Archive | May, 2010

GRI Conference Report

On the eve of Memorial Day weekend, here is some relevant reading from Marcy Murninghan.  As many of you know, the GRI just completed its biennial conference, and by all accounts, it was magnificent.  Some highlights:

  • During the Opening Plenary, GRI’s Chief Executive Ernst Ligteringen outlined two goals for the next decade. Firstly, GRI proposes that environmental, social, and governance (ESG) reporting should become a general practice to help markets and society take informed and responsible decisions. GRI advocates that by 2015 all large and medium-sized companies in OECD countries and fast-growing emerging economies should be required to report publicly on their ESG performance, or if they don’t, explain why.
  • Secondly, GRI proposes that ESG reporting and financial reporting need to converge over the coming decade. GRI advocates that a standard for integrated reporting should be defined, tested and adopted by 2020. GRI is working with leading global organizations in financial markets, accounting, corporate responsibility, ESG reporting, and civil society to establish the International Integrated Reporting Committee. The committee’s purpose is to promote integrated reporting, and to facilitate and coordinate collaboration between key institutions to develop an integrated reporting standard.
  • On Wednesday, the public comment period has opened for thematic revisions to three content areas – Community, Gender, and Human Rights – and will continue through 23rd August.  These revisions will make GRI’s current G3 Guidelines more relevant, transparent, and specific, without adding extra complexity to the reporting process. The G3.1 revisions are available for public comment for 90 days.  The recommendations have been developed by three different international multi-stakeholder Working Groups with representatives from a range of organizations and a diverse number of geographies including among others Australia, Brazil, Chile, Denmark, India, Mongolia, South Africa, the UK, and the USA. Sustainability reporting practitioners and their stakeholders are encouraged to provide feedback on the G3.1 content proposals via an online public survey.
  • On Tuesday, the United Nations Environmental Program (UNEP), KPMG Sustainability, the University of Stellenbosch Business School (USB) and The Global Reporting Initiative (GRI) launched “Carrots and Sticks – Promoting Transparency and Sustainability,” a study on trends in voluntary and mandatory approaches to sustainability reporting. This research reveals that the regulatory landscape has substantially evolved in all parts of the world. The study Carrots and Sticks – Promoting Transparency and Sustainability investigates the latest developments in sustainability reporting and ESG (environmental, social and governance) disclosure in the regulatory field. It is the latest edition of a study initially published in 2006 to provide readers with an easy reference and overview of mandatory and voluntary approaches to sustainability reporting and assurance throughout the world. A co-production of UNEP, KPMG Sustainability, USB, and GRI, the study covers the majority of OECD countries (Organization for Economic Co-operation and Development) as well as emerging market countries such as Brazil, China, India and South Africa.
  • Today, the GRI and the UN Global Compact announced its new agreement to work together to advance the cause of sustainability and transparency.  Under the terms of the agreement, GRI will develop guidance regarding the Global Compact’s ten principles and issue areas to integrate centrally in a next iteration of its Sustainability Reporting Guidelines, a comprehensive framework developed to facilitate transparency and accountability for businesses and other organizations seeking to disclose their environmental and social performance. At the same time, the Global Compact will adopt the GRI Guidelines as the recommended reporting framework for the more than 5800 businesses that have joined the world’s largest corporate responsibility platform;
  • Brazilian companies swept all the Readers’ Choice Award categories, setting a high bar for the rest of the world to follow.  Congratulations to Banco do Brasil, Banco Bradesco, Vale and Natura Cosmeticos!
  • Throughout the Conference, the topic of integrated reporting predominated, as well as the use of interactive tools and social media, the ways in which XBRL technology might be linked to sustainability reporting.  These topics were featured on a number of panels and plenary sessions.  Our friends Bob Eccles and Mike Kruz were speakers, as were other members of COST US, including Ernst Ligteringen, Sean Gilbert, Mike Wallace, Aron Cramer, Laura Berry, Adam Kanzer, Peter DeSimone, Paul Freundlich, Bill Baue, and, of course, GRI co-founders Allen White and Bob Massie.  (Apologies to anyone I overlooked!)
  • Speaking of panels, on Thursday Bill Baue moderated and Laura Berry participated in a panel discussion of the use of interactive tools for stakeholder engagement.  This also was the occasion when the Harvard CSR Initiative report on The Accountability Web: Weaving Corporate Accountability and Interactive Technology was launched, which Bill and I have been working on since last July.  You can download the full report and an executive summary on the CSR Initiative website.  Special thanks to Jane Nelson, Caroline Rees, Shannon Murphy, and Bob Massie for enabling us to do this work, and helping assure it’s the best it can be!
  • Speaking of interactive technology, the Conference was covered by a number of people who used social media to provide an ongoing chronicle of events and opinion.  In the Twittersphere, at least 19 people used hashtags to report, primarily #GRIConference.  Take a look and drill deeper by following some of the individual posts for a fuller picture.  Blogs, too, provided recaps of each day, and links to other sites. This aspect of the conference experience is the tip of the virtual iceburg, as there are many ways in which digital tools can be used to extend the momentum generated, beyond the conference time-frame.  This is something my colleagues and I are working on, so stay tuned!

Marcy Murninghan was associate at the CSR Initiative at the Kennedy School’s Mossavar-Rahmani Center for Business and Government when she and Bill Baue completed the study mentioned above.  She’s currently joining with colleagues to form a consultancy, The Transition Group, to help leaders and organizations make the transition to a sustainable and just society.

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PIRC CorpGov and RI Journalism Awards

In recognition of the important contribution that journalists make in the areas of corporate governance and responsible investment, and to encourage quality journalism, PIRC and Robbins Geller Rudman & Dowd LLP are awarding Corporate Governance and Responsible Investment Journalism Awards. These awards will recognize journalists who are helping record and clearly explain the issues emerging in these vitally important areas.

Journalists are invited to submit three articles demonstrating their skill in communicating developments in corporate governance and/or responsible investment in a clear and accessible way. The winner in each category will receive a cash prize of £1,000, presented at an awards event in London on 15th July. For an entry form, email [email protected]. The closing date for entries is 18th June. Tell them you saw the announcement at

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Worth Reading

The Deal Magazine’s Guide to Corporate Governance provides a great introduction to the subject, divided into bite-sized segments.

  • What Berle and Means have wrought – “a complete guide to the corporate governance complex of attorneys, dealmakers, academics, judges and politicians.”
  • Attorneys – Here the focus is on Ira Millstein and Marty Lipton at the opposite ends of the spectrum.
  • Academia – Harvard University’s Lucian Bebchuk often spars with Stanford University’s Joseph Grundfest.
  • Hedge Funds – Carl Icahn, T. Boone Pickens, Ralph Whitworth.
  • Pension Funds – CalPERS, CalSTRS, TIAA-Cref
  • The Law – Leo Strine, Mary Schapiro, Barney Frank, RiskMetrics

Know someone who wants to know the basics but won’t read more than a single page? Download a pdf, “Governance on the Head of a Pin” by Dan Boxer, UMeLaw School for use in his classes and with boards.

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Q&A on Client Directed Voting

Historically, most retail shareowners have tossed their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so. “Client directed voting” (CDV), a term coined by Stephen Norman is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture much of the broker-votes cast in their favor that evaporated with recent reforms.

The SEC has indicated that CDV will, among other “proxy plumbing” matters, be the subject of a forthcoming concept release. Therefore, it is critical that shareowners become familiar with this term. The SEC can shape their concept release to facilitate management entrenchment or their framework can further the interests of shareowners. My intention with this Q&A is to help readers understand some of the surrounding issues and be better prepared to judge proposals.

Since Stephen Norman coined the phrase in 2006, the concept of CDV is generally attributed to him and his work with NYSE’s Proxy Working Group.  On October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting on the election of directors. Two months later in December 2006, Steve Norman presented a proposal called Client Directed Voting at an investor communications conference.  The main feature of CDV is that it allows  shareowners to instruct their broker how to vote in the event they fail to return a proxy and it severely limits their default voting options.

Recent posts on the Harvard Law School Forum on Corporate Governance and Financial Regulation by John Wilcox (Fixing the Problems with Client Directed Voting, March 5, 2010) and Frank G. Zarb, Jr. and John Endean (Restoring Balance in Proxy Voting: The Case For “Client Directed Voting,” February 14, 2010) have helped to expand and popularize the concept beyond Norman’s initial concept. See also: CDV vs FAVE: More Proxy Voting Options,  2/17/2010 and Comparison of “Proxy Plumbing” Recommendations, 11/8/09.

Mark Latham, a member or the SEC’s Investor Advisory Committee (SECIAC), actually proposed something similar at least as far back as 2000 (see The Internet Will Drive Corporate Monitoring and other papers at and his system provides more of an open framework, instead of leaning to management. Tbis post builds on his work, especially the Q&A he recently posted on the subject. My main contribution is to simply highlight some relatively small differences and to call out some additional concerns.

See Latham’s recent post Client Directed Voting Q&A on the Publications page at His post provides more online references as well as an interesting introduction to frame the topic. Here, I simply dive into frequently asked questions. The questions and Mark Latham’s responses are in black. My responses are in dark red. Caution: Where my response significantly differs from his, you won’t necessarily know, without comparing this post to Latham’s paper.

1. What do you view as the most significant merits and drawbacks of CDV?

Merits of the Open Proposal:

Quality of voting is more important than quantity of voting (voter turnout). The Open Proposal will increase both the quality and the quantity of voting by both retail and institutional investors. But I think its most significant impact will be to increase the quality of voting by both individuals and institutions. This will happen because of the implicit competition among various voting opinion sources, and their evolving reputations in the eyes of retail investors. Opinion sources will include institutional investors, retail investors, bloggers, activists and professional proxy voting advisors funded by possible new mechanisms discussed later in this questionnaire.

Retail investors are the principals in the principal-agent system of corporate governance. We are the beneficial owners of all equities – in the U.S., 25 to 30 percent via direct purchases, and 70 to 75 percent via our ownership of shares in mutual funds, pension funds and other intermediaries. (By “share” of a pension fund, I mean the fraction of the fund’s assets that funds a person’s expected future benefits.) The agents in our corporate governance system include CEOs, boards of directors, institutional investors, proxy advisory firms, compensation consultants etc. The Open Proposal will improve the accountability of all these agents to the principals, by empowering retail investors with better information and voting tools.

Drawbacks: The Limited Proposal has the substantial drawback of severely limiting retail investors’ choices for standing instructions on voting. The Centralized Proposal likewise has the drawback of limiting our choices to only the decisions shared by institutional investors. The Open Proposal has no drawbacks that I can think of.

The key issue is to let shareowners control where their electronic ballots are delivered, just as there is no question they can control where hardcopy ballots are delivered. This simple requirement would give third party content providers an opportunity to compete and improve content.

2. In your view, how viable a solution is CDV to increase retail participation in proxy voting in the short term? How long do you think it would take before CDV materially increased retail participation rates?

Once the Open Proposal is implemented by more and more retail brokers, I expect the quality of all voting and the quantity of retail voting to increase materially within 2 years. The increase in quality is more important, but I expect our retail voting rate to increase steadily and substantially in the long term, eventually surpassing 70%.

Any implementation schedule would be heavily influenced the need for fees to be delivered to third-party providers and the need for a requirement that brokers must follow client instructions to deliver ballots electronically to third-party platforms. I’ve had personal experience with a broker reluctant to deliver proxies according to my instructions.

3. What other complementary reforms would you view as essential to ensure the success of any CDV approach that were to be implemented?

We should fund various competing sources of proxy voting advice that would be available free to all investors. We should also fund some infrastructure for sharing voting opinions. Funds should be allocated among competing providers by retail investor vote. Sources of funds are discussed in my responses to later questions below.

Retail Shareholder Participation

1. In your view, would CDV be more likely to cause retail shareholders to engage with or disengage from proxy voting? Why? Do you think that either of the Limited Proposal or Centralized Proposal would be more likely to engage retail shareholder participation? Why?

I don’t think the Limited Proposal would engage retail participation significantly. A wider range of voting choices is needed for that, so the Centralized Proposal would engage more retail participation, and the Open Proposal would engage the most retail participation.

The Open Proposal will cause retail shareowners to engage with proxy voting because it offers several new and powerful ways for us to do so. Most will just choose a voting feed and instruct our brokers to implement it for our shares. That is powerful because it takes little time, yet can implement intelligent voting based on reputations of the voting feeds – reputations that will become conveniently available in the financial media, just as the reputations of car makers and computer makers are widely available.

Many third-party platforms or voting feeds will be designed around “issues,” rather than harder to understand policies and procedures. That will naturally appeal to a broader base of retail shareowners.

A small but important percentage of retail shareowners will get more involved in helping to determine those reputations of voting feeds. They will compare feed quality by such means as creating focus lists at ProxyDemocracy – see for example

Additionally, institutional investors will begin to discuss their votes with each other more frequently, as well as with beneficial owners. Both are already happening, mostly as a result of votes disclosed at ProxyDemocracy. I’ve personally initiated such dialogues with several funds and have increasingly been met with a favorable response.

2. Assume there are three groups of retail shareholders: (i) those who participate in proxy voting currently, (ii) those who would participate but find the process too time consuming and onerous and (iii) those who are unlikely to ever participate in proxy voting. (a) In your view, how many retail shareholders would switch from category (ii) to category (i) if CDV were implemented? Would it make a difference in your view if the Limited Proposal or Centralized Proposal were implemented?

