Archive | May, 2009

CalSTRS Breaking Ground with Broadridge and ProxyDemocracy

Yes, the huge California teachers fund is moving into a beautiful new headquarters building along the Sacramento River on June 22, but more importantly they are also taken what Gary Lutin, of the Shareholder Forum, says is "a major step in the development of a clearinghouse for shareholder voting recommendations."

CalSTRS has become the first institutional investor to pre-disclose their voting decisions through Broadridge’s ProxyEdge® integrated vote recommendation service. This will now allow other institutional investors with voting policies similar to CalSTRS to compare and align their votes with them.

ProxyEdge is Broadridge’s suite of electronic voting services that help simplify the management of institutional proxies by providing access to third-party recommendations and/or pre-disclosure of third-party vote decisions. ProxyEdge allows institutions to manage, track, reconcile and report proxy voting through electronic delivery of ballots, online voting, and integrated reporting and record keeping to help institutions satisfy their SEC requirements.

MaryEllen Andersen, Vice President, Issuer & Institutional Relations at Broadridge, says, "By pre-disclosing votes via ProxyEdge, institutional investors which have voting policies similar to CalSTRS are able to weigh their proxy decisions against those of CalSTRS, enabling greater voting consistency among like-minded investors." (CalSTRS Turns to Broadridge for Electronic Voting Proxy Services, Earth Times, 5/27/09)

In addition, and much more important to retail shareowners, CalSTRS has joined an exclusive group of nine respected institutional investors whose votes are announced in advance on Proxy Democracy. CalSTRS will make its votes known before the annual meetings
of its more than 3,800 holdings in North America. Last year CalSTRS cast more
than 47,000 individual proxy votes.

"CalSTRS has called for greater transparency from its portfolio companies and we intend to lead
the way with comprehensive disclosure of our votes,” said Anne Sheehan, CalSTRS director of
corporate governance. “Information is vital for shareholders to make informed decisions about
the companies they own and CalSTRS intends to let fellow shareholders, as well as management,
know how we intend to vote." "Announcing our votes in advance will open the door to engagement with more of our
companies. This discussion will bear fruit in better corporate governance practices," Sheehan
said. CalSTRS will also archive its votes starting from 2007 on

CalSTRS was already among the leaders in corporate governance. This move should accelerate that position as it will enable other funds look to see how CalSTRS is voting before they cast their own votes. I’m sure none will simple copy CalSTRS but their recorded votes may give them pause and should lead to more dialogue among institutional investors about their reasons for voting. The nine funds now listed on ProxyDemocracy are beginning to change how retail shareowners vote.

In other news, CalSTRS will discuss their policies regarding placement agents at an upcoming June 3 board meeting. See a letter from Nicholas Bienstock, a managing partner at New York-based private real estate firm Savanna Investment Management LLC included in the agenda. (Find it here; search for ‘placement agents’ to get to the exact link.) Although their existing policy is stricter than most, CalPERS is looking to enhance disclosure requirements. (Placement Agent Furor: The (Smaller) GP Strikes Back, WSJ
Private Equity Beat, 5/26/09) (posted 5/27/09)

Previously, CalSTRS asked 300 of its portfolio companies to develop
comprehensive executive compensation policies and to allow
shareowners advisory votes on those policies. (CalSTRS Guidelines Offer Substance on Executive Pay, press release, 5/5/09) The CalSTRS principles offer companies a five-part approach that calls for:

  • A clear overarching philosophy that aligns the interests of shareholders and management
  • A well designed, comprehensive compensation policy that takes a detailed look at all of its components Transparency through a plain-English description of a well-crafted compensation plan
  • Accountability through a responsible compensation committee
  • A compensation committee comprised of independent directors using only independent advisors and consultants
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Proxy Access and Hybrid Boards

The Chamber of Commerce opposes the SEC’s proposals on proxy access, claiming that such decisions reside within individual states. “No compelling reason exists to overturn the long-standing state law role in controlling the substantive rules regarding director election,” wrote the Chamber’s Richard Murray in a letter to Schapiro. “Pursuit of a federal right to access will lead to a one size fits all rule.” (Chamber Challenges SEC Over Proxy Access, Directorship, 5/1/09) “The Chamber believes that greater proxy access would not advance the financial interests of individual investors. Instead, it would allow labor unions and other special interest groups to advance their agendas at the expense of these investors.” (U.S. Chamber Calls Greater Proxy Access Good for Special Interests, Bad for Individual Investors, press release, 7/25/07)

“The potentially harmful consequences of proxy access must be considered. As
CEOs of leading U.S. companies, we are concerned about these renewed attempts to allow special and disparate interests to sidetrack corporate boards, as well as the inevitable effect these attempts will have on the ability of management and boards to focus on the long term value creation for shareholders and employees,” said John J. Castellani, President of Business Roundtable, an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees. (Business Roundtable Statement on SEC Proxy Access Proposal, press release, 5/20/09)

Rarely, however, do opponents of proxy access cite studies to support their agruments, which are more likely to be grounded in their own selfish interest to remain entrenched than in any true concern for shareowners or the US ecomony. Unions can’t hijack corporate elections if it takes a majority vote to elect directors, as it now does at most of the companies with CEOs in the BRT.

