Archive | June, 2010

SEC Adopts Pay to Play Regulations

In a unanimous vote Wednesday, the Securities and Exchange Commission adopted a regulation designed to curtail so-called “pay to play” schemes in which advisers try to curry favor with politicians by donating to their campaigns.

Under the rule, if an investment adviser or certain employees of an advisory firm contribute to a politician with influence over hiring, they cannot be paid by the pension fund for two years. Advisers would be prohibited from bundling donations from other people or political action committees for the officeholder or a party. (SEC limits political gifts from advisers to pension funds, Investment News, 6/30/10)

The new SEC rule has three key elements (SEC Adopts New Measures to Curtail Pay to Play Practices by Investment Advisers):

  • It prohibits an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser.
  • It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as “bundling” — for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
  • It prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

The new rule becomes effective 60 days after its publication in the Federal Register. Compliance with the rule’s provisions generally will be required within six months of the effective date.

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Fortune Uses Proxy Democracy to Question Vanguard

In a 4-minute video, Fortune asks Vanguard’s CEO, based on Proxy Democracy data, why they vote against management less than 85% of funds. The CEO answered that Vanguard has its principles on the Internet and frequently engages with the companies it invests in. He thinks they’ve been successful with quiet diplomacy. From those principles:

The funds generally did not support proposals that would mandate specific actions with respect to executive compensation (limiting the discretion of an independent compensation committee), call for separating the duties of chief executive and chairman, or require particular corporate or social policies.

The Vanguard family of funds voting profile on Proxy Democracy shows that Vanguard funds have voted against the recommendation of management on 13.7% of the proposals they have faced. 87% of the fund families in the Proxy Democracy database voted against management more often than that. (thanks to Fortune Uses ProxyDemocracy To Critique Vanguard’s CEO On Their Voting Record, VoterMedia Finance Blog, 6/30/10)

See how your funds are voting; decide how to vote the stocks you hold as a retail investor. Proxy Democracy has the tools to inform your investing behavior and your vote.

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NoCal NACD and Others on 2010 Proxy Season

2010 Proxy Season Panel: NoCalNACD

On June 29th the Northern California Chapter of the National Association for Corporate Directors held a low-cost high-quality lunch-time meeting at the headquarters of the California Chamber of Commerce. Now that we have wrapped up the 2010 Proxy Season with issues this year like executive compensation, risk management and high profile withhold campaigns for some Directors, how did it go?  What lessons did we learn?

Anne Sheehan

Moderator: Anne Sheehan is Director of Corporate Governance of the California State Teachers’ Retirement System (CalSTRS). Prior to that, she served as Chief Deputy Director for Policy at the California Department of Finance, serving on more than 80 boards, commissions, and authorities on behalf of the Director of Finance. She also served as the Executive Director of the Governor’s Public Employee Post-Employment Benefits. Anne Sheehan was appointed to the CalPERS Board in December 2007 as the designated representative of the State Personnel Board.  She was named one of the 100 most influential people on corporate governance by Directorship Magazine in 2008 and 2009.

Panelists: Lydia Beebe, Corporate Secretary and Chief Governance Officer, Chevron Corporation, a position she assumed in 1995.  She serves on the board of directors of the Council of Institutional Investors and the Society of Corporate Secretaries and Governance Professionals where she was  past chairman. In her remarks, Ms. Beebe initially focused on corporate disclosures required by the SEC. In that context, the proxy season was “predictable,” given new disclosures for compensation. Such disclosures take up an increasing amount of space.

Lydia Beebe

Beebe pondered the idea that perhaps some thought should be given to getting rid of some parts that may be less informative than others. Perhaps by example, she noted that with regard to director qualifications, companies aren’t likely to use that disclosure requirement to tip their hat concerning which directors, if any should be voted out.

Given the BP spill and new disclosure requirements, risk analysis is getting increased attention at Chevron. Like many of us, she thought the industry was well beyond such accidents. The Gulf spill will have repercussions for many years to come. Boardroom discussions around risk have increased. What is the right balance regarding board involvement? How can we be sure our processes are being followed on the ground? Careful auditing is essential. Compared crisis of management vs crisis of lack of oversight. Boards have a thirst to know and to weigh risks from the geopolitical to the geological.

She also noted what might be an increased trend of plaintiffs or their allies using shareowner proposals to further their lawsuits. She also expressed some regret and frustration over increased security requirements around annual meetings. (Activists rally at Chevron’s Houston offices during shareholders’ meeting, Houston Business Journal, 5/26/10)

Abe Friedman, Director of Corporate Governance, BlackRock. BlackRock is one of the world’s preeminent asset management firms and a premier provider of global investment management, risk management and advisory services to institutional, intermediary and individual investors around the world.  As of March 31, 2010, BlackRock’s assets under management total US $3.36 trillion. Friedman

Abe Friedman

is responsible for the firms proxy voting efforts worldwide. The biggest surprise of this year’s season was how boring it was with regard to substance and new issues. Companies appear more willing than ever to engage. As evidence of that, CalPERS had no focus list this year because they were able to negotiate changes with potential targets. He thinks the trend is engagement and there are more opportunities for shareowner voices to be heard. However, he did caution that willingness to engage with shareowners may reduce if the economy improves substantially.

Friedman reiterated his opinion, that I have heard and covered at many other venues, that “say on pay” is a bad idea for investors and will likely provide insulation to boards that can point back to shareowner approval. Shareholders aren’t equipped to set pay or determine compensation in advance. Voting out compensation committees is a better strategy. He speculated that a few high profile cases could do more for adjusting compensation to risk that say on pay.

Diane Miller

Bob McCormick, Chief Policy Officer, Glass Lewis & Co. manages the analysis and drafting of 18,000 Proxy Paper research reports on shareholder meetings of public companies in 80 countries. Previously, McCormick was the Director of Investment Proxy Research at Fidelity Management & Research Co. He serves on the International Corporate Governance Network’s Cross-Border Voting Practices and

Bob McCormick

Securities Lending committees.  McCormick was named one of the 100 most influential people on corporate governance by Directorship magazine in 2008 and 2009. McCormick sees global convergence across borders as one trend that continued this year. Trends to influence election of directors, obtain more information, increased use of voting rights.

There seems to be a private ordering around issues like majority voting requirements.He also sees more engagement with shareowners. Perhaps there was a learning phase or trust building required. BP and Massey drove the focus on risk.  Asked about the need to a separate board risk committee, McCormick, like the others, said it depended on a number of factors. If the board has never really managed risk, then a separate risk committee or manager reporting to the board will guarantee at least a discussion. On the other hand, compensation committees need to be aware of risk and how it relates to incentives. The audit committee also needs to be aware, so companies shouldn’t shunt risk off to one committee.

A study cited in the Sutherland and The Altman Group webinar discussed below found that 8% of surveyed companies have primary responsibility for risk management resting with the board. 34% is with 1 or more committees and 52% said both board and various committees have responsibility for risk oversight.

Great questions from the audience… need to validate subcontractor skills and performance. Discussion around perhaps higher need for risk committees at insurance companies. Ideally best nominations come from nominating committees because they know the strengths and weaknesses of the existing board.  However, when they fail, proxy access will be useful as long as it is used judicially. Interesting stories from insiders, as well as international examples of rights and problems that may be coming our way.

It was close to a full house, a great little buffet, wonderful discussion and when I got the last question I asked about how funds decided to withhold votes on directors. Leading factors seem to be:

  • Compensation committee members where there were large gaps relative to performance.
  • Audit committee members and others when there is a crisis.
  • Poor performance, coupled with poor governance.
  • When directors repeatedly ignore the will of shareowners by not enacting proposals that have passed twice.

Another worthwhile event by the Northern California Chapter of NACD. Join or at least sign up to be notified of future events. Don’t miss out.

For another perspective on the 2010 proxy season, see Ted Allen’s The ISS Preliminary U.S. Postseason Report, available to subscribers of and probably available somewhere at, although I can’t seem to find it. A few highlights:

  • Despite warnings from some corporate advisers that the end of broker voting in uncontested board elections would unleash a surge of withhold votes this year, the number of directors who failed to receive majority support remained about the same.
  • One of the most notable developments this season occurred at Motorola, when the electronics company became the first-ever U.S. issuer to fail to win majority support during a management-sponsored advisory vote on compensation.
  • After reaching a record high in 2009, fewer governance proposals filed by shareholders obtained majority support this season. As of June 15, 117 (30.2 percent) of the 388 proposals that went to a vote garnered majority approval, down from 150 (or 35.2 percent) of the 426 proposals on the ballot during the same period in 2009.
  • “Say on pay” resolutions were averaging 44.1 percent support at 47 companies.
  • Resolutions seeking to rescind supermajority voting rules were averaging 69.6 percent approval at 32 firms.
  • For declassification proposals, there was 60.2 percent average support at 55 companies.
  • Right of a majority of investors to act by written consent averaged 54.7 percent approval at 16 firms this season.
  • Special meeting resolutions were averaging 43 percent support at 43 firms, down from 51.8 percent in 2009, as companies increasingly adopt 25% or higher standards to avoid the 10% demanded by shareowners.
  • Independent board chair resolutions were averaging 28.9 percent support at 36 annual meetings, down from 38.8 percent during the same period in 2009.
  • Majority voting proposals averaged 57.6 percent approval at 29 companies, up from 51.3 percent in 2009.

From a review by Sutherland and The Altman Group. (I presume it will be posted to the Articles portion of the The Altman Group site.  If not, contact Cynthia M. Krus at Sutherland or Francis H. Byrd at The Altman Group.)

There was no huge perfect storm that many expected with loss of broker vote. ISS clamped down on compensation committee members in 2009. No further ratcheting in 2010 but companies deserve credit for taking a more proactive stance in 2010.

Some discussion of Dodd-Frank bill. Non-binding Say on Pay at least twice every six years, with variability 1, 2, or 3 years. Many institutions that advocated annual SoP aren’t prepared to vote annually because too much work to look through thousands and thousands of proxies. Management SoP didn’t pass at Occidental, Motorola and KeyCorp. ISS didn’t support management’s recommendation at any of these companies for a variety of reasons.

Issuers can no longer exclude risk assessment or CEO succession planning proposals based on ordinary business exclusion. Presentation went into more detail as to why votes may have turned out as they did in 2010. See Staff Legal Bulletin 14E.

Their webinar focused much more on proxy disclosure rules and how to please both the SEC and RiskMetrics Group. I would think the slides would be useful to all involved in compiling such disclosures for companies. Additionally, a proxy plumbing draft will be released by the SEC soon. See Modernizing the Proxy Voting System: Setting Priorities and Practical Solutions To Improve The Proxy Voting System at The Altman Group.

See also RiskMetrics 2010 Policy Updates: Test of Pay for Performance and List of Problematic Pay Practices Fine-Tuned, Peal Meyer Client Alert from December 2009 and Pay Czar Feinberg’s Best Practice Principles, The Corporate Library, 7/1/10.

Also of interest to NACD members, “Who Watches the Watchers? Why an External Board Evaluation is Most Likely to Result in a Higher-Performing Board.” This article, available from Deloitte, discusses the involvement of a third-party in assisting with the board evaluation process and explores the benefits of having an independent party involved.

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Placing Corporate Law Within a Political Context

The Corporation as Imperfect Society by Brian M. McCall articulates a corporate metaphysics rooted in the political philosophy of Aristotle. The dominant models of corporate law and philosophy are rooted in the realm of private law, especially contract, agency and property law. Corporations are viewed as a nexus of contracts or as vehicles for joint ownership of a private pool of economic assets. The result has been entrenchment of the principle of shareowner wealth maximization.

By viewing them in the context of public law, not private ordering, corporations are seen as a constituent part of larger societies whose operation must be harmonized to the common good.  McCall goes on to show that while his vision differs from current commentary, corporate law practices are actually more consistent with his vision than the shareholder wealth maximization standard. While this later point reinforces the veracity of his argument, it also leaves at least this reader wondering, “if we embrace McCall’s philosophy of corporate law, what difference will it make?”

Don’t get me wrong, I enjoyed McCall’s trip from Aristotle’s definition of community, to recognition by Medieval jurists of the quasi-political nature of the corporate form, and the incorporation of the Averdeen Harbor Board in 1126, arguably the first profit making business. His critique of contract law and stakeholder theory were also persuasive. I’m convinced that a constitutional understanding of the nature of a corporation better explains the results of corporate law cases than a shareowner wealth maximization model rooted in contract or property law. We leave the paper with better alignment between theory and practice but shouldn’t a change in theory result in a change of practice? We only get hints of how that project might proceed.

According to McCall, “the nation has the competence and the right to restrain corporations when in pursuit of their imperfect end they harm the common good of the nation.” In pursuit of their own ends, corporations will create externalities that should be regulated. Directors and managers must be mindful and consider the larger public good in their decisions. Secondly, directors and managers must also consider the common good of the entire corporate community. “No decision should merely advance the particular good or harm of a group. Also cost should not be disproportionally inflicted out of proportion to the common good on one group in particular.”

With respect to the assertion that nations have the competence and the right to restrain corporations, is that really true? Multinational corporations owe no allegiance to any one country. Are individual nations really competent to regulate them, especially given constraints like the decision in Citizens United, which seems to give corporations undue influence over the political sphere? With respect to determining the common good within the corporate community, how do we ensure the views within that community are known by and represented by directors and managers? We don’t seem to even know the boundaries of the corporate community, let alone having common best practices with regard to internal governance structures guaranteeing any real degree of representation. We’ve had enormous difficulty just trying to move from self-perpetuating boards to giving shareowners direct input into nominating up to a quarter of the boar through proxy access, how do we ensure the interests of employees and others are also represented?

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Proxy Access Update

A recent report from the Altman Group provides the best short update on proxy access that I have seen. They recommend to clients that “the Rubicon has been crossed. It is time for companies to start thinking about conducting over coming months detailed Governance Risk Assessments examining the challenges that are likely to be presented by shareholders taking advantage of a proxy access rule in the 2011 proxy season.” The main summary of their report is as follows:

U.S. House and Senate negotiators agreed last week to use language in the financial reform bill that will grant the SEC the authority to issue rules on proxy access, but without eligibility or other specific criteria defined by the U.S. Congress. House negotiators rejected efforts led by Senators Christopher Dodd and Charles Schumer to constrain the SEC’s rule-making on proxy access by defining certain eligibility criteria. Sen. Dodd, in a provision detailed in the Senate’s “Counter-Offer” of June 16, had initially pressed for amending: “Section 972 Proxy Access of the base text so that only shareholders that have owned not less than 5% of outstanding shares for not less than 2 years have access to the proxy.” When House negotiators resisted (the 5% level in particular), Sen. Schumer floated an alternative proposal of 3% of O/S held for 3 years + a requirement that a shareholder nominating a director under proxy access provisions would have to maintain an ownership stake for 2 years following the meeting at which their nominee was elected to the board. The latter proposal marked a turning point in the process. House negotiators ended up rejecting all efforts to define eligibility criteria. House Financial Services Chairman Rep. Barney Frank reportedly remarked that “sentencing people to own shares is an odd concept” (Dow Jones, June 24).