My rough guesses for long term participation rates: Limited Proposal: 25% increase, with most votes going automatically to management. Centralized Proposal: 50% participation. Open Proposal: 70% participation. Of course, these numbers depend on the promotion, regulation and disclosure of whatever CDV system is implemented. Engagement requires either a fiduciary obligation, which we won’t have for retail shareowners, the perception of value in the process (which may take a while) or passion around relevant issues. Of the three, passion around relevant issues will be the easiest to ignite.

(b) In your view, would CDV have a meaningful impact on the level of category (iii) investors?

Yes – the Open Proposal in particular will significantly reduce category (iii). Most shareowners are passionate about at least some specific issues. Once engaged, they are likely to engage further.

3. In your view, would implementation of CDV increase retail shareholder engagement with the annual meeting process? Why or why not?

Yes. The most important part of the AGM is voting, so in my view engagement with voting is one type of engagement with the annual meeting process, even if the shareowner doesn’t physically attend the meeting. (See answer under #1 above). Director elections will be more closely watched, once shareowners gain a sense of empowerment.

If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around proxy assignments. Proxies assigned to organizations or individuals, for example, could give AGMs a new meaning. See

In the 1940s and 1950s thousands of shareowners frequently showed up for shareowner meetings because they sometimes actually deliberated issues and some of those in attendance held proxies from others. Lewis Gilbert, for example, was often given unsolicited proxies, which he used to negotiate motions at meetings.

We are a long way removed from those days. Voting is important, but having a say in setting the agenda on what will be voted on is even better. If a significant number of proxies are assigned or even if shareowners routinely follow specific voting advisors or institutions, leading voices can actually begin to influence how agendas for annual meetings are set.

4. Do you think a CDV arrangement that called for individualized marked proxy cards, as contemplated under the Limited Proposal, would encourage or discourage retail shareholder engagement in the proxy process?

The Limited Proposal would take us at least part way back to broker votes. In the absence of meaningful choices, most shareowners will defer to management. Although that would result in votes, I don’t see it resulting in “engagement.” It might be a plus for shareowners to be able to pull up a pre-filled ballot to show them this is how they are about to vote, according to registered preferences.

However, I wouldn’t ask them to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in lots of different companies or who would just rather spend their time on other activities. Under an Open Proposal, feeds will offer the ability for retail shareowners to essentially build a “voting policy” just as institutional voters are able to do. That model will increase participation and the quality of the vote.

5. In your view, would CDV encourage sufficiently informed retail shareholder voting or would it effectively discourage retail investors from reading the proxy statement and understanding the particular proposals in the context of a company’s particular circumstances? What criteria do you use in determining whether retail shareholder voting is sufficiently informed? Does your answer differ as between the Limited Proposal and Centralized Proposal?

In my view, the Open Proposal will encourage sufficiently informed retail shareowner voting. In order for retail voting to be sufficiently informed, it is not necessary for all retail shareowners to read the proxy statement and understand the particular proposals in the context of a company’s particular circumstances. Most retail shareowners won’t read proxy statements.

Open Proposal CDV enables retail shareowners to implement a specialization strategy similar to that of institutional investors. Most fund managers do not read the proxy statement and understand the particular proposals in the context of a company’s particular circumstances. They have specialized staff for that, some in-house, some out-sourced. Likewise a few of us retail shareowners will read proxies, but most will not. Those who do not read them will be informed by those who do, and by the many other sources of voting opinions who read the proxies.

The criteria for determining sufficient information are in general too complex and subjective to describe concisely. But some features I would look for in an effective retail shareowner information system include:

(a) a wide range of voting opinion sources;

(b) open access for any new opinion sources to publish their opinions;

(c) open access for shareowners to choose any opinion source for our standing instructions on voting;

(d) sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote.

Thus the Limited Proposal would not inform shareowners sufficiently; the Centralized Proposal would be better; and the Open Proposal would be best in facilitating the ability of retail shareowners to align with groups they trust and that share their values.

6. What investor education measures would you recommend to ensure investors were sufficiently informed about CDV? Who should undertake those and bear the cost?

I would recommend an ongoing competition open to any providers of investor education, who would compete for funding allocated by retail investor vote. This could be limited to education about voting issues (informing about CDV, providing voting opinions, organizing voting opinion data feeds, discussing reputations etc.), or voting could be included in a broader retail investor education competition. For more explanation, please see .

This would benefit us retail investors, so we should pay for it. Since the benefit is shared broadly, it should not be paid by retail investors one at a time, but rather by funds that we own collectively – corporate funds. (See my answer to General question #1 above – “Retail investors are the beneficial owners of all equities.”) There are several possible ways of arranging this. One example is the “Proxy Advisor” proposal at In the near term, the agents in our corporate governance system may try to prevent us from using our funds to empower ourselves this way, so a helping hand from regulators may be needed to get it started. Public funds earmarked for retail investor education and advocacy could be used for the first such initiatives.

Implementation and Ongoing Administration

1. Should retail shareholders have to renew their agreement with their brokers with respect to standing voting instructions annually or on some other basis? Why? Is your conclusion affected by the lower incidence of retail voting following the introduction of “notice and access” (i.e., even asking shareholders to take the time to access the proxy statement online resulted in a significant drop in participation)?

Yes, it’s reasonable to require retail shareowners to renew their standing instructions annually. This renewal should only require a simple mouse-click, once the investor has logged in to the broker’s website and gone to the standing instructions page. The renewal could be done at any time, and be valid for one year from the last time the investor clicked to renew. It also affirms the channel of communication… the e-mail address is still valid.

The quality and reputation of voting feeds will change over time, so retail investors should review their choice of feed at least annually.

No, the “notice and access” participation dropoff may not be relevant here, since it occurred in a system without CDV. CDV is likely to fundamentally change retail investor attitudes and behavior regarding proxy voting.

2. Should the renewal process be an affirmative one – that is, the arrangement would drop away, absent shareholder action to renew his / her voting preferences? Does the fact of a rapidly changing governance landscape affect your decision? Why or why not?

My answer to the previous question covers this question also.

3. How should CDV address director slates, in contested and uncontested elections?

I don’t think director slates in contested and uncontested elections would make any difference to the implementation of CDV. All such cases can be handled the same way, with the retail shareowner voting as per standing instructions to use a specified voting feed.

4. Which matters should be eligible for inclusion in a CDV arrangement (e.g., only uncontested matters)? How would those matters be defined (e.g., shareholder proposals are almost always “contested” by management and the board)? How should the fact of significant variation among proposals on a given matter, particularly in light of a company’s particular circumstances, affect the decision about whether a matter is appropriate for treatment within a CDV arrangement?

Like my answer to #3 above: All matters should be eligible for inclusion in a CDV arrangement. All can be handled the same way, with the retail shareowner voting as per standing instructions to use a specified voting feed. Competition among voting feeds will encourage those who create them to constantly try to improve their voting quality and reputation. One improvement is to adapt their analysis and voting decisions to the significant variation among proposals on a given matter.

5. If only selected matters are eligible for inclusion in a CDV arrangement, will CDV materially improve the retail investor’s engagement in the annual meeting process or the administration of proxy voting, given that there could be other matters on the proxy card as to which the shareholder would have to vote?

Limiting CDV to selected matters only would lessen the benefits of CDV, so I don’t recommend such limits. It would be better not to implement any CDV that severely limits voting options, since once such a system is enacted it would be difficult to amend, given that those who would benefit from such limitations will be in an even stronger position to fight opening up the process.

6. Should preferences be indicated on a portfolio or per stock basis?

Preferences should be indicated on a portfolio basis. That is simplest for retail investors and for brokers when they offer CDV to clients. Changing preferences stock-by-stock can be handled by those who create the voting feeds. So brokers need not build systems for stock-by-stock customization of standing instructions.

With the Open Proposal, anyone can create a voting feed, just as anyone now can create a blog. One way to create a feed is to remix other feeds, just as blogs often post or link to material from other blogs. A remixed feed can select different source feeds for different stocks or different industries or different categories of voting matters (director elections vs shareowner proposals etc.). In the article “The Internet Will Drive Corporate Monitoring” I called remixed feeds “meta- advisors”.

7. The Limited Proposal is constructed such that retail investors could provide standing voting instructions to their brokers in their brokerage agreements. If standing voting instructions were indicated on a portfolio basis, should the instructions cover only those companies in which a retail investor owns shares at the time the brokerage agreement is signed or all subsequent purchases of stock as well? If instead preferences were indicated on a per stock basis, when would retail investors indicate their preferences with respect to stocks purchased after the investor’s brokerage agreement was signed? At the time of purchase or some other time?

Standing voting instructions on a portfolio basis should cover all subsequent purchases of stock in that portfolio.

8. What choices should a retail shareholder have when deciding its standing voting instructions? (a) Only those from the Limited Proposal, namely (i) vote against management, (ii) vote for management, (iii) abstain on all matters, and (iv) vote proportionally with the firm’s other clients’ instructed votes? (b) Vote in accordance with the brokerage firm’s published guidelines? (c) Various institutional investor voting guidelines? (d) Proxy advisory firm guidelines? What do you see as the pros and cons in providing each of these choices to shareholders (e.g., insufficient number of choices, information overload, likely absence of action when too many choices)? Are there other choices that are appropriate?

Because we retail investors are principals not agents, there are few reasons to regulate how we vote our stock. One valid reason is to prevent vote-selling. The tried-and-true way to prevent vote- selling is to keep voting decisions confidential, as we do in democracies. Only when an agent is voting other people’s stock do we require vote disclosure, even though that opens the door to vote-selling.

Therefore retail shareowners should be able to vote any way we choose, subject only to a prohibition on selling our votes. So I recommend the Open Proposal, where we can choose any voting feed. The potential information overload problem can be handled well enough by the market for public reputation. Most retail investors will only pay attention to perhaps the top ten best known voting feeds. A small minority of retail investors, along with writers in the financial media, will be the opinion leaders helping to determine public reputations, and thus which of the hundreds of voting feeds deserve to become the best known.

9. The Limited Proposal, as originally conceived, calls for the default choice to be proportional voting with the brokerage firm’s other instructed votes. Do you agree or disagree with this default choice and, if the latter, what should the default choice be (e.g., no vote)?

This question arises for all three CDV proposals discussed here: what about investors who don’t give standing instructions, or whose instructions have lapsed after one year with no renewal? The default choice should either be whatever the shareowner selects or it should be a “no” vote, just like if a voter fails to mark an item on the proxy, that item should be left blank.

Counting a blank vote as anything else would make mounting campaigns to deny companies a quorum much more difficult. Neither brokers nor anyone else should be permitted to vote on any ballot item in the absence of voter instructions (i.e., all items should be considered non-routine matters in NYSE rules). This is one reason why the Limited Proposal is such a poor choice. It would be better not to have CDV at all than it would be to go with the Limited Proposal. Again, once adopted, it will be hard to change because those who benefit from severely limiting options will have a vested interested in continuing to limit the voice of shareowners.

10. What administrative steps would brokers have to take to implement CDV? What step is most likely to provide an obstacle for CDV (e.g., individualized marked proxy cards, having information from companies about proposals to be voted on a timely basis)? How would broker obligations affect the company’s own obligations under Rule 14a-8 (e.g., would those obligations have to be accelerated)?

Brokers would have to create a page on their website for retail investors to indicate which voting feed they want to use for standing instructions. Brokers would have to store their clients’ instructions and transmit them to Broadridge (or other service provider). I don’t think individualized marked proxy cards are necessary, but could be provided if an investor requests them. Broadridge could handle the details of getting the voting decisions from the selected voting feeds, matching them with client shareholdings, and offering electronic and paper-based ways for investors to override their feed-based instructions if desired. I don’t think broker obligations would affect the company’s own obligations under Rule 14a-8.

Brokers/banks, transfer agents should be capable of passing through or delivering proxy votes to all valid electronic platforms. If that is the case, they don’t need to do much more than be aware and make their clients aware of the options.

11. In your view, would brokers in fact increase their engagement with retail investors about matters subject to a vote at a company’s next annual meeting? Would liability considerations affect your conclusion? Should brokers who do engage be exempt from the solicitation rules?

I don’t think it would be the brokers’ role to increase engagement with retail investors on voting matters, unless a broker wants to develop a reputation as a voting “brand.” (see Proxy Voting Brand Competition at There will be plenty of engagement in the public shared realm, for example via sites like Brokers could just link to such sites from their client web interface.

12. Should brokers be able to delegate responsibility for fulfilling their obligations under a CDV approach such as that contemplated by the Limited Proposal (i.e., filling out individualized proxy cards, maintaining lists of customer standing voting instructions, etc.) to a third party agent? Are there any obligations brokers should not be able to delegate to an agent?

I’ve addressed most of these issues in my response to question #10 above. Brokers should not be forced to take on CDV responsibilities. Other third-party firms will do a better job. The key is to ensure that brokers or their agents deliver ballots to wherever the shareowner directs.

13. What level of responsibility and liability should be attached to intermediaries for properly completing a proxy card for CDV, if that feature were adopted as part of a CDV arrangement? If brokers are able to delegate such responsibilities to a third party agent, what liability, if any, should attach to the agent?

I have no particular view on this, beyond the obvious general principle that there must be enough responsibility to make the overall CDV system work. I’m not sure which design will best balance cost, integrity and ease of use.

