Archive | April, 2010

Top Pay Issues

Pearl Meyer & Partners presents their annual look at the Top 10 executive pay and governance issues in 2010:

Revisit Your Executive Compensation Strategy and Philosophy
Address Possible “Red Flag” Compensation Practices
Validate and, Where Needed, Strengthen Pay-for-Performance Relationships
Expand Assessment of Compensation-Related Risk
Review Long-Term Incentive Program Design
Adopt an Enforceable Clawback Policy
Reconsider the Need for Employment Contracts and Severance Agreements
Improve Proxy Disclosure in Preparation for “Say on Pay”
Create a More Rigorous CEO Evaluation Process
Evaluate the Adequacy and Independence of Compensation Advice

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China's Increased Voting Power

World Bank members voted to place China’s voting power in the organization behind the United States and Japan. The China’s stake in the bank climbed from 2.8% to 4.4 %. Given that China has made many achievements in eradicating poverty, we have reasons to believe the country will contribute more to global efforts on poverty reduction. (A resounding vote, China Daily, 04-27-10)

The World Bank’s private sector arm has signed its first deal to finance Chinese investment in Africa. (China Shifts Its Africa Investment Strategy, Forbes, 4/28/10) Will working more with international bodies, such as the World Bank improve China’s corporate governance, human rights and environmental standards?

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Common Law Power Struggle

The Rising Tension between Shareholder and Director Power in the Common Law World by Jennifer G. Hill, available at SSRN, explores the rising tension between shareholder and director power in the common law world. First the article analyzes key arguments in the shareholder empowerment debate, and current US reform proposals to grant shareholders stronger rights, from a comparative corporate law perspective, examining how traditional US legal rules diverge from other common law jurisdictions. Secondly, the article discusses power shifts in the opposite direction – namely toward the board – in some parts of the common law world.

The article shows that US shareholders have traditionally possessed significantly fewer participatory rights than their counterparts in other common law jurisdictions, and examines particular legal rules that contribute to this divergence. Indeed, the current reform proposals to enhance shareholder rights, despite being the subject of great controversy in the US, fall far short of rights already held by shareholders in other common law jurisdictions, such as the UK and Australia.

The article also identifies an important tension between legal rules designed to enhance shareholder power, and commercial practices designed to subvert it. It shows how strategic commercial responses to regulation can affect the operation of legal rules. The existence of commercial pushback of this kind suggests that, even if US shareholder powers are significantly strengthened, that will by no means be the end of the story.

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Annual Meeting Horror Stories

The Council of Institutional Investors wants your horror stories on barriers to annual shareowner meeting attendance. We’ve been hearing that companies seem to be making investors jump through more and more hoops to attend annual meetings. If you have any horror stories that will help Council staff identify and discourage unreasonable barriers to attending annual shareowner meetings, please notify Council staffer Justin Levis.

Nell Minow told a recent audience, MAXXAM once “moved their annual meeting from Houston, a city you can fly to, to a small city in Texas, Huntsville, that is impossible to reach. They also set the meeting for 8 in the morning and bought up all of the hotel rooms in town. And then they had the chutzpah to put in the proxy, ‘We look forward to seeing as many of you as possible at the annual meeting.'” John Chevedden tells me that some serous shareowners actually rented a motor home in order to attend the MAXXAM meeting.

Your story doesn’t have to be that bad to be worthy of passing on to CII. Of course, I’d appreciate letting our readers know about them too.

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Ensuring Bad News Gets Above the 77th Floor

Recommended reading or listening: Diane Sanger Memorial Lecture by Nell Minow, sponsored by the SEC Historical Society and delivered on March 17, 2010. Her talk took on a wide range of topics, including:

  • What Karl Marx, Adam Smith, Benjamin Franklin, and Andrew Carnegie had in common,
  • Adventures with Bob Monks,
  • The impact of Lewis Gilbert, current economic problems,
  • Citizens United,
  • The problem of intermediaries,
  • Need for more tagging of SEC data,
  • Client directed voting,
  • Owning Mahowny,
  • The need of shareowners to be able to chose the state of incorporation,
  • Absolute clawbacks,
  • Option and stock grants need to be indexed to peer group (70% of option gains are attributable to the overall market).
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Ramblings on Votes, the Power of, TCL and Jim Crow for Retail Shareowners

I see from Alcoa’s 8-K filing, that William Steiner’s proposal to end supermajority requirements won 68%. Last year, a similar proposal won 73% but this year management put their own proposals on the proxy, so some just voted for their proposals to end supermajority requirements in three areas. Management’s highest proposal won 736,143,769 votes, with 20,319,646 opposed and 4, 344, 531 abstentions. I understand that’s 74% of stock outstanding, so the measures still failed to meet the 80% supermajority threshold required for change.

With 74% favoring, and 2% opposing, it is yet another frustrating exercise in futility by shareowners. Since management placed proposals on the proxy, they look like they’re being cooperative. However, how much was real and how much was just for show? Did they make any real effort to solicit proxies to overturn supermajority requirements? My guess is that it was minimal, if any.

I see from the 8-K filing by Kellogg that my proposal to end supermajority requirements won about 46% of the vote, despite opposition from the Kellogg Foundation, which owns about 23% of shares. At least with the new filing requirements, we’re getting results a lot quicker.

At Bank of America, shareholders passed a resolution by John Chevedden that would give shareholders the right to call a special meeting as long as owners of at least 10% of shares vote in favor of it, down from the current 20-25% requirement (unclear in Fortune article). (Bank shareholders fight back — and win, Fortune, 4/29/10)

I reviewed Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance by Martin B. Robins on April 22 in Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule. I may be going out on a limb but I think that publicity was all that was needed to push the paper onto the list of SSRN top downloads. Now, if we can only influence proxy voters as much as we influence SSRN readers, we’ll have a huge impact on corporate governance.

Ric Marshall and Cheri Gaudet, of The Corporate Library, put on a great webinar yesterday, “Director Elections 2010: A Shareowner’s Guide.” Ric was able to demonstrate their tools using some well know examples of outrageous disclosures. If you missed it, you may be able to catch the recorded version on-demand, assuming it is available to those who didn’t register.  It was especially interesting to see how TCL flags directors for various issues such as overboarding, lack of full independence, involvement in corporate failures, compensation and for several other reasons. Want to know which directors have lucrative compensation contracts with management? TCL has the tools to get you their in seconds. Check out Director Flags – Highlighting Shareholder Concerns. You can also request a free trial to Board Analyst to try out the Director Highlights feature.

John Chevedden brought to my attention what appears to be draconian bylaw provisions that call for a whole bunch of hoops to be jumped through for raising issues at shareowner meetings.  Some companies appear to be trying to discourage shareowner proposals by telling proponents that in order to file a rule 14a-8 proposal they have to jump through the same hoops as hedge funds. See item 4 in this example from H&R Block but note the language near the end  that says rights of Rule 14(a)-8 aren’t impacted. Comments on what this is all about?