Ted Allen provides the most comprehensive coverage with regard to corporate governance provisions. (Lawmakers Release Final Text of Financial Legislation, RiskMetrics, 6/28/10)

Lawmakers Release Final Text of Financial LegislationYou can find a link to the conference report on the financial reform bill at More from Morrison & Foerster at Reconciliation: A Summary Scorecard on Regulatory Reform (Part I) and on the larger bill at Lawmakers guide Dodd-Frank bill for Wall Street reform into homestretch, Washington Post, 6/26/10. See also, SEC Will Have Hands Full Once Financial Reform Passes, The Conference Board, 6/22/10.

However, there is also a reminder that it ain’t over til its over. Bill can’t bank on Brown’s support, The Boston Globe, 6/26/10. Senator Scott Brown, a Massachusetts Republican, said he was withholding support, citing $19 billion in new bank taxes inserted at the last minute. And there’s this from the Wall Street Journal, 6/28/10:

The Business Roundtable, a Washington group that represents big-company CEOs, said Friday it would keep urging the SEC to limit proxy access to shareholders who have held a 5% stake for at least two years. “We will continue our very strong advocacy,” said Alexander “Sandy” Cutler, CEO of manufacturer Eaton Corp. and head of the Roundtable’s Corporate Leadership Initiative… The SEC is considering scrapping the tiered approach and instituting one stake level for all companies, according to a person familiar with the discussions. The Council of Institutional Investors, a powerful association of pension funds, has proposed requiring a 3% stake for two years at all firms. Lawmakers did agree to let the SEC exempt smaller firms, which corporate lobbyists said they would urge.

Of course, it is at small businesses that shareowners generally need the most help, since there are few active institutional investors involved. I guess the’re not too big to fail, or screw their owners.

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CorpGov All Atwitter

Board member are finally discovering LinkedIn and Twitter. advises readers they can see what’s being tweeted on corporate governance  by searching #corpgov. “In addition to the many publications that maintain Twitter accounts (think: Wall Street Journal, New York Times, and business magazines), there are activisits, attorneys, and CEOs using this medium.” (Who’s Who in the Corporate Governance Twitterverse?) is listed, along with about a dozen others. Thanks!

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Access is Back, Majority Vote to be Battled Company by Company

Lawmakers Reach Deal on Proxy Access by Ted Allen on June 25, 2010 12:03 AM. “In the end, the lawmakers essentially went back to where they started and will allow the SEC to hash out the many thorny issues related to proxy access.” “The SEC’s current draft rule, which was issued last June, calls for a sliding ownership threshold for investor groups that ranges from 1 to 5 percent depending on a company’s market cap, and would impose a one-year holding period. The commission may consider a final rule as early as next month.” Thanks to Allen for keeping a close eye on this important legislation.

I’m also told there was one additional line that the SEC can, at its discretion, exempt certain small businesses from proxy access requirements. Mandatory say-on-pay moves to biannual or triennial at company’s option; exemption from SOP for “small issuers.” No majority vote standard will be required. (The House-Senate Reconciliation Reaches the Finish Line: The “Proxy Access” & “SOP” Results Are In, 6/25/10… also excellent coverage by Broc Romanek at

Here Are The Key Points You Need To Know About Today’s Big Financial Regulation Agreement,, 6/25/10. House and Senate Agree on Finance Overhaul, NYTimes, 6/25/10. Now I wait for some group like to do a complete dissection of the bill. It looks like we won much more than we lost thanks to all those calls and emails.

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Self-Selecting Aspirational Peer Group: Impact on CEO Pay

The Investor Responsibility Research Center (IRRC) Institute and PROXY Governance Inc. (PGI) today released a new study, “Compensation Peer Groups at Companies with High Pay,” that identifies a subset of S&P 500 companies with high pay that is not aligned with high performance. The data reveal that high executive pay companies self-select larger than appropriate peers – in terms of market capitalization and revenue – for compensation benchmarking purposes. The self-selected peer groups also are better performers. Then, not content with systemically skewing the comparables for the purpose of setting executive compensation, the boards of directors of the high pay companies basically ignore the peer groups to compensate chief executive officers (CEO) an average of more than double, or 103 percent, above the median of the self-selected peer group. By contrast, the baseline, or non-high pay, companies paid CEOs an average of 15 percent lower than the median of benchmarking peers. The key research findings are as follows:

While all companies in the study tended to select larger compensation peers, the differential was more dramatic for companies with high pay. Measured by market capitalization, companies with high pay were an average of 45 percent smaller than self-selected peers versus an average of 5 percent smaller among baseline companies. Measured by revenue, companies with high pay were an average of 25 percent smaller than self-selected peers, while baseline companies averaged only 17 smaller.

  • Unlike baseline companies, companies with high pay tended to select higher-performing companies as compensation peers. On average, companies with high pay performed 7.7 points worse than self-selected peers, based on the studyʼs aggregate scoring metric. By contrast, baseline companies performed an average of 3.0 percentile points better than their self-selected peers.
  • Companies with high pay were also more likely (21 percent) than baseline companies (17 percent) to select other companies with high pay as compensation peers. Conversely, however, the average company with high pay appeared in fewer S&P 500 compensation peer groups, at 8.5, than the average baseline company, at 10.3.
  • Companies with high pay compensated their CEOs an average of 103 percent above peer group median despite being 25 percent smaller than those peers by revenue. Baseline companies, by contrast, paid their CEOs an average of 15 percent below peer group median – a discount roughly in line with approximately 17 percent smaller average revenue.
  • Companies with high pay also structured their larger CEO pay packages with a disproportionately richer mix of equity awards (69 percent of total pay) than either their self-selected peers (62 percent) or baseline companies (61 percent). Full value equity awards at companies with high pay constituted 41.3 percent of total pay, versus 35.2 percent among self-selected peers and at baseline companies.
  • Contrary to general perceptions, having an external CEO on the compensation committee appeared to act as a mild deterrent to high pay. Among the S&P 500 companies, 6.5 percent of companies with high pay had external CEOs on the compensation committee, versus 9.0 percent of baseline companies. Across the broader Russell 3000, only 1.7 percent of companies with high pay had external CEOs on the compensation committee, versus 10.5 percent of baseline companies.
  • Nearly 65 percent of companies with high pay had a CEO who was also chairman, slightly higher than the 60 percent rate among baseline companies. Baseline companies, however, were moderately more likely to have a classified board (29 percent versus 24 percent) or have had a shareholder pay proposal on the ballot in the prior three years (29 percent versus 24 percent).

In my experience, companies that benchmark to larger than appropriate peers do so because they pick their peer group based on aspiration, rather than reality. Yeah, I’d like to play like Tracy McGrady. If my board pays me to match his $23,239,561, will that motivate me enough to play as well as McGrady?

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Shareholder Forum on eAGMs

Gary Lutin’s Shareholder Forum is putting together an impressive panel of luminaries to help consider proposed standards for judging the fairness of communications associated with voting at shareholder meetings, assuring a shareholder’s right to:
(a)      present questions and views to a company’s managers and to other shareholders,
(b)      observe the presentation of other shareholders’ questions and views, and
(c)      observe the responses of managers to all shareholder questions.

These are important aspects of larger issues surrounding the idea of moving to virtual annual shareowner meetings. It looks like the group has already done a substantial amount of work through preliminary workshops. We look forward to seeing the results from this effort and would encourage participation by our readers.

The open meeting will be held on Tuesday, July 13, 2010, at the New York Society of Security Analysts (“NYSSA”). However, the building is secure and attendance will be limited to about 30 people. You won’t get in without identification and a reservation. More details at the The Shareholder Forum.

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House "Compromise" on Proxy Access

Thanks to Ted Allen of Risk Metrics for his continuing coverage of the financial reform legislation. (House Lawmakers Propose Compromise on Proxy Access, 6/24/10) Today he reports that, as expected Rep. Barney Frank said House lawmakers won’t support Senator Dodd’s proposal to impose a 5% ownership threshold and a two-year holding period on investors who seek proxy access.

Frank said the House would agree to insert instructions in the bill to direct the SEC to consider the need for a holding period and a minimum ownership stake. Dodd will soon to present a revised offer on proxy access.

Today is supposed to be the final day of conference committee negotiations on the 2,000-page financial reform legislation. Besides proxy access, there are other contentious issues to be resolved, including whether to adopt a “Volcker rule” to restrict proprietary trading by banks and to force banks to spin off their derivative trading operations. Lawmakers also are discussing SEC funding and whether to extend fiduciary duty obligations to broker-dealers.

I think we can all readily embrace Frank’s “compromise.” Will the Senate?

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Ceres is Hiring

Are you ready to change corporate, investor and business practices on climate change and other sustainability challenges? Do you have the strategic savvy to engage entire industries — the insurance sector, for example — to tackle the business impacts from global warming? Ceres is seeking the best and the brightest candidates.

Ceres is a national coalition of investors, public pension trustees, foundations, labor unions, and environmental, religious and public interest groups with collective assets of over $9 trillion, dedicated to advancing more sustainable business practices and corporate accountability. Ceres’ mission is to move businesses, capital, and markets to advance lasting prosperity by valuing the health of the planet and its people. They are also changing fundamentals, like how corporations are governed.

Get off your ass; create a more salubrious environment. (these words are mine)

Positions currently available include the following:

  • Manager, Policy Program
  • Manager, Electric Power Program
  • Manager, Oil & Gas Program
  • Senior Associate, Water Risk Initiative, Corporate Programs
  • Coordinator, Development
  • Associate, Communications
  • Associate, Human Resources and Operations
  • Associate, Investor Programs
  • Associate, Database
  • Director, Corporate Program
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CorpGov Bites

WSJ reports on the effort of CalPERS, CalSTRS and CII to recruit “scores of executives” to be nominated for seats on poorly performing corporate boards of companies in which they hold shares. Dubbed 3D for “Diverse Director Database,” the initiative is linked to coming SEC rule changes to provide proxy access to corporate boards. (Calpers Aims Director List at Increasing Board Sway, 6/18/10) Unfortunately, the whole effort is now in jeopardy pending the outcome of a conference committee rewrite of the financial reform bill.

Ted Allen, at Risk Metrics, does a good job of reviewing where we are with the conference committee and proxy access. (Investors Lobby Against Proxy Access Limits, 6/21/10) See also Bebchuck Tells It on Proxy Access, The Corporate Library, 6/21/10; Conference Committee Poised to Abandon Proposed Corporate Governance Reforms, Social Funds, 6/21/10; note from Brendan Sheehan of the Corporate Secretary;; read letter from Social Investment Forum to Conference Committee, 6/11/10. For the latest, see House-Senate Reconciliation Continues: Shareholder Votes on Golden Parachutes Are “In” at, 6/23/10.

On June 20, SEC Chairman Mary Schapiro spoke to the Stanford University Law School Directors College. She made several comments she made on corporate governance matters, including issues involving proxy “plumbing” and proxy advisory services. For example, on the recently enacted enhanced disclosures, she made several points:

  • The new rules require more than the bare outline of a board candidate’s qualifications, they also require the “specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director…in light of the [company’s] business and structure.”
  • A thorough discussion of the risk-related responsibilities of the board and its various committees. It then adds a detailed narrative that touches on the company’s reporting to the Board and its committees about credit and liquidity risks, risk-focused auditing strategies, and the impact on risk of compensation policies.

With regard to proxy plumbing, “the Commission will soon consider publishing a concept release soliciting detailed ideas about how to modernize the voting infrastructure through which, I am told, over 600 billion shares are voted every year at more than 10,000 public company shareholder meetings.” “Proxy advisers play an increasingly important role, particularly with regard to investors who may not have the specialized expertise to weigh in on particular questions. Should there be checks on the accuracy of the information provided by proxy advisers? Are advisers who provide services to both corporations and investors managing and disclosing the resulting conflicts of interest appropriately? Are SROs appropriately overseeing proxy distribution fees? And, in an area very near to my heart, how can we increase voter participation by retail investors?”

ESG Investing Can Restore the Legitimacy of Financial Markets: Pax World’s Joe Keefe Addresses Boston Fed. “Sustainable investing, unlike other investment approaches, attempts to address two of the fundamental reasons that corporations and markets fail to produce better outcomes: the problem of agency and the problem of externalities. The problem of agency is essentially the separation of ownership and control at the heart of the modern corporation, and increasingly at the heart of most financial institutions, where agents or fiduciaries invest and control other people’s money. … The problem of externalities is that market transactions often impose costs on others not party to the transaction, and I can think of no bigger externality than climate change, but all of the developing ecological imbalances … can be understood as the externalities of commerce.”

Research by The Conference Board shows that, despite formal assignment of responsibilities to top business leaders, many companies still lack the structural framework to enable proper director oversight of corporate sustainability. In particular, what appears to be largely missing is access to independent sources of information as well as the detailed procedures and metrics for effectively integrating social objectives into daily business activities. However, a rapidly developing regulatory climate and the increased sensitivity of enforcement authorities to the risk implications of environmental issues have opened the door to shareholder activism in this field. Most recently, the success rate of social funds demanding change has risen to levels that were unimaginable only a few years ago. (Sustainability in the Boardroom, Matteo Tonello, 6/17/10)

Moxy Vote welcomes three new advocates: Domini Social Investments, Ceres and F&C Asset Management.

  • Domini Social Investments is an SRI firm that has filed more than 200 shareholder proposals at more than 80 companies. They were also the first mutual fund manager in the U.S. that made its proxy voting record public. In fact, it even petitioned the SEC to require that all mutual funds do so. For over 15 years, it has helped reform corporate behavior through its shareholder activism program.
  • Ceres is a national network of investors, environmental organizations and other public interest groups. Its mission is to “integrate sustainability into capital markets for the health of the planet and its people.” By helping companies and investors implement sustainability on issues like the reduction of green house gases, Ceres plays an important role in shareholder activism and corporate reform.
  • F&C Asset Management is a leading diversified multi-specialist investment management group. It is an independent group with offices in eleven countries. As one of Europe’s largest shareholders, they promote the use of better environmental, social and governance practices at companies.

I don’t mention Michelle Leder’s blog footnoted very frequently but she continues to pull the outrageous from recent SEC filings. Gaming the housing bust at Electronic Arts … tells of the millions and millions paid to lure John Schappert, an in-demand software executive, from Microsoft.

Eleanor Bloxham (The Risks in Budgets and Plans, 6/15/10) reflects on BP and offers “As a director, consider carefully the regularity with which plans are faulty and evaluate how good any company really is at planning (did your company forsee the breadth and depth of the financial crisis?). Consider this carefully before you consider tying peoples’ performance, reputation, promotion and pay to “plans”.”

“Have Chinese factories improved to such an extent that they are now manufacturing partners as opposed to just manufacturing flunkies?” (Outsourcing To China. The Less You Have The Better It Gets?, China Law Blog, 6/21/10)

“There is a deeper reason public companies may want to address their compensation plans in the near future. There is a societal context to executive compensation as U.S. businesses try to regain the trust of the public and citizens feel some degree of common cause with those businesses. The financial crisis is the latest erosion of that trust.”(Compensation Plans Provide Companies Chance to Rebuild Trust, The Conference Board, 6/18/10)

“Abercrombie & Fitch’s compensation policies stink. And since they don’t have a say on pay there yet, shareholders did all they could by massively withholding votes from the only two members of the compensation committee up for election this year – Edward Limato and Craig Stapleton – and voting down the management proposal for the long-term incentive plan.” (Vindicated: Abercrombie & Fitch’s Compensation Policies Do Stink, The Corporate Library, 6/22/10)

“Unless the founding principles of business are rooted in the dharma and culture of a country, their easy and wider acceptability and adaptability become elusive, if not difficult. It is important for us to find our own idiom for true governance, one that is rooted in the Indian ethos, but speaks the global language.” (Pratip Kar: An Eclectic View, India’s Business Standard, 6/14/10) India can boast of a quarter of the world’s workforce by 2025, provided the country harnesses the potential of its young and productive population, a study by staffing firm TeamLease Services said. (Silicon India, 6/21/10)

Bob Monks discusses the boom and bust patterns of a capitalist culture. Predictable Crash, June 16, 2010.

