Archive | April, 2009

Will the Chamber be Respected in the Morning?

The U.S. Chamber of Commerce is the world’s largest business federation representing 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. More than 96% of U.S. Chamber members are small businesses with 100 employees or fewer. Today, they are challenging the SEC’s power to grant investors equal access to the proxy and supporting the efforts of convicted criminals. If you are a member, you might consider if the Chamber reflects your values.

A December 2008 public opinion survey conducted by Harris Interactive found that Americans rank the U.S. Chamber of Commerce among the top five best-known and respected organizations in Washington. The Chamber consistently leads the pack on lobbying expenditures. Will these activities help the Chamber increase its reputation with the public? I doubt it.

The Chamber’s avowed mission is "to advance human progress through an economic, political and social system based on individual freedom, incentive, initiative, opportunity, and responsibility." From recent news reports, it looks like the Chamber may be instead fighting for the freedom of entrenched boards to maintain their positions and of CEOs to take the opportunity to initiate fraudulent short-term trading. Responsibility appears an outmoded concept at the Chamber, perhaps better left to taxpayers.

Thanks to Lynn E. Turner, a senior advisor and managing director in the forensic accounting practice at LECG, for bringing three articles to my attention. "Despite all the damage that has been done to American consumers, investors and taxpayers as a result of the current subprime and economic crisis, the following articles seem to indicate, in my opinion, the Chamber of Commerce is not on their side," says Turner.

Bloomberg reports, U.S. Business Lobby Challenges SEC Power to Grant Proxy Access (4/29), "the U.S. Chamber of Commerce wrote SEC Chairman Mary Schapiro yesterday, saying the states have responsibility for director elections and shareholder rights. The SEC’s federal powers are limited to proxy disclosure rules, the chamber said."

"No compelling reason exists to overturn the long-standing state law role in controlling the substantive rules regarding director election," wrote Richard Murray, chairman of the Chamber’s Center for Capital Markets Competitiveness. This is a right investors have been fighting for since the inception of the SEC. How can directors be considered shareowner representatives when we are denied an efficient mechanism to ensure entrenched board members can be replaced with directors of our own choosing? Most corporate "elections" are more similar to elections in North Korea than to anything most US citizens are familiar with.

Bloomberg reports the Chamber is in discussions with Gibson, Dunn & Crutcher LLP, the same firm that successfully challenged the SEC rule that required independent chairs at mutual funds. Any challenge to proxy access is unlikely to win, especially with Congress working on legislation to "confirm the SEC’s authority to grant shareholders access to the corporate proxy."

Investment News reports, Chamber of Commerce asks court to reverse securities decision (4/24/09). The Chamber "urged the 1st U.S. Circuit Court of Appeals to reject the ruling handed up in December by a three-judge panel in Securities and Exchange Commission v. James Tambone and Robert Hussey and rehear the case." Tambone and Hussey are former executives of a distributor for about 140 mutual funds in the Columbia Funds complex. "They were charged with fraud by the SEC in 2005 for participating in a scheme to allow preferred customers to engage in frequent short-term trading, despite fund disclosures claiming such trades were not permitted."

The Denver Post reports, U.S. Chamber of Commerce backs Nacchio (4/28/09). "Former Qwest chief executive Joe Nacchio, serving a six-year federal prison term for illegal insider trading, has a new ally in his appeal: the U.S. Chamber of Commerce."

"Nacchio was convicted in 2007 of selling $52 million in Qwest stock in early 2001 based on private warnings about the company’s revenue projections. In one instance, former Qwest chief financial officer Robin Szeliga cautioned Nacchio that the company might miss revenue targets for 2001 by $900 million, or 4.2 percent."

Nacchio argued the warnings were not "material." "The chamber agrees: ‘The notion that doubts about revenue projections can be material as a matter of law — without a rigorous threshold establishing the certainty of such information — is fundamentally misguided.’"

Perhaps continued membership in the Chamber is really what is misguided or continuation of current leadership at the Chamber. Will Americans, who don’t seem thrilled with entrenched or convicted CEOs, continue to view the Chamber as one of the "top five best-known and respected organizations in Washington." If they do, maybe that says more about other Washington-based organizations than it does about the Chamber. Watch out for swinging pitchforks.

