Archive | February, 2010

ICGN – June in Toronto

The world’s foremost leaders in corporate governance will gather in Toronto from 7 – 9 June 2010 at the International Corporate Governance Network’s annual global summit to focus on the evolution within the global capital markets and its impacts on corporate governance. Full details of the program and side meetings can be found at According to David Beatty, Founding Managing Partner, The Canadian Coalition for Good Governance (Canada) and co-chair of the ICGN conference:

This year’s summit will bring together the world’s top thought leaders on corporate governance issues to look at new trends we’re seeing in the global capital markets – including the emergence of the BRIC countries –  and its impacts on fostering good corporate governance from a global perspective. We are looking beyond the traditional corporate governance lens of a public company and focusing on the evolution of capital markets and the questions it raises for corporate governance. As we have seen from the recent global financial crisis, which sparked volatility across the industry, restoring equilibrium in capital markets and good corporate governance are integral to stability and growth in the financial markets.

“In an environment where policymakers and market participants alike are focused on reform, it’s time for ‘market-led’ change in corporate governance. Regulatory evolution alone is not enough to ensure global capital market stability. Thoughtful discussion on this topic is urgently needed with all parties at the table – including rising powers from China and India as well as influential players such as Sovereign Wealth Funds or hedge funds,” says Christianna Wood, Chairman of the board, ICGN.

The ICGN Annual Conference is being hosted by the Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, two of Canada’s largest institutional investors and proponents of good corporate governance.

Over 60 speakers from 30 leading markets will tackle a range of subjects ranging from the evolution of capital markets and threats to good corporate governance, a new model for shareholder stewardship and rising influence of hedge funds and sovereign wealth funds, the efficiency of regulatory solutions to market-led problems, challenges to proxy voting across borders, executive compensation, increasing gender balance on boards, to the influence of BRIC economies and its impact on Western style governance.

Speakers include leading figures from policy, business, investment and stakeholder groups. The Conference is being opened by Jim Flaherty, Minister of Finance for Canada, which precedes a joint session with the World Economic Forum with a focus on the new global economic balance. Key sponsors are the Royal Bank of Canada, RBC Dexia Investor Services and TMX Group.

The conference coincides with the ICGN’s 2010 Annual General Meeting which will map the ICGN’s work programme going forward, policy initiatives and priorities, and will elect board members for the coming year.  ICGN is a not for profit membership organization promoting the cross border exchange of information and experience, advocacy for reform and development of best practices in corporate governance. It has over 470 members based in more than 45 countries worldwide, who include investors responsible for $9.5 trillion in global assets.

James McRitchie, the publisher of will be there. How about you, eh?

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USPX to File Amicus Curiae Brief in Apache vs. Chevedden

Yesterday, Judge Lee Rosenthal of the Federal District Court in Houston issued an order  (ApacheOrder) granting the United States Proxy Exchange (USPX) leave to file an amicus curiae (friend of the court) brief in Apache vs. Chevedden. The USPX had petitioned the court for leave on February 16, stating in part:

Amicus curiae filings are often appropriate in cases where one party is pro se or where a decision might impact parties that are not litigants. Both conditions are present in this case. Mr. Chevedden is representing himself, and an adverse decision could impair property rights of most shareholders in the United States in ways the court should be made aware of.

The directors, staff and volunteers of the USPX have extensive experience with SEC Rule 14a-8 resolutions. Their perspective and expertise are complementary to, but not duplicative of, the analysis given by the parties and might assist the court in deciding this case.
The USPX is a non-government organization, incorporated in the Commonwealth of Massachusetts, dedicated to facilitating the exercise of shareholder rights, primarily through the proxy process.

Apache’s lawyers have advanced the position—contrary to standard practice followed with shareowner resolutions for years—that a broker letter is not acceptable evidence of share ownership. An ambiguous sentence in SEC Rule 14a-8 states that beneficial shareowners who are not owners of record must prove ownership by submitting “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.” For almost all retail and institutional shareowners, the owner of record is Cede & Co. But Cede & Co. has no information about beneficial owners. Apache’s lawyers have not explained how Cede & Co. would provide letters confirming matters of which they have no knowledge. Apache’s lawyers have not addressed whether Cede & Co.-–even if it had such information— would be willing to participate in the shareowner resolution process in this way. There are no SEC rules requiring them to do so!

An adverse ruling in Apache vs. Chevedden might undermine the use of broker letters while not providing any clear alternative. This could have a chilling effect on the ability of all shareholders to submit shareowner resolutions. John Chevedden is heroic, standing up to Apache and its lawyers. All shareowners owe him their gratitude, not only for his efforts in this case, but for his tireless work on their behalf over many years of submitting shareowner resolutions.

However, pro se litigants are rarely successful. With John Chevedden representing himself against high-priced Houston lawyers, the potential for an adverse ruling was significant. Now that the USPX is involved, all shareowners can breath a little easier. That doesn’t mean we are out of the woods, but shareholders now have an independent and authoritative voice advocating for their rights before the bench.

For further information, please contact USPX Executive Director Glyn A. Holton at 617.945.2484 or [email protected].

It would be great to see participation by other shareowners assembling supporting arguments in Chevedden’s defense. As noted above, if he loses, we can expect many more companies to refuse to accept a simple broker’s letter as evidence of ownership. See previous post on this case at David vs Goliath (updated).  See also, Apache Sues Activist John Chevedden, Ted Allen, 1/19/10 Risk Metrics Group; When companies know better than shareholders, Houston Chronicle, 2/6/10. Apache’s briefs filed with the court can be found at

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Top Resolutions for 2010

Pensions and Investments reports on the top shareowner resolutions in 2010 (Right to call meetings leads proxy-season proposals, P&I Daily, 2/18/10)

  1. A proposal seeking a right of shareholders to call a special meeting was the leading shareholder proposal filed for the 2010 proxy season as of Feb. 1, with votes pending at 51 companies, according to tracking by RiskMetrics Group.
  2. A proposal on say on pay, or an annual shareholder advisory vote on executive compensation, is the next most frequently filed shareholder proposal, pending at 50 companies
  3. A call for reporting on corporate political spending, at 48 companies
  4. taking action on climate change, at 36 companies
  5. independent board chairman, at 34 companies
  6. reporting on environmental and other sustainability issues, at 28 companies
  7. ending a supermajority vote requirement for shareholder action, at 19 companies
  8. setting a retention period for stock awards, at 13 companies
  9. requiring annual election of directors, at 12 companies
  10. annual election of directors and promoting board diversity, each at nine companies;
  11. excluding the CEO on compensation committees, at eight companies;
  12. anti-gross-ups policy — opposing corporate reimbursements to executives to cover their tax liability on perquisites and other benefits — at six companies.
  13. CEO succession planning is pending at five companies
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SEC IAC Report

The following is a quick summary from Peter DeSimone, Director of Programs of the Social Investment Forum of what happened at the beginning portion of Securities and Exchange Commission’s Investor Advisory Committee (IAC) meeting today.   First, the IAC as a whole adopted a recusal policy (draft) that recognizes that each IAC member represents specific constituencies, further defines conflicts of interest and outlines responsibilities for IAC members in these areas.

Then, the Investor as Owner Subcommittee offered and the IAC approved two resolutions:

  • The first addresses Regulation FD and recommends that the SEC staff issue interpretive guidance to suggest ways in which issuers can address Regulation FD compliance concerns surrounding the selective disclosure of material corporate governance information in private meetings with investors.  A copy of the proposal appears here.
  • The second takes up the issue of proxy voting transparency, and it asked the SEC staff, as part of its review of the U.S. proxy voting system (or proxy plumbing as it is being called), to study the costs and benefits of mandating a standardized tag-data format for certain proxy voting and related filings, including the proxy statement (DEF 14A), mutual fund disclosures of proxy votes (MDX) and voting results (8-K).  The proposal recommends that the XBRL standard be used and notes that XBRL USA plans to have a taxonomy ready on U.S. proxy voting filings and related materials in November, but it says that the SEC staff should also review alternatives.  The upshot of the proposal is that, if implemented, all agenda items, director information and other important qualitative and quantitative data points in these filings will be tagged and therefore easily placed in datasets and analyzed by investors. Link here to the proposal.

The Investor as Owner Subcommittee then advised the rest of the IAC that it would be looking into the following issues in the coming months:

  • ESG disclosure:  the Millstein Center’s Stephen Davis and Domini’s Adam Kanzer outlined a work plan for the subcommittee on ESG disclosure that would include testimony from experts in the field and look into several particular issues.  In March will call in SEC staff to brief the subcommittee on their activities to date.  Next, in April, the subcommittee will hold a meeting on the benefits of ESG disclosure to investors from a risk management perspective.  Then, in May, they will look at accounting standards and triggers for disclosure of contingent liabilities in the United States and other markets.  In June, they will review reporting standards, including the Carbon Disclosure Project and the Global Reporting Initiative, and look at information collected by the European Commission during its six meetings on ESG disclosure over the past year.  The subcommittee plans to hold a public hearing on ESG disclosure in the summer to coincide with another meeting of the entire SEC, so that other members of the IAC could easily attend if they were interested.  As far as output from this process, the subcommittee says possible outcomes could be, but are not limited to, a recommendation for an ESG disclosure rule, recommendations for areas for further study, or a white paper on the topic.  They emphasized that the group as part of the work plan would look at a broad range of ESG issues, not just climate change.  While many IAC members admitted that this was an emerging issue they did not know much about, several commended the subcommittee for taking on the issue and looked forward to a briefing on it.
  • Financial reform:  The subcommittee noted legislation pending in the House and Senate and noted that they would take up this issue again in March once they had a better idea of what would be included in the final bill.  In particular, the subcommittee said that if majority voting and/or proxy access was not included that they would be looking into ways the SEC could act. For example, it was suggested that, as it does on the separate chairman and CEO issue, that the SEC could issue new disclosure requirements for companies without a majority voting standard to explain to investors why they do not.
  • Political contributions:  While this issue was not on the agenda officially, the subcommittee noted as part of its next steps that it would take on a work plan process similar to the one it proposes on ESG disclosure, albeit shorter, to look into possible remedies at the SEC for the recent Citizens United v. FEC case and getting better disclosure or otherwise limiting corporate political contributions.

The Investor Education Subcommittee discussed the results from a FINRA national financial capability survey.

The Investor as Purchaser subcommittee discussed fiduciary duty and mandatory arbitration.

DeSimone left before the last two subcommittees presented, so has no further details. Thanks so much to him and to SIF for his report. See also, Mark Latham’s Voter Media Finance Blog, where he frequently posts on his involvement on the IAC.

I listened on and off to the IAC but my internet connection kept getting dropped… at one point being interrupted by ABC News (strange). I did hear some discussion around “majority vote” requirements for directors and the idea of a required disclosure for that as a fallback (if legislation isn’t forthcoming). The approach would be similar to recently enacted SEC requirements to explain the CEO/Chair board structure. As I recall, the discussion boiled down to something like, let’s explore what the limits of SEC authority in this and perhaps other areas.

Kayla Gillan was asked at one point during the meeting when the SEC would come out with its proxy access rules. “Soon,” was her response. Overall, I’d have to say I am impressed with the quality of work being done by the IAC and its subcommittees. Great to be able to tune in on the meetings and to be able to submit comments each time on agenda and suggested agenda items.

On a somewhat related note, the SEC now has a page devoted to investor education on proxy voting. Spotlight on Proxy Matters is a good start. However, it leaves no answers or suggestions on the most critical questions:

  • Where can I find analysis of proxy voting issues?
  • How are others voting and why?

I still like Mark Latham’s idea in this area: USA Investor Education: How should the USA Investor Ed voter community divide funding among these websites/blogs?

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Canadian Pensions Fail to Provide Proxy Voting Direction

The Shareholder Association for Research and Education’s (SHARE) ninth annual Key Proxy Vote Survey found that a substantial proportion of investment managers (71%) say they vote most of their pension fund clients’ proxies at their own discretion, without instructions or guidance from their clients.