And speaking of John Chevedden, he e-mailed me with yet another way retail shareowners get the shaft when voting through a voter information form (VIF) from Broadridge. I’ve written extensively on the “blank vote” issue and even filed a rulemaking petition with the SEC. Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. However, VIFs typically include a practically microscopic footnote. Chevedden point out that after you cast your preliminary vote, it is easier to see how your blanks will be voted; and he provided this example from Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared. Gotcha! I revised my post, Jim Crow “Protections” for Retail Shareowners, to include this additional information.

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Corporate Governance Paradigm in Crisis

The March 2010 edition of Corporate Governance: An International Review (CGIR), one of our favorite “stakeholders,” contains three articles that struck me as particularly significant.

Corporate-Governance Ratings and Company Performance: A Cross-European Study by Annelies Renders, Ann Gaeremynck, and Piet Sercu finds a significant positive relationship between corporate-governance ratings and performance across 14 developed economies in Europe from 1999-2003. The strength of this relationship seems to depend on the quality of the institutional environment, the correlation being weaker in countries with higher corporate governance ratings and stronger in countries with weaker shareowner protection laws. The authors find that improvements in corporate-governance ratings over time result in decreasing marginal benefits in terms of performance.

Second, the editorial by William Q. Judge, Editor in Chief, is significant in announcing a new type of article, which CGIR intends to publish. Noting the thesis of Thomas S. Kuhn’s The Structure of Scientific Revolutions, that paradigms do not get replaced until a credible alternative arrives that more effectively describes and explains unsolved puzzles, CGIR now invites “Perspectives” to “challenge the existing paradigm in which corporate governance research operates, point to anomalies that are not being solved, and suggest an alternative world-view that may better solve the problems before us.” The first such offering is included in the issue and is prominent governance consultant John Carver.

Like governance ratings by The Corporate Library’s ratings, Carver’s theory appears to be built from the ground up, measuring from the ideal, rather than from common practices.

A Case for Global Governance Theory: Practitioners Avoid It, Academics Narrow It, the World Needs It includes the following opening observation:  “A credible theory of corporate governance will not arise by studying what is.”

Since governance is a social construct, we are not best served by “studying our own creation in order to tie together practices that grew in the absence of theory. Taking that course is to forever constrain tomorrow’s possibilities by today’s practices.”

I assume it is his long-time consulting practice that taught him it is better to start with what we need from corporate boards, rather than what they already do. “Therefore, it is not descriptive theory we need for governance but prescriptive theory.”

Once we have determined the needs of governance, those need can serve as the measure to judge the appropriateness of “accounting standards, structural considerations, reporting methods, techniques of delegation, officers’ roles, the choice of topics for board involvement, even statutes and codes.”

Clarifying what boards are for must not be based on the needs of CEOs (as is all too common today). Because boards’ prime fiduciary obligation is to owners, their organizational authority comes from owners, and their relationship to management is one of greater authority, boards are organs of ownership, not of organs of management.

Carver’s theory, like his practice, builds on the central position of the board. If we examine the board’s central purpose, we are only distracted from our theory building by recounting how boards have been used. We must start from the barest necessity.

The board represents owners in the governance of the enterprise… The board is owner-representative before it is the CEO’s superior and, in fact, before it makes a decision to have a CEO to begin with… It is the board’s necessary function, then, to define and demand what owners want the organization to accomplish and what risks it may take… Construed in line with this raison d’être, the board should be the most vigorous shareholder activist in sight.

Starting from this basic foundation, Carver argues that many other things follow:

  • Board agendas, for example should become the board’s agendas rather than management’s agendas for the board.
  • The board chairman works for the board, not the other way around.
  • Sarbanes Oxley is misdirected, since if assigns responsibility to sub-board units, rather than recognizing the board’s accountability for all its delegated authority.
  • Advising the CEO is an optional obligation. “Responsible governance theory cannot allow the mandatory to be sacrificed to or even potentially weakened by the optional.” “The board’s unique responsibility is not to give good advice, but to ensure that the CEO produces good performance.”

Carver’s theory has been elaborated into what he calls his “Policy Governance” model, which

positions governance as an owner-representative function rather than a management function; provides for resolute board action despite diversity of views among owners and even among directors; balances overcontrol and undercontrol through a policy design that enables boards to control what they need to control and safely leave to the CEO what they do not need to control; avoids both rubber stamping and micromanaging; optimizes the values of CEO empowerment and board control; moves directors from advising on management’s job to defining management’s job; forces the practice of group authority by allowing no way to elude it; ensures that committees are aligned with dominant board accountability; positions the topmost of a two-tier board arrangement as the owner-representative (“governing” board), and illuminates any practice or structure that detracts from total board allegiance to agency responsibility (such as executive/inside directors and chair-CEO duality).

While he doesn’t claim his model to be the only governance theory possible, he does argue forcefully that a globally-applicable theory would facilitate progress by introducing a common language, enhancing public perception of corporate boards as accountable stewards, clarifying the distinction between governance and management, guiding productive research, clarifying roles, and aiding investor confidence.

Kuhn posited that “normal science” is predicated on the assumption that scientists know what the world is like. Anomalies are discounted until extraordinary investigations lead the profession to new paradigms, incompatible with time-honored theories. Scientist reject the old paradigm only when the new has more explanatory power.

Unlike the natural sciences, where paradigms are used to explain and predict, corporate governance is socially constructed. Paradigms in our discipline are normative models, used to to discipline and guide. The major stumbling block to shifting paradigms is recognizing the element of choice. We aren’t stuck with what we have. We can choose to move to a whole new paradigm, if it offers a better foundation for building the kind of world we want.

Personally, I doubt if the current crisis will push us into a new corporate governance paradigm. However,  it may accelerate explorations of what such a paradigm might look like. I’m delighted to learn that  Corporate Governance: An International Review will facilitate such discussion.

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CorpGov Bites

The rewards of virtue Does good corporate governance pay? Studies give contradictory answers (The Economist, 4/26/10). Interesting review of a small body of research. Yet, the article provides no real contradiction to the idea that good corporate governance does pay… we’re just having some problems measuring it.

Riding Herd on Company Management, WSJ, 4/27/10. Roger Ferguson, of TIAA-CREF, points to Amgen, which provided shareholders with the ability to comment directly to the compensation committee. He calls on shareowners to more fully engage and on mutual fund companies to have more independent boards of directors, who can put shareholder interests ahead of those of the investment adviser.

EOG investor calls for capping executive severance, The Houston Chronicle, 4/27/2010. Innovative proposal by Amalgamated Bank’s LongView Funds at the annual meeting of EOG Resources, Inc. (NYSE: EOG). The proposal urges the board to adopt a policy prohibiting any equity awards to top executives from automatically vesting upon a change in control.

Wal-Mart Workers Can Sue as Group in Gender-Bias Case Over Pay, BusinessWeek, 4/27/2010. Does anyone need further evidence that getting ahead of the curve on ESG issues pays? In 2001, the company settled 13 lawsuits by paying out $6 million. How much will it cost to settle claims by 2.5 million current and former employees?

