Archive | March, 2010

Building High Performance Boards

The Canadian Coalition for Good Governance’s (CCGG) has issued a revised report on Building High Performance Boards. Here’s a quick overview with just a few examples of best practices highlighted — the report contains many more:

Facilitate shareholder democracy

Allow shareholders to vote for individual directors; no slates. All directors should be up for election each year – board terms should not be staggered. Adopt a majority voting policy for director elections, using language that is substantially similar to the CCGG model policy (available at Get shareholder approval before issuing 25% or more of the shares of the company as part of a transformational transaction. Report voting results on SEDAR within 5 business days, indicating the actual number of votes cast for, against and/or withheld for each resolution.

Ensure at least two thirds of directors are independent of management

Make sure at least two-thirds of directors are “independent.” Have a formal board policy that limits the number of board and committee director interlocks on the board. Report all board and committee interlocks to shareholders.

Separate the roles of Chair and Chief Executive Officer

The independent members of the board should appoint an independent board chair to function in a non-executive capacity, with a defined mandate and role. The board chair should be prepared to invest a considerable amount of time and effort, and should ideally be independent of the controlling shareholder, where there is one.  The independent chair (or independent lead director) should set board agendas with the CEO and other directors and be responsible for the quality of the information sent to directors. The CEO should be required to leave the board when he or she retires. In cases where an incoming CEO has been recruited from outside the company, the board can consider keeping the former CEO as a board member during a transition period. The board should establish an annual review process for the chair and report on it to shareholders.

Ensure that directors are competent and knowledgeable

Each director’s career experience and qualifications should be described in the proxy circular. Some directors should have financial accreditation and/or be financially literate.  All directors should demonstrate well developed listening, communicating and influencing skills so they can actively participate in board discussions and debate.  We believe that directors who hold a full-time executive position should have only one or two outside public company directorships (recognizing that there can be value in a senior executive gaining board experience in another or related industry) and that directors who are not employed full time should generally hold no more than four outside corporate directorships that take up a significant amount of time.

Maintain and disclose to shareholders a ‘matrix’ of director talents and board requirements to identify skill gaps on the board and to create a board built on a diversity of background, skills and experience. Disclose each director’s relevant skills. Build and maintain an “ever-green” list of suitable candidates to fill planned or unplanned vacancies. Have a plan in place for the orderly succession. Establish a continuing education program for directors to update their skills and knowledge of the company, its businesses and key executives, and to address ongoing and emerging issues in the functional areas of the board (like corporate governance, audit, compensation practices and risk management). Disclose to shareholders the education programs directors participate in every year.

Ensure that the goal of every director is to make integrity the hallmark of the company

To deepen their understanding of developing ethical issues, directors should read appropriate literature or attend seminars and then act accordingly. When meeting with company employees (including the CEO and other senior officers), directors should take the opportunity, whenever possible, to emphasize the importance of integrity. Directors should demonstrate a proven understanding of fiduciary duty and their role as fiduciaries.

Emphasize the importance of integrity during in-camera sessions, and consider whether the CEO and other senior officers demonstrate the right “tone at the top” to ensure a culture of integrity throughout the organization. + many more

Establish mandates for board committees and ensure committee independence

Hold in camera sessions with independent directors only, as a regular part of all committee meetings. Review committee charters every year and amend or confirm the mandate and procedures based on information received from the board and committee evaluation processes. Make sure every committee includes directors of diverse backgrounds and at least one director with significant expertise relevant to the committee’s role. Plus, many recommendations for individual committees.

Establish reasonable compensation and share ownership guidelines for directors

Require directors to own the equivalent of five years’ annual retainer in the form of shares or deferred share units within five years of becoming a director. Boards may wish to establish interim targets (e.g. 3 times annual fees after 3 years on the board) to allow the director to work toward the total requirement.

Evaluate board, committee and individual director performance

Make sure the performance review process assesses a director’s skill set against the company’s strategic plan, environment and needs. Determine and document the kinds of events that would normally lead a director to resign from the board (not meeting attendance expectations, age or change in principal occupation or place of residence, for example). Evaluate the performance of individual directors every year using a confidential peer-review survey. Disclose the performance review processes in the proxy circular in enough detail to demonstrate that there is a strong and viable system in place.

Oversee strategic planning, risk management and the hiring and evaluation of management

Financial institutions should establish a separate risk committee, made up of independent directors, that focuses on the governance of risk. Another model has every committee addressing the risks relative to their mandate within each committee then bringing its perspective to the entire board. Disclose to shareholders the board’s analysis of the primary risks of the business and describe how the corporation is monitoring and mitigating the risks.

Assess the Chief Executive Officer and plan for succession

Review succession plans for the CEO and other senior executives once a year (or more frequently) and review with the CEO the performance of his or her direct reports.

Develop and oversee executive compensation plans

The consultant should align its interests solely with the interests of the corporation and not have any other conflicting interests. The independent consultant should earn most (if not all) of its fees from the company for work performed for the compensation committee. Link compensation and risk management.

Report governance policies and initiatives to shareholders

Report in the proxy circular how and to what extent the company complies with each of the guidelines in this document. Our disclosure best practices documents (which are available at include many examples of effective disclosure. Have the chair of each committee available to answer questions at the Annual General Meeting.

Engage with shareholders within and outside the annual meeting

Provide opportunities for shareholders to have access to board members outside of the annual meeting to discuss issues that concern either party. Add an advisory shareholder “Say on Pay” resolution to each annual meeting agenda.

See also, Restoring Trust in Corporate Governance, Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Program on the Legal Profession, on Wednesday January 27, 2010.

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GRId Analysis

Subscribers to can listen to a podcast that provides a quick excellent overview to RiskMetrics Group’s new Governance Risk Indicators (“GRId”). (Inside Track with Julie: Ning Chiu on RiskMetrics’ GRId (3/26/10)).

Another good overview is posted to (United States: Adapting to RiskMetrics Group’s New Governance Risk Indicators System, 3/30/10). “In comparison to the CGQ score, which was based upon a relative ranking of the corporate governance of peer companies in any given industry group against RMG’s standards, the GRId system is intended to operate on an absolute basis so that companies are judged only on their own governance practices as compared with what RMG perceives as local best practices.”

All covered issuers will have access to a complimentary data verification tool, which will enable them to view the Indicators for their firm, as well as to verify the underlying data. All companies are advised to avail themselves of this opportunity. For more complete coverage, see the RMG site.

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Engagement Survey

In collaboration with the IRRC Institute, RMG/ISS is conducting a study of the state of issuer-investor engagement in the U.S.

As an initial step, they are seeking input from a broad base of issuers and investors on their engagement activities. They developed a short survey that investigates the issues, goals and outcomes of engagement. Responses will provide important information on the level and focus of engagement activity, insight into the expectations and experiences of both issuers and investors, and illuminate how the engagement process can become more productive and successful for both issuers and investors.

I urge all shareowners who file resolutions or who otherwise engage with corporate managers and/or boards to complete the survey. An additional incentive, those who participate will be sent a copy of the results.

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Fiduciary Duty for Sustainability

The nation’s largest private water utility company has joined a federal lawsuit that aims to force the manufacturer of atrazine, a widely-used herbicide, to pay for its removal from drinking water. The class action lawsuit was filed in U.S. District Court for the Southern District of Illinois alleging that Syngenta, Inc. made billions of dollars selling atrazine while local taxpayers were left “the ever-growing bill for filtering the toxic product from the public’s drinking water.” (Nation’s Largest Private Water Utility Joins Lawsuit Against Herbicide Maker, Common Dreams, 3/31/10) Governance questions:

  • Will the fact that EPA registered atrazine provide adequate legal protection?
  • Did Syngenta’s board fully consider the risk of such lawsuits?
  • What about your company’s products and board?

In a related story, Harrington Investments, Inc. (HII) announced that Intel agreed to amend the Charter of their Corporate Governance and Nominating Committee to include “corporate responsibility and sustainability performance.” Intel also provided Harrington with an outside legal opinion stating that under Delaware Law, directors have a fiduciary duty to address corporate responsibility and sustainability performance as specified in the committee charter. Said John Harrington:

Intel has acknowledged in their committee charter, that directors must take into consideration corporate responsibility and sustainability performance, including long and short term trends and impacts on Intel’s business, as part of their fiduciary duty. This is a major victory for advocates of corporate responsibility and environmental sustainability, and others who strongly believe that these issues are essential in recognizing directors’ and officers’ fiduciary duty.

For the second year, Harrington Investments introduced a shareholder resolution to amend Intel’s bylaws to create a Board Committee on Sustainability. Intel initially opposed the resolution but then engaged in a dialogue with HII. This resulted in Intel agreeing to change their corporate charter to require the Governance and Nominating Committee to:

review(s) and report(s) to the Board on a periodic basis with regards to matters of corporate responsibility and sustainability performance, including potential long and short term trends and impacts to our business of environmental, social and governance issues, including the company’s public reporting on these topics.