“We saw a 10% decrease this year in the number of firms that said they receive guidance or direction from their pension plan clients on how those clients’ proxies should be voted,” says SHARE’s Director of Law and Policy, Laura O’Neill,    “This suggests that more institutional investors, including pension funds, let their money manager decide how their proxies should be voted. The lack of direction is cause for concern.”

In 2009, 35 firms responded to SHARE’s voluntary survey, which asked the firms how they voted on a selection of 34 issues that appeared on the ballots of Canadian companies. These issues include board and committee independence, executive stock option plans, and corporate reporting on environmental and social risks, as well as others.

“Pension funds, and other institutional investors, should give their proxy voting agents guidance on how their proxies should be voted, ideally by adopting a set of proxy- voting guidelines,” said O’Neill, “This is important because pension fund trustees have a fiduciary duty to oversee how the proxies attached to their funds’ stocks are voted.”

The survey also found of the firms that responded, 40% (an increase of 11% over 2008) of firms disclose their proxy voting guidelines to the public and 49% (up from 39% in 2008) consult with their clients about the proxy voting guidelines.

An encouraging trend in this year’s survey is that all but one of the firms handling securities lending for their clients have procedures in place to recall lent shares in time to vote them. Also, the survey response rate of 56% marks an increase from previous years, indicating greater fund manager willingness to be transparent and accountable about the exercise of proxy voting rights on behalf of clients.

The annual Key Proxy Vote Survey is undertaken by the Columbia Institute’s Responsible Investment Program with the assistance of the Shareholder Association for Research and Education.

SHARE recommends that all pension fund trustees take the following steps to oversee how the proxies of their funds’ equity investments are voted:

  1. Review the proxy voting record of your plan’s investment manager or proxy voting service and discuss it with them. Discuss with them how they voted on the issues in the Key Proxy Vote Survey. Ask for an explanation of their votes on issues in the survey and on any other issues of interest to you.
  2. Establish proxy voting guidelines that match the geographical scope of your plan’s investments; if the plan has global investments, establish proxy voting guidelines with a global scope.
  3. In the plan’s Statement of Investment Policies and Procedures (SIPP), set out the roles and responsibilities for voting the plan’s proxies. Trustees should retain the discretion to direct proxy voting if they choose to do so. The SIPP should make reference to the plan’s proxy voting guidelines.
  4. Give investment managers, proxy voting services, or other voting agents a copy of the plan’s proxy voting guidelines.
  5. Monitor how the plan’s proxies are being voted to ensure that they are being voted according to the guidelines.
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CorpGov Bites

“Bank of America persuaded the SEC to drop “proxy access” provision as they negotiated a $150 million settlement of a lawsuit tied to the takeover of Merrill Lynch & Co… The U.S. Chamber of Commerce, which represents more than 3 million companies, has said “activist shareholders” would use proxy access to hijack elections to pursue “political or social issues.”” (SEC Said to Push BofA Proxy Rule in Enforcement Case,, 2/18/10)  “SOX substantially beefed up the obligations of the audit committee, at least for Exchange traded companies.  See Section 301 of SOX.  The committee was given the direct authority to supervise and to hire/fire the outside auditor.  The committee was also given the authority to hire counsel without full board approval.” “In the proposed settlement with BofA, the SEC is seeking to augment the authority of the audit committee one more time.  The Commission is giving to the audit committee (not the full board) the authority to hire counsel.  Counsel must not only review filings but must discuss possible deficiencies with the audit committee in executive session, without the presence of the non-indpendent directors.  The latter restriction is significant.” (The Board of Directors and a Review of Corporate Disclosure,, 2/17/10)

Interesting, Bloomberg failed to get the Chamber’s new line. “Late last month, for the first time in more than a decade, the US Chamber of Commerce changed the boilerplate language that appears at the bottom of its press releases. The nation’s largest business lobby no longer claims to be “representing more than 3 million businesses and organizations of every size, sector, and region.” Instead, it claims to be “representing the interests of more than 3 million businesses” (emphasis added). The smallness of the tweak masks its major significance: Representing somebody, which strongly implies a direct relationship, is very different from representing their interests. The Chamber is in effect acknowleging that the “3 million” businesses aren’t actually its members… It was forced to admit that its true membership isn’t the 3 million businesses that it has claimed, but something on the order of 300,000.” (Chamber of Commerce No Longer “Represents” 3 Million Businesses, Mother Jones, 2/12/10)

I guess we at should be claiming to represent the interests of the approximately 100 million Americans who own stocks or mutual funds… but why stop at Americans, since we occasionally cover corporate governance issues in other countries as well?

Apple, lags industry peers on sustainability reporting and has not made public greenhouse gas reduction commitments. Apple shareowners are beginning to vote their proxies on Moxy Vote, based on recommendations from Calvert Investments to support a resolution on on sustainability reporting. (Is Apple green enough?, Mac News)  The problem is there is another proposal seeking a bylaw requiring a board committee on sustainability… and there are all those directors to vote for or against. While I love Moxy Vote and own Apple stock, at this point, in Beta form, I’m disappointed the site has no one to advise me on how to vote the other issues or on the directors. So, I turn to and even they have collected no votes in advance of the 2/25/10 meeting from “ten institutional investors that are particularly engaged in corporate governance.” I’ll wait until next week to vote.

Eric Jackson does a nice job interviewing John Gillespie and David Zweig, co-authors of “Money for Nothing.”  Gillespie says we won’t have real change until the old players like Bernanke, Geithner and Summers leave. Zweig says, “corporate governance needs a new name to encourage change, maybe corporate democracy.” (Corporate Governance Role in Meltdown,, 2/17/10) See my review under the heading Fix the Boards – Fix the System. Buy the book.

“Advocates of genocide-free investing won another important victory this week, when American Funds, a family of mutual funds with more than $775 billion in investments, decided to divest virtually all its holdings in PetroChina. Before a shareowner meeting held on November 24, American Funds owned 167 million shares in PetroChina, worth $190 million.”  “Investors Against Genocide advanced a resolution asking that the Board of American Funds “institute procedures to prevent holding investments in companies that…substantially contribute to genocide or crimes against humanity.” American Funds opposed the measure, and affirmative votes for the proposal ranged from 8.5% to 11.8% at the meeting.” (American Funds Sells PetroChina Holdings,, 2/18/10) The showing on their resolution would have probably been much higher had voting instructions issued by Broadridge actually complied with the requirements for proxies to clearly indicate the voting topic instead of simply referencing “a shareholder proposal described in the proxy statement.” Broadridge could get away with it because that the language the issuer wanted and since Broadridge uses a voter information form, they don’t feel they are bound by SEC requirements that apply to proxies. (see our coverage of that issue at Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

Corporate governance advisory firm PIRC made history again. In January 2009 they took a radical step, and began publicly disclosing via their website the voting recommendations they make for company meetings. Now they have set out have set out six best practice principles for corporate governance advisors, as follows:

  • Clear voting policy guidelines should be made available to clients, the companies whom the adviser is monitoring and to the market;
  • Clear audit trail and explanation of the process for assessing companies and making voting recommendations should be available to clients and the companies monitored;
  • Possible conflicts of interest should be disclosed to clients and to companies monitored and, where necessary, to market regulators (i.e. paid consulting with companies);
  • Companies monitored should be given reasonable opportunity to comment on voting recommendations made and the basis of such recommendations;
  • Voting agencies should routinely report to clients on actions taken on their behalf;
  • All voting recommendations made by a voting adviser should be publicly disclosed post-meeting. (Corporate governance agencies: the need for transparent voting decisions by Tom Powdrill on Responsible Investor, 2/18/10)

The Securities and Exchange Commission Investor Advisory Committee will meet in DC on February 22 at 9 a.m. The agenda for the meeting includes consideration of a Committee recusal policy, a report from the Education Subcommittee, including a presentation on the National Financial Capability Survey, a report from the Investor as Purchaser Subcommittee, including a discussion of fiduciary duty and mandatory arbitration, a report from the Investor as Owner Subcommittee, including recommendations for the Committee on Regulation FD and proxy voting transparency, as well as reports on a work plan for environmental, social, and governance disclosure and on financial reform legislation, and discussion of next steps and closing comments. I’ll be tuning into the webcast if time permits.

The Conference Board issued a new report, Directors’ Duties under the New SEC Rules on Disclosure Enhancement, available to members. From my quick review, the report appears comprehensive but written clearly and in an easy to understand format. Highly recommended for directors, their advisors and monitors. Additionally, the SEC posted six new Compliance and Disclosure Interpretations 116.07, 117.05; 119.21, 119.22 and 119.23, which offer guidance on disclosure under Items 401, 402(a), and Item 402(c) of Regulation S-K. Staff also added new question 121A.01 related to Exchange Act Form 8-K, which explains calculation of the four-business day filing period for disclosing the results of a shareholder vote. See also  guidance on the new requirements from Compliance Week issued in January and December as well as the original rule. Additional guidance from the Altman Group, Walking the Tightrope – New Proxy Disclosures on Director Qualifications, Board Risk Oversight and Board Diversity – and new Climate Change Disclosures for the 10K.

The Corporate Library’s ‘2010 Proxy Season Foresights #3: The Growth of Clawback Provisions, ($15) found that the number of companies with clawback provisions continued to increase in 2009, and almost half of such companies are smaller-cap firms outside the Russell 1000.

The Centre for Corporate Governance Research (CCGR) is organising its 8th International Corporate Governance Conference on Wednesday 23rd June 2010, to be held at the University of Birmingham, UK.  The theme of the conference is ‘Corporate Governance and Sustainability’. Keynote speakers include Colin Melvin (Chief Executive, Hermes Equity Ownership Services Ltd), Dr Michael Blowfield (University of Oxford) and Dr Beate Sjåfjell (University of Oslo). Sir Adrian Cadbury, the CCGR’s External Advisor, will be attending the event. Papers are invited on issues relating to any area of corporate governance and sustainability. Papers should be sent as an electronic copy in PDF format, by 31st March 2010 to Karen Hanson.

Moxy Vote is running a series, Here’s to the many pioneers!, Part 1 includes yours truly, Jim McRitchie, along with Mark Latham, Andy Eggers and Matt Keenan. Part 2 will include Glyn Holton, Nell Minow, and the Social Investment Forum. I’m blushing to be in such company. Thanks to Mark Schlegal and to all the fine work at Moxy Vote for facilitating involvement by retail investors and providing advocates such an important pipeline of influence.

The Council of Institutional Investors (CII) published a White Paper, The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting, authored by Alan Beller and Janet Fisher of the law firm Cleary Gottlieb Steen & Hamilton LLP.  Mr. Beller is a former Director of the SEC’s Division of Corporation Finance. From the Executive Summary:

The SEC is likely to be cautious in seeking to change the current framework in significant ways, at least in the near term. Defining the objective is critical to developing a proposal. If the goal is to increase the ability of shareowners and companies to communicate directly, a number of incremental steps may be taken to address the OBO/NOBO distinction and facilitate direct distribution of proxy materials, without discarding the current distribution platform. Such an approach could lead to meaningful improvements, without seriously affecting the interests of many of the participants in the current framework, and we believe it has a greater chance of widespread support than more radical alternatives… On balance, we believe that the immediate interest of shareowners and companies in better communications would be better and more effectively served with an incremental approach that promotes less reliance on — or eliminates altogether — the OBO/NOBO distinction and otherwise increases the potential for direct communications.

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David vs Goliath

The 2-15-10 court brief from Apache includes the following statement: “When it comes to shareholder proposals, Apache is the ‘David’ and Chevedden is the ‘Goliath.’ ” That seems strange to me coming from a company with a $33 billion market cap. I know John Chevedden and he is no Warren Buffet, when it comes to assets. The last I heard, Apache was represented by multiple attorney’s while Chevedden was representing himself. Yes, David vs Goliath but Apache has it reversed.

This is a case involving basic shareowner rights. At the heart of the slapp suit against Chevedden is Apache’s contention that he must provide evidence that he is the beneficial owner of the appropriate amount of Apache stock to file a resolution. Normally, that wouldn’t be a problem. Every company I have ever filed a resolution with has been fully satisfied with a letter from my broker.

