Archive | January, 2010

Recent Reports from Broc

Broc Romanek posted the results of one of his recent surveys of upcoming proxy issues in their blog. About 33% of his mostly corporate respondents are worried or very worried about the impact of elimination of broker nonvotes. About 12% appear to be more likely to use a proxy solicitor during the 2010 season. Almost 55% have a majority vote standard and the movement still appears to be in that direction, although at a reduced pace.

Broc also posted the transcript for a webcast: “Pat McGurn’s Forecast for 2010 Proxy Season: Wild and Woolly.” One major point is that McGurn sees more focus  on making sure that true majority voting rules are in place at more companies going forward in order to be able to have a real say over directors.

Also posted at theCorporateCounsel.net is Inside Track with Broc: Mark Schlegel on Moxy Vote (1/11/10). Another good reason to subscribe. Speaking of MoxyVote, I got an e-mail from them notifying me that one of my brokers had agreed to direct future proxy ballots to MoxyVote.com, so I will soon be able to receive and vote them on that platform, as well as to get voting advice. Good one-stop shop.

Continue Reading ·

SEC Requires Disclosure of Climate-Related Impacts

The SEC issued new interpretive guidance that clarify companies must weigh the impact of climate-change laws and regulations when assessing what information to disclose to investors in terms of climate-related ‘material’ effects on business operations, whether from new emissions management policies, the physical impacts of changing weather or business opportunities associated with the growing clean energy economy.

In the 3-to-2 vote, the commission said companies in the U.S. should also consider international accords, indirect effects such as lower demand for goods that produce greenhouse gases, and physical impacts such as the potential for increased insurance claims in coastal regions as a result of rising sea levels. (SEC Sets Climate-Change Disclosure Standards for Companies, BusinessWeek, 1/27/2010)

More than a dozen investors managing over $1 trillion in assets, plus Ceres and the Environmental Defense Fund, requested formal guidance in a petition filed with the Commission in 2007, and supported by supplemental petitions filed in 2008 and 2009.

“We’re glad the SEC is stepping up to the plate to protect investors,” said Anne Stausboll, chief executive officer of the California Public Employees Retirement System (CalPERS), the nation’s largest public pension fund with more than $205 billion in assets under management. “Ensuring that investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is absolutely essential. Investors have a fundamental right to know which companies are well positioned for the future and which are not.”

“Today’s vote is a clarion call about the vast risks and opportunities climate change poses for US companies and the urgency for integrating them into investment decision making,” said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk, a network of 80 institutional investors with $8 trillion in collective assets.

Last June, Ceres, EDF and The Corporate Library issued a report showing that S&P 500 companies – including those with the most at stake in responding to the risks and opportunities from climate change – are providing scant climate-related information to investors. The study was based on an analysis of 10-K and 20-F filings by 100 global companies in 2008. (SEC Issues Ground-Breaking Guidance Requiring Corporate Disclosure of Material Climate Change Risks and Opportunities, Ceres, 1/27/2010)

Social Investment Forum CEO Lisa Woll said:   “This is perhaps the biggest development so far in the long-term campaign to promote wider sustainability reporting.  We welcome today’s SEC action as a critical step in the direction of fuller environmental, social and governance (ESG) or sustainability disclosure.  Today, we renew our call for mandatory corporate ESG or sustainability reporting.

Investors’ efforts to incorporate ESG information into investment decisions have been hindered by a lack of comprehensive, comparable data. Because sustainability reporting among corporate issuers is largely still voluntary, it is far from universal, and often inconsistent and incomplete.

That is why we are asking the SEC to require issuers to report annually on a comprehensive, uniform set of sustainability indicators comprised of both universally applicable and industry-specific components and suggest that the SEC define this as the highest level of the current version of the Global Reporting Initiative (GRI) reporting guidelines.” (Social Investment Forum: SEC Climate Action “Important First Step” Toward Broader Sustainability Reporting For Investors, SIF, 1/27/2010)

Commissioner Aguilar encouraged the SEC’s Investor Advisory Committee to review climate and other ESG risks to see if other disclosure requirements were needed.

Continue Reading ·

Advocacy websites offer hope

Nice article by that title appeared in Canada’s Financial Post. “Imagine a democracy where those who don’t vote have their ballots automatically cast in favour of the incumbents… Enter an idea whose time has come: websites such as corpgov.net, shareowners.org (corrected), proxydemocracy.org and moxyvote.com. These are just four offerings on the Internet designed to help disgruntled shareholders organize and register their displeasure or lobby for change.” (1/26/2010) Prior article was entitled Shareholder democracy oxymoron (FP, 1/25/2010)

Reporter, Diane Francis, goes on to compare our sites to the Politics 2.0 social movement that elected Obama. She concludes with a quote from former New York governor Eliot Spitzer from an article in the Wall Street Journal. “Virtually every thoughtful discussion of corporate governance concludes that unless shareholders act like the true owners they are, all the proposed corporate reforms will fail. While there are some who claim shareholders are simply too ill-informed to participate meaningfully, this argument should carry no more weight in the corporate context than it does in the traditional political arena.”

I certainly hope the sites mentioned by Ms. Francis, and others such as isuffrage.org, Lemonjuice.biz and theRacetotheBottom.org, can foster the type of movement that changed politics… and I hope we can do it sustainably.

Continue Reading ·

FINRA: Compliance Considerations for Social Networking

FINRA offers a relatively low cost webinar covering compliance and regulatory considerations when using social networking sites to communicate firm business.
February 3, 2010, 1:30 p.m. – 2:30 p.m., Eastern Time / 10:30 a.m. – 11:30 a.m., Pacific Time. With the advent of Facebook, LinkedIn, MySpace and Twitter, business use of social networking sites has become popular and can present supervision challenges for firms. Panelists from FINRA discuss the guidance that was recently issued in Regulatory Notice 10-06. This webinar, which may qualify for CLE credit, lasts approximately 60 minutes. Audience members can participate in the live, real-time version or listen to the on-demand version at a later date. Questions can be submitted during the live program.

Continue Reading ·

Voter Funded Investor Education Proposal

Mark Latham represents individual investors on the SEC Investor Advisory Committee (SECIAC). He reports in his VoterMedia Finance Blog on a creative Voter-Funded Investor Education Proposal. It was considered by the Investor Education subcommittee. Unfortunately, he was informed the SEC is not empowered to distribute funds to other organizations.

Hopefully, he will be able to attract the attention of FINRA, the Department of Treasury, Congress, or some other entity for funding.

Our concept for voter funded investor education is oriented toward worldwide web based education programs aimed at a broad (national or global) audience. All individual investors could vote on a web based ballot to determine the shares of funding for perhaps 15 or 20 competing education programs. The voting and funding can be conducted continuously through time, thus giving the competitors a continuous incentive to serve investors’ education needs.

The ballot web page would link to each participating education program’s website. This could be a component of a new portal at OIEA’s website investor.gov, where investors could find links to a wide range of education programs.

Read more about Latham’s Voter Funded Investor Education Proposal. See a beta-test ballot. Let us know what you think of the idea and consider voting for Corporate Governance during the beta-test.

Continue Reading ·

RiskMetrics Group Reportedly on the Auction Block

According to a Wall Street Journal report, RiskMetrics Group Inc. has put itself on the auction block. “The company could fetch a premium of about 30% to its current value, said one person involved in a potential transaction. That would value the company, which has about 1,100 employees, all in New York, at around $1.3 billion.”  (RiskMetrics Puts Itself Up for Sale, 1/23/10) All in New York?  Corporate headquarters are there but RMG has offices all around the world. When I have visited, it has been to Rockville, MD.

In the reported running are MSCI Inc., a former Morgan Stanley unit that specializes in building market indexes, Bloomberg, McGraw-Hill Cos. and Thomson Reuters. “Potential bidders include Kohlberg Kravis Roberts & Co. and Carlyle Group. Roughly 92% of RiskMetrics revenue, estimated at $300 million in 2009, are recurring.” “The company has grown via acquisition, most notably with the acquisition of corporate-governance firm Institutional Shareholders Services in January 2007 for about $550 million. That unit often weighs in on proxy battles and can tip the balance in close elections or hostile takeovers where a target is battling outside shareholders or an unfriendly acquirer.”

