Archives: August 2009

Ponzi Pension

Funds risk fraud, white collar crime, indictments, and staggering financial losses when manipulated by the Bernie Madoff’s of the world and others selling Ponzi schemes. Better to take a few preventative measures than to wake-up to headlines that you failed to meet your fiduciary responsibilities and may be found personally liable.

In Are Mini-Madoffs Lurking in Your Pension? (, 8/21/09), Olivia Robinson, of Background Intelligence, Inc., argues it’s the “human factor” that has the potential to put the fund, its trustees and executives at risk of financial loss and legal challenge. The article goes on to offer practical steps to “Madoff-Proof Your Pension.”

With millions at risk, why aren’t more funds doing at least a simple background check?

Will the Sky Fall if Union Representatives Sit on Boards?

Many who submitted letters opposing the SEC’s proxy access proposal argued the rule would result in the election of “special interest” candidates. That seems unlikely, since shareowner nominees would still be elected by all shareowners. Other shareowners aren’t likely to vote in candidates that cater to one stakeholder, at the expense of future profits to the firm.

In Unions Into the Boardroom: Don’t Expect Socialists— or Sycophants (Corporate Board Member, 3rd quarter 2009), Craig Mellow looks at a dozen or so companies that have had “union” directors imposed on them over the past 30 years, usually as a trade-off for wage and benefit concessions. This is a much different situation than shareowners actually voting in favor of such candidates. However, even under these unusual circumstances, the sky didn’t fall.

Unfortunately, Mellow’s look does reveal one likelihood. Union representatives were often isolated, even when they advocated for what in retrospect looked like good ideas. Unfortunately, the same seems likely to happen with the token representative limits now proposed by the SEC for proxy access by shareowners.

Baruch College

I stumbled across several items that may be of interest to readers at the City University of New York, Baruch College. Check out their Digital Media Library, searching terms such as “corporate governance” and “shareholders.” Some clips are dated. However, most of the guidance of panelists and speakers is still very informative and timely.

Look to Internet for Revolution in Democracy

Shelley Alpern provides an excellent overview of several websites that facilitate shareowner democracy and involvement in the Summer 2009 edition of Trillium Asset Management’s Investing for a Better World. Entitled “The (R)evolution Will Be Computerized: Web 2.0 Technologies Will Make ‘Shareholder Democracy’ a Reality,” she discusses how retail shareowners and mutual fund investors can get involved through sites we have been promoting like Investor Suffrage MovementProxy, and the It is great to see these sites getting some of the attention they deserve.

One relatively new site, which Alpern left off is, which is published by Mark Latham, a member of the newly created SEC Investor Advisory Committee. Recently, I discussed his initiative under the heading SEC Investor Advisory Committee: Latham’s Proposal on Investor Education in hopes that site will also gain traction.

To me, shareowner democracy is incomplete. To fully realize the transformative power of a democratic economy we also need more democratic workplaces and a more informed and involved citizenry. Of course, we have pages full of links geared to that and welcome new suggestions. Three of the more helpful sites in reporting on the movement to more democratic workplaces are WorldBlu, the National Center for Employee Ownership NCEO, the ESOP AssociationFoundation for Enterprise Development, and the Employee Ownership Foundation. With regard to a more informed and involved citizenry, I would again point to, as well as Public Citizen and others too numerous to mention.

Of course, I hope my own sites, and, will also contribute to a revolution in democracy.

Way-Back Machine

For the last couple of months I forgot to step into the Way-Back machine. Five years ago, one of my posts on CalPERS included the following:

Just as CalPERS recommends that certain corporate governance changes should be put to the vote of shareholders, CalPERS itself should at least check in with its members from time to time, either with formal votes or informal surveys. If they had done so on several recent hot-button issues, they might be facing a loss hostile environment today. Additionally, by doing so, they educate members and set a positive example that could help move markets.

Addiitonally, I reported on a study, Do Board Members Pay Attention When Institutional Investors ‘Just Vote No’? by Diane Del Guercio, Laura Wallis, and Tracie Woidtke (August 2004). The authors found such campaign ineffective and that targeted firms are more likely to add management friendly charter provisions and takeover defenses following a campaign. My take-away was the funds need to work closer with proxy advisors before pursuing such campaigns and that shareowners need proxy access.

In a powerful essay (Politics and money: a volatile mix, Financial Times 8/9/04) Stephen Davis, of Davis Global Advisors, called on shareowners to form “an investor-class version of, the powerful, web-based mobiliser of grassroots political activism.” Although not quite to the stage, we are now beginning to get there with Investor Suffrage MovementProxy

The House voted to override a rule proposal by the Financial Accounting Standards Board to require companies to expense stock options. Nell Minow, cofounder of The Coporate Library noted, “We’re in the part of the movie where the empire is striking back.” Now, the “dark side” has at least been wounded.

Speaking of movies, we also reported Joel Bakan had authored a book as well as a documentary movie, The Corporation: The Pathological Pursuit of Profit and Power.

Ten years ago, Marjorie Kelly, editor of Business Ethics (May/June 1999), points out that stockholders have “no tangible relationship” to the modern corporation, “take no responsibility for its misuse, and play no part in its upkeep.” Yet, an ownership myth persists and with it undertones “more at home in the medieval era.” I suggested the conclusions of Blair and Stout were instructive. The shift in the balance of power to shareholders is “the result not of directors’ sudden recognition that shareholders are in fact ‘owners’ of the corporation but of changing economic and political forces that have improved shareholders’ relative bargaining power vis-à-vis other coalition members.” Capital can move at the speed of light to another company/country. Labor can’t and neither can citizens.

At the same time, I argued that one of the primary stumbling blocks to achieving greater accountability of corporate boards to shareholders is the prohibition contained in SEC rule 14a-8(c)(8) which allows corporations to exclude shareholder nominations from the proxy. I urged Domini and CalPERS to work for that would provide shareowners effective access to the director nomination process. Three years later, Les Greenberg and I petitioned the SEC for proxy access.

Finally, Some Attention on the Activities of CalPERS’ Charles Valdes

Years after one of my last contests to try to get on the CalPERS Board, the FPPC and the press are finally paying attention. In an exclusive to the Sacramento Bee, Andrew McIntosh notes Chuck Valdes’ bankruptcies and $38,600 in campaign donations from companies and individuals doing business with the pension fund after the 2005 contest.

“Valdes, who was chairman of the multibillion-dollar pension fund’s investment committee at the time, has never had to account for how – or whether – the funds were spent because of an exemption in state regulations for retirement board members and candidates…. Valdes also received 2005 donations from a prominent Los Angeles developer, Richard Meruelo, who earlier that year had secured a rare $150 million line of credit from CalPERS.” (FPPC probes campaign donations to CalPERS board member with money woes, 8/21/09)

I wish someone had sponsored a CalPERS Candidate Forum back in 2005. I would have loved to hear Valdes explain why, with double bankruptcies, he was qualified to head the Investment Committee. I argued that since California laws would prevent him from acting as a trustee for a will going through probate, he wasn’t qualified to sit on the CalPERS Board. However, the Board defended him, arguing they were exempt from California laws because their authority was derived from the Constitution. They gave the same reason for not following the Administrative Procedure Act. Fortunately, that issue was taken to court and they found CalPERS did have to follow the APA. No one ever went to court on the applicability of trust law to the Board. I couldn’t afford to take the issue to court but wondered if Board members ever got out of speeding ticket by arguing they were exempt from traffic laws when on the way to a Board meeting. I do remember one member billing for the hours he was sleeping because he was “dreaming of CalPERS.” Few seemed to care about this attitude of entitlement that once seemed to pervade the Board.