However, my understanding is that Apache has refused to acknowledge the adequacy of evidence provided by Chevedden’s broker and with their further attempt to follow the chain of custody a further level up. Since the shares are held in “street name,” Apache appears to want the letter to come from Cede & Co., which holds the vast majority of corporate stock. Of course, Cede & Co. does not know if Chevedden is a beneficial owner, since their records don’t go that far down.

Have others had a similar demand from Apache or any other company.  Or, if you have a resolution at Apache this year, what evidence of ownership did they require from you or your fund?  Please e-mail me (James McRitchie) if you have any information on these practices.

As I indicated in my earlier post, Apache v Chevedden: SEC Rules Don’t Reflect Reality, part of the problem stems from the language of Rule 14a-8 (b)(2)(i).  “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.”

The SEC rules assume that brokers and banks are “usually” record holders. They are not; at least not technically. Brokers and banks also largely hold “security entitlements,” once transactions are completed. Cede & Co. holds the actual immobilized registered securities. Here’s how attorney Jonas Kron (building from arguments made by Professor Paul Neuhauser in Clear Channel Communications (February 9, 2006)) puts it in a letter to the SEC dated 1/10/2008 regarding a no-action request by McGraw Hill. Although Kron didn’t succeed in this case for other reasons, I understand Neuhauser did.

As is known among securities professionals but not by the typical investor, the ownership structure between the multiple securities intermediaries and beneficial owners is complex. To begin, street name shares are owned by the broker or bank. The broker or bank then deposits the shares in an account at the Depository Trust Corporation. The Depository Trust Corporation, however, is not the record owner.

Rather the shares are held of record by Cede & Co., a nominee of the Depository Trust Company. Therefore, in order to determine the identity of the street name owner one must go first through the depository to the brokers and banks depositing shares, then through the broker or bank to the beneficial owner. This also means that the record owner in the case of brokers and banks is almost invariably Cede & Co, or some other nominee and not the broker or the bank itself. Furthermore, Cede & Co has no knowledge as to the ultimate beneficial ownership of the stock that it holds of record for brokerage firms… Cede & Co. merely knows the gross securities position of each participant in the Depository Trust Company.

Kron also notes this situation is confirmed in footnote 21 of Rel 34-50758A (December 7, 2004) in which the SEC observes:

The relationship between various levels of securities intermediaries and beneficial owners is complex. There may be many layers of beneficial owners (some of which may also be securities intermediaries) with all ultimately holding securities on behalf of a single beneficial owner, who is sometimes referred to as the ultimate beneficial owner. For example, an introducing broker-dealer may hold its customer’s securities in its account at a clearing broker-dealer, that in turn holds the introducing broker-dealer’s securities in an account at DTC. In this context, DTC or its nominee is the registered owner and DTC’s participants (i.e., broker-dealers and banks) are beneficial owners, as are the participants’ customers. However, DTC, the clearing broker-dealer (the DTC participant), and the introducing broker-dealer are all securities intermediaries.

The reality is that the name of the beneficial owner, John Chevedden, will not appear in the company’s, DTC’s or Cede’s records, but only in the records of his broker, Ram Trust. Consequently, his broker is in the best (if not only) position to document who the ultimate beneficial owner is.

SEC Staff Legal Bulletin No. 14B (CF), section C,1, provides guidance to companies on how companies should notify shareowners of defects by providing “adequate detail about what the shareholder proponent must do to remedy the eligibility or procedural defect(s).”

Instead of instructing Chevedden on how to remedy eligibility (or allowing the otherwise universally accepted letter from his broker), Apache seems to have attempted to send Mr. Chevedden on a wild goose chase by implying that he must obtain a letter from the actual holder of record, Cede & Co. As already explained, Cede has no idea who the ultimate beneficial owners are for the stocks they hold. As noted in the Jonas Kron letter to the SEC dated 1/10/2008 quoted extensively above, “Staff has rejected 14a-8f claim when the registrant seemed to demand proof from Cede Co. See Equity Office Properties Trust March 23 2003.”

In a footnote Kron also notes, “See also Clear Channel Communications (February 9, 2006) in which the company also argued that neither the proponent or its broker were record holders. In that case, the proponent made the same argument we are making here leading the Staff conclusion in that case was “that Clear Channel failed to inform the proponent of what would constitute appropriate documentation under rule 14a-8(b) in Clear Channel’s request for additional information from the proponent.”

Also of note, The SEC staff rejected a similar argument made by Dillard Department Stores, Inc. (Mar. 4, 1999). There, the proponent submitted a written statement that the proponent’s shares were held of record by the Amalgamated Bank of New York through its agent, Cede & Co. (“Cede”), the nominee of DTC. Dillard’s argued that the proponent was required to submit a letter from Cede, which Dillard’s argued was the true record owner. The SEC staff disagreed and declined to allow exclusion.

From all the above, it appears that Apache bypassed a “no-action letter” request to the SEC in hopes that Chevedden would be intimidated by a slapp suit that could potentially cost him a small fortune in attorney’s fees if they can convince the federal district court in Texas to rule in their favor. The case should be very simple. Like 99.99% of shareowners holding in “street name” presenting a resolution, Chevedden has met the reasonable requirement that he provide evidence of ownership from his broker.  Only a court dumbfounded by hundreds of pages of largely irrelevant legal argument, or one predisposed to rule in favor of rich and powerful managers, would require a shareowner to document every entity involved in the chain of custody from his broker to Cede & Co. and to get each to sign off on that chain.

Finally, I find it interesting to see how the case is being played out in the limited press coverage it has been given. I posted some thoughts on this early on at Apache Files Slapp Suit: More Support for DRS and Apache v Chevedden: More Comments. I’d now like to point to two examples since then. The first is by a trade publication, Westlaw Business (Proxy Disclosures: Activist’s Last Act in Court?, 2/5/10). It is somewhat obvious from the title that the attention grabber to the largely corporate counsel audience is. Will Apache shut down “John Chevedden’s one man shareholder rights band”?

The author of the article, Erik Krusch, appears somewhat knowledgeable about proxy issues and the idea that most shareowners don’t actually hold registered shares.

Many investors’ shares are held for them by their broker, known as holding a share in “street name”. Under these arrangements, the broker is the record holder and a proponent needs to have introduction letter sent from its broker to the company to which it has made a proposal.

Unfortunately, it is not so simple, as explained above. The broker is not the record holder; Cede & Co. is. Although the article goes on to present some balance, revealing that Apache CEO Steven Farris advised the SEC to abolish non-binding shareholder proposals, it is easy to surmise that Krusch knows who his audience is.

Apache may think Chevedden’s proposal calling for a simple majority vote “already had a lot stacked against it,” but Krusch fails to note such resolutions typically get 70% and 80% support. Again, “Apache decided to try its luck in court and if Chevedden has to foot the legal bills…he might not make quite as many proposals in the future.” Does Krusch think owners of corporations should have to foot legal bills to have issues presented on the proxy?  He doesn’t let us know, so I suppose you could say the reporting is “fair and balanced,” mostly from the view of corporate interests.

The Houston Chronicle is no Mother Jones, but Loren Steffy, their business columnist, seems to have a far better grasp of central issues. His article, When companies know better than shareholders (2/6/10) opens with the following:

I own a few shares of stock, but I’m not sure I can prove it.

I don’t have the certificates. The only proof I have is that my brokerage service tells me I have the shares and tracks the value of my portfolio.

Most shares that investors claim they own are actually held through a chain of custody involving a string of brokers and clearing firms and ultimately residing in a central depository trust.

Technically speaking, none of us actually owns the stock we think we do.

Steffy covers much of the same ground as Krusch but if he is pandering to anyone, it would appear to be the “every” man or woman who is likely to resent “Apache’s legal bullying.” Should management of a $33 billion company prevail against its own shareowner just because they can hire “high-dollar attorneys,” which they have asked the judge to make Chevedden pay for if they win or is this just a case of bullying by managers who want to remain unaccountable to owners? Steffy reveals where he thinks justice lies.

Given the reasonable nature of Chevedden’s proposal — a measure that’s been supported at other companies by far larger investors, including CalPERS, the country’s biggest pension fund — I asked Harrison (Apache’s attorney) why Apache didn’t simply adopt a majority vote on its own.

“Apache believes that its current voting rules are in the best interest of its long-term shareholders and should not be changed,” he said.

In other words, it believes its owners are better served by having less input, and it would prefer they simply shut up and fork over their money.

Then again, based on its legal arguments, Apache doesn’t even seem to believe it has owners.

That’s the real irony here. Apache CEO Steven Farris believes shareowners shouldn’t be able to file nonbinding resolutions… they shouldn’t be able to make formal requests of management. If they do file, only those who hold registered shares will be recognized. Registered shares are usually held by very small investors in DRIP accounts or by employees in 401(k) plans. Of course, the other registered shareowner, Cede & Co. isn’t going to take any action as an owner because their job is simply to hold the immobilized stock.

Given the complicated legal chains involved in “street name” registration and laws that were often written based on a misunderstanding of who really owns corporations, Steven Farris thinks he holds all the cards. Will justice prevail or do court decisions simply depend on who can hire the best attorneys?

This just in: The United State Proxy Exchange (USPX) will be filing a motion for leave to file an Amicus Curiae memorandum with the court later this week. Stay tuned. Also just in, Broc Romanek followed up previous posts at “As noted by Allen Nelson in the reactions to this case, Chevedden could have easily obtained the evidence showing his record ownership if he had his “tackle” together and made a simple request to DTC. Here is a sample of how he could have proved his ownership and avoided this mess.” The link is to a broker-like letter from Cede & Co., with information concerning the beneficial owner and company redacted.”  The letter includes an attached “Proposal to Declassify the Board of Directors of the Company.” The final paragraph in the letter from Cherl Lambert of Cede & Co. reads as follows:

While Cede & Co., is furnishing this demand as the stockholder of record of the shares, it does so at the request of Participant and only as a nominal party for the true party in interest, the Customers, Cede & Co. has no interest in this matter other than to take those steps which are necessar to ensure that the Customers are not denied their rights as beneficial owner of the Shares, and Cede & Co. assumes no further responsibility in this matter.

Searching the internet, similar letters can be found involving China Yuchai International Limited (NYSE: CYD) here and here.  Another similar letter involving Cryptologic, whose registered office in Guernsey, can be found here.  One common theme is the involvement of companies domiciled outside the United States.

Getting a demand letter from Cede & Co. to inspect the books in order to obtain a list of shareowners of record may be common practice in a bona fide proxy contest. However, it is certainly not common practice when shareowners file resolutions. Nor should it be. How many banks or brokers have been caught lying, by writing a letter evidencing ownership by a customer who is not a beneficial owner?  Even if a rare instance of such behavior can be found, the same could occur if there were a requirement to get broker letters from Cede & Co. Cede doesn’t have a list of beneficial owners. They would have to depend on the word of the bank or broker, just as 99.99% of companies do in accepting a broker letter. Let’s not put up more procedural barriers to the exercise of our rights.

By shifting from street name registration to a system of direct registration, we could all avoid the issues faced by Chevedden. Who owns what would be clear. (see Co-Filers Wanted on Petition to Eliminate Street Name Registration) Neither would we have the problem of blank votes going to management (Support Petition to Keep Blank Votes Blank) or the identity of proxy resolutions being obfuscated on voter information forms (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration). Additionally, direct registration would put a stop to most of the abuses around firms going dark (Firms Gone Dark: Another Reason to Abolish Street Name). I hope readers will consider joining with us in our efforts to stop these abuses.

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The Council of Institutional Investors is seeking a full-time analyst for an opening in Washington, DC.

Duties largely consist of extensive investment and corporate governance research; and in-depth analysis of investor-related issues pending on Capitol Hill and at key regulatory bodies such as the Securities and Exchange Commission and Public Company Accounting Oversight Board, as well as various stock exchanges. At the direction of senior staff, analysts may also engage member funds and key policymakers and their staffers to advance the Council’s dual mission of education and advocacy.