14. Should a clear audit trail and related reporting be required elements of CDV? Who would bear responsibility for assuring the quality of the audit trail and producing related reports? Who should receive the reports in the first instance (e.g., only the company and the tabulation agent)?

Same answer as for #13 above.

15. What costs would you foresee in implementation of CDV? Who should bear those costs? If the costs should be shared, how should that decision be made? Why should companies wish to pay for CDV, given that they may view CDV as a reductionist approach to complex issues of governance (i.e., indirect subsidies by smaller companies with fewer issues or larger institutional ownership, as compared to larger companies that attract greater attention and have potentially larger retail ownership)?

Cost categories include: (a) creating voting opinion feeds; (b) system development for brokers; (c) vote processing by Broadridge and similar service providers.

If the SEC publicly encourages the development of CDV, many organizations are likely to build the necessary systems voluntarily at their own cost. Voting opinion websites have already started appearing (,, These can easily start sharing voting opinion feeds. To enhance their quality, public funds earmarked for retail investor education and advocacy could be allocated by investor vote among such competing providers of tools for CDV.

Once we have a broad choice of publicly available voting feeds, it will not be expensive for brokers and Broadridge to adapt their existing proxy vote systems to use the feeds. Some adjustment to the existing system of issuer fees for vote processing will help shift payments from paper mailings to electronic submission via CDV standing instructions.

CDV will increase the quality of voting and decrease the quantity and costs of paper mailings. These benefits will outweigh the costs of building CDV systems. Standardized data tagging will likewise streamline the system and reduce costs in the long run, although it will require some up- front investment.

In your question “Why should companies wish to pay…?”, I’m not sure if you mean “Why should the owners of companies wish to pay…?” or “Why should senior employees of companies (e.g. CEOs) want companies to pay…?” So I’ll answer both questions: We owners of companies should wish to pay (with our companies’ funds) because for us, the benefits of better voting, increased accountability, better corporate governance, and resulting higher investment returns will outweigh the costs. Some employees (e.g. some CEOs) may not want companies to pay, because the increased accountability would reduce their power and influence over their own pay and tenure as CEOs.

NYSE rules require payment by issuers for the cost of voting electronically but issuers may not always be doing so. See NYSE Rules 450-460 pertaining to proxy distribution.  The Rules are actually written for “member organizations” (i.e., brokers) and specify what brokers or their agents (e.g., Broadridge) can charge for distribution and collection of proxy-related items.  The rules are very clear that Issuers are supposed to pay for all of the distribution (and collection) costs and that brokers can expect to collect from them. These rules should also apply to Issuers when shareowners choose to take delivery of proxies or to vote through sites like RiskMetrics, ProxyGovernance and MoxyVote.

The fees that Broadridge is charging to electronic voting platforms (RiskMetrics, ProxyGovernance, MoxyVote, etc.) should be paid by the issuers as part of the overall collection costs (like postage).  The electronic platforms, in this function, are merely an extension of the proxy distribution agent and it’s odd that fees are payable to Broadridge (beyond a nominal fee covering their costs).  It’s also notable that Broadridge charges on the order of 10X for electronic vote collection from these platforms than it is permitted to charge the issuers, from what I understand.

If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less?  The answer is that one does not exist. Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners at and the petition I filed with the SEC for a rulemaking on “blank votes” at

A key point here is also that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year).  Electronic platforms are generally passing along these costs to voters.  That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes.

This is, in effect, a system where the voter is paying to vote, like the old Jim Crow poll tax.  It also inhibits progress (i.e., the development of electronic platforms for retail shareowners) because voting through the mail and through the phone is free. Why should retail shareowners have to pay when voting online, which is inherently the least expensive method of voting? Why should services like MoxyVote have to front such expenses? Without a change, it is hard to see how they can ever turn a profit and it seems even less likely that nonprofits, such as ProxyDemocracy, would ever be able to offer users the option of voting on a ProxyDemocracy platform.

16. What ongoing costs would there be in the use of CDV? Who should bear those costs?

My answer to the previous question applies to this question also. The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like that should be sharing in this incentive, since shifting to electronic from paper voting saves money.

17. Do websites such as, or (or even a new database of institutional decisions) make CDV, or at least the need for tailored proxy cards, less necessary as a method?

These websites are the first steps toward Open CDV. For the sake of improved accountability, corporate governance and investment returns, we should build on these pioneering initiatives and develop a complete Open CDV system to empower all retail shareowners. I don’t think hard-copy proxy cards are important, but could be offered to those investors who request them. We should have online systems that let investors manually override their standing instructions. All CDV proposals include this feature. We can preserve the manual online voting systems we already have, as an option that each investor could use if and when desired. Ballots can land in electronic mailboxes of choice blank and can then be pre-filled based on the “voting policy” or “brand” loyalty program created by the user (i.e., just as institutional voters have been doing for years).

Centralized Proposal

In this section, I try to answer the questions in two contexts – for the Centralized Proposal and for the Open Proposal (which I also call Open CDV).

1. In your view, would institutional investors be willing to provide their voting decisions in advance of a meeting? Are there obstacles to institutional investors’ providing this information (e.g., confidentiality considerations, considerations relating to proprietary investing strategies or investments)? (Note that some mutual funds do this now.)

If predisclosing their voting decisions is voluntary, then some institutional investors would do so and some would not. One reason could be to maintain confidentiality of their voting decisions, for example to avoid improper influence on them from corporate management. Another may be to avoid revealing their holdings (and thus proprietary investing strategies) at that moment.

In the Open Proposal which I favor, it’s not a problem if many institutional investors don’t predisclose their votes.

There is already a healthy base with Florida SBA, CalSTRS and CalPERS  covering most companies. In addition, there will be plenty of other sources of voting advice besides institutional investors, many of which will be focused on a limited number of issues. Some can already be seen at

2. In your view, is it feasible to receive institutional investor voting decisions sufficiently in advance of an annual meeting to input into a database as contemplated in the Centralized Proposal? What operational concerns might you have?

Yes, with automated networked systems, timeliness should not be a problem. This would be less of a concern with the Open Proposal, since its numerous sources of voting advice can be used as fallbacks in case some voting decision sources are too late or missing. has already built its system that way, where users specify a priority list of decision sources, and the highest priority one with a decision available is used.

A fundamental operational issue is data standardization across all users in this shared networked system. The SEC Investor Advisory Committee’s Proxy Voting Transparency proposal, passed unanimously on February 22, 2010, advocated standardized data tagging that should resolve this issue. Additionally, I understand that on electronic voting platforms, the vote doesn’t necessarily get submitted until very near the final deadline. However, if votes are simply being filled out according to the guidance of third-parties, votes can be compiled and cast very quickly.

3. Should retail investors be given notice when new institutional investors add their voting decisions to the database after a retail investor has provided its standing voting instructions? What sort of notice should be provided? Who should be responsible for providing the notice?

CDV will induce an active public discussion in the financial media about the reputation of various sources of voting opinions. Most of us retail investors will not need to pay attention to every new source of opinions. Most of us will pay attention to the opinion leaders in this public discussion, who will let us know, for example, their top ten recommended and/or popular opinion sources, and their general characteristics – e.g. degree of emphasis on financial vs environmental vs social/political considerations. It will be like brand reputation for makers of complex products like cars or computers.

So no, there is no need for notice to be sent to retail investors when new institutional investors add their voting decisions but investors should be able to seek and find such information easily and should be able to subscribe to a news feed like google, alerting them to new participants. The new providers have every incentive to get the word out. Again, this issue is less of a concern in the Open Proposal, with its greater breadth of available voting opinion sources. Annual review and/or confirmation will help those who do not pay attention to keep up more than they otherwise might.

4. Would you allow any institutional investor who wanted its voting decisions to be in the database to be included? Why or why not? If not, what criteria should be used to decide which voting decisions would be available? Should there be an ownership threshold? If so, what threshold would you recommend? Should they be paid a license fee?

Likewise, these kinds of concerns are a good illustration of why the Open Proposal is better than the Centralized Proposal. In the Open Proposal, anyone can publish a voting feed for free, just as anyone can now publish a blog for free. There is no centralized database of blogs; there is just a data standard, which we should soon have for proxy votes.

5. Should a CDV database of voting decisions provide background about the nature of the contributing institutional investors, so that retail investors could place the voting decisions in context (e.g., determine whether the institutional investor likely has a bias)? If an institutional investor’s voting guidelines or decisions are reported, should it be required to provide context for the guidelines or decisions (e.g., conflict of interest disclosure)? If so, what contextual information would be appropriate? Should liability attach to that information?

An unregulated public market for reputation of voting opinion sources can probably handle most of these issues well enough, especially in the Open Proposal where it is easy for new entrants to compete by building better reputations for serving retail investor interests. Additional disclosures, especially regarding potential conflicts of interest, should be encouraged but not required until we see abuses that may make such requirements advantageous. Normal contract law should cover liability requirements.

6. In your view, should a proxy advisory firm’s guidelines on voting various measures be included in a database of voting decisions? Why or why not? Would your view change if the SEC regulated proxy advisory firms?

If I answer in the context of the Centralized Proposal, I would favor making it as much like the Open Proposal as possible: free voluntary access by all who want to participate, as providers of voting decisions and receivers of voting decisions. If a proxy advisory firm wants to publish its guidelines and/or its specific voting recommendations, they should be allowed to do so, as at least some do now. The Open Proposal does not depend on a centralized database, so the inclusion question does not arise. My views here do not depend on SEC regulation of advisory firms.

7. How easy or difficult would it be to develop the technology for the voting decision database and proxy-voting platform contemplated in the Centralized Proposal?

Not difficult. ProxyDemocracy and Moxy Vote have already built much of this, on a very low budget. Both systems can be readily enhanced if additional data standardization is adopted by the SEC and if cost reimbursement is forthcoming from issuers. See discussion by at

8. Who should bear the costs of maintaining any database of voting decisions? Who would determine what fees could be charged for use of the database? Should CDV be premised on retail investor willingness to pay for access to the database (as is the case for existing proxy advisory firms)?

Voting systems are a collective benefit to all shareowners of a company. So it does not make sense to make each individual voter pay to be able to vote. That’s why democracies don’t charge their citizens a fee to use a polling booth when there is an election. Citizens pay for election administration costs as a group, not one by one.

Likewise the information systems to enable intelligent voting are a collective benefit, and should be paid collectively, not one user at a time. To encourage competition among information providers, collective funds (i.e. corporate funds) should be allocated among them by the voters. Thus retail shareowners should allocate at least some of the CDV infrastructure funds by vote. This could pay for professional proxy voting advice that could then be shared freely. It could also pay for some infrastructure, such as free shared databases if they are needed. There is a large cost differential between delivering proxies by U.S. mail and through the internet. This cost savings should be used to pay the costs of Open CDV.

Institutional Investor Perspective

1. Why should institutional investors care about CDV? Isn’t this a retail shareholder issue?

Building reputations will build followers; institutions successful in creating “brands” will gain following and influence. As mentioned above, CDV will create a new public debate about the quality of institutional investor voting. Institutions are voting on behalf of retail shareowners now. So this retail issue is also an institutional issue.

2. If a database of institutional investor voting decisions were made available as contemplated under the Centralized Proposal, would other, smaller, institutional investors make use of this database?

Under either the Centralized Proposal or the Open Proposal, I expect that many smaller institutional investors would make use of the voting opinions available. Proxy advisory services may try to curtail disclosure by larger institutional investors in order to maintain their business and avoid disseminating research for free to smaller institutional investors but I expect they will have a difficult case, since many of these larger institutions subscribe to multiple services and have their own staff. They will be able to argue and show that disclosure of their votes is not giving the proxy advisory services they paid for directly to smaller institutions, since their final votes will often differ.

Management Perspective

1. In your view, would corporate managements generally be willing to support CDV as a means to increase retail shareholder participation or does the diversity of issues facing public companies in light of their particular circumstances make it less likely that they would favor participation over informed participation? Do you think CDV would be more or less likely to promote a “one size fits all” approach to governance and other issues?

Some corporate managements would be willing to support CDV as a means to increase retail shareholder participation. Other corporate managements may oppose CDV (especially the Open Proposal) because it will reduce their power while empowering the firm’s beneficial owners.

Some managers and entrenched directors may prefer participation by “sheep” in a relatively constrained environment where a few sizes fit all. However, an Open CDV system would encourage management to participate in these platforms as well. Management and existing boards want the ability to communicate with shareowners. Open CDV systems could provide the platform in a space of higher trust.

It will enable more informed voting by networking and sharing the information available. This is similar to the way institutional investors vote stock, where typically a staff of specialists make the voting decisions on behalf of fund managers and beneficial owners.

One key difference with CDV however, especially under the Open Proposal, will be that we beneficial owners will have the power to choose among competing sources of voting opinions. We will also have more opportunity to contribute to the voting opinions and the reputation assessment of opinion sources. Open CDV will increase informed participation by retail investors in the voting decisions of stock we beneficially own through institutional investors. At a minimum, we will be able to express more informed opinions about how institutions are voting our stock.

Open CDV would be less likely to promote a “one size fits all” approach to governance and other issues, since it offers maximum competition among sources of voting opinions. Competition will enhance voting quality, and “one size fits all” is a low quality approach which will thus be used less and less.

For example, when I find conflicting votes between CalPERS and another advance discloser, I often go with CalPERS because they most frequently provide a reason for their vote. As this becomes more popular, more care will be put into the reasons disclosed.  Canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following.

