Archive | September, 2009

Archives: September 2009

Symantec’s Annual Shareholder Meeting

Shareowners scored another victory with the passage of Kenneth Steiner’s measure to reduce the threshold for calling special meetings to 10% ownership, down from 25%. Matthew Rafat, working with the Investor Suffrage Movement, presented the proposal at Symantec’s meeting and posted a wonderful summary on Seeking Alpha (Notes from Symantec’s Annual Shareholder Meeting, 9/26/09)

Check out Matt’s law firm and his blog, Quiet Highway: Saga of a Gentleman. I hope Matt continues to keep us posted and continues working with the Investor Suffrage Movement.

CalPERS Board Election

For the first time in many election cycles, James McRitchie, the publisher of CorpGov.net and PERSwatch.net, is not endorsing any candidates. We felt we could play a more productive role by encouraging dialogue with the candidates and objectively reporting on their responses.

The current election is for the two at-large seats, elected by all 1.6 million members of the System. (see CalPERS announcement) Ballots were mailed September 4, 2009 and are due back to CalPERS by October 2, 2009. Eligible active and retired members who did not receive a ballot by September 18, 2009 should contact the CalPERS Board Elections Office at (916) 795-3952 or (800) 794-2297 to request a replacement ballot.

PERSWatch surveyed the candidates. Download a pdf that includes their responses to ten critical questions, as well as contact information for each candidate. VoterMedia.org provides links to other sites and blogs covering the CalPERS election. At VoterMedia.org you can vote for the websites/blogs offering the best information on the election and you can e-mail them to add websites/blogs. We hope you’ll consider taking the time to vote for PERSWatch as providing the best coverage of the CalPERS election.

“California Foundation for Fiscal Responsibility” has done some polling, talked to a signature-gathering firm and is fine-tuning an initiative for the November ballot next year. (CalPERS counters attacks as initiative looms, Calpensions.com, 9/24/09)

TCL Pay Survey

Big Pay, Poor Performance: The Corporate Library’s 2009 CEO Pay Survey, Sept 22nd, 1:00 PM – 2:00 PM EDT Webinar. Reserve your seat.

At which companies were the pay/performance links most starkly broken in 2008? What should they have done instead? What lessons can other companies learn from their mistakes? Join us as the authors of The Corporate Library’s 2009 CEO Pay Survey shed light on these questions. Receive 15% off the price of the report just for attending!

USPX Comments on Proposed Proxy Disclosure and Solicitation Enhancements

The United States Proxy Exchange (USPX) and co-signers offered several suggested amendments to proposed SEC rules. One of the fundamental comments discussed the nature of risk:

We believe that, over the past two decades, the financial services industry has discovered “risk” to be a convenient scapegoat in instances where financial institutions or their clients suffer staggering losses due to fraud or other forms of abuse. If a man jumps out of an airplane without a parachute, is he taking risk? If he is certain to die, the answer is “no.” Risk is not about consequences. It is about uncertain consequences. If there is no uncertainty, there is no risk.

The group suggests amending existing CD&A disclosure requirements to focus more directly on potential or actual abuses. The centerpiece of a new rule should be a comprehensive, open-ended report signed by the principal executive officer and CFO for inclusion in the 10-K, with both individuals held personally liable for omissions in that report that come to light as a result of subsequent unanticipated losses.

The group recommends each director nominee be required to produce a standardized resume documenting education, employment, publications, references and why they would be of value to the board. Although the group could not agree with regard to disclosures on compensation consultants, they give voice to important views that should be fully considered by the SEC. Additional comments from other groups and individuals are also posted on the SEC site.

CalPERS Neutral on Placement Agent Measure

The CalPERS board narrowly voted to be neutral, rather than opposed, to a proposed federal ban on placement agents, who introduce investment managers to pension funds. (Placement agents: to ban or not to ban, CalPensions.com, 9/17/09) I would have rather seen CalPERS offering amendments. It is clear regulation of placement agents needs reform. The “policies” enacted by the Board in May are clearly “underground regulations,” since the Board didn’t go through the required rulemaking process. If the Board believes the proposed federal ban is defective, they should come forward with specific amendments.