Applications must be received on or before the close of business on March 15, 2010, and must contain the following: (1) a cover letter; (2) a resume; and (3) a two-page writing sample of the candidate’s own work—no group projects please. The writing sample may be an excerpt from a previous project. Candidates who submit writing samples exceeding two pages will not be considered. Further details on Craig’s List.  Wow! This the opportunity of a lifetime for the right person.

The Ethical Performance Recruitment site has updated CSR and sustainability vacancies. Vacancies recently listed:

  • Head of Programmes – Ethical Trading Initiative, London, UK
  • Global Sustainability Analyst – Mattel, El Segundo, US
  • Ethical Trade Executive – Primark, Dhaka, Bangladesh
  • Client Account Manager – Animal Welfare Charity, South East England or Germany
  • Sustainable Development Manager – SABMillar, Woking, UK
  • Sustainability Manager – Berkeley Homes, Battersea, London, UK

Ethical Performance has also launched a new internships area on its recruitment site.

PIRC, the UKs’ leading independent research and advisory consultancy providing services to institutional investors on corporate governance and corporate social responsibility, also has a listing of jobs and internships.

CalSTRS has continuous testing for Portfolio Manager positions, as does CalPERS for positions in their Actuarial Office and their Investment Office.

There are lots of corporate governance related jobs listed at, and Juju Job Search. These run the gamut from paralegal and attorney positions to auditors and business writers. While we may have high unemployment generally, the field of corporate governance appears to be booming.

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CDV vs FAVE: More Proxy Voting Options (updated)

Frank G. Zarb, Jr., a Partner at Katten Muchin Rosenman LLP, and John Endean,  President of the American Business Conference, raise an important topic in a recent post to the HLS Forum on Corporate Governance and Financial Regulation (Restoring Balance in Proxy Voting: The Case For “Client Directed Voting,” 1/14/2010). Unfortunately, their solution would likely lead us essentially back to a restoration of “balance” through what amounts to “broker voting.” Mark Latham’s proposal for “Feed-based Automated Vote Emulation” (FAVE, see Investor Education On Proxy Voting, VoterMedia Finance Blog, 1/29/2010) based on the concept of Proxy Voting Brand Competition offers more promise. Let’s take the best elements from both proposals.

As Zarb and Endean point out, “the voting rate among individual investors hovers at the 20% level.  Companies that mail their investors a notice that the materials are available on the internet – in lieu of mailing the all materials in paper – have seen even lower voting levels in the 5% range.” They attribute the low turnout to “busy lives” and likelihood that “reviewing and completing multiple voting forms along with related materials is not a center ring concern.”

As Latham puts it:

It’s not that we retail investors lack intelligence. We lack the time and expertise to analyze proxy voting issues – board elections, executive compensation, mergers etc. We lack the economic incentive to spend the time and to gain or buy the expertise. So those who do vote tend to follow the board’s recommendations – the only professional advice conveniently available.

By contrast, institutional investors are much better organized to use specialized professionals for voting decisions.

Most people realize there’s no point in casting uninformed votes just for the sake of voting. That plus the difficulty of becoming informed are key reasons why many do not vote.

Under CDV, a shareowner could provide their broker with advance standing instructions for the voting on specific types of proposals “that are sufficiently clear that the broker would not have to interpret standing instructions when applying them to the proposal.  An example is a company or shareholder proposal to de-stagger the board of directors.” The voter instruction form provided to each shareowner would be tailored to them, indicating which proposals are the subject of standing instructions and providing them with a means to over-ride their previous instructions.

I like this aspect of the Zarb and Endean proposal on CDV. Unfortunately, very few shareowners would be willing to sit down and fill out a questionnaire that lists typical shareowner resolutions, hopefully also explaining the pros and cons of each. If they were willing to do that, they’d probably be voting already. The most effective way to educate shareowners on these issues would be to expose them to the policies developed by institutional investors and encourage them to compare policies as a whole and/or as applied to specific votes.

Many shareowners could eventually be encouraged to undertake such exercises. However, it is mostly likely to be a gradual process. Education will mostly likely come one issue or one company at a time. Most shareowners faced with such a questionnaire would probably ask for other options. The default offered by Zarb and Endean’s CDV proposal consists of choosing one of the following options to ba applied to all votes:

  1. in proportion to other retail shareholders;
  2. in a manner consistent with the board’s recommendation; or
  3. in a manner that is contrary to the board’s recommendation.

If a participant did not choose one of these default elections, no vote would be recorded on matters with respect to which the shareholder has not otherwise affirmatively cast a vote.

I call option 3 the “bomb throwing option.” Why would individual own a stock and provide instruction to always vote against the board’s recommendation? That makes no sense, especially when applied to a whole portfolio. Option 1 allows your vote to count toward forming a quorum but would otherwise have no effect. Marking none of the three options would deny your vote to the quorum. Neither would appear rational on a predetermined basis for an entire portfolio. That leaves option 2, which would have an effect very similar to broker voting. We can do better than blind trust in all the boards of all the companies in our portfolio on every issue. Think of giving such a blank slate to a politician.

In contrast, Latham’s proposal would rely on “proxy voting feeds,” similar to blog RSS feeds, that would have a standardized format for transmitting and receiving proxy voting decisions. “Anyone could publish a feed, and anyone could subscribe to any published feed. You would instruct your broker to vote your shares according to the decisions in your chosen feed. You could change your choice of feed at any time, and manually override any specific voting decision.”

These feeds, for example, could be provided directly by institutional investors, public interest groups and others. I could set up my feeds to vote with the Domini Funds, if they own the stock and announce their vote in advance. If Domini doesn’t vote, vote like Florida SBA. If neither vote, vote like CalPERS, then CalSTRS, TIAA-CREF, etc.

More likely than direct feeds from individual institutional investors or advocates, initial feeds would probably come from aggregators like,, or I’d like to see a system that allows me to set defaults by resolution type AND by the voting practices of trusted brands. Let’s give shareowners real options… and options that will eventually encourage them to obtain an education by conducting their own comparisons, whether of proxy voting policies or the basis for brand reputation.  Latham’s paper also offers some reforms that will help us to get from here to there, like “data-tagging (e.g. XBRL) of proxy and vote filings, to facilitate creating public databases.”

I’d like to see further discussion of such proposal and exploration of all options. The Corporate Library Blog provided a good start with the following: “I’d like this if it also offered investors the opportunity to have their proxies voted according to the recommendations of independent sources like RiskMetrics or according to the guidelines of groups like the Council of Institutional Investors, the Shareholders Education Network, or the organizations participating in Moxy Vote.” (“Client Directed” Voting, 2/14/10)

Larry Eiben of also raised important issues in a letter to the SEC dated November 19, 2009. Among his many thoughtful recommendations is the following:

The Commission should pass a rule that states that a shareholder has full control to request that a proxy ballot or VIF be delivered electronically to the voting platform of his or her choice (e.g., as one may select a physical address or an e-mail address). Such a rule would compel participants to “plug in” to electronic voting platforms that are being developed. Consequently, distributors and tabulators would quickly realize that a central dissemination and collection point may provide a nice solution to the inefficiency of attempting to build an interface with each platform separately. Or, in lieu of a central source, such a rule would encourage the development of standardized file formats and procedures for electronic voting that would expedite progress.

A January 20 Moxy Vote Blog, Want better governance? Here is your silver bullet, raises a final important point, conflicts of interest.

It is of even greater importance for regulators to ensure that a shareholder has full control over the delivery of his/her proxy ballot because there are conflicts of interest among industry participants that could derail the development of electronic voting platforms.  The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares).  As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance.  By giving delivery control to the shareholder, we’d create a proper check and balance on the proxy distribution agents that otherwise may not have incentive to engage with all retail-friendly electronic platforms.

Client Directed Voting, as outlined by Zarb and Endean, has some very good elements… like the ability of creating “default” proxy voting policies, much like those used by institutional shareowners. However, it falls short in failing to recognize the potential conflicts of interest outlined in the above cited Moxy Vote Blog post. “The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares).  As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance” or what is best for the individual shareowner.  Delivery and feed subscription control must go to the shareowner.

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PRI Is Not Just PR

A new white paper, “Why the PRI Is Not Just PR,” is available as a free download from The Corporate Library’s website.

The United Nations’ Principles for Responsible Investment (PRI), launched in 2006, have been endorsed by more than 670 asset owners, money managers, and investment service providers who have pledged to incorporate environmental, social, and corporate governance (ESG) issues into their investment analysis and ownership policy. At first glance, the Principles can seem vague: what exactly does it mean, one might ask, to “incorporate ESG issues into investment decision-making” or “seek appropriate disclosure on ESG”? The Principles are explicitly “voluntary and aspirational,” and signing on to them might seem like a mere marketing gesture. However, the sixth of the Principles is a promise to report on an entity’s progress toward implementing all of them, and in August 2009 five organizations were removed from the signatory list for failing to make such a report.

The report goes on to describe each of the Principles, provides guidance on what each is about and on how to comply.

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Firms Gone Dark: Another Reason to Abolish Street Name

Thanks to Jesse M. Fried for signing on to our draft petition to the SEC to abolish street name registration. (see also, Co-Filers Wanted on Petition to Eliminate Street Name Registration, 1/13/10 and Street Name Registration: An Antiquated Idea, HLS Forum on Corporate Governance and Financial Regulation, 1/30/2010) More important, Fried reminded us that moving to a system of direct registration would also represent a significant step in ending the abuses that often occur at Firms Gone Dark, which he explored in a paper by that name.

Securities laws generally permit firms to exit from mandatory disclosures even though their shares are held by hundreds (or even thousands) of investors and continue to be publicly traded if two
conditions are satisfied:

  1. trading in the firm’s securities is moved exclusively to the “Pink Sheets” over-the-counter (OTC) market; and
  2. the firm does not have any class of securities outstanding with three hundred or more “holders of record.” (section 12(g)(4) of the Exchange Act)

Since “holder of record” (see 17 CFR Section 240.12g5-1(a)) is the party “identified as the owner” of the security on the firm’s records, a firm with thousands of real (“beneficial”) owners can go dark. Fried describes the phenomenon, considers the desirability of mandatory disclosure and suggests that firms only be allowed to go dark if a majority of public shares (other than those held by insiders) are voted in the affirmative and it meets the two existing conditions.

Fried cites two previous efforts at reform.

  1. A Petition for Commission Action to Require Exchange Act Registration of Over-the-Counter Equity Securities was filed on July 3, 2003 by several institutional investors to include beneficial owner holding securities in “street name” as holders of record.
  2. In 2006, the SEC’s own Advisory Committee on Smaller Public Companies a recommended the SEC change the definition of “holder of record” to “beneficial owner.” (see Final Report of the Advisory Committee on Smaller Public Companies (April 23, 2006).

Either strategy (as well as that of our petition to require direct registration) would significantly reduce the number of firms going dark. However, the proposals “would not eliminate insiders’ incentives to undertake value-decreasing exits in order to expropriate value from public investors.” “Reverse stock splits and repurchase tender offers conduced in the shadow of an anticipated exit from mandatory disclosure can be used to cash out public investors at less that the actual value of their shares.”

While we favor Fried’s requirement that going dark be put to a vote of publicly held shareowners, we do believe acceptance of our petition would dramatically reduce abuses, since it is much easier to get below 300 “registered” owners when most are held in the name of Cede & Co. than it is to get below 300 actual owners under direct registration.

Take a look at some of the cases that have “gone dark.” From the petition by institutional investors:

“When the public’s investment interest was at its peak, SmartDisk was only too happy to access the public markets to finance its ideas. In these times, when capital-raising is difficult for technology companies with little or nothing in the way of earnings, SmartDisk’s management would callously plunge over 6,000 public investors into the dark, depriving them of the ability to monitor the management of the $17 million in total assets remaining from their original investment.”

United Road Services had assets of $100 million and 6,000 beneficial owners when it went dark in 203 with 294 holders of record. From Fried’s paper, “Over a twelve-month period beginning with the announcement, firms going dark experience abnormal negative returns of 16 percent, with these returns becoming more negative as the period lengthens.” The vast majority of firms not required to report provide little or no information to public investors. That makes it virtually impossible to monitor for self-dealing or for even normal business activities.