2. In your view, would you expect that solicitation expenditures would decline, increase or stay the same if CDV were implemented? Why?

I expect that that solicitation expenditures will decline under Open CDV, especially in terms of just getting participation. Solicitation will be replaced by and/or migrate to elements of the CDV system, which will be supported by collective funds, becoming free or low cost to all users. Solicitation will focus on convincing the CDV opinion leaders and large funds of the relative merits of each possible voting decision, just as solicitation now gives emphasis to convincing proxy advisory firms.


1. Are other approaches that are comparable to CDV more desirable?

a. Creating a system of “public” proxy advisory firms to increase public availability of professional voting advice?

This would be a valuable adjunct to CDV. Even under the Open Proposal where anyone can contribute voting opinions to the public, I expect we will still need professional voting advice. Widespread sharing of free advice via the internet is likely to undermine the business model of existing proxy advisory firms (PAFs), just as free sharing of news is now undermining business models of the mainstream media. So to raise the overall quality of voting, a system of “public” PAFs makes sense. That was the reason for the title of my article “The Internet Will Drive Corporate Monitoring”. “The Internet” was a reference to internet-based CDV, and “Corporate Monitoring” was a reference to public PAFs and enhancements thereof.

For such a system to work, it is important for the public PAFs to be chosen by shareowner vote, to give PAFs a strong incentive to serve the owners’ interests. They should be paid from the shareowners’ corporate funds. The SEC should encourage the development of PAFs by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples at that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented.

b. Changing the pop-up on to allow for other choices besides voting for management?

This too would work best as an adjunct to CDV. A potential difficulty with the pop-up approach is, which choices should be offered? With Open CDV, there will be potentially hundreds of choices – too many for a pop-up. But the pop-up could show the choices being selected by those retail investors who are using the full CDV system by rank and another alphabetically.

c. Allowing shareholders to “plug in” to a voting feed or electronic voting platform (e.g., by requiring companies to permit shareholders to direct the proxy card or VIF to the desired platform)?

Voting feeds and electronic voting platforms like Moxy Vote are not “comparable” to CDV. They are CDV – ways for clients to direct voting by giving standing instructions. I think the best design for CDV is the Open Proposal with voting feeds. It is scary to me that CDV systems that don’t allow shareowners to dictate where their electronic proxy ballots are to be delivered are actually being contemplated. NYSE rules already allow the shareowner to control delivery to a physical address, why would this not extend to electronic mailboxes?

2. Would you be in favor of additional regulation to facilitate the creation of public voting databases, such as data-tagging of proxy and vote filings and further relaxation of solicitation rules?

I would be in favor of data tagging mandates. They are a mild and inexpensive form of regulation, just a transparency requirement. In the long run, Open CDV will make it feasible to reduce many other more expensive and intrusive forms of regulation, that try to limit abuses by the agents in our corporate governance system. It is cheaper and more effective to empower the principals with a better information system.

I also favor relaxation of solicitation rules. That would be less regulation, not “additional regulation”. Certainly, it would be good to have clarification that making voting decisions known in advance of AGMs does not constitute solicitation.

Further Comments

The development and implementation of Open CDV seem to me both desirable and inevitable. The SEC Investor Advisory Committee has created momentum toward data standards (like XBRL) for proxy votes. General principles of free speech would support allowing anyone with an opinion on any proxy voting issue to share that opinion with others, such as in a voting feed published on the internet. When a range of well informed voting feeds become available, some brokers will start offering CDV, and retail clients at other brokers will start demanding it too. In “The Internet Will Drive Corporate Monitoring”, I described the inevitability this way: “Would you outlaw software that makes voting easy? Would you outlaw advice?”

Not only will CDV improve our corporate governance system, but “public” voting advisors will make agents more accountable to principals in corporations and in democracies. We will have competitive markets for shared information. Voting advisors that compete for public funds allocated by citizen vote in democracies are called “Voter Funded Media” or VFM. They make political leaders and bureaucrats more accountable to citizens.

The VFM system has been developed and tested at the University of British Columbia for the past four years – see “Global Voter Media Platform” at Its success provides a live illustration of how a new competitive voter information system can influence the older less competitive system, even when the older system has far more funding. If the new system is more closely aligned with the principals’ interests, it will put competitive pressure on the old system.

The established campus newspaper, The Ubyssey, receives an annual fee of $5 from each student, totalling over $200,000 per year. In the new VFM system, blogs compete for slices of an award pool averaging less than $10,000 per year for the past four years. Not surprisingly, the bloggers appreciate this support, even though they have to compete hard for a piece of it. The voting system does not guarantee positive shares for all; many receive nothing – see Perhaps more surprising however, is the reaction of The Ubyssey’s Coordinating Editor Justin McElroy [Video interview, 2010-04-30]:

…the established media, the one that students are giving their money to, and are more or less bound to giving, you know, that media wasn’t doing its job, and so competition is always good. It ensures that people do their best, and try to break the stories first, and get that information out there. And from a simple standpoint of, does it ensure that The Ubyssey does a better job meeting the needs of students and getting stories out there, VFMs ensure that, because it provides accountability to us, simply because if a story’s out there by a VFM that’s better than ours before us, you know, we have egg on our face. So, we’re paid way more money, we have way more resources…

…the fundamental questions of whether, does VFM work for students? I think yes. Does it increase campus discussion and student engagement? I think absolutely. Does it ensure that established media, you know, does a better job? Yeah. Are students and is this campus better off because of that? Well, absolutely.

The new equilibrium is one of cooperative competition. The Ubyssey now cooperates with VFMs on joint news media productions. These media competitors often link to each other. Student journalists comment on their competitors’ news stories, and sometimes leave one media group to join a competing media group.

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Review: Rethinking the Board's Duty to Monitor

In “Rethinking the Board’s Duty to Monitor: A Critical Assessment of the Delaware Doctrine,” to be published in 2011 in the Florida State University Law Review (current version available, Prof. Eric Pan of the Cardozo Law School substantially advances the discussion of how corporate governance needs to be improved in order to minimize the macroeconomic impact of poor decision-making at the firm level and the need for costly bailouts. Moving beyond the recent “hot” topics of maximizing director independence, enhancing minority shareholder proxy access and improving the executive compensation process, he focuses on considerations directly impacting the outcome of board deliberations.

This is an essential complement to such topics in that it addresses actual board performance in consideration of issues of business policy – that is, once directors are installed, we need to ensure that they do a good job in addressing company business. Prof. Pan recognizes that the problem of board performance is not solved once we get the “right” people in place.

He correctly observes that to the extent that present Delaware law addresses director performance in its management oversight role at all, it does so by focusing on failure to “monitor” management in order to prevent major legal violations, and almost entirely absolves directors from any responsibility for adverse business outcomes, no matter how disastrous for the single firm or for the economy, so long as appropriate process was utilized. The implications of the Caremark and Citigroup decisions for the former and latter propositions, respectively, are well described. The implications of poor oversight by the Citigroup board for that firm and our economy need no further description. Prof. Pan argues quite persuasively that we need to expand the board’s duty to monitor created in Caremark to encompass management decisions leading to poor business outcomes, even if no laws are violated, irrespective of the process which is utilized.

Rather, boards should be held responsible for business as well as legal outcomes. Courts should shift the burden onto directors to show they made an effort to be informed and to respond to developments leading to such outcomes.

This reviewer has argued in “Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance,” 48 Duquesne Law Review 33, reviewed on this site in an April 22, 2010 post, that fixing this gap in corporate law with such burden shifting in order to avoid disastrous decisions by our largest firms is a fundamental but overlooked step in the financial reform overhaul currently in process.

Like this reviewer, Prof. Pan argues for a regimen where directors have some – in his view, seemingly undefined – financial responsibility when their firms suffer major losses as a result of management decisions which are not meaningfully challenged by the board, even where there is no legal violation. Presumably, this would apply to situations requiring public bailouts such as the recent financial industry debacles. Prof. Pan would enhance his case by attempting to enumerate specific circumstances, such as a need for governmental assistance, in which such responsibility should attach.

As contemplated in Prof. Pan’s article, the new responsibilities would apply to all firms (or at least to all publicly traded ones). This reviewer strongly disagrees with such breadth.

In that all concerned, including Prof. Pan, agree that such a change would likely reduce business risk-taking, we need to apply it only in cases involving companies of sufficient size and interconnectedness and events of sufficient magnitude, where poor decisions can have significant external effects for the broader economy.

A third concern is that the duty to monitor as advocated in this paper, will usurp the board’s discretion in determining the appropriate degree of monitoring and inhibit risk-taking. We do not want the duty to monitor to prevent corporations from conducting certain activities which may actually be beneficial to the company and its shareholders. In other words, the board may conclude that it is in the best interest of the corporation for it to expose itself to extreme amounts of business risk.

The Citigroup court correctly notes that the present business judgment rule is intended to permit entrepreneurial activity – i.e. risk-taking. While it obviously worked too well for Citigroup, especially today when we face a nascent economic recovery, we should not inhibit risk-taking – and often employment – any more than necessary. There are many large public (and private) companies where the consequences of a poor decision will be limited to that firm and its shareholders without any material ramifications for the economy.

The situation addressed by the Delaware Supreme Court in upholding under the business judgment rule, the actions of Disney’s directors despite their signing off on a wasteful compensation and severance package for a former President illustrate where the current regimen of deference to director business judgment is working effectively. Even though this decision turned out to be a very poor one for Disney, it had no implications elsewhere.
In any event, as Prof. Pan notes in his discussion of how as a result of resistance at the state level, recent innovations in corporate law have largely been under the guise of the federal securities laws, it will be difficult to implement any of the changes he suggests. As such, what is proposed should be as narrow as possible in order to increase the likelihood of its enactment.

Prof. Pan makes a major contribution to the corporate governance discussion by focusing on actual governance issues as opposed to process, compensation and board composition issues, and his ideas should be heeded by those considering changes in this area. However, it is preferable for those ideas to be refined to ensure that they are properly targeted (by firm and event) so as to cause as little disruption to business risk-taking as is possible.

Publisher’s Note: Thanks to guest reviewer Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.

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Behavioral Economics

Remarks by Dan Ariely, author of The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home, at the SEC Investor Advisory Committee (May 17, 2010, morning session) are well worth watching. Just a few cryptic observations to whet your appetite. Duration doesn’t matter as much as intensity. High pain that goes down is less painful than low pain that increases. Useful to take breaks, if pain is going to last. He provides some great examples of visual blindspots and financial decision illusions. Opt out vs opt in inertia. Default decisions influenced more where the environment is important and complicated. The more options, the more you are likely to procrastinate. Where you are on a scale can dramatically shift your decision. Adding choices, even choices that no one wants, influences choice outcomes.

On cheating: lots of people cheat just a little, regardless of the likelihood of being caught. People who signed first cheated less than those that signed after. Cheating increased dramatically with use of tokens, one step removed from actual money. Disclosure of conflicts of interests leads people to feel free be more biased. Lots of irrational tendencies. We often don’t see them. We keep following our intuition, rather than experimenting to learn. But Ariely believes we are as limited in the cognitive domain as we are in the physical. Input from cognition much different from input from emotion… difficult to imagine what we will feel when the event happens.

It is incredibly easy to create conflicts of interest. People will feel favorable towards someone even if they simply by them a cup of coffee… it doesn’t take thousands of dollars. Higher salaries can backfire if makes you think too much of the money… it may reduce creativity. We don’t make less mistakes in investing than we do in driving but we have many more  rules for driving. He thinks we need to give investors more help… defaults that will help them save more.

See also previous post: Cognitive Bias.

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How I Voted: SunOpta, Ballard, Sirius, RiskMetrics

Sorry to say my usual sources for voting advice had very little to say on several of my smaller companies. I found no advice on SunOpta or Ballard Power Systems, so voted with management on both. For Sirius Satellite Radio, I voted with Trillium… the only fund with votes posted to For RiskMetrics, I went with CBIS, again the only fund with votes posted to Unfortunately, it is at smaller companies where we really need “brands” to follow, since there is even less press coverage of their proxy issues. Better luck next year.

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CorpGov Provisions in Senate Bill

Annette L. Nazareth of Davis Polk & Wardwell LLP nicely summarizes the provisions of the Restoring American Financial Stability Act of 2010 that passed the Senate in her post on the Harvard Law CorpGov blog, Senate Bill Passes with Broad Corporate Governance and Compensation Provisions, 5/21/10.

  • Listing exchanges would be required to impose a majority vote standard in uncontested director elections for all listed companies, reverting to the plurality standard in contested elections.
  • Authorizes the SEC to prescribe rules permitting shareholders to include their own director nominations in issuer proxy solicitation materials. (proxy access)
  • Within six months after enactment, any proxy statement that requires compensation disclosure must include an annual nonbinding vote to approve executive compensation as disclosed under Item 402 of Regulation S-K.
  • Requires exchanges to adopt standards requiring listed companies to have policies enabling the recovery of incentive-based compensation (including stock options awarded as compensation) from current or former executive officers following a restatement.
  • Listing exchanges would also be directed to impose additional independence requirements on the compensation committee, taking into account consulting, advisory and other compensatory fees and affiliate status.
  • Listing exchanges must prohibit broker discretionary voting in connection with the election of directors, executive compensation or any other significant matter, as determined by the SEC.
  • All publicly traded nonbank financial companies that are supervised by the Board of Governors of the Federal Reserve System must have a risk committee, and all publicly traded bank holding companies with assets over $10 billion would be required to have a risk committee.
  • Requires further disclosure of the link between compensation and performance, employee and director hedging, and excessive compensation at certain financial institutions.