Intel also had their outside legal counsel Gibson, Dunn & Crutcher LLP write a legal opinion specifically stating that pursuant to Delaware law, corporate responsibility and sustainability reporting based upon the committee’s charter, was part of the fiduciary duty of company directors. With this agreement in hand, HII agreed to withdraw its bylaw amendment resolution. Harrington concluded by saying,

I am very appreciative of the work put in by Irving Gomez, Intel Shareholder Relations and Cary Clafter, Intel Corporate Secretary, on this very progressive change in Intel’s Committee Charter. It will be of great assistant in moving forward with other corporations in our efforts to get corporate management to recognize that corporate social responsibility, including environmental sustainability and human rights, is an integral part of directors’ and officers’ fiduciary duty.

Harrington Investments, Inc. is a 28 year-old Napa, California-based socially responsible investment advisory firm that manages assets of individual and institutional investors requiring social and environmental as well as financial portfolio performance. Harrington utilizes a comprehensive social and environmental screen, commits clients’ assets to community investing and engages in shareholder advocacy, recently introducing shareholder resolutions specifically on U.S. economic security, corporate governance, CEO compensation and advancing human rights and sustainability as part of corporate officers’ fiduciary duties.

See also, Don’t Ask, Don’t Tell: A Poor Framework for Risk Analysis by Both Investors and Directors, HLS Corpgov and Financial Regulation blog, 11/15/09), Is Responsible Investing a Must, or a Should? UNEP FI on Fiduciary Responsibility, RMG blog, 7/24/09), and How companies manage sustainability: McKinsey Global Survey results, 3/2010.

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Our Favorites

As we continue migrating material from out 15 year old Corporate Governance Site, we have now updated and moved over our Stakeholders page. These publications and organizations are our primary reference groups, those who contribute regularly to our “vocabulary of meaning.” We look to them as leading authorities in explaining movements and motives in the field. We make every attempt to work cooperatively with them and with our readers in our effort to bring you timely information on the most critical issues in corporate governance.

Over time we will add, and no doubt subtract, from this influential group. Please let us know of additional organizations you think should be included and why. Of course, many additional resources can be found on our Links page

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Church Investors to Vote as a Bloc in UK

PIRC Alerts reports that the UK Church Investors Group (CIG) issued a report on executive pay saying that a ratio between the pay of the top executive and that of the average pay of the lowest 10% of employees in excess of 75 times would be hard to justify. They’ve adopted a common framework.  PIRC will provide research and voting advice on group members’ holdings in the FTSE100. In practice this will mean that members participating in the initiative will be able to adopt the same voting stance, making the CIG an important new shareholder voting bloc in the UK’s capital markets.

PIRC also reports, the average vote against a remuneration report at a UK-listed company last year was 17.28%. That compares to a figure for 2008 of 3.2%. If you would like a copy of the 2010 UK Shareholder Voting Guidelines, please contact Janice Hayward on [email protected] or phone 020 7392 7894.

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CEO Jet Set: BofA Gets Finger

A free report from The Corporate Library concludes that expenses related to CEOs’ personal use of corporate aircraft increased by over 9% at the median between 2007/2008 and 2008/2009. The increase occurred as the incidence of personal corporate jet use held steady.

The report, titled “Proxy Season Foresights #8: CEOs’ Personal Use of Corporate Jets Still Flying High,” analyzed such expenses at more than 2,500 Russell 3000 companies for which data was available for the last two years (as of January 29, 2010). For companies that had not yet filed proxy statements for the 2009 fiscal year, the sample included data from 2007 and 2008; 2008 and 2009 data was used for those that had already filed 2009 proxy statements. Key takeaways include:

  • Fifteen percent of Russell 3000 and 40 percent of S&P 500 report aircraft expense for CEOs’ personal use
  • Increase in the averages of reported expenses in the last year: 3.3 percent
  • Aircraft expense is up an average of over 70 percent (median 9 percent) for Russell 3000 companies with expenses in both years
  • Average payout in 2008/9: $131,340
  • Median payout in 2008/9: $80,368
  • Incidence rate holding steady (around 400 Russell 3000 companies in each of last two years)
  • McGraw-Hill is an example of best practices in recouping personal expense
  • Tax gross-ups and family use are still prevalent

The report concluded, “in the cases where tax gross-ups and family use were approved, it calls the corporate culture into question: if the board cannot set appropriate limits for the CEO in this regard, will it be able to do so in matters of greater strategic consequence?”

On a related note, Finger Interests Ltd., the Houston investment firm that tried to oust Ken Lewis from Bank of America last year, has a new target this year: The firm filed a motion Monday urging shareholders to vote against director Chad Gifford. According to the Fingers:

Mr. Gifford knew that Bank of America did not undertake sufficient due diligence when they acquired Merrill Lynch. He also knew it was a bad deal for Bank of America shareholders. But he did not have the courage or moral conviction to fulfill his duty to shareholders. Rather, he was more concerned with maintaining his position as a director of Bank of America and making sure that his employment agreement, which entitled him to 120 free hours on the corporate jet (each year), was renewed for another year.

According to a report in the Charlotte Observer, “Gifford had enjoyed a perk from the bank that let him use company-provided aircraft for up to 120 hours a year, in addition to his regular pay as a director. In 2009, Bank of America spent $956,007 on Gifford’s airplane use, plus $293,004 to help him pay the accompanying taxes. It did not renew the agreement for this year.” (Shareholder wants Bank of America director out, 3/30/10) Hat tip to Tweet from Bob Monks.

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Nomination Lessons From Sweden

Tomorrow’s Company, a UK-based business-led think-tank issued a report, backed by activist investor Cevian Capital, calling for UK-listed companies to invite big shareholders to join their board nomination committees.

According to the report, Swedish shareowners play a direct role in selecting and sometimes removing board members. Nomination committees typically include four or five of a company’s biggest investors, company representatives and the board chairman, reporting their findings to the annual general meeting.

For such a system to work in the UK, or the US, if fund managers would need to get much more involved, recruiting and training people to serve on such committees as their representatives. (Lessons to learn from Sweden,, 3/28/10)

This reminds me of an idea that Bob Monks was pushing about ten years ago, shareholder advisory committees that “would consist of three paid representatives elected by the company’s largest institutional shareholders; it would be funded with a penny a share by the company itself, and have a right to meet with the company, propose candidates for director and publish its views annually in the proxy statement.” The Swedish version, now pushed by Tomorrow’s Company, appears more even more direct and promising. Let’s hope the idea gets further consideration.

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Alarm Bells at Waddell & Reed

Shareowners of Waddell & Reed Financial Inc. will soon receive a troubling letter from CEO Henry Herrmann in advance of the company’s April 7 annual meeting.  In a special solicitation filed alongside the company’s proxy statement, Mr. Herrmann claims in bold print that giving shareowners an advisory vote on his compensation and that of other executives could put the company “at a serious competitive disadvantage and could erode the value of your investment.”  Mr. Herrmann further exclaims that an advisory vote could “reduce executive compensation below competitive levels,” “lead to the loss of executive talent” and that a vote of disapproval on the company’s compensation policies and practices “creates the risk of unintended consequences and negative publicity.” He also sent an alarm to his own employees.

It is hard to reconcile the alarmist picture painted by Mr. Herrmann with reality.  To date, over 60 companies have pledged to implement say on pay including financial leaders such as Goldman Sachs, JPMorgan Chase, Capital One, Ameriprise Financial, Morgan Stanley, Wells Fargo, State Street, Bank of New York Mellon and hundreds of other financial institutions that received TARP funds, many of which voluntarily agreed to continue the advisory vote after their TARP obligations ended.  Furthermore, in 2009, Waddell & Reed announced that 50.6% of its very own shareowners supported an advisory vote on executive compensation.  The company later reported that just under 50% of shareowners supported the reform after the company took the extraordinary step of asking the Delaware Chancery court to re-open the polls and count missed votes it identified as being cast against the reform.

Dawn Wolfe, Associate Director of ESG Research at Boston Common Asset Management, the firm leading the advisory vote initiative at Waddell & Reed for the past three years issued the following statement:

Mr. Herrmann’s letter contradicts the positive responses from companies that have implemented an advisory vote. In addition to the numerous companies that have implemented say on pay, rejecting the notion that it will erode shareholder value, institutional investors actively involved in promoting good governance publicly support this reform, including the State of Connecticut, CalSTRS, CalPERS, TIAA-CREF, and the Council of Institutional Investors. Waddell & Reed is one of the outliers in its aggressive campaign against this important reform, and that concerns us as shareowners.

California State Teachers Retirement System (CalSTRS) and Calvert Asset Management are co-proponents of the advisory vote proposal at Waddell & Reed Financial, Inc. this year. Anne Sheehan, CalSTRS director of corporate governance, said:

CalSTRS has a long history of promoting responsible compensation policies that link pay to performance and align shareholder and management interests and that is one reason we support an advisory vote on pay. We view say on pay as a way to help improve long-term returns and as shareowners of Waddell & Reed Financial we are asking the company to adopt this important reform.

Waddell & Reed Financial’s 2010 Annual Meeting of Stockholders will take place at 10:00 a.m. CDT on Wednesday, April 7, 2010 in Overland Park, Kansas. “Financial services companies such as JPMorgan Chase and American Express have voluntarily adopted say on pay.  Waddell & Reed’s position on this reform is clearly out of line with its peers and general public opinion on executive pay,” said Aditi Mohapatra, Sustainability Analyst at Calvert Asset Management.