As I indicated earlier the week, with the Supreme Court decision in Citizens United, firms like RMG and Glass Lewis become even more important. Their policies could help reign in the expected surge of corporate cash into political campaigns… or not. (Disclosure: CorpGov.net publisher, James McRitchie, is a RMG shareowner)

Continue Reading ·

Vote Disclosure Coming at Pension Funds

At a hearing on compensation in the financial services industry, House Financial Services Committee Chairman Barney Frank said, “If you are the owner of shares … you have a privacy right, but if you own shares on behalf of a fiduciary you will need to disclose how you vote.” In late 2003, after years of pushing from people like Bob Monks and Nell Minow, approved rules requiring mutual-fund managers to disclose how they voted their proxies once a year every August.

A MarketWatch article (Frank: We’re going to have big investors disclose votes, 1/22/10) quotes Beth Young of the Corporate Library, “”By requiring public disclosure of votes, investment managers will think more about whether they have the information and staff to act as a fiduciary for the people they are voting on behalf.” Public disclosure increases feedback between corporations and investment managers as both consider votes more carefully.

The Employee Retirement Income Security Act (ERISA), has long required pension-fund administrators to disclose to pension-fund investors how they are voting on their behalf. However, that information does not need to be disclosed publicly. Additionally, to my knowledge, no fund administrator has ever been disciplined for failing to vote in the interests of plan beneficiaries. See my 1995 correspondence with the Pension and Welfare Benefits Administration and commentary under Fiduciary Responsibilities for Proxy Voting.

The MarketWatch article goes on to quote Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, on the positive impace on mutual fund voting. “The public-disclosure requirement has had a positive impact on how they operated and voted their slates. The information about mutual-fund votes does push the funds to be more active than they were.”

Apparently, no bill is in the drafting stage but such a provision may be included in future legislation later this year. This would be another very positive step that would help shareowners, in this case pension members, hold fund managers and ultimately corporate managers accountable. You can’t hold your pension fund trustees accountable if you don’t know how they vote. Examination can lead to change.

We saw that to be the case earlier this week at State Street Global Advisors (SSgA) after pressure from Walden Asset Management and United for a Fair Economy. Prior to their scrutiny, SSgA voted automatically Against ALL shareholder resolutions on environmental and social issues, whether the issue affected shareholder value or not. SSgA will now abstain if the resolution’s economic impact case is not clear, but will vote FOR resolutions where a strong case regarding how this affects shareholder value is made. (Major Shift in Proxy Voting Policy at State Street, CorpGov.net, 1/20/10)

We can expect similar shifts at pension funds, once Frank’s future measure is enacted. Of course, several public pension funds already not only disclose their votes once a year, but also do so in advance. You can see how leaders like the AFSCME Employees Pension Plan, CalPERS, CalSTRS, and Florida SBA are voting by going to ProxyDemocracy.org. I find that information very valuable when I’m voting my own shares as a retail investor. As a member of CalPERS, I also monitor how they are voting to ensure it is in the best interest of plan beneficiaries, like myself. When it isn’t, you can be sure CalPERS hears from me. Fortunately, those disagreements are infrequent.

Continue Reading ·

SIF Funds Outperformed

A review of 160 socially responsible mutual funds from 22 members of the Social Investment Forum (SIF) finds that the vast majority of the funds — 65 percent — outperformed their benchmarks in calendar year 2009, most by significant margins.

These SRI funds topped benchmarks across nearly all asset classes, including balanced, large cap, small cap and global funds, as well as bonds. The performance data that was analyzed by the Social Investment Forum covered all of 2009 and was provided by an independent third party, Thomson Reuters. (Download full table of results.)

This analysis underscores the reality that socially responsible investments offer what are genuinely competitive returns,” said Cheryl Smith, chairman of the board at SIF and president at Boston-based Trillium Asset Management Corporation. “In fact, the 2009 data show that SRI funds specializing in large cap stocks have turned in an extremely strong performance that outpaced the S&P 500 over both the short term and the long term.”

The 22 fund families represented in the SIF analysis are: Access Capital Strategies; AHA; Appleseed; Ariel; Azzad; Calvert; Community Capital Management; Domini; Gabelli; Green Century; Integrity; Legg Mason; Meeder Asset Management; MMA Praxis; Neuberger Berman; New Alternatives; Parnassus; Pax World; Portfolio 21; Sentinel; Walden; and Winslow.

Today, SIF also unveiled its revamped Mutual Fund Performance Chart for retail investors. The new and improved chart allows interested investors to learn more about SRI mutual funds based on asset class, performance record, approaches to environmental, social and governance (ESG or sustainability) issues, proxy voting guidelines, and other investment criteria.

For example, the Chart shows that more than 50 percent of SIF member mutual funds consider companies’ executive pay practices when developing their portfolios, and more than two-thirds look for companies with good records on climate change issues and community development. Virtually all exclude tobacco companies altogether from their portfolios or restrict their involvement in such firms. (Download table.)

Lisa Woll, CEO, Social Investment Forum said: “In the wake of the financial crisis more and more consumers are concerned about runaway executive pay practices and other forms of corporate misconduct and sustainability risks. The SIF’s Mutual Fund Performance Chart allows retail investors to explore which SRI funds incorporate these and other sustainability issues into their investing and proxy voting practices.”

You can also compare many of the proxy voting records of these and other funds at ProxyDemocracy.org. Responsible investing is less risky in times of bubbles. They are also less risky if you want to keep living on a habitable planet.

Continue Reading ·

Future Directions for CorpGov after Citizens United

Yes, corporate governance takes on more importance since the decision. Corporations could easily control our elections.  ExxonMobil spent $45 million lobbying at the federal level during the 2007-2008 election cycle. Jamin Raskin, Professor of Constitutional Law at American University and a Maryland State Senator, says if they spent 10% of their 2008 profits, or $8.5 billion, on electing their own candidates “that would be three times more than the Obama campaign, the McCain campaign and every candidate for House and Senate in the country spent in 2008. That’s one corporation. So think about the Fortune 500.” (In Landmark Campaign Finance Ruling, Supreme Court Removes Limits on Corporate Campaign Spending, Democracy Now!, 1/22/10)

Who controls corporations? I would argue it is still mostly CEOs. Of course, they’re supposed to report to directors but, so far, the balance of power seems to remain with the corner office and the Business Roundtable. A lot has changed since the early 1990s when Sears allocated over $5.5 million to defeat one independent board candidate, Robert A. G. Monks. Most of the S&P 500 now have a majority vote standard for elections… although directors who don’t get a majority of the vote usually only have to offer their resignation to the board. The board doesn’t have to accept it and nothing stops them from replacing tweedle dee with tweedle dum.

More corporations are moving to split the roles of CEO and chair. Many, like Whole Foods, appear to be making the change, not because they believe in good governance but because they want to avoid unnecessary distraction. In his blog (12/29/09), Mr. Mackey writes, “Was I forced to give up the Chairman’s title? Absolutely not! Both the idea and the decision to give up the title were completely my own… At no time has anyone on the Board or in management ever asked me to give up the title.” (Whole Foods: Progress But Still a Lapdog Board, CorpGov.net, 12/30/10)

We finally won repeal of broker votes, which almost always went to management. However, there is still the issue of blank votes… when a shareowner votes at least one item on their proxy but leaves others blank, the blanks magically turn into votes for management. (see SEC petition, 5/15/09)

But, all in all, shareowners have gained relative power in the last few years. CEOs may still control corporations but through organizations such as the Council of Institutional Investors, the International Corporate Governance Network and businesses like the RiskMetrics Group and Glass Lewis, institutional shareowners have gained substantial clout. In a few years, ProxyDemocracy.org, MoxyVote.com, Shareowners.org, and the Investor Suffrage Movement might similarly empower retail shareowners and that is where I will probably put most of my efforts.

Since posting Corporate Governance: More Important than Ever with Supreme Court Decision yesterday, I’ve already gotten several inquiries concerning my statement that “We either need a law like in the UK so that companies must get permission from their shareowners in advance to make political contributions in excess of some amount or we need a massive number of shareowner resolutions at each company to accomplish the same.”

I understand Senator Charles Schumer is already considering a bill that would require shareowner approval of certain political contributions. I trust the Center for Political Accountability will expand their current focus from disclosure to shareowners to permission from shareowners if they can. Our friends at Calvert, Walden Asset Management, Domini, Trillium Asset Management and elsewhere are likely to take up the charge and I will be there lending whatever support I can.

For me, the most important immediate task will remain trying to level the playing field. Investors need to move from holding poker-chip like entitlements to being actual owners. Once investors begin to think like owners, instead of gamblers, they will demand accountability from their corporations. Since most shareowners invest in a market basket of companies, rather than single companies, we should all be able to agree that it is in our best interest if none of our companies makes political contributions.