I encourage readers to sign on to our petition by e-mailing Jim McRitchie or Glyn Holton. Of course, we are also still looking for additional support in the way of papers like Jessie Fried’s Firms Gone Dark. Please let us know of additional examples where “street name” registration is problematic.

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CorpGov Bites

“In many ways, 2010 is the Foundation Proxy Season. By next year, the world will be changed. It is likely that both say-on-pay and proxy-access measures will be mandated. Directors will undoubtedly face greater scrutiny and more challenges than ever before. As a result of these impending challenges, boards must use the 2010 season to lay a strong foundation that prepares them for the future. That means building relationships with investors and strengthening management teams and boardroom rosters.” (This Proxy Season: Bowling for Ballots, Directorship, 2/11/10) Like always, Patrick McGurn provides the best insights into this year’s proxy season.

For excellent analysis of Citizens United, see Jay Brown’s Rallying place for action seems to be

For companies trying to figure out how to address the new disclosure requirements related to board qualifications, leadership structure, risk oversight, etc., Broc Romanek has you covered, offering up samples at Blog. (Samples: Companies Complying with the SEC’s New Rules, 2/11/10)

Ceres, in collaboration with Bloomberg and UBS, launched a new benchmarking study today called Murky Waters: Corporate Reporting on Water Risk.” The report (available here) ranks 100 publicly-traded companies in 8 water-intensive sectors on their water risk disclosure: beverage, chemicals, electric power, food, homebuilding, mining, oil & gas, and semiconductors.

Senate Bill 1007, by Democratic Sen. Loni Hancock of Berkeley, would require candidates for board seats with the California Public Employees’ Retirement System and the California State Teachers’ Retirement System to file ongoing campaign contribution and spending reports during and after an election. (Bill would boost CalPERS, CalSTRS election transparency, From The Capitol, 2/10/10)

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Proxy Voting Made Easy

David Bogoslaw, writing for BusinessWeek, notes new services like Moxy Vote—and upcoming regulatory changes—may boost the level of individual investors’ participation in shareholder voting. (Proxy Voting Made Easy, 2/10/2010)

Our hope is that is also will allow shareowners to vote more intelligently by letting the see how others are voting and by providing abbreviated reasons. Shareowners can vote like their favorite brands, using services like Proxy Democracy and Good to see mainstream media picking up on this development.

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Footnoted is now a part of Morningstar

For years I’ve been fascinated and sometimes shocked by the revelations of Michelle Leder on * Yesterday, I held my breath when starting to read Morningstar acquires footnoted!

While she wasn’t able to negotiate for keys to a corporate jet, or any of the other “perks” she frequently discusses in her posts, I as delighted to see the arrangement will allow her to continue her work but will enable her to reach a larger audience. That’s great.

Today, she reviews Eli Lilly and Company. “What’s interesting here is that the company touts its progress on “the little stuff” while glossing over the fact that the big dollars continue to flow to the top executives, even though it admits that shareholder return has suffered.” (Looking past “the little stuff” at Eli Lilly…, 2/10/2010)

Also check out FootnotedPro.

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Directors Forum 2010

First, a precautionary note about this post. These are strictly my impressions. There is no intention here to present juicy findings with regard to any corporation, fund, individual etc. My purpose is simply to help facilitate dialogue and understanding.  Keep this in mind as you read my notes, as well as the following. One of the panelists from a government agency began with the standard disclaimers about how what he said was his opinion alone and did not necessarily reflect the views of his agency. Ted Mirvis, a partner with Wachtell, Lipton, Rosen & Katz interrupted, as I recall, saying something to the effect that he not only disavows the applicability of any of his statements to his firm, he also disavows their applicability to himself. That got a laugh, but says it all. The conference was the perfect venue for throwing out ideas and seeing what sticks… what resonates with those attending. We can learn a lot from that.  Of course, there were also plenty of hard facts.

Your comments and especially your corrections are welcome. To comment directly on the blog, you’ll need to register first. Just press the “No comments” button and it wil step you through registration, if you aren’t already registered. (This process cuts down on spam.) If you don’t want to bother registering, you can always e-mail your comments directly to [email protected]. Your feedback on my coverage, the topics and the conference itself are important to me.

Prior to the dinner, there was a networking reception held outside the Joan B. Kroc Institute for Peace & Justice… a wonderful facility in a beautiful setting overlooking the northern part of San Diego. My little point and shoot camera can’t do the place justice. I’m sure the Forum will have much better photos on their site, perhaps on the Conference Materials page where you will find a wealth of studies, books and other resources.

Keynote: The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery.

At the dinner to kick off Directors Forum 2010, Strine’s main point seemed to be that we can’t expect corporations to act in the long-term interest of shareowners if most investors are rewarding short-term performance. He looks at corporations as republics, rather than direct democracies. Regarding proxy access, he appears to favor the opt-in option to encourage innovation without imposing a government mandate. Shareowners who propose changes should have long-term holdings, whereas most activists hold only a short time. They should have a substantial positive interest and disclosure should be required so we know they aren’t shorting.

Adolph Berle discussed separation of ownership from management and control but now we have separation of ownership from ownership. Too many fund managers are looking out for their own interests, rather than those of beneficial owners. Hedge funds are turning over their shares three times a year. Active mutual funds are holding only for a year on average. At the NYSE turnover was 130% in 2008 and 250% in 2009. Owning Intel 14 times in 10 years isn’t being a long-term owner by Strine’s measure. Institutional investors have been too little concerned with risk management and utilizing leverage. Too many are focused on getting rid of takeover defenses, stock buy-backs and replacing CEOs who don’t yield the highest short-term returns. We’ve been driven to the point that 280 out of the S&P 500 spent more on stock buy-backs than on investments.

Strine ended by quickly throwing out some reform ideas to consider. I didn’t get them all down but here are a few:

  • Pricing and tax to discourage short-termism.
  • Build fundamental risk analysis into corporate governance measures.
  • Compensation of investment managers based on the horizons of beneficiaries and beneficial owners.
  • 401(k) and college plans consistent with those time horizons.
  • Indexes should act and vote consistent with long-term
  • Limitations on leveraging and disclosure by hedge funds
  • Fixing the definition of “sophisticated investors.” Many trustees are sophisticated investors and shouldn’t be able to take their funds into unregulated pools. If pools dry up, that may lead hedge funds to disclose, since they need that capital.
  • We need to know more about hedge funds – your positions, your voting policies, etc.
  • Investors should focus less on leverage and gimmicks, more on real cash flow and perfecting business strategies. Let’s get away from checklist proposals.

See also Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, The Aspen Institute.Linda Sweeney Also of note is Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10. Most of the companies which excel in the employee satisfaction are privately held. Among those that are public, company founders or families have a disproportionate ownership stake. These firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective.

Welcome & Introductions from Linda Sweeney, executive director, Corporate Directors Forum; Larry Stambaugh, conference program chairman, Corporate Directors Forum. I must say, Linda, Larry, Cyndi Richson and Jim Hale have built this conference into a premier event.

Plenary Session: Shareholder Hot Topics
Moderator Cynthia L. Richson, president, Richson Consulting Group; former member, PCAOB Standing Advisory Group, former head of corporate governance, OPERS & SWIB. Panelists – Patrick S. McGurn, special counsel, RiskMetrics Group , ISS Governance Services; Jennifer Salopek, chairman, Charlotte Russe Holding, Inc. principal, ARC Business Advisors LLC; Andrew E. Shapiro, president, Lawndale Capital Management, LLC; John Wilson, director, Corporate Governance, TIAA-CREF.

Cynthia RichsonAgain, there was some focus by panel members of long-term vs. short. Are compliance driven measures and the use of compensation consultants driving oversized compensation? Some seem concerned that directors are more focused on compliance and in developing a plan that can be explained than they are in coming up with the best package. Also of concern, last year’s rally may lead to out-sized awards implemented last March or April.

As several others at the conference also pointed out, options are a vestige of the tax system… better to see restricted stock granted as performance targets are met. The feeling expressed by many is that the tax system shouldn’t be driving the form of C-Suite pay. There is also a tendency by a shareowner elite to focus on exit that leads many companies to underinvest in strategy, R&D,  and management systems.

Shapiro sees a wave of management led buyouts on the horizon as well as activism by creditors to address over leveraged balance sheets and liquidity problems. He is buying up debt that can be converted to equity… reamortizing balance sheets. He expects this to continue for several years because of limited economic growth. Management is likely to see the light at the end of the tunnel first and will use that advanced knowledge to look for private buyout opportunities. He sees too many no-shop clauses, rights of first refusal and other deal protectors that give a control premium to management. In these situations, independent directors should seek real competition through an auction.

John Wilson was asked about how proxy access would be impacting TIAA-CREF. He responded that ideally they will have access rights and never use them. Just having that power should lead to more dialogue between shareowners and companies. They will look at each situation individually and may side with as access filer or management.

Pat McGurn said these types of contests will be management’s to lose, not to win. RiskMetrics will need to be convinced of the need for change. It will be something of a last resort, like just vote no campaigns. Many are likely to settle out before proxies are finalized, either through trade-offs or board enlargement. He also noted that out of 12,000 board candidates up for election last year, fewer than 100 didn’t get elected. Many such contests are coming at companies that don’t have majority vote requirements.

Shapiro and others pointed out the real impact of proxy access may be overblown, since not much will be saved by having a universal proxy card. Challengers will still need to campaign and that costs money. Additionally, many hedge funds won’t use it because of the change-in-control exclusion.

Asked about liquidity, Wilson said at TIAA-CREF it is driven more by economic conditions than any growing net-flow of baby boomers out of the workplace. Companies should see long-term shareowners as their allies, not those who acquire rights just before the proxy vote. Again, emphasized the need for constant communication.

Salopek said one of the advantages she has found in having a split chair is increased dialogue with shareowners. Shareowners find it more difficult to talk about concerns, such as about CEO pay, when the CEO is also the chair.

Shapiro emphasized the need for communication, citing its lack as the biggest reason for escalation by funds like his. He also sees that interaction as part of director responsibilities around “duty of care.”

Another panelist cited a university of Santa Cruz study that showed even one woman director on a corporate board led to greater board independence and better financial reports. (sorry, I did a quick search but didn’t find the study) That led to discussion around diversity and the need to apply thinking more broadly. I know that CalPERS and CalSTRS are working to build a pool of potential candidates for proxy access nominations. Diversity will play a large part in developing the list.

Shapiro gave some advice concerning annual meetings, pointing to Warrn Buffett’s practice of calling on individual committee chairs to report their respective parts of the annual report. Also some discussion around virtual meetings with Intel pulling back on their virtual-only meeting, but that web broadcast would allow many more to participate and would make them a real event that could generate a lot of publicity and positive dialogue. (see my posts on this from 1/20/10 and earlier same day)

Wilson’s final advice included papering in a day or two of engagement for directors with shareowners before the meeting. Shapiro similarly recommended calling your top 10 shareowners to hear their concerns… actually check in with several types. Keyword for the panel — communication. Further reading: Activist Shareholder Dialogue, Andrew Shapiro.

Plenary Session: Shareholder Rights AND Responsibilities

Moderator    The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery. Panelists – Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz; Brandon J. Rees, deputy director, office of investment, AFL-CIO; Lynn A. Stout, professor, Corporate and Securities Law, University of California, Los Angeles School of Law; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.

We were reminded that individuals still own about a third of all shares, mutual funds and ETFs are the next largest holders with pensions coming in third with about 20%. Turnover by all seems to be going through the roof. While it was about 150% in the early 2000s, it accelerated to 200% and last year 300%.

Among the most pressing issues this season for labor are “say on pay” and proxy access.  Compensation plans aligned with long-term interests and holding. Restricted stock awards should be held for five years and preferably beyond retirement. When chasing return and trying to beat the market, active managers are likely to be little concerned with corporate governance or proxy issues. Yet, ideally these should factor into investment decisions. Labor would like to see reforms in the tax code and a very small transaction tax to discourage turnover.