The Waddell & Reed letter goes on to argue the proposal would not “result in meaningful dialogue with stockholders.”  Experience simply proves this false.  “Scores of companies that have implemented an advisory vote on executive compensation are demonstrating that it can and does stimulate dialogue, especially when the company reaches out and seeks investor advice and input,” stated Tim Smith, Senior Vice President of the Environment, Social and Governance Group at Walden Asset Management and a primary organizer of the say on pay campaign with the American Federation of State, County, and Municipal Employees (AFSCME) union. See their January letter to 17 financial institutions.

“Waddell & Reed is attempting to manipulate its shareholders through scare tactics,” said AFSCME President Gerald W. McEntee. “The time has come to implement an advisory vote on Say on Pay. Sixty companies have made the commitment already. It’s time that Waddell & Reed did the same.”

Despite growing investor support for this reform, Mr. Herrmann’s alarmist letter is just the latest in a string of actions by Waddell & Reed Financial to undermine say on pay.

In February, Boston Common, CalSTRS, and Calvert submitted a letter to the SEC arguing that the company’s proposed statement formally urging a vote against say on pay in the proxy was materially false and misled shareowners in stating that none of the company’s peers had adopted a similar reform.  Waddell & Reed later altered its statement.

At the 2009 annual stockholder meeting, Waddell & Reed announced that the say on pay proposal received over 50 percent support from investors.  Over 3 months later, the company filed its 10-Q with the SEC, stating that the proposal did not receive majority support.  Investors were left in the dark about why the result changed between the annual meeting and the quarterly report.  During that period, Waddell & Reed Financial argued to the Delaware court that it should be allowed to retroactively count approximately 3.2 million additional votes, more than 2 months after the close of the polls.

Henry Hermann claims that “the company supports the goal” of letting stockholders provide feedback on compensation practices by directly contacting the Board or Compensation Committee.  Shareowners tried that method as well, only to receive correspondence from the company’s legal department on March 3, 2009 that “management does not desire, nor see any need for, further discussion.”  It appears painfully obvious that Waddell & Reed has no interest in communicating with shareholders on executive compensation in any form.

Coming on the heals of Apache’s SLAPP suit against John Chevedden, we’re beginning to see something rear guard action by desperate CEOs afraid of working in partnership with owners.  It took until 1987 for shareowners to finally win their first resolution. By 2007 shareowners were winning 24% of those taken to a vote. That has since gone up to 30% in 2008 and 37% in 2009. Last year, “say on pay” proposals averaged 46% support. The tide is turning toward more democratic forms of corporate governance. What could be more reasonable than giving shareowners some say, in the form of an advisory vote, on pay?

Mr. Herrmann earned almost $10 million dollars last year, according to Forbes. I notice he didn’t include that information in his letters to shareowners or employees. However, a recent issue of Proxy Governance Spotlight said: “Company has reasonable pay.” Additionally, The Ontario Teachers’ Pension Plan announced it won’t support shareholder proposals for “say on pay” advisory votes at companies, arguing that “say on pay” is new to many companies: “We do not wish to unfairly burden companies that are making efforts to involve shareholders in compensation matters by voting against management advisory compensation proposals.” (RI round up – 3/26/10) Although reasonable people can differ, Waddell and Reed’s opposition still appears a little over the top.

For further background on say on pay, see Say on Pay Facts and Background (compiled by the AFSCME Office of Corporate Governance and Investment Policy),  Say on Pay: Where Are We Heading in North America? (from 3XCD) and  The Herrman doth protest too much, methinks (The Corporate Library). Thanks also to the Shareholder Forum.

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Converting Funds to Roth IRA

No, nothing to do with corporate governance but since current income limitations on Roth contributions and conversions will be lifted this year, many are looking at the possibility of rolling differed compensation into a Roth IRA. The Roth IRA Conversion Evaluator from Putnam is worth a quick look. It only took me a couple of minutes to enter approximate data. Although it could be better by including your actual tax bracket, income, expenditures, etc. at least it gets you started. I thought Fidelity’s calculator was better, largely because it actually helps you estimate your cost or savings after conversion and it uses your tax bracket data.

Dissatisfied with both, I found several additional calculators at I’ll have to look at those later. See also, Conversion of a Traditional IRA to a Roth IRA:  A Simple Tradeoff of the Time Value of Money Versus an Option? from Marc Lane. I’m beginning to think it is best to convert all funds in 2010 and pay taxes in that year, rather than taking the automatic deferral to pay 1/2 in 20111 and half in 2012 when I think tax rates may well be higher.

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Directors & Boards

The current edition features a cover article, The Great Divide: Separating the Chairman and CEO Roles. Thought leaders tackle the issues involved in splitting the two top leadership positions of the corporation. On one side of the debate: “The development is inexorable,” says Ira Millstein. “Beware the simplicity of saying two heads are better than one,” says James Robinson. Sure, the consensus of this group is that such a split should not required by law. Maybe they’re right, but the arguments in favor of splitting the roles in most cases were far more compelling than those opposed. What do you think?

New disclosure requirements are going to make many boards rethink the issue, especially when they have someone in the combined role stepping down. In another article, Henry D. Wolfe offers more timely advice in What you want in a nonexecutive chair, while Diane Lerner and Ira T. Kay offer up Revisiting the pay of the nonexecutive chair.

Several other excellent articles round out the issue, including an interview of Dennis Kozlowski by John Gillespie and David Zweig, authors of Money for Nothing. Their interview is entitled If he had it to do all over. Sure, in hindsight, Kozlowski wishes he had done some things differently; maybe he should have been a little less ambitious.

However, what is presented is mostly the self-portrait of a victim… a victim of a system well documented by Gillespie and Zweig which cedes too much authority to CEOs. If Tyco had a stronger board, he wouldn’t be working in a prison laundry. Staying out of jail, another good reason to strengthen boards by splitting board and chair positions.

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SVNACD: New Proxy Rules on Executive Compensation

Networking Before SVNACD Meeting

What are the new SEC disclosure rules for executive compensation, especially the “risk” to the corporation of their compensation plans? How are companies dealing with these new rules — what do the early returns from this proxy season indicate? Are these new SEC requirements more of an annual risk assessment of compensation than disclosure rules — is any company really going to make a disclosure that its compensation policies create a risk to the entity? Will the RMG/ISS guidelines have as much, or more, impact than the SEC rules? How will these rules relate to pay for performance? Exactly what compensation programs are “unduly risky”? What mitigation practices will companies adopt? What are the “best practices” that should be considered?

Those were some of the issues taken up by panelists bright and early at 7:30 am at a monthly meeting of the Silicon Valley chapter of the NACD:

  • Lon Allan, Chairman of the Silicon Valley chapter of the NACD.
  • Katie Martin, Senior Partner at Wilson Sonsini Goodrich & Rosati’s Palo Alto office, where she practices corporate and securities law. 
  • Tom LaWer, Senior Partner at Compensia, a management consulting firm providing executive compensation advisory services.
  • John Aguirre, Senior Partner at the law firm of Wilson Sonsini Goodrich & Rosati, specializing in executive compensation and employee benefits, including tax, ERISA and federal and state securities laws.

I’m certainly no expert in this area but I’m sure it was paradise for actual practitioners in the trenches. What follows are a few items that struck me as an interested observer. Although I know I got the order of panelists right, who said what is less certain. The links are to sites I think readers might find useful. I didn’t run them by the speakers for endorsement.

Katie Martin

Katie Martin started with some discussion on changes to required disclosures. For example, directors must disclose seats held at any time during last five years.  Legal proceedings: 10 year look back, rather than 5. Disclosure is expanded to include judicial proceedings relating to mail or wire fraud, violations of state securities, disciplinary sanctions.

Disclose experience, qualifications, attribute and skill that led to selection. Most are placing disclosures right below the biography. She discussed the new RiskMetrics Group Risk Indicators GRId (their new gov scoring system). The old CGQ scores will be frozen on March 17, 2010 and retired completely at the end of June 2010. Here’s an SEC FAQ for issuers.

My own impression, reinforced at the meeting, is that the SEC rules are largely non-prescriptive, whereas the substance of disclosures will mean more when graded by RMG. Verify the facts. Look at ways to improve. Use new D&O questionnaires, which ask directors to self-identify their particular experience, qualifications, attributes and sills.

Diversity considerations. Whether, if so, and how. The SEC rules include no mandates and the definition of diversity is being interpreted broadly.

Board leadership structure. Whether and why CEO and Chair are same or separate. If same, description of Lead Independent Director is critical. Review governance policies with respect to the role of lead independent director to consider whether further clarity is needed. Discuss and document the rationale for your current leadership structure.

Risk management oversight. Disclose the board’s responsibility for risk-management oversight. For example, is it the responsibility of entire board or is the function assigned to one or more committees for different categories of risk? This is a good opportunity to discuss these issues with the board and/or appropriate committees. Discussion will normally bring some changes and more formality. There is a trend toward having a separate risk management committee, not so much in the tech sector, but in larger firms.

With the new rules regarding 8-K requirements, we’re talking close to real-time disclosure, within 4 business days after meeting. File preliminary results, if final results not known.