One big start in getting investors to think like owners would be to repeal section 17A, subdivision e, of the Securities Exchange Act of 1934, which requires the Securities and Commission to immobilize securities certificates. As we point out in our draft petition to the SEC, a direct registration system will facilitate shareowner-shareowner communications, reducing the cost of proxy contests and making corporate elections more democratic.

Appropriate steps should be taken to ensure communications are presented in a manner that is intelligible to and convenient for average investors. For example, shareowners have long sought integrated proxy solicitations that combine materials from all parties in a contested election. DRS would facilitate this.

An increased volume of communications would go hand-in-hand with an increase in the number of contested elections or issues. As average investors realize they were being offered opportunities to make real decisions, retail shareowner participation in corporate elections will likely rise. To further enhance this trend, technology and policies can allow shareowners to customize their participation, opting out of some types of communication, and controlling the form of media and style of presentation of others, much as users customize some news websites to deliver only the types of news that interest them… an RSS feed for shareowners.

So, my answer for now is, “let’s get control of corporations.” Institutional investors are already required to vote in order to meet their fiduciary duty. Many are conflicted. Our best hope may be to get individual investors to think like owners. First step is to make them actual owners, instead of holding security entitlements. Take a look at that draft petition, my table on how street name registration results in rights denied, and give us some feedback. You can either do that through the comment function (yes, you have to register with the site first… I don’t want to clean out a lot of spam) or you can e-mail me.

Start using ProxyDemocracy.org for proxy research, MoxyVote.com for voting, join Shareowners.org and the Investor Suffrage Movement. Years down the road, let’s hope Citizens United is overturned. Even then, getting control over corporations, which have so much influence over us, will be vitally important.

Continue Reading ·

Apache v Chevedden: SEC Rules Don't Reflect Reality

I was delighted to see Broc Romanek coverage of the controversy surrounding Apache v Chevedden, although he did so in a members only area of theCorporateCounsel.net. I hope the case gets a lot of attention.

Yesterday, I was discussing a table I am working on that shows some of the rights denied to street name shareowners that are readily available to registered shareowners. Glyn Holton, Executive Director of the United State Proxy Exchange, pointed out something.  It is obvious those who wrote the regulations don’t know how the system works… or perhaps the rules haven’t been changed since the great immobilization, when almost all the shares were turned over to Cede & Co. and we started trading “security entitlements.”

Rule 14a-8 (b)(2)(i) says that “If you are the registered holder of your securities, which means that your name appears in the company’s records as a shareholder, the company can verify your eligibility on its own. Otherwise submit to the company a written statement from the ‘record’ holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year.”

Of course, that is exactly what Chevedden did. He followed the rules and got a letter from his broker, Ram Trust. When Apache insisted that Ram Trust didn’t show on their records, he went another level up. However, Apache’s gotcha moment may have been in recognizing that the SEC rules are incorrect, since the rules assume that brokers and banks are “usually” record holders. They are not. Brokers and banks  also largely hold “security entitlements.” Cede & Co. holds the actual immobilized registered securities.

Please pull up the simple table I have begun constructing of  known instances where Street Name shareowners are being denied rights readily available to registered shareowners. (SECRuleStName2) Do you know of other similar situations? Please share your information by e-mailing James McRitchie at [email protected]

Continue Reading ·

Corporate Governance: More Important than Ever with Supreme Court Decision

As the New York Times put it, “Sweeping aside a century-old understanding and overruling two important precedents, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.” (Justices Overturn Key Campaign Limits, 1/22/10)

Off to the right on the blog site of CorpGov.net, we quote from Power and Accountability by Robert A.G. Monks and Nell Minow, “Corporations determine far more than any other institution the air we breath, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.” When I’ve quoted that statement in the past, I’ve often prefaced it with something like, “with the slight exaggeration suitable for book covers…” Not anymore. Now, whoever rules corporations rules the United States of America.

“With its ruling today, the Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans,” said President Obama, who most certainly would not have been elected if the ruling were in force when he ran.

“This is the most radical and destructive campaign finance decision in the history of the Supreme Court,” said Fred Wertheimer, President of Democracy 21. “With a stroke of the pen, five justices wiped out a century of American history devoted to preventing corporate corruption of our democracy.” (Supreme Court’s “Radical and Destructive” Decision Hands Over Democracy to the Corporations, AlterNet.org, 1/21/10) I think Mr. Wertheimer is being too cautious; this decision may turn out to be the most destructive decision in the history of the Supreme Court, period. We look to the courts to protect our rights, not to give them away. Corporations are not people.

Back in August of last year Bob Monks and Peter Murray wrote an essay addressing judicial activism and its likely impact on our election system. “It’s difficult to conceive at this time of corporate overreach and abuse of power that the United States Supreme Court would go out of its way to remove all obstacles to ‘corporate speech’ in the social and political life of our country,” Monks said. “Corporate speech is not derived from the language of the Constitution, and is in fact, a conjury of the Court. There is something grotesque about our Supreme Court having a special hearing so as to expand the already questionable legitimate category of ‘corporate speech’.” Read the essay and weep for democracy.

Over the course of history, there has been toward democracy. As Pierre-Yves Gomez and Harry Korine wrote in their wonderful book Entrepreneurs and Democracy, “the more the entrepreneurial force becomes concentrated in ever larger corporations, the greater the need for social fragmentation to maintain the legitimacy of governance – so as to ensure that corporations are governed according to the liberal spirit.” Democracy has begun to spread into every sphere. They asked a key question, “does it serve economic performance or is it imposed by political attitudes against the economic interests of society?” Their conclusion gives some hope. “There are good economic reasons to think that democratization of corporate governance and the growth of economic performance go hand in hand.” (my emphasis)

We can thank God that, at least up until now, more democratic economies have generally had better economic performance. Therefore, it is in the best interests of business to continue democratizing itself and to maintain democracy as a system of governing civil affairs.

Corporate control of government will introduce a more integrative effect. Elected officials may soon be a lot more like managers… technocrats, whose legitimacy is based on their special competences. As our corporations and government become more integrated and monolithic, will we still have the agility to deal with the increasing complexity of the problems we face, like global climate change? Have we turned our destiny over to the masters of public opinion? Aren’t those the same folks who drive us at an ever increasing pace toward each speculative bubble? Corporate crowd control, will it work?

Think of the deliberation that now occurs in Congress and in your state legislature. Now think of the highest deliberative body of corporations… the annual meeting. We’re obviously headed for trouble. We, as shareowners must begun to look at concepts like fiduciary duty with renewed vigor. Further democratization of the structures of representation within the corporation takes on new urgency. What about the nationality of corporations and their shareowners, what part will that play? Which corporations are really American or does it make a difference?

Whereas corporations are largely global, we are not. We have to work, live, breathe the air of one country or another. The flexibility of labor isn’t nearly as great as the flexibility of our capital. While countries can knit themselves together into the United States, the United Nations, etc. to resolve differences, will corporate combinations be viewed with the same legitimacy… especially if they join together to battle parochial concerns, like ours?

Frankly, I’m a little frightened. However, I’m also resolved that transforming corporations into more democratic entities is more important than ever. So, for me that means going back into the weeds of proxy mechanics… how democratic are corporate voting systems, even if we accept that those with more shares get more votes?

A recent study of more than 12,000 companies, led by University of Minnesota professors Rajesh Aggarwal, Felix Meschke, and Tracy Wang, found that corporate political expenditures were typically linked with lower shareholder value. The survey suggested that donations were based in part on managers’ political preferences, not on what might benefit their businesses. see Corporate Political Contributions: Investment or Agency? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=972670 Shareowners get a very limited version of proxy access soon; managers get unlimited corporate funds to buy more politicians. Who’s winning?

We either need a law like in the UK so that companies must get permission from their shareowners in advance to make political contributions in excess of some amount or we need a massive number of shareowner resolutions at each company to accomplish the same.

“More than 70 companies, including Microsoft Corp., Time Warner Inc., and Campbell Soup Co., have adopted disclosure policies. This year, shareholders have filed disclosure resolutions at 47 companies, said Bruce Freed, president of the Washington- based Center for Political Accountability, a nonprofit organization that works with shareholder groups.”

“Companies now will be under tremendous pressure from Republicans and others to pony up,” Freed said. “The corporate governance route now is the only way for companies to avoid this pressure.” (‘Free at Last,’ Business Says as Court Opens Campaign Spending, Business Week, 1/21/10)

Continue Reading ·

Intel Virtual Mtg Out for 2010 But Exploring Future with USPX

Bowing to shareowner concerns, Intel Corp. scrapped plans to hold an exclusively on-line virtual annual meeting in 2010 and is likely to participate in a Fall conference to establish safeguards for the conduct of virtual meetings in the future, the United States Proxy Exchange (USPX) announced today.