How to Prepare for a Proxy Access World

With the SEC likely to adopt proxy access rules before the proxy season, companies should be gearing up for a wild proxy season. Even if a company doesn’t expect the changes to impact it, planning for the unexpected is critical. This webcast will provide a list of the tasks you need to perform now including scrubbing bylaws, understanding the demand for stockholder lists process, etc. Presented by TheCorporateCounsel.net. Thursday, September 17, 2009. 2:00 – 3:00 pm, eastern [archive and transcript to follow]

Only the Super-Rich Can Save Us!

Ralph Nader’s newest book is a fantasy novel about the wealthiest citizens banding together to save the country. You’ll recognize many of the characters, including Warren Buffett, George Soros, Barry Diller, Ted Turner, Paul Newman Yoko Ono and Bob Monks, among many others.

With Bob Monks recommending it, that’s good enough for me. I’ll be getting it after it comes out on September 23rd. I’m sure it will be interesting but let’s not hold out for that fantasy. We need to organize not just the super rich but the middle class. At 736 pages, the book might throw the real efforts of activists off track for several days as we hunker down with this voluminous missive.

Monks posts a brief excerpt on his blog, which has Bill Gates Sr. recommending that every American incorporate… he will even pay the fees. That portion of the novel also has Gates forming a committee to run corporations for public office. Why not? It looks like the Supreme Court may be giving them most of the rest of constitutional rights of human beings, without the responsibilities… like the possibility of prison.

SEC’s Investor Advisory Committee Creates Three Subcommittees

An Investor Education Subcommittee chaired by Dallas Salisbury (President and CEO, Employee Benefit Research Institute) plans to focus on matters related to financial literacy, the efficacy of layered educational resources that may permit investors to access information at varying levels of detail reflecting their needs, the ways that issuers and boards of directors communicate with investors, and the types of technology that can be utilized for education.

An Investor as Purchaser Subcommittee chaired by Mercer Bullard (Founder and President of Fund Democracy, Inc. and Associate Professor of Law, University of Mississippi School of Law) expects to examine the needs of investors when they purchase specific products (mutual funds, hedge funds, money market funds) and services (brokerage, investment advisory, and financial planning). This subcommittee also will consider the fiduciary duty owed to investors by those who provide investment advice, as well as issues related to pre-sale and other disclosure, intermediary fees and compensation practices, arbitration, and technology.

An Investor as Shareholder Subcommittee chaired by Stephen Davis (Executive Director of Yale School for Management’s Millstein Center for Corporate Governance, and board member of Hermes Equity Ownership Service) intends to review proxy solicitation and disclosure issues, proxy voting and process (including the role of proxy advisory firms), majority voting, Regulation FD, executive compensation practices, the responsibilities of shareholders, international issues, and technology related to shareholder communications and voting. (SEC Investor Advisory Committee Forms Subcommittees to Tackle Ambitious Agenda on Behalf of Investors, 9/15/09)

In Defense of Public Pensions

Ray Edmondson Jr., CEO of the Florida Public Pension Trustees Association, notes a American Federation of Teachers 2008 annual national survey of 45 professions revealed that for the ninth consecutive year, public employee compensation lagged behind private sector compensation for the same jobs in all but four job categories. Paying into defined benefit plans is one reason the public sector is still able to attract some of the best and the brightest… although I’d have to say the quality of employee in California state service has declined dramatically in the last 30 years, at least from my observations.

The average pension benefit is from the Florida Retirement System (FRS) is $1,354 per month, or $16,248 per year – hardly a lavish income. The average retirement for CalPERS members is $2,101 but 78 percent of all service retirees receive less than $36,000 a year or less.

Public pension systems vary slightly from state to state, but nationwide, 81.6 percent of pension plan payouts came from earnings on investments, while employees paid 5.9 percent and taxpayers paid 12.5 percent – a small price to pay for the myriad of public services provided. (Public pension debate twists reality, Tampa Tribune, 8/29/09)

Survey Re No Action Letters

The Securities and Exchange Commission, Division of Corporation Finance, is holding a meeting with representatives of some key stakeholders on September 22 to discuss the process by which the staff decides on no action letters regarding shareholder resolutions. To help inform that meeting, Sanford Lewis and others have prepared a very brief survey for shareholders who have had experience in that process. They integrated feedback from leading share owner coalitions in refining the survey.