Its the bill everything we’d like? Not by a long-shot. Hopefully, we can come back and fill in some of the gaps later. (see Bonfire of the Loopholes, NewsWeek, 5/21/10;  Frank to chair financial reform committee, Reuters, 5/24/10; and a comparison of the Frank and Dodd bills by Weil, Gotshal & Manges LLP, 5/24/10)

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Strine Rocks Stanford

The last time I covered an event sponsored by the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford I complained that it was just attended by a few Stanford students. Such a program would have packed the house at Harvard, with students coming from all over the Boston area. (Stanford Rock Center Proxy Access Forum) This time I don’t know where they came from but the auditorium was packed… standing room only. Maybe it was the featured speaker who may just have more influence on corporate governance than anyone else in the whole world. (Disclaimer: These are my recollections of the event. I don’t type quickly and I didn’t record it, so there are bound to be errors. Let me know if you spot any. Oh, and sorry about the poor quality photos; I lost most in a download glitch.

Ron Gilson

Ronald Gilson introduced the Honorable Leo E. Strine, Jr., Vice Chancellor of the Delaware Court of Chancery, noting the Chancery is the closest to a common law court that we have in the US. He praised the court for linking experience and logic. Judges at the Chancery come over time to deeply understand their subject matter and many of the leading cases have been written by Strine over his 12 years at the Court. Not only is he widely known and respected for the opinions he has rendered, he is also one of leading scholars on corporate governance based on published articles.

Gilson also likened Strine to Groucho Marx.  I don’t recall if Gilson elaborated on that comparison but I presume it is based on Strine’s quick wit and rapid fire monologue. Strine welcomed the comparison, saying he had just watched Duck Soup (a political farce) again the other night. He played to his audience with quips, such as Harvard being “Stanford East.” He made cultural references from Leave it to Beaver and Gilligan’s Island to current rock tune lyrics. Weaving humor and popular culture references into his talk gave a light tone to an important subject that impacts us all.

Strine began talking about the long tradition in the Delaware Chancery of being immersed in both the academic and real world. He related a story or two that conveyed to the audience that he believes government has an important role to play. Water, the Internet, etc. allow commercial exploitation of public technology. Government does make a contribution.

Leo E. Strine, Jr

The generation of durable wealth is (or should be) the primary goal of for-profit business.  The law provides investors limited liability to encourage wealth generating innovative behaviors that involve risk. Isn’t technology great. You can look at beautiful people on your laptops or iPad at the same time you listen to me speak, he said.

Strine made it clear that he favors a republican model of corporate governance over a democratic model, that is corporations are  representative democracies, as opposed to direct democracies. In corporate governance, shareowners elect the board and the board represents the shareowner’s interests in their relationship with management. Shareowners may be required to vote on mergers and in other rare circumstances but primary authority is left to directors. The investor’s firm specific risk can then be diversified through many investments, which take only minimal involvement.

Direct democracy would refocus management’s attention from the actual business to meeting shareowner demands. Managers would become politicians.  (Sidebar: See Toward A True Corporate Republic: A Traditionalist Response To Bebchuk’s Solution For Improving Corporate America, Harvard Law Review, 2006, which is written by Strine but “should not be confused” as representing his own opinion. It is offered as the perspective of “an open-minded corporate law ‘traditionalist.’ My description of this perspective attempts to describe fairly a school of thought about the American corporate governance system that not only has many adherents among investors, but also pervades the two major political parties whose members populate Congress and state legislatures,” says Strine. So, although the viewpoint is disclaimed as Stine’s, it appears he believes it is held by just about everyone else of any importance, except Lucian Bebchuk.)

Because corporations are republics, we have an interest in the fairness of elections, especially the election of directors. Indexed funds have no option to exit; they hold bad companies all the way down, until they’re out of the index. Investors are (or should be) looking for boards to ensure a sound corporate strategy, avoiding imprudent risk. There are collective action problems. Affordable challenges to management and entrenched boards (he didn’t use that term) are important in letting the market work. Strine appears to approve of an enhanced Rule 14a-8(i)(8), opt-in option for shareowner director nominees… not surprising, since that’s what Delaware adopted. (see SEC Commissioner Troy A. Paredes’ 5/20/09 speech on the subject) Strine believes the rules regarding shareowner nominees should be “investor driven,” rather than mandated by government. That would make better use of the corporate treasury by avoiding nuiscance campaigns. Investors should decide issues like when challengers would get a subsidy. Majority (of shares) should decide for themselves.

Then Strine took aim at investors with short time horizons. It isn’t just managers and directors who have a role to play if the system is to work. Shareowners must also fulfill their role with their own long-term interests in mind, based on their usual time-frame for investing, saving for the college expenses of their children and for their own retirement. Strine talked about the “separation of ownership from owners,” with more and more stock being held through intermediaries.

What are the most widely held companies in America? They’re not companies that actually make something, they’re funds like Fidelity and Vanguard. Here, as I recall, he made an indictment central to the whole talk; the more rights have been given to “alienated shares” (since they’re owned indirectly through funds), the more we are driven to short-term strategies of investing and governance.

His points then began to come in rapid succession, so I started taking them in bullet form.

  • stockholders who make substantive proposals should have substantial long-term interests… $2,000 threshold far too low
  • disclosure requirements should be updated regularly, 13D requirements are a joke; the English have figured this out
  • Adolf Berle – embraced by right wing-nuts. Strange reinterpretations out of Chicago. Adolph Berle discussed separation of ownership from management and control but now we have separation of ownership from ownership. Too many fund managers are looking out for their own interests, rather than those of beneficial owners. He doesn’t believe in an unregulated market. Concerned about dispersed weak stockholders. Managerial class could become dominant (but now we should be more concerned with fund managers?). We’re obsessed with agency costs… could be “part of a drinking game.” Separation of ownership from ownership is one of the very big problems.
  • Vanguard, Fidelity and other funds have the most stockholders (implication, with very little voice)
  • 70% stock controlled by institutional investors…. subsidized by tax breaks…. limited choice through your typical 401(k) plan
  • mountains of money flowing to these funds.
  • hedge funds – good news you may get to invest in them through your pension fund because they’re “sophisticated investors.” But your pension trustees are not and they’re investing in hedge funds with an average 300% turnover.
  • Mutual funds – 100% turnover a year turnover… pension funds similar
  • 138% turnover in 2008 but then I thought he said 300% in 2008 across all exchanges. Anyway, point is too much turnover.
  • High speed trading strategies are inconsistent with likelihood of beating the market…. Strine’s an indexed investor.
  • Unfortunately, the time horizon of many institutional investors is one year or shorter.
  • Owning Intel 10 times in 8 years isn’t long-term investing.
  • The most rational investors are the least represented.
  • Hedge funds, pressured to deliver 30% returns, are going to focus on short-term.
  • Fund families normally vote together. Indexed funds within family echo the voice of family’s active funds, even though time horizon longer.
  • Easy to press for votes because of internet.
  • Excessive leveraging, accounting, managing risk (Says, won’t find these as corporate governance strategies — but actually I think TCL and GMI have been strong in these areas)
  • Got CEO link to pay only after pressure from institutional investors and pay then soared.
  • Reduction in takeover defenses, pill, majority voting (70% of largest firms now have)
  • Short-term investors pressed for stock buy-backs, CEO turnover.
  • Strong market for corporate control. Boards have never been more responsive. Excessive risk, under investment in firm.
  • Contradictory to fight for shareowner rights and long-term growth since 100% turnover each year.
  • Also fueled by ISS, which has a 2 year time-frame for their policy.
  • Capital gain tax policy based on 1 year equated with long-term holding.
  • If given more clout, it is vital that institutional investors be more accountable to beneficiaries and fund holders.
  • Fund managers must compete on qtrly basis, since we buy into what’s hot and trade out of those that are prudent.

Strine ended by quickly throwing out some reform ideas to consider. (some of these may have been from a keynote at Directors Forum 2010) I didn’t get them all down but here are a few:

  • Pricing and tax to discourage short-termism and fund hopping.
  • Informed voting mandate has been potent. Unfortunately, there has been no informed investing mandate. Fundamental risk should be factored in.  Build fundamental risk analysis into corporate governance measures. We need balance in risk compared to voting.
  • Compensation of investment managers should be based on the horizons of beneficiaries and beneficial owners. Incentives should be based on long-term holding.
  • 401(k) and college plans consistent with those time horizons. Stop mixing altogether. Create funds that focus on those objectives
  • Indexes should act and vote consistent with long-term — stop giving vote to short-term buybacks and other strategies that temporarily bump up stock but actually rob from the company’s future.
  • Limitations on leveraging and disclosure by hedge funds. Decrease ability to push companies into risky business.
  • Proxy advisory services – “shouldn’t have to pay for the recipe.’ Should be able to read the cook book (can’t you? — You can at RiskMetrics, they even invited comment before finalizing for season). Can’t rely on voting advice unless their horizon is at least 5 years.
  • Fixing the definition of “sophisticated investors.” Many trustees aren’t sophisticated investors and shouldn’t be able to take their funds into unregulated pools. If pools dry up, that may lead hedge funds to disclose, since they need that capital. County pension funds are generally not sophisticated investors…. its your money…. publicly subsidized. They are not effective monitors. Chasing returns is digging deeper holes. Yet, they insist they want access. There aren’t as many personal sophisticated investors…. if they don’t qualify as someone who can easily afford to lose their money, they should be banned or trained and certified.
  • We need to know more about hedge funds – positions, voting policies, etc.

Nonbinding annual say on pay (Microsoft proposed a more sensible every three years), election reform, how much further can we go? Further incursions on the republican model create a public forum for pet concerns. Just how much direct democracy do we want?  Constititons promote stability. The Senate is the oldest classified board. More important to promote long-term outcome.

Californians should have a special ability to identify with the problems of direct democracy because some of the mess out here (my words) is proposition driven. Companies (management) should have more leeway not less. 14a-8 voice nonbinding plebicite. $2,000 stock, no filing fee. Issues of corporate governance claiming to link to corporate profit should only be introduced in resolutions by shareowners with millions of dollars in holdings and a $2,000 filing fee. The current process ties up directors and officers with issues de jour without substantial benefit to the company or most investors.

Boards are working harder but not on the right things. We’ve mandated too many independent committees. The boards priorities have shifted to accomplish what is legally mandated first. You get what you mandate. New laws and mandates tell boards what more they are required to do but not what they can now do less of. How do we give them time to focus on what’s important?

Humans are fallible, especially when given too much to do. When given more, say what they should be doing less of. They should be focusing on what preserves value long-term. We can’t have everything. There must be tradeoffs. With choices come costs. Stop blaming those who run companies. We can’t expect managers to deliver long-term when the market is driven by gimmicks. People are seeking profits in too many stupid ways. Investors should look in the mirror for what needs fixed.

I think there was an implication that if proxy access is needed anywhere, it is needed at mutual funds. We won’t have optimal corporate governance until institutional investors can be held accountable. Investors should focus less on leverage and gimmicks, more on real cash flow and perfecting business strategies. Let’s get away from checklist proposals.

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

Leo Strine Answers Questions

Q/A: Someone, I think a student, asked about rating agencies – choice A & B. Investor is interested in green rating. Strine answered there is too much risk tolerance for equity investors and the cost of externalities is too high for society, so he seemed to be endorsing a green strategy, other things being equal.

I asked a question about TransUnion or Smith v Van Gorkem. The Chancery had ruled against the board for gross negligence but then the Delaware legislature almost immediately took an action that could be considered overruling the Court because they enacted provisions in their General Corporations Code that allow directors insurance to cover gross negligence (Delaware General Corporation Law, section 102(b)(7)).

Even though I was listening intently, I didn’t hear a direct answer. Maybe criticizing any decision made in the Delaware legislature, even one made 25 years ago, is impolitic for a judge in the Delaware courts. I don’t know. He seemed to say that without such coverage, companies would have a hard time attracting director candidates. Additionally, I think he said something to the effect that protecting against corporate externalities was the more important issue.

Gilson raised the issue that AIG, before it imploded, had one of the best corporate governance ratings. He listed several strong features, including hold until retirement provisions. Strine said that there has been too much emphasis on independent directors and independent committees. We should be anticipating what the investor is looking for.  Much of corporate governance standards are noise that only hurt a board’s ability to do its job. The electorate doesn’t want corporations to seek silly risky short-term gains with long term losses but investors aren’t out to protect society… they’re out to get money.

The problem at AIG was a “cult” that owed allegience to one person. Expertise to do exotica is lacking. They didn’t have an extermal monitor. Old style boards may have been fatter, happier, involved more employees, and the community. Board may have included a banker, members from related industries, a lawyer; they worried about the long-term. Now, there is an expertise gap. The need for independent monitors is higher. The derivatives at AIG were so complex they couldn’t be monitored. If you don’t know how your company makes money, you shouldn’t serve on the board.

Gilson followed up with something about the UK’s Walker Commission and how they’d maybe gotten it right, with an emphasis on risk management.  I think Strine replied with something about bubble behavior not being new but some of the vehicles are, like credit default swaps. In many states you can’t bet on football but can bet on a company going down. Complexity is a risk in itself. What Lehman could get, now everyone can get.