Background

Last Fall, Intel Corp. announced plans to scrap its annual shareowner meeting for 2010 and host an on-line forum in its place. In 2000, Delaware enacted legislation allowing corporations to do exactly this. Sadly, that state’s legislators granted shareowners no say in the matter, leaving the decision solely to the discretion of corporate boards.

Broadridge Financial Services has developed software for the conduct of virtual meetings. A handful of smaller corporations have already adopted that software and switched to entirely virtual meetings. For a number of years, Intel has held hybrid shareholder meetings, allowing people to attend both in person or via the Internet. Their plan had been to go to an all virtual meeting in 2010.

There is every reason to believe that, with strong safeguards, virtual shareowner meetings could enhance shareholder participation in meetings while protecting—even restoring— shareowner rights that have atrophied over the decades. However, no such safeguards are in place. Here are just a few scenarios illustrating how virtual meetings will deprive shareowners:

  1. A well known shareowner activist plans to ask some pointed questions at the shareholder meeting, but his connection to the meeting somehow fails. He is left wondering if he was targeted or if there truly was an honest technical problem.
  2. A shareowner wants to challenge the chair’s conduct of the meeting with a point of order. She is within her rights to do so and may interrupt the chair for this purpose, but she finds that the electronic forum software won’t allow her to do so ….. one more shareholder right lost.
  3. A shareowner wants to make a floor amendment, but the software doesn’t allow that either.
  4. The meeting software provides no means of group communication, such as applause of booing, so shareowners come away from meetings with no sense of how other shareholders felt.
  5. Corporate executives decide to pre-record their comments for a virtual shareowner meeting, including answers to pre-selected “shareowner questions.” The executives then don’t bother logging in during the actual “meeting.”

Most annual meetings are heavily scripted. The chance for real interaction often comes in informal encounters before and after the formal meeting. Those opportunities would also be gone with virtual meetings.

Formation of the Coalition to Preserve Shareowner Meetings

Following the announcement by Intel, shareowners discussed what might be an appropriate response to virtual shareholder meetings. Intel was the first major corporation to announce plans to switch to a virtual meeting, and more corporations were likely to follow suit. Without safeguards in place to protect shareholder rights, the situation was critical. There were few attractive options.

The SEC would be unlikely to intervene to preempt a Delaware law. We could launch a withhold vote campaign against the directors of Intel and other corporations that host electronic-only meetings, but that would entail participating in—and thereby accepting as legitimate—the virtual meetings.

In November, the USPX announced it was exploring a two-pronged strategy to address the issue of virtual shareowner meetings:

  1. Host a conference in the Fall of 2010 to develop safeguards that would allow virtual meetings to be held in a manner that protects shareowner rights, and
  2. Organize a withhold proxy campaign against corporations holding virtual meetings without safeguards.

Since that announcement, USPX has made considerable progress on both aspects of the initiative. A formal announcement of the formation of a Coalition to Preserve Shareholder Meetings is expected shortly. That announcement will include details on the Fall conference.

Conclusion

“The United States Proxy Exchange applauds Intel’s decision to postpone implementing of virtual shareholder meetings until after the Fall conference. We welcome all parties— investors, shareowner advocates and service providers—to join the Coalition to Preserve Shareholder Meetings and participate in the Fall conference, said Glyn Holton.

Interested parties should contact USPX Executive Director Glyn A. Holton at 617.945.2484 or [email protected]. See also, Intel Yields on Virtual Meeting, 1/20/10. I hope to be at this conference myself and urge others to join us.

Continue Reading ·

SEC Self-Funding Authority Demanded

Members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs were sent a letter today from signatories representing a broad coalition of investors and market participants (including the publisher of CorpGov.net) urging them to provide self-funding authority to the SEC so that it has the resources necessary to fulfill its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The SEC monitors 30,000 entities, including more than 11,000 investment advisers, up 32% in the last four years. Yet, in the three years from 2005 to 2007, the SEC’s budgets were flat or declining. Self-funding could give them the resources they need and the ability to do long-term planning.

Like the letter earlier today to the same committee urging them to require proxy access and majority votes for director elections, this letter was also signed by several members of the SEC’s relatively new Investor Advisory Committee, in fact, the vast majority of Committee members signed.

The SEC collected $1.54 billion in fees in 2007 but received only $881.6 million through Congressional appropriations. The SEC’s budget could have increased by 75% that year if it had been self-funded. A 2002 GAO report concluded, the “increased funding flexibility (from self-funding) would likely allow SEC to more readily fund certain budget priorities, such as pay parity, and to more quickly respond to the ever- changing securities markets.” (SEC OPERATIONS: Implications of Alternative Funding Structures)

Continue Reading ·

Senate Banking Gets Message From Investors

Members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs were sent a AFRtoSenateLetterJan20-2010 from signatories representing a broad coalition of investors and market participants (including the publisher of CorpGov.net) urging them to require proxy access and majority votes for director elections.

We believe Congress should adopt director election reforms in two ways: (i) shareholders should have the ability to nominate directors through inclusion of their nominees in the company ballot and proxy materials and (ii) directors should not be elected unless they receive majority support from shareholders who cast their votes.  These are fundamental rights that should be available to shareholders in the US.

Signatories included academics, religious groups, CSR/SRI funds, investment advisors, consumer protection, unions, foundations, and the Council of Institutional Investors (CII). Several who signed are also members of the SEC’s relatively new Investor Advisory Committee, in fact, fully half the members of that Committee signed.

In a separate letter to the SEC, dated January 14th, CII stated:

When the fog of various myths about proxy access and “private ordering” is dispelled, it becomes clear that only a uniform, federal proxy access rule can truly remedy the deeply flawed director election process and empower investors to hold boards accountable. As the SEC reviews this second round of public comments, we urge the Commission to reject the following myths about its proposed proxy access rule.

Their letter goes on to address the myths that changes to state law makes a federal proxy access rule unnecessary, that proxy access will subsidize investors leading to excessive nominations or election of “special interest” directors and that shareowner opt-out is an “investor choice” approach to proxy access. Each myth is dispelled with excellent arguments. I urge readers to read the letter directly, posted here: CII1-14-10ProxyAccessCommentLetter.

See also their November 18, 209 letter to U.S. Senate Committee on Banking, Housing, and Urban Affairs:

Majority Voting for Directors. At most U.S. public companies, directors are elected by a plurality of votes cast, rather than by a majority. Since nearly all director elections are uncontested, plurality voting results in “rubber stamp” elections and directors who are accordingly less accountable to shareowners. As mandated by the discussion draft, majority voting in uncontested elections ensures that shareowners’ votes count and makes directors more accountable to the company’s owners.

In an email to me yesterday, Anne Simpson, Senior Portfolio Manager for Corporate Governance at CalPERS, noted:

We think it is vital that proxy access get passed without an opt out provision, which is being floated as a compromise… a dangerous precedent. Imagine if companies could opt out of producing financial statements? Or pay disclosure? If directors cannot be removed, and they cannot be replaced, then we have a rotten core… system.

She goes on to emphasize the importance of the SEC being “kept on track.”   More comments from the people whose savings are at stake “would surely be good.” She then includes a copy of their letter of January 19th offering comments on the reports and data sources cited in the SEC’s latest consultation concerning proxy access.

Again, like the CII letter addressing myths, this is one that should be read by everyone concerned with proxy access, since it addresses arguments put forth by the Business Roundtable. Obviously, many of their CEO members would rather continue hand-picking their boards.

Continue Reading ·

Major Shift in Proxy Voting Policy at State Street

Last year Walden Asset Management filed a resolution at State Street Global Advisors (SSgA) seeking a proxy review. While SSgA successfully obtained a “no-action” letter from the SEC, their voting practices were still the subject of a debate at the annual meeting. This year United for a Fair Economy picked up the torch and filed a similar appeal. This time, SSgA responded positively and UFE has withdrawn its resolution.

Previously, SSgA voted automatically Against ALL shareholder resolutions on environmental and social issues, whether the issue affected shareholder value or not. Over the years this record had become increasingly controversial and was challenged by a number of SSgA clients including pension funds in Europe as well as investors and environmental groups here in the USA. An internal review found SSgA found its voting in stark contrast to State Street’s own forward looking record on the environment and other CSR issues.