SEC Investor Advisory Committee announces agenda for May 17, 2010 meeting. Written statements to be considered by the SECIAC should be received on or before May 10, 2010 through the Commission’s Internet submission form or by sending an e-mail; include File Number 265-25-04 in the subject line.

Credit Rating Agency Hit With Subpoena for Failing to Comply With Investigation, Social Funds, 4/26/10. The Financial Crisis Inquiry Commission (FCIC) issued its first subpoena, to Moody’s Investors Service, for “failing to comply with a request for documents in a timely manner.”

Shareholders veto HKEx resolution,, 4/22/10. Investors sent a clear message to the Hong Kong Exchanges, voting by 70.2% against a proposal to allow the company to bypass board meetings and pass resolutions with a simple majority of signatures.

Next SEC Governance-Reform Target: Proxy Advisors?, Agenda, 4/26/10. The SEC will issue its long-awaited concept release by the end of June on suggested reforms of the proxy voting system such as NOBO/OBO classification, client-directed voting, voting mechanics, and regulation of proxy advisers.

Stanley Black & Decker launches video annual review, Cross Border, 4/26/10. “We’ve created the site to give you access to information in a way that’s more interactive, cost effective and better for the environment. As you travel around the site, you’ll learn about Stanley’s performance in 2009, and you’ll hear from some of our leaders about our exciting future as Stanley Black & Decker.”

Arthur Levitt: The Real Governance Problem, Directorship, 4/27/10. A failure of regulatory oversight led to the problems we now are dealing with. We need a resolution authority to handle the failure of financial institutions.
Regulatory responsibility should be divided into four major areas: prudential regulation and supervision (which applies to deposit-taking banks); market regulation and supervision; consumer and investor protection regulation; and systemic risk oversight.

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Armchair March Protests Inaction on Wall Street Reforms

When some 10,000 union members and activists march on Wall Street April 29, they will be joined by “virtual marchers” demanding an end to Big Banks’ reckless practices and insisting on real Wall Street reform.

The AFL-CIO will print the name and personal message of virtual marchers on stickers that marchers will carry to insist on real reform.

Two-thirds of Americans support stricter regulations on the way banks and other financial institutions conduct their business. The AFL-CIO may have struck on an easy and creative way for members and others to join in as armchair protesters. (More than 8,000 Set for Virtual March on Wall Street—Join Us Today, AFL-CIO, 4/27/10) Will it have any impact on Republican politicians?

The Activist Investor provides a nice summary of “legislative and regulatory initiatives of interest to activist investors.”

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CEO Pay in the Context of Society

An alternative approach is offered by Jay Lorsch and Rakesh Khurana in The Pay Problem, Harvard Magazine, May-June/2010, which theorizes find that the current compensation trouble stems from unexamined assumptions about the purpose of boards, executives, and the corporation.

The underlying assumption that executives would work more effectively if their monetary rewards were tied to results built on incentives for factory workers, using piece-rate schemes advocated by Frederick Taylor. But these prescriptions missed two complications when applied to senior executives:

  • often executives have little or no control over the results they rewarded for achieving; and
  • results are more often produced by a group of executives or even by an entire organization’s effort.

Turnover in chief executive suites led to a belief of a well-functioning market for senior executive but compensation in reality depends much more on negotiations than anything like a market rate. Another factor that transformed compensation was agency theory that linked top executives’ pay plans to a firm’s stock price. “Prominent business organizations switched from advocating a ‘stakeholder view’ in corporate decisionmaking to embracing the ‘shareholder’ maximization imperative.”

In 1990, for instance, the Business Roundtable, a group of CEOs of the largest U.S. companies, still emphasized in its mission statement that “the directors’ responsibility is to carefully weigh the interests of all stakeholders as part of their responsibility to the corporation or to the long-term interests of its shareholders.” By 1997, the same organization argued that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to the stockholders.”

“Executive pay is rising not so much as a driver of improved performance, but as a consequence of improving performance and an accompanying rise in equity values.”

The authors want to move from the prevailing paradigm, which regards managers as needing to be bribed to perform, back to something like when managers were viewed as professionals with obligations to various “stakeholders” and to the broader society.

Re-thinking the nature of executive pay within the context of our larger economic and social system and the challenges we face may enable us to create a new model of compensation rooted in a more realistic recognition of the social context within which firms operate. It should, and can, rest on valid assumptions and fundamental values that allow us to build a more inclusive and sustainable economic future—one in which we don’t have to bribe executives to do the duties we have entrusted to them.

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Say on Pay With Teeth Down Under

Australian Minister Chris Bowen plans to introduce extensive executive remuneration reforms designed to force boards to be more accountable and give shareholders more power, including the “two strikes” proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues as follows:

  • 25 per cent ‘no’ vote on remuneration report triggers reporting obligation on how concerns addressed; and
  • Subsequent ‘no’ vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.

A claw-back provision would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. (Australia Looking to Take Say-on-Pay One Step Further,, 4/27/10)

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How I Voted at Winmark, Rovi, Under Armour, Fluor and Waste Connections

Busy week coming, so I used on Sunday mostly to research how my favorite “brands” voted and to vote. Here are the results:

  • Winmark – I got no voting advice from my usual sources, so voted with management’s recommendations.
  • Rovi – I voted with the recommendations of Florida SBA and management’s recommendations.
  • Under Armour – I voted with CalSTRS, withholding my vote from several director nominees.
  • Fluor – I voted with Florida SBA in favor of the proposal from the Central Laborers’ Pension, Welfare & Annuity Funds (Jacksonville, Illinois) resolution to adopt a policy that the board’s chairman be an independent director who has not previously served as an executive officer of Fluor.
  • Marriott International – I voted with Florida SBA, withholding from a couple of directors.
  • Waste Connections – I voted with management.

Upcoming are 3M, Goldman Sachs, Valeant, EW Scripps, Dreamworks, Interface, Home Depot, Sirius XM, among others. Any voting advice from readers on these issuers?

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1.59% of total household income, about $8.7 trillion, went to the top 400 wealthiest US households in 2007, up from 0.52% of $3.6 trillion in 1982. If I’m getting all my zeros right, that works out to about an average of $345,825,000 each for those top 400 families.

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Apache v. Chevedden: a Non-Starter

It would appear that Apache v. Chevedden is now fading into oblivion. Two companies have sought no-action letters based Apache-inspired arguments. Both have failed. To briefly review:

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. OK, a law firm got a lot of publicity for “winning” a lawsuit on behalf of a giant firm against an individual who represents himself in court.

Some speculated the case might lead to a change of course in future no-action letters from the SEC. For example, Post “Apache v. Chevedden”: What Will Companies (and the SEC) Do Now ( Blog, 3/11/10).

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.

I disagreed, since the judge clearly stated:

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 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.