“If shareholders do not lift their eyes and see that… stewardship is weakening and needs to be strengthened, then Governments will conclude that governance must become based on law – and that is not good news for shareholders investing in companies that need flexibility to win in global markets – and the public will conclude that shareholders do not deserve their rights. So to those who have shareholder rights, I say use them or lose them. And to those who can get engaged, I say now is the time to start”. (Stephen Haddrill, chief executive of the Financial Reporting Council, at the Yale Corporate Governance Forum as reported by PIRC Alerts, 6/22/10; download speech)

The Millstein Center for Corporate Governance and Performance at the Yale School of Management announced the recipients of its third annual Rising Star of Corporate Governance Award, with what appears an increased emphasis on international governance. Congratulation to the following:

  • Santiago Chaher, Founder and Managing Director, Cefeidas Group International Advisory Firm (Argentina)
  • Douglas K. Chia, Assistant General Counsel & Assistant Corporate Secretary, Johnson & Johnson (USA)
  • Rick E. Hansen, Counsel, Securities and Corporate Governance, Chevron Corporation (USA)
  • Dr. Hans-Christoph Hirt, Director, Global Head of Corporate Engagement, Hermes Equity Ownership Services, Hermes Fund Managers Limited (UK)
  • Alexander Ikonnikov, Chairman of the Supervisory Board, Independent Directors Association (Russia)
  • Marcos Pinto, Commissioner, Comissão de Valores Mobiliários (Brazil)
  • Maali Qasem, CEO and Founder, Schema (Jordan)
  • Md. Rashedur Rahman, Senior Research Associate and Project Manager, Bangladesh Enterprise Institute (Bangladesh)
  • Stefano Rossi, Assistant Professor of Finance, Imperial College Business School (UK)
  • David Smith, Head of Asia-Pacific Corporate Governance Research, ISS | Institutional Shareholder Services (Singapore)

“One of the most important roles gatekeepers must play is as a check on management’s tendency to focus on short-term profits at the expense of long-term shareholder value. After all, although auditors work for issuers and report to management, investors rely on them to objectively assess a company’s financial statements.” (Gatekeepers Are The Key To Good Governance, Elisse B. Walter and Matthew A. Daigler, Forbes, 06.21.10.

In their continuing E-Meetings review, The Shareholder Forum identified several elements included in most quarterly call that should be considered when conceptualizing electronic annual meetings:

  • The scheduling and access information for the open conference call is publicly announced, usually on the company’s web site as well as by press release. Timing is typically less than an hour after the planned reporting of financial results for the completed quarterly period, but some companies have been scheduling up to a day between reporting and the call to allow more thorough investor consideration of the reports and preparation of questions.
  • Telephone and/or internet access is open to all, allowing all investors and analysts to observe, usually with audio, with or without slides, and in some cases with video.
  • Nearly all calls start with recitations of legal statements, followed by scripted management presentations about performance in the recently completed period.
  • A Q-and-A session that provides for investor and analyst questions, usually through a limited number of call-in lines. Variations include submission via internet, with varying visibility of submissions.
  • Archived calls that are available for replay for defined periods. Companies store their archived calls either with a service provider or on their own site.

Giving Institutional Shareholders Food for Thought (ComplianceWeek, 6/8/10) Stephen Davis and Jon Lukomnik look back on more than a quarter century of corporate governance history and conclude that “much change occurs because of lonely, almost solitary challenges to the established order of things, as well as through legislation.” With that in mind they ask and discuss 3 Impertinent Questions:

  1. Have we made a fetish of independence?
  2. Can the organized institutional shareowner community enunciate a positive vision?
  3. Is there a danger in the rush toward codifying risk management into a stand-alone discipline?

More than any other group, the U.S. Chamber of Commerce serves as the poster child for why we need more disclosure of corporate spending on politics.  If the average person gives a substantial amount of money to a Congressional candidate (or for that matter, political party, PAC or just about any group involved in advocating the election of members of Congress) it must be disclosed. So why should corporations be able to use the U.S. Chamber to spend millions without disclosing a dime?

In 2008 a single contributor gave the Chamber $15 million.  Two more combined for an additional $11 million — a total of $26 million from just three contributors.  Those three combined for enough to finance more than half the budget of the Chamber’s entire political program. Who are they?  We don’t know.  The Chamber consistently refuses to provide any disclosure about the identity of its funders. This will be the Chamber’s biggest-spending year on record. Change to Win has now created Chamber Watch to help us track their activities.

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Proxy Season Roundup

Bruce Herbert, President, and Larry Dohrs, Vice President of Newground Social Investment were interviewed by Diane Horn for the Sustainability Segment of Mind Over Matters, in an hour-long radio interview on June 12, 2010 at Seattle’s KEXP.  Herbert and Dohrs provide a great overview of SRI and a colorful review of the 2010 proxy season to date. Seattle is lucky to have such an informative radio program but the rest of us can all benefit by listening to the streaming archive that will still be up until about June 26, 2010.

The dynamic duo do a great job of covering governance, human rights and environmental issues in an easily understood manner. They discuss Newground’s proposals at Plum Creek Timber on vote counting, Microsoft and Starbucks on political transparency (including contributions to groups such as the US Chamber of Commerce), TJX to report on energy efficiency (reached agreement without the need to file resolution), McDonalds on supply chain disclosures, as well significant and new proxy proposals at other companies such as long term risks of natural gas company fracking.

I’m delighted that they were candid in both their praise of several companies they worked with but also with laggards, such as Chevron, which kept 20 people with legal proxies out of their meeting. Good emphasis on connection between values and investment and in highlighting the work of others, such as I especially appreciated their closing comments, reminding listeners that coming together as a community we can do much more than we can as individuals. “Invest as if your grandchildren matter.” Even if you invest primarily because you love money, you should invest in a socially responsible manner so that there will still be something left worth spending it on.

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Manifest's e-mail to Valerie Jarrett

June 17, 2010 to [email protected]

Good morning Ms Jarrett;

My name is Sarah Wilson, I am CEO of Manifest, a European proxy voting agency based in the United Kingdom. We act on behalf of a range of international investors ranging in size from small public pension funds to major European Sovereign Wealth Funds, in total a a community of investors representing assets in excess of US$3.trillion. Our clients take their responsibilities as long-term, diligent share-owners very seriously. We like they, are members of bodies such as the International Corporate Governance Network and the UN Principles for Responsible Investment. Manifest has significant experience in the proxy field, our firm has been operating since 1995, and we have actively participated in regulatory reforms in the UK and Europe with one view: to facilitate informed and responsible share ownership.

With this in mind we feel compelled to write to you and your colleagues to encourage the Obama Administration not to implement a 5% ownership threshold and a two-year holding
period for investors to nominate board directors on corporate proxies. We share the view of the ICGN that this would be extremely detrimental to the attractiveness of the US market from overseas investors. Furthermore, at a time when investors are being asked to step up to the plate and exercise diligent ownership oversight on their equity holdings, it would represent a retrograde step for US and global corporate governance.

Manifest is not as an activist with a short-term outlook, we speak as an organisation with long-standing practical experience of the mechanics of share ownership that believes that there should be a strong linkage between the economic and democratic process. With this experience, we see a number of practical problems with the proposals as currently drafted. We would therefore like to bring a number of points against these proposals to your attention for your active consideration.

1. The Ownership Threshold is Too High
Let me be clear, Manifest is no advocate of gadfly shareholders with single issue agendas to pursue. That would indeed be a reasonable basis for setting a high ownership threshold. However, the proposed threshold is being set too high to be remotely useful, particularly for larger companies, by the informed and thoughtful investing community which we work for. Ownership thresholds have been debated at length by the SEC and the arguments for the lower threshold thoroughly reviewed and understood. We therefore strongly encourage a lower ownership threshold, such as 3% for all companies, and in particular with market caps greater than $10 billion. It is also essential that shareholders should be able to work collectively as owners, it is therefore imperative that the ownership threshold can be met by multiple owners, not merely one.

2. The Ownership Period is Too Long
The right to vote is a fundamental human right which we tinker with at our peril. Would we suggest that the right to vote or be involved in democratic processes would only every be granted to individuals that have lived in a particular constituency for two years or that have an income above a certain threshold? Hopefully not. The right to vote, to representation and to holding those representatives to account is surely core to the concept of all democracies?

As the credit crisis has show us, boards that are left unaccountable can wreak havoc. Ineffective boards are not just a tax on shareholders, they are a tax on global economies. At the heart of the rift between the UK and the Thirteen Colonies was the concept of “no taxation without representation”.  If shareholders are to be taxed by agency costs then it is only reasonable for them to request representation. Without effective and accountable representation, shareholders rights are diminished and our economies pay a steep price.

3. Proof of Ownership is Tortuous to the Point of Impractical
We would also like to highlight the operational difficulties that the owners of US companies face in both proving their ownership and exercising their franchise. Two recent cases in your courts, Apache vs. Chevveden and Kurz v Holbrook, demonstrate that the property rights of investors (i.e. share ownership and voting of proxies), are heavily curtailed by a proxy plumbing process that is no longer fit for purpose in a internet-enabled investing world. Valuable time, effort and opportunity cost will be lost by market participants who will find themselves drawn in to protracted debates about who is or is not an owner/entitled to act. We encourage you to give weight to the SEC’s efforts to overcome these obstacles and bring about reforms which allow more timely and effective proxy voting and investor/issuer dialogue.

4. International Investors are Responsible Investors
Proxy access may represent a step into the unknown for many corporations. It is understandable that they would be concerned about being held hostage to special interest groups. These fears are based on fear itself and not on the real world experiences of global public markets which offer proxy access. International investors now own close to one fifth of the share capital of US listed companies, they are also active owners in other global trading markets. In the overwhelming majority of cases, shareholders are very supportive of their investee companies in which they have invested significant amounts of capital. They see significant responsibility associated with their ownership rights. Indeed in a market such as the UK, which has very permissive shareholder rights, these rights are rarely exercised in a negative way and both proxy battles and shareholder resolutions are extremely rare. Under UK company law, for example, 100 shareholders holding shares in a company with an average sum, per shareholder, of not less than GBP100 par value, can requisition a motion at the company’s annual general meeting (without any qualifying holding period). The number of such motions (resolutions) in the UK this year has been under 6, interestingly two of which were resolutions related to the environmental impact of exploration activities of two oil companies, Shell and BP.

Your Government stands at a major crossroads in financial reform and both the markets, as well as ordinary voters, will look to you to set the highest possible standards of probity in the financial industry. We urge you to grasp this opportunity to let investors play their part in ensuring the continued success of global capital markets.

Thank you for your time and consideration of our views, it is much appreciated.


Sarah Wilson, Chief Executive
FN Top 100 Most Influential Women in Finance 2009
Manifest | 9 Freebournes Court | Newland Street| Witham, Essex| CM8 2BL | England

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Stoneridge Should Stand

Rep. Frank undermines the effort to improve governance with his effort to include in the financial regulation bill a bonanza for the plaintiffs’ securities bar provided by a reversal of the Supreme Court’s  Stoneridge decision [discussed in WSJ lead editorial of 6-18-10, Reforming Main Street]. As a transactional lawyer who dealt with the consequences of the law before the Supreme Court rationalized it in 2008 and would deal with them again if Rep. Frank succeeds, I think some elaboration is needed.

Simply put, this effort would cost jobs and greatly impede economic recovery. It would do so by making it harder for companies to procure goods and services from each other, thereby decreasing total economic output. The proposed change, which would allow private damage actions for aiding and abetting the securities law violations of others, would prompt many companies to address the securities law compliance efforts of at least those public companies (and possibly private companies with outside investors) with which they propose to do business, in addition to customary concerns about price, quality, timing, etc. These matters would be addressed in due diligence and through formal warranties and indemnities in contracts.

This was exactly what was happening before the Supreme Court acted in 2008. Contract negotiations over various goods and services having nothing to do with financing, were often digressing into discussions of vendor accounting, especially revenue recognition, and public reporting, making it much harder and more costly to get the deals done.

All of this may be justified if it truly protects investors, but this is not the case. There is no evidence that we are plagued with a rising tide of securities disclosure or accounting violations of this nature. In any event, even if we are, under existing law, anyone is already liable (in damages and to SEC sanctions) for their own primary securities violations. This includes, but is not limited to, material assistance  of a violation which is nominally by a third party, but where both parties participate and hope to derive some benefit. Rep. Frank’s effort would substantially lower the bar for holding one company liable for the securities violation of its counterparty, where the dealings are at arms length. Honest companies would have to be concerned that they will have to justify their actions in court if it turns out that their counterparty encounters unhappy investors. This is especially true if the vendor is considerably smaller than the customer – the “deep pocket” syndrome.

Congress needs to promptly relegate this “employment prevention act” to the dustbin where it has been residing, and focus its efforts on steps which will bolster the economy, by improving governance and public confidence, such as enhancement of proxy access in the manner which has been so eloquently advocated by other commentators on this site and which is threatened by recent efforts discussed on this site. Let’s emphasize companies getting their own houses in order before we ask them to care for the “securities houses” of others.

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.

For more on Stoneridge, see Publisher’s post Stoneridge Symptomatic, 4/2008 — you’ll have to scroll down a bit to find it.

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Proxy Access: Monday AM

The Huffington Post appears to have the latest coverage, White House Flip Flops On Reining In CEO Pay, 6/17/10. I watched the televised Conference Committee where Chuck Schumer failed (on a vote of 4 to 8) to delete Dodd’s amendment that basically guts proxy access by limiting it to one 5% shareowner, an impossibly high threshold as most companies.

House Speaker Nancy Pelosi and Barney Frank are still stand strong against the effort by Dodd and the Business Roundtable to water down the proxy access provisions. The New York Times ran an editorial, Congress Defends the Big Guys (6/19/10). The bill that was supposed to restore confidence in the financial sector and business in general appears to be coming apart at the seams:

  • Exempt most publicly traded companies (worth less than $75 million) from a SOX anti-fraud auditing requirement.
  • Keeping boards safe for cronies by gutting proxy access.
  • Self-funding for SEC now in question.

So, as of early this morning our best understanding is that the House Conferees will reject the Senate counteroffer language on proxy access (the newly inserted 5% language). However, until that actually happens, it continues to make sense to contact the House conferees requesting that they reject the Senate language, and get in letters to the Senate Conferees protesting the 5% language.

Assuming, the House conferees reject the Senate language, the issue goes back to the Senate conferees.  Then we need to turnaround Senators Dodd, Johnson and Lincoln.  Senators Bayh and Warner also appear to be critical.  Until we learn more, I would advise continuing to call Obama’s point person for the Administration, Valerie Jarrett through the White House switchboard at at (202) 456-1414 and by email to [email protected].