Non-GAAP Financial Measures: Recent SEC Interpretations. Historically, restrictive approach by SEC to non-GAAP financial measures. Recent changes have not led to full blown non-GAAP report but anything that flushes out trends would be positive. SEC filings should be consistent with other public communications. If doing an offering, get comfort from auditors. (Revised SEC Interpretations Regarding Non-GAAP Financial Measures, Cooley Godward Kronish LLP, 2/26/10)

Focus on process aspects, risk and possible litigation. Don’t let your board get blind-sided.

John Aguirre

John Aguirre – New Compensation Disclosure Rules: Policies and Practices Relating to Risk Management — Requires narrative disclosure regarding compensation policies and practices for all employees to the extent that risks arising from such policies and practices are “reasonably likely to have a material adverse effect on the company.” Reasonably likely is the same disclosure threshold used in the Management Discussion & Analysis. Whether disclosure is required is a facts and circumstances test for each company and its compensations programs (e.g., the program features and goals). Dodd bill may require comp committee to have their own attorney. Focus on process.

Risk disclosure, grants, and consultant fee disclosure… Forward-looking statements that don’t create risk.

SEC examples of practices that may have risk requiring disclosure included business unit that:

  • carries a significant portion of company’s risk profile.
  • has compensation structured significantly different from other units within the company.
  • is significantly more profitable than other units.
  • has compensation expenses as a significant percentage of unit’s revenues or compensation that varies significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while income and risk to company from task extend over a significantly longer period of time.

If disclosure is required, the SEC noted possible areas for discussion:

  • General design philosophy and manner of implementation of compensation policies and practices for employees whose behavior is most affected by incentives created, as related to risk-taking on behalf of company.
  • Risk assessment or incentive considerations, if any, in structuring compensation policies and practices in awarding and paying compensation.
  • How compensations policies and practices relate to realization of risks resulting from employee actions in both short and long term, such as policies requiring clawbacks or imposing holding periods.
  • Policies regarding adjustments to compensation policies and practices to address changes in risk profile. Material adjustments that have been made to compensation policies and practices as a result of changes in risk profile. Extent of monitoring of compensation policies and practices.

List of SEC’s examples is not exhaustive. SEC expects principles-based approach in the disclosure, similar to CD&A requirements. Avoid generic or boilerplate discussion. SEC does not require an affirmative statement that a company’s risks arising from its compensation policies and practices are not reasonably likely to have a Material Adverse Effect. If a company does not disclose any material adverse risks, the SEC likely will, in the course of its review, issue a comment asking the company to explain the nature of the internal analysis that was conducted in making its determination that no disclosure was required.

What should you do? Update board or comp committee on new rules. Consider whether compensation policies need updated. In addition to the examples John provided, which I expect may be referenced on the SVNACD site, here are some examples from Holme Roberts & Owen LLP.

Must disclose aggregate “grant date fair value” of awards computed in accordance with FASB ASC Topic 718. Whole value of the award, even if they may never get it. This effects who is covered in your table.

Tom LaWer

Tom LaWer – The SEC has set a very high bar for disclosure. If disclosures are made, expect disclosure of past issues along with disclosure of how the issue has been fixed. The rules provide a fresh opportunity to focus in on the risk assessment of compensation policies and practices. The examination will likely influence compensation plan design… Revising compensation programs to improve design based on issues uncovered in the risk review. You might indicate, for example, that policies are reviewed annually.

No generally accepted compensation principles. Best practice guidance is sometimes conflicting. Most guidance is conventional wisdom. Standards may evolve over time based on empirical research. SEC examples tend to focus on the issues for financial companies.

Again, RMG risk guidelines might be a more important driver than the SEC.  He went over several practices that will get further scrutiny and possible mitigating factors. It is a good time to review and assess for correct goals, mix, use, and design flow. For example, did the person who was demoted still got their bonus because there was no discretion built into the compensation plan?  Are you doubling up, because long-term and annual incentive plans are based on the same metrics? Tell shareowners how your actions ensured these problems don’t arise again.

Here are some handouts from a similar panel meeting of the Twin Cities Chapter of the National Association of Stock Plan Professionals and brief overviews from O’Melveny & Myers, Grant Thornton LLP , Seyfarth Shaw LLP., Jenner & Block, Dorsey & Whitney LLP, Ulmer & Berne LLP, Thomson Reuters, and  I hope readers find these links helpful. The panel did a great job on a rather technical topic and brought home in many examples how requirements might be addresses, especially by the predominately high tech companies of Silicon Valley. Also be sure to see SVNACD’s page with handouts and interviews, as well as a podcast from KPMG/NACD, New SEC Proxy Disclosure Rules for 2010: What Boards Are Doing to Prepare.

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Club Memberships for CEOs Continue

Despite all the talk of restraint and cost cutting, there were actually more CEOs with club membership fee benefits in 2008/2009 than in 2007/2008, according to a study just released by The Corporate Library. (2010 Proxy Season Foresights #7: Club Membership Benefits Holding Steady) Key findings:

  • Club memberships were provided to 382 CEOs in 2008/9 and 372 CEOs in 2007/8.
  • Median and average increases in cost of club memberships were 3.71 percent and 65.85 percent, respectively.
  • Median and average costs of club membership perks in 2008/9 were $6,399 and $10,653, respectively.
  • Only 43 CEOs in the S&P 500 (8.6 percent) received club memberships, representing only just over 10 percent of all CEOs receiving the perk.
  • Although financial services companies account for only 12.6 percent of the study sample, CEOs at these companies make up over a quarter of the group receiving this benefit, some 97 of them.

Key Takeaways

  • Club membership perks show no sign of decline, though provision is shifting.
  • Best practice would dictate either that executives reimburse the company for personal use of country clubs or cover the cost of membership themselves and seek reimbursement as for ordinary business expenses. Numerous examples of this best practice exist.
  • Shareholders should be wary of boards that continue to pay for club memberships, particularly if this is part of a wider pattern of excessive perquisite provision.
  • Shareholders should be particularly wary of the provision of club memberships at financial services companies that must comply with TARP pay regulations while in debt to the Treasury.
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AFL-CIO Key Votes

Since 1997, the AFL-CIO’s Key Votes Survey has helped pension fund trustees fulfill their fiduciary obligations to monitor their investment managers’ proxy voting performance. The proposals included in the Key Votes Survey are submitted by a variety of union-sponsored and public pension funds, employee shareholders and other investors and are consistent with the AFL-CIO Proxy Voting Guidelines. The Key Votes Survey is a record of how investment managers, mutual fund and proxy voting consultants voted the shares they manage on behalf of worker funds on key issues at annual meetings during the proxy season.

Those with low scores are unlikely to find labor-based funds lining up for services. See results from the 2009 AFL-CIO Key Votes Survey.

Updates to the 2010 scorecard will be distributed as data becomes available. I see that one of the proposals on this year’s scorecard has already been voted. Shareowners at Whole Foods approved a resolution from Amalgamated Bank’s LongView Funds to roll back a bylaw change that directors put in place a few months after the SEC closed an investigation into the online chat activities of  John Mackey in April 2008. The proposal would permit sharewners to remove a director either “with or without cause.”

When they lowered their standards to with cause only, the board redefined “cause” narrowly as covering only a criminal indictment or a judicial finding that a director had breached his or her fiduciary duties to the Company or was not capable of performing a director’s responsibility. The proposal won 53% support. Over the next several months, we will see how the other scorecard resolutions fare.

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Corpgov Bites

The Vote is Cast: The Effect of Corporate Governance on Shareholder Value by Cuñat Martinez, Vicente, Gine, Mireia and Guadalupe, Maria (February 17, 2010). Available at SSRN: Results show that passing a corporate governance provision generates a 1.3% excess return on the day of the vote. This implies the value of a governance provision is 2.8% of market value. They also find evidence of changes in investment behavior and some long-term performance improvements.

‘Selling Us Short: The Limits of Markets (and Governments)’, with Joe Stiglitz and Jim Chanos, a 6/4/09 video posted by New Deal 2.0 brought to my attention by SimoleonSense. This is still well worth watching.

Drive me to the moon. Astronomical Pay: Schlumberger and Smith Acquisition, posted on’s blog, 3/22/10, finds what might be termed a match made in heaven. It compares the outrageous pay packages given to both CEOs. Schlumberger CEO Andrew Gould could have could have bought more than 19,832,868 gallons of regular gasoline with his pay.  He could have driven to the moon and back more than 2,075 times with a Toyota Prius (assuming those great cars could fly to the moon at the same 50 mpg it takes here on earth). Former Smith “CEO Douglas L. Rock received a base salary of $1,175,000 in 2007 and $1,347,115 in 2008, when his total realized compensation was $15,844,792. That’s enough for him to tailgate Mr. Gould in his own Prius for more than 640 round trips.” More analysis and more on target regarding specific concerns can be found in TCL’s Board Analyst profiles. (Disclosure: In what may have been a first at Schlumberger, my Say on Pay proposal received 39.8% of votes last year. Why is Schlumberger is incorporated in the Netherlands Antilles? Of course, “tax purposes.” It also minimizes shareowner involvement.)

