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; Shareowners.org; 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 theCorporateCounsel.net/blog, 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.

One Response to CorpGov Bites

  1. dougchia June 23, 2010 at 5:17 pm #

    Jim:

    Thanks for the Rising Stars mention and for your blurb on 3D, a worthy effort with which I have begun to get involved. I’m not going to speak on behalf of those spearheading it, but I personally don’t think 3D’s success is dependent on proxy access rights. In my mind, 3D is an idea that will have a purpose regardless, as it has more to do with identifying solid director candidates whom a broad range of investors can support and whom board nominating committees may even be inclined to put up for election. Now, more than ever, companies need to be identifying exceptional director candidates, and 3D may help fill in the blind spots that exist in the traditional methods of director recruiting.

    -DKC

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