Tell her how unhappy you are with with the White House interference on the crucial issue of proxy access. Express strong opposition to the Senate’s amendment imposing a 5% ownership threshold for shareowner access to the proxy.  Tell Jarrett and the White House to support the original language passed by both houses of Congress simply affirming the SEC’s authority to issue a proxy access rule.

I’ve written several times to committee members, staffers, etc. Here’s a quick version:

Please oppose the Dodd amendments to the conference committee bill on financial reform.  A 5% threshold by an individual investor will almost never be met by large diversified institutional investors since even the larges rarely hold more than about 1/2% of the shares of large companies. Shareowners need to be able to form groups to nominate directors using the corporate ballot.  Reject the Dodd amendment and take a step towards reducing entrenched boards and CEOs.

I break them into clusters so my outbasket doesn’t get clogged. Send e-mails to the following

[email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected],

[email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected],

[email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], [email protected]

Proxy access is the most important reform in the bill. It would begin to provide shareowners with the tools to end cronyism and hold directors accountable. Directors are supposed to represent shareowners. All too often, they represent CEOs and their own entrenched interests. We need the SEC to be able to move forward with proxy access. Please take a few minutes for a phone call and an e-mail and be sure to include your contact information in your e-mails.

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Networking at ICGN 2010

volunteer floating in mid-air

ICGN conferences are a great place to network with others in the field of corporate governance from around the world. The 2010 conference in beautiful Toronto Canada was no exception. I’ve reported on day 1 and day 2 of the topical sessions. Now time to cut loose a little.

The best example of that, within the context of the whole group, was a bit of a celebration at the Royal Ontario Museum.  Tops in  entertainment was “illusionist,” Brian Michaels.  One trick involved a guy from the audience and, of course, a beautiful assistant tied up.

Soon, the volunteer and the assistant were hidden behind a curtain. After what seemed like only a few seconds, the curtain was lifted and the volunteer had lost his jacket.

…And there was the jacket, on the assistant. Time to get untied.

Another illusion involved a woman from the audience who verified use of an ordinary tissue, which was then made to spin in the air with no visible means of support. Maybe you had to be there.

With ICGN being held in Canada, they brought several famous hockey players up on stage, along with a couple of Mounties and a woman with a great voice who sang the national anthem. Then the icing on the cake, with three of our Canadian hosts being presented with hockey jerseys. All had Wayne Gretzky’s number 99 and their own names on the back, with our “team” name, ICGN, on the front. They’ve skated to glory!

I had a great time networking with dozens of people I had previously only met via e-mail. One of these was Alex Todd. He authored a chapter in the forthcoming book, Corporate Governance: A Synthesis of Theory, Research, and Practice (Robert W. Kolb Series).  Todd proposes “Aspirational Corporate Governance,” building on the work of Shann Turnbull and others. The ACG framework specifies three aspirational conditions for good corporate governance:

  1. Requisite organization handles information complexity.
  2. Requisite variety in information from stakeholders reduces uncertainty.
  3. Adaptive capacity provides response mechanisms to compensate for stakeholder uncertainty.

Todd goes on to create a diagnostic tool for measuring and analyzing these (existing and prospective) principles and practices as well as a blueprint for improving the design of any governance system. He groups governance styles into four broad categories that correlate with distinct business performance metrics:

  1. Control – management-controlled companies have better sales growth performance;
  2. Trust – companies with corporate governance practices that help shareholders establish trust enjoy higher valuations (Tobin’s Q);
  3. Sovereignty – companies with truly independent boards, both from management and shareholders, are more profitable (return on equity and profit margins); and
  4. Influence – companies with boards that are strongly influenced by management and where shareholders have fewer rights pay out more to shareholders in dividends and stock repurchases.

Read more in his article, Corporate Governance Best Practices:  One size does not fit all.  He recently revisited his research findings by tracking the stock performance of a small sample of companies with each of the four governance styles over the past two years and found distinct patterns in stock price performance associated with each of the four governance styles.  However, the results were markedly different from the original study.  This time, during the recession, issuers with the Management Controlled Board style had the worst stock performance and were by far the most likely to become delisted, while issuers with the Management Influenced Board style delivered the best shareholder returns, largely due to their tendency to pay dividends.

Todd appears to be on to something applicable to both structuring funds and, of course, in advising corporate boards.

Another fellow I got to meet was David R. Koenig, who recently launched The Governance Fund, LLC, a private investment management firm that uses a proprietary model of corporate governance based on several data-sets to capitalize on what he terms “the value gap” between well-governed and poorly governed companies. They’ve back-tested ten years of data and have been sending out model portfolios to potential clients so they can see that development isn’t based on cherry-picked after the fact correlations. I note that one of ICGN’s co-founders, Jon Lukomnik, the founder and managing partner of Sinclair Capital, LLC, has joined the Investment Committee of The Governance Fund, LLC, and will serve on its Board of Directors.

I see Koenig was also interviewed in the recently published book, The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives. You can peek inside the book at Amazon and see something about the fund’s unique characteristics. For one thing, the fund’s compensation is based on both risk and return. That’s very unusual and should serve them well, since the recent meltdown seems to have incentivized money managers to take excessive risk for short-term gain. Another feature is transparency of all positions and trades executed to investors willing to sign nondisclosure and intellectual property agreements.

Another unique characteristic is their Governance and Risk Advisory Board, which meets on a quarterly basis. The minutes of their review of the governance and risk management practices of the investment manager is made available to all investors as one method of providing enhanced transparency. Members include the following:

  • Dr. Robert Mark, former Chief Risk Officer, CIBC and 1998 GARP Risk Manager of the Year, Managing Partner, Black Diamond Risk Enterprises, LLC
  • S. Jean Hinrichs, former Chief Risk Officer, Barclays Global Investors, 2003 Buy Side Risk Manager of the Year (BGI)
  • Dr. Don Chance, James C. Flores Endowed Chair of MBA Studies and Professor of Finance, Louisiana State University
  • Dr. Robert Kolb, Professor of Finance/Frank W. Considine Chair of Applied Ethics, Loyola University
  • Dr. Joseph Swanson, Clinical Professor of Finance, Kellogg Graduate School of Management, Northwestern University

Of course, I’ve had a strong interest in this subject for years, posting some thoughts on the idea of a Corporate Governance Mutual Fund in 1996, so I’ll be eagerly following the progress of the Governance Fund.

I also got a chance to learn a little about EIRS (Experts in Responsible Investment Solutions) from Peter Webster. I’m particularly interested in their ESG proxy voting service, which can help funds actively implement UN PRI or other principles into ownership policies and practice. See their one of their latest briefings on the risks of bribery.

Vindel Kerr, who I first met at a conference in London at the 6th International Conference on Corporate Governance (ICCG), is busy on a second edition of his book Effective Corporate Governance: An Emerging Market (Caribbean) Perspective on Governing Corporations in a Disparate World.

During one of the lunches, I got a chance to meet Anne Kvam with the Norges Bank Investment Management. They make CalPERS look small but don’t seem as far developed with regard to corporate governance… or maybe it is just those mild Norwegian manners. For example, they’re against “say on pay,” reasoning that’s the job of the board. Fine, if you can actually hold the board accountable… which I don’t think we can in most instances in the States. NBIM does appear very progressive regarding social issues. For example, see Pension funds urge chocolate industry to end child labour. There’s a good deal of transparency on their site and I look forward to paying closer attention to their ESG efforts.

Too many others to mention but I must say I’m looking forward to a possible visit to India in the fall and looking up Dr. YRK Reddy, who I’ve been in touch with for many years, and others if they are available during my stay. Well, until we meet again.

Other finds at ICGN:

  • The Rotman International Centre for Pension Management (ICPM) publishes the Rotman International Journal of Pension Management in partnership with Rotman / University Toronto Press twice a year.  To sign up, simply email [email protected].   Be certain to include your name, organization, and email address along with a subject line that reads RIJPM Subscriber Request. Great articles by some of the top researchers.
  • Barroway Topaz puts out a quarterly client newsletter that can be downloaded in pdf format.


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CII Adds Voice to Outrage re Gutting of Proxy Access

The Council of Institutional Investors sent out an alert today, which reads in part as follows:

All Council members opposed to the Senate’s proposed 5% ownership requirement for proxy access are strongly encouraged to call and email White House advisor Valerie Jarrett TODAY.
As a senior advisor to President Obama, Jarrett has significant influence over the ongoing House-Senate conference committee negotiations, particularly regarding the proxy access provision of the base text (section 972).

To support proxy access, call the White House switchboard at (202) 456-1414 and request to be connected to Valerie Jarrett’s office.  If you cannot reach Ms. Jarrett, we encourage you to leave a message expressing your strong opposition to the Senate’s amendment imposing a 5% ownerhsip threshold for shareowner access to the proxy.  Tell Jarrett and the White House to support the original language passed by both houses of Congress simply affirming the SEC’s authority to issue a proxy access rule.  Be sure to include some brief information about your fund as well as your contact information.  You can also send Ms. Jarrett an email at [email protected].

Tell Valerie Jarrett and the Obama administration to publicly oppose the Senate’s proxy access amendment imposing a 5% ownership requirement.  Encourage them to call upon House and Senate conferees to reject this harmful change.

According to an earlier report in the Huffington Post (White House Guts Reform To Protect CEO Pay, 6/17/10), Jarrett is the administration’s liaison to the Business Roundtable. Three of their sources said Jarrett was behind the effort to strip any teeth from the proxy access provision; their other two sources were unsure. Please add your voice to those of the Council. The Obama administration needs to know credibility will evaporate if proxy access is gutted, especially at their request.

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I Think I'm Going to be Sick: Obama and Proxy Access

According to the Hufffington Post (White House Guts Reform To Protect CEO Pay, 6/17/10), the White House is behind the latest move to kill proxy access at the request of the Business Roundtable.

When questioned on the issue, a White House spokesperson responded: “It was not part of our original proposals, and we have not taken a position explicitly.”

However, Two months ago, Deputy Secretary of the Treasury Neal Wolin addressed the Council of Institutional Investors and explicitly supported the provision.

The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal…  the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard.

If Valerie Jarrett, a senior White House adviser and the administration;s liaison to the Business Roundtable is behind this latest move, Obama can only regain credibility by firing her and advocating proxy access provisions be retained in the conference committee bill. We can’t all move to Canada.

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E-Mail from Lynn Turner on Proxy Access

An email from Lynn Turner below and frequent emails this morning from Tracey Rembert highlight key provisions we are in danger of losing, in the broader fight for shareowner rights and corporate governance. Elected officials need to hear from all of us about how important these provisions are, especially proxy access. Corporations are lobbying hard in an 11th hour push. Proxy access is in DIRE danger, as are many reform provisions. Please take five minutes and pick up the phone or draft an email (see posts below for who to contact). If we lose these key fights, we lose years of momentum. See also, Senate Conferees Vote to Restrict Proxy Access, RiskMetrics, 6/17/10.

Here’s the email from former SEC Chief Account, Lynn E. Turner:

Today was a very, very good day for Wall Street and Big Business in the halls of congress and a very, very poor day for Main Street and Investors.  Developments in the House/Senate Conference that occurred today include:

Investors Ability to Hold Corporate Executives and Boards Accountable are eliminated or seriously watered down by Senators and White House


The bills adopted previously by both the House and Senate would give the SEC the authority to adopt rules that would give investors equal access to the annual proxy with management for purposes of nominating directors.  The SEC has proposed rules that would give investors that had a threshold of the company’s stock the ability to nominate directors.  It was generally expected that threshold would end up a 3%.  Even at that threshold, it would be difficult for enough investors to pool their holdings together to nominate as a group, a director.  Also the SEC would likely limit how many directors in a year could be nominated.

However, today Senator Dodd has proposed language that would effectively prohibit shareholders from having proxy access in a tremendous blow to any attempts to hold corporate boards accountable for their actions.  I understand that in reviewing the Dodd language more carefully, there appears to be an even more pernicious aspect:  the amendment strikes the reference in the current language to “shareholders” in the plural and substitutes “shareholder” in the singular and then goes on to impose the 5% ownership requirement on any SHAREHOLDER who seeks access to the proxy.  This seems to require that a group of shareholders seeking access to the proxy would have to EACH be a 5 percent shareholder.

This would completely gut the proxy access provision because there would be no single 5 percent shareholder for most corporations of any significant size, and thus the 5% ownership threshold would never be satisfied.  The SEC has always envisioned permitting a group of shareholders, such a public pension plans to aggregate their holdings in order to satisfy the minimum ownership threshold for proxy access.  The Dodd language appears to completely reverse that and would mean that for most large corporations proxy access would not be available to shareholders.

Just as an example, GE has no single shareholder with 5% or more in stock.  The top three shareholders, BlackRock, Vanguard and State Street each hold approx 3.4%.  There are three instititional investors that hold 1.1 to 1.2% of the stock.  After that, all shareholders own less than 1%.  In fact, the top 50 shareholders only own 32.8%.  That ensures no single shareholder could in fact “commandeer” and election as many in the business community have falsely argued.  And getting 50% of the vote for any single director candidate still requires substantial and WIDESPREAD support among investors.

Senator Schumer from NY and Representative Waters from California have been fighting very hard for investors on this issue and working to keep in the original proposal.  At the same time, I understand from a number of sources, that the White House and Treasury department are “carrying the water” for the business community, including the Business Round Table or its members on this issue.


In the Bill passed by the Senate,  there was language that required any candidate up for election to the board of a public company, to receive a majority of the votes cast, in order to win election (The same rules as apply to congressional elections and members of congress).  That is because today, investors can only vote for a director or withhold their vote, which is the equivalent of not voting, as the vote does not count in determining whether a director is elected.  In fact, a director receiving just one vote (even if their own vote) is elected according to what can only be considered very ridiculous and insane law.

I understand the Senate has now agreed to strip this language on majority voting which would have established democracy in the board room, out of any final bill.

Democrats (DURBIN, Inouye) Prevailing in Limiting SEC Necessary Resources.

For years, the SEC has had Congress put severe limitations on the resources made available to it.  To resolve this shortcoming contributing to a failure in regulation, the US Senate voted in its legislation to provide the SEC with Self Funding, Just as all the banking regulators have, as the new proposed consumer protection bureau has, as the regulator for credit unions and Freddie Mac and Fannie Mae have.

The members of the House agreed to self funding.  However, now in a bizarre twist of fate, two key Democrats, Senator Durbin and Inouye are once again attempting to strip this language from the bill, once again handcuffing the agency in a most serious fashion, and just as Congress is asking the SEC to do much, much more.  As a result, Senator Dodd has told Senator Schumer, who once again has been a tremendous champion for the SEC and investors on this issue, that he must strike some deal or accord with Durbin and Inouye and amend the language that these two senators previously voted for when they voted to approve the senate bill at the end of May. In the future, when the SEC comes up short of funds again as it most certainly will, and cannot carry out regulation as it should, one can only label it the “Durbin/Inouye” folly.

Congress considers Limiting SEC Regulation of Securities as it Limited Regulation of Derivatives

Some congressional members of the conference, such as Senator Harkin from Iowa and Senator Johnson from South Dakota, a home for Insurance companies, appear to be giving difference to members of the insurance industry who continue to press for inclusion in the conference report of anti-consumer legislation to exempt equity-indexed annuities from securities regulation.