Turner was largely in agreement with Rees up until that transaction tax. He sees the need for taxreforms, greater transparency and much more dialogue, as well as a heightened fiduciary duty that would include better disclosure of conflicts of interest. All funds should have to disclose votes and policies. He also sees too many funds voting for poorly performing corporate directors. As I heard this last point, I couldn’t help thinking, “Yes, but how do we know which are the poorly performing directors?” Maybe the new disclosures required by the SEC will begin to give clues.

Ted Mervis noted a 2003 Conference Board report that investment fundsshouldn’t compensate on a quarterly basis. Yet, that isn’t likely, because funds with the highest returns this year attract the most capital next year… even if there is no correlation in the performance for both years. Perhaps sharowner democracy amounts to “faith-based” corporate governance, since there is so little evidence that shareoweners are really in it for the long-term.

There was some mention that corporations are more likely to talk to activist funds than indexed funds, even though they are less permanent shareowners. I presume this is because activist funds are more likely to spend time and money analyzing the issues, whereas indexed funds, wanting to minimize expenses, may do less.

Stout said there is decades of evidence that trading eats up about 1.5% of return each year. The greater the sharowner power, the higher the issuers turnover.

Rees said he supported indexing, long-term investing, defined benefit plans, disclosure of proxy voting and a reassessment of securities lending practices and rules.

Mervis thinks too many directors may be knowing each other “by name tags” because of increased turnover and less collegiality.

Strine seemed to put forth the idea that shareowner rights aren’t inherently good. In fact, maybe we should embrace shareowner ignorance. Increasing leverage to chase returns can lead to ruin. He agreed with Stout, we need higher fiduciary standards for investors.

Stout seemed disposed to a small transaction tax and thought ERISA standards are needed to limit what funds can invest in. It is also time that companies looked at adopting bylaws limiting those who can file bylaw proposals to those without certain conflicts and derivative positions… maybe shareowners should have to hold for two years. That got a lot of attention from directors in the audience who virtually swarmed Stout at the panel’s conclusion.

For further reading see The Mythical Benefits of Shareholder Control (Stout, 2007) Fiduciary Duties for Activist Shareholders (Iman Anabtawi & Lynn Stout, 10 April 2009) Find more reading from several of the panelists on the Conference Materials page. Personally, Lynn Stout is one of my favorites. I don’t always agree with her conclusions, but she is certainly a creative and stimulating thinker.

Plenary Session: The Fast Changing Regulatory Landscape: Judicial, Congressional and Executive Developments

Moderator    Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz. Panelists    Rhonda L. Brauer, senior managing director, corporate governance, Georgeson; Byron S. Georgiou, of counsel, Coughlin Stoia Geller Rudman & Robbins LLP, Financial Crisis Inquiry Commission member; Robert Jackson, Jr., deputy special master for executive compensation, Department of the Treasury (aka deputy “pay czar”); Frank Partnoy, George E. Barrett Professor of Law and Finance; director, University of San Diego Center for Corporate and Securities Law.

Mervis went over the pending proxy access proposal and discussed legislative push for separating board chair and CEO, push against staggered boards, mandatory risk management committees and enhanced disclosures. Some boards are getting ahead of the ball by passing their own measures granting shareowners a say on pay but limiting it to every three years.

Brauer advised boards to be ready with their own proxy access proposals.What alternative does your board want if given and opt out option. Be ready for that possibility and check with your shareowners first.

Jackson advised to look at how your compensation policies might be incentivising risk. Have a discussion before the fact with your shareowners and disclose the process you use to think about risk. Too many financial intermediaries are making decisions that extend over years but are paying bonuses based on only yearly returns.

Partnoy thinks reviewing a “worst case” scenario might be a useful exerciseFrankk Partnoy for most companies in developing a risk profile. Partnoy expressed his desire to see financial institutions treated differently.

Georgiou noted the Financial Crisis Inquiry Commission got an enormous volume of google searches during its first hearing. Regulators can’t keep up with innovation and need market mechanisms to enforce behavior.

One key reform might be a requirement to have underwriters hold a portion of the securities they create. They should be required to eat their own cooking, maybe also institute clawback provisions for their earnings. Capitalized gains and socialized losses doesn’t work. The issuer paid model is faulty. Even CEOs recently asserted no one should be too big to fail. Discussion around a resolution authority to take down such companies without risk to the larger economy. Problems at seven or eight firms shouldn’t be allowed to infect the whole system.

Further reading, see Frank Partnoy’s posts on the Huffington Post and the Conference Materials page.

Lunch Panel: Bad Loans, Gatekeepers and Regulators – Is change on the Horizon or just a Mirage?
Moderator Lynn Turner, managing director, LECG, former chief accountant, SEC; trustee, AARP, Colorado PERA. Panelists – Charles Bowsher, former Comptroller General of the United States & Head of the GAO, director, the Financial Industry Regulatory Authority (FINRA); Kristen Jaconi, former senior policy advisor, for Domestic Finance, US Department of Treasury, former senior counsel to Michael Oxley, US House of Representatives; Barbara Roper, director, investor protection, Consumer Federation of America, member, PCAOB Standing Advisory Group.

Bowsher sees at least part of the problem stemming from traders getting essential control of several banks, like at Enron. Safe and sound banking is important to reestablish. Favors a risk regulator with real stature but is worried that legislation that is 1700 pages long fails to focus.

Roper sees the idea of an individual systemic risk regulator as a reform in name only, since they wouldn’t have the tools to do the job. They need to have the staff, tools and the authority,  otherwise reform will be a mirage. See her testimony to Congress here. What we need, if anything is to be accomplished, is a fundamental shift in how we see regulation.

Jaconi says we aren’t thinking big enough. The center of arbitrage is London, not New York. We need to be thinking on the scale of the IMF. Another point she emphasized was the importance of inspections and examinations. Training inspection staff will be critical but there is little notion of that in current proposals.

The consensus of the group seemed to lean in the direction of mostly mirage with some substantive reform. The public has embraced say on pay but watered down derivative regulations appear likely to mostly miss the mark.

Plenary Session: Risk Management: Monitoring for Known and Unknown Risks Moderator   James Hale, former EVP, general counsel & corporate secretary, Target Corp.; director, The Tennant Company. Panelists    Heidi M. Hoard Wilson, VP, general counsel & corporate secretary, The Tennant Company; Stephen A. Karnas, director, Mars, Incorporated; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.

Wilson discussed their extensive process at Tennant, from weekly meetings, board involvement, measuring probability and potential costs, disaster recovery plans, their ranking process, supply chains, etc. She discussed the need to pay special attention to sole source suppliers. You need to know who to turn to if they go bankrupt.

Karnas described his experience at Mars and their use of a chief risk officer primarily functioning as facilitator. Their process is top down as well as bottom up, a little different than that of their recent acquisition, Wrigley, which views risk primarily from a centralized perspective. He discussed how each work and how they are likely to be integrated. Interestingly, the Mars board gets very involved, apparently traveling on a bus, during quarterly Board weeks, to their factories so they can view the production process and operations and become very familiar with risk at the core business level.

Turner discussed his approach as one of finding out keeps them up at night. Ask your external auditor what are the top five risk areas at your company and at the competition. Ask the executives the same and note differences. What are the key trends in marketing, spending rates… key dashboard issues. How do you get to know risks that don’t get communicated? He stressed the need for a bottom up process, as well as top down.

The consensus of the group was that risk is an issue that should be addressed by the full board, not shuffled off to an individual committee… although it may be important for the board to get input from multiple committees.

Further reading: see Risk Management and the Board of Directors, Wachtell, Lipton, Rosen & Katz, 2009;  Managing Corporate Risk,; and Risk roundup 2010,

Plenary Session: A Compensation Committee in Action (A Socratic Dialogue)
Moderator    Larry Stambaugh, chairman & CEO, Cryoport, Inc., principal, Apercu Consulting. Panelists – James Hale, former EVP, general counsel & corporate secretary, Target Corp., director, The Tennant Company; Garry Ridge, president & CEO, WD-40 Company; Anne Sheehan, Director of Corporate Governance at CalSTRS; Matthew T. Stinner, senior managing director, Pearl Meyer & Partners.

Gary Ridge

This was an interesting play-like exercise that was so much fun, I failed to take notes. However, I do recall the pretend CEO using that famous line, “It depends on what the meaning of the word ‘is’ is,” in response to a question from the compensation committee. It was a good discussion of the factors of what goes into pay for performance and the importance of what gets left out that isn’t recognized until after the fact.

Key points: Most companies don’t factor in consideration of performance relative to peers or even the market… and they probably should. Plans should be simple and easily understood but driving compensation based on a single metric, like net income, probably results in too narrow of a focus. Payouts should be held for 3-5 years to emphasize longer term thinking. Further reading: Compensation Committee topics on and Compensation Season 2010 (Wachtell, Lipton, Rosen and Katz)(PDF).

Dinner and Keynote Speaker; John J. Castellani, president, Business Roundtable

Castellani asserted there is a cultural divide between public thinking reflected by Congress and that of business leaders that is not unlike the divide between C.P. Snow’s scientists and nonscientists. The public wants many thing from business: high quality, employment, good stewardship, earnings, shared sacrifice. They see little difference between finance and other sectors… lumping all large businesses together. Board attention is generally more concentrated on good earnings and stock performance.

Congress suffers from ignorance regarding how businesses work. They think boards are constituent based. They think boards operate like Congress does. The prevailing view is that directors are rubber stamps of CEOs. Yet, the truth is that CEOs are practically an endangered species (my term, not his)… going from a tenure of 8 1/2 years in 2006 to 4.1.  He sees most of the reforms like “say on pay” and separating CEO and chair positions as a “relief valve” for American frustration with bigness and fears there will be unintended consequences.

We need to help politicians understand how businesses work.  He noted that the costs and performance of the U.S. health care system have put America’s companies and workers at a significant competitive disadvantage in the global marketplace. (see Business Roundtable Health Care Value Comparability Study) People hate insurance companies and banks. They are looking for shared sacrifice.  For further reading: John J. Castellani’s blog entries on the Huffington Post.

Plenary Session: Insider’s View of Surviving a Proxy Contest
Moderator  Karin Eastham, director, Amylin Pharmaceuticals, Inc., Illumina, Inc., Genoptix, Inc., Geron Corporation. Panelists – Daniel M. Bradbury, president & CEO, Amylin Pharmaceuticals; Daniel H. Burch, chairman, CEO & co-founder, Mackenzie Partners, Inc.; Suzanne M. Hopgood, director of board advisory services, National Association of Corporate Directors director, Acadia Trust Realty, Point Blank Solutions Inc.; James P. Melican, senior advisor, Ridgeway Partners, former chairman, PROXY Governance, Inc.; Alison S. Ressler, partner, Sullivan & Cromwell LLP

One discussion during the session was the problem that during a proxy fight, particularly in a three card proxy fight, shareowners can split their vote between cards, picking the best directors from each advocate. However, that opinion was not universal. The opposing viewpoint was that slates are good because they are more likely to result in an integrated board and directors with Suzanne Hopgoodcomplimentary vetted skills.

It was a very informative session focused mostly around Amylin Pharmaceuticals, in addition to several experiences of Ms. Hopgood. Aside from three proxy cards at Amylin, the company also had three previous CEOs on their board, one as chairman. Takeaway points for me were as follows:

  • Things generally go worse when the company refuses to talk.  Earlier is better.
  • RiskMetrics doesn’t seek to review a strategic plan from dissident slates Dan Burchunless they are seeking a change of control.
  • Most dissident groups are giving more thought to their director candidates these days… no longer mostly relatives.
  • Hire a good proxy solicitor.
  • Review corporate governance practices and consider eliminating those that are unpopular with media, like shareholder rights plans (poison pills). If you are going to make changes, do it before the contest.
  • Identify possible conflicts of interest all around.
  • Don’t retain CEOs on the board after they leave.
  • Pay close attention to board skill sets and succession planning.
  • Learn what shareowners are thinking.
  • Dissidents shouldn’t assume they’ll get the votes if the stock price tumbles.