There was another question asking if value and stock price are completely disconnected?  Strine answered that prices are informative. Unfortunately, too many people trade on the greater fool theory.  There’s plenty of evidence of not engaging in long-term investment because of the (hot?) market. Head injured investor behavior, is compounded by empowering them. If you tell people you’re going to get them a 30% return, you’re going to have press for short-term gains.

In the old days boards might tell you to get lost (Strine used stronger language). Now days they don’t stand and fight. Independent directors have become too much like politicians out to make a deal to keep ISS/RMG happy. Better to elect hedge funds to the board. At least it keeps them locked up. “It is the drive by shootings that get me.” There is a tendency that the market will over value what’s hot. Stock option backdating isn’t good idea. People do things (maybe especially bad things?) in herds. When markets reward companies for risk and fail to discipline too often, it distorts everyone’s approach.

The last question came like a bit of a bombshell considering the huge applause Strine had been given (more than I have ever heard for anyone else at these events) and the general deference he had been given. The question was something like, Isn’t it disingenuous to go after institutional investors, as if they were responsible for the recession? You say that shareowners have all this power but they’re only on the cusp of reaching what they’ve been going after, namely proxy access. Strine was essentially being accused of Blaming the Victim.

Strine responded that there is plenty of blame to go around but that institutional investors largely hadn’t faced up to their contribution. If you create an incentive structure built on short-term profits, you’ll get more risk taking than healthy returns. There was a failure of prudential regulation the wrong profit incentives. Investors have been trying to blame managers but they didn’t temper their own risk. Takeover defenses are way down, options were their idea (ed: institutional investors, because options linked pay to performance… but only in one direction). There are more independent directors. Plenty of blame.. bond rating agencies. His main point seemed to be that investors weren’t out there temporing risk, but were instead rewarding it.

I would have loved for the conversation to continue around this core issue but the program had already gone on longer than expected, so another good evening ended too soon. My own assessment is that Strine had many excellent points. Shareowner pressures for higher returns do shift costs to society in the form of externalities. The idea of tying pay to performance has largely backfired. The problem of churn is huge. While I agree with Strine that shareowners have gained power through a number of recent reforms like majority voting at very large companies, it is also true that shareowners have little direct control. Even if they win proxy access, the current proposal is to allow no more than 25% of any company’s nominees to come directly from shareowners.

There’s no question that Strine has emerged as the hardest-working, wittiest and most outspoken judge at the Delaware Chancery. He’s also been very innovative, like when he ordered Tyson to complete a merger with IBP or when he negotiated a deal between PropleSoft and its hostile acquirer, Oracle. However, Strine wants Delaware’s opt-in model, rather than a mandate from the SEC on proxy access. I can’t help thinking that is because his ship is tied to Delaware. Not only do a fifth of their revenues come from franchise taxes on corporations, Delaware also has a substantial revenue stream from unclaimed dividends and abandoned accounts held by brokers incorporated there, which Strine helped to negotiate for a former governor.

Corporate governance expert Charles Elson said the Dodd provisions requiring a majority vote for directors and providing greater legal backup to the SEC’s proxy access proposal could spell “the beginning of the end” for the state.  A corporate exodus could leave the state in a “severe fiscal crisis,” searching for new revenue through dramatic increases in income taxes or a new sales tax, he said. “What everybody is worried about is things [getting] chipped away,” said Rich Heffron of the Delaware State Chamber of Commerce. “A company might say, ‘Why do I have to be in Delaware? I could be in Colorado.’ ” (Wall St. reforms could bite Delaware, The News Journal, 5/19/10)

I still tend to think real shareowners have too little, not too much, power. I couldn’t disagree more with his idea that shareowner proposals should be limited to those with millions of dollars in holdings who must pay a fee of $2,000 to get their item on the ballot. What’s next, a poll tax? Some of the most important reforms have been led by so-called gadflies like Lewis Gilbert and John Chevedden.

However, the problem of short-term investment horizons is real. Strine calls on tax policies to discourage short-termism but he certainly didn’t elaborate. Let’s get specific. What about taxing speculative gains (held less than 90 days) at 60%, less than a year at 35%, two years at 25% and thee years or more at the current rate of 15%? Even three years isn’t really long-term, but at least that would head us in the right direction. We could also make use of a Dutch auction system mandatory in IPOs or at least encouraged, so that companies begin public life with more long-term shareowners, rather than speculators.

Strine says risk isn’t factored enough into proxy voting decisions. I agree. One problem is that proxy advisors, like RiskMetrics, don’t have the staff to really dig into most companies. They tend to rely too heavily on governance policies applied broadly to most companies. A proposal recently revised for reintroduction by Mark Latham would allow shareowers to vote funding to advisors, based on the quality of their advice. Since the proposal essentially spreads the cost to all shareowners and avoids free-riders, it should result in far more money being spent, resulting in more in-depth research. (see Ultimate Proxy Advisor Proposal, Voter Media Finance Blog, 5/15/10)

For more from Leo Strine, see Why Excessive Risk-Taking Is Not Unexpected, New York Times DealBook, 10/5/09 and Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate, Harvard Law School John M. Olin Center for Law, Economics and Business Discussion Paper Series, 05/2007.

It was great to see a packed house. I hope it set a solid precedent for future events put on by the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford. See you there next time. In the meantime, check out this and other recorded events as they are posted.

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Life Created

Not directly related to corporate governance but just something interesting to pass along… Scientists for the first time have created a synthetic cell, completely controlled by man-made genetic instructions, which can survive and reproduce itself, researchers at the private J. Craig Venter Institute announced Thursday. Created at a cost of $30 million, the experimental one-cell organism opens the way to the manipulation of life on a previously unattainable scale. (Scientists Create First Synthetic Cell, Opening New Era in Biology, WSJ, 5/20/10) Mary Shelley, time to wake up.

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Sustainability Reporting

The Corporate Library has a new free report well worth downloading, Ten Myths About Sustainability Reporting. Kimberly Gladman explains how the UN’s GRI has become mainstream.

  • According to SIRAN, almost all S&P 100 companies disclose some sustainability informaon either in reports or on their websites.
  • UNI’s principle to “seek appropriate disclosure on ESG issues by the entities in which we invest” has have been endorsed by more than 700 investors represenng approximately $20 trillion in capital.
  • Growing evidence suggests a posive relaonship between strong ESG performance and equity returns.
  • Increasingly, external auditors verify company reports.
  • Comparisons among companies are facilitate by GRI, Corporate Register, Ceres, and Carbon Disclosure Project.

Want to get your company involved? Gladman’s report offers suggestions on your next steps and who to contact.

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Update on Virtual Shareowner Meetings

As they have done for the past few years, Intel Corp. hosted a hybrid shareowner meeting today, allowing shareowners to attend in person or via the Internet. This meeting was important because Intel had planned to make it a virtual meeting, hosted exclusively on the Internet. A strong reaction from shareowners prompted Intel to back down for this year, but this may be just a one-year reprieve. As the same technology used for today’s hybrid meeting would be used for an exclusively virtual meeting, we had today a glimpse of what a virtual Intel meeting might be like. (see Intel Virtual Mtg Out for 2010 But Exploring Future with USPX)

Broadridge provided the technology, and the meeting was hosted on a Broadridge website. Shareowners accessed the meeting using the same 12-digit control numbers they use to vote shares on-line through Broadridge’s website. Since it is unclear how a competing technology provider might authenticate sharewoners, Broadridge is poised to monopolize the market for virtual—and even hybrid—shareowner meetings.

In the days leading up to the Intel meeting, shareowners were welcome to post questions to an “Investor Network” website that is in beta testing by Broadridge. Many questions were posted and Intel staff answered a number of them on that same website prior to the meeting. Intel represents that questions posed over the Internet during the meeting, if not answered during the meeting, will be answered on that website. The process appears manual. I tested the system by posting a question during the meeting. It was not answered during the meeting, and an hour after the meeting, it had not appeared on the Investor Network website.

The meeting itself was a typical shareowners meeting. It lasted just 40 minutes, with the chair and CEO fielding questions while the polls were open. It was professionally run and actually one of the better shareowner meetings I have recently participated in. Despite the availability of access via the Internet, about twenty-five shareowners attended in person. Many corporations that don’t offer Internet access fail to get that number.

Questions from the audience were mostly interesting. Two individuals praised the hybrid format while arguing that an all-virtual meeting would not be good for shareowners. In response, chair Jane Shaw said no plans have been finalized as to whether Intel will go all-virtual in 2011 “or beyond.” She declined to endorse criticisms of an all-virtual format, which suggests there is still interest in going all-virtual.

As feared, Broadridge’s technology largely reduces shareowners to a spectator role. I routinely speak out at shareowner meetings, sometimes to ask questions, but also to address procedural errors by the chair, which are common. No such opportunity existed with Intel’s meeting today. You can shout at your computer screen, but it won’t do any good. The user interface is dominated by a small video of the meeting. There are links to the proxy materials, meeting rules and a few other documentations. You can click on a button to fill in your ballot at any time during the meeting up until the polls close. There is also a small window for typing in a question. The brevity of the meeting and the fact that the chair appeared to read Internet questions from a sheet of paper suggest that Internet questions were pre-selected from questions submitted in advance of the meeting. In summary, there appears to have been no means for shareowners participating via the web to participate during the meeting. Other than filling out the ballot, our role was entirely passive. Neither before, during nor after the meeting was there any mechanism for shareowner-to-shareowner communication.

Needless to say, there will need to be improvement before shareowners can support corporations in hosting all-virtual meetings. The United States Proxy Exchange (USPX) is spearheading shareowners’ response to the opportunities and risks virtual or hybrid meetings pose. We will be hosting a deliberative conference this November in Boston at which shareowners will set guidelines for the conduct of virtual meetings. Intel has already committed to participate in that conference, and I invite all institutional and retail shareowners to join us as well. Details about the conference will be announced in a few weeks. To receive that announcement, please e-mail me at mailto:[email protected].

(Publisher’s note: Thanks to Glyn Holton for this guest commentary and for his good work at the USPX. Guest posts on substantive corporate governance issues are always welcome. Contact James McRitchie.)

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Bogle on Taking Ownership

I wish there were more than one Jack Bogle; the founder of the Vanguard funds seems to stand alone all too often. Kimberly Gladman, of The Corporate Library, blogged on his talk at the CFA Institute conference in Boston this morning. He noted that no mutual fund company has ever filed a shareholder proposal opposed by management. “Never,” he stressed. “That’s not very often.” He also said mutual funds have moved from the “own-a-stock” mentality of his youth (typical fund turnover was about 20 percent in 1950) to a “rent-a-stock” model (average turnover today is 100 percent). He favors the return of Glass-Stegall and taking governance into account in security analysis. (Jack Bogle on “The Silence of the Funds“)

One minor correction, Bogle only seems to be thinking of mainstream funds. Maybe he ought to join the Social Investment Forum. Hundreds of resolutions have been filed by their member funds.

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How I Voted: Home Depot, Interface & Talbots

Home Depot: Since I’m only getting around to voting the day before the meeting I knew I couldn’t vote at but I went there anyway because it is very easy to pull up the proxy there. I also went to CalPERS but they had no voting advice on HD. I then went to, which had collected the votes of five institutional investors.  Most voted for the directors and most of the shareowner resolutions, except the resolution from John Chevedden to reincorporate in North Dakota. Only AFSCME voted for that one. I went with their recommendations. I like the North Dakota resolution and have submitted it to several companies. I’d love to see a race to the top, instead of the current race to the bottom by states that pander to management, rather than shareowners. The North Dakota incorporation code facilitates proxy access, favors director term limits, restricts poison pills, requires separating the role of chairman and chief executive officer, permits votes on compensation, requires majority voting when electing directors, etc. Frankly I can’t understand why CBIS, Calvert and MMA Praxis voted against it. Likewise, the proposal to allow cumulative voting from Evelyn Davis got support from AFSCME, Calvert and MMA, but CBIS voted against it and Trillium and Domni abstained. AFSCME appeared to make the right choices down the line.

Interface, Inc.: Likewise, I’m voting late at Interface as well. I went through the same drill. Not surprisingly, CalPERS had nothing (so far, they are announcing in advance on only 300 companies). There weren’t any shareowner proposals. I’m fairly comfortable with the company. It has been hit hard by the building downturn. Domini and Trillium withheld votes from some directors. Along with Florida SBA, they also voted against amending the omnibus stock plan. I voted with Florida SBA. I wish we were able to drill down to see why funds are voting against various directors. If I could see their reasons, I might be more inclined to follow their lead… perhaps in the future.

Talbots: Third company of mine that is meeting tomorrow. I didn’t even bother checking CalPERS or looking up the proxy. There aren’t any shareowner resolutions. CBIS voted against the auditors but, of course, I don’t know why. The company appears to be turning around during the past year. So, I went with management and Florida SBA.

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Massey Board Under the Gun

The following is a statement from the CtW Investment Group Executive Director William Patterson regarding the results of the shareholder vote at today’s Massey Energy Company annual meeting.

Preliminary tallies indicate that shareholders cast 49.8% of their shares against Dan Moore, 49.6% against Baxter Phillips Jr., and 48.5% against Richard Gabrys.  This razor thin vote casts a cloud over the legitimacy of the current Massey board and is a clear demand for new directors who will make needed changes in company leadership. The opposition votes against the Massey directors were the highest of any this year at an S&P 500 company.  Despite demands from shareholders at the meeting today, the Company refused to disclose the actual vote count and that nearly half of the voting shares appear to have opposed these directors’ election.