Equity-indexed annuities are hybrid products that combine elements of both insurance and securities, but they are sold primarily as investments. Indeed, as documented in a seven-part Dateline NBC hidden camera expose, they are among the most abusively sold products on the market today. Responding to a rising level of complaints, the Securities and Exchange Commission voted in late 2008 to adopt rules regulating equity-indexed annuities as securities, a move that was immediately challenged in court by the insurance industry. In deciding the case, a U.S. Court of Appeals sided with the agency on the basic issue of whether equity-indexed annuities should be regulated as securities while remanding the rule with respect to procedural issues. Having failed to prevail in court, the insurance industry has turned to Congress to preempt legitimate securities regulation of this product and do their bidding.  The reasons this is so anti investor, anti consumer and anti Main Street includes:

Equity-indexed annuities are complex products whose returns fluctuate with performance of the securities markets. Absent regulation under securities laws, they can be sold by salespeople with no more understanding of the markets than the customer.

Although the National Association of Insurance Commissioners has developed a model suitability rule for annuity sales, it has not been adopted in all states. Regulation under securities laws would provide national uniformity, would bring to bear the added regulatory resources of the SEC, state securities regulators, and FINRA, and would provide additional investor protections in the form of improved disclosures and limits on excessive compensation.

Exempting equity-indexed annuities from securities regulation would set a dangerous precedent and encourage the development of additional hybrid products designed specifically to evade a more rigorous form of regulation.

This highly controversial measure which is opposed by consumer advocates as well as state and federal securities regulators was not included in either the House or the Senate bill and is not germane to the underlying legislation. To include it in the conference report would be a gross violation of the integrity of the legislative process.

Congress Exempts a large Group of Public Companies From Having to Ensure their Internal Controls will Produce Financial Statements Without Errors

In 2002, in light of hundreds of billions of dollars lost from corporate scandals such as Enron and Worldcom, resulting from false and misleading financial statements, members of congress passed a law that required ALL public companies to have their internal controls inspected by their independent auditors to ensure against misleading financial statements. That bill passed in the Senate by a 97-0 margin and in the House with all but three votes.

The House had passed a bill last December that would have exempted all public companies with under $75 million in market value, which includes companies such as Blockbuster and Zales, from having those inspections done. This despite investors time and time again telling congress and the SEC they were willing to bear these costs in order to get accurate financial statements. And also despite the fact there were almost 750 of these companies over the last year and a half who had to restate their financial statements for errors, the single large group of companies with such errors reported.

But in a reversal, the House told the Senate today they would not require that in the final legislation. In once again a bizarre twist, the Senate who did not have any such exemption or provision in its bill, voted to put it in. Led by Senator Crapo who introduced the language, and joined by two democratic senators, Senator Johnson from South Dakota and Lincoln from Arkansas, these senators got a permanent exemption put into what will be the final bill, giving an exemption to all these companies, which represent approximately half the public companies, and with over $375 billion in market value. And Senator Dodd today noted that the White House was once again behind this move as well.

Senators To Let Wall Street Get Away Car Drivers Get off

And finally, a couple of years ago, the Supreme Court Ruled that Securities Laws today, prohibit investors from suing someone who knowingly provides substantial assistance to someone who is committing a securities fraud, unless that person tells the investor they are doing so (as if anyone would do such a stupid thing). The court also said in their opinion that if congress wanted to change the law, it was up to congress to do so. At the time, both Representative Frank and Senator Dodd wrote letters vehemently condemning the ultimate decision the court reached.

The House, included language in their bill last December that would allow investors to recover from those who negligently or fraudulently assist others in the commission of securities fraud. In the Senate, Senators Specter and Reed and others proposed language that would all recover when it could be proven some knowingly or recklessly provided substantial assistance in the commission of a securities fraud.

Once again, the Senate, and I am told with Senators Dodd concurrence, are opposing the House on this issue and insisting that consistent with current law and the Supreme Court ruling, one can still knowingly provide substantial assistance to others in the commission of a securities fraud and avoid a shareholder lawsuit. One can only ask how condoning such behavior today, when over 100 million Americans have their savings invested in the markets, is REFORM.

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Conference Committee Threatens Proxy Access

According to the latest update from the Social Investment Forum conferees are meeting now to discuss the 5% proxy access provision the Senate offered yesterday.  This is a “backroom” maneuver, given that this provision is not in EITHER the House or Senate bill, and CII, SIF and Americans for Financial Reform, among others, strongly opposes this. (see the SIF page for continuing coverage)

Word is Senate Banking Chairman Christopher Dodd (D., Conn.) is pushing to set a threshold for shareholders to gain so-called proxy access to nominate their own candidates in corporate elections, requiring a shareholder to own at least 5% of outstanding shares for at least two years, according to a summary circulated by Dodd’s staff. We are not sure if the use of the singular “shareholder” is intended.

Either way, if Dodd prevails, it would be a win for the business community, which vehemently opposes granting shareholders proxy access. The underlying bill dictates no such threshold. Rather, it would explicitly empower the Securities and Exchange Commission to write a rule granting shareholders proxy access. See also, Senate Seeks to Drop Majority Voting From Reform Bill and Weaken Proxy Access, RMG Insight, 6/17/10.

Please take 5 minutes and send an email to the following people (who are either working to remove this provision or are in leadership positions on the issue and need to hear opposition).  You can email them all at the same time or separately.

[email protected]
[email protected]
[email protected]
[email protected]
[email protected]

“In a surprise move, because the provision is not in the Senate or House bill,  the Senate made an offer yesterday to the House imposing a five percent ownership threshold for shareholder access to the proxy.  The House and Senate passed bills were virtually identical in reaffirming the authority of the SEC to issue rules, leaving the details to the agency to work out.  Proxy access gives long-term shareholders the power to hold directors accountable. The five percent threshold all but negates proxy access because even the largest institutional investors generally do not have that level of ownership in any one company.  The House should reject the Senate offer.  We appreciate your support.”

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ICGN Day 2: Coverage

ICGN 2010 Annual Conference, The Changing Global Balances: Toronto, Canada

Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the  best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.


Session 7 The New Balance – The World’s Largest Shareholders

The weight – and therefore influence of large pension funds and major asset pools

Frank Dubas

continues to grow. This session focused on the investment and governance philosophies of some of the world’s largest shareholders. What are the demands for better corporate governance when you expand investments in developing markets? How will these funds react to the shareholder democracy initiatives in the US? What do they think about say-on-pay and how do they secure the competence of the board of directors in portfolio companies?

Moderator: Frank Dubas, Global Managing Partner – Sovereign Financial Institutions, Deloitte, USA

David Denison

David F. Denison, President and Chief Executive Officer, Canada Pension Plan Investment Board. – Assume risk. Build in for turbulence. Looking to emerging markets. We’re there now assuming they will be there in 10 years. Resilience in this recent downturn. We can have good alignment of interests with some of the long-term sovereign investors in Asia. Compensation is consuming a lot of time but it should because of its multifaceted nature. It is not just what you pay but how ensure it aligns with corporate strategy to reflect key elements. How take into account risk? Manage within tolerable limits. Much of what goes on in the boardroom is invisible but we can see the compensation framework and how directors use their discretion to make those decisions. It is a major indicator re director competency.

There is now a renewed realization that government must play a stronger role. We’ve overshot on the lack of regulation. Focusing on risk, caps on leverage. Capital levels. Canadian banks relied on force capital levels. We encourage government to get back to more regulations. Not stifling regulations. Align risk managers with a 30 yr time frame built into investment horizon. Difficult to build into compensation since discounting factors for 20-year compensation wouldn’t create what we want… wouldn’t retain the talent we need. It is a constant trade off to keep  compensation as long as we can but not so long that we don’t attract talent. No easy answer. Engagement: with about 35 companies over past 12 months. Dramatically different attitude post downturn. Say on pay opens conversation to other key governance issues. Important investment related issues. Weighting impact of companies to focus resources. Develop networks, coordinate with others.

Anne Kvam

Anne Kvam, Global Head of Ownership Strategies, Norges Bank Investment Management, Norway. – We’re big and can’t maneuver. Having a well functioning efficient market is key because we can’t beat the market. Very long term. Not a question of being there or not being there. The challenge is how to be there to get information, to be responsible. As investors we’re concerned. UK, its bossy, standard setting.

Phone call from China, why voting against? You gave is no reason to vote for the measure. Without the necessary information to evaluate, we vote against. “Oh, okay we’re going to ignore your vote.” Looking at the competence and quality of boards. Independence… goes well beyond that. Diversity much more than gender. How are board members recruited? Recruitment was changed. What are competencies we’re looking for in women and then started applying that to men as well. Annual election. We vote against all say on pay. We see that as the board’s role. We will hold them accountable for how they do it. We don’t want to be bogged down. More important is that we have the right board. The competence of directors is paramount. Remuneration is important. We measure to what degree they succeed… then we hold them accountable. 9 out of 10 calls have been about compensation. I just don’t think that’s the right place to put the focus.

Government’s role: Self-regulation won’t work. Well functioning, legitimate. Increasing role as shareowner, prudent. Audience: How hold accountable if you can’t vote them off the boards? Even though we don’t have means yet, we will continue that fight, since we will be around for a long time… we’ll stick to our principles. Question re engagement: Not able to engage as much as we would like. Have to say no thanks to many because we don’t have capacity. We want to speak to boards on our agenda, not necessarily their’s. Relative vs. absolute returns. Strict selection of topics, markets and tools.

Scott Evans

Scott Evans, President & Chief Executive Officer, TIAA-CREF Investment Management and Teachers Advisors, USA. – We’re permanent investors. Partner with investors we trust. Focus on individual securities. Avoid exposing to too much risk in any sector. We have an independent risk management group. They scan the skies looking for inclement weather. In some of these markets shareholder rights are much different. We have to evolve our practices to mesh. Agree that competence is what we seek. We have (or soon will have) established so many shareholder rights. Access to proxies, say on pay, majority voting, major planks. We’ve arrived to where we have rights. It’s now going to be about using our power wisely, proactively and consistently. How do we get the wide spectrum of shareholders engaged? Very important time for the transition of corporate governance.  Sees government walking a fine line. On the margin, we caution that rules may have unintended consequences but they are good on balance. Question from Peter Clapman re activism.  Equity staff actively engaged… both sides of house working together. We pursue engagement quietly were we think there’s a concern and clear changes need to be made. By being focused, concentrating on companies with big problems… stay out of the papers. Has excellent coordination with others investors on issues.

Session 8 – Break Out Sessions –   How Do We Fix The System?

US style governance and the system of capitalism has come under attack as a result of the economic crisis.  Now is the time to focus on specific problems and specific solutions.  Each of the breakout sessions examined a particular issue. I only attended one but provide a few scattered comments reported on some others.

8.2 Carrots, sticks or codes? How can we make shareowners become good stewards?

For the first time the UK will have its own code for investor best practice. Is this a model that will work for the rest of the world?  Other jurisdictions are developing their own codes – is there a case for a universal code? What are the barriers? Agreement on need for voluntary adherence. See FRC UK website. Revising to issue code with 7 principles and three objectives, generating a critical mass. Comply or explain may come. Clarifying relationships between fund managers, trustees. Appropriate regulatory reinforcement. Accept responsiblity to obtain or retain. Independent organization to monitor (Peter Butler) driven by shareholders themselves. Carrots – proxy access, disclosure, communication among shareowners themselves. CalSTRS interest in code. Develop and articulate best practices. Some US funds are active owners that but many funds need encouragement. Question to audience: should there be a global code of corporate governance for investors. Yes 74%; No 20%

8.3 What boards have learnt from the financial crisis

Some companies are coming through the crisis bruised and battered.  Others have sailed through whilst many failed.  What have boards learned from their experiences and what would they do differently now?

Difficult to draw conclusions. Need for boards to pay attention to risk. Key theme is getting right people on boards. Risk committee, risk officers. But still need right people on board and adequate time to have conversations around risk. Institutional changes; at least many are now having the conversation. Those with risk committees fared better than most. Institutionalized way to bring risk issues to board, priority acknowledged. Whatever you institute don’t fall to trap of imitation box ticking. Emphasized importance of accountability and responsibility at board level. Audience survey: 41% think boards aren’t taking adequate steps. Did the pre-crisis focus on independence interfere with technical capacity? No 63%.

8.5 Shareholder litigation

Michelle Edkins

What has been the experience of shareholder litigation over the recent past. Has litigation improved standards of governance?  What are the trends in litigation we can expect post the crisis?  Is shareholder litigation going to be much more common in jurisdictions outside of the US? Is more litigation good or bad for financial markets?

Moderator: Michelle Edkins, Managing Director, Head of Corporate Governance Europe, BlackRock. – European right to nominate board members much stronger.

Charles Elson, University of Delaware, USA – Benefit of. Effective in duty of loyalty cases. Courts comfortable judging thieves. On the care side much more difficult. Care claim doesn’t exist in DE. Suit on a care claim that forces a specific change like clawbacks can be good where litigation results in decisions to avoid liability. SOX brought 404 review of internal control and risk.

Charles Elson

Danger is that it has resulted in systems better designed to avoid liability than to address actual risk and controls. Institutions had risk depts but missed risk and kept board liability shielded. Ultimately costs the system itself. Cases specifically brought for specific reforms work. SOX created risk analysis. Unintended consequence because someone sold them a bill of goods. Companies typically threw a bunch of retired internal officers at it to cover the legal requirements.  Prevention – independent, vibrant elections, skin in the game (incented). Need to address loyalty but can’t really get good governance on that through litigation. Elections have always provided the out, in theory, but you couldn’t get rid of directors in practice.

John Kehoe, Barroway Topaz Kessler Meltzer & Check, LLP, USA. – Tyco, Lehman Bros.

John Kehoe

Shifting $40B in days. Where is corporate governance? Stoneridge did away with second-hand liability. Most important trend is limiting standing to those who purchased securities. Can only sue on offerings purchased.  Notice to a class. Custodial banks should be filing claims for you. If you switched banks you often don’t have trading evidence to know if you’re in the class. How assured? If there’s a settlement and you’re in that class, you may have a fiduciary duty to file and be in the action. How do I ensure my claim is being filed? Ask your law firm. At custodian, many fall though cracks. Some comparison of Europe, South America. More European countries moving toward class litigation. Germany has group litigation but can take 13 years. Opt in. Everyone has right to litigate their case. Can settle a case on class basis but not bring them. (Dutch, prepackaged global settlement. Judge gave extraterritoriality on a prepackaged settlement because company wanted it.) What did you money managers know and when? Infrequently go to trial.

Interesting dialogue among audience members on limited discovery rules in Germany. There, loser pays their costs (Canada as well). Markets developing in advance of regulatory framework. Individual actions may be brought together as a group where there is a vibrant active pension fund… angry because they’ve lost huge amount to fraud. Willing to take action. Very uneven and bumpy. Shell wanted to draw a line in sand and get rid of issue of overstating oil reserves. Cultural barrier to Europeans suing in US. More leverage by bigger institutions.

Who benefits most? litigators and market.  Who suffers? current shareowners. How hold accountable? remove from office.

8.6 Governance issues in controlled and private companies

There are many controlled companies that perform well over sustained periods of time. What can we learn from these companies?  Because of the lack of accountability, minority shareholders need to be aware of the risks and warning signs when things might be going wrong – what are these?  How can shareholders put pressure on controlled companies? Dual class shouldn’t be banned but should cease with trigger events. Majority board independence. Cumulative voting for directors. Minority should have board representation. Stand up to board. If not enough liquidity to get out, then don’t go there.