Unfortunately, the press largely failed to inform the public of problems at the CalPERS Board and organizations that endorse candidates too often failed to hold them accountable. With this report and with the Sacramento Bee co-sponsoring an upcoming CalPERS Candidate Forum, past neglect may be turning around. A further step would be for the Bee to investigate each candidate after the Forum and to make endorsements. Ideally, the 1.6 million members of the System, who are eligible to vote in the upcoming September elections, should have several sources for information: unions, traditional press, bloggers, and various public interest groups.

Comment Letter Troubles

The SEC announced (see boxed notice) that it had experienced problems receiving electronically submitted comment letters on a number of proposing releases, most notably the shareholder access proposals and the proposed amendments to Regulation SHO. The problems occurred during a “brief time” on August 17, although it is not clear from the notice when that brief time occurred. Some folks who attempted to submit comments got e-mails from the Secretary’s office following up, while others did not. (Thanks to, 8/21/09) Check the submitted comments. If yours don’t show contact the Office of the Secretary (202-551-5400) and resend your comments.

First CalPERS Candidate Forum

CalPERS is believed by many, and for good reason, to be a paragon of virtue with regard to its advocacy of good corporate governance. Yet, their own election process has long been criticized as making it nearly impossible to unseat incumbents. At one point, the Board voted in favor of regulations prohibiting criticism of the Board in candidate statements, which were to be strictly limited to biographical information. Until recently, Board members were elected on a plurality basis, so candidates could win with as little as 5.5% of the vote in a large candidate field. has been a force behind reforms. After convincing the Board to adopt majority voting, we have recently been urging them to use “instant runoff voting,” to avoid the expense of up to $1 million for runoff elections. On September 2nd PERSWatch (whose publisher also publishes takes another step, increasing democracy at CalPERS by paying for and co-sponsoring, with the Sacramento Bee, the first CalPERS Candidate Forum. The League of Women Voters of Sacramento has agreed to moderate the event.

Member-At-Large Board ballots will be mailed to each eligible member’s home address beginning September 4, 2009 and must be received by October 2, 2009. The Forum is offered to give eligible CalPERS members and the interested public an opportunity to see, meet, and question the candidates, resulting in a more informed vote in the upcoming election. All candidates have been invited.

Those attending will have an opportunity to submit written questions on cards distributed and collected by League of Women Voter volunteers so that the moderator can group and ask questions, as time permits. After a ten minute intermission, each candidate will be given an opportunity to respond to questions from the Sacramento Bee. Each candidate will have two minutes for an opening statement and one minute for a closing statement.

This is an historic event, since it may be the first such Forum, even though CalPERS has operated for more than 75 years, provides health benefits to nearly 1.3 million members, pension benefits to more than 1.6 million and administers a trust fund of more than $190 billion. The impact of decisions by Board members is felt locally, state-wide, nationally and internationally. For more information, see the invitation to candidates to participate and thepress release.

Voting Integrity

Dawn Wolfe describes how the vote for a Boston Common Asset Management “say on pay” proposal at Waddell & Reed Financial went from majority support to 48.5% of the vote more than 2 months after the close of the polls. “The Court of the Chancery of the State of Delaware granted Waddell & Reed’s petition to reopen the polls and count the specific block of votes identified by its proxy solicitor as omitted on June 12th. The majority of those votes were cast against the proposal, according to Waddell & Reed.” [Emphasis added.] (Every Vote Counts, but Who Counts the Votes? Boston Common’s Dawn Wolfe on the Integrity of the Proxy Process, The KLD Blog, 8/19/09)

This is exactly why we need the United States Proxy Exchange, a nonprofit designed to hold all the proxies. We can’t have fair elections when management controls the proxy process. Please support the Investor Suffrage Movement.

Proxy Access: The Letters Are In

The deadline was August 17th, so the comment letters on proxy access have all been filed and posted. Many are well worth reading. If you don’t see yours posted, you might want to resubmit it.

TIAA-CREF, one of the more conservative shareowner activists, calls on the Commission to raise the threshold to 5% for shareowners at all companies, regardless of size. Additionally, they want to require a two year holding period and recommend instead of the “first in” approach, nominations should go to the largest owner or and (here they get creative) to the shareowner or group that has held their shares the longest. They voiced opposition to reimbursement: “Reimbursement of expenses could be used to facilitate the election of special interest directors. Reimbursement also encourages fighting and proxy contests to achieve representation at the distraction of directors rather than dialogue and productive change.” Instead, they favored “incentives for a meeting between shareholders and the board in order to identify director candidates who are acceptable to both parties… Ultimately, the best possible outcome is to avoid a proxy contest altogether… We believe that the nominee should receive at least 20% of the vote in order to be re-nominated in subsequent years.”

Cornish Hitchcock, writing on behalf of the LongView Funds warns against a state-law carve-out, praising the merits of a uniform system. Like TIAA-CREF, the LongView Funds would like to see the required holding period extended to two years and nominations going to the largest nominator.

J. Robert Brown, of, offers a spirited rebuttal to comments by the Delaware Bar Association regarding their argument in favor of private ordering. “The evidence in fact suggests that in the absence of a federal requirement, companies will opt for a categorical rule denying access.” “Evidence suggests that management’s control over the drafting process and its ability to rely on the corporate treasury eliminate any real prospect of private ordering. Instead, when matters are made discretionary, they result in a categorical rule that favors management.” “The only way to ensure meaningful access to the proxy statement is to adopt a federal rule that institutes the requirement.”

Lucian Bebchuk’s letter, signed by 80 professors, favors the rulemaking and notes, “no matter how moderate eligibility or procedural requirements may be, shareholder nominees must still meet the demanding test of getting elected before they can join the board. A shareholder nominee will join the board only if the nominee obtains more votes than the incumbents’ candidate in an election in which incumbents, but not the shareholder nominee or the nominator, may spend significant amounts of the company’s resources on campaign expenses.”

As expected, the Shareholder Communications Coalition, comprised of the Business Roundtable, the National Association of Corporate Directors, the National Investor Relations Institute, the Securities Transfer Association, and the Society of Corporate Secretaries & Governance Professionals sent a letter opposing the rulemaking “until the Commission: (1) completes its intended examination of the proxy system; and (2) promulgates new regulations to modernize and reform this cumbersome and expensive system.” “A shareholder nomination process that operates in a proxy voting system that cannot produce an accurate and verifiable vote count will do little to improve the overall corporate governance system.” I just can’t help making a snarky comment. So we should just go with the current system that elects incumbents based on inaccurate and unverifiable voting results until we can ensure the system works properly

Broadridge submitted a letter discussing various technical issues. Great for those who want to get into the weeds.