North Carolina’s State Treasurer Janet Cowell also criticized the company’s leadership. “Based on the close results, it is clear that a near majority of shareholders have no confidence in these directors. We will continue our fight to secure leadership at Massey Energy Company that will look out for the interest of their shareholders and the safety of their own workers,” Cowell said in a statement. (Three directors re-elected to Massey board, MarketWatch, 5/18/10)

Two non-binding shareholder proposals passed at the meeting. One urged the Massey board to have all of its members stand for election annually—a move the board announced it was endorsing last Friday. A second resolution suggested that directors facing reelection be required to receive a majority of votes cast. Last month, Massey directors adopted a similar policy. Two other proposals that would have encouraged the board to issue reports on the company’s water management and carbon emissions failed to pass. (Three Massey Directors Eke Out Reelection, WSJ, 5/18/10)

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Addressing Risk in Money Market Funds

Capital Advisors Group (CAG), a leading institutional investment advisor focused on short-term cash investing,  announced the launch of FundIQ – “the industry’s first money market fund research product designed to help treasury professionals pursue investment performance by applying the firm’s new fundamental risk analysis process and an independent credit opinion to institutional prime money market funds.” (press release, 5/17/10)

Ben Campbell, Capital Advisors Group’s President and CEO noted,

The most interesting part of this research is that all of the funds we evaluate today are rated triple-A by nationally recognized ratings agencies, yet we still find notable variances in the inherent risk in the funds based on the research method we use. This deeper level of risk assessment is meant to help treasurers who simply don’t have the time or resources to conduct the level of due diligence required to support their money market fund investment decisions. FundIQ was developed in response to these treasurers’ concerns and we hope that they can now invest more confidently knowing that a research team has invested a great deal of time and effort in assessing some very specific risk factors within these funds.

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Positive Changes at announced today that Tracy Stewart is moving from her post as corporate governance manager at the Florida State Board of Administration to serve as the advocacy group’s first executive director. also disclosed that CalPERS has named William Sherwood-McGrew, a portfolio manager within the system’s Global Equity Corporate Governance Program, to join the governing board.

Both appointments represent a welcome move by the Board. The Board and the organization’s Advisory Committee are composed of very diligent and respected members of the corporate governance community… fantastic groups. Although staff have done a great job, I believe the sudden movement of Rich Ferlauto to his new role at the SEC left something of a vacuum. These new appointments should do wonders to put on an even keel in keeping this young but vital organization on its important course of facilitating the ability of shareowners to communicate with each other and coordinate action.

Launched in June 2009, is a nonprofit and nonpartisan organization that educates and organizes U.S. investors to support both short- and long-term financial market reforms.’s broad four-part agenda focuses on the need for stronger regulation (including a beefed-up SEC), increased accountability of boards/CEOs, improved financial transparency and protection of the legal rights of investors. Mike Musuraca, acting chairman,, said:

We are delighted to have two such outstanding individuals as Tracy Stewart and William Sherwood-McGrew bring their on-point skills and background to the important work of Tracy is a nationally respected champion of investor rights and is exactly who needs to become a prime voice for citizen investors. Bill brings his own commitment to investor rights as well as the backing of CalPERS, the nation’s largest pension fund. As recent developments on Capitol Hill and Wall Street have shown, much work remains to be done if we are to rebuild the trust of shareowners in the United States. We believe that Tracy and William can and will make a material difference in this important and ongoing effort.

Tracy Stewart has been corporate governance manager at the Florida State Board of Administration (SBA), Tallahassee FL, from June 2007-present. In that capacity, she has been responsible for coordinating corporate governance activities and policies of the $130 billion public pension fund in a manner that best promotes protection of assets, mitigation of governance risk and adoption of practices which enhance shareowner value. Stewarts also has: overseen proxy voting and policy research and design; draft comments to regulatory oversight bodies such as the SEC and NYSE; engaged with companies and other stakeholders directly to improve governance practices; represented SBA at various director and investor conferences and meetings; and conducted independent research on various governance topics.

Previously, Stewart served as a senior corporate governance analyst from January 2005 to May 2007 at the Florida SBA. She has been a business instructor since May 2001 at Flagler College, Tallahassee FL . In 2008, Stewart was recognized as a “Rising Star of Corporate Governance” by The Millstein Center for Corporate Governance & Performance at the Yale School of Management. She has been an invited speaker at the Conference Board Governance Center, the Millstein Center’s Yale Governance Forums, the Council of Institutional Investors, the International Corporate Governance Network conference, and the RiskMetrics Group annual meeting on executive compensation. With regard to her appointment, Tracy Stewart said: will step up its efforts to help shareowners find their collective voice and use it to become more effective advocates for better governance and performance. I would like to help turn around the situation today in which the shareowner vote still lacks participation from the majority of retail investors. Among other things, I would like to work to restore participation by lowering the cost to owners of making informed voting choices.

William Sherwood-McGrew is a portfolio manager within the California Public Employees’ Retirement System (CalPERS) Global Equity Corporate Governance Program. He is responsible for facilitating the operations of a dedicated cross-asset class governance team to further CalPERS’ leadership role in financial market reform, corporate engagement, and governance policies and practice as a means of improving the Pension Systems’ sustainable long-term performance of assets under management.

Sherwood-McGrew has played an integral oversight role during the last eight years in developing CalPERS’ Governance Program and implementing the Board of Administration’s strategic corporate governance initiatives. Governance initiatives include direct portfolio company engagement, the application of CalPERS’ Global Principals of Accountable Corporate Governance to over 7000 equity portfolio holdings through the System’s proxy voting responsibilities, and advocating environmental, social, and governance policy reform measures at domestic and international levels through a targeted Financial Market Reform Program. With respect to this new appointment, William Sherwood-McGrew said: provides an excellent conduit for retail investors to channel their collective voice to the boardroom, regulatory leaders, or institutional investors and asset managers. Shareowners, large and small, are increasingly recognizing that a shared voice can contribute to restoring confidence in the capital market system by addressing sustainable investment, environmental, social, and governance practices. Enabling sensible governance and regulatory structures, responsible stakeholder engagement, meaningful disclosure, and long-term corporate strategic vision that, at its core, emphasize sustained shareowner value creation are vital. As investors, we must take action and I look forward to advancing the growth of

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SEC XBRL Mandate For Dummies

Clarity Systems is issuing its book, SEC XBRL Mandate For Dummies, as a free download… at least on a temporary basis. It is designed to give you the basics about the U.S. Securities and Exchange Commission’s (SEC’s) XBRL mandate. It looks like a good resource for comparing Outsourced XBRL, Bolt-On XBRL, Integrated XBRL approaches.

Hey, the price is right. How can you miss? And it is written in a style that even dummies can understand.

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Shell Pension Fund Engages

Stichting Shell Pensioenfonds, the €15bn scheme for the oil giant’s Dutch employees, engaged with 117 companies on corporate governance and responsible investment issues in the first three months of this year through advisor, Hermes Equity Ownership Services. Issues discussed included board structure, executive remuneration, child labor, climatic change, controversial weapons, water control and corruption. The dialogue was with 68 companies in Europe, 16 in the Americas, 32 in Asia and one in Middle East/Africa. It did not name the firms involved.

I’ve heard of many such campaigns by public pension funds and TIAA-CREF but this is the first I recall by a private pension fund, though I’m relatively certain there have been others. Let’s hope it is part of an accelerating trend. (Shell’s Dutch pension fund engages with 117 companies, Responsible Investor, 5/13/10. Report) Hat tip to Tim Smith of Walden Asset Management for heads up on this issue.

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CA FPPC Ups Fine of CalPERS Director: Possible Suspensions in Future

Priya Mathur, an otherwise conscientious director at CalPERS from what I know, faces her third fine for failing to timely disclose her financial interests. She reportedly evaded service of legal papers and other efforts to reach her by staff of the California Fair Political Practices Commission, so the Commission increased her fine from $3,000 to $4,000 to get her attention.

State Treasurer Bill Lockyer proposed that directors be barred from carrying out their official duties if they fail to file financial disclosure papers. CalPERS board President Rob Feckner agrees and expects to discuss the measure in a governance committee as early as next week. Feckner wants to change board policy to require that all economic-interest filings be sent first to his office to make sure that all members have complied. “If and when they don’t file, for whatever reason, I am proposing that they be suspended until such time as they are compliant,” Feckner said. (CalPERS board member Priya Mathur is fined $4,000, LATimes, 5/14/10)

Unfortunately, the Board probably will not be able to suspend directors, since the California Constitution contains the following provision:

(f) With regard to the retirement board of a public pension or retirement system which includes in its composition elected employee members, the number, terms, and method of selection or removal of members of the retirement board which were required by law or otherwise in effect on July 1, 1991, shall not be changed, amended, or modified by the Legislature unless the change, amendment, or modification enacted by the Legislature is ratified by a majority vote of the electors of the jurisdiction in which the participants of the system are or were, prior to retirement, employed.

However, the Board could deny delinquent filers their committee assignments, optional travel and other activities until they have filed. As a former department ethics officer in California, all FPPC filings came through my office, including a copy of the director’s. If we didn’t get them before the FPPC deadline, employees got a phone call from the chief deputy director. It was like getting called into the vice principal’s office in junior high.

Mathur, who works as a financial analyst with the Bay Area Rapid Transit District, was fined $3,000 last month for not filing her 2007 statement on time and was fined $6,000 earlier for problems related to her filings after being elected to the board in 2002. Since her reports show “no reportable” financial interests, it is difficult to understand why she has taken what appears to be such a cavalier attitude toward meeting these legal obligations.

When I was in state service, the form took me an hour or two to fill out but I had to report on business activities and all my stock transactions. As the publisher of, I still feel it is important to report potential conflicts of interest to my readers, even though I am under no legal obligation to do so. See Possible Conflicts of Interest. My Form 700 filings ran up to maybe 10 pages. Mathur, claiming “No reportable interests,” would only need to fill out one page, mostly giving the address of where she works.

Although she’s a financial analyst by profession, she doesn’t seem to have done a very good job calculating the cost/benefit analysis of taking 15 minutes to fill out a one page form versus a $4,000 fine. Worse, CalPERS seems to be getting constant press for scandals surrounding former officials and Mathur is up for reelection this year, although she is unopposed. Neither Mathur nor CalPERS can afford the bad publicity that comes from such irresponsible behavior. Hopefully, turning forms into a central office will allow CalPERS to send reminders before they are due to the FPPC, avoiding any such future incidents.

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CEOs Running Scared in Washington

Businesses have intensified their efforts to kill the “proxy access” provision of the Senate’s financial regulation bill. Forty CEOs lobbied in Washington, DC last week alone.  “This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. Last week alone, Castellani said, 40 chief executives were in town visiting Capitol Hill about proxy access, since they see it eroding their power.

“This hinges on senators recognizing the fact that boards in too many companies like Citigroup or AIG really failed in their responsibilities here,” said Daniel Pedrotty, director of the AFL-CIO Office of Investment. With proxy access, shareholders would be able to send a strong message to management if they weren’t happy with a company’s strategy, for instance, in managing risk or charting growth.

Currently, shareowners must pay thousands, sometimes millions, of dollars to run candidates that aren’t selected by current CEOs and boards. Proxy access would force companies to add shareowner nominees to the corporate proxy, at minimal cost, allowing them to comprise up to 25% of boards… if a majority of other shareowners agree with their picks. That still leaves current boards in control but the mere idea that some directors could be replaced has CEOs worried.

Senators Thomas R. Carper (D-Del.) and Bob Corker (R-Tenn.) have introduced amendments that would cut proxy access from the bill, but there are more than 250 other proposed amendments as well. It is hard to know which will get heard. Castellani said the BRT has gotten a sympathetic hearing from several Senators.

Jeff Mahoney, general counsel at the Council of Institutional Investors, said fears are overblown. “Just because you put someone on the proxy card doesn’t mean they’ll be elected,” he said. “At the end of the day, no one is going to get on the board unless most of the owners of that company want that.” (CEOs from far and wide band against financial bill provision, The Washington Post, 5/14/10.

Robert Sprague and Aaron J. Lyttle analyze the development of current corporate governance standards and examine whether the current financial crisis can provide an avenue for change. They find that a “significant shortcoming of the shareholder primacy norm, as supported by the business judgment rule, is that corporate directors and officers have a plain incentive to maximize short-term profits, possibly, as in the case with Citigroup, at the expense of the overall viability of the firm.”

There is one critical assumption underlying the discretion provided to corporate directors and officers under the business judgment rule—if shareholders are displeased with directors, and the officers they hire and supervise, the shareholders can elect new directors. This replacement power is especially important when director decisions are insulated from judicial review due to the business judgment rule.

Unfortunately, that ability is largely an illusion. Shareowners have very little input into electing directors, since in most cases all they can do is vote for or withhold their vote from management’s candidates. Sprague and Lyttle conclude, “The most viable possible revision to corporate governance in the United States is to allow shareholders access to proxies to nominate alternative directors.” (Sprague, Robert and Lyttle, Aaron J., Financial Crisis: Impetus for Restoring Corporate Democracy (January 26, 2010). Midwest Academy of Legal Studies in Business Conference Proceedings, 2010. Available at SSRN:

Martin B. Robins would take a complimentary but different approach, reversing the present burden of proof placed on plaintiffs in actions alleging breach of a directors’ duty of care under certain circumstances. (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule)

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 ongoing basis whether their firms’ managements should be in their positions at all, in order to screen out dishonest, reckless or incompetent persons.