The survey will likely take about five minutes to complete. If you have filed a shareholder resolution within the last five years, and have gone through the no action letter process, please fill out this brief survey by 9/17.

http://www.surveymonkey.com/s.aspx?sm=A5GRPtY_2biiCLAfSKI6iL9w_3d_3d

Your individual comments will be kept confidential; compiled data will be presented to the SEC on September 22.

Whole Foods

The Organic Consumers Association (OCA) has been pressuring Whole Foods Market (WFMI) and its supplier, United Natural Foods, Inc. (UNFI), to respect workers rights and put a priority on selling organic, as opposed to so-called “natural foods.” Whole Foods responded on August 26, 2009, signed by one of its attorneys, threatening to sue OCA under the bizarre pretense that a petition they circulated violates Whole Foods’ “intellectual property rights.” OCA responded, in part, as follows:

Given all the bad publicity that you’ve gotten lately for admitting that Whole Foods Market (WFM) retail stores are purveyors of ‘junk food,’ that WFM needs to sell a lot more certified organic products (rather than conventional items greenwashed as ‘natural’), that WFM’s ‘365’ private label products need to be thoroughly tested for GMO contamination, that you don’t think all Americans deserve government subsidized access to health care or need labor unions, perhaps you may want to reconsider suing the largest organic consumer watchdog organization in the United States…

Join with OCA and CorpGov.net in sending a message to WFMI and UNFI.

CorpGov Bites

David Stevenson’s The challenges in China presents some of the issues faced when investing in China. “Although the quality of financial reporting among large companies is now quite high, especially among those listed overseas, the value of non-financial reporting is much lower. The disclosure of director remuneration is often quite vague and misleading, while rules governing disclosure of share transactions by directors and material transactions are not up to international standard. There is little scope for minority shareholders to organise themselves into an independent association to protect their interests against over-mighty majority owners, either.”

In one of the stranger US proxy contests witnessed in recent years, Leonard J. Brandt, the co-founder and former CEO of CNS is claiming victory in the election of a slate of dissident directors at a special meeting held on Sept. 4, 2009, while the company is saying that the meeting was invalid. (When shareholder meetings go wrong, Manifest Blog, 9/11/09)

Ceres is seeking a Director of Investor Programs to lead Ceres’ work with institutional investors and asset managers on climate change and other sustainability issues. The Investor Programs is a priority program of our organization. This position will provide direction and oversight to the current program staff and focus on building the Investor Network on Climate Risk (INCR). INCR is a project of Ceres with more than 80 institutional investors with over $7 trillion in assets.

Herman Miller’s proxy statement indicates it will hold a virtual annual meeting. (The Return of Virtual-Only Shareholder Meetings? Herman Miller’s Third Year in a Row, TheCorporateCounsel.net/Blog, 9/10/09)

The 10th International Conference on Corporate Governance is being held on 9 -10 October 2009 at Royal Overseas League in London. The theme of the conference is “Reenergising Corporate Governance by realigning the moral compass of the boardroom.” Eliot Spitzer, the former Governor of New York and the Attorney General of New York State would be delivering the keynote address.

According to Eric Jackson, if you exclude Carl Icahn and Michael Murray, Yahoo! insiders have collectively purchased $103,700 in stock during the past two years, while selling $233 million during the same period. (Yahoo! Insiders Cash Out: Activist, TheStreet.com, 9/9/09)

Overcoming Short-termism

The Aspen Institute has released a September 9, 2009 report, Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management. It is short and clear (6 pages) and comes at a very timely moment. Signed by a diverse group including Bogle, Buffet, Lipton, Lorsch, Millstein, Stout, Trumka and Wilcox, the recommendations attempt to address three basic problems:

  1. High rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.
  2. Fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term. High-risk strategies designed exclusively to produce high returns in the short-run leads to market failures, social and environmental degradation.
  3. If managers and boards pursue strategies to satisfy ahort-term investors, theyt can put the interests of sharewners seeking long-term growth and sustainable earnings and the corporation’s future at risk.

