directors, say on pay, M&A, contests, the new administration, initiatives from 2008 and those we will see in 2009. The loss of broker votes, combined with majority requirements, will make a difference in director elections. In his handout, McCormick discusses the Waxman Report on Conflicts of Interest Among Compensation Consultants, which found that almost half of the S&P 500 got executive pay advice from conflicted consultants. Another issue he raised that has been too little discussed is redomestications to lower corporate tax rates. Apparently, several are or were looking to Switzerland. For 2009, he discussed many of the same proposals already mentioned above and the likelihood of SEC and Congressional support for proxy access, eliminating broker votes, say on pay, compensation consultant conflicts, etc.

You can pull up a four-up pdf of my presentation, IncreaseVotingClout4 at and a copy of my very brief paper at corpgov.net/news/2009/GRU.doc. My hope is to generate additional interest and involvement in Proxy Democracy and the Investor Suffrage Movement. If you get inspired or have questions, please contact me. At Proxy Democracy we are primarily seeking funds willing to post their votes in advance of annual meetings; including the reason(s) for votes would be even better. ProxyDemocracy will soon beta test the ability of retail shareowners to vote directly through the site based on information posted there, including votes by trusted funds. At the Investor Suffrage Movement we are developing a network of people willing to present shareowner proposals locally, saving proponents, such as public pension funds, substantial expenses for time and travel. We are also helping shareowners write proposals, defend them against no action requests and, as mentioned, present them at annual meetings.

Laura Berry (left) then gave an impassioned presentation on the Interfaith Center on Corporate ResponsibilityLaura Berry. “Inspired by Faith. Committed to Action.” ICCR represents about 300 faith-based institutional investors with over $100 billion in invested capital. She emphasized how their prophetic voice has anticipated emerging areas of corporate responsibility. Over many years prior to the recent market collapse, they introduced 120 resolutions on subprime lending and securitization. Resolutions allow them to begin a conversation and to educate. This year, they filed 292 resolutions but engaged in 350 dialogues. They introduced some on governance issues, such as executive pay, but many more on social issues, such as: adopt human rights policy, reduce emissions, recycle, health care reform. They are making good use of data developed by Trucost to determine which companies to target on climate risk indicators. One example of their successes is that WalMart is now boycotting Uzbekistan cotton over its use of force child labor during harvest. I have bulletins from ICCR going back a dozen years and, of course, they’ve been around since the early 1970s.

The finCBowieal presentation of the day was from Carol Bowie (right) of the RiskMetrics Group. She described their elaborate process to develop policies and requested feedback on information posted on their Policy Gateway, a really great resource. She also highlighted some of the key policy updates for 2009. I’ve got resolutions in at companies to reincorporate to North Dakota because of their shareowner friendly policies, and was a bit disappointed that RMG is taking a case-by-case approach on such resolutions… better than opposing them all. RMG has come out with a strong bias in favor of pay resolutions calling on executives to hold until retirement and “bonus banking,” holding for years. It appears they are taking a much harder look at executive pay, with revised performance tests. Say on pay factors include:

  • alignment of incentive plan metrics with business goals (something which few CD&As address)
  • peer group benchmarking process
  • performance trend vs. pay trends
  • internal pay disparity
  • balance of fixed vs. performance-based pay
  • poor pay practices
  • information/rationales in CD&A regarding pay determination
  • board’s responsiveness to investor input

See also Hot Proxy Season Topics for 2009 and Explorations in Executive Compensation.

All in all, it was a great conference, close to the airport (less hassle), low key and very informative. Sorry for all the clipped head shots. Next year I’ll bring a camera. I went to a similar conference about 15 years ago in Oakland and there were only about twenty people attending, as I recall. This time there were about 150. Next year, I’m sure attendance will be in the hundreds. Three cheers to the Los Angeles Pension Trustees Network for sponsoring the event.

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India Funds Investor Activism

India’s Securities and Exchange Board of India (Sebi) will offer financial help, as “investor education and related activities,” to select investor rights groups fighting court battles against listed companies and market intermediaries such as brokerages. “Funding will be considered on a case-to-case basis,” said a senior Sebi official, who did not want to be identified. Sebi will pick up to 75% of legal fees in these cases.

Legal cases fought by investor associations will qualify for Sebi funding only if there are a thousand or more investors affected, or likely to be affected, by issues such as mis-statement in offer document, non-payment of dividend, fraudulent and unfair trade practices or market manipulation. Legal aid will not be provided if the Sebi board is a party in the court case or where it has initiated enforcement action.

IIM-A’s Varma, who is also a former Sebi board member, said a more effective step would be if India introduces class action law suits. “It is easy for a large firm to buy out a small association of retail investors.” (Sebi to finance, nurture activist investor clubs, LiveMint.com, 2/20/09)

Yes, we have class action lawsuits in the US, as well as several activist institutional investors, such as Florida SBA, CalPERS and CalSTRS. However, most of the associations focused on retail investors seem to be geared toward brokers and other providers of service and stock picking but nothing on responsible ownership and proxy analysis. The closest we see to have are the Investor Suffrage Movement and Proxy Democracy. I’d love to see SEC funding for organizations like them and for promoting corporate governance activism. Under e-proxy, 95% of retail shareowners aren’t voting. Obviously, something is wrong. Maybe the Sebi is onto something.

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They Lie to the SEC Without Consequence

Andrea Romi, a doctoral candidate at the University of Arkansas’ Sam M. Walton College of Business, examined the SEC filings of 309 companies that received notice from the Environmental Protection Agency between 1996 and 2005 that they should expect to pay at least $100,000 in fines – the minimum amount required for disclosure by SEC Regulation S-K, Item 103.

Romi found that 72% omitted this information on their filing forms, a violation of federal law. Companies that did follow the law and publicly announced the EPA sanction saw the value of their stock fall by an average of 1.6%.

Since those that omit the information are unlikely to suffer any consequences, it is clear that more enforcement is needed. (Accounting Study Reveals Firms’ Failure to Disclose Environmental Sanctions, 2/17/09) At minimum, the SEC should fine these identified companies and award a finders fee to Ms. Romi. Unfortunately, the SEC awards no such finders fees.

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