Writing on behalf of Sodali, a global corporate governance consultancy, John Wilcox asks: “Is Rule 14a-11 is sufficiently deferential to the traditional role of the states in regulating corporate governance?; and (2) Does the proposal achieve the Commission’s goal of removing burdens that the federal proxy process currently places on the ability of shareholders to exercise their basic rights to nominate and elect directors?” His analysis answers with a resounding yes.

Eleanor Bloxham, of the Value Alliance and Corporate Governance Alliance notes that “having an orderly, ongoing process for shareholder to nominate directors may produce improvements in shareholder returns. Certainty, competition in the process for board seats could, I believe, produce better candidates.” She addresses the issue of affiliation and loyalty, Bloxham recommends each candidate be required to prepare a statement as part of the proxy process that would stipulate that the candidate understands that as a director, if chosen, their  obligations are to act in the best interests of all shareholders, including minority shareholders, and to act without preferential treatment related to who may have nominated them.”

As I have previously mentioned, I signed on to a letter from the United States Proxy Exchange (USPX), endorsed by members of the Investor Suffrage MovementRobert MonksJohn Harrington and John CheveddenGlyn Holton did a great job of putting together sixty-nine pages of comments. I urge everyone to read our common sense approach outlining the democratic option, the need for deliberation and the reasons for our recommendations, which include:

  • Mandating a federal standard that take precedence over state laws.
  • Placing all bona fide candidates on a single management distributed proxy card.
  • Not encouraging a system where corporations are willing to reimburse expenses shareowners incur in conducting a proxy contest, since this will only escalate costs paid by shareowners.
  • Don’t place an overt limit the number of candidates shareowners are able to nominate. If limits are need to keep the pool manageable:
    • limit individuals to five for-profit corporate boards
    • charge a modest fee
    • require a system of endorsements
    • require all candidates to file pre and post election estimates and accounting of all campaign expenditures
  • Reduce the focus on control by establishing a system that will encourage diversity. “Corporate democracy will allow shareowners to take ‘control’ away from an entrenched board and not give it to any one faction.”
  • Eliminate the arbitrary and elitist proposed thresholds, opting instead for the time-tested $2,000 of stock held for a year. “The challenge should reside in winning the election, not in making the nomination.”
  • Increase candidate statements to 750 words and specified space for graphics that can address any issue related to the election, including short-comings of the current board.
  • Measures to ensure board members nominated by shareowners are not marginalized.
  • Implementation of a broad safe harbor for individual director communications with shareowners.

After we had already sent the USPX comment letter, I recalled a few additional issues and sent in my own letter as an addendum, recommending the following:

  • Amendments to Rule 14a-8 also clarify that shareowner resolutions can seek to collectively hire a proxy advisor, paid by for with company funds, that isn’t precluded from offering advice on board elections.
  • Require that companies must allow shareowner resolutions to be presented during the business portion of the annual meeting.
  • An override mechanism on Rule 14a-8(i)(5) (Relevance) and (i)(7) (Management Functions).

Dozens of studies in communications and organizational behavior find current corporate structures to be inefficient. Most decision-making structures, including those now governing corporations, are designed around status needs related to dominance and control over others. They are not designed to maximize the creation of wealth for shareowners or for society at large. In order to gain higher status, individuals seek to dominate more and more people. This dynamic moves the locus of control inappropriately upward. In order to generate more wealth, we need to take advantage of all the brains in our companies, as well those of concerned shareowners. We can do so by making corporations more democratic, top to bottom.

Now, we eagerly await the Commission’s action. If they are slow in finalizing the proposed rules, I hope it is because they carefully read our letters and are rewording them to require more, not less, democracy. (permanent link address:

Support Proxy Access

It is time to get those e-mails and letters into the Securities and Exchange Commission (SEC), since the deadline for comments is Monday, August 17th.

The Commission proposed giving shareowners access to the proxy to nominate directors in 1942 but sloppy language and World War II got in the way. In 1976 the nation was rocked by business scandals (see Corporate Morality — Whose Business Is It? – Address by Roderick M. Hills, SEC Chairman, April 13, 1976).

In response, the Business Roundtable (BRT) in 1977 recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” Their memo noted that such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.”

More recently, the BRT has opposed proxy access. So far this year, they have tried to get the rule postponed. They’ve also met with Chairman Schapiro at least twice on the subject. They and other opponents are starting to flood the SEC with complaints about a one-size-fits-all approach, preemption of states rights and claims that access will lead to election of special interest directors.

Yes, the Commission voted on June 10 along party lines, three to two, to propose rule amendments aimed at giving shareholders the right to nominate directors to corporate boards. However, it will make it difficult for them to proceed if the comments are mostly opposed. Here’s the basics:

  • The proposed rule is open for public comment until Monday, Aug. 17, 2009.
  • A press release describing the 250 page rule can be found at
  • The full text of the proposed rule can be found at:
  • Previously submitted comments are posted to the SEC’s website.
  • Submit comments via e-mail to Be sure to put File No. S7-10-09 in the subject line.
  • Alternatively, you can submit comments via the SEC’s web form. On this webpage, you will be asked to fill in a form with you or your organization’s information. You can either type your comments in the box provided or type “Comments attached.” Click on continue and then upload your letter.

I’ll be signing onto a letter from the United States Proxy Exchange (USPX), endorsed by members of the Investor Suffrage MovementRobert MonksJohn Harrington and John Chevedden, among others. I may also send an individual addendum. Here’s a link to the current draft, still in progress. If you would like to sign on as well, send a pdf of your signature, as well as your typed signature block (Name, Title, Organization (if applicable), Address, including zip code) to Glyn Holton. If you don’t have a pdf of your signature, send him a picture of your signature from your cell phone by 8/14/09, Friday noon.

The expressed intent of the access rules is to provide an alternative that “functions, as nearly as possible, as a replacement for an actual in-person meeting of shareowners.” As you put together your own comments, please consider the following:

  • Thresholds. The proposed thresholds of 1%, 3% and 5% held for a year, which have no real basis in research or history, will severely limit the number of companies where alternative candidates are proposed. A shareowner doesn’t need 1% of the stock to propose a candidate at a meeting. (The problem is not that shareowners can’t nominate candidates. It is that nominations must be presented for a vote at a the shareowners meeting and very few find it convenient to attend. Since most votes are made in advance by proxy, it does no good to nominate a candidate at the meeting that isn’t on the proxy.) Only large, active funds with a strong legal staff are likely to engage. Most don’t have investments in small companies where governance is often the worst. To ensure the threshold is on a sound legal footing and that it can be widely applied, I recommend the SEC use the same standard that has long been in place at Rule 14a-8 for making a shareowner proposal, $2,000 worth of stock held for a year. Hundreds of shareowner proposals, and some of the most innovative ones, come from individual investors. Institutional investors own shares in thousands of companies and typically aren’t willing to put in the time necessary to draft proposal, come up with a “Plan B” for a company or nominate directors. We need the involvement of retail shareowner activists.
  • If you think the SEC won’t tolerate a threshold of $2,000 an add on could be something drawn from thecomments of Kenneth Squire, Founder and CEO, 13D Monitor. “Require the nominating shareholder to get the ‘endorsement’ of a minimum of 1% of the shareholders (including its own holdings), regardless of the market capitalization of the company. This would just be an endorsement and not subject the endorsing shareholders to any liability or additional burdens. The nominating shareholder who gets the largest percentage of ‘endorsements’ will be the one who will be awarded access and will be allowed to nominate a full slate of directors to the Company’s board in the Company’s proxy statement. Under this framework, the one year holding period can be eliminated because the endorsing shareholders will make their own judgment on the nominating shareholder, taking into account the amount and length of ownership.”
  • Who gets access. The proposal is to have shareowners rush the door with their nominations. The first one there gets their candidates on the proxy. Many are commenting that this isn’t fair, plus many could come in at the same time when the clock starts. Most of those commenting on this point suggest the largest shareowner or group should have their candidates listed. I like Squire’s idea of the nominating shareowner with the largest percentage of “endorsements.” Better still, would be to not overtly limit the number of candidates. Wouldn’t we have better boards if shareowners could choose from several candidates for each position? To ensure we aren’t overwhelmed with gadfly candidates who just want to see their name on the proxy, require some more paperwork in the form of anticipated and actual campaign expenses. Once imposed on CalPERS, their board elections had far fewer gadfly candidates. Additionally, we would then be able to see who is spending $1,000 vs who is spending $1,000,000. This might be especially important to shareowners when they know one side (the board endorsed candidate) is spending what is essentially shareowner money from corporate coffers. For the provisions imposed on CalPERS Board candidates, see California Government Code, section 20096.5.
  • Nomination Limits. The proposal would limit the percentage of board members that can be on the proxy as a result of shareowner nomination to 25%, to ensure there is nothing close to a change in control. Therefore, if it is year two, all directors are on the proxy every year and shareowners already nominated 25% of the board, they can’t nominate any additional board members. The whole idea of proxy access is to be able to change control. The 25% limit guarantees that entrenched boards will continue but with the infusion of up to 25% new members, the hope is that they will be able to convince the current board to change its position. CII advocates shareowners be able to nominate up to less than half the board but at least two candidates in all cases, to avoid a single board members being frozen out. I would do away with any limit on shareowner nominees. (see their comments of August 4th) If the board needs replaced and no one is putting up the money for a proxy solicitation, why shouldn’t shareowners be denied the right of electing candidates of their own choice? The threshold is contrary to the Commission’s stated intent of facilitating the ability of shareowners to “exercise their state law rights.” Most states do not impose any requirement other than ownership of a single share a precondition for nominating directors. The USPE draft contains a good discussion on why the focus on “control” is misplaced. July 16th comments by Phillip Goldstein of Bulldog Investors discuss why having more than one proxy card (ballot) is confusing, and maybe even illegal. Goldstein says, “the Commission can craft a simple common sense rule to require that any proxy card that that excludes the name of any bona fide nominee known to the soliciting party is materially misleading and hence a violation of rule 14a-9(a).”
  • Nominee Eligibility. Nominating shareowners should be required to represent that no relationships or agreements between the nominee or the nominating shareowner or group and the company and its management exist. However, there should be no requirement that shareowner-suggested nominees be independent of the nominating shareowner or group. Shareowners should be able to nominate people they have worked with and trust.
  • Rule 14a-8(i)(8). If the SEC takes my recommended amendments to the proposed Rule 14a-11 they will render the current prohibition for proxy access shareowner proposal largely moot. However, if the SEC goes ahead with a closer approximation to what they have proposed, amending 14a-8(i)(8) to allow such proposals is critical. As indicated above, the proposed thresholds, especially 5% at small companies, will mandate a company by company movement by shareowners to open up access, similar to the current movement to require that directors be elected by majority vote.

Don’t let this opportunity for a real shift in power to pass us by. As Monks and Minow have noted, with the slight exaggeration suitable for book covers, “Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.” Isn’t it time corporations were at least accountable to shareowners?

Fiduciary Duty

IMHO: Duty Call? ( has a great article for those who may not know they are fiduciaries under ERISA. I’ll just list the seven things you should know. To learn why, see the article:

  1. If you’re a plan sponsor, you’re a fiduciary.
  2. For the very most part, you can’t offload or outsource your fiduciary responsibility.
  3. If you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary. If you are able to hire a fiduciary, you’re (probably) a fiduciary.
  4. Hiring a co-fiduciary doesn’t keep you from being a fiduciary.
  5. You have personal liability as an ERISA fiduciary.
  6. Once you’re a fiduciary, you can’t just quit and walk away.
  7. You’re expected to be an expert—or to hire help that is.

Florida SBA in Leadership Role

During the fiscal year ended June 30, 2009, Florida’s State Board of Administration (SBA) executed votes on 3,383 public company proxies covering approximately 29,000 individual voting items, including director elections, audit firm ratifications, executive compensation plans, mergers, acquisitions, and other management and shareowner proposals. The SBA voted for, against, or abstain on 71.3 percent, 28.5 percent, and 0.1percent of all ballot items, respectively. Of all votes cast, 31.1 percent were against the management-recommended vote, up 3 percent from last year.

“Through active support of corporate governance reforms and prudent voting of company proxies, the SBA works to enhance shareowner value and support its long-term investment objectives. The SBA strives to responsibly vote proxies and engage corporations on behalf of the Florida Retirement System (FRS) and other client accounts to foster accountability, good corporate governance and sensible business practices,” said Ash Williams, Executive Director & CIO of the SBA. Emphasis was placed on:

Director Elections—Board elections represent one of the most critical areas in voting since shareowners rely on the board to monitor management. The SBA supported 71 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about candidate independence, attendance, or overall board performance. The SBA policy is to withhold votes from directors who fail to observe good corporate governance practices or demonstrate a disregard for the interests of shareowners.

Executive Compensation—The SBA considers on a case-by-case basis whether a company’s board has proposed or implemented equity-based compensation plans that are excessive relative to other peer companies or plans that may not have an appropriate performance orientation. As a part of this analysis, the SBA reviews the level and quality of a company’s compensation disclosure—believing strongly that shareowners are entitled to comprehensive disclosures of compensation practices in order to make efficient investment decisions. Although improvements have been made over the last year, we continue to observe reporting deficiencies at a majority of companies, raising hard questions about the integrity of their compensation practices. Over the last fiscal year, the SBA supported 26 percent of all non-salary (equity) compensation items—while supporting 99 percent of shareowner resolutions asking companies to adopt an advisory vote on executive compensation (a.k.a., “Say-on-Pay”), 50 percent of executive incentive bonus plans, and 28 percent of management proposals to adopt restricted stock plans in which company executives or directors would participate (58 percent for the amendment of such plans). The SBA co-filed four shareowner proposals in an effort to promote more effective compensation practices. The proposals encouraged bonus structures with greater orientation to long-term performance and discouraged the excessive use of tax gross-ups (reimbursements to senior executives paid by the company to cover an executive’s tax liability) and “golden coffins” (posthumous benefit payments covering severance, bonuses, and perquisites awarded after an executive dies).

Audit Ratification—The SBA supported over 96 percent of ballot items to ratify the board of directors’ selection of external auditor. Votes against auditor ratification are cast in instances where the audit firm has demonstrated a failure to provide appropriate oversight or when significant conflicts of interest exist, such as the provision of a large monetary amount of non-audit services.