Slate’s Will Evans warns that the “World’s Most Ethical Companies” list issued by Ethisphere may have some validity and credibility issues. (Consider the Source — “Independent” Judges of Pay and Ethics,’s blog, 3/21/10)

Also worth reading, the Blog is running a series of posts on key issues: Human Rights, Corporate Political Spending, and Climate Change. The series is in conjunction with the Sustainable Investments Institute (SI2), a Washington-based nonprofit research group.

Business Roundtable’s letter to Senators Dodd and Shelby on the Dodd bill.

The proxy access provision represents an unwarranted federal intervention into state corporate law and could exacerbate the short-term focus that is widely considered to be a contributing factor in the recent financial crisis; the derivatives provision would unnecessarily tie up capital at corporations across the country; the resolution authority title would drain companies of resources in order to create a new fund, possibly years or decades before it is ever needed; and the clawback and say-on-pay provisions adopt an inflexible, one-size-fits all approach.

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ICGN Issues Global Guidelines for Setting Non-executive Director Pay

In new calls for strengthened accountability, transparency and alignment in non-executive director pay, the International Corporate Governance Network (ICGN) is specifically calling for pay to consist solely of a combination of a cash retainer and equity based remuneration. The ICGN also calls for the elimination of perquisites for non-executive directors.

Commenting on the new Guidelines the ICGN Chairman, Christianna Wood says,

As the shareholder’s representatives, non-executive directors are elected by the owners of the company and must have a strong alignment of interest with the owners in the form of meaningful equity ownership while serving on the board. Furthermore, directors have a conflict of interest in that they set their own pay and as a result need to provide the utmost transparency and clearly state the board’s philosophy behind the director remuneration programme.

These principles were crafted over the last several years in a consultation that included many of the largest global shareowners.  Ted White, Chairman of the ICGN Remuneration Committee responsible for developing the new Guidelines also commented,

These principles were hotly debated by our members from around the world.  While practices differ from country to country, continent to continent, we all agreed that this was an important policy and that the principles of accountability, transparency and alignment of interest were agreed upon principles that should exist in the setting of all non-executive director remuneration programmes.

The ICGN acknowledges that remuneration practices differ around the world.  Carl Rosen, ICGN Executive Director added:

Among the agreed upon themes are that non-executive director equity remuneration should be immediately vested and not performance-based.  The ICGN believes that directors should have solely cash retainer and equity ownership remuneration, with a preference against the use of options.

The Guidelines aim to help communicate investors’ perspectives on this critical issue and are primarily addressed to companies and their non-executive board members.  Since remuneration policies are set by the board, it is important that they be transparent, address shareholder expectations, and those setting them be held accountable. Accordingly, three principles underpin these guidelines: transparency, so investors can clearly understand the program and see total remuneration for non-executive directors; accountability, to ensure that boards maintain the proper alignment of interests in representing owners; and alignment of interest between non-executive directors and shareowners.  The cornerstone of non-executive director remuneration programs should be alignment of interest through the attainment of significant equity holdings in the company meaningful to each individual director.  Key aspects of the Guidelines are as follows:

  • Places an emphasis on non-executive director alignment of interest with long-term owners.
  • Draws a distinction to differences to executive remuneration, particularly related to performance-based remuneration.
  • Opposes the use of performance-based remuneration for non-executive directors.
  • Examines the tools of remuneration, and favors solely cash retainer and equity, with a preference against the use of options.
  • Provides flexibility for companies to implement the principles in ways consistent with their unique circumstances.
  • Calls for clear disclosure including the philosophy of the non-executive director programme.
  • Calls for equity to be vested immediately but subject to holding periods.
  • Suggests companies establish ownership guidelines for non-executive directors.
  • States non-executive directors should not be eligible for retirement benefits.

The Guidelines are intended to be of general application around the world, irrespective of legislative background or listing rules. As global guidelines, they need to be read with an understanding that local rules and structures may lead to different approaches to these concepts. The ICGN will also seek change to legislation, regulation or guidance in particular markets where we believe that this will be helpful to generating corporate governance improvements and particularly where such change will facilitate dialogue and accountability.

The ICGN Non-executive Director Remuneration Guidelines has been developed by the ICGN Remuneration Committee in consultation with ICGN members. A consultation paper on the subject was sent to ICGN members for comment and a wide range of responses were received and contributed toward the final draft. The Guidelines will be launched at the ICGN Conference, being held on the 24 – 25 March at London’s Guildhall, entitled ‘Will shareholders rise to the ownership challenge?’ The event is hosted by the City of London and supported by the Department for Business, Innovation and Skills, among other partners.

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Take a Stand Today as a ShareOwner

Joe Mont writes New Efforts Push Investors to Take a Stand (, 3/22/2010). When shareowner returns slid, CEOs continued to be paid 319 times what the average employee drew down. The checks and balances built into corporate governance don’t seem to be working. And how could they, when only 20% of individual shareowners bother to vote? Yes, CEOs are responsible to boards elected by shareowners… at least in theory. Mont reports on some of the new tools that might just make those checks and balances more effective. hopes to be a portal for proxy materials and online voting. Posting the advice of “advocates” and allowing shareowners to vote directly on their site, Moxy Vote could become the next Facebook for people who take their role as owners seriously., helps shareholders vote by publicizing the votes of institutional investors.  They pay for proxy research and advice; you can benefit from it by following their advice. It also publishes and scores how mutual funds have voted, so investors can “purchase funds that represent their interests and pressure those that don’t.” is helping shareowners advocate together — pushing the Dodd bill, majority voting, and proxy access.

It is good to see bringing attention to these important resources. Of course, we’ve been bringing these sites to the attention of our readers for years. Unfortunately, with an internet traffic ranking of  380,000 at v 2,500 for, we don’t reach anywhere near the audience. Will they take it to the next level? For example, will they join with in asking for their readers to call their Senators TODAY at 202-224-3121 and urge them to support the corporate governance provisions of the Dodd bill. (main points) You can also send them a message through their web-based contact forms. Read some helpful do’s and dont’s from CalPERS and others regarding what to say or write (press release). Read a letter from major public employee retirement systems. I told my Senators the following:

In uncontested elections, directors should be elected by a majority of votes cast. However, the bill needs amendments to give this provision teeth or else boards will simply refuse to accept the resignations of directors who fail to win a majority vote. Please amend the bill so that directors who fail to get a majority vote must be removed within 90 days.

Shareowners should have the right to place director nominees on the company’s proxy. Please ensure the SEC has full authority to proceed with their proposed proxy access rulemaking.

Companies should give shareowners an annual advisory vote on executive compensation. I’m under no illusion this will immediately bring CEO pay back to earth. However, it will get boards talking to shareowners about this issue and it seems likely to reduce the use of incentive structures based on “heads I win, tails you lose.”

Now if the hundreds of thousands of readers would do the same, we could begin to make real progress in acting like shareowners, not just shareholders.

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Collective Intelligence: Governance Systems for the Modern World

Governance in a Disenchanted World: The End of Moral Society by Helmut Willke reasserts the spirit of liberalism invoked during the American and French Revolution when moral attitudes based on religion were trumped by secularization and the invention of modern politics and law. According to Willke, we are now facing second revolution, which will replace the dominant normative focus of the state with a global network of knowledge-based systems of governance.

In those first revolutions, we moved from a fundamentalist search for ultimate and final truths to a system that largely banished religious or moral definitions of ‘truth’ from public discourse. Whereas a continuing shared understanding under fundamentalism required the oppressive use of state power, the liberal state flourished based on developing democratic decision-making structures which allowed individuals to pursue individual freedom within the agreed upon rules.

Over the years, we developed mechanisms to lessen the likelihood of a tyranny of the majority, such as separation of powers, a hierarchy of laws and horizontal subsidiarity, allowing health, economic, university, family and countless other systems to be largely self-governing. As we transition to a knowledge-based economy, secular trends seep further into these self-governing systems. What were formerly moral questions are now discussed in the public square using scientific evidence, instead of moral exhortation, since religious morals can be less readily agreed upon than the rules for decision-making. While this frees public deliberation somewhat from moral passions, it also largely converts the power of those passions into the rational calculation of interests. Many find that wholly dissatisfying and continue to search for common touchstones and eternal truths.

Added to that, “social systems do not follow the motives and desires of people but instead follow their innate operation logics,” leading to ‘estrangement’ from our own social inventions… such as the modern corporation. A procedural approach provides guidelines for activities without assuming or mandating specific outcomes. While this liberates creativity and freedom it can also lead to a backlash by fundamentalists who witness the havoc of temporal complexities, absent any universal idea of social justice.

In the spirit of liberalism, Willke argues that rather than delimiting democracy to the level of nation-states and leaving global contexts to a laissez-faire regime, we would be better to support emerging global governance regimes like the ISO, WHO, Basel II framework and the WTO that strengthen self-organization and self-governance, even if as we lower our aspirations for more formal democracy at that level through world systems like the United Nations.

He sees globalizing knowledge societies as moving “from unitary order to complex order, from homogeneity to heterotopia, from linear order to a combination of order and disorder, and from hierarchy to heterarchy.” In fact, the new job of the political system is provide the preconditions for developing an array of distributed and decentralized collective intelligence, as well as coordinate and moderate the interplay of largely autonomous units.