State Street’s review included a comparison to other mainstream investment firms which are competitors. It found that the SSgA proxy voting was an “outlier” in comparison to these firms records. According to Timothy Smith of Walden Assets, SSgA will now abstain if the resolution’s economic impact case is not clear, but will vote FOR resolutions where a strong case regarding how this affects shareholder value is made. This is very similar to Risk Metrics position. SSgA notes it is understaffed to do robust proxy voting so may add staff and of course will look seriously at recommendations of proxy advisory firms they use.

Our congratulations to Walden’s Timothy Smith and to Mike Lapham of Responsible Wealth. This is a significant shift in proxy voting by a major firm. It is great to see SSgA now more fully addressing its proxy voting responsibilities.

Continue Reading ·

Intel Yields on Virtual Meeting

From a IntelOurPublicStatementRegardingVirtualMeeting: “In the fall of 2009 Intel indicated it was going to attempt an experiment and hold its’ 2010 stockholders meeting entirely on the web, moving from a physical annual meeting to a virtual meeting.

A number of shareholders expressed support for the expansion of the annual meeting via the web, but voiced concerns about the elimination of the physical meeting and the lack of accountability of the Board and top management if there was no physical meeting with in-person interaction possible.  This would be particularly true if stockholder resolutions were being presented or probing questions asked of Board members.

Intel discussed this issue with investors seeking advice on ways to make the virtual meeting as fair and transparent as possible and also discussed concerns about the downside of eliminating the physical meeting.

Concerned investors wrote letters, talked to management and several actually filed a shareholder proposal urging a continuation of physical stockholder meetings.

After deliberation, in January Intel reported to concerned investors that they had decided to continue to hold a physical annual meeting in 2010 and were putting aside the virtual only meeting.

Investors led by Walden Asset Management and United for a Fair Economy (UFE) commended Intel and UFE withdrew the shareholder resolution on the issue. A UFE member had filed the resolution along with Walden clients.

They indicated support for creative expanded virtual access to the stockholders meeting stressing it must be combined with an in-person meeting.

In addition, two other resolutions were withdrawn after discussions with Intel, one asking for increased transparency on succession planning and the other on Board diversity.”

We congratulate Timothy Smith and others involved in these negotiations. Intel made made the right decision. Another important factor in Intel’s decision many have been a threatened “withhold proxy campaign,” from the Investor Suffrage Movement.   (see our prior coverage, Guest Commentary From Glyn Holton: Emergency at Intel, 12/2/09) That group is planning to hold a conference later this year to discuss what safeguards are necessary before they would consider endorsing virtual shareowner meetings. Intel has agreed to participate in that upcoming conference.

Continue Reading ·

Who Funds Chamber Attacks?

The U.S. Chamber of Commerce recently revised its published membership numbers from 3 million to 300,000 after Mother Jones uncovered it was playing games with its numbers. But even the revised numbers are misleading, since the Chamber’s 25 largest contributors provided a staggering $54 million to the Chamber in 2008, accounting for 39% of its $140 million in total contributions. One contributor gave the Chamber $15.3 million in 2008. The Chamber has not disclosed any of the contributors’ names.

As National Journal exposed just last week, this is exactly what five of the nation’s largest health care providers have been doing. Though publicly supporting President Obama’s health care reform efforts, Aetna, Cigna, Humana, UnitedHealth Group and Wellpoint secretly funneled $10 million to $20 million to the Chamber in the latter half of 2009 to fund ads aimed at killing health care reform.

Now, the Chamber is using the same type of financing to oppose the proposed Consumer Financial Protection Agency (CFPA). They will cloak their opposition in false claims about the CFPA’s impact on small business, but the Chamber’s opposition is really about the major financial services firms that we believe secretly bankroll the Chamber and its multi-million dollar campaign to defeat the CFPA, says Americans for Financial Reform, a coalition of over 200 national, state and local consumer, labor, retiree, investor, community, business, and civil rights organizations who are campaigning for real reform in our nation’s financial system.

“Neither Congress nor the American public should have to accept the Chamber’s misleading and self-serving misrepresentations of its membership and their contributions,” AFRtoSenateLetterJan20-2010) states.  “We deserve to know who is really bankrolling this effort to keep a broken status quo in place.”

The ongoing unwillingness of Wall Street bankers to lend, despite trillions of dollars of taxpayer money provided to them through the bailout, is not the result of “the uncertainty in regulatory standards and increased liability” created by the recently proposed CFPA, as the Chamber asserts. Rather, it is result of the banks’ uncertainty about their own balance sheets following years of excessive risk-taking and questionable lending practices that was made possible by the risky and incomprehensible consumer financial products they themselves created under a regime of inadequate and incoherent regulatory oversight.

Continue Reading ·

How to Include Employees in Decision-Making

WorldBlu looks at this important issue within a long series aimed at implementing democracy in the workplace. This segment looks at DaVita, a FORTUNE 500 company comprised of 35,000 employees with nearly $6 billion in annual revenue. It is the largest independent provider of dialysis services in the United States, operating over 1300 clinics.

On a regular basis, DaVita teammates are asked to vote on various aspects of the company, including program names and logos, new practices, and initiatives being considered for the upcoming year. DaVita’s Chairman and CEO, Kent Thiry, explains  “At DaVita, we are truly a community first and a company second.” (Disclosure: James McRitchie, CorpGov.net Publisher, is a DiVita shareowner.)

Continue Reading ·

A Fistful of Dollars: Lobbying and the Financial Crisis

On December 31, 2007, the Wall Street Journal reported that Ameriquest Mortgage and Countrywide Financial spent respectively $20.5 million and $8.7 million in political donations, campaign contributions, and lobbying activities from 2002 through 2006 to defeat of anti-predatory lending legislation. Such anecdotal evidence suggests that the political influence of the financial industry contributed to the 2007 mortgage crisis, which, in the fall of 2008, generalized in the worst bout of financial instability since the Great Depression.

Using detailed information on lobbying and mortgage lending activities, Deniz Igan, Prachi Mishra, and Thierry Tressel find that lenders lobbying more on issues related to mortgage lending (i) had higher loan-to-income ratios, (ii) securitized more intensively, and (iii) had faster growing portfolios. Ex-post, delinquency rates are higher in areas where lobbyist’ lending grew faster and they experienced negative abnormal stock returns during key crisis events. The findings are robust to (i) falsification tests using lobbying on issues unrelated to mortgage lending, (ii) a difference-in-difference approach based on state-level laws, and (iii) instrumental variables strategies.

These results show that lobbying lenders engage in riskier lending. The authors conclude their study provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand the incentives behind better.

Igan, Deniz, Mishra, Prachi and Tressel, Thierry, A Fistful of Dollars: Lobbying and the Financial Crisis (December 2009). IMF Working Papers, Vol. , pp. 1-71, 2009. Available at SSRN: http://ssrn.com/abstract=1531520

Continue Reading ·

Corporate Library's Free ESG Webinar

Ignites and FundFire are jointly hosting “Social Investing Opportunities And Challenges” a special 45-minute webinar on January 26th, 11:00 AM EDT, helping money managers, financial advisors and investment consultants address the increased interest in investments focused on environmental, social and governance (ESG) issues.

Sponsored by The Corporate Library, an independent corporate governance research firm, this event will explain:

* Which of the areas of ESG promise the most opportunity?
* How do firms identify likely investors?
* What changes to your trading infrastructure does ESG require?
* How will adding ESG impact your distribution strategies?

Continue Reading ·

Apache v Chevedden: More Comments

Gary Lutin was kind enough to forward some additional comments on this case from a few of his Forum participants. Two of them are noteworthy and were not discussed in my prior post on this case. I found Clearfield’s statement straightforward by Nelson’s more puzzling.

Andrew M. Clearfield, CEO of Investment Initiatives, LLC, formerly Managing Director of International Corporate Governance at TIAA-CREF and a Governor of the International Corporate Governance Network (“ICGN”), in an email statement:

“The problem is compounded three- and four-fold if you look at cross-border ownership.  Custodians and securities houses don’t want to address it, because it is cheaper and more profitable for them to play the shell game with investors’ shares than to make sure it is clear at all times who owns what. They will not lobby for change, and may fight it.  It is up to investors to (a) demand cooperation from their custodians (after all, it is the investors who pay the custodians, rather than the other way around), and (b) to go to the trouble to lobby the authorities for clarification in the laws.  No one else is going to do it for investors; they must spend the money and take the time to do it themselves, or it will never happen.”

Allen Nelson, President of Allen Nelson & Co., Inc., the firm that provides WorldProxy solicitation and investor relations services, in an email statement:

“I don’t believe the Apache Corporation v. John Chevedden case is an example of a “proxy plumbing” problem nor, necessarily, demonstrates that the current system of defining share ownership is dysfunctional. It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.

“Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares. …It is standard practice to refer to the Cede & Co. list as well as the registered shareholder list to determine the validity of proxy votes. The Cede & Co. listing would be of no use in ascertaining how long Northern Trust or the underlying beneficial owners have had held Apache’s shares.

“Mr. Chevedden should have known better. He could easily have established his standing as a shareholder of record by directing his broker to deliver the Apache shares out to him. Then Apache and its lawyers would have been able to confirm that he was named on the registered shareholder list. Mr. Chevedden would also have had a dated stock certificate that would prove that he was a registered shareholder of long standing.

“I agree that securities lending and derivatives practices have created serious problems that need to be addressed.”

    Mr. Nelson says, “Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares.”
    According to the court filing by Apache, Chevedden submitted evidence of ownership from his broker, Ram Trust, indicating he has held fifty share continuously since November 7, 2008. That’s all I’ve ever had to submit, when filing a resolution. However, Apache checked their list and Ram Trust wasn’t on it. Ram Trust then identified Northern Trust as the actual record holder (presumably with Chevedden actually holding a security entitlement). Apache again checked and didn’t find Northern Trust on their records.

    According to Nelson’s note, “While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.”

    If Apache is trying to see if Northern Trust is an owner, wouldn’t they automatically look to Cede & Co. to find them on their list? I’m not a proxy solicitor but I think that’s what I do if I were one, since Cede legally holds the shares of most “shareowners.”

    According to Nelson, Chevedden should have directed his broker to deliver the Apache shares out to him. Then Apache would have been able to confirm him as registered shareholder.  However, it is my understanding from this advisory from Edwards Angell Palmer & Dodge and others who covered the change that DTC began charging $500 for such deliveries as of July 1, 2009.

    At base, Nelson’s position appears to be, “It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”

    Nelson almost makes denying shareowners the right to submit resolutions to be a sport, rather than a right. To me, that is simply further evidence that shareowning, for far too many, has become nothing more than legalized gambling. Owners shouldn’t have to withdraw their shares from their broker, paying at least the $500 fee required by Cede, in order to simply put a question on the proxy that would inform the board of the sentiment of company owners concerning an important issue of governance.

    I also find it ironic that Steve Farris, President of Apache, was named one of the “Best CEOs in America” in the January 2006 issue of Institutional Investor based on his vision, integrity and ability to “deliver superior results.” While those are characteristics well worth cultivating, shouldn’t it also be important to investors that CEOs should at least respect their rights as shareowners? Would Institutional Investor have honored Farris if they had know his position on shareowner resolutions?

    In comments on a 2007 SEC rulemaking, Farris argued that non-binding resolutions should be banned outright.  Absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.

    If Apache is successful against Chevedden, all shareowners will lose their rights to participate in governing their own companies. Is there anything like an Environmental Defense Fund for shareowners? If not, one should be created to come to the defense of Chevedden and other shareowners faced with slapp suits. One sharp attorney could make a name for themselves by defending the rights of shareowners in this potentially landmark case. Volunteers?

    I put my concerns to Mr. Nelson who was kind enough to respond as follows:

    Dear Mr. McRitchie

    Management’s first duty when confronted with a shareholder demand, whether it be to submit a proposal or obtain a shareholder list in order to launch a proxy contest, is to determine if the shareholder has standing to do so; ie, has owned a minimum number of shares of the company for a certain amount of time as set out in the corporation’s articles and by-laws, state and/or federal law.  This is the opening move in the intricate chess game for corporate control which I have played many times over the decades for both management and activist shareholders.

    It appears to me that Apache and its lawyers are not all that anxious to confirm that Mr. Chevedden is a record holder entitled to have his proposal included in the company’s 2010 proxy statement.  Rather, they appear to be arguing the strict legal interpretation that Mr. Chevedden does not have standing because he is not named on the registered shareholder list even though he may be a beneficial owner of Apache shares that are held on the registered list by Cede & Co. who is acting as the electronic clearing house for Northern Trust which in turn is the correspondent for RAM Trust through whom Mr. Chevedden holds his Apache’s shares. As I wrote previously, Mr. Chevedden also has an obligation to prove to Apache that he is a shareholder of record.  The courts will decide.

    This doesn’t mean the system is broken, it simply means everyone must appreciate, understand and play by a strictly enforced set of published rules regardless of how complex they may appear to the uninitiated.  It is no more unfair than ancient rules stating that bishops can only make diagonal moves in chess.

    The fact that it now costs $500 to register shares in your own name does not indicate the system is broken, it merely says that the cost of registering share ownership is not free and someone has to bear this cost directly or indirectly.  The corporation pays its stock transfer agent to handle its share register and you indirectly pay your broker or bank to hold your shares in “street name.”

    For the past four decades there has been a concerted shift from paper stock certificates to electronic share records.  This has accelerated as computers became more powerful.  Today, it is relatively cheap to store financial records on computers and very dear to maintain paper records.  Therefore, I don’t consider a $500 charge to deliver out an actual paper share certificate to be onerous.  The price may be slightly more than actual cost, however, I don’t believe it is meant to disenfranchise investors, rather, it is an incentive for investors to hold their shares electronically.  Do you think $500 is too expensive an admission price to play the game of corporate control?

    Until recently, activist shareholders had to pay tens or hundreds of thousands of dollars out of their own pockets to challenge the management of a public company.  Corporate governance proponents and shareholder activists have made good progress in leveling the playing field between management and shareholders.  The system still favors management today and always will; it has also has given you and other small investors the tools to challenge them quite inexpensively.

    Regards,

    Allen Nelson

    Allen Nelson & Co., Incorporated
    International Proxy Solicitation Since 1977
    P.O. Box 16157
    Seattle, WA  98116

    There you have it, according to at least one well-informed proxy solicitor, shareowners should be expected to hold paper certificates if they want to “challenge management.” We can avoid this additional expense if we can shift to a system of direct registration.

    Continue Reading ·

    Apache Files Slapp Suit: More Support for DRS

    As reported in Risk & Governance Blog (1/13/10), theCorporateCounsel.net Blog (1/13/10), GlobalProxyWatch (1/15/10), and by Gary Lutin via e-mail (1/15/10), Houston-based Apache has sued shareowner activist John Chevedden, contending that he failed to meet the proof-of-ownership requirements in SEC Rule 14a-8(b) required to submit a resolution. See Apache v Chevedden.

    Chevedden provided documentation of his ownership but Apache contends he didn’t submit enough information to trace the shares through to a record holder. Apache bypassed the normal route of first requesting a no-action letter from the SEC, choosing instead to go directly to court and to recover costs from Chevedden. To me, that looks like a slapp suit, designed to intimidate Chevedden and other activists with mounting legal costs and simple exhaustion.

    Apache has a long history of rejecting the rights of shareowners to influence management decisions. In 2007, “G. Stephen Farris, CEO of energy company Apache, argued that shareholder proposals should be banned outright, or absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.”

    However, even the hard-line U.S. Chamber of Commerce questioned the legality of an all-inclusive bylaw: “Under federal case law, a corporate bylaw (to opt out of allowing shareowner resolutions) … cannot act as ‘a block or strainer to prevent’ shareholder proposals from inclusion in a company’s proxy materials.” (Non-Binding Proposals Defended, RMG, Risk & Governance, 10/12/07)

    Here’s what others had to say:

    As reported by Risk Metrics Group–  “It’s fairly unusual for a company to sue its own investors, and it’s even more unusual to sue an investor before an SEC staff ruling,” noted Cornish Hitchcock, a Washington-based attorney who represents labor funds in no-action matters.

    The RMG article says the lawsuit appears to be an attempt by Apache to get around the SEC’s no-action ruling in October 2008 that rejected a similar challenge where SEC staff said that a written statement from an “introducing broker-dealer constitutes a written statement from the ‘record’ holder of securities,” as required under the federal proxy rules.

    Federal judges aren’t bound by SEC staff opinions, and may have a different opinion on what constitutes proof-of-ownership.  The RMG article goes on to recount the successful activism of Chevedden and his network of retail investors in recent years on various issues. (Disclosure: I am one of those network members.) Those victories have angered corporate officials, especially when we submit more than one proposal on different topics at the same company. However, the SEC has held the group is not in violation since the filings are by different holders, with Chevedden acting essentially as our agent.

    Broc Romanek, at theCorporateCounsel.net Blog, appears to share the opinion of issuers with regard to Chevedden assisting other shareowners with their proposals, “Many corporate secretaries will be cheering to hear that Chevedden was recently sued over his efforts to submit a proposal (although this situation doesn’t involve alter egos).”