Institutional investors and related intermediaries should be properly incentivized to focus on the interest of promoting sustainable, long-term growth. The group divides its recommendations into 3 categories.

  1. Market incentives to encourage patient capital are likely to be the most effective mechanism to encourage long-term focus by investors. To that end, the following are recommended:
    • Revise capital gains tax provisions or implement an excise tax in ways that are designed to discourage excessive share trading and encourage longer-term share ownership. Capital gains tax rates might be set on a descending scale based on the number of years a security is held. An excise tax could be imposed that would also allow for the inclusion of tax- exempt and other investment entities.
    • Remove limitations on capital loss deductibility for very long-term holdings, now capped at $3,000 per year for losses related to holdings of any duration.
    • In exchange for enhancing shareholder participation rights, consider adopting minimum holding periods or time-based vesting, along the lines of the one-year holding period required under the SEC proxy access proposal currently under review.
  2. Better align the interests of financial intermediaries and investors by ensuring that the fiduciary duties of financial intermediaries are clarified, enhanced and rigorously enforced.
    • Apply a higher degree of accountability and enhanced fiduciary duties to financial intermediaries, by requiring increased disclosures on compensation, incentives, trading, policies on proxy voting and other matters that indicate compatibility (or lack thereof) with the fund’s stated objectives, and the goals of the ultimate beneficiaries.
    • Modify ERISA allowable investment practices through rule changes to promote long-term investing by those investors holding equity in tax-advantaged accounts.
    • Ensure, through clearer and more rigorously enforced fiduciary duties, that investment advisers of all types take into account, and clearly inform investors of, tax and other implications of changes made to encourage long-term holding as recommended herein.
    • Pursue regulation or policy to base the compensation of long-term oriented fund managers on the fund’s long-term performance and extend to such funds the compensation disclosure requirements that are currently applicable to operating companies.
  3. The final leverage point, greater transparency in investor disclosures, especially of complex non-traditional structured and derivative arrangements, can also play an important role in helping corporations maintain a long-term orientation.

The maturation of the institutional investor community creates both opportunity and responsibility to promote the long-term health of capital markets and, in particular, to pursue investment policies and public policies that empower and encourage business managers and boards of directors to focus on sustainable value creation rather than evanescent short-term objectives.

California to Limit Placement Agents

The California Senate passed AB 1584, which would require more disclosure by placement agents seeking business from government pension funds and lengthens revolving door prohibitions. The bill now goes back to the Assembly for concurrence with amendments.

The bill, applicable to all California public pension systems:

  • requires adoption of policies mandating the disclosure of fees paid to investment placement agents;
  • requires the disclosure of campaign contributions and gifts made by placement agents to public retirement board members for the 24 month period prior to solicitation;
  • prohibits public retirement board members from selling investment products to other public retirement systems; and
  • lengthens post-employment restrictions on influencing retirement board actions for former system executives and board members to five years.

The measure comes in the wake of investigations by New York Attorney General Andrew Cuomo and SEC. Two members of the Los Angeles Department of Fire and Police Pensions oversight commission, Sean Harrigan and Elliott Broidy, quit May 7 after the SEC queried them about ties to firms under scrutiny in New York. Neither are accused of any violations.

CalPERS, which supports the measure, approved new rules in May requiring investment firms to disclose when they hire placement agents, how much those agents are paid, and the services they perform. (California Senate Approves Placement Agent Disclosure Rules, Bloomberg, 9/4/09) CalSTRS went through a lengthly rulemaking process to adopt similar requirements a couple of years ago.