I’m relatively certain that if the judge had all the facts in the Apache case, she never would have ruled the way she did. Here is what the judge said:

RTS is not a participant in the OTG. It is not registered as a broker with the SEC. or the self-regulating industry, organizations FINRA and SIPC. Apache argues that RTS is not a broker but an investment adviser, citing its registration as such under Maine law, representations on RAM’s website, and federal regulations barring an investment adviser from serving as a broker or custodian except in limited circumstances … The record suggests that Atlantic Financial Services of Maine. Inc., a subsidiary of RTS that is also not a DIG participant, may be the relevant broker rather than RTS. Atlantic Financial Services did not submit a letter confirming Ghevedden’s stock ownership. RTS did not even mention Atlantic Financial Services in any of its letters to Apache.

After the judge’s ruling, Chevedden was able to follow-up with RTS. RTS confirmed they are a Maine chartered non-depository trst company and that they do, in fact, directly hold his shares in an account (under the name Ram Trust Services) with Northern Trust. Their letter made no mention of AFS because AFS plays no role in the custody of his shares. For purposes of Rule 14a-8, RTS is the record holder of his securties. The judge ruled “narrowly” against Chevedden because she thought AFS might be the real record holder.

Shareowners can rest easier knowing the SEC, which is more familiar with not only its own rules but with the structure of the financial industry, isn’t making the same error.  First the SEC rejected arguments by Gibson Dunn on behalf of Union Pacific on March 26, 2010. More recently, in a letter dated April 20, 2010, the SEC rejected a similar no-action request by Mayer Brown on behalf of Devon Energy. Mayer Brown offered the following:

Specifically, in Apache Corp, the court found that a letter from RTS, intended to establish the Proponent’s satisfaction of Rule 14a-8 ownership requirements with respect to another public company, was insufficient for that purpose because RTS purported to be the Proponent’s “introducing broker” but is not, in fact, a registered broker. RTS was also not a registered holder of the securities at issue, and was not a DTC participant. For these reasons, the court found that a letter fromRTS was unreliable and could not satisfy the eligibility requirement of the Proponent under Rule 14a-8. See Apache Corp. v. Chevedden, a copy ofwhich is attached as Exhibit C.

The SEC responded:

We are unable to concur in your view that Devon Energy may exclude the proposal under rules 14a-8(b) and 14a-8(f). Accordingly, we do not believe that Devon Energy may omit the proposal from its proxy materials in reliance on rules 14a-8(b) and 14a-8( f).

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Get Out the Vote on Financial Reform

I strongly encourage readers to send a letter to your Senators on behalf of you as an individual investor and/or your firm and to also to ask your friends and clients to send letters/emails to support passage of comprehensive financial regulatory reform.

Download a model letter (in Word) written by Joe Keefe, CEO of Pax World Funds and Lisa Woll, Executive Director of the Social Investment Forum. You can also download an Excel spreadsheet of Senate Contacts and a draft Financial Reform Letter to the Editor to send to your local paper.

The authors have highlighted some of the important corporate governance language and securities regulation that is in the bill as well as the need to strengthen certain sections in particular advocating for an independent Consumer Financial Protection Agency.  This measure would be a good start. More is needed.

The vote in the Senate on Financial Regulatory reform will likely take place next week. We need to do everything we can to ensure better transparency, disclosure and regulation.  The other side is mounting an immense effort to stop the bill or significantly weaken it. (What Financial Reform Means for You, SmartMoney, 4/22/10;  Obama moves to close deal on financial reform, MSNBC, 4/22/10 and The Debate on Wall Street Reform, Council on Foreign Relations, 4/22/10)

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The Corporate Library's Governance Ratings and Equity Returns

Research on the relationship of governance ratings systems to investment performance has shown mixed results, and the significance of particular governance features to equity returns is widely debated. A recent study by The Corporate Library suggests their ratings system, focused on the identification of agency problems rather than supposed best practices, can contribute significantly to generating excess returns.

TCL backtested a model portfolio benchmarked to the Russell 1000 that excluded companies they rated “high” or “very high” risk in board, compensation and/or overall governance. Unlike “best of class” studies, TCL didn’t hesitate to underweight entire industries where poor governance is widespread and risk is higher.

In comparison to the benchmark Russell 1000, the model TCL portfolio with the strictest standards had a smaller weighted average market-cap ($42 billion, vs $79 billion) and a slight growth tilt (P/E ratio of 20.3 vs 18). It was persistently underweight in financials and energy, while overweight in technology stocks. Annualized performance was 6.91%, compared with 4.16% for the benchmark for the 2003-2010 period.

Download the study for free from TCL.

I consider studies such as this one extremely important. We can shout from the rooftops about the need for corporate governance reforms until we’re blue in the face, but once a few funds have been initiated that make excess returns using corporate governance indices to overweight or underweight issuers, the walls of resistance will really come down. Please let me know of additional studies and especially of any funds using corporate governance strategies.

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Facebook Forum Official at TVI Pacific

In a development that demonstrates the potential for the social web to bring companies and their shareholders closer,  Canadian-based copper producer TVI Pacific Inc. (TSE:TVI) has recognized the discussion board on the company’s Facebook page as its “official Corporate Discussion Forum.”

The move to official status was announced in an April 22 news release providing details of the company’s annual meeting and updating investors on the construction of a zinc extraction system at the company’s Philippine mine.  The release referred readers to the company’s Facebook discussion board for more information about the the Zinc circuit. (Company adopts Facebook for official investor forum, by Dominic Jones on April 22, 2010, Investor Relations Blog)

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Require Affirmative Proof in Specified Circumstances of "Too Big to Fail Companies" in Order to Meet the Business Judgment Rule

“There is no such thing to my mind as an innocent stockholder. He may be innocent in fact, but socially he cannot be held innocent. He accepts the benefits of the system. It is his business and his obligation to see that those who represent him carry out a policy which is consistent with public welfare.” — US Supreme Court Justice Louis Brandeis

We seem to have moved very far from Brandeis’ ideal for shareowners, even to the point where directors too, are absolved of all responsibility, as long as they follow a very minimal set of process rules. In an effort to prompt discussion of a poor corporate governance as a critical but largely ignored cause of the financial crisis, Martin B. Robins shifts our focuses to outcomes in his draft Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance.

After reviewing and largely rejecting several currently proposed reforms, as insufficient by themselves, he suggests that directors at highly interconnected firms that are too big to fail assume a greater amount of direct responsibility for seriously adverse outcomes. Such responsibility would take the form of a reversal of the present burden of proof placed on plaintiffs in actions alleging breach of a directors’ duty of care.

Under his proposal, D&O insurance at such firms, if allowed at all in order to order to reach agreement on reforms, could have a high deductible payable by individual directors. One half the premium would also be paid by the directors and procurement of such insurance would need to be approved in advance by shareowners holding at least 60% of the firm’s voting equity.  Directors could escape liability by affirmatively demonstrating they have properly overseen management along the lines of Smith v. Van Gorkom.

Robins writes that he is generally satisfied with current public policies regarding director liability, except where inadequate corporate governance can “impact those outside the corporation,” which seems to me rather broad, since a great many firms externalize costs, but which he restricts to something like what most of us would consider companies that are “too big to fail.” Smith v. Van Gorkom emphasized the need for directors to “inform themselves ‘prior to making a business decision of all material information reasonably available to them.”