Session 10 – The Quality of Shareholder Votes

Carol Hansell

It is widely acknowledged that there are serious issues with the proxy voting system around the world.  When shareholders cast their votes there are a variety of reasons that their votes may not be counted.  They could be lost, pro-rated or rejected. The investor will never know if this has occurred. Derivative instruments create a second set issue in the proxy voting system, not only do they contribute to overvoting problems, they also lead to votes being cast by persons with no true economic interest in the corporation. While the result is often benign, it can distort the decision making process. This session examined three issues – the nature and extent of problems with the proxy plumbing system; empty voting/negative voting/hidden voting; and the role of institutional investors in promoting the effectiveness of the voting system.

Moderator: Carol Hansell, Senior Partner, Davies Ward Phillips & Vineberg LLP, Canada

Henry Hu

Henry Hu, Risk Director, Securities and Exchange Commission, USA. – Problem of decoupling votes with economic interest. Negative. Debt can also be decoupled, credit default swaps. Creditors might want company to go into bankruptcy. Role of proxy advisors, states. Dual record dates; how does that dovetail with proxy voting? Participation rate. Retail investors technology to increase. Counting correctly. Overvoting. Votes actually voted. Hidden morphable ownership. Area enormously complex, only solved by a huge research grant (humor from prior academic post). SEC will look at comment letters with extraordinary care.

Erik Breen, Head of Responsible Investing, Robeco, The Netherlands. – Might be rational

Eric Breen

not to vote, depending on expense of voting. Most investors lend to earn more money. Has flexibility to recall shares to my liking but don’t use much. 90%/10% better to have capability in-house to get most payoff. Doesn’t trust the voting system. Uncertain, poor audit trail.  Too big of a voting chain. No incentive or liability if they get it wrong.  Can’t breakdown into pieces. Keep true interest of beneficiary in mind, if outsourcing.

John Wilcox

John Wilcox, Chairman, Sodali Ltd., USA. – Quality of vote is the issue. Bipolar or split brain issue. On corporate side: real businessmen don’t deal with compliance; they pay others for that service. At institutional investors there’s a gap between investors/traders and governance staff. Shareowners are now more powerful, so voting can make a difference. Some have made votes matter. Shareholder rights are promised in proxy plumbing. Environmental and social movement showed true economic impact. Gulf of Mexico. great lessons against split brain. Voting rights quality going to be recognized and improved through new rights.  Lending should be economic. Where does the ownership lie at any one moment? Tax laws are applicable to rapid trading in derivatives. Could those rules be useful in tracking voting rights?  We should be trying to make corporate governance process customized to companies.

Ken Burch from audience. Good corporate governance requires real judgment, can’t rely on proxy service for applying. Shareowners are accountability shy. You can’t depersonalize director elections.

Keynote: Lucian Bebchuk, Friedman Professor of Law, Economics, and Finance Director, Program on Corporate Governance, Harvard Law School

The Wages of Failure. The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes  the wealth of the top executives was largely wiped out along with their firms. Commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. Paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes this assumed fact is incorrect.

We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. Top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These substantially exceeded the value of the executives’ initial holdings in the beginning of the period, so the executives’ net payoffs for the period were decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out that  executive pay arrangements provided them with excessive risk-taking incentives.

Paying for Long-Term Performance lays out remedies focusing on equity-based compensation, the primary component of executive pay, we identify how such compensation should best be structured to tie pay to long-term performance. We consider the optimal design of limitations on the unwinding of equity incentives, putting forward a proposal that firms adopt both grant-based and aggregate limitations on unwinding. We also analyze how equity compensation should be designed to prevent the gaming of equity grants at the front end and the gaming of equity dispositions at the back end. Finally, we emphasize the need for widespread adoption of limitations on executives’ use of hedging and derivative transactions that weaken the tie between executive payoffs and the long-term stock price that well-designed equity compensation is intended to produce.

Lucian Bebchuk

In contrast to “hold until retirement,” set forth by proponents such as AFSCME and Jesse Brill, Bebchuk and Fried point out that can incentivize premature retirement, especially for long-serving successful executives.

  • Prevent the ability to cash out equities quickly. Once vested, unwinding should be limited, holding for a fixed number of years.
  • For example, hold for two years after vesting, then allow sale of up to 20% per year for five years (approach adopted by TARP Special Master, Feinberg)
  • Limit the fraction that can be unloaded each year, say to 10%. Avoids short-term focus because 90% still held.

Execs may use inside information to decide when to sell or may control release of decisions disclosed.

  • Remedied by hands-off cashing schedule, and here’s the part I hadn’t heard before, based on the average price of that year, rather than in a given day.
  • One of the most important takeaways was that companies must prohibit executives from engaging in any hedging that protects against downturns in company stock price. If they don’t, executives can undo the effects of pay incentives built in by the board. While one size doesn’t usually fit all, Bebchuk believes this bit of advice is applicable to all companies.
  • Another bit of advice. We all recognize that options don’t reflect actual loses. He suggests linking to a broader basket of the company’s securities, such as shares, preferred shares and bonds.

Government’s role: Provide shareowners with rights to prevent structures detrimental to long-term value. UK has stronger rights.

  • Effect the power to replace directors: proxy access, majority voting, annual elections
  • Effect the rules of the game: initiative to change charter, expand scope of subjects influenced through bylaw changes.

Warned that corporate governance applicable where shareowners are widely dispersed may not be applicable or may even be counterproductive where there are controlling shareownrs. At financial companies government should play broader role. With pay supervision other forms of regulations can be looser.

See also Lucian Bebchuk’s Keynote Speech at the ICGN Annual Meeting, Regulating Bankers’ Pay, The Elusive Quest for Global Governance Standards, and 2000-2010 Publications and Working Papers. When does he sleep?

Also consider: 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term. Another study finds a negative relationship between a higher CEO share of the executive compensation pot and firm value.

Session 11  –   The Evolving Role of Hedge Funds in Corporate Stewardship

Jane Buchan

This covered growth in Assets Under Management overall and by strategy type.  Particular focus given to equity based strategies: Merger Arbitrage, Statistical Arbitrage and ‘quiet’ Activists.  Quantitative and qualitative analysis on recent trends (e.g. leverage/prime broker issues/prop. trading desks, etc.) affecting these strategies and to what extent they are impacting markets. Do these strategies feed into claims of hedge fund short-termism?

Jane Buchan, Chief Executive Officer, Pacific Alternative Asset Management Company, USA. – Says hedge funds bigger than private equity.  Asked: What do you fear?  Anything that would restrict short selling.

Omar Asali

Omar Asali, Harbinger Capital Partners, USA. – Discussed several cases. Looks for companies that are undervalued. Tries quiet strategy, then noisy. Works behind closed doors most of the time. If interests not aligned, take more adversarial position. We don’t have formulaic answer re proxy policies. turnover 3, 4, 6 times in 3-6 months but some up to 7 yrs… work with management in those companies.

Cliff Asnes

Cliff Asness, Managing and Founding Principal, AQR Capital Management, LLC, USA. – Quant fund, value strategies. Doesn’t like accrual methods, sustainable growth, anti-democratic not better.. seems to be a push…benefits are in the price.  Either neutral or we like good governance. Voting on prices.  We’re looking for prices that aren’t right. Outsource most of the proxy voting. Useful platform for embarrassing management or to vocalize attention. Statistical arbitrage. Random “riskless” arbitrage (a trade we kind of like… we do it but the guy who runs it says we don’t.. they do it over days, not seconds).  6 to 12 month momentum strategies, profit in 3 out of 4 yrs. Nontaxable investors (like pensions) should be pursing short-term strategies because don’t have to be tax efficient. What do you fear? Anything that would restrict short selling.

Eric Knight

Eric Knight, Chief Executive Officer, Knight Vinke, USA. – Why would you take on government? Take on when gov is a large shareowner. Royal Dutch Shell can’t be taken over, so if mismanaged a lot of potential stored value. There’s an enormous amount of information on these large firms that no one is reading. HSBC board members spend 20 days /yr. reading what’s been handed to them by management. They’re all brain-washed. (With respect.) Who has most votes. Can’t have proxy contests at large firms. Recognizing that, no group can bring about change. Big firms are controlled or at least influenced by stakeholders, gov, press, regulators, taxpayers, competitors. We look at which has interests aligned with shareowners. Communicate with a broad audience through press. Buy full pages in newspapers. Might spend a year before trying to force restructuring.  Invests in highly liquid large caps over -5 yrs. We don’t short or leverage because it would handicap us. Avoids stalling tactics. European banks leverage 100 to 1. US 100 to 3.

Moderator: Christy Wood, Chairman, ICGN

Session 12 – The New Balance in Economic Growth – the Emerging Economies

Jang Hasung

Governance is critical to capital market formation in all jurisdictions.  Approaches to governance have developed in the emerging economies appropriate to their markets and culture.  What corporate governance improvements are under consideration in the emerging economies countries?  This session theme is “Distinctive Aspects of Our Governance Practices and Why They Work for us.”

Moderator : Hasung Jang, Dean and Professor of Finance, Korea University Business School – 20 yrs emerging market 1/2 – family dominated ownerships similar to India, Brazil. Some litigation beginning in China. Pensions investing abroad. Recent initiative to introduce poison pills. Q: Why retrograde step now? Ans: We made much progress since crisis. Regulators taking back step to be friendly to business. Hasn’t been legislated yet.

Jose Luiz Osorio

Brazil – José Luiz Osório, Founding Partner, Jardim Botanico Partners, Brazil. – Improved investment market protection. Private special listing requirement.  204 IPOs in 2010 raising $100B. Huge success. Need a free press so can use as tool for activism. Board must vote best interests of owners but large concentration of ownership. New simplified proxies, how they pay (fixed and variable) some didn’t disclose. International accounting standards soon. New reforms 20% independent directors increased to 30%. Growing fast. election yr. wages increased 10% in first quarter. 10% base interest rate? Election yr. seminar, importance of equity markets as second part of presidential debate, so recognized in politics. Do your own diligence. Increased disclosure requirements for manager but 40 companies got together and sought an injunction. 4th largest buyer of US securities.  We’ve been allowed to invest abroad for 2-3 yrs. Now listing or ADR equivalents is beginning.

Jamie Allen

China – Jamie Allen, Secretary General, Asian Corporate Governance Association. – Reaction against western standards emotional reaction but will get on. Best ideas come from around the world. Stimulus underlined role of state and state sector. Last 5 years banks becoming more normal. Decreasing non-performing loans. Have they taken step backwards? Independent directors, committees, financial standards, reporting. Not really step backwards but continuum. Different local institutions. Supervisory boards in China but party role strong, playing an important role above boards of directors. Ethical and cultural development is the rationale. Much more disclosure on who’s on committee. (state enterprises) What does it leave for board but implementing strategies, looking at operations… can be useful. Chair may be open minded to get views of others. Meetings fully scripted. Cross border acquisitions in Asia and around world. Dealing with different regulatory regimes may force them to be more open and sophisticated. Evolving. Q: Are minority shareholder allowed to say something in the not so free press?  Ans: No, and that will constrain them at some point. Minority shareowners will play a role… especially in other part of Asia. Retail investors in China seem more interested in going to court and protecting rights. If can litigate, they may exercise stronger powers. Potential for plaintiffs bar where in other parts of Asia all the attorneys are working for corporates. Hard to invest abroad. Most still held by state. 20-25% of shares owned by individuals.

YRK Reddy

India – DR YRK Reddy, Founder Trustee, Academy of Corporate Governance. – BRIC $300B foreign reserves. Sansex up 90% in ten years. 2nd most attractive market after China. 139 new issues last year. 25% in public hands may be soon mandated for traded enterprises. That might help discipline minority interests. Unlisted state owned enterprises are going to have to follow same standards. Related party transactions/ relationship based, trust-based. Family businesses. Monarchs are not going to spawn a revolution against themselves. Manner of selecting directors has improved.  Activism in boards have changed. Management needs to be challenged. The seem to be realizing the importance of more diverse opinions internally. Structurally, SME can’t take standards in full sum. Will take time. Internationalized firms appreciate world standards. 9% growth. Jamie did white paper on India. There is little counting of actual votes in India. Indian companies have been acquiring companies abroad. 2nd highest in UK.

Brazil wins corporate governance beauty question among those in attendance.

Bresson and Hellebuyck

Closing Remarks and Thanks

Christy Wood, Chairman, ICGN.

Welcome to ICGN 2011, Paris Arnaud de Bresson and Jean-Pierre Hellebuyck –  by fall of 2011 we should know more of EEC relation, transparency, new directive.

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Urgent Call to Save Proxy Access

The Social Investment Forum learned late this afternoon that the Senate may set a threshold for proxy access at 5 percent for all companies.  This would effectively render proxy access useless, expect in very rare circumstances.  They want the language in the Senate bill because it simply grants the SEC authority to move forward with its proxy access rule.  SIF and its members favor the SEC rule, as it sets a graduated 1-3-5 threshold based on a company’s market capitalization. While I see that specifying thresholds in the bill could save the SEC from litigation, the 5% threshold is too high. I sent a note to BarneyFrankProxyAccess6-16-10 (download pdf). Please copy from it and get it out as soon as possible.

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ICGN Day 1: Coverage

ICGN 2010 Annual Conference, The Changing Global Balances: Toronto

Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the  best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.

Christy Wood


Christy Wood, Chairman, ICGN opened the conference noting that Canada set highstandards for its banks and in other areas, helping it weather the financial crisis better than the US.

Conference opening keynote

Jim Flaherty, Minister of Finance, Canada spoke of the G20 Summit coming to Toronto and walked us through how the financial crisis occurred and was addressed, noting that a majority of the stimulus packages will end about next March. The Canadian economy, which is growing at a rate of more than 6%, hopes to then cut its deficit in half, even while cutting taxes. He said that

Jim Flaherty

Canada has the lowest taxes on businesses, is the first tariff-free country on manufactured imports and has the strongest recovery within the G7. Shareholders should bear the costs associated with bank failures, preferably through use of contingent cash reserves. He looks forward to a federal securities regulator in Canada and expressed hopes that emerging economies would increase domestic demand to counterbalance European fiscal discipline.

Session 1:  The New Global Economic Balance

The financial crisis of 2008 and the “Great Recession” of 2009 raise tough questions about governance of the global financial system. The write-down of assets is approaching US$ 4 trillion, a record-setting destruction of wealth. How can global governance gaps be overcome? Is global integration under threat or will the widespread social backlash subside in a post-crisis world? What will the “New Normal” look like in terms of economic balance?

Antonio Borges

Antonio Borges, Chairman of the Hedge Fund Standards Board and the European Corporate Governance Institute, Portugal. – Greece represents the tip of an iceberg in the banking sector. What starts with a small country can create contamination. Sovereign debt had not been considered risky, like CDOs. Countries blame market speculators, according to conventional wisdom, but we need to solve the moral hazard problem that would accompany any bailout.

Christian Stenger

Christian Strenger, Government Adviser and Director, DWS Investment GmbH, Germany. – The root cause lies in fundamental deficits, lack of stringent supervision. The general public and the banks were misled concerning the safety of Greek bonds.