Shareowner Proposals Create Value

Luc Renneboog and Peter G. Szilagyi reviewed 2,800 shareowner proposals submitted between 1996 and 2005 for their research paper Shareholder Activism through the Proxy Process (August 2009). They found that regardless of their objective (which may be self-serving or political), proposals are more likely to be submitted against firms that:

  1. Use antitakeover provisions to entrench management,
  2. Have ineffective boards,
  3. Have ill-incentivized CEOs,
  4. Have more directors, and
  5. Have combined CEO/chair positions

Proposals are less likely where cash flows are leveraged. The results of the study imply that activists are valuable monitoring agents, imposing discipline on targeted companies. Abnormal stock returns were highest during stock market runups and heightened takeover activity. Abnormal returns were also associated with takeover-related proposals and those sponsored by public pension funds. In conclusion, shareowner proposals impose nontrivial control benefits “especially as an alternative agency mechanism when the market for corporate control can no longer exert discipline.”

The authors provide an important contribution to an expanding body of research that finds that although most proposals are nonbinding, 40% that win a majority end up being implemented. Targets that ignore the will of shareowners draw negative press, get downgraded by rating firms, and, perhaps most directly, their directors become the targets of “just vote no” campaigns… and are less likely to be reelected and more likely to lose directorships at other companies as well.

Corporate Court

The number of registered lobbyists in Washington has increased from 3,400 in 1977 to almost 34,000 in 2006. In the 2008 House and Senate races $400 million dollars was raised and spent for candidates by political action committees, mostly linked to business corporations. Robert A. G. Monks and Peter L. Murray document a 30 year old constitutional right, which gave corporations influence over political campaigns and the outcome of public elections.

They trace the idea to the 1978 case of First National Bank of Boston v. Bellbottom, 435 U.S. 765, where a 5 to 4 majority of the Court voided a Massachusetts law prohibiting corporations from expending funds in connection with state referenda having nothing to do with their business on the ground it was an unconstitutional interference with corporate freedom of speech. Bellbottom stands for the principle that corporations may spend money to influence the outcome of a public referendum regardless of whether the issue relates to the corporation’s business interests.

Now Chief Justice Roberts may be about to use Citizens United v. FEC to overrule established precedent (and overturn carefully drafted legislation) to grant business corporations a constitutional right to use their funds to participate in political debate, not only on public issues, but even in the election of candidates to office. (Is the Supreme Court Determined to Expand Corporate Power?, HLSFCGFR, 8/25/09) Also of interest, Bill Moyers discusses the case with Floyd Abrams and Trevor Potter (9/4/09) and he’s even uploaded their briefs that will be argued before the Supreme Court.

Environmental Liabilities

Despite the criticism leveled at FAS 5, FASB seems unlikely to change it in the near future. The equivalent international rule, IAS 37, currently requires that firms provide investors with the midpoint, rather than the bottom, of a probable range of environmental-liability estimates, a difference that would likely cause the environmental liabilities at American companies to soar if the United States converts to international accounting.

“Either FASB or the SEC should issue a rule that says if a company is giving estimates of contingent liabilities to someone other than investors, it would be materially misleading not to also disclose the estimates [publicly],” says Sanford Lewis. (Dirty Secrets, CFO Magazine, 9/1/090)

GreenMoney

The fall edition of the GreenMoney Journal is out and publisher Cliff Feigenbaum continues to do a great job helping readers align personal, corporate and financial principles.

This is an excellent place to track the performance of 65 screened mutual funds, check the calendar for upcoming green events, catch up on the latest news and go in-depth with a review of Muhammad Yunus’ Creating a World Without Poverty: Social Business and the Future of Capitalism, learn the story behind Honest Tea, and sit in on an interview between Mark Regier, head of stewardship investing at MMA Praxis funds and Laura Berry, the new executive director of the Interfaith Center for Corporate Responsibility.

Way-Back Machine

Five years ago, the electronics-manufacturing company Spartan held a special meeting on 9/24/04 but when it didn’t get the results it wanted, they decided to abruptly adjourn and postpone the vote for three weeks “to permit the balance of unvoted shareowners to express their votes.” Are corporate elections of such little consequence that how they are conducted is of little or no consequence to the larger society? Where is the outrage?

This year, Dawn Wolfe described 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.”(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)

Ten years ago the Allied Owners Action Fund was registered by Privateer Asset Management of New York, to take strategy of “aggressive shareholder oversight.” Prospectus indicates it will invest in companies with excessive capital, unresponsive or incompetent management and those with weak directors. After acquiring a 5% stake in a company, it will post the stock and “extensive information and analysis” on its internet discussion board to stir debate. Active, insightful participation on the site is hoped to unlock the stock’s value.