Environmental & Sustainability Reporting—Increasingly the SBA has supported general sustainability reporting requirements and improved environmental disclosures issued by companies in its portfolio. The SBA supported 62 percent of shareowner resolutions asking companies to publish sustainability reports, 32 percent of shareowner proposals dealing with climate change and global warming, 100 percent of shareowner resolutions asking companies to produce reports assessing the impact on local communities, and 74 percent of shareowner resolutions regarding greenhouse gas emissions. This fiscal year, the SBA co-filed one shareowner proposal requesting the company prepare a report on the feasibility of adopting quantitative greenhouse gas emission goals.

In an effort to increase transparency to beneficiaries, invested companies and investor peers, the SBA posts proxy voting records on its website. This real-time vote disclosure occurs in advance of all annual shareowner meetings, normally within a few hours of the proxy vote being cast. Voting information is fully searchable based on date, calendar range, company name, and SBA portfolio. Voting data covers every publicly traded equity security for which the SBA retains voting authority (which excludes most foreign securities). The SBA’s current and historical proxy votes can be viewed here.

SBA’s votes are also posted to where they can easily be compared with other funds. ByProxyDemocracy‘s measure, Florida SBA is in the top 10% of activism overall and in voting on directors. For environmental and social impact voting, they are in the top 16%. However, on corporate governance issues they are in the top 6% and on executive compensation they are in the top 1%. These categories are broken down even further at PD, so you can see for example where Florida SBA stands on “Political Influence and Charitable Contributions.”

Are Institutional Investors Prepared for Power?

Stephen M. Davis and Jon Lukomnik answer with a resounding no in their much needed Compliance Week article,Investors Need to Hone Ownership Abilities. (8/11/09) If investors get to vote on compensation packages and win proxy access will they be willing to pay more money to RiskMetrics, Glass Lewis, Proxy Governance and others to provide adequate analysis?

“An ambitious compensation consultant could start a new service focused just on compensation disclosure and voting issues. Or perhaps the new needs will popularize high-level engagement services such as Governance for Owners, Hermes EOS, and F&C.”

Regarding other issues, Davis and Lukomnik are confident that investors will vote against any attempts by “limited-interest campaigns.” The real danger is that investors will take a checkbox approach because they won’t be willing to shift resources from trading to ownership.

They conclude: “Few investors consistently can trade out of the way of trouble. Maybe it’s time we admit that. Then we’ll be ready to exercise those new powers responsibly to try to help prevent trouble, rather than believing we can all be traders who can outrun it. With great power comes great responsibility, and it’s time for investors to prepare for it.”

Enron: The Play

Nothing has been learned, according to Lucy Prebble’s hugely ambitious play, covering the rise and fall of the Texan energy company. According to critic, Michael Billington, “Enron, is an exhilarating mix of political satire, modern morality and multimedia spectacle.” Jeffrey Skilling, takes on the role of prime mover and principal villain, aided by Andy Fastow, who creates exotically named shadow companies in which Enron’s escalating debts are disguised as assets.

Billington says the play captures “the dual face of capitalism: its turbulent energy and hubristic vanity.” (Enron,, 7/23/09) Hat tip to Michelle Leder of for her tweet.

IIA Reiterates Position on Independence and Issues Two Advisories

“Internal audit services should not be provided by the same accounting firm that audits the organization’s financial statements, as it would impair the independence of the external auditor. We have expressed this numerous times over the past two decades and we feel it’s important to re-emphasize this at a time in which the practice is potentially being reconsidered,” said Richard Chambers of the Institute of Internal Auditors (IIA). “The SEC prohibits this practice by public companies listed in the U.S., but The IIA believes that even if allowed by law or statute, this practice – at a minimum – creates a perceived impairment of independence and erodes public trust.” In addition, the IIA recently issued two advisories, both available on their website:

Using the Risk Management Process in Internal Audit Planning: Practice Advisory 1010-2

This guidance addresses implementing risk-based plans to prioritize the goals of the internal audit activity and ensure that the internal audit department’s goals are consistent with those of the organization it serves. The guidance advocates using a holistic, fully integrated approach to risk management that applies to all aspects of an organization. Such an approach establishes an environment that allows for the identification of key controls for significant inherent risks. Internal auditors are responsible for auditing those key controls and providing assurance on how the risks are managed.

When developing the internal audit plan, internal auditors should consider the identification and assessment of inherent and residual risks; the linkage of mitigating controls, contingency plans, and monitoring activities; whether risk registers are systematic, completed, and accurate; and whether risks and activities are documented. They also should coordinate their work with the work of other assurance providers, relying on the work of others, as appropriate. Normally, the audit plan will focus on:

  • Unacceptable risks with minimal key controls or mitigating factors that require management action.
  • Control systems on which the organization is most reliant
  • Areas with a great differential between inherent risk and residual risk
  • Areas of high inherent risk.

Assurance Maps: Practice Advisory 2050-2

This guidance addresses how the board of directors is responsible for ensuring that business-critical risks are being assured and adequately managed. Assurance is provided by a broad range of departments, differentiated by the stakeholders served; for example — those who report to management, those who report to the board, and those who report to external stakeholders. An “assurance map” is an organizational tool that will prevent redundancy, as well as some areas falling through the cracks.

“Assurance mapping is an excellent tool for transparently and comprehensively documenting and reporting on the coordination and effectiveness of assurance activities,” added Prentice.

Internal auditors typically provide assurance over the entire organization. However, the input of many others is critical, and other assurance providers may hail from numerous areas of the organization, including senior management, external auditors, compliance, quality assurance, risk management, environmental auditors, health and safety auditors, government auditors, financial reporting review teams, and subcommittees of the board. An assurance map streamlines the processes regarding “who is doing what” and “what has been done to date,” and provides comfort to those at the top by demonstrating that all participants are being responsible and accountable. The organization’s assurance map should be developed under the leadership of the CAE, and include such categories as:

  • Significant risk category.
  • Risk owner.
  • Inherent risk rating.
  • Residual risk rating.
  • External audit coverage.
  • Internal audit coverage.
  • Other assurance provider coverage.

SEC Investor Advisory Committe: Latham’s Proposal on Investor Education

One of the many issues the new SEC Investor Advisory Committee is grappling with is how to promote investor education. This involves everything from being smarter at buying and selling to how to be a more involved and intelligent owner/voter in corporate elections.

A minimal level of effort might be to substantially increase the Links the SEC site provides to go beyond financial literacy. They could include sites like the Investor Suffrage MovementProxy,TransparentDemocracy.orgSocialFundsThe Motley Foolfootnoted.orgFund DemocracyConsumer Federation of AmericaLearning MarketsSEC Watch, and of course Corporate Governance.

With a lot more effort and money, the SEC could design its own site or contract for a site that contains more of the kind of information they think is needed in a useable format. That option would require a lengthy process to write a request for proposals, some time for bidding, a difficult award process, and meaningful evaluation to determine if targets were met and the public is actually getting the information the SEC paid for. Or, we’d get a site, that gives us some basic consumer protection advice but little that could be considered at all controversial. The SEC certainly isn’t going to advise you how to vote in specific corporate elections.