    Romanek goes on to quote an anonymous member of CorporateCouncil.net: “I am glad they are taking Chevedden to court. More companies should make sure his shenanigans have some real consequences. If he started getting his butt hauled into court all across the country, then his proposals would cost more than the price of a stamp.”

    That attitude simply reinforces my initial opinion that this is nothing more than a slapp suit. Escalate the cost dramatically and shareowners will be too intimated to file resolutions. Chevedden’s resolution to require simple majority votes isn’t even binding on the board if passed by shareowners. My opinion is that owners of a corporation shouldn’t be dragged into court for making a suggestion to be voted on by other owners.

    GlobalProxyWatch pointed out one irony: “Apache’s in-house governance domo is none other than Sarah Teslik, ex investor champion-in-chief at the Council of Institutional Investors. If Apache succeeds, expect similar tactics from other firms seeking to block resolutions like Chevedden’s.”

    Gary Lutin’s e-mail notes, “Mr. Chevedden provided records that he did in fact own shares, but the financial service firms that confirmed his position did not appear in the records of registered ownership. Leaving aside the comical aspects of this case, the court filing shows clearly that our current system of defining ownership is dysfunctional.”

    “Whether you think this effort to block a shareholder proposal is proper or not, I assume you will agree that there is something wrong with rules that allow this argument to be made. What seems like a simple matter of defining ‘ownership’ of stock has become a real challenge, especially in the context of recently evolved securities lending and derivatives practices, and needs to resolved before anyone can sensibly consider what kind of ‘plumbing’ hardware to order.”

    I think Lutin’s comments are spot on. With street name registration, how can Apache know if Chevedden is really a shareowner? (although, appears obvious in this case that he is)  How can anyone expect Chevedden to submit more in the way of proof? He’s already submitted a letter from his broker and, as I recall, another entity up the chain.

    As we point out in our draft petition to the SEC, we retail shareowners aren’t really shareowners at all. We simply trade in “security entitlements.” The further we stray from direct registration, the more complicated it becomes to enforce the rights of ownership.We moved to the convoluted system we have now because it was the easiest way to get through a paperwork emergency that was bankrupting dozens of brokers. Direct registration wasn’t feasible because we didn’t have adequate computer power. Those days are over. Isn’t it time to move on to direct registration where companies know who there owners are and shareowners can more easily communicate with each other?

    Continue Reading ·

    Advice for Financial Advisors

    Most affluent retirees want more than just investment management from their adviser, according to a survey released by Sallie Krawcheck’s wealth management group at Bank of America Corp. (Well-off retirees: We sought financial advice too late, Investment News, 1/14/10) According to Ms. Krawcheck, this is an opportunity for financial advisors, “what we’re learning is that our business is really becoming a business of solving problems with people.”

    Financial advisors might also spend some time advising shareowners on where to find impartial information on how to vote. With voting down to 4% among retail shareowners only getting notice and access, they obviously need help. Advisors could point clients to sites like ProxyDemocracy and MoxyVote that disclose how institutional “brands” are voting or provide voting recommendations of “advisors.”

    Financial advisors should also warn their clients that those who those who hold securities under “street name registration” only hold “security entitlements,” not real shares. SEC laws and regulations are written to protect shareholders, not those with security entitlements.

    Therefore, Broadridge and others interpret requirements that apply to proxies as not applicable to their “voter information forms.” Counting blank votes for management, with only a microtype warning on the ProxyVote screen and summarizing resolutions so voters can’t even guess the subject are abuses that would end with a system of direct registration and the use of actual proxies.

    Advisors could further gain the trust of their clients by educating them a little on their role as owners, instead of being completely focused on asset allocation, when to buy, and when to sell.

    Continue Reading ·

    Proxy Reform

    Chris Kentouris takes up the issue of Who Pays for Proxy Reform? at Securities Industry News (1/12/2010) “In one corner is the New York-based Broadridge Financial, which is only too eager to tout the efficiencies of the current system in which it holds a virtual monopoly. It’s actually the world’s largest distributor of proxy materials for broker dealers and banks on behalf of beneficial shareholders. On the other corner are the Washington, D.C.-based Shareholder Communications Coalition (SCC) representing issuers and transfer agents, and The Altman Group, a proxy solicitation firm in New York. They say plumbing in the proxy industry is in major need of overhauling.”

    Giving corporate management direct access to shareowners registered in street name “goes hand in hand with giving them a say in who will mail or electronically distributes their proxy materials and counts up their votes.” SCC wants issuers to have unfettered access. The Altman Group wants issuers to have access to objecting beneficial owners during a limited number of times a year, like when proxies go out.

    For a more thorough comparison of proposals, see my Comparison of “Proxy Plumbing” Recommendations.

    Companies have always been able to communicate with shareowners. The layers they have to go through just add expense that ultimately reduce shareowner earnings… although I’m reluctant to endorse any system that puts corporations fully in charge of their own elections.

    As indicated in Co-Filers Wanted on Petition to Eliminate Street Name Registration, the United States Proxy Exchange and CorpGov.net are working on “proxy plumbing” reforms that result in more communication between shareowners. We need to look at safeguards, such as “do not call” lists, so that shareowners themselves decide who can contact them directly outside annual elections and proxy contests. There are many details to work out.

    Personally, my major concern is that those under “street name registration” only hold “security entitlements,” not real shares. SEC laws and regulations are written to protect shareholders, not those with security entitlements.

    Therefore, Broadridge and others are interpreting requirements that apply to proxies as not applicable to their “voter information forms.” Counting blank votes for management, with only a microtype warning on the ProxyVote screen and summarizing resolutions so voters can’t even guess the subject are abuses that would end with a system of direct registration and the use of actual proxies.

    These are issues left unaddressed by SCC or the Altman Group. Let’s hope the SEC gives them full attention.

    Continue Reading ·

    Co-Filers Wanted on Petition to Eliminate Street Name Registration

    As I indicated in my last post (Can We Change Voting Behavior?), I’m working with the United States Proxy Exchange (USPX) on a petition to the SEC to end “street name registration.”  That largely ad hoc system took root under emergency conditions stemming from a paperwork crisis during the 1960s, before networked computers were ubiquitous in trading markets. Street name registration, and a system that immobilized stock, were supposed to be temporary measures but they have grown to undermine our ownership culture. Just as poker chips allow us to play under rules that often favor the house, those holding “security entitlements” do not acquire the rights of real shareowners.

    Street name registration is the primary reason proxy solicitations cost hundreds of thousands of dollars—and that exorbitant cost is why entrenched boards routinely run unopposed. Eliminating street name registration, in favor of a direct registration system, could bring the cost of proxy solicitation down to a few thousand dollars, which would have a bigger impact on shareowner rights than the SEC’s proposed proxy access initiative. It would also eliminate the use of voter information forms and other vehicles that circumvent the legal rights of shareowners with official proxies.

    We welcome interested parties to co-sign the petition with us. The January 12, 2010 draft petition may go though minor revisions, based on your recommendations, but the substantive points will remain. We intend to submit the petition by the end of January to help ensure it is considered by staff preparing recommendations to the Commission concerning how to resolve various “proxy mechanics” issues.  If you are interested in signing on to the petition, please e-mail Glyn Holton, Executive Director, United States Proxy Exchange, indicating you want to co-sign, and provide the following:

    • Your signature block with your organization affiliation, if any
    • Please note the affiliation is for “identification purposes only” if you are not signing on behalf of the organization
    • Please include a small pdf of your signature that can be used in the filing
    Continue Reading ·

    Can We Change Voting Behavior?

    We Own You!: How technology can help stockholders take control of the corporations they own, Slate.com, 1/12/10.  Eliot Spitzer writes,  “Twitter, text messages, YouTube, and other technology transformed politics in 2008. This success raises a compelling question: Can the same technology awaken the more dormant world of corporate democracy?… Could proxy voting in 2011 generate the same enthusiasm as actual voting did in 2008?” It just might if we can get a few people with Spitzer’s star power to focus attention.

    Good to see Eliot Spitzer talking up use of ProxyDemocracy.org, MoxyVote.com and Shareowners.org. He gets his facts slightly wrong, Both ProxyDemocracy.org AND MoxyVote.com intend to be neutral information providers. MoxyVote.com labels its information sources as “advocates” but that doesn’t mean MoxyVote.com agrees with them.

    Both work on the concept of trusted brands to help shareowners vote more easily and more intelligently. In the case of ProxyDemocracy.org, their “respected institutional investors” spend considerable resources investigating not only resolutions but also director nominees. By announcing their votes in advance, they allow retail shareowners to benefit from their research and they create brands with a larger following than they would have voting alone.