As Charles Handy has pointed out, the transformation of wealth generation from tangible objects, to one largely based on knowledge, has huge implications for politics. “It is for instance, impossible to give people intelligence by decree or to redistribute it.” That leads Willke to the conclusion that “public policy and democratic decision-making are therefore inappropriate for dealing with questions of the creation and distribution of intelligence and expertise.”

Politics, it seems, retreats to the concern of deciding on the premises of decision-making. It is bound to leave the actual and factual decision-making to more knowledgeable and more competent actors, organizations and institutions, particularly in the fields of economic and financial policies.

Politics loses traditional command and control responsibilities of “telling people what to do,” while becoming more important in the role of capacity building and infrastructure. Institutions and professions become largely self-governing but political actors are still involved in requiring transparency, monitoring externalities, demanding accountability and arbitrating disputes. The idea of democracy itself must be transformed from one based on “moral demands for solidarity,” to one based on agreement upon methods for determining “moral hazard, misguided incentives, and counter-productive side effects of social security provisions or other well-intended legislation.”

In order to increase the collective intelligence of social systems it seems necessary to retire the time-honored ideal of ‘security’ as stability in favor of a more daring idea of security as resilience… ‘having the capacity to change before the case for change becomes desperately obvious.'”

The retreat to moral authority undermines the unconditional rule of democratically created law.  Dissenting opinion is branded as fundamentally wrong or even treasonous in everything from global finance, terrorism, global warming, etc. Willke argues these and many other complex problems “exceed the coping mechanisms and capacities for understanding of simply too many people. In constellations of excessive uncertainty recourse to morals turns out to be an efficient way to reduce complexity.” Unfortunately, that leads to insoluble fragmentation and dissipation.

While I may disagree with Willke concerning the “capacities for understanding” of the masses, I certainly do agree that systems head in the wrong direction when they emphasize skill sets needed for twentieth century industry, rather than analytic reasoning and critical thinking, which are increasingly required in a world of growing complexity and uncertainty.

I like Willke’s exposition of the danger of social systems becoming “iron cages.” Like the sorcerer’s apprentice, we seem to have waved our magic wand only to have generated systems that have evolved beyond our control. Our desperate search for a grounding often leads to a regression to moral arguments that places guardians above the law and independent of empirical facts. Yet, in a pluralistic world guardians are soon challenged by others also claiming legitimate authority based on moral grounds. Willke’s alternative visions is a world of largely cognitive-based rule systems, deriving their legitimacy from a continuous process of criticism and revision as to what passes for empirical fact and congruence.

I can’t envision a better grounded system myself but it would only seem to work if a majority of citizens are immersed in “scientific communities” and “communities of practice.” Even in the United States, McKinsey estimates that only about 40% of jobs are mostly based on knowledge work involving abstraction, system thinking, experimentation and collaboration… and how many of them work in an environment where empirical evidence usually prevails over systemic rules-based iron cages? We sure have a long way to go in any transition from individual morals to collective interests. Willke is dealing with the most crucial issues of our time. After reading it, I certainly have a better understanding of the challenges… unfortunately, most of the answers, like the challenges, aren’t simple.

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More Regulatory Oversight for Proxy Advisors?

Two of the members of the Shareholder Communications Coalition — the Society of Corporate Secretaries & Governance Professionals and the National Investor Relations Institute — have developed a Discussion Draft on Proxy Advisory Services, to help policymakers and regulators in their review and evaluation of the proxy voting systems. The Discussion Draft presents recommendations for improving the regulatory oversight and transparency of proxy advisory firms, as a starting point for policy deliberations on these issues.  Proxy Advisory Services: The Need for More Regulatory Oversight and Transparency can be downloaded as a pdf. Recommendations include the following:

  • Regulatory Oversight of the Proxy Advisory Industry.
  • Public Disclosure of the Proxy Governance Models Used by Advisory Firms.
  • More Robust Due Diligence Regarding Proxy Vote Recommendations.
  • Public Disclosure of Proxy Voting Recommendations and Decisions.
  • Public Company Input into Advisory Recommendations.
  • Public Disclosure of Voting Errors.

The draft is certainly worth discussion. I’m especially fond of the recommendation that “All institutional investors using proxy advisory services-including pension funds, hedge funds, and private equity funds-should publicly disclose the actual proxy votes cast by them (or on their behalf), if they are not already disclosing their voting records.”

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UK Funds to Combine Voting Clout

Two of the UK’s largest pension funds, Railpen and the Universities Superannuation Scheme (USS), have formed an alliance to coordinate their share voting at company meetings, with a view to creating a global voting resource to be used by other pension funds. (UK pension funds, Railpen and USS, create shareholder voting alliance, Responsible Investor, 3/17/10) Could these funds be setting an example that US funds may want to follow?

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"Own the Fed" Rally

Unlike the growing popular movements of angry Americans who want to end the Fed or have it controlled by Washington politicians and bureaucrats, the “Coalition for Capital Homesteading” wants every citizen to “Own the Fed.” This new Coalition held its first rally at the Fed in 2005 to mobilize, transform and democratize the Fed and its money-creating powers, in order to bring about a more productive, participative and just free market economy.
• Thursday, April 15, 2010, we’ll gather at noon for the Sixth Annual “Own the Fed” rally at the Federal Reserve (Washington, DC). Our keynote speaker will be State Rep. Anastasia Pittman of Oklahoma City who is spearheading community Capital Homesteading economies through local Citizens Land Cooperatives for financing land and infrastructure development in Oklahoma. Speakers from around the U.S. and other nations will call for the new policy goal of “Every Citizen an Owner” through capital homesteading. We’ll tell our citizens and leadership “Why We Need a Capital Homestead Act.” (For more information on the 2010 “Own the Fed” Rally, the Capital Homestead Act, and the Coalition for Capital Homesteading, visit

•  Friday, April 16, they’ll hold the Second Social Justice Collaborative on “Planning Community, National and Global Initiatives,” which will convene organizations, community leaders and activists to chart the road map to the goal of “Every Citizen an Owner” through the Capital Homestead Act of 2012. Community, national and global demonstrations of capital homesteading will be presented, as part of a step-by-step strategy timed for the 150th anniversary of Lincoln’s Homestead Act of 1862. (Click the link here for more information on the Second Social Justice Collaborative.)

•  Saturday, April 17, CESJ will hold its annual meeting and celebrate our 26th Anniversary with a Syrian-Lebanese feast prepared by Chef Chris O’Connor. (The luncheon is $25 per person.)  Join as we embark on our journey to “Every Citizen an Owner: On the Road to the Capital Homestead Act.” (Click the link here for more information on the CESJ Annual Meeting and 26th Anniversary Luncheon.)

R.S.V.P. by e-mailing [email protected].

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Dodd Bill: Majority Vote Provisions

Senator Dodd  finally introduced his bill. I’m sure it will get a massive coverage and comment. I will have little to add. Find a quick overview at The Corporate Library (Dodd’s Bill, 3/15/10). The Dodd Bill: Weighing In at a Portly Six Pounds, by Broc Romanek at provides the best guide I’ve seen.

However, I would also draw your attention to Restoring American Financial Stability Act of 2010: Reforming the Independent Director Standard and Federalizing Executive Compensation and other posts by J. Robert Brown at, 3/16/10. Brown brings to our attention a couple of good “sleeper” provisions that may help override provisions now controlled by exchanges and Delaware. However, he also points with disappointment to a requirement for listed companies that directors be elected by majority vote in uncontested elections.

The legislation would merely require directors not receiving a majority to resign.  The board would then have the discretion to reject or accept the letter.  As RiskMetrics has noted, somewhere around 100 directors in 2009 did not receive a majority vote and none of them lost their position because of this failure.

In many cases, companies did not have a majority vote provisions in place.  But where they did (Axcelis and Pulte), the companies did not accept the letters of resignation.  In other words, these provisions do not provide shareholders with any additional rights or protections.  Directors lose but the board doesn’t remove them.  The provisions are, therefore, a myth.

I hope CII and others will take up this issue. Brown writes, “Real reform would provide that directors who do not receive a majority lose and cannot take office.” I’m willing to concede there may be circumstances where that could create a problem. However, if a board doesn’t accept a resignation, they should be required to immediately find a replacement and do so within six months.

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Apache v Chevedden: Postmortem

There seems to have been more news coverage going into court than coming out. Although the United States Proxy Exchange, which submitted an amicus curiae memorandum to protect shareowner rights, and Susman Godfrey L.L.P., who’s firm sued John Chevedden on behalf of Apache, both issued press releases, only Susman Godfrey’s seem to have been read by the mainstream press. (Susman Godfrey L.L.P. Wins First-of-Its-Kind Judgment for Apache Against Shareholder Activist, MSN Money, 3/12/10; Susman Godfrey L.L.P. Wins First-of-Its-Kind Judgment for Apache Against Shareholder Activist, Forbes, 3/12/10; Susman Godfrey L.L.P. Wins First-of-Its-Kind Judgment for Apache Against Shareholder Activist, BizJournals, 3/12/10) How many other law firms get so much publicity for winning a lawsuit for a giant firm against an individual who represents himself in court?