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April 2009 Special News Supplement: Ceres 2009

I hadn’t been to a Ceres conference in far too long. This national network of investors, companies, environmental organizations and other public interest groups working to address sustainability challenges such as global climate change is celebrating its 20th anniversary. While most continue using a model of unsustainable growth, Ceres members push forward. Just a few of many accomplishments: Continue Reading →

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Mutual Fund Voting

RankFund FamilyScore
1 (tie)Templeton7
1 (tie)Oppenheimer7
3 (tie)T. Rowe Price7.67
3 (tie)AIM7.67
5 (tie)Schwab8
5 (tie)JP Morgan8
8American Century10.67
9Legg Mason11
12Morgan Stanley13
13Van Kampen13.33
14 (tie)TIAA-CREF13.67
14 (tie)BlackRock13.67
16 (tie)Putnam15
16 (tie)Scudder15
16 (tie)American Funds15
20 (tie)Fidelity16
20 (tie)Lord Abbett16

FT says mutual funds are expected to spend more time evaluating proposals, especially compensation-related resolutions. (Pay proposals to dominate proxy season, 4/5/09) They also note that “mutual funds have contributed to corporate America’s excessive pay by voting in favour of companies’ compensation plans, research by corporate governance experts will reveal on Monday. (Mutual fund votes helped to boost pay, 4/5/09) Better to start giving a damn in 2009 than never.

The Corporate Library, Shareowners Education Network and AFSCME analyzed 2008 votes in Compensation Accomplices: Mutual Funds and the Overpaid American CEO and found “AllianceBernstein, Barclays Global Investors, Ameriprise and Bank of America’s Columbia Management were the most consistent backers of management proposals to increase executive pay.” In 2008, the 26 mutual fund groups studied voted in favor of management compensation proposals 84%, 82% in 2007 and 76% of the time in 2006. “T Rowe Price, Templeton (part of Franklin Resources) and Charles Schwab were at the top of the rankings of those voting to constrain pay, the study found.”See table to right.

My analysis: It looks like funds got a little bit of fiduciary responsibility religion when the SEC required mutual funds to start disclosing their votes in 2004 but grew complacent… probably since few people use voting behavior as a factor when considering where to invest. Now, since almost all funds are losing a ton of money for their customers, they are probably worried blame may spread to them… as it should. Voting rights are assets and must be treated as such. Always voting with management and simply saying that is “in the best interests of its shareholders” won’t cut it anymore.

What should an investor do? The report came out with four recommendations (my additions):

  1. Mutual fund families that have been consistently
    categorized as “Pay Enablers” should revise their
    proxy voting policies to ensure that they promote
    responsible compensation programs that encourage
    the creation of long-term shareholder values and do
    not promote excessive risk-taking. (Contact funds in your portfolio and let them know of your concerns.)
  2. Mutual fund companies should have a uniform
    mechanism in their corporate governance and proxy
    voting policies for establishing and communicating
    their view of pay to boards, especially compensation. (If you can’t identify this in your funds policy, contact them and ask them what it is.)
  3. Retail investors in mutual funds, whom the
    Shareowner Education Network calls “citizen
    investors,” have a responsibility to critically evaluate
    how their mutual funds vote on pay issues and hold
    those funds accountable for votes that enable pay
    abuses. (Of course, you’ll want to view performance as well. However, if they are relatively the same and your “enabler” funds refuses to budge, dump them.)
  4. The Securities and Exchange Commission (SEC)
    should require funds to distribute a Plain English report
    on proxy voting to their investors and should revise
    and improve the N-PX data disclosure. (The SEC should also urge funds to announce their votes in advance of annual meetings. If votes are an asset and they put a lot of effort into voting, shouldn’t they want retail shareowners to copy their voting behavior?)

Another good source of information (although the funds reviewed are limited) is Here’s their highest rated ten funds on executive compensation issues and their activism scores.