I eagerly participated in this initiative. Unfortunately, they were probably ten years ahead of time. Now, with stronger internet and other communication tools, look for new startups over the next few years.


Continue Reading ·

A Primer for Boards

Cornelis A. de Kluyver, an academic and practitioner with global experience, has written A Primer on Corporate Governance published by Business Expert Press. While not nearly as extensive as recent textbooks by Bob Tricker or Monks and Minow, this is a quick read that provides most of the basics for future directors and those who work with them.

He very briefly reviews the history of corporations, rise of fiduciary capitalism, recent moves to federalize corporate governance, various conflicts of interest, and provides a thumbnail international sketch. However, his short explanations sometimes over simplify. For example, in reviewing director duties he states, "the primacy of shareholder value maximization wa affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company.

Unfortunately, he’s not alone in perpetuating this myth. In Why We Should Stop Teaching Dodge v. Ford (pdf, Virginia Law & Business Review, spring 2008), Lynn Stout argues more convincingly that credit for the concept that corporations exist only to make money for shareholders should go to law professors, not the courts. Dodge v. Ford is best viewed as a case that deals not with directors’ duties to maximize shareholder wealth, but with enforcing the fiduciary duty of controlling shareholders to minority shareholders. Because different shareowners have different investment time frames, tax concerns, attitudes toward risk, etc. it is impossible to discern a single, uniform measure of shareholder wealth to be maximized. Additionally:

  • Articles of incorporation typically don’t say they are organized primarily to profit shareholders but, instead, for anything lawful.
  • Similarly, state corporation codes typically provide their purpose is "to conduct or promote any lawful business or purpose" and many authorize corporate boards to consider other stakeholders.
  • Judges routinely refuse to impose any legal obligation on directors to maximize shareowner wealth.

De Kluyver does explore stakeholder theory but concludes shareholder value maximization "will continue to dominate the U.S. approach to corporate law for the foreseeable future," with the courts giving boards increasing latitude.

Elsewhere, he discusses governance reforms and concludes, "There is real danger, however, that the rise in shareholder activism, the new regulatory environment, and related social factors are pushing boards towards micromanagement and meddling." Many of us wish there had been a lot more "meddling" by boards prior to the current financial crisis, but de Kluyver is writing for board members, not shareowners.

Although he appears to reject recent moves to require specific subsets of directors to be independent, he appears to agree they should be more allied with shareowners than with management and that separating the roles of chairman and CEO "gives boards a structural basis for acting independently."

In discussing stock options, de Kluyver notes, "Until recently, many U.S. companies were not very diligent in assessing the cost and value of options and treated options as being cost-free." He says nothing about the Business Roundtable’s campaign to undermine the Financial Accounting Standards Board. An uninformed reader could be left with the impression that CEO’s had no role in this effort to hide costs. Likewise, he says "most of the pressure on boards on the last 25 years has come from shareholders." Hasn’t more pressure come from CEOs who are there providing direction at every board meeting? Even with recent steps empowering shareowners, CEOs still hold more sway over boards, including who is nominated.

In discussing shareowner proposals, de Kluyver says, "One of the most popular shareholder proposals today demands that shareholder be allowed to directly nominate and elected directors rather than work with the slate recommended by the board’s nominating committee." Popular in what sense?

The SEC allowed such proposals for many years until it looked like the proposals would obtain majority votes. Then the SEC, without changing the governing regulations, decided such resolutions violated the rules. That position stood for many years until challenged by AFSCME. When the underground regulations were overturned by the court only about three such proposals were introduced before the SEC, under Cox, banned them through new regulations. Now, under Schapiro, such proposals will again be legal, probably in 2010. To describe "proxy access" proposals in 2009 to be "the most popular shareholder proposals today," without much explanation, seems misleading.