George Lewis

George Lewis, Group Head, Wealth Management, RBC Royal Bank. – Lewis began on an optimistic note, discussing the need to address trade flows and market distortions.

Borges: The Eurozone is working fine, in balance. Countries that are competitive will attract capital. Some Southern European countries have misspent their debt wastefully. Their fiscal problems will only be eliminated by becoming competitive and through growth. Stressed the importance of savings, since a lower savings rate leaves them very vulnerable when foreign capital is at stake.

Moderator Chrystia Freeland, Global editor-at-large, Reuters, Canada. – But didn’t Goldmen Sachs facilitate by hiding possible liabilities through public/private partnerships?

Chrystial Freeland

Strenger: Too often things were allowed that were not entirely in conformity with the highest ethics. There’s noting wrong with making $100M in a day but the general public finds it difficult to understand. Authenticity problems.

Lewis: We need to reinforce the role of fiduciaries and agents. Regulators need to establish better fiduciary standards, empowering shareowners, reinforcing a duty of care – suitability, not inappropriate mortgage products. Too little down-payment and there was also the issue of commissions based on selling mortgage products.

Borges: Don’t ask regulators to do more than they can, otherwise you generate a false sense of security. Who are the people interested in financial security? Investors must be mobilized around tougher transparency requirements. Investors are in charge, not regulators but ownership is decoupled when control rights are traded away. High frequency trading is having a growing impact, since a large number of shares do unvoted. (or were these last points made by Strenger?)

Lewis: Yes, there are problems around ownership and control. We need sound regulations to level the playing field, reinforcement of a stronger role for debt holders.

Freeland: Was government bailing out its friends? Canadian banks rebut that the source of risk wasn’t commercial banking but mortgages in the US.

Borges: It wasn’t casino banking but relying on market specialists. In addressing the issue Borges noted that about 80% of corporate financing comes from banks in Europe, about the reverse of in the US, where about 80% comes from market equities.

Christian: At least part of the problem was that companies are often engaged in businesses their boards don’t fully understand.

Borges: The most important role of financial markets is to impose discipline. Shareowners need to hold companies accountable.

Audience: A major function of the market is to control risk but if you can pass on the risk, responsibility vanishes and you don’t have to at prudently.

Borges: People who take risks must do so responsibly. Although retail investors may need protected, sophisticated institutional investors must push for transparency and then take risks. Risks should be taken by specialists. Regulations may raise the cost of capital.

Lewis: Touched on proposed Basel III rules and competition.

Press conference

With more diversification by institutional investors, they know less and less about the markets they are in. Global guidelines and standards influenced by ICGN become more important. Meeting is timely with G20 also coming to Toronto. There was discussion around the idea that attempts to regulate executive pay have actually driven pay higher. Real answers will come with better boards and more control by shareowners, whose rights have been hampered in the US. Consensus around the idea of more input from ICGN into G20. ICGN should be viewed by them as a valuable resource worth consulting.

Session 2 – The business case for more women on boards

Diversity affects the way groups behave. Evidence indicates that more diverse groups foster creativity and produce a greater range of perspectives and solutions to problems. A larger proportion of women on boards seems to affect directors’ attendance behavior and the number of scheduled board meetings. Demographically dissimilarity in the boardroom seems to affect incentives for replacing CEOs, the director nomination process, and the design of compensation systems. But is this enough to prove the “business case” for more women in the boardroom? The panel discussed the most recent academic findings as well as practical experience from the US and Norway, the only country in the world where gender diversity on boards are regulated in law.

Eli Saetersmoen

Eli Sætersmoen, Managing Director, Falck Nutec AS, Norway. – The threat was that companies that didn’t comply with the new requirement of 40% women on their boards would be liquidated. She’s been serving on boards for more than 10 years and sees that women add value… more detail oriented… leading to more socially robust and stronger boards. Interestingly, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up. She suggests the Norwegian model could be adjusted based on culture… the real question is political will.

Faye Wattleton

Faye Wattleton, former Chair of Nom. Comm of Este Lauder, USA. – She was the only woman on the board but it takes three before the culture of the board really changes. There needs to be a “critical mass” to reduce the need to “explain the details to the woman on the board.” We are a different species, resulting in more decisions grounded in reason and more open communication. A company’s highest governing boy should reflect society or at least its own customer base. Favors something more like affirmative action, rather than mandates like Norway.

Daniel Ferreira

Daniel Ferreira, Reader (associate professor), Department of Finance Director, Corporate Finance and Governance Programme, Financial Markets Group (FMG) London School of Economics. (book chapter on Board Diversity, Women in the Boardroom and Their Impact on Governance and Performance and other papers). – One difference is that not only do women directors have a better attendance record at board meetings but men at boards with women also have better attendance, suggesting their presence results in the job being taken more seriously. Women are most likely to be on certain committees, least of which are compensation committees… so there was no data to correlate women on boards with executive pay. Boards with women were more likely to replace CEOs after poor performance… apparently, tougher monitors. Gave a plug to further research being done by his “Women in the Boardroom” co-author Renee B. Adams on Swedish boards (see also).

Deborah Gilli

Deborah Gillis, Vice President, North America, Catalyst. – Companies with more women had 53% higher return on equity. (see The Bottom Line: Corporate Performance and Women’s Representation on Boards, 2007 and the Catalyst Research and Knowledge Base). Agreed with Wattleton re need for three to change culture, signaling a tone at the top that is respectful of differences. More woman directors also leads to more woman corporate officers, more innovation and out of the box thinking. Companies with diverse boards are more likely to recruit the best talent. She would be hesitant to require quotas and likes the SEC’s recent requirement for disclosure re diversity to ensure the conversation at least happens. Boards need to broaden their search beyond C-suites.

Moderator David R. Beatty O.B.E., Conway Director, Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management, University of Toronto.

Session 3 – The Evolution of Capital markets threats to good corporate governance

Capitalism has both good and bad sides. On the one hand, it fuels economic growth and wealth creation. On the other, it is susceptible to being managed or even manipulated by certain players in the system. This session examined threats to good corporate governance ranging from the role of new exchanges and high-frequency trading, derivative-based ETFs to regulatory arbitrage between stock exchanges.

Claire Bury

Claire Bury, European Union. – We’ve moved from believing everything to nothing about what bankers tell us. Interested in high frequency trading and increasing liquidity at US banks. Also expressed concerns with securities lending/empty voting. Advocates transparency above a certain level in debates in Brussels this week. Concerning short-selling, sees need for European-wide disclosures. When voting capital is small, relative to trades shares, it leads to major problems. Frenetic trading generates profits for bankers and brokers but not usually for investors. During Q&A, suggested that maybe debt holders should hold voting rights if shareholders don’t exercise their rights.

Tom Kloet

Tom Kloet, Chief Executive Officer, TMX Group, Canada. – TMX recognizes the difference between mature and venture companies, operating both the Toronto Stock Exchange and the TSX Venture Exchange. Regarding high frequency traders, they are in the market to stay. With 25% of the volume, they keep markets liquid. He doesn’t think they are hurting corporate governance. ETFs were a key invention, first appearing on TSX 20 years ago.

Marcel Jeucken, Manager for Responsible Investment, PGGM Investments, The Netherlands. – Emphasized using shareowner rights, integration of voice with the investment process, and transparency. Advocates disclosing votes and informing management. Yes, buy proxy research, but also underst how that impacts each specific company, avoiding a check-box approach. Funds should be transparent themselves. Indexes can’t vote with their feet. Funds that integrate corporate governance concerns within their investment designs should outperform. Problems in Asian companies where votes are counted by hands raised, not in proportion to the number of shares held.

Moderator Doug Steiner, Strategic and technical operations consultant, Scotia Capital, Canada. Mentioned that he sees market for voting rights coming. We may soon be monetizing voting rights. (see Monetization, Realization, and Statutory Interpretation by Paul D. Hayward and post by Broc Romanek)

Session 4 – The New Balance in Corporate Social Responsibility

Understanding and managing a corporation’s relationships with its stakeholders is critical to the corporation’s ability to execute its strategy. A significant part of CSR,  Environmental Strategy, is top in the minds of investors, businesses and governments internationally. The resource sector faces some of the most high profile issues in this area. During this session leading CEOs discuss their approach in mitigating their impact on theenvironment.

David Collyer, President, Canadian Association of Petroleum Producers . – Thinks tar sands mining can be responsible but they need to listen to their critics. Demand for energy is growing exponentially. Developed world is stabilizing but not India, China. Doubling by 2050. Oil on decline.

David Collyer

Supports diversification of supply sources but we need to be pragmatic about how long they will take to develop. World increasing reliant on conventional gas and oil resources. Tension: enviro, eco growth, energy security and reliability. Going to need all sources. How done responsibly. Oil producers are in much more than oil sands. They’re active in renewables. But oil sands lie at the nexus. They are a key part of addressing energy, representing the 2nd largest reserve of oil in world… 1/2 of accessible reserves. Canada is open to dialogue not possible in other parts of world where oil is being developed. Water use is a low 2% of Athabasca River flow. Surface area impacted by mining is less than a medium sized city. Only slightly higher contributor to greenhouse gases and conventional extraction. Canadians, 74%, support continued development. Working with his members to facilitate responsible engagement. Believes in responsible energy and they’re on track to improve and demonstrate. We’re up to the challenge.

Brian Ferguson, President and Chief Executive Officer, Cenovus Energy, Canada . One of 25 largest Canadian companies. Probable reserves of 2.1 billion barrels. Technology driven oil sands company operating in Alberta and Saskatchewan.

Brian Ferguson

Uses two technologies. On 15% use conventional mining techniques but 85% of sands are accessed through horizontal drilling wells.  Cenovus has 40% of the global carbon capture and sequestration capacity… 15 million tons stored to date. Small footprint at well-pad. Striving for good governance. Rigorous, respectful and ready. One doesn’t have to be sacrificed for the other (environment and energy). Environmental stewardship integrated with exploration and extraction. Corporate responsibility impacts business. Will release report later this month. Oil sands will be a significant contributor for decades to come. Measurable improvements in intensity, footprint, air pollutants, water usage. 95% of water they use is brackish water. None from surface. Production growth is up 190%. Injecting steam into wells, extracting from wells below. Relative infancy so innovation continues. They see themselves as a technology company in the oil industry. Working on 50 different technologies. Energy efficiency and operations program. Environmental opportunity fund (with investments in renewables).

Hal Kvisle

Hal Kvisle, Chief Executive Officer, TransCanada Corporation. –  TransCanada is involved in pipeline and power generation. They are North America’s 2nd largest narutral gas storage operator. Big project to move gas down to US Midwest.  Another to bring gas down from Alaska. ExxonMobil partner. Building largest compressors globally for the Mackenzie valley pipeline. $800M to get through regulations. $40B project. Mega project challenges. NGOs always ready to weigh in. Impact on right of way. Constructing below ground (unlike Alaska pipeline). Impact on consumers. 85% from clean sources, 15% coal. Reduce consumption. Substitution. Different forms of energy. Remove CO2 from atmosphere.  Values: integrity, collaboration, responsibility, innovation. The entire financial sector was painted with one brush but Canada did relatively well. Things may unfold that way on energy side as well.

Damon Silvers

Damon Silvers, Director of Policy and Special Counsel for the AFL-CIO, Member of the Congressional Oversight committee for the TARP. – Ambiguities: Middle East blood, Nigeria, environmental issues. Good jobs in Alberta. Getting harder and harder to extract fossil fuels. People died on BP platform. Energy prices rising and becoming more volatile. Funds have chased commodity prices over time. Financial crisis should teach us the need for regulation. We are universal investors and don’t jump in and out for glamor. Bubbles: look out for them. Tobacco also reduced a lot of good jobs. Labor had a close relationship. We tried to figure out how to act responsibly. They ended up facing perjury charges, admitted to selling poison. There is no way to look at fossil fuels as anything other than selling poison. Good they are trying to do it less dirty but we shouldn’t continue to deny, even through there are a lot of good jobs there, that global climate change must be addressed sooner rather than later. The challenge isn’t how to shut it all down but is come up with a feasible transition strategy.

Collyer: Tobacco industry of our times. No. Hydrocarbons are going to be here. Policy makers will decide. This isn’t about my energy being better than yours. Focus has to be on cleaning up. Dirty oil?  The worst kind of tobacco. Market will decide. Barriers could be put in place based on environmental damage.

Moderator Chrystie Freeland, Global editor-at-large, Reuters, Canada. – Asks Ferguson about worst case scenario? Yes, they’re looking at that. Every employee must understand their safety role. How do you make sure you go home safely. Governance practices and procedures. Understanding risk. He doesn’t contemplate an environmental disaster. When pressed, he responds that a “steam rupture” could come to surface. But it could be easily contained and mitigated. The inherent risk is low.

My reaction: Come on, you just lost all credibility with that answer… although, I then start thinking the Gulf spill could be good news for oil sands. For a more balanced view, see Report Weighs Fallout of Canada’s Oil Sands, NYTimes, May 18, 2009. My conclusion: If reliance on oil is like tobacco, oil sands will place us on a speedier path global warming and massive death… even if a lot of profits are made along the way.

Shyan Sunder

Session 5 – International Financial Reporting Standards – Was Accounting a Root Cause of the Global Financial Crisis?

Were accounting standards one of the reasons behind the financial crisis? How do the standards continue to impact on companies?

Shyam Sunder, James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management. – Principles are hare to define. In legal systems, we have judges. The head of Arthur Andersen liked the ideal in the 1950s. Sunder likes it today. God has no accounting standards. While institutions seek order, we should keep in mind that any such order will be circumvented. Messiness will continue.

Paul Cherry

Paul Cherry FCA, Chairman, Standards Advisory Council,

Canada. – Canada put in place a form of arbitration.

Unfortunately, it was done once and shelved.

Kin Shannon

Moderator Kim Shannon, President and Chief Investment Officer, Sionna Investment Managers, Canada

Session 6: The New Balance:  Strategic Environment for Business, Keynote: Lowell Bryan, Director (Senior Partner), McKinsey & Company, US

Dramatic shifts in world economy. Showed pictures of a couple of cities in China 15 years ago and today. Wow, from hovels to high rises. Expects, 50% growth in next 10 years from emerging markets.

Drivers. Organized people, urbanization, labor productivity. Less dependents, purchase power. Over 10-15 years there will be adjustments in currency that may reduce growth. Over $1B new middle class consumers in next 20 years. Creating new business models. Rethought and re-engineered. Refrigerator designed for interruptible electricity. GE developed electrocardiogram for India that cost 15%. Demand is up for raw materials.

Volatility could be back. How do you get your house in order with this much unemployment? We could revalue our currency. Demand for commodities will put pressure on prices. If currencies are overvalued, they will overpay for commodities. Developed countries are paying too little. China is paying too much.

Lowell Brya

Fault lines: currency misalignment, commodity (currency issue), debt risks. Surveys show a high probability of another financial shock in next 3 years. Safe harbors?  Organizations need to be more flexible. Scenario planning should be taken seriously. Improve risk/reward opportunities. Banking relationships. Error on side of over-capitalization, over-liquid and over-prepared. Decisions just in time.

Invest heavily in options that pay. Lots of broken business models, capital strategies, regulatory regimes, posture to governments, make decisions just in time. Keen awareness of time horizons critical.