    Spitzer says there are at least two critical hurdles that still have to be overcome:

    1. “First, most shareholders don’t vote because they assume their votes don’t matter; shareholder votes are almost never close.” However, this year that is changing. With most of the Fortune 500 using majority vote requirements to elect directors and with “broker votes” no longer allowed when retail shareowners fail to vote within 10 days of the annual meeting, your vote counts more than ever. We are sure to see several directors turned out of office. That doesn’t stop them from replacing tweedle dee with tweedle dum, but its a good start.
    2. “There is no water cooler for corporate democracy. A presidential or mayoral race prompts conversations among friends and colleagues and generates daily press coverage. A corporate proxy vote doesn’t. We don’t all own the same shares, and even if we did, we probably wouldn’t talk about it.” That’s where sites like Shareowners.org and my own blog come in. People should be talking about how they are voting. It would be great to have TV shows like the Nightly Business Report actually providing analysis of the issues facing owners, rather than tips for the next bet. If PBS doesn’t do it, Spitzer could do it through Slate.com.

    Of the two problems, the second is more important. When shareowners start talking to each other about how they’re voting, more will vote… and, more will vote intelligently. We will also start taking on more of the issues that currently send the system off balance.

    For example, this morning I received a copy of a letter from Goldman Sachs to the SEC referencing my resolution to allow shareowners to ask the board to amend the bylaws, allowing owners of 10% of the company’s stock to call a special meeting. Management at Goldman Sachs wants to omit the resolution from the proxy on the basis that they intend to submit a proposal to the 2010 annual meeting to allow shareowners of 25% to hold a special meeting.

    They argue that Rule 14a-8(i)(9) allows them to exclude the proposal from its proxy, since the proposal directly conflicts with their proposal. In the past, the SEC has allowed such exclusion based on confusion that would reign if shareowners passed both resolutions. That is nonsense. If both pass, the lower threshold applies. If we can ever get the “water cooler” discussions going around corporate democracy, shareowners won’t stand for a system that tips the balance of power to management at every turn. We will see if the SEC under Mary Schapiro acts to protect shareowners by allowing the resolution, or if they protect management by issuing a “no action” letter.

    “Street name registration” undermines our culture, turning investors into gamblers by providing them “security entitlements,” instead of real ownership rights. Just as poker chips allow us to play under rules which often favor the house, those holding “security entitlements” do not acquire the rights of share owners. For example, one right sharowners have is to receive a proxy, whereas those of us registered in street name receive a voter instruction form (VIF). SEC rules guarantee certain rights to proxy holders but not, it is argued, to those voting through VIFs. (see
    Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

    On January 13th I will post a draft petition to the SEC that I have been working on with Glyn Holton, of the United States Proxy Exchange, and others to convert from “street name” to a system of direct registration. I hope you will consider signing on as a co-filer. Can we change voting behavior? Yes, we can! Just give us the rights of ownership and see how democracy transforms the world of corporations.

    Continue Reading ·

    CorpGov Bites

    TheCorporateCouncil.net posted a transcript of a recent Webcast on the SEC’s new Proxy Disclosure requirement. Like always, they do an excellent job of sorting out issues for those getting into the weeds.

    RMG reports “The wave of new federal securities lawsuits related to the global credit crisis has finally subsided, down 7-24% depending on whose data you use. The largest category of 2009 cases were those that arose from the credit crisis. (Investors File Fewer Lawsuits in 2009, 1/6/10)

    theRacetotheBottom.org has covered a raft of issues lately that are worth a read. These include: Executive Compensation at Goldman Sachs, Executive Compensation, Delaware’s Top Five Worst Shareholder Decisions of 2009 and the need for reinstating Glass-Steagall.

    Bowing to pressure from shareholders of On2 Technologies, 11.5% of whom voted they share through MoxyVote.com, Google raised its offer  to  $132 million, up from $106.5 million. (Shazam! Google raises its offer price for On2, 2/7/10)

    Study finds Private Investments in Public Equity (PIPEs) announcement returns decrease almost linearly across the first six PIPE transactions, going from positive to negative. Firms that issue multiple PIPEs have high cash levels, and a majority make acquisitions. Successive PIPE transactions delay accessing of public markets while keeping institutional ownership low. Hence, they are greeted skeptically by the market as maintaining managerial entrenchment. (Are Private Placement Announcement Returns Really Positive? On the Information Content of Repeated PIPE Offerings, Ioannis V. Floros and Travis Sapp, SSRN, 1/7/2010)

    Small ESOPs, those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) Management-worker alliances to thwart hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. (“Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership”, Kim and Ouimet, SSRN, 12/1/09)


    Continue Reading ·

    Up From Wall Street

    Up From Wall Street: The Responsible Investment Alternative by Thomas Croft is a book that should be read by all working North Americans, concerned with the reckless loans and short-term stock market bets that nearly plunged the world’s economy into chaos. The book is especially relevant to those working at and those seeking to influence pension plans. While investment of plan assets must be made solely in the interest of plan participants and beneficiaries, Croft reminds readers that as deferred wages, “it makes sense for trustees to invest these funds in ways that advance the interests of beneficiaries more broadly.”

    The first part of the book is an expansive but easily digested primer on incorporating environmental, social and governance (ESG) analysis into investment strategies, current best practices and the role of organizations such as the United Nations in promoting responsible investment practices. Croft familiarizes readers with concepts and practices such as economically-targeted investment, capital stewardship, the “Lanoff letter” that basically okayed consideration of “incidental benefits” for ERISA funds, targeted investments and micro-finance. He also provides links to several excellent information sources, as well as an extensive body of notes and references.

    Croft does and excellent job of explaining the rise of “financialization,” short-termism and how buyout and hedge funds “provided some of the black powder that quickened the landslide.” Trustees, union, and members of funds who want to influence them will benefit substantially from the chapter, “Action Steps for Trustees: How to Talk Back to Experts.” Here Croft lays out how to get fund consultants to expand their horizons to include consideration of investments that can earn high risk-adjusted returns over the long-run, which also help sustain employers and communities. The chapter includes 12 steps with specific advice, such as “Ask your consultant to independently verify the sources and amount of returns from private equity funds… disclose cash in/cash out documentation.”

    Part two of the book is a “field guide” that provides information on six responsible private equity and venture capital funds. Each fund is profiled for structure, capacity, products, impacts, financial performance, experience of principals and at least a case study or two of the firm’s investments. Yes, you can make money while doing good. These firms have proven that and continue to do so through the financial melt-down.

    On a personal note, I met Tom about twenty-five years ago when we were both trying to address plant shut-down issues in California. It is great to see him continuing this work as Director of the Heartland Labor/Capital Network and with the help of the Heinz Endowments. Read more about author, Tom Croft as he chats with United Steelworkers President Leo Gerard about the book at the Hill’s Congress Blog, Talking with Responsible Pension Investments Expert Thomas Croft, 12/28/09)

    Continue Reading ·

    TK Kerstetter Wrong on Board Disclosure

    TK Kerstetter wrong on board disclosure proposal at the SEC. TK Kerstetter is the president and CEO of Board Member Inc. a privately held publishing, database, research, and conference company focused on corporate board issues and governance trends. Corporate Board Member is sent to all corporate directors of public companies on the NASDAQ, NYSE Euronext, and NYSE Amex stock exchanges. Usually, the publication contains excellent advice. A rare exception is Kerstetter’s Director Qualification Disclosure Will Prove Lame. (The Board Blog, 12/9/09) Continue Reading →

    Continue Reading ·

    How to Be a Good Lead Director: Be the Chairman

    In July 2009, the SEC proposed new proxy disclosure rules that will require public companies with a combined CEO/Chairman to disclose why the company believes such a leadership structure is appropriate and what specific role the Lead Director plays in the leadership of the company. via How to Be a Good Lead Director – Boardmember.com.

    Unreported in the article is the fact that the new rules have an effective date of February 28, 2010. A January 6th Georgeson Report provided much better and more specific advice: “If the same person holds both positions, companies should disclose whether they have a lead independent director and what role that person plays. In this regard, companies would be well advised to review the details that RMG considers when evaluating whether or not to support a shareholder proposal calling for an independent chairman.” They also discuss what is required in the way of disclosing consideration of diversity in the nomination process.

    I think the concept of “lead director” is on the way out. Are the new SEC rules an indication of the U.S. heading toward “comply or explain”?

    Continue Reading ·

    Powered by WordPress. Designed by WooThemes