Plenary Session: What is the Director’s Job Today, and How Does He or She Prepare for It?
Moderator    Kenneth Daly, president & CEO, National Association of Corporate Directors. Panelists – John T. Dillon, director, Caterpillar, Inc., Kellogg, Company, DuPont; Matthew M. Orsagh, director, Capital Markets Policy, CFA Institute Centre for Financial Market Integrity; Margaret M. Foran, VP, chief governance officer & secretary, Prudential; Richard H. Koppes, director, Valeant Pharmaceuticals International, former general counsel, CalPERS.

Ken Daly explained that NACD had worked with CII, ICGN, AFL-CIO, BRT and others to develop 10 principles, which they have posted on their website and on the Conference Materials page. He urged all directors to download the principles, review them and provide NACD with feedback. The idea is to empower boards to lead the way in restoring public and investor confidence. “If we don’t act, lawmakers will do so with prescriptive rules and regulation.”

One interesting finding from a recent survey was that board members are less happy with agendas than CEO/Chairmen. Strategy is top priority for boards in the coming year. Interestingly, the conference made use of their ability to rapidly survey those in attendance regarding various topics. We simply pressed numbers on a little remote control type gadget and in seconds they displayed the results. This worked smoothly until this panel where there was one glitch. Asked if information received from management engages the board’s expertise in planning and Matthew Orsaghexecuting strategy, the graph makes board members seem a little more satisfied than they really are, since there isn’t much difference between 51% and 49%.

Aside from the fun with numbers, I noted the following takeaway points:

  • Boards want to discuss strategy before it is fully baked; strategy is job #1.
  • Directors shouldn’t play the role of gotcha. Trust and respect are essential to board functioning. Dissent should be accepted.
  • IT expertise and succession planning deficient on many boards.
  • Balancing long and short-term strategies is key… see Aspen Principles.
  • Put something in your proxy regarding succession planning.

Further reading: The New and Emerging Fiduciary Duties of Corporate Directors by Elizabeth B. Burnett and Elizabeth Gomperz.

Keynote Speaker: William A. Ackman, founder and managing partner, Pershing Square Capital Management LP. Apparently, Ackman was on a recent edition of Charlie Rose, so Frank Partnoy couldn’t resist beginning the interview as if he were Charlie Rose.

With all the talk about the need for long-term holders, that was one of the first questions. Pershing Square typically holds for about 2.5 – 3 years. Ackman described his process, which mostly involves picking stocks that are undervalued (spread between price and value) and then he works on a strategy to get the market to recognize that value.

He described his efforts at Wendys, which owned Tim Hortons. The chains weren’t really a great fit because of differences in how they operate and management styles, so he worked to get Hortons spun off… yielding a hefty profit. Ackman believes competition for board seats will give us better candidates and will cause boards to do more self-examination. Choice will force board to adopt term limits to keep fresh.

He says boards should invite their largest holders and short-sellers to discuss any issues or concerns they may have. Try your best to understand your harshest critics. You’ll probably learn something. Asked how he’d do that, he suggested issuing a press release inviting the company’s biggest critics to call in and schedule a confidential meeting.

Another case he discussed extensively was Borders, which he believes had been consistently mismanaged and is now finally facing a possible turnaround, even though the CEO that helped them regrow the company had just resigned the night before for a better offer… with no warning.

One factor that appears to keep him invested for a longer term is reputation. If he bails out too quickly with a loss, his reputation suffers more than if he keeps a company for longer but ends up making something.

Where’s the next crisis? Akman thinks it is likely to be failed municipalities.

Pre-Conference Bonus Sessions – “Legal Issues in the Year Ahead: What Directors and General Counsel Need to Know”

Session 1: “What to Expect in Regulation,” presented by Frank Partnoy, director of USD’s Center for Corporate and Securities Law.

The sun was shining outside our beautiful auditorium at the University of San Diego but Professor Partnoy’s prognostications inside the hall were gloomy with his comparisons of the current financial crisis and the Great Depression. “This is 1931,” he said, noting that markets recovered from the 1929 crash but then turned down again. Because of the recovery (like the little bear market in 1930), he doesn’t see strong demand for reform. Like then, banks say they will reform themselves. Like their Pecora Commission, our Financial Crisis Inquiry Commission is mostly political theater. Pecora didn’t even arrive at the commission remembered for him until 1933. Our efforts could be similar. If history is a guide, it will take a couple of years.

Partnoy doesn’t see real reform on the horizon until more revelations of wrongdoing. He predicts the Volker rule will be watered down and sees an absence of commonsense in the process.

Proxy access is coming but there are still some vestiges of a federal versus state law battle. Delaware incorporated companies may already adopt bylaws and many may do so to preempt the proposed federal default rules. (Elsewhere at the conference the advice was more to be ready, once we know what the rules will be.) Partnoy described the basic outline of the proposed default, with its thresholds ranging from 1, 3 and 5%, depending on size – the 25% limit on board members so nominated and the one year holding period.

Broker nonvotes won’t count this year and that has hedge fund activists excited. They don’t care much about proxy access because the new rule can’t be used for a change in control, and that’s what hedge funds seek. Derivative and credit rating reforms may be the most important reforms on the horizon for 2010. However, strong action appears unlikely. Yes, they’ll probably pass something but there won’t be a central clearing platform for the derivatives that really matter.  Banks don’t like the idea of open source disclosure of all contracts, even on a lag basis.

Partnoy thinks the Fed will have to raise rates at some point and when they do, we may see derivative contracts implode.  Institutional investors who actually depend on rating agencies to grade risk are being naïve or irresponsible. He cited several commonly know examples where the rating agents gave companies high marks… even as companies tumbled into bankruptcy. Perhaps on of the more important provisions will be to expose credit rating agencies to legal liability.  See additional discussion at Proposed Credit Rating Reforms May Empower an Embattled Moody’s (HuffingtonPost, 1/4/2010) and Why Rating Requirements Don’t Make Sense (WSJ, 1/18/2010)

Session 2: What to Expect in Litigation, facilitated by Fran Partnoy. Panelists included Leo E. Strine, Jr., Vice  Chancellor of the Delaware Court of Chancery; Darren J. Robbins, Coughlin Stoia Geller Rudman & Robins LLP; and Koji Fukumura, Cooley Godward Kronish LLP.

Initial discussion focused around the issue of individual director liability and the fact that many funds are pushing for that. They want individual directors to feel the pain, not just be covered by D&O insurance. So far, it appears that most of the money that has come out of director pockets has come from CEOs who also chair their boards. Cases were down in 2009 because the market is up. Companies have spent up to $80 million to defend two directors. Strine offered up a bit of speculative advice. Separate director’s insurance from officer’s insurance.  Officers get most of the focus, often depleting the coverage available. Options backdating and earnings smoothing created a culture of corruption that led to the move by public funds to go after individual directors. See discussion at Insurance for A-Side D&O Exposures after Enron—A Riskier Proposition?, and Recent Developments in D&O Insurance, HLS CG&FR Bog.

There was also discussion around the fact that many disclosure only cases filed in state courts are abusive. They are filed as soon as any action happens, like an agreement to sell. Several cases discussed. Strine also cautioned to watch shortcuts regarding tax avoidance and don’t sign consents of action after the fact… like documents where management fills in the blanks later. Gimmicks are gimmicks and should be avoided. Also some discussion around a case where the company tried to sue its own internal auditors for malpractice but couldn’t.

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We Talk Long-Term Investing, but…

A study, Investment Horizons: Do Managers Do What They Say?, conducted by Mercer and funded by the not-for-profit IRRC Institute, examines the investment horizon of active equity investment managers, comparing various strategies, different geographies and styles between June 2006 and June 2009. Nearly two-thirds of institutional investor-focused investment strategies exceeded their expected turnover from June 2006 through June 2009.

Turnover was on average 26 percent higher than anticipated, with some strategies reporting turnover between 150 and 200 percent more than expected. “Short-term investing often is cited as an issue by the press, policymakers, academics, and many in the business and investing community,” noted Jon Lukomnik, program director for the IRRC Institute. “What has not been recognized until now is that this is not only particular to day traders, arbitrage funds, or others who may have short time horizons by design. When two-thirds of long only equity institutional investment products have turnover that exceeds what they themselves expect, there is a systemic issue.”

“The findings should raise serious questions for investors,” Lukomnik continued. “When managers greatly exceed their expected turnover level, the impact can be significant in terms of cost, performance, and risk that the strategy is not being managed in line with its stated investment approach.”

“A deviation in actual versus expected turnover can be a possible indicator of deeper problems with investment processes,” said Danyelle Guyatt, the head of research for Mercer’s responsible investment team and the report co-author. “Clients interested in a strategy that seeks to capitalize on longer-term trends and hold stock in corporations for longer periods need to be aware if that situation is changing and why,” she added.

The study deployed two approaches to the data analysis. First, a quantitative analysis of portfolio turnover of over 900 strategies examined intended and realized average holding periods for various investment products across different regions and styles. Then, Mercer researchers conducted a qualitative case study analysis on eight active equity fund managers. The key findings of the quantitative analysis include:

  • Nearly two-thirds of strategies have turnover higher than expected, with some strategies recording more than 150-200 percent higher turnover than anticipated. Of the 822 strategies for which Mercer had expected and actual turnover information, 550 exceeded the turnover during the sample period. The average turnover was 26 percent higher than anticipated.
  • Within the entire sample of 991 strategies, the average annual turnover of the sample is 72 percent, with some 20 percent of strategies having turnover of more than 100 percent.
  • Value managers tend to have a lower annual turnover figure than the other style types. Large capitalization portfolios have lower turnover rates than small capitalization strategies, and socially responsible investing (SRI) strategies have lower turnover than non-SRI strategies.
  • Across regions, UK, Canadian and Australian equity strategies have the lowest average turnover value, while European (including UK), international and US strategies have the highest average turnover levels.

The key insights from the qualitative case study analysis from the fund managers include:

  • Causes of short-termism [1] include volatile markets and changing macroeconomic conditions; mixed signals from clients; short-term incentive systems; and behavioral biases.
  • Fund managers recognize the potential destructive nature of short-termism even while claiming it was unavoidable. The managers indicated that short-termism potentially places short-term pressure on companies; increases market volatility; demonstrates a lack of discipline in fund managers’ investment processes; and creates a misalignment of interests between fund managers and their clients.
  • The managers also identified potential solutions to short-termism, further details of which can be found in the report. The complete study, “Investment Horizons – Do Managers Do What they Say?,” is available at and

The report goes on to briefly examine possible regulatory measures, the idea that longer client relations with money managers and others would foster longer-term holdings, and the need to reexamine just what long-term goals and benchmarks are. We need to walk the talk. Tomorrow I will post notes from Corporate Directors 2010 where this issues was also discussed repeatedly.

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ProxyDemocracy Update shares our vision of empowered investors and of corporations that stay accountable to their owners.  They’ve got a new look to the site and sent out a note updating readers on the following:

Get the latest information: ProxyDemocracy has changed its appearance — and is offering more information than ever. Visit our dynamic new Web site and check out the storyboard that explains our educational services. In addition, see how “ProxyDemocracy News’’ catches you up with reports and analysis about votes, campaigns, meetings and policy. And explore “Around the Web,” a daily update of shareholder news from a variety of sources.

Influence critical decisions:  As we head into the peak 2010 corporate meeting season, we’d like to keep you informed. Soon ProxyDemocracy will be launching a newsletter describing our activities, previewing our reports and inviting your feedback. While we have your e-mail address, under federal rules you need to opt in to continue receiving updates from us. Just enter your e-mail address and name in the “Join Our Mailing List’’’ box on our Web site. We promise not to abuse the privilege.

Change corporate behavior: Writing last month in Slate, former New York Governor Eliot Spitzer said that, just as technology has changed politics, new-media forums led by ProxyDemocracy are transforming corporate democracy.  You are on the verge of something big.

Build ProxyDemocracy: ProxyDemocracy is a one-of-a-kind resource. Ours is the only organization to show individual shareholders how big institutions plan to vote at corporate meetings — and to keep score of the proxy votes made by the mutual funds in your 401(k) accounts. As a nonprofit organization, we rely on your help. To cast your vote for ProxyDemocracy, make a tax-deductible contribution. Please click the new “Donate” box on our Web site so we can continue this exciting work.