Notice a theme in the titles? It is no wonder that the mainstream press is losing out to niche industry news and blogs. The main point of the articles seems to be, “this is the very first time that a company has sought to exclude a purported shareholder proposal by taking the proponent directly to court, without first seeking a no-action letter from the SEC staff.” Implied: we can go after your shareowners too. Of course, the content slant is wholly in favor of Apache and the law firm.

Apache described Chevedden as “the single most persistent proponent or proxy of purported shareholder proposals in history,” whose proposals “have been the subject of a whopping 953 SEC staff no-action letters.” That figure, which may be high according to Chevedden, fails to account the grounds of the no-action requests, many of which are filed on the grounds that the companies have taken action in response to these proposals. Additionally, many no-action letters are issued allowing a cure, if certain actions are taken within a short time.

I’m not sure where the Motley Fool stands in respect to mainstream but their coverage was much more balanced. They note Apache’s previous attempts to shut down proxy proposals altogether. “That hasn’t happened, so Apache is taking a different tactic to shut down this perceived nuisance. Sticking shareholder activists like Chevedden with large legal bills, after outmaneuvering them on some technicalities in court, could derail this movement in a hurry.” (A Major Skirmish Over Shareholder Rights, 3/12/10)

On Wednesday, a judge ruled narrowly in favor of Apache, finding that Chevedden’s submission of a letter from his broker did not meet the requirements of proof of stock ownership. The judge did not award attorney’s fees to Apache, so Chevedden lives to fight another day. For us little guys, I believe that’s a very good thing.

Manifest, the UK based proxy voting agency, was a bit more substantive and also balanced in their comments. (Chain of intermediaries binds US shareholders too, 3/11/10)

What did shock US shareholders was the company’s decision to spend their money on suing a private individual for attempting to introduce what is generally regarded as a reasonable governance reform.

Apache contended that letters of ownership must be issued by the “registered owner” which in in this case would have been the Depository Trust Company’s Cede & Co (the US equivalent of the UK’s CRESTCo). In practice this is impossible as Cede & Co is unaware of the underlying beneficial ownership chain and is reliant on DTC participants to identify the “real owners”.

While Apache has won its case and Chevedden’s resolution is excluded, the Judge not only called Apache’s arguments “disingenuous”, but also did not award costs to the company. Owners of US companies can also heave a collective sigh of relief that, provided their letters of ownership are watertight, they can carry on submitting shareholder resolutions.

RiskMetrics Group, also covered the decision more substantively than the mainstream press. (Two Different Views on the Apache-Chevedden Decision, 3/12/10) Although their article includes bragadocious from the company’s lead lawyer in the case, Geoffrey L. Harrison, that the decision was “a game-changer that very well may have a dramatic impact on the way shareholders make proposals, and the way companies respond to them,” they also included lines like the following:

While Judge Rosenthal didn’t formally rule on the sufficiency of Chevedden’s evidence of ownership, she did not agree with Apache’s narrow interpretation of Rule 14a-8(b)(2). Observing that the DTC is neither a broker or a bank, the judge said the rule permits but does not require Chevedden to obtain a letter from the DTC.

The judge also rejected Apache’s argument that the SEC’s Hain decision was a “rogue” decision, noting various post-Hain no-action letters where the staff has reached similar conclusions. “The SEC staff’s position in Hain Celestial and the similar letters is more consistent with the text of Rule 14a-8(b)(2) than the position Apache advances,” she wrote.

In an e-mail to subscribers,‘s Gary Lutin summed up the decision as follows:

The court’s position seemed to be effectively summarized in its citation of the following SEC statement, from a 1999 case supporting a shareholder’s response to a corporate manager’s challenge (page 24):

“Beneficial owners generally have a relationship with their broker or bank; requiring investors to obtain a letter from an agent of their broker or bank would needlessly complicate the process and encourage the sort of petty games-playing in which [the issuer company] is engaging here.”

Post “Apache v. Chevedden”: What Will Companies (and the SEC) Do Now? ( Blog, 3/11/10) begins to speculate on how the case may shape future action. “It’s unclear what application the case has beyond its specific decision, since the Judge noted her opinion is narrow – and yet it could be argued that some of her reasoning throws into question the SEC’s Hains position and other forms of proof of ownership. So the waters are a little murky here too.” At least Broc Romanek is asking the right questions in looking to what impact the decision will have on the future. However, I don’t see how her reasoning throws into question Hain. She clearly states:

Hain Celestial was not a “rogue” position. The Hain Celestial no-action letter was neither the first or last letter in which the S.E.C. staff declined to agree that a letter from the registered owner was required under Rule 14a-8(b)(2).

Another frequent commentator, viewed the ramifications quite differently (Half a Loaf? Narrow Court Opinion Allows Exclusion of Activist’s Proxy Proposal, Jim Hamilton’s World of Securities Regulation, 3/11/10)

Following such a narrowly-drawn opinion in the Texas case, and the lack of any fee award, it is not likely that large numbers of issuers will follow Apache’s lead. Litigation is costly and time-consuming, and many issuers may be hesitant to square off against their own investors on questions that are procedural and not related to the substance of the proposal.

N. Peter Rasmussen also noted that Apache isn’t under such constraints, since they are already on record that “non-binding proposals should not be permitted at all. They have no legal standing under the corporate laws of Delaware and other states.”

I’m guessing Rasmussen is right, most companies won’t want to square off against their shareowners on minute procedural grounds by taking them to court. However, how far most will go is anyone’s guess.

And this just in from Securities Industry News, Proving a ‘Beneficial’ Shareholder Is, In Fact, a Shareholder (3/22/10). They provide a good overview of unnecessary complexity. I say, let’s make it simpler through some variant of direct registration.

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Murray Hill Inc. for Congress

“Until now, corporate interests had to rely on campaign contributions and influence-peddling to achieve their goals in Washington,” Murray Hill Inc. a  public relations firm, said in a statement. “But thanks to an enlightened Supreme Court, now we can eliminate the middle-man and run for office ourselves.”

William Klein, a “hired gun” who has been enlisted as Murray Hill’s campaign manager, said the firm appears to be the first “corporate person” to run for office and is promising a spirited campaign that “puts people second, or even third.”

The firm is seeking to enter the Republican primary for the 8th District seat held by Rep. Chris Van Hollen, since “we feel the Republican Party is more receptive to our basic message that corporations are people, too.” (Campaign stunt launches a corporate ‘candidate’ for Congress, The Washington Post, 3/13/10)

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International Investment Linked to Better Corporate Governance

Aggarwal, Reena, Erel, Isil, Ferreira, Miguel A. and Matos, Pedro P., Does Governance Travel around the World? Evidence from Institutional Investors (October 5, 2009) claims paper may be “the first to establish a direct link between international portfolio investment and the adoption of better corporate governance standards that promote corporate accountability and empower shareholders worldwide.”

The authors examine whether institutional investors affect corporate governance by analyzing institutional holdings in companies from 23 countries during the period 2003- 2008. They find that foreign institutional investors and institutions from countries with strong shareowner protection are the main promoters of good governance outside of the U.S., especially for firms located in civil-law countries.

The authors also provide evidence that institutional ownership has a direct effect on corporate governance outcomes, functioning as a disciplinary mechanism in terminating poorly performing CEOs. Furthermore, increases in institutional ownership lead to increases in firm valuation, suggesting that institutional investment not only affects governance mechanisms, but also has real effects on firm value and board decisions.

In light of the recent Supreme Court decision in Citizens United, I also found very interesting their finding that “a particular aspect of foreign institutions that seems to be important is their independence with respect to the local corporate management.” Will the voice of institutional investors still be heard as the political voice of management increases?

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Corpgov Bites

Catching up after Apache v Chevedden, here are a few news bits that caught our attention.

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Pyrrhic Victory? Apache Delays Shareowner Proposal, Loses Attempt to Require Broker Letters From DTC

March 10, 2010, Press Release from the United States Proxy Exchange (USPX).

Shareowners are celebrating a dramatic win in the Apache vs. Chevedden lawsuit, which was decided in an expedited manner by Judge Lee H. Rosenthal in Federal District Court in Houston today.

Shareowners were glum when the judge’s decision first arrived. It started by announcing a “narrow” decision in Apache’s favor, but as they read on, shareowners realized just how “narrow” that decision was. On page after page of the decision, the judge rejected Apache’s evidence, its arguments, and ultimately its claim that (essentially) proponents of shareowner resolutions must document their holdings with a letter from DTC. Because it is impossible for DTC to provide such a letter, a ruling on the issue in Apache’s favor would have crippled shareowners’ ability to submit proposals. The judge’s rejection of Apache’s position transformed the lawsuit from a possible weapon of mass destruction against shareowner rights into a minor dispute over whether or not Apache may exclude John Chevedden’s proposal from its proxy materials this year. At the very end of the decision, the judge decided that minor issue in Apache’s favor. She did so on a technicality. That was the “narrow” decision.

The case was a split decision, but shareowners won. Apache got a consolation prize. Shareowners did more than dodge a bullet. We proved that we can pull together and not only present a united front, but actually win on substantive issues against expensive corporate lawyers. We learned some valuable lessons through the experience. We doubt Apache Corp. will be suing any more resolution proponents soon. If they do, shareowners will be more than ready for them.