However, as Robins points out, to encourage directors to continue to undertake risky but potentially value-maximizing strategies in good faith, the Delaware Legislature promptly enacted title 8, section 102(b)(7) of the Delaware Code to allow corporations to include in their certificates of incorporation language “eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty [other than duty of loyalty or intentional misconduct/bad faith] as a director.” Apparently, more members of the Delaware Legislature are dependent on management than on shareowners, since shareowners would have been unlikely to provide such a total escape from liability.

Robins believes, “the time has come to reconsider this policy of simply absolving directors who properly inform themselves of relevant information of any responsibility for the ultimate use of such information.” Blind deference to the judgment of rating agencies, when you know they have drastically reduced their standards should no longer suffice.

SEC protections are largely built around requirements of disclosure and the prohibition of deceit. Boards are generally fully protected by the business judgment rule, except when their firm is “in play.” Then, they are expected to heighten their focus with respect to potential changes in control. Noting that non-M&A matters like credit underwriting and investment standards can also have great impact, Robins calls for the development of “comparable jurisprudence governing oversight of operational matters.”

Perhaps to build up the value of his own proposed reforms, he appears to attack say on pay and proxy access, which “call upon attenuated logic to believe that shareholders will recognize poor performance by directors early enough to prompt them to exercise authority to cause their removal and timely installation of a new board which will insist upon a reversal of the ill-founded management policies before they do serious damage.” While I would not be so quick to dismiss efforts to align the interests of directors and shareowners, as well as to create mechanisms of accountability, I fully embrace the assertion by Robins that “we need a standard that encourages critical thinking instead of herd behavior.”

We need a legal regimen which forces directors at systemically important firms to familiarize themselves with what management is doing, and ask the tough questions of management before policies are implemented, to see if the downside risk of those policies is understood (or has been considered at all) and to change course when even an originally well conceived strategy is no longer suitable. Ultimately, we need to force directors to consider on an ongo- ing basis whether their firms’ managements should be in their positions at all, in order to screen out dishonest, reckless or incompetent persons.

As mentioned at the beginning of this post, Robins sets out proposed legal changes, at the state level, which include a set of “triggering events” to limit applicability to companies that are too big to fail.  He outlines conditions where compliance with Smith v. Van Gorkom would not suffice in any civil action alleging bread of any duty of care, including undismissed criminal and civil proceedings, bankruptcy, large write downs, etc.

I disagree with some of the details of Robins’ arguments and recommendations. Implementation of too big to fail reforms, especially by increasing director liability, seems doomed to failure if we must rely on adoption on a state by state basis. Perhaps I’m a cynic, but I think we have much more of a race to the bottom, rather than a race to the top. Management and self-sustaining boards control the state of incorporation, not shareowners.  Robins’ arguments, if not his recommendation, provide additional support for a federal corporation law. Maybe the recent carnage and public desire for change will prompt state courts and legislatures, especially in Delaware, to take a fresh look in attempt to preempt federal action. Both courses should be pursued. Public comments to the Delaware Court of Chancery, Charles M. Elson at the John L. Weinberg Center for Corporate Governance at the University of Delaware and the SEC Chair, and the SEC Investor Advisory Committee might help move such reforms along.

Additionally, while I like the idea of forcing directors to meet a high deductible for D&O insurance in circumstances outlined by Robins, what’s to stop any additional costs from being built into their compensation structure? I also disagree that “failures that arise from faithful management must come from the markets” for all but too big to fail companies. By the time markets recognize board decisions that are stupid, egregious or irrational, shareowner value has generally plunged and correction by markets, involving full blown proxy contests, are very expensive compared to other remedies, such as proxy access.

Robins is too modest in his proposal, many elements of which should be extended well beyond the scope of companies that are too big to fail, especially the ideas of flipping the business judgment rule presumption and requiring affirmative proof of reasonable care, going beyond process, if specified events have occurred. Nevertheless, applicability of these reforms at companies that are too big to fail would represent a good start, with the hope of later expansion. Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance warrants wide circulation and consideration. I urge readers to include Marty Robins, and his outcome-oriented model, in their discussions around corporate governance reforms that could reduce the likelihood of the next financial crisis.

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BPA, It's The Real Thing

The first ever shareholder resolution on BPA that was filed at Coca-Cola received 22% of the vote. The information below is from Michael Passoff of As You Sow, which was a co-filer on the shareholder resolution:

Our speaker at the Coke annual meeting just reported that the shareholder resolution on BPA received a 22% vote. This is an excellent first year vote. Few new resolutions get more than 5-6% on a first year vote. Some of the other new resolutions that I can remember getting more than 20% on their first vote were the Say on Pay and climate change resolutions – both of which now regularly get very high support – some even winning majority votes

The resolution received support from some significant sources.

  • RiskMetrics Group and Proxy Governance – the first and third largest proxy analyst services in the country both recommend voting FOR this resolution. Both groups note that Coca-Cola does not sufficiently disclose the steps the company is taking to address shareholder and consumer concerns about the use of BPA in can linings.
  • CalPERS, the nation’s largest pension fund – voted all of its 6,075,143 shares for this resolution (= aprox. $346M)
  • The Investor Environmental Health Network – a shareholder network with $41B in combined assets – supported this resolution.

We will be bringing it back every year until the company catches up with the rest of the industry in recognizing the risks of BPA. Coke should be concerned about where these resolutions are headed over the long term. The main implication of the resolution is that Coke is an industry laggard, and shareholders like to invest their money with leaders not laggards.

Our shareholder coalition contacted Coke in 2007, 2008, and 2009 requesting a dialogue regarding the company’s use of BPA. The company did not agree to talk with us until December 2009. At that point we had already surveyed more than 20 companies over their use of BPA and had engaged in dialogues with several of them – so our dialogue with Coke made it quite clear that they were lagging the industry in several significant ways.

  • Coke does not provide consumers with sufficient information regarding the health risks associated with BPA. For example, Heinz Company’s website notes that the company is “proactively exploring alternatives to BPA.” In stark contrast, Coke’s website claims that its beverage packaging does not pose a public health risk, including any “alleged risks” associated with BPA. As the world’s largest beverage company, Coca-Cola sells almost 570 billion servings of beverages. A significant part of this business is selling beverages in aluminum cans that contain BPA. Yet, our company has failed to provide shareholders with sufficient evidence that it is addressing or mitigating BPA related risks.
  • Coke’s assumption that BPA does not pose a public health risk, in the face of mounting regulatory restrictions and consumer concerns exposes our company to regulatory, legal, and competitive risks. Coke does not provide investors with information about these financial risks. ( In my opinion, the company has basically taken the position of Don’t Ask, Don’t Tell: A Poor Framework for Risk Analysis by Both Investors and Directors (HLSCG&FR, 11/15/09)

Coke also lags behind the industry in exploring alternatives to BPA. Coke’s failure to explore BPA-free alternatives leaves it unprepared for likely regulatory changes. For example:

  • Four bills were introduced in the 2009-10 Congress to ban or limit the use of BPA.
  • Four states passed legislation banning or limiting BPA and in 2009 over 20 states introduced similar legislation.
  • In January 2010, the FDA reversed decades of silence on the possible dangers of BPA, stating its concerns about the potential effects BPA has fetuses, infants and young children. The FDA also stated that it supported efforts to replace BPA and to developing alternatives – sending industry a clear signal that it should transition out of BPA

All of this led As You Sow, Domini Social Investments, and Trillium Asset Management to file the first-ever shareholder resolution focused on BPA – and apparently a lot of Coke investors share our concerns.