Companies have more degrees of freedom than individuals and governments. There are consumption growth opportunities. Assumption for inflation: risk here is financial. Demand driven high in developing markets. Developed world cutting spending and deficits. Will global structures survive? He thinks we’re going to get adjustment because market forces will push us to do so. Look at Asia in 1987. Their policies have served them well. Difficult economic times could lead to other problems.

Rise in populist governments. If you express your fears and prepare, maybe they won’t happen. Governments need right policies. Will populations do the right thing in a crisis? US saves more, gets better trade balance… not happening. Democracies frequently don’t understand their own interests.  We face a backlash from a fading middle class, like the Tea Party.  It has to happen to get policy adjustments. He’s confident government leaders will do right thing… eventually.

Welcome Reception at the Royal Ontario Museum

Peter Dey, Chairman, Paradigm Capital Inc., Canada received a lifetime achievement award for his work in making corporate directors more effective,  developing governance guidelines in 1994 for companies on the Toronto Stock Exchange, and later helping develop global governance guidelines for the Organization for Economic Co-operation and Development and its Global Corporate Governance Forum.

Peter Dey

Dey said he supports shareholder activism by advocacy groups like the Canadian Coalition for Good Governance (CCGG), but said their best tool is the use of private conversations with a board, not “public confrontations.” “Where you can be most effective is identifying good directors, getting them on the slate and electing them, and, if necessary, removing ineffective directors,” he said. “But to try to jump in and make judgments where the board should be making judgments, I think is just the wrong direction.”

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Devon's AGM (Updated)

John Chevedden recently had one of his more common shareowner proposals at Devon Energy (update at bottom):

Resolved, Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal to the fullest extent permitted by law. This includes each 67% supermajority provision in our charter and/or bylaws.

Chevedden has assisted me on such proposals. They have typically been winning strong support, often in the 70% and 80% range. His proposal included a supporting statement that noted several other issues with the company. For example, The Corporate Library rated the company “D” with “High Governance Risk,” “Very High Concern” for our takeover defenses and “Very High Concern” for executive pay. See proxy item 3.

Julie Skye presented Chevedden’s proposal at Devon’s Jun 9th AGM. Imagine her shock when the meeting Chair asked if there was a second (there was none) and the Inspector of Elections failed to report out voting results? Fortunately, with assistance from the United States Proxy Exchange, Chevedden was able to cite the fact that in response to Motorola (1987), SEC staff affirmed there is no need for a second on shareowner proposals.

Timothy Smith, of Walden Asset Management, also wrote protesting Devon’s “parliamentary maneuvers to prevent hearing the views of stockholders on a legitimate corporate governance matter” and urging them to “put the vote on the record and properly identify the tally in the 8K form required by the SEC.”

According to Chevedden, the Devon Chair called him and said the proposal passed overwhelmingly and it will thus be reported in the 8-K. Devon had earlier requested a no-action letter from the SEC, relying on Apache and was denied. Interesting coincidence that Apache recently completed its acquisition of Devon Energy’s oil and gas assets in the shallow waters of the Gulf of Mexico Shelf for $1.05 billion.

It is hard for me to believe Devon’s counsel didn’t know that no second is required to present a shareowner resolution at an AGM. Why would a company bother with such fruitless maneuvers? Is anyone grading companies on their performance at AGMs like Lewis Gilbert used to do? If so, they should certainly get a failing grade. Unfortunately, obstruction of shareowner rights, especially at the procedural level, doesn’t get much press. I doubt you’ll be reading of this incident in the mainstream press.

The SEC just posted Devon’s 8-K as this post was scheduled to go live. Here is Devon’s explanation:

A shareholder proposal for a Simple Majority Vote was presented. The Company, in accordance with normal Annual Meeting procedures, asked for a second to the motion for the proposal. There being no second, the vote on the proposal was not called. Subsequent to the meeting, the Company determined upon further investigation that the staff of the Securities and Exchange Commission had actually provided informal guidance on this issue in the form of correspondence issued twenty-three years ago, in which the staff indicated that the voting of proxies received with respect to a shareholder proposal included in a company’s proxy material pursuant to Rule 14a-8 should not be conditioned upon the proposal being seconded at the meeting, absent a second being required by state law or by a company’s governing instruments. Based on this earlier guidance, a second to the motion in support of the shareholder proposal was not required and, accordingly, the vote on the proposal has been certified. A total of 72% of all voted shares were cast in favor of the shareholder proposal. The results of the vote are as follows:


Ted Allen, writing for the RiskMetrics Group, Devon Energy Drops Objection to Shareholder Proposal, infers that presenting a proposal at a meeting or getting a second, if required by state law or corporate bylaws, seems like a needless formality, given that the vast majority of votes are cast before a shareholder meeting. Perhaps the SEC should address this relic in its proxy plumbing concept release.

The Devon case is another example of the various SEC, state, and corporate procedural rules that can thwart shareholders in their efforts to bring resolutions to a vote. While most investors vote in advance through electronic means and seldom attend meetings in person anymore, some of the SEC’s requirements for proponents still reflect the ways that shareholder meetings used to be conducted. For instance, under SEC Rule 14a-8(h)(3), a company may exclude a proponent’s resolution for two years if the proponent (or a qualified representative) fails to appear in person to present the proposal and cannot demonstrate “good cause” for failing to attend.

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Mercer's Responsible Investment Update

Mercer’s Responsible Investment Newsletter (June 15, 2010) outlines preliminary results of integrating ESG analysis into global equity portfolios.

Our analysis of the beta of ESG integration has so far been quite positive – ESG factors are material and integrating these factors into investment decision-making can reduce investment risk without sacrificing return…

Initial analysis on adding alpha to a global equity portfolio through a tilt towards sustainable themes, indicates the following:

  • A portfolio with a tilt towards sustainable themes has a higher risk/reward ratio versus a broad market index, but has mixed results when versus a comparable themed index.
  • In the sustainable themed space, the risk of bubbles and strategies’ short track records make manager selection key.
  • The themes of renewable energy and water so far show strong return potential versus the broader market.

The Newsletter also addressed the fatalism of many investors, including large funds, who doubt their proxy vote can make a difference, providing several examples to refute that assertion. Even if you are not ready to take the plunge into “active” ownership, Mercer argues an interim step, “informed” ownership. “This could be defined simply as being satisfied, through due diligence, that votes are being cast in the best long-term interests of the end client or owner.”

Of course, Mercer offers due diligence on investment managers, including evaluation of resources and processes dedicated to proxy voting and ESG issues. They also cite membership organizations, such as the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility and the UN’s Principles for Responsible Investment.

Around the world, institutional investors work hard to achieve the best long-term returns for their clients, participants or beneficiaries. We believe that voting and constructive engagement with companies and peer organizations can help mitigate company specific risks for which investors may not be compensated. There is also reason to believe that more shareholder participation over time can raise the bar for corporate governance in the broader market and improve beta. If your organization agrees with these arguments, then voting and engagement may be a low cost way to help achieve these results.

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Resignations Could Spell Trouble

Outside directors have incentives to resign to protect their reputation or avoid increased workload when they anticipate the firm will perform poorly or disclose adverse news.

In find no real surprise in the research of Fahlenbrach, Low, and Stulz who find strong support for the hypothesis that following surprise director departures, affected firms have stock performance, worse accounting performance, a greater likelihood of an extreme negative return, a greater likelihood of a restatement, and a greater likelihood of being sued by their shareholders.

Surprise departure of an outside director increases the probability of an earnings restatement by almost 20% and the probability of being named in a federal class action securities fraud lawsuit by 35%. The authors suggest analyzing the impact of different types of compensation schemes on directors’ incentives to quit to protect their reputation.
(The Dark Side of Outside Directors: Do They Quit When They are Most Needed?, March 1, 2010)

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Reign of the Shareholder is Over?

I just returned from ICGN 2010 (and will post on that next week). Among the thousands of e-mails I received during my week of absence, one stands out (although I haven’t gone through them all). Brendan Sheehan, the usually thoughtful Executive Editor of the Corporate Secretary, posits the “Reign of the Shareholder is Over” because 36 members of Congress wrote to BP protesting the company’s announced intention to pay a dividend.

Sheehan argues “that members of Congress are showing their true colors: they care about whatever the hottest topic of the day is. After two years of fighting for the rights of shareholders everywhere, they have turned on them almost overnight.” “So it now appears that the message from Congress is ‘Shareholder be damned.’”

First, when did a “reign” of shareowners begin? If there ever was such a phenomenon during my lifetime, I missed it. True, we are finally to the point where at about 2/3 of S&P 500 shareowners can vote against directors and if those incumbents don’t get a majority of the vote, when running unopposed, they are supposed to turn in a letter of resignation, which boards so far have more frequently refused than accepted. The vast majority of companies still operate under a plurality vote system, much like the old Soviet Union… vote for the party but if you don’t they are in anyway. Congress and the SEC are still moving forward on proxy access, so it isn’t as if Congress has all of a sudden turned against trying to rebalance, in a small way, the huge advantage given CEOs over shareowners.

Of course Congress cares about the hottest topics of the day. They are elected to represent the public. Too often, they are more concerned with taking money and advice from lobbyists. On issues as huge as the Gulf spill, they can’t duck out completely. Congress needs to at least attempt to get BP to hold on to cash needed to pay for cleanining up the oil spill and damages, although it is hard to imagine that any amount of money will undue all the damages to people and to nature.

BP also faces political pressure on their home-front, since dividends funded a good portion of British pensions. Apparently, BP may hold off on paying the dividend, placing the money in an escrow account “until the full scale of the company’s liabilities” from the spill are clear. (BP plans to defer dividend after pressure from Obama, Times of London, 6/1/10)

After purporting to show that Congress has turned against shareowners, Sheehan goes on to argue that giving more power to shareowners is a mistake because in speaking before the Financial Crisis Inquiry Commission, Warren Buffett, the largest shareowner at Moody’s, defended their lack of foresight regarding the risk of subprime loans. Since Buffett made the same mistakes and assumptions as the rest of management, “it is a slap in the face to all those who argue that greater shareholder representation on boards would have mitigated some of the problems.”

Sheehan mistakenly lumps all shareowners into a single class. Buffett is widely known for the passivity of his management style, once a company has entered the Berkshire Hathaway fold. Members of the Interfaith Center on Corporate Responsibility (ICCR) aren’t nearly as passive as Buffett. As early as 1993, ICCR members filed six resolutions to more closely regulate subprime mortgages. According to ICCR Executive Director Laura Berry:

When our institutional investor members view their holdings through the lens of justice and sustainability, the priorities for action that emerge frequently anticipate market moves. Time and time again, the prophetic voice of faith has allowed our members to anticipate emerging areas of corporate responsibility, in investment policy as well as in social, economic and environmental policy. For more than a decade before anyone else, our visionary members have been expressing concerns related to predatory lending practices, inappropriate underwriting standards and the potential consequences of securitization of debt instruments.

Of course, it would be nice if proxy access empowered long-term responsible shareonwers like the members of the ICCR. Unfortunately, even a best case scenario is likely to leave ICCR members mostly out of the loop because of the high thresholds that will be required to nominate a small portion of board members.

The government has a role to play in regulating companies and in ensuring corporations are operated more democratically. Certainly, they capture of regulators by businesses doesn’t help avert disasters such as the Gulf spill. Even before Citizen United, active shareowners like ICCR sought to limit the political influence of not just the companies whose stock they own, but all companies. Now, that task is even more urgent.

The reign of shareowners has yet to begin. If it ever does come about, let’s hope activists like ICCR are empowered, rather than pacifists like Buffett. Buffett may make lots of money, but don’t count on shareowners like him to foresee or forestall housing bubbles, oil spills or global climate change. Of course, according to organizations like the Business Roundtable, governance reforms, like even a mild for of proxy access, will only empower “special interests” that will “hurt the U.S. economy.”

It may take a little hurt in the short-run to address long-term problems. I hope Brendan Sheehan and the corporate governance professionals he works for aren’t too short-sighted.

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Another Area Where Corporate Governance Failures Have Spreading Implications

While the financial crisis prompted this writer and Prof. Eric Pan of Cardozo Law School to write about how corporate governance law requires change to take into account outcomes as well as process in order to prevent harm to innocent bystanders – such as taxpayers – from occurring, the BP Gulf oil spill is yet another situation illustrating the need for law to prompt greater oversight of and by senior management. It is far from clear at this time whether the various claims made about BP, Transocean and Halliburton in connection with the infamous well are true, and there are obvious issues of extraterritoriality with respect to BP itself, but if a significant number of them are, this will indicate a major breakdown in corporate governance.

At the least, it appears to me that BP had no real plan in place to deal with the aftermath of a spill in extremely deep water when it started such activity. While hindsight is always 20/20, it seems reasonable to expect the governing body for a firm like this to insist upon some meaningful strategy and analysis to mitigate harm to innocent people before the firm undertakes operations which can have such widespread impact and are the subject of so little definitive learning. Even if such a plan is not technically perfect, the mere process associated with its creation, should a cause a more effective response and weighing of alternatives if the worst happens.

Yet, from what we can deduce from BP’s halting, thus far ineffective, response to the spill, the difficulties associated with dealing with a spill in literally uncharted waters and the differences between such circumstances and much more shallow water, were not the subject of much deliberation at the top levels of the company. This is inexcusably poor corporate governance and its effects are being felt by the families of those killed in the rig explosion and by tens or hundreds of thousands in the Gulf Coast region, who were not BP shareholders and thought they had no connection to the company.

Additionally, claims have been made that BP cut many corners with respect to the doomed well in its haste to conclude its operations and that such corner cutting may have played a role in the drill rig explosion. If this is the case, whether it resulted from the wrong message coming from the top of the company or from poor decision-making by midlevel managers is subject to interpretation and fact gathering. If the problems are traceable to senior level edicts, this is yet another argument for much greater board oversight.

I am not asking for boards and CEO’s to be insurers and responsible for every serious problem befalling their companies, but merely to seriously consider what can go wrong when major initiatives or changes in strategy are being pursued, and how to respond in such case, before proceeding with an approach which can have so many severe consequences for so many outside the company who can do little to protect themselves. If such consideration is done and results in a plan which is prima facie viable, yet does not ultimately solve the problem, one can use the need to take business risks to drive the economy, especially where we are pursuing alternatives to imported oil, to justify absolving executives and directors from further personal responsibility.

What is intolerable is the blank check we have seen in the financial sector where blind faith was placed in the likelihood of real estate values not declining, and apparently in the oil field when drilling moved into unprecedented areas. When commenting to (June 4, 2010; Tutton, Lessons Learned from  the Largest Oil Spill In History) on oil spill clean ups, specifically the 1991 Persian Gulf operation, Abdul Nabi Al-Ghadban of the Kuwait Institute for Scientific Research gives excellent guidance for all such risky activity:

If you have offshore operation you need to have a good contingency plan in place of spillage, damage, earthquake or a problem with the pipeline. We learned the lesson that we have to have an action plan – you have expect the unexpected.

When companies take risks that can have huge external implications, corporate law needs to require those ultimately in charge of such companies to ensure that such risks are fully understood and alternatives are in place to deal with the manifestation of such risks. With the growing external implications of so many corporate decisions, we can no longer afford a process-oriented corporate governance regimen, but must do more to link decisional authority and responsibility for outcomes. This means augmenting current initiatives around proxy access and compensation clawbacks with some sort of direct responsibility for damages suffered by third parties outside firms as a result of poor oversight within the firms.

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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