  1. Green Century Equity Fund 79.7
  2. AFSCME Employees Pension Plan 74.0
  3. Florida SBA 70.8
  4. Sentinel Sustainable Core Opportunities Fund (formerly Citizens Core Growth) 65.5
  5. Trillium Asset Management 61.4
  6. Domini Social Equity Fund 60.6
  7. CBIS 56.4
  8. Calvert Social Index Fund 51.4
  9. Calvert Social Investment Fund 48.6
  10. Parnassus Fund 48.5

The ten least activist funds and their scores are as follows:

  1. Dodge & Cox Stock Fund 0.0
  2. Dodge & Cox Balanced Fund 0.0
  3. Barclays Global Investors S&P 500 4.6
  4. AllianceBernstein Large Cap Growth Fund 5.3
  5. AllianceBernstein Value Fund 5.5
  6. Vanguard Wellington 7.6
  7. Vanguard Windsor II 8.2
  8. Growth Fund of America 9.4
  9. Northern Institutional Balanced Fund 9.4
  10. Northern Institutional Mid Cap Growth Fund 9.5

Look up yours here. ProxyDemocracy also rates funds for their activism on corporate director elections, corporate governance and corporate impact (social and environmental issues). Other more comprehensive analysis can be found at Fund Votes and The Corporate Library. In a related article, Amgen’s proxy directed shareholders to a 10-question online survey written by pension-fund manager TIAA-CREF to help it evaluate pay plans of companies in which it invests. (Companies Seek Shareholder Input on Pay Practices, WSJ, 4/6/09) And, of course, there’s plenty of blame to go around. (Executives Took, but the Directors Gave and Who Moved My Bonus? Executive Pay Makes a U-Turn, NYTimes, 4/4/09)

Two good observations from Dave Lynn: “The study does note a contrary trend that I think everyone has probably noticed in the past couple of years – mutual funds seem to be increasingly willing to withhold support or vote against directors serving on compensation committees of companies where pay practices are perceived as subpar. One limiting aspect of the study is that the data only goes through June 2008, so the full impact of the recent “torches and pitchforks” attitude toward compensation is not fully reflected.” (The SEC’s Corporate Governance Agenda Comes into Focus, Blog, 4/7/09)

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Japan's Example

Will America experience a “lost decade” of economic stagnation like Japan in the 1990s? Will Obama’s strategy of “grow now, ask questions later” to jump-start consumption lead to a sustained uptick or a bigger bubble later? Corporate Governance in the 21st Century: Japan’s Gradual Transformation by Nottage, Wolff and Anderson doesn’t give direct answers, but it provides clues.

Christopher Pokarier argues that Japan is open to being closed. One wonders if Americans will follow the Japanese example and keep savings in cash, rather than mutual funds and stocks. In the 3rd quarter of 2007, capital investments were 11% of Japanese household assets vs. 31% in the US. Cash/savings accounted for 50% in Japan, 13% in the US. Class divisions are hardening and intergenerational transmission of status is increasing.

In the 1980s Japan’s corporate governance system seemed a creditable alternative to the Anglo-American model. Its emphasis on employee welfare, keiretsu interlocks, and bank monitoring provided evidence that independent outside boards weren’t necessarily better… until Japan slumped into a long recession. Massive reforms, many based on shareowner primacy, appear to have moved Japan in the direction of the US. However, the authors represented in this reader see the changes as a more gradual transformation that endures as a unique variety of capitalism. “Everything is changing gradually and in ambiguous directions.”

One example provided is “flexicurity,” a balance between flexibility of working practices (terminate at will) and security of tenure. Wolff concludes lifelong employment was never a Confucian-inspired preference but a tool to ensure the continuity of core employees to meet business needs. Wolff finds the influence of employee stakeholders has been exaggerated and what lifelong employment existed wasn’t progressive but was rooted in inequality and inequality is increasing.

Puchniak’s case study of Japanese banks lending trillions of yen to “zombie” firms at below market rates finds that, contrary to shrinking as the US savings and loan industry did after their period of “creative destruction,” bank influence increased. Banks replaced management and restructured underperforming companies. Primary reliance on banks for financing went from 28% of largest listed companies to 47%.

Matsui’s chapter on closely-held companies or SMEs should find a wide audience in countries where family companies continue to play a large role. He highlights important reforms to company law and judicial decisions aimed at protecting minority shareowners, while maintaining flexibility.

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