There is a much simpler solution that is both more market driven and more democratic; let shareowners decide which sites offer the educational content they need by allowing them to allocate money to those sites doing the best job. I suspect Mark Latham’s proposal mostly went in one ear and out the other during the very busy initial meeting of the Committee. However, to show how simple the process can be, he’s added a USA Investor Education page to his website.

At this point, there’s no funding for the project but you can still go in and vote, by distributing percentages among listed sites. Don’t like the sites? He asks you to recommend others. By using the page, you’ll learn of resources you probably didn’t know existed. For example, I’d never heard of SEC Watch. I’ve already created a short watchlist so that I’ll be notified when any of five companies files a report with the SEC and I’m eager to try highlighting content from a filing and creating a URL to that specific section that I can then post on my site as part of a discussion. For example, this would be handy for highlighting my own proxy proposals and corporate responses.

Latham’s basic point is that instead of trying to anticipate every important need, the SEC should facilitate a system that builds on the existing needs and intelligence of the investing public. If they place a high value on knowing how institutional investors are voting in upcoming elections, they’ll vote some future purse to Proxy Democracy. If they value establishment of an online investor networking community, they’ll vote to support Evaluation and feedback from such a system would be ongoing and dynamic.

Yes, there’s a few improvements that can be made. For example, I’d like to my input result in changing the totals right away, instead of through a daily batch process. I’d also like to see how many have voted. I’m sure that other users will come up with plenty of recommendations. And that’s just the point. Instead of some top-down dictate from SEC experts, Latham suggests building a flexible system that facilitates grassroots involvement by investors in determining their own educational needs and rewarding those that help them meet their own educational goals. It is a very creative solution to a problem the SEC has been grappling with since its inception. Let’s hope they embrace it and provide some funding.

Senate Shareholder Bill of Rights Hearing

We are very fortunate that Doug Chia, an in-house lawyer who focuses on corporate governance and securities, was able to cover the hearing on July 31, 2009. His coverage not only walks through the major provisions of the bill but also lets you which of the witnesses is supporting or opposing the various provisions. I hope you find it as insighful as I did. I hope to get more reports like this from Chia and other readers.

Report of the Task Force on Delineation of Governance Roles & Responsibilities of the ABA Business Law Section Corporate Governance Committee

Obviously, the corpgov committee is a group of distinguished attorneys who put together the title as well as thereport, without the benefit of Madison Avenue. Among a committee with representatives from institutional investors, corporations, academics, law firms, advisors and a union, there were few snappy phrases or headline grabbers.

Most of the relatively short paper (26 pages of text and another 26 pages of notes) is taken up with an extensive background discussion, mostly focusing on roles. I was glad they said the objective of most corporations is “enhancing corporate profit and shareholder gain.” That’s better than the “maximizing return” mantra, which is so frequently repeated by less informed observers.

However, they tried a little too hard in pointing out that corporations can’t be considered democratic and are not really owned by shareholders:

Although the corporation’s governing body – the board of directors – is elected by the shareholders, the board’s governance powers are determined by law and therefore neither delegated by, nor derived from, the shareholders…

The analogy of shareholders to “owners” of the corporate “asset” is imperfect at best… Shareholders do not have the right to come to corporate headquarters and remove a proportionate share of machinery or dictate how widgets will be manufactured.”

The powers of legislative bodies are also “determined by law” and it isn’t as if we can go to the Pentagon and take our proportionate share of hardware or paper. Neither can we go down to our local food cooperative and walk off with our “share” of food or equipment. Cooperatives have long operated with democracy as one of their core principles. Yes, corporate board have certain responsibilities not shared with most elected officials, but they could be significantly more open and democratic than most are today, even without significantly changing the current legal framework. I don’t expect corporations to adopt the “one person, one vote” model of civic democracies or cooperatives, but I do expect a continuing trend toward more open book management and empowerment of shareowners. We see some recognition of this in the Task Force’s final report.

The paper does a good job of highlighting trends. For example, here are are few of those noted relative to board composition and practices for the S&P 500:

  • The percentage of independent directors has grown from 78% in 1998 to 82% in 2008, even as the definition of “independence” and the responsibilities of such directors have been enhanced.
  • In 2008, 60% of new director nominations came through a search finn, 21% came from independent directors and 9% were recommended by the CEO, down from 14% in 2005.
  • Fewer active CEOs and other similarly senior executives now serve on boards, with only 31% of new independent directors also holding positions as active CEOs, COOs, chairmen, presidents or vice chairmen, down from 49% in 1998.
  • Boards are gradually improving their racial and gender diversity. In 2007, 85% of Fortune 1000 companies had one or more female director, (up from 78% in 2001) and 78% had one or more director from an ethnic minority (up from 68% in 2001).72 In 2008, approximately one in five new directors came from a diverse ethnic background, and women accounted for 18% of new directors.
  • Directors spend more time preparing for and participating in board and committee meetings (223 hours per year). The average number of board meetings per year has increased from 7 in 1998 to almost 9 in 2008.
  • Independent board leadership has increased. Approximately 16% of S&P 500 companies now have an independent chair; among S&P Mid and Small Cap companies the figure is higher (23% and 27%, respectively). In 2008, 95% of S&P 500 boards had an independent lead or presiding director, compared with only 36% in 2003.
  • Boards are getting tougher. In 1995, one in eight departing CEOs resigned under board pressure or were fired, while in 2006 almost one in three departing CEOs left involuntarily.

Here are a few of the changes in shareowner influence noted by the report:

  • The growth of pension funds with inherent long-term obligations and investment horizons, which led them to focus on the governance of companies in their portfolios;
  • Changes in SEC regulation in 1992, coupled with technological innovation (internet) that respectively, removed legal barriers and eased the ability of institutional investors to communicate with one another and coordinate efforts;
  • Clarification by regulators that pension fund and mutual fund fiduciaries have a fiduciary duty with respect to the voting rights associated with the portfolio;
  • Regulations that require mutual funds and investment advisors to disclose votes and voting policies;
  • Increasing reliance by mutual and pension funds on proxy advisors (who have business incentives to support increased areas for shareholder consideration and voting);
  • Revision of the SEC’s position on executive pay issues related to ordinary business and the resulting focus of shareholder proposals on compensation issues and expanded executive compensation reporting requirements, which require greater pay disclosure and explanation;
  • Moves by companies (especially large caps) to replace plurality voting with majority voting for uncontested director elections;
  • Abolition of broker discretionary voting in uncontested elections;
  • Increased media and public attention to governance issues due to a number of high profile governance failures and scandals, and increased legislative and regulatory receptivity to the imposition of reforms;
  • Trends removing classified boards and other anti-takeover devices;
  • Lowered participation of individual shareholders in proxy voting due to e-proxies, enhancing the influence of institutional shareholders.

The report includes a good discussion of divergent interests among shareowners who are often mistakenly characterized as monolithic. What are frequently termed the “special interests” of various shareowner types is handled deftly. The Committee isn’t looking for major changes.

The current state law framework that gives the board authority for the business and affairs of the corporation within a framework of fiduciary duties owed to shareholders creates an efficient decision-making structure for engaging in entrepreneurial actions for the benefit of the equity providers and ultimately our economy at large. …

Reform efforts should be aimed at encouraging communication and negotiation between boards and shareholders on key issues, while also ensuring boards retain the authority and ability to carry out their responsibilities.