A recent study, Effectiveness of Hybrid Boards by Chris Cernich, Scott Fenn, Michael Anderson and Shirley Westcott, prepared by Proxy Governance under contract with the Investor Responsibility Research Center, looked at the effectiveness of 120 “hybrid” boards formed when shareowner activists were able to get a short slate elected and found total returns at such companies were over 19 percent — 16.6 percentage points better than peers. Total share price performance through the three-year anniversary of the hybrid boards averaged 21.5 percent — almost 18% percentage points more than their peers.

More than half of the excess return occurs within three months after an activist announces their intention to battle for board seats. Investors bid up its shares in hopes that a hybrid board will result in positive changes. Not suprisingly, performance was better where dissidents held a greater proportion of shares. They have both a better chance to get elected and more incentive to monitor. However, boards that seated a sole dissident moderately outperformed, whereas companies with three new directors significantly underperformed. Perphaps more positions being contested led to more resources being drained from the company and a greater distraction of management.

Companies whose hybrid boards were created through contest settlements averaged a sale premium of 29.6%, more than double the 13.5% average premium for companies whose hybrid boards were created by a proxy contest which went to a shareholder vote. Full blown proxy contests, like wars, can be expensive for both sides. Proxy access appears likely to bring positive changes at less cost, like the gradual transitions of democratic elections in government.

Expect to see more activist investors once proxy access becomes a reality. Like classic value investors, these firms rely on fundamental analysis showing that a company’s inherent value is greater than its trading price. Unlike most, however, they don’t wait for the market to recognize the value. They work for changes to close the gap. When they do get elected, they frequently bring much greater resources and experience to boards than most directors. Expect to see more funds like Steel Partners, Ichan Partners, Ramius Capital Group, Barington Capital Group, Breeden Capital Management, Relational Investors, Riley Investment Management, Third Point, Costa Brava Partnership, MMI Investments, Oliver Press Partners, and Lawndale Capital Management. I’ve updated our links page for such groups. If you know of others, please let me know.

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Support Petition to Keep Blank Votes Blank

This morning, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners.

While waiting to see the actual language of the rule proposal, please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden. See petition File 4-583 Send comments to [email protected] with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company’s soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as “broker voting,” which has already been repealed on “non-routine” matters and, we hope, will soon be repealed for so-called “routine” matters, such as the election of directors. For example, even though “broker voting” has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company’s soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can see ProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to “broker voting.”

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVote platform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don’t want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that it may fall short of what the SEC requires. Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority “provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case.” (my emphasis)

Broadridge says that shareowners using ProxyVote are communicating “voting instructions” to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to “forms of proxy,” not the “voting instruction form,” there is no violation. However, subdivision (1) refers to the “person solicited” and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope they move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions. While the petition is being considered for action, we hope Broadridge will modify its system to clearly indicate in red bold-face type how votes will be cast for each item where a blank vote will be changed.

A few months ago, The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox… Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of, are:

Again, please submit comments on the petition to [email protected] with File 4-583 in the subject line.

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Corporate Governance: Principles, Policies and Practices

Bob Tricker helped introduce many of us to corporate governance as a field. His 1984 long out of print, Corporate Governance: Practices, Procedures and Powers in British Companies and their Boards of Directors was first to include the phrase "corporate governance" in the title. His definition of the term, even then, was spot-on: "The governance role is not concerned with the running of the company, per se, but with giving overall direction to the enterprise, with overseeing and controlling the executive actions of management and with satisfying legitimate expectations of accountability and regulation by interests beyond the corporate boundaries." Twenty-five years later, Tricker updates his opus.

Tricker notes in his introduction that, "Some teachers, particularly those working with students without a lot of business experience, might prefer to build their courses from theory to practice. This is quite feasible, not least since to date the theories of corporate governance, other than a broad concept of agency, have not contributed significantly to its development. The underlying paradigms have been derived from company law and the codes of good practice have emerged as responses to corporate catastrophe and collapse." Thus, readers can see at the outset, Tricker is a realist.

Anyone familiar with his work knows he has certainly tried to build the discipline. Corporate Governance: An International Review was his effort to publish cutting-edge research in comparative corporate governance in hopes of building theory and practice on rigorous science. Tricker has often proclaimed the 19th century the entrepreneur’s, 20th century management’s, and 21st that of governance. We certainly see focus swinging to questions of legitimacy and effectiveness in wielding power worldwide. By the time the 22nd century dawns, corporate power may actually be exercised "in a way that ensures both the effective performance and appropriate social accountability and responsibility… rooted in rigorous and replicable research," as Tricker envisions. If it happens, it will be in no small part due to Tricker’s contribution. I was delighted to see my website,, listed as the first of many useful websites at the end of each chapter.