I hope readers will check out their new site, give them some feedback and make a donation to keep their effort growing.

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CorpGov News Bites

Goldman Sachs Group Inc., trying to show it is responsive to public pressure over its pay, said Chairman and Chief Executive Lloyd Blankfein would get a $9 million bonus for 2009, a fraction of the $68.5 million payout he got in 2007. (Goldman Bows on CEO Pay, WSJ, 2/6/10) My heart bleeds for him but I still haven’t earned a dime from my 2007 investment in Goldman, a company where management certainly dominates over shareowners. We did win big last year on my “simple majority vote,” with 75% of shares voted thanks to efforts by John Chevedden,  Claire Davis of the Edward G Hazen Foundation, and Timothy Smith of Walden Asset Management. If we can democratize Goldman, we can democratize anything.

Ceres is seeking a director of investor programs to lead in their work with institutional investors and asset managers on climate change and other sustainability issues. More information about the position and how to apply. This is a great opportunity to influence and work with more than 80 institutional investors with over $8 trillion in assets.

John Chevedden’s proposal for a majority voting standard for directors won 51% at Oshkosh (OSK) on Feb. 4th, even after OSK said it was not needed because they had already adopted majority vote requirements (in a lesser form).

Most of the companies which excel in the employee satisfaction measures used by Fortune to determine their “100 Best Companies to Work For” are privately held. Among those that are public,company founders or families have a disproportionate ownership stake. Maybe one key is that these firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective. (Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10)

Download a free Environmental, Social and Governance (ESG) Research Starter Kit for Investment Risk Management from The Corporate Library. The Financial Crisis is moving such assessments from the vanguard few to a part of normal fiduciary duty. Don’t get left behind.

SEC gets governance reforms as part of BofA settlement. As Broc Romanek notes, “governance by gunpoint” settlements have typically been driven by judges over the past decade, where institutional investor are plaintiffs. Will this be a new trend for the SEC? (The SEC Enforcement Division’s Use of Governance Reforms: Something New?,, 2/5/10)

From the member area of, “Can you get attorney’s fees for causing a company to add disclosures to its proxy materials? In this case – Pipefitters Local DB v. Oakley – the California Court of Appeal said ‘no.'” However, plaintiff’s counsel (Coughlin Stoia et al.) appears to have done a sloppy job. “The amended complaint copied identically worded paragraphs from previous complaints and even included the name of one of the defendants in the those other suits.” More importantly, the implication is that you might get attorney’s fees, if done right. (Suing for Attorney Fees: Causing Company to Add Proxy Disclosure, 2/4/10)

Investment Officer II opening at CalSTRS. One of the benefits; parking is only $28/mo. Great place to work.

As the debate about the rights of shareholders to appoint their own nominees to US boards continues, the PROXY Governance (PGI) Hybrid Boards study, sponsored by the IRRC Institute, is appearing with increasing frequency in shareholder comment letters and other governance analyses regarding the SEC’s proposed proxy access rules. The study found that total shareholder returns at ongoing companies with hybrid boards were 19.1% – 16.6 percentage points better than peers. (Proxy access – hybrid boards perform for shareholders, Manifest, 2/5/10)

The Altman Group’s 2/5/10 newsletter contains informative interviews with Charles Elson, which includes a discussion of the adoption of a reimbursement bylaw, and
a guest commentary from Robert Lamm, which provides a roundup of information for the 2010 and recommended action by boards.

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Lobbying Efforts Up: More Bills Coming

The 20 trade associations and companies that spent the most on lobbying increased their spending by more than 20% in 2009 to $507.7 million, up from $418.2 million a year earlier, according to a USA TODAY analysis of reports compiled by the non-partisan Center for Responsive Politics.

The U.S. Chamber of Commerce led spending, pumping $144.5 million into lobbying last year, according to the center’s tally. That’s a nearly 60% increase over 2008 and came as the business federation battled Congress and the White House over legislation dealing with health care and financial regulation. (Lobbying industry booms in recession, 2/5/2010) And this is before Citizens United opened the floodgates.

Sen. Sherrod Brown introduced a bill that would require corporations producing political ads or engaging in other independent campaign activities to get shareholders’ approval for political spending. The “Citizens Right to Know Act,” would also require corporate CEOs to appear in corporate sponsored political ads,  much as political candidates now appear briefly on camera or are heard on a radio ad taking responsibility for a spot.

His bill also would shore up protections against foreign companies spending money on U.S. elections by banning any company that has a foreign entity as a majority owner from making political expenditures. (Ohioan takes on corporate politicking, the Columbus Dispatch, 2/5/2010) More bills to come.

Continue Reading · Organizes Around Citizens United

Shareowner organizations are working together to advance a three-pronged response to the last month’s U.S. Supreme Court decision providing much greater latitude to corporations making campaign contributions:

  1. Direct engagement of management at publicly traded companies, modeled on the work done by Bruce Freed at the Center for Political Accountability and a number of institutional shareholders, as well as under the guidelines of the Council of Institutional Investors (CII). That engagement through shareholder resolutions and one-on-one company “dialogues” typically involves (1) disclosure of a company’s soft money contributions, payments to trade associations and other tax exempt organizations used for political purposes, and grassroots lobbying expenditures; (2) disclosure of a company’s policies and procedures for political contributions and expenditures; (3) identification of persons participating in decision-making on the contributions and expenditures, and (4) board oversight of the company’s political contributions and expenditures.
  2. Outreach to the Securities and Exchange Commission (SEC), through both the Investor Advisory Committee and a direct petition requesting SEC rulemaking in this area.
  3. A letter to Congress from the shareholder community asking lawmakers to ensure that shareholders have all tools they need to ensure that decisions about political spending by public companies does not erode shareholder value and the long term sustainability of the company.

More information available at  Can shareowners wrench control over the corporations they own before managers consolidate their already often dominate positions over boards and Congress? Will company funds pour into political campaigns that benefit a broad base of long-term shareowners whose interests are closely aligned with that of the whole nation, or will they be used to reinforce a greedy few?

Robert A.G. Monks said: “The bad news is that Citizens United represents the worst judicial decision since Dred Scott; the good news is that the Supreme Court of the United States has held that there is such a thing as corporate democracy. Now is the time for shareholders to put that democracy to work to protect their own interests against boards that may want to ‘play politics’ and have no clue as to how to do so without devaluing their companies.”

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The New Normal

Stephen Barth & Joshua Agen argue our traditional market-based, capitalistic, macro-economic business environment may be entering a new era, dubbed the “new normal,” characterized by slower domestic economic growth; more government involvement in private business through increased regulation, taxation and direct intervention; a relatively weak dollar; long-term inflation risk; and overall increased business risk aversion. (Corporate Governance in the “New Normal” Business Environment, Corporate Compliance Insights, 2/1/10)

They also speculate the financial provides momentum to “opportunistic” corporate governance practices such as majority director voting, the elimination of classified boards, the elimination of broker non-votes in director elections, permitting shareholders to more easily call special meetings and proxy access.

One effect of many of these reforms is to change the relative balance of power between directors and shareholders in favor of shareholders by permitting shareholders to more easily affect director elections, as well as some of the decisions being made in the boardroom. This may result in the potential for politicization of the director election process and use of the election process for narrow special agendas that are of interest only to some shareholders.

Hmm, elections are politicized if shareowners can more easily affect director elections. If China moves to a president elected by popular vote, would we say their elections are policicized?

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Citizens United May Unite Us

Bill De Blasio, a trustee of the New York City Employees’ Retirement System (NYCERS), says his office “will work with the investor community, particularly through entities like the Council of Institutional Investors, to build a national shareholder movement behind full corporate disclosure. But this is just the beginning. Going forward we will also seek to give shareholders a greater say in whether or not companies they invest in should engage in political spending, especially if it has no limits. We will support and applaud corporations that voluntarily empower shareholders by giving them greater access to and authority over campaign spending. And we will continue to shine a light on companies that resist these reforms.” (Transparency Can Curb Corporate Impact on Elections, The Nation, 2/1/2010)

Maybe Citizens United will unite us. We’d better do it fast though. Democracy is fast disappearing.

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Delist, Relist

Noteworthy interview with Glenn Tyranski, Senior Vice President for Financial Compliance at the New York Stock Exchange.  Mr. Tyranski is a financial expert and is responsible for the financial reviews of prospective and existing listed companies. In this interview posted at BulletProofBlog, Mr. Tyranski discusses how compliance and financial oversight affect listed companies, the process by which delisted companies can return to the NYSE, and the top issues public companies faced in 2009.

While many challenges remain for companies to return to their previous positions in the capital markets, the NYSE recognizes the value of its brand to the companies themselves and to the investing public and remains vigilant in its oversight responsibilities.

Read the full text at What’s Next: The Bulletproof Interview – Glenn Tyranski on the Compliance Challenges of Being Listed on the New York Stock Exchange,, 2/1/2010.

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Chamber Outspends RNC & DNC BEFORE Citizens United

“For the first time in recent history, the lobbying, grassroots and advertising budget of the U.S. Chamber of Commerce has surpassed the spending of the national committees of BOTH the Republican National Committee and Democratic National Committee,” begins The Corporations Already Outspend The Parties, the Atlantic, 2/1/10. And, of course, that is before the decision in Citizens United.

The article goes on to note, “Republican lawyer Ben Ginsberg went so far as to say that the parties would be ‘threatened by extinction.’ And Ginsberg supports the CU decision!”

According to The Center for Responsive Politics, the U.S. Chamber of Commerce and its national subsidiaries spent $144.5 million in 2009, far more than the RNC and more than double the expenditures by the DNC. None of the contributions that made up this $144.5 million were subject to disclosure. ChambThe article discusses expenditures around defeating health care and expenditures of about $1 million each in Virginia and Massachusetts

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Disclosure Enhancements May Drive Resolutions

The Corporate Library’s free new report entitled “What To Expect During Proxy Season 2010,” states, “The SEC’s new ‘Proxy Disclosure Enhancements’ will likely dominate the coming season.”

The report also anticipates increased scrutiny of executive compensation practices, and new disclosure requirements for compensation consultants. Finally, the report expects that publication of proxy voting outcomes will be “dramatically accelerated.” (SEC Ruling on Proxy Disclosure Is Likely to Lead to Increased Shareowner Activism, SocialFund, 2/1/10)

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Of Alter Egos and Solicitations

Broc Romanek, of has drawn the attention of his subscribers to an online solicitation by Physicians Committee for Responsible Medicine “to essentially “borrow” shares in an effort meet the eligibility requirements of the shareholder proposal rule and be able to submit shareholder proposals at 11 companies (and thus advance their own social agenda)? Pretty blatant violation of Rule 14a-8(b) in my opinion.”

He thinks that because of their solicitation, “PCRM will have a hard time arguing that it intends to act as somebody’s agent or representative, which is the argument that John Chevedden has successfully made on a number of occasions. In this case, I think PCRM would be ‘dead in the water’ if a company raised an alter ego argument in an exclusion request to Corp Fin.” He’s already heard that a request for exclusion by Starbuck’s was granted by Corp Fin in December. However, as he notes, that was granted on the ordinary business basis, 14a-8(i)(7), and  “the company didn’t make an eligibility argument.”

Romanek is much more expert in these matters than I am but the “alter ego” argument put forth by Gibson Dunn & Crutcher and Wachtell Lipton Rosen & Katz was based on the noting that shareowners serve as Chevedden’s puppets, his “alter egos,” allowing him to circumvent the one proposal per shareholder limit for each meeting under SEC Rule 14a-8 (c) and be heard at meetings where he is not eligible. There is nothing in the solicitation by Physicians Committee for Responsible Medicine indicating they intend to submit more than one proposal at each of the firms with which they express concern.

Frankly, I don’t see anything wrong with trying to find shareowners who are sympathetic to your cause and offering to work with them to submit resolutions. Is that immoral? Illegal? Why?

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