Advice to shareowners includes not taking a “check box” approach to governance issues. Look at each company’s long-term situation and review advisors’ capabilities and potential conflict of interests. They recommend boards become more transparent (especially regarding incentive packages), affirmatively engage with shareowners, and act in the “long-term best interests of the corporation and the shareholding body as a whole – no matter how challenging it may sometimes be to balance divergent interests – and be prepared to explain their decisions on a principled basis.”

They want policy makers to “ensure that short-term shareholders are not unduly enabled to take actions that could undermine the long-term interests of the corporation and other shareholders.” Additionally, “consideration should be given” to requiring “disclosure obligations of securities holders, including disclosure of security lending.” Perhaps the most recommendation is the following:

Encouraging shareholder interest in long-term investment, for example by rewarding long-term holding through tax incentives and potentially enhanced voting rights is worth exploring… (Also, we note that while it is difficult to set absolute parameters for what constitutes long- term investing, it should be longer than a quarter, a year or even 18 months.)

Any controversy among members of the Task Force appears to have been relegated to the end notes, which are equal in length to the paper and contain a wealth of information and opinion, including many citations easily accessible through the internet. Although I would have liked more in the way of a prescription for shareowner rights, we can’t expect such proclamations from an ABA task force. As a background paper that provides a “context for policymakers, participants in the corporate governance process and the public in considering responses to the current crisis,” I’d have to say it mostly hits the mark. I know I’ll keep my copy handy for quite some time as an excellent reference.

Worth Reading

Investrend Weblogs has some interesting posts, especially a series by Susanne Trimbath, of STP Advisory Services, on corporate governance.

AuditNet recently compiled a handy list of articles by Dan Swanson, a senior security and internal audit professional with a prolific pen.

The Business & Human Rights Resource Centre, a UK-based non-profit whose website contains information on the human rights records of 4,000 corporations in 180 countries, has added to its website a portal for “materials relating to the work of the United Nations Secretary General’s Special Representative on business & human rights, John Ruggie.” Ruggie proposed a policy framework for managing business and human rights challenges based on “three pillars: the state duty to protect against human rights abuses by third parties, including business; the corporate responsibility to respect human rights; and greater access by victims to effective remedy, judicial and non-judicial.” (Website Containing Human Rights Records of Corporations Adds Work by UN Representative for Business and Human Rights, SocialFunds, 8/3/09)

Georgeson offers advice on how to prevent failed director elections, given the SEC’s approval of an amendment to New York Stock Exchange Rule 452 that would eliminate the so-called “broker discretionary vote” in uncontested director elections. Shareowners haven’t held as much power as they do now since the separation of ownership and control noted by Berle and Means. If you are an incumbent director and want to be reelected, you really should readSEC Approves Elimination of Broker Discretionary Voting in Uncontested Director Elections.

Institutional investors might be interested in When it comes to transparency, institutional investors are being treated as “second class citizens” by Steve Deutsch for, 7/23/09. Deutch argues, “the level of transparency routinely provided to institutional investors is sadly lacking.” Most of the article centers around a June report from KPMG, “Renewing the promise: Time to mend relationships in investment management.” Apparently, financial intermediaries (defined as advisors, not investment managers) are now perceived by institutional investors as, “less trustworthy than politicians.” Here he notes that even the Investors Working Group Report turns to government, rather than self-regulation.

“Even if intermediaries (investment consultants or specialized advisors) have more information, there is no economic incentive for those intermediaries to provide that information to their institutional investing clients.” Included in his discussion is an exhibit of Morningstar data showing administrative costs and fees paid to investment consultants and investment managers from a randomly selected group of California public pension plans. They range from 0.13% at CalSTRS to 1.28% for the City of Fresno Retirement. Deutsch concludes, “lack of transparency can be good for business.”

“Most industry conference agendas dedicated to sales and not to objectively educating audiences on things like risk management processes. So investors must demand more objective forums if they are truly interested in raising their skill level and becoming pro-actively engaged with intermediaries.”

SVNACD to Discuss Outside Directors

Should outside directors take a more proactive role in formulating, or at least critically reviewing, corporate strategy? Should they vigorously challenge “accepted” industry norms of risk taking? If so, how will this impact the traditional distinction between “oversight” and “micromanagement”? Should institutional investors be more involved in the selection and election of directors?

These are just a few of the issues to be explored at a program entitled, The Board’s role in business strategy and risk management: How should directors be chosen and how should they be paid? September 17, 2009 Networking at 7:30am. Program: 8am – 9:30am, Palo Alto.


On our Links page, we’ve added Americans for Financial Reform to several categories. AFR is a coalition of nearly 200 national, state and local consumer, labor, retiree, investor, community and civil rights organizations that have come together to spearhead a campaign for real reform in our banking and financial system.

On their site you can get news on the push for real reform and some good advice on how to take action. Right now, they’re asking individuals to call and/or write your Member of Congress, urging him or her to support the creation of the Consumer Financial Protection Agency. A sample letter and script can be downloaded here: Sample Letter and Phone Script in support of Consumer Agency. You can also check out events, press releases, and download an AFL-CIO paper on Regulating the Shadow Markets.

CII on Proxy Access Proposals

CII’s comments on the SEC’s proxy access proposal have been posted to the SEC’s comment page. (8/4/09) CII generally supports Rule 14a-11 as proposed. They oppose including any triggering events, delay for smaller issuers or requiring shareowner-suggested nominees to be independent of the nominating shareowner or group. Here are a few highlights:

  • Appears to “favor giving shareowners the opportunity to nominate at least two candidates” up to less than a majority of the board but later agrees with proposed limit of 25%.
  • Opposes first-in approach. Favors “largest beneficial ownership along the lines included in the Commission’s 2003 proposed proxy access rules.”
  • “…strongly support the proposed amendment to Rule 14a-8(i)(8) as a critical supplement to Rule 14a-11,” allowing shareowners to strengthen proxy access.

The bulk of CII letter attempts to address the Commission’s questions, relative to the proposals. I’ve attempted to highlight differences and other significant responses. Please let me know if I missed anything significant.