Elsewhere, Robins argues, “pending bills only divert the focus from holding responsible those making the decisions requiring resolution and encourage more bad decisions.” (ROBINS: Financial regulations miss the target, The Washington Times, 5/13/10)

Although far from the recommendation of Robins, reports on two amendments to the Dodd bill that “would significantly expand the disclosure obligations of ’34 Act companies – principally because they contain no meaningful disclosure thresholds (i.e. materiality), and in the case of the Byrd Amendment, would significantly expand the bases upon which directors and officers may be found personally liable for failures to disclose.” (Drilling Down Into the Dodd Bill Amendments: Personal Liability for Directors and Officers!, 5/14/10)

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SEC's IAC Meeting Agenda for May 17

The Securities and Exchange Commission has posted the agenda and schedule for the Investor Advisory Committee meeting in Washington, DC for this coming Monday, May 17. Webcast should be linked from here or here. Hat tip to Committee member Mark Latham and his VoterMedia Finance Blog for the reminder.

Dan Ariely, an expert on behavioral economics and author of Predictably Irrational: The Hidden Forces That Shape Our Decisions, will discuss his work with regard to factors that influence investor decision-making. It should be worth tuning in just for this segment, even if you aren’t interested in the important work of the IAC.

The Committee will also hear from a panel of experts on the topic of mandatory arbitration provisions in customer agreements with brokers. Subcommittees will also report on the status of their activity, including analysis of potential disclosure regarding environmental, social and governance issues.

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Verizon Communications: Deliberate Cheating or Just Error?

John Chevedden sent along this example of a shareowner proposal by Kenneth Steiner to allow shareowner’s holding 10% of the company’s shares to call a special meeting. The proxy language was butchered, removing the title.

Verizon claims stripping away the title of the proposal had no impact on votes. Chevedden points out Verizon didn’t strip away the titles of management’s proposals. Even with this handicap, Steiner’s proposal received 43% support. It is disappointing to find yet another example where management has their thumb on the scale and is unapologetic. (see also, How Votes are Counted: More Important Than Who Votes at Plum Creek)

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No-Action Letters in Question

Robert A.G. Monks submitted a couple of shareowner proposals asking for chair and CEO positions to be split. The companies appealed to the SEC and were granted no-action letters… the SEC would take no action if the companies left the proposals off their proxies. Now Monks says the SEC should get out of the business of reviewing proposal since “its bureaucracy has often been an obstacle, rather than a help, to those seeking better corporate practices.”

The SEC should use its scarce resources for other purposes. According to Monks,

Corporations have lawyers who are quite capable of evaluating whether proposals are required to be included in their proxy materials under SEC rules. If the corporation’s lawyers find a proposal not legitimate, the corporation need not include it. And if the corporation’s lawyers are not certain, then there is little harm in having the proposal included. (On shareholder proposals, SEC should exit the no-action letter biz, P&I, 5/11/10)

That may be true, but many managers of corporations want to deny shareowners a voice at any turn. Apache has been among the most vocal in this category. Recently, we reported that they ended their annual meeting abruptly, without taking any questions from shareholders. (Apache to Shareowners: Give Us Your Money and Shut Up) 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.

I very rarely disagree with Bob Monks but I must in this one instance. While I totally understand why he sees the no-action letter process as problematic, given the startling result his resolutions obtained, doing away with the process would hurt shareowners in the long run. Many companies, such as Apache, would routinely refuse to include resolutions in the company proxy. They view the proxy as management’s proxy, not as the company’s or shareowner’s proxy. Shareowners would have to go to court to protect their rights. While shareowners must front court expenses from their own pockets, corporate management simply taps the corporate treasury. Essentially, shareowners end up paying twice.

In fact, Apache took John Chevedden to court, claiming he had no right to submit a resolution, since his name didn’t appear on the company’s list of registered owners. (Most retail shareowners hold their shares through street name registration. Their shares are held in trust by the Depository Trust Company’s nominee, Cede & Co.) In Apache v Chevedden, Apache won the right to keep Chevedden’s very simple resolution off the proxy because the judge didn’t fully understand the stock ownership structure and how it meshes with SEC rules. The SEC has since received at least two, maybe three, no action requests based on similar arguments used in that case and has flatly rejected them. (Apache v. Chevedden: a Non-Starter)

Sure, SEC staff sometimes get it wrong, as they obviously did in the case of the resolutions cited by Monks. However, doing away with the process would send many cases through an expensive process in the courts, which know little of arcane SEC rules and are already clogged with more than they can handle. Monks should appeal his cases directly to the Commission.

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Sustainability Report Proposal Wins 43%

A resolution submitted to St. Jude Medical requesting the company to publish a sustainability or corporate responsibility report around issues such as the environmental impact of its products and services as well as its workplace practices, such as diversity practices won almost 43% of share votes. Over 20 investors co-sponsored the resolution, among them the Evangelical Lutheran Church in America, Board of Pensions.

The voting results are as follows: 42.81% For; 57.18% Against. (Following the SEC formula for resubmissions, abstentions are not counted in our numbers.) This is in the range of a record vote on sustainability reporting, sending a huge message to the Board and management.

The recent increase in voting percentages supporting corporate disclosure of its performance around ESG issues has mushroomed in the past few years. When proposals receiving 10 or 15% support were singular achievements, we now see resolutions clearly asking for disclosure in the high 30 and 40%. We believe this trend is indicative of a growing awareness by investors of the value of sustainability reporting and the results of this proposal will make the strong case to all companies to develop internal systems to examine ESG risks and opportunities and to report on their progress via a sustainability report for some time to come.

Transparency and accountability are the foundation of good standing; St. Jude shareholders have sent this message clearly to the board and management. (Hat tip to Tim Smith and Marcela Pinilla of Walden Asset Management.

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Vanguard on Corporate Governance

It is great to see an article in the WSJ from John Brennan, chairman emeritus of Vanguard on Improving Corporate Governance: A Memo to the Board (5/10/10).  Brennan says boards are improving and offers several bits of advice to keep the momentum going:

1) Know that you are the shareholders’ first line of defense.
2) Build value through mutual respect.
3) Communicate. Great boards of directors listen and hear.
4) Measure your success. Great boards are self-reflective and self-evaluating.
5) Compensate yourselves in equity.
6) Share your metrics.
7) Hold yourselves accountable.
8) Establish an “owner’s relations committee.”

Great to see a representative of Vanguard speaking out about the importance of corporate governance. I’m delighted to learn that largely passive investor Vanguard “hardly takes a passive approach to corporate governance.” Much good advice and I’d love to see Vanguard take it as well.

However, when I look at their voting track record on I see, for example, the Vanguard 500 fund only voted against management twice on Board Independence and Performance proposals out of 235 times. If they really take corporate governance and voting seriously, why not announce those votes in advance on sites like and If their votes really are thoughtful, retail investors will follow their lead. It looks to me like they need to put a little more thought into proxy voting. (Hat tip to Martin Robins for bringing the article to my attention.)

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CorpGov Bites

Boston Scientific Corp., which posted a $1.6 billion first-quarter loss, is on probation for concealment of safety defects in its heart defibrillators earlier in the decade and is faces charges of overpaying its CEO, is barring media from its shareholders meeting tomorrow morning. Beth Young, of the Corporate Library said,

I think it’s not the best practice to close a meeting. It sets a tone and creates a feeling of distrust and secretiveness, which is not what a company wants to do when it’s facing challenges. (Media barred from Boston Scientific meeting, The Boston Globe, 5/11/10)

To me it is a sign of management closing ranks and becoming insular, afraid of not being able to control questions that might come up from shareowners or the press.

The CalPERS focus system works so well that after negotiations with 15 companies, there are no targets left this year for the first time since 1988 when it began the public identification of companies for poor shareholder performance and corporate governance. “The whole point is not to embarrass them but to get improvements, and it worked,” said Clark McKinley, CalPERS spokesman. (CalPERS drops company focus list for 2010, P&I, 5/10/10)

From a speech by Goh Chok Tong, Senior Minister at the Singapore Corporate Awards 2010. (Singapore Encourages Better Corporate Governance, Government of Singapore, 5/10/10)

Corporate governance is not simply about complying with rules or reporting requirements. Boards of directors and senior management need to internalise the values, spirit and purpose behind the rules…

Financial institutions which experienced more significant problems during the crisis tended to apply a “mechanical” approach to risk management, without exercising expert judgement to challenge the outputs of quantitative risk models…

Boards need to take a broader and a longer-term view when setting directions for their companies, balancing the drive to generate earnings with appropriate guidance on the level of their companies’ risk appetite.

In Sweden, shareowners typically elect a nomination committee composed of leading shareowners. They, along with the company’s non-executive chair of the board then composes a slate for a vote at the annual meeting.  Investors are also free to propose other candidates from the floor. Stephen Davis and Jon Lukomnik say the Swedish model doesn’t fit the US, since “investors would have to nominate nearly 100,000 directors.” “Nomination committees may well bear the brunt of reform following the financial crisis.” Look for greater participation by investors in several different forms. (Seeking Governance Inspiration—From Sweden?, ComplianceWeek, 5/11/10)

Broc Romanek reports the Deloitte Forensic Center released a study about which executives most frequently get named in SEC enforcement actions during 2008. The results were a little surprising to me – the financial executives (ie. CFOs, chief accounting officers and controllers) collectively represented only 44% of the individuals named. In comparison, CEOs represented 24% and directors and general counsel were named 4% of the time. (Survey: Who Gets Named by SEC Enforcement in Fraud Cases,, 5/11/10)

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How I Voted at EW Scripps, Dreamworks & Valeant

I procrastinated too long to vote at on these issues. They close voting three days in advance, since they are in beta and are want to be able to ensure against last minute glitches. I checked for votes at and voted with Florida SBA at EW Scripps and Dreamworks. At Valeant, I voted with CalSTRS. I’ve got additional votes coming us at Home Depot and Interface. I hope to be getting more voting advice from and by the end of the week or so.

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Ten years ago in BusinessWeek calls governance activist investor Andrew Shapiro the Gary Cooper of corporate governance in their 5/29/2000 edition. I didn’t quite get the connection. Maybe its that Shapiro charisma or that frontier mystique with a worldly polish. Regardless of his relation to the film star, the article pointed out Shapiro’s bylaws, which he put in place at Quality Systems, are “fast becoming a template for other investors looking to create change.”

Following the lead of Domini Social Investments, Calvert’s new fund has announced it will post its proxy votes starting in 2001.

Preliminary results reported by IRRC (4/21) indicate that 12.7% of First Union shareholders voted to require the nominating committee to nominate two candidates for each board position. The resolution also called for statements by candidates on why they believe they should be elected were also to be included with future proxies.

Five years ago in EBSA, which enforces the Employee Retirement Income Security Act (ERISA), closed 4,399 civil investigations in FY 2004, with nearly 7 in 10 of those producing corrected ERISA violations. Criminal investigations led to the indictment of 121 people in 205 cases and the recovery of $5.6 million. The agency prosecuted wrongdoers under criminal statutes governing theft or embezzlement from employee benefit plans, lying on ERISA-required documents, as well as offering, accepting, or soliciting a bribe in order to influence the operations of an employee benefit plan. EBSA listed six key fiduciary violations:

  • failing to operate a plan prudently and for the exclusive benefit of participants;
  • using plan assets to benefit certain related parties;
  • failing to value plan assets properly at their current fair market value or to hold assets in trust;
  • failing to make benefit payments due under the terms of the plan;
  • taking adverse action against an individual for exercising his or her rights against the plan;
  • failing to offer continuing group health-care coverage for at least 18 months after a worker leaves the company.

Public customers of securities brokerage firms are required to agree to arbitrate disputes using specified forums. Drawing on 30 years of experience serving as an NASD arbitrator and as legal counsel for either claimants or respondents, Les Greenberg recently filed a Petition for Rulemaking (File No. 4-502) that seeks to level the playing field. The Petition requests the creation of rules designed to:

  • specifically permit arbitration panel members, should they elect to do so, to conduct legal research, or, in the alternative, forbid Self-Regulatory Organization (“SRO”) sponsored arbitration forums from restricting arbitrators from conducting legal research;
  • abolish the requirement that a securities industry arbitrator be assigned to each three person panel hearing customer disputes or, in the alternative, require that information presented to a panel of arbitrators by a securities industry arbitrator be revealed to the parties during open hearing;
  • require SROs to conduct continuing evaluations of the ability of every arbitrator on their panels to perform his/her duties, including, but not limited to mandatory peer evaluations;
  • require SROs to train arbitrators in applicable law;
  • require SROs to reveal in pre-dispute arbitration agreements whether their arbitrators are required to follow the law in their decision-making process, the training of their arbitrators in the law, and their process, if any, to evaluate their arbitrators on a continuing basis; and,
  • require the SEC’s Division of Market Regulation to specifically oversee SROs to determine whether they are in compliance with rules adopted pursuant to items (1) through (5), inclusive.

Majority Vote Momentum Grows. Proposals won 57% support at Raytheon, 52% at Freeport McMoRan Copper & Gold Inc., 51% at Federal Realty Investment Trust, 46% at Motorola Inc., 45% at Bristol-Myers Squibb Co., 43% at Verizon Communications and 42% at General Growth Properties.

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