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Eli Lilly

A proposal to remove an 80% approval threshold for takeover bids against the wishes of Lilly’s board received approval from shareholders owning 74% of Lilly’s shares. But to pass, the proposal needed the approval of investors holding 80 percent of all of Lilly’s outstanding shares.

Another Lilly proposal aimed at improving governance also failed to get the necessary supermajority: to hold annual elections of directors, rather than staggered elections under current bylaws. Some 75% of shares outstanding were voted in favor of that proposal.

Both items were pushed by activists such as John Chevedden and CalPERS. However, this year, even with Lilly’s board behind the measures, they still didn’t get the 80% approval needed. Chevedden speculates the problem may be the Lilly Endowment, Inc., which controls 11% of the vote. Maybe the Endowment is acting like the US Treasury. (Shareholders fail to remove Lilly’s anti-takeover provision, Indianapolis Business Journal, 4/19/10 and Lilly’s Bid To End Supermajority Rule Misses Supermajority, WSJ, 4/19/10) Reform seems to be a very long time coming.

This just in:

This year, it appears that the Lilly Endowment, the company’s largest shareholder with an 11.8 percent stake, opposed the proposals. The endowment has voted against declassification measures in the past. It appears that the endowment is concerned that removing takeover defenses might expose the company to a hostile acquisition and cause Lilly to leave its hometown of Indianapolis. The private foundation, which is independent of the company, was founded in 1937 by Lilly family members and has a separate board. (Lilly’s Supermajority Rules Stymie Reform Again, RiskMetrics Group, 4/20/10)

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Treasury Cop-Out at Citigroup

Of the 30% support achieved for faith-based investors resolution urging greater derivatives disclosure at Citigroup, ICCR Executive Director Laura Berry said:

“We are delighted with the clear support for the principles reflected in the apparent high level of shareholder support for this resolution. Given the history of ICCR attempts to bring these issues to the attention of our fellow shareholders, long before the crisis and bailouts began, the administration’s decision to vote with management is mystifying and inconsistent. The SEC’s recent ruling, allowing these resolutions to move forward, and the administration’s oft-stated commitment to financial reform and transparency led us to imagine the full support of our government in their stewardship of the shares they hold on behalf of U.S. taxpayers.” (Religious Shareholders See Big Boost for Derivatives Disclosure in Proxy Resolution Vote at Citigroup, but Criticize U.S. for Failing to Fully Vote its Shares in Support, 4/20/10)

The United States government, which controls 27% of Citigroup as a result of the bank bailouts, failed to fully support the resolution. “At the time of the exchange (acquisition), Treasury agreed with Citigroup that it would vote on all other matters proportionately–that is, in the same proportion (for, against or abstain) as all other shares of the company’s stock are voted with respect to each such matter.” (Treasury Announces Voting of Its Shares at Citigroup Annual Meeting, US Department of Treasury press release, 4/20/10)

Treasury copped out. There were plenty of issues at Citigroup worthy of support (see How I Voted at Citigroup) but they had “agreed with Citigroup” to vote most matters proportionately. Apparently the Obama administration thinks Citigroup is managers but the owners are in charge of the managers. Why would the owner defer to the employee?

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How I'd Vote at Coke

As can be seen from the list of stocks I own, I don’t have any direct investments in Coca Cola (KO). However, I do have indirect holdings through my pension at CalPERS and through several mutual funds and a strong longstanding concern about the safety of Bisphenol-A (BPA), a chemical used in the epoxy lining of Coca-Cola’s canned beverages.

Domini Social Investments, As You Sow, and Trillium Asset Management Corporation filed the first shareowner proposal focused solely on BPA at Coke, asking for a study updating investors on how the company is responding to the public policy challenges associated with BPA, including summarizing what the company is doing to maintain its position of leadership and public trust on this issue, the company’s role in adopting or encouraging development of alternatives to BPA.

Scientific studies indicate that BPA is an endocrine-disrupting chemical that mimics estrogen in the body. Numerous animal studies link BPA, even at very low doses, to changes in brain structure, immune system, and male and female reproductive systems changes. A recent study in the Journal of the American Medical Association links BPA exposures in humans to cardiovascular disease, diabetes, and liver enzyme abnormalities. Health Canada, a Canadian federal agency has warned that BPA can leach into beverages.

Manufacturers of baby and sports bottles have been eliminating BPA-containing plastics from their product lines. Eden Foods has been using BPA-free cans since 1999 and General Mills recently announced that the company will offer alternative can linings that do not use BPA for their organic canned tomatoes, so substitutes can be found.

There are additional shareowner proposals on the ballot seeking an advisory vote on executive pay, requiring an independent board chairman and performance-based equity awards. All should be supported. I’m delighted that CalPERS is voting in favor of all the resolutions and is also withholding votes from directors B. Diller and J. Wallenberg for serving on too many boards.

Need more voting advice on Coke? Check out

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Jim Crow "Protections" for Retail Shareowners

A strange revolution, or perhaps a counter-revolution against management excesses, is under way, a quiet and orderly one of small capitalists, determined to win democracy and fair treatment from the tycoons they pay to manage American business. — Lewis D. Gilbert, Dividends and Democracy, 1956

John Chevedden sent me an e-mail over the weekend, attaching two examples of the prejudice shown by on-line voting using a voter information form (VIF) from Prudential. The fact that the example is from Prudential is immaterial… it could be from just about any company in the US. The current system of VIFs that go out to retail investors not only makes me wonder if the revolution that Gilbert spoke of ever occurred, it also hearkens back to days when women could only influence their vote through men, blacks had to take a literacy test or pay a poll tax and earlier, when voting was restricted to men of property. From Chevedden’s e-mail:

  • By pushing one button a shareowner can vote as recommended by management. A fair ballot would also allow a shareowner to push one button to vote against management’s recommendations.
  • The ballot adds language to the shareowner’s proposal that only “if properly presented at the meeting” will the vote count. However, the same provision applies to management proposals and the VIF provides no such warning. By including the language only on shareowner proposals, the VIF tells the voter that he or she is potentially wasting their vote because there is the likelihood that all votes on the shareowner proposal will be thrown out if the shareowner fails to have the proposal presented.  It is another way saying that the proponent is irresponsible because of the likelihood they will fail to present their proposal.

Of course, I’ve already enumerated several other defaults in the VIF system.

  • Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. VIFs typically include a practically microscopic footnote. Then after you cast your preliminary vote, it is easier to see how your blanks will be voted; see this example at Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared.
  • Actual proxy ballot titles have to clear and impartial. VIFs, are apparently drafted by management and might be edited by Broadridge without any requirement that they be either clear or impartial.
  • Actual proxy ballot titles have to actually state the nature of the item being voted. VIFs can simply refer retail investors back to the actual text, buried in a different document, the proxy.
  • While each failure of VIFs to meet the legal requirements of proxies acts as an impediment to fair voting, the combination of factors has a multiplicative, rather than additive effect. For example, if the VIF includes no summary but merely refers the retail shareowner to the proxy, shareowners are less likely to bother voting that item. If they see the warning that their vote may not count, because the item many not be presented at the meeting, they are again less likely to vote that item. If they don’t vote the item, their blank vote will be changed to a vote in favor of management’s recommendation.

Why are most votes cast using proxies that have to meet various legal requirements to ensure fair elections but when it comes to retail shareowners, the SEC appears to be unconcerned with issues such as clarity and fairness?

Most retail shareowners are not sophisticated investors. Laws require that the majority of investors in a hedge fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge.

I don’t always agree that small investors should be discriminated against, denied the ability to invest in  hedge funds. However, at least I understand the logic of protecting the “little guy” against potentially unrecoverable risk. Someone thinks it is for their own good.

Yet, as much as I try, I can’t understand how it can possibly be in the best interest of retail shareowners that VIFs don’t have to meet the legal requirements of actual proxies. Voting with a VIF feels a little too much like landowners “consulting” with their peasants, slaves or wives and then casting ballots “on their behalf.” Is it “for our own good?”

I previously discussed specific cases when I filed a petition with the SEC last year to stop blank votes from turning into votes for management and when I posted Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration. See also “Corrected” Ballot at Altrea Tips Votes to Management.

Where is the Wall Street Journal, New York Times, Huffington Post or even the Motley Fool on this issue? There must be more people concerned with Jim Crow laws for retail shareowners.  VIFs and legal proxies are not equal. I urge readers to bring this discrimination to the attention of the SEC’s Investor Advisory Committee through use of their online comment form and to Chairman Mary Schapiro via e-mail.

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What Should Boards Learn From Goldman Sachs?

As most know by now, the SEC sued Goldman Sachs alleging that the bank created and sold “synthetic” collateralized debt obligations, CDOs linked to subprime mortgages without disclosing to buyers that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. Goldman is strongly disputing the SEC’s allegations.

Business Week notes the Goldman Sachs Suit May Prompt Wider Probe, Regulation. “This is probably just the tip of the iceberg,” said Chizu Nakajima, director of the Centre for Financial Regulation and Crime at Cass Business School in London. “As far as other financial institutions are concerned, they are obviously very worried. If the SEC’s action is actually successful, it could well open up the gates to other litigation worldwide.”

There’s been a raft of coverage. One of the best summaries I’ve seen is Goldman Sachs vs. SEC: All You Need To Know (Latest UPDATES) on the Huffington Post. However, boardmembers of Goldman Sachs and other vulnerable banks are advised to read Wall Street beware: the lawyers are coming, by Frank Partnoy,, 4/19/10 and  The Goldman Sachs Board and the SEC History at The Bloxham Voice, 4/19/2010.

Lynn Turner, the former SEC chief accountant, and Frank Partnoy, author of the The Match King have published Off-Balance Sheet explaining how Congress could reform this area with one simple paragraph requiring that financial statements reflect reality, and by empowering lawyers to enforce that requirement after the fact.

Bloxham notes that in April 2003 the SEC settled with Goldman over conflict of interest charges. Goldman was permanently enjoined “from violations of NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342).” NYSE Rule 472 which begins:

Each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member organization to customers or the public must be approved in advance by an allied member, supervisory analyst, or qualified person designated under the provisions of Rule 342(b)(1).

What was the level of supervision in the most recent example? This is a question the Goldman Sachs board will need to address. Bloxham then proceeds to go through several other requirements in a similar manner. Boards would be advised to go through the same exercise.

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How I Voted: Berkshire Hathaway & Scripps Networks Interactive

I found no advance voting recommendations or advocates regarding Berkshire Hathaway from either or  No items were on the proxy other than election of directors. There seems to be a slight glitch on, since it only appeared to allow voting in favor of all director candidates or withholding. That wan’t a problem for me. I went ahead and voted for all as recommended by management.

For Scripps Networks Interactive, only had the votes of Florida SBA. I aligned my vote with them, withholding from Dale Pond and Ronald Tysoe. In most instances, I trust Florida SBA so knowing their vote made mine easy… although it would be even better if I knew why they withheld their vote from these nominees. For me, this was a case of strictly voting on brand reputation. (see Latham’s Proxy Voting Brand Competition, 1/27/07)

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How I Voted at Kellogg (K)

First I checked and noticed the voting deadline is 4/19/2010, so I stopped procrastinating. I didn’t see any voting advice there, so I looked at Two funds listed there didn’t vote. The funds that did vote, voted for all items, including my resolution to reduce supermajority voting requirements. I’ll do the same, including voting for my own resolution.

I added a link to the bottom of the page at so that readers can easily pull up a copy of my resolution. Hat tip to John Chevedden for his help and advice on this one. Oh, I did check CalPERS, especially since they often provide a reason as to why they are voting the way they do, but they hadn’t announced their vote yet as of this post. Of course, I voted using the voting platform.

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Free Webinar: Director Elections 2010 – A Shareowner's Guide

Join The Corporate Library on April 28 for a free webinar with Chief Analyst and co-founder, Ric Marshall. New SEC proxy disclosure rules and changing director election standards have greatly expanded the ability of shareholders to influence election outcomes for individual corporate directors, but for many investors they have also increased the complexity and uncertainty of the voting process.

Current subscribers of The Corporate Library’s Board Analyst database will benefit by learning more about the individual director screens employed by our top analysts in evaluating individual director and board effectiveness, while non-subscribers will have an opportunity to better inform their own analysis and decision-making by learning more from these same insights. Time: 1:00 – 2:00 PM EDT. Register; I certainly did.

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Parallel Universes Undercuts its Own Arguments

In his article The Parallel Universes of Institutional Investing and Institutional Voting, Charles M. Nathan appears to pine for the days when institutional investors took the “Wall Street Walk” if they disagreed with management on governance issues. T. Boone Pickens Jr’s response to that perspective:

That’s like the gardener telling the estate owner, “If you don’t like the way I take care of your property, sell it and move out.” That’s not the way the real world works.

Nathan’s major point is that institutional voting, for the most part, is no longer done by money managers, and is, instead, often handled by a separate internal voting function or is essentially outsourced to third-party proxy advisory firms. Because of the economies of scale, most resort to largely one-size-fits-all voting policies based on perceived corporate governance best practices, without reference to the particulars of each company’s situation. Therefore, firms should develop parallel systems to communicate with the two very different constituencies.

On the other hand, he also advises corporate governance specialists on the investor side to move to a more nuanced approach, recognizing the legitimate need for variation in corporate governance specifics in the context of more than 10,000 public companies in the US that exist in different sectors and different stages of development. That’s constructive advice. Unfortunately, Nathan also includes some very bad advice, such as the following:

The corporate governance community should recognize that it does not need and should not want to talk to the operating and financial management of a company because the voting decision makers are, by design, not involved with measuring the company’s operating and financial performance.