  • We strongly disagree that lower quality boards will be a result or cost of the proposed rule.
  • We strongly disagree that costs incurred by companies to defeat the election of shareowner nominees should be considered a cost of the proposed rule.
  • We strongly disagree that the proposed rule will create costs resulting from an agenda that conflicts with other shareowner interests.
  • Claims that the adoption of proposed Rule 14a-11 would go beyond the procedural or informational nature of what Section 14 allows are, in our view, unfounded.
  • We strongly oppose exempting companies facing proxy contests from Rule 14a-11… Shareowners should not be forced to make the choice between a change in control or business as usual.
  • The Commission should clarify that the lowest number of shares held by the nominating shareowners or each member of the nominating group during the one-year pre-Schedule 14N period be used to calculate the percentage of securities owned and entitled to vote on the election of directors for purposes of the eligibility threshold, accompanied by a representation that the participant will hold no less than that amount through the date of the annual meeting.
  • We recommend requiring companies and nominating shareowners to fully disclose all relationships between director candidates and the company, company executives, and in the case of candidates nominated by shareowners, the nominating shareowners… Once shareowners have full information about relationships between all nominees—including board-nominated and shareowner-nominated candidates—they can make a reasoned and informed voting decision.
  • We generally do not oppose the Commission’s proposed 25% maximum percentage of shareowner nominees for director. We, however, generally would support, as indicated in our response to question E.1., permitting shareowners to nominate at least two candidates in all cases.
  • To the extent that a company intends to devote more than 500 words to supporting its own candidates or opposing the independent candidates, the company should provide notice to the nominating shareowners and an opportunity to amend the latter’s statement to be equal in length.
  • The rule should explicitly state that the nominating shareowner’s or group’s supporting statement may contain statements opposing the company’s nominees. In addition, we believe those opposing statements can be included in the nominator’s 500-word or more statement.
  • We would support the Commission following the no-action process used as to Rule 14a-8, with the possibility that currently exists as to company determination letters, namely that a nominating shareowner could treat the company’s determination as a violation of federal securities law and pursue litigation against the company to compel inclusion of the materials in the company-prepared proxy.
  • Shareowners should be permitted to submit non- binding proposals or mandatory bylaw amendments supporting a stronger proxy access mechanism than what is offered by Rule 14a-11.
  • To the extent that the Commission may believe that an adjustment is warranted (to the $2,000 requirement for shareowner proposals), we believe that the Commission should do so on a spot basis, rather than with automatic periodic adjustments, which are less easy to administer.
  • We generally do not see a reason to require a separate disclosure regime for shareowners who submit a proxy access proposal that would be any different from the regime affecting all other types of shareowner proposals.
  • We see no reason for a prohibition on an affiliation between nominees and nominating shareowners. A shareowner-nominated candidate will be elected or defeated based on his or her own merits and will have fiduciary and other obligations if elected to the board.


WorldBlu List 2009 awardee Nearsoft interviewed the co-Founder of, another WorldBlu List 2009 awardee, about transparency and democracy at Glassdoor. “To create a democratic and transparent online work community we strive to maintain the same elements in our own work environment.”

Lyell Dampeer, President of Broadridge Financial Solutions, is interviewed by Broc Romanek on the latest proxy statistics.

Long-term Ownership

Paul Myners, the UK Financial Services Secretary called for “radical solutions,” such as denying the right to vote at AGM’s until bank shareowners have held there shares for more than six months. Writing for Responsible Investor, Hugh Wheelan, says this would be a step in the right direction. He would add tax breaks or enhanced dividends for long-term shareholders to the discussion mix. (We must incentivise long-term investment to help prevent systemic risk, 8/4/09)

PIRC says that “if long-term investors were granted preferential voting rights it might ultimately make it harder to eject poor management, or seek reform of remuneration policy, especially if passive managers do not devote proper attention to governance issues.”

PIRC likes tax relief on dividends for long-term holders but doesn’t see it as likely. Instead, the put forth the idea of forcing “every share purchaser to disclose ultimate beneficiaries from the start, thus making it difficult for traders and predators to skulk behind opacity and dummy companies.” Additionally, “if companies could also report whether those on their register voted or not this would expose those who aren’t using their ownership rights effectively, or highlight failures in the voting ‘chain.’” (Right question, wrong answer, PIRC Alerts, 8/4/09)

Quote of the Week

“When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.” — New York Attorney General Andrew Cuomo explains the approach to ‘performance-related’ pay amongst banks. (PIRC Alerts, 8/4/09)

Stock Shock

Michael Moore, Oliver Stone and Ridley Scott are all apparently working on films about stock market manipulation and Wall Street schemes. Sandra Mohr’s Stock Shock is first out, since the meltdown. The movie looks at one very small slice, the price collapse of Sirius Satellite Radio (SIRI).

One very positive element of the film is that it does a reasonably good job of explaining naked short-selling and mentions repeal of the up-tick rule, implying these practices contributed to the steep drop in the price SIRI shares. If the film does nothing else, it may begin to educate those who watch it of the importance of a sound regulatory structure to efficient markets. Unfortunately, while it offers some educational and shock value, as viewers begin to grasp weaknesses in the current governance structure, it does little to empower action.

The SEC recently made permanent a rule aimed at reducing naked short-selling, requiring that brokers must promptly buy or borrow securities to deliver on a short sale. The Commission is also working with the exchanges to ensure prompt reporting.

Additionally, the SEC is looking at restoring the up-tick rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. This helps to prevent selling sprees that feed upon themselves. Another approach being reviewed would ban short-selling for the rest of the trading session in a stock that declines by 10% or more. (‘Short sellers’ in SEC’s cross hairs as it votes new rules, LATimes, 7/27/09; Even With New Rules, Naked-Short Violations Hard To Enforce, WSJ, 8/3/09)

Therefore, viewers of Stock Shock may think the problems are solved, or nearly so. Although I found the film mildly interesting… I haven’t been following SIRI, I’m disappointed there was no real call for action that one might expect from a Michael Moore film or from other producers of documentaries. One could argue, the attempt is to present a balanced approach in order to let viewers make up their own minds. However, it looked to me more like fear of getting sued because the facts were complicated and the filmmaker did little to sort through them.

Corporate governance expert, Bud Burrell and other commentators did little to clarify the issues. Did anyone bother to look up SIRI on Yahoo and see their RiskMetrics Group corporate governance rating is only better than 16% of the Russell 3000. Obviously RMG thinks there are problems. But what are they? I didn’t hear anything like a satisfactory explanation. Even for a low budget film, it probably would have paid to spend $850 to get a copy of The Corporate Library’s rating. That way, the film could at least give viewers a better idea of board and management governance issues.

Instead, the film’s primary focus is on a few retail shareowners who essentially placed heavy bets on the company based on their love of the product. Much of the movie centers around Michael Hartleib, a shareowner activist who apparently filed at least one lawsuit against the firm accusing management of violations of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) and the Sherman Act, as well as breach of fiduciary duty. We hear from him and we hear reactions from the other shareowners. Some think he’s fighting the good fight. Others think his actions are just hurting the value of their stock. Those interviewed appear to be mostly isolated. We learn little of Hartlieb’s Save Sirius group, which now appears to be heavily pushing Stock Shock. Instead, the film examines one active retail shareowner, the phenomenon of short sellers, and a lot of passive shareowners.

I would have liked to see more about the attempts by shareowners to coordinate actions, such as passing resolutions. For example, I see Hartlieb had a “say on pay” proposal this year that lost, although I see it won the support of CalSTRS and perhaps other large institutional investors. What kind of outreach attempts were made to RiskMetrics, CII and others? Did the group consider running a proxy contest? Was there a plan B?

The film makes no reference to groups like the Investor Suffrage MovementProxy,, or Americans for Financial Reform. Let’s hope others to a better job of pointing a way out of the meltdown by working with others toward reforms that will result in a more accountable financial system. Until then, Stock Shock serves as an opening act, at least warming up the audience. Buy mine, played once

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 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 ProxyVoteautomatically 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 ofBroadridge 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 with File 4-583 in the subject line.(posted 5/20/09; link

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