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

Apache was able to keep a “simple majority vote” shareowner proposal off this year’s proxy by spending tens of thousands of dollars of assets collectively owned by all shareowners in order to take a single shareowner to court, threatening him with the possibility that the judge would require him to reimburse Apache for its costs. Chevedden lost on the adequacy of the letter from his broker, not on the central contention by Apache that letters evidence ownership must be issued by the registered owner, in this case the Depository Trust Company’s Cede & Co.

However, the judge did not award attorney fees to Apache. Even more important, the judge dismissed Apache’s arguments that “record holder,” as used in SEC Rule 14a-8(b)(2), means a registerd holder whose name appears in the company’s records as a shareholder. Several of Apache’s arguments were dismissed; at least one was even called “disingenuous.” In the judge’s words, the examples provided by Apache “show that DTC will only process letter requests forwarded to it by participants, not by beneficial owners.”

Apache’s very limited victory came because “the inconsistency between the publicly available information about RTS and the statement in the letter that RTS is a ‘broker’ underscores the inadequacy of the RTS letter, standing alone, to show Chevedden’s eligibility under Rule 14a-8(b)(2).” Atlantic Financial Services of Maine, a wholly owned subsidiary of Ram Trust Services is on the SEC, FINRA, and SIPC membership lists; apparently, Ram Trust Services is not. Chevedden’s letter, from Ram Trust Services, which issues his monthly statements, was deemed inadequate by the judge.

The only issue before this court is whether the earlier letters from RTS – an unregistered entity that is not a DTC participant – were sufficient to prove elegibility under Rule 14a-8(b)(2), particularly when the company has identified grounds for believing that the proof of eligibility is unreliable. This court concludes that the December 2009 RTS letters are not sufficient.

I expect Chevedden will be back next year, again proposing “simple majority” vote requirements at Apache. Similar proposals have won from 74% to 88% support at the following companies in 2009: Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. In the meantime, an important right has been upheld. Shareowners will continue to evidence ownership through their banks and brokers, not through DTC, which usually doesn’t know who they are or what shares they hold.

March 10, 2010, Memorandum and Order from Judge Lee H. Rosenthal, in the United States District Court for the Southern District of Texas, Houston Division. Apache’s response to Chevedden’s Motion for Summary Judgment. John Chevedden’s Motion for Summary Judgment.  Apache’s Reply Brief on the Merits.  United States Proxy Exchange amicus curiae brief. Apache’s Brief on the Merits. More documents at, which offers “help for people interested in challenging for corporate director seats.”

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Hyperbolic Message With Unconstrained Abandon: Apache v Chevedden

As regular readers know, I’ve joined with Glyn Holton of the United States Proxy Exchange (USPX) recently in defending a direct assault on shareowner rights that came in the guise of a lawsuit by Apache, a $33 billion company, against John Chevedden. (see Who Should Submit Shareowner Proposals?, HLS Forum on Corporate Governance and Financial Regulation, 3/9/10) In “Apache’s Reply Brief on the Merits,” they characterize our defense of shareowner rights as follows:

It may be fun for USPX (and its co-signer to have yet another forum in which to broadcast their hyperbolic message with unconstrained abandon, but it’s nothing short of irresponsible for them to do so here.

They give no clue as to what is being considered “irresponsible.” We know Apache’s CEO G. Steven Farris has publicly declared in a comment letter to the SEC on proxy access that:

Non-binding proposals should not be permitted at all. They have no legal standing under the corporate laws of Delaware and other slates, are an inefficient and ineffective method of communication between shareholders and companies, and distract attention from the genuine business issues presented for shareholder votes at shareholder meetings. The Commission should eliminate the federally created right of share holders to make non-binding proposals.

Is he now trying to obtain through the court what he could not at the SEC? Am I being irresponsible because I oppose that viewpoint?

Since there are no disputes of fact, only of law, John Chevedden filed a Motion for Summary Judgment in Apache Corp. v. Chevedden, which is now on its way to the court. Apache’s response to the MSJ is also in route.

The heart of Apache’s argument is that to be able to submit a shareholder’s proposal, shareowners must have their shares directly registered with the company or, if held in “street name,” they must get a broker letter from the Depository Trust Company’s nominee, Cede & Co.

The reason we are so interested in this case (hyperbolic or not) is that if Apache wins, it could essentially cut shareowner proposals to a trickle. Only directly registered shareowners would be able to file.  Those of us holding shares in street name wouldn’t be able to get a broker letter from DTC, or would certainly face additional difficulties, since DTC has no direct knowledge of who the beneficial owners are for the stocks they hold.

As evidence that Chevedden could obtain such a letter, “as many shareholders do” Apache contends, Apache’s attorneys direct the court’s attention to a form on DTC’s website called a “Confirmation of Shares” letter and they attached letters, which they claim support their contention that beneficial owners can easily obtain evidence of ownership from DTC.

However, like the no-action letters in their Brief on the Merits, which they claim supported their case but did not, none of the attached letters involved a shareowner obtaining evidence from DTC that they beneficially owned stock. The purpose of all the letters cited is to nominate directors, give notice of a proposed bylaws amendment or take some other action that DTC can take because they are the legal owner of the shares and they have been requested to do so by direct participants in DTC. For example, here’s how share ownership is “confirmed” in one such letter:

DTC is informed by its Participant, Merrill-Lynch. Pierce Fenner & Smith Incorporated (“Participant”) that on the date hereof 85 of such shares (the “Shares”) credited to Participant’s DTC account are beneficially owned by The Circle K Corporation, a customer of the Participant (the “Customer”). (my emphasis)

If DTC were willing to issue “evidence of ownership” to a beneficial shareowner holding in street name for the purpose of filing a shareowner proposal, it would have to be qualified, such as:

We have received a letter from our participant firm Northern Trust saying they received a letter from non-participant firm RAM Trust saying that a client of theirs, John Chevedden, holds shares of Apache Corp …

It reminds us of the parlor game played by whispering something in a circle, asking your neighbor to pass it on, and finding out how distorted it becomes by the time it goes fully around.

A ruling in favor of Apache would come close to accomplishing a previously stated goal of Apache’s CEO G. Steven Farris to “eliminate the federally created right of share holders to make non-binding proposals.”

I don’t think the law requires that shareowners holding in street name have to get evidence of ownership from DTC, rather than from their bank or broker, as we all have been doing for many years. I have never seen such a letter and Apache, which has accepted letters evidencing ownership from banks and brokers for previous shareowner proposals, has been unable to come up with one tangible instance where that has occurred.

Will the judge push shareowner rights off a cliff? We may know by the end of the week.

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Turned Down at WFMI Again: Still, There is Progress

John Chevedden helped me draft and defend a resolution at Whole Foods Markets that requests the Board to adopt a policy establishing an engagement process with proponents of shareowner proposals supported by a majority of the votes cast, excluding abstentions and broker non-votes, at any annual meeting. It seemed like a rather straight-forward and simple request to me.

If shareowners vote in favor of a proposal and the board doesn’t implement it, such as the simple majority-voting proposal which won our 57%-support at our 2009 annual meeting, Whole Foods would set up an independent board committee, schedule a telephone meeting with the proposal proponent, and would present the proposal with the committee’s recommendation to the full Board.

Well, I guess this type of proposal is a little new or maybe I’m viewed as a bomb-throwing radical by some for proposing that a company at least discuss a shareowner proposal with the proponent before deciding not to implement it after it is passed by a majority of votes cast. The proposal only got 39% of the vote.

Another simple-majority voting proposal this year from John Chevedden won 58% this year. Will they ignore it again?

The proposal for CEO succession planning from the Central Laborers’ Pension Fund fared worse, only got 30% of the vote. Even living on a diet of whole foods, Mackey won’t be forever. Isn’t it good to plan ahead?

In addition to passing a second simple-majority proposal, shareowners also approved a resolution from Amalgamated Bank’s LongView Funds would roll back a bylaw change that Whole Foods directors put in place a few months after the SEC closed an investigation into the online chat activities of  John Mackey in April 2008. The proposal would permit sharewners to remove a director either “with or without cause.”

When they lowered their standards to with cause only, the board redefined “cause” narrowly as covering only a criminal indictment or a judicial finding that a director had breached his or her fiduciary duties to the Company or was not capable of performing a director’s responsibility.

I’m glad to see this proposal won 53% support. “We are pleased that investors have supported this call for the Board to reinstate fundamental shareholder rights,” said Scott Zdrazil, Director of Corporate Governance for Amalgamated Bank. “We encourage the Board of Whole Foods to be responsive to shareholders and to take the necessary steps to implement the proposal.”

All the proposals were reasonable and deserve full consideration by the board.

When Mackey was pretending to be someone else in the Yahoo! chat room, he said shareowner proposals turn annual meetings into “a circus.” Yet, I understand, it was Whole Foods employees who applauded management and heckled at least one shareowner for speaking during the Q&A portion of the meeting. Did Canadians suddenly become less polite after the Olympics (the meeting was held in Vancouver) or were these imported Americans, specially trained by Mackey in how to misbehave?

In part, I’m teasing but I also believe shareowners should be treated with respect. Discussing the issues should be a major portion of any annual meeting, especially one like WFMI, which has chosen to ignore the expressed will of the owners.

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