That advice is absurd. Many in the “parallel universe” of corporate governance are actually housed within the investment framework of their organizations. This is certainly true of CalSTRS and CalPERS. The CalPERS Corporate Governance team executes an annual process that identifies approximately 15 to 20 companies in the domestic internal equity portfolio that exhibit poor economic performance and corporate governance.

Nathan grasps the drive by shareowners to move the board from a “trustee model of a effectively self-perpetuating board” to “an assembly of annually elected representatives who are directly accountable to their electorate.” Yet, he believes “proxy access doesn’t involve investment decision makers but rather is the province of voting decision makers.”

While it may be helpful to recognize these functions governance and investment functions are often somewhat specialized, there certainly is frequent communication between the two functions on the investment side. Proxy access isn’t just “good governance.” For many, like myself, proxy access is one more mechanism to correct the “self-perpetuating board” that Nathan mentions. Many object to the ever increasing share of profits doled out to executives, up from 5% to 10% of the total.  Directors that are directly accountable to shareowners may work harder for investors than the CEO. That would be a plus.

Nathan cries that any attempt at accommodation to the demands of the corporate governance community becomes “merely a prelude to another round of demands.” Yet, he must recognize how far we are from that goal of “directly accountable” directors. Even if the SEC’s proxy access rule is finalized, it only facilitates direct accountability for 25% of the directors at companies; the other 75% can remain “self-perpetuating.”

He also loses credibility with retail investors when, in a footnote, he describes the “groundswell” to develop “client directed voting” as one that would allow a default voting pattern of “for or against management’s recommendations or to vote in proportion to all other shareowners.” Any client directed voting that doesn’t include allowing investors to build their own systems of default, based on the votes of institutional investors announced on sites like or by advocates on sites like, should be flatly rejected.

Although the thrust of the article is to encourage companies to constructively engage in dialogue with what Nathan sees as separate corporate governance constituency, he frequently undermines his own arguments. That’s too bad because flexibility and dialogue are certainly needed on both sides.

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How I Voted at Citigroup was very helpful, with several funds reporting their votes in advance. Also very helpful was CalPERS’ site, which provided reasons for their votes.  I voted for most of the directors, along with most of the funds who reported voting in advance on ProxyDemocracy. However, I joined with CalPERS in withholding my vote from the following two, since I found CalPERS’ reasons compelling:

Director Andrew N. Liveris – I joined with CalPERS in voting against Liveris, since he served as members of the audit and risk committee prior to the financial crisis when there was a failure to ensure appropriate corporate governance practices pertaining to risk management were in place. Additionally, Mr. Liveris is a current CEO while serving on an excessive number of public company boards.

Director Judith Rodin –  Like Liveris, he served as members of the audit and risk committee prior to the financial crisis when there was a failure to ensure appropriate corporate governance practices pertaining to risk management were in place.

Along with most of the funds, I voted to ratify the auditors, support the omnibus stock plan, and approve TARP repayment shares. I voted against the Advisory Vote to Ratify Named Executive Officers’ Compensation, since CalPERS believes the company does not adequately disclose the process by which executive compensation is determined.

Along with most of the funds, I voted to Amend NOL Rights Plan (NOL Pill). Generally, I vote against such plans, but CalPERS believes the poison pill is in shareowner best interest. Additionally, the company has indicated the adoption is not for anti-takeover purposes.

I joined with the funds to Approve Reverse Stock Split. I voted with most of the funds in favor of Affirm Political Non-Partisanship, a proposal by Evelyn Y. Davis. CalPERS voted against it. They believe the proposal is unnecessary because Citigroup indicates it adheres to all state and federal regulations on this matter. That doesn’t seem like a convincing reason to me but I’m not very firm in my support. In glancing at the proposal, it may well be that everything in the resolution is already covered by law. If so, it does no harm to vote in favor of it.

Along with most of the funds, I voted in favor of all the shareowner proposals. Report on Political Contributions, by the Firefighters’ Pension System of the City of Kansas City. CalPERS believes this proposal poses no long-term harm to the company. According to, the Center for Political Accountability also supports this proposal.

Report on Collateral in Derivatives Trading, by the Sisters of Charity of St. Elizabeth. CalPERS believes this proposal poses no long-term harm to the company. It seems to me this has the potential to reduce risk. That’s better than posing no long-term harm. In fact, if shareowners had listened to the Sisters of Charity and members of the Interfaith Center on Corporate Responsibility there is a good chance we would have missed the Great Recession. See this 2008 press release about ICCR sounding the alarm for 15 years. Why weren’t shareowners and management listening? Rev. Seamus Finn, director, Justice, Peace & Integrity of Creation, Missionary Oblates of Mary Immaculate and an ICCR board member, said:

The U.S. government controls over a quarter of outstanding Citigroup shares today.   It has an extraordinary opportunity here to send a clear message to Wall Street that more derivatives disclosure is vital.   Even more to the point, the Treasury Department really has no choice other than to support our resolution since a failure to do so would directly undercut its campaign for critical financial reform.

ICCR Executive Director Laura Berry said:

To adopt an inconsistent posture at this critical juncture on derivatives disclosure would be disastrous both in terms of how Wall Street reads the signals from Washington and how seriously Congress sees the Obama Administration as being in its support of vital financial services reform. (Shareholders: Treasury Should be Consistent on Capitol Hill and on Wall Street by Voting Citi Shares for More Derivatives Disclosure, press release, 4/16/2010)

Ability to Call Special Meetings, by William Steiner. CalPERS believes shareowners should be able to call special meetings. So do I. I’ve even submitted proposals myself on this issue and, like William Steiner, I often work with John Chevedden on these submissions.

Proposal Regarding Stock Retention, by AFL-CIO. CalPERS is a firm supporter of stock ownership guidelines that require executives to satisfy minimum levels of ownership after leaving the company. It should be noted the proposal mandates that executives hold 75% of their equity awards for two years after retirement or termination. CalPERS prefers that guideline specifics be designed and implemented through the company’s Independent Compensation Committee. I favor holding most equity awards until after retirement.

Shareholder Proposal Regarding the Reimbursement of Expenses in a Contested Election, by AFSCME. CalPERS believes this proposal poses no long-term harm to the company and would be a benefit to shareowners. I think this proposal could increase the ability of shareowners to have additional influence on nomination and election of directors.

I voted using I you agree or disagree with my votes, you can leave comments here on or on my wall at MoxyVote, search James McRitchie. If you use ProxyDemocracy, keep in mind that you can post how you’ve voted or any other advice regarding a company right on the site. For and example, see the bottom of the Citigroup page. When it becomes technologically feasible, it would be great if sites like MoxyVote and ProxyDemocracy can tell users who sponsored each resolution. Having to look that information up on the proxy takes an extra minute or so. Just as many will vote with various funds because of their “brand” reputation, we will also vote based on the brand of the sponsor.

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