In the book’s epilogue de Kluyver revisits the issue of "proxy access." However, rather than clarifying the issue he informs readers that the SEC considered proposed rules to allow it, but rejected them. Of course this is true, but de Kluyver gives the impression the issue is dead, whereas everyone following this issue has known for years that "proxy access" would be back on the table under a new administration. It would be important to note that majority voting requirements, the end to "broker voting" and proxy access will require boards to cooperate more closely with shareowners.

The book is at its best in borrowing liberally from thought leaders and consensus shaping organizations by providing various lists of best practices: Succession Planning is an Ongoing Process; CEO Selection: Common Board Mistakes; Succession Planning: Best Practices; Red Flags in Management Culture, Strategies, and Practices; 10 Questions About Ethics and Compliance for the Board; Five Questions About Hedging; Enterprise Risk Management: The Board’s New Tool; Executive Compensation: Best Practices, What Defines Best In-Class Boards?,; etc.

Regardless of my nitpicking, de Kluyver gets the big picture right. "The tug of war between individual freedom and institutional power is a continuing theme of history. Early on, the focus was on the church; more recently, it was on the civil state. Today, the debate is about making corporate power compatible with the needs of a democratic society." De Kluyver offers readers information that can help them to become better directors and better corporate citizens.

Continue Reading ·

Overcoming Short-termism

The Aspen Institute has released a September 9, 2009 report, Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management. It is short and clear (6 pages) and comes at a very timely moment. Signed by a diverse group including Bogle, Buffet, Lipton, Lorsch, Millstein, Stout, Trumka and Wilcox, the recommendations attempt to address three basic problems:

  1. High rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.
  2. Fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term. High-risk strategies designed exclusively to produce high returns in the short-run leads to market failures, social and environmental degradation.
  3. If managers and boards pursue strategies to satisfy ahort-term investors, theyt can put the interests of sharewners seeking long-term growth and sustainable earnings and the corporation’s future at risk.

Institutional investors and related intermediaries should be properly incentivized to focus on the interest of promoting sustainable, long-term growth. The group divides its recommendations into 3 categories.

  1. Market incentives to encourage patient capital are likely to be the most effective mechanism to encourage long-term focus by investors. To that end, the following are recommended:
    • Revise capital gains tax provisions or implement an excise tax in ways that are designed to discourage excessive share trading and encourage longer-term share ownership. Capital gains tax rates might be set on a descending scale based on the number of years a security is held. An excise tax could be imposed that would also allow for the inclusion of tax- exempt and other investment entities.
    • Remove limitations on capital loss deductibility for very long-term holdings, now capped at $3,000 per year for losses related to holdings of any duration.
    • In exchange for enhancing shareholder participation rights, consider adopting minimum holding periods or time-based vesting, along the lines of the one-year holding period required under the SEC proxy access proposal currently under review.
  2. Better align the interests of financial intermediaries and investors by ensuring that the fiduciary duties of financial intermediaries are clarified, enhanced and rigorously enforced.
    • Apply a higher degree of accountability and enhanced fiduciary duties to financial intermediaries, by requiring increased disclosures on compensation, incentives, trading, policies on proxy voting and other matters that indicate compatibility (or lack thereof) with the fund’s stated objectives, and the goals of the ultimate beneficiaries.
    • Modify ERISA allowable investment practices through rule changes to promote long-term investing by those investors holding equity in tax-advantaged accounts.
    • Ensure, through clearer and more rigorously enforced fiduciary duties, that investment advisers of all types take into account, and clearly inform investors of, tax and other implications of changes made to encourage long-term holding as recommended herein.
    • Pursue regulation or policy to base the compensation of long-term oriented fund managers on the fund’s long-term performance and extend to such funds the compensation disclosure requirements that are currently applicable to operating companies.
  3. The final leverage point, greater transparency in investor disclosures, especially of complex non-traditional structured and derivative arrangements, can also play an important role in helping corporations maintain a long-term orientation.

The maturation of the institutional investor community creates both opportunity and responsibility to promote the long-term health of capital markets and, in particular, to pursue investment policies and public policies that empower and encourage business managers and boards of directors to focus on sustainable value creation rather than evanescent short-term objectives.

Continue Reading ·

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