Tricker quickly outlines the history and issues of corporate governance. He covers all the usual topics in corporate governance but does so from a multitude of perspectives, as perhaps only he can. Included are a large number of graphics and case studies that simplify understanding of complex relationships and concepts. I even like the typesetting. If you want to know not only about corporate governance in the United States, but also internationally, especially current and former Commonwealth countries as well as China, Japan, Russia, etc., you will find the book an unequaled guide.

Tricker generally takes a very measured approach to his subject, providing the latest advice on principles, policies and practices, balancing all perspectives worth attention. However, when it comes to grounding praxis in the results of research, he is passionate. For example, in discussing the future of corporate governance reporting, he predicts, "The current box ticking approach to simple structural questions will be replaced by performance measures against corporate governance criteria. The reports will also provide independent and objective opinions on the caliber of directors and boards, and on the quality of corporate governance, in the same way that auditors now report on corporate finances." I hope he is right and I hope they are not as "independent and objective" as some recent reports on corporate finances but as good as they could be without current conflicts of interest.

Tricker calls for a "new paradigm," that reflects the interests of all principal stakeholders. "Instead of legal entities, corporate bodies could be seen as self-governance social institutions… defined by the ability of external parties to exercise power over the entity… governance arrangements may also have to be more participative, less secretive, and fare more transparent."

While Tricker sees globalization driving integration, a counter movement of nationalism and economic patriotism is also on the rise, especially with the latest economic crisis. "Ultimately, a class of directors of global companies may emerge who transcend national boundaries, economic interests, and political barriers."

He cautions that "greed seems to have replaced trust as capitalism’s driving force. Indeed, the dominant paradigm of corporate governance, agency theory, is rooted in the belief that people are utility maximizers who need to be controlled because they cannot be trusted." "Above all, governing bodies need people who can be trusted, people who understand their fiduciary responsibilities, people who put the rights and needs of others ahead of their own." He then reminds us, "the best interests of people need not be solely power, personal aggrandizement, or greed." Integrity, treating employees and other stakeholder fairly and being reliable stewards for the others’ interests must be elevated in importance.

Be sure to check out the blog Tricker writes with Chris Mallin, Founder and Director of the Centre for Corporate Governance Research, at the University of Birmingham, UK. Read more about both. As I write my review, Tricker is back in Hong Kong. He notes, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the largest investment fund in the world, ensures that the State’s interests are represented in the activities of China’s listed companies, including removal of directors and top executives. Obama recently removed the head of General Motors and the British Government is currently involved in the appointment of directors to various British banks they have nationalized.

"Maybe convergence is a two-way street," he concludes. Undoubtedly. Although primarily aimed at graduate students, complete with projects, exercises and self-test questions, practitioners will also benefit. Corporate Governance: Principles, Policies and Practices reflects the author’s worldwide experience and multi-faceted perspective on the critical subject he has been instrumental in naming and advancing.

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Women on Corporate Boards of Directors

Women on Corporate Boards of Directors: International Research and Practice, edited by Susan Vinnicombe, Val Singh, Ronald J. Burke, Diana Bilimoria, and Morten Huse presents an excellent set of worldwide research on progress, strategies, results, and challenges.

Overall, progress seems to be glacial but more pronounced in European countries, such as Norway with legislated quotas.

Women’s representation appears associated with representation in senior management, smaller pay gaps, equity legislation, work-family initiatives, social/cultural support, quality of board deliberations, and increased profit. Of course, if the correlation with increased profit proves strong enough, we may see growing demand for the Pax World Women’s Equity Fund and others that promote gender equity. So far, correlations seem too weak, although several public pension funds, including CalPERS and CalSTRS may help the cause.

One of the more interesting papers in this collection is that of Val Singh, who focuses on Jordan and Tunisia. I haven’t seen much research on corporate governance in Arab countries, especially focused on women, and was surprised to learn 10% of Tunisian directors are women. It is difficult enough trying to get inside the "black box" of boardrooms anywhere. Creating benchmark studies in Arab countries must be even more difficult, given what at least appears to this outsider as a general reluctance to tackle gender issues.

Women do much better at state-run businesses. In the US, we seem to be more willing to experiment at companies that are broken, so the financial crisis may present an opportunity. However, several researchers warn of a "glass cliff." Apparently, women are invited onto more boards where companies are failing and are desperate. They are paid less at companies performing well and more at those doing poorly. Like directors elected by dissident shareowners, women directors are often isolated as outsiders and do better when they are not alone.

At the February 2009 "Women in Investments" conference in Sacramento, CalSTRS board member Carolyn Widener, drew a big laugh when she quoted Nicholas Kristof about speculation at Davos, Switzerland concerning "whether we would be in the same mess today if Lehman Brothers had been Lehman Sisters." Eventually, if resurrected, maybe we’ll have Lehman Sisters and Brothers. This volume contains some of the best research to date from a wide variety of disciplines around the world that may just help to get us there.

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