Archive | July, 2010

Shareholder Engagement Executive Wanted

PIRC Ltd is seeking a talented and experienced individual to join and develop their longstanding institutional shareholder engagement work with listed companies. This will entail co-ordinating and ensuring accurate, on-time delivery of PIRC’s engagement consultancy services and projects on behalf of its clients. Salary commensurate with experience. Location: London. Applications must be on file by 9/15/10.

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Video Clip Friday

Friday… a good time for a visual break. Sheena Lyengar studies how we make choices – and how we feel about the choices we make. She talks about both trivial choices (Coke v. Pepsi) and profound ones, and shares her groundbreaking research that has uncovered some surprising attitudes about our decisions… some may even apply to corporate governance.

About thirty years ago, two of my best friends, Jerry Hines and Sheldon Dunn, died because of hypersensitivity to chemicals. One had worked in a lab for a drug company where his immune system was destroyed long before the AIDs crisis. The other was a hospital administrator who contracted a rare form of hepatitis with somewhat the same result. I went to work writing legislation to address the issue but industry had a more powerful lobby and the bill was vetoed.

Now, California’s Department of Toxic Substances Control may be on the verge of promulgating regulations that would create a list of toxic chemicals. Products containing those chemicals would be prioritized based on factors such as volume in commerce, the extent of public exposure and how the product is eventually disposed. Manufacturers would perform an “alternatives assessment” to determine if viable safer alternatives are available. Watch “The Story of Cosmetics.” In the meantime, thank you for choosing to be “fragrance free” for the sake of chemically sensitive colleagues.

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7 Qualities of an Innovative Board

  1. Strategic – A board that strives to be strategic makes a constant and conscious effort to ensure strategic focus to every issue it deliberates.
  2. Healthy Skeptics – Questions at board meetings should be clear and direct, not obtuse; open, not closed; positive and building, not negative and tearing down.
  3. Diligently Prepared – Directors cannot expect to move to the level of adding value and innovation to an organization if they are not prepared.
  4. Diversely Competent – Innovative boards have diverse, skilled, experienced, competent people on them.
  5. High Expectations – Not only should board members prepare diligently, there should be an expectation that everyone will have prepared with that same level of diligence.
  6. Delegate – Shaping the right committees, populated with the right people, who have the right skills, allows the board to delegate and trust their work.
  7. Empower and Encourage – Trust, but verify. A Board should never substitute its own judgment for management’s – but it does ensure that management is exercising sound judgment.

Helpful list? That’s just the tip of the iceberg… more at BrownGovernance. If you’re not subscribing to their free newsletter or attending their conferences, you’re missing out.

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2010 Proxy Season

Robert Kropp, writing for, ran a recent series of three posts interviewing people on the passing proxy season.

First up was Environmental Shareowner Resolutions Gain Record Levels of Support in 2010 Proxy Season, in which Kropp interviewed Michael Passoff of As You Sow.  Looking back on shareowner vote totals for first-time environmental resolutions over the past decade, five of the top ten were for resolutions filed this year. One reason, according to Passoff, was that “Shareholder activists are getting better at making financial arguments about risks from environmental and social liabilities.” In addition to strong showings for resolutions on coal ash and hydraulic fracturing, which got considerable press, a first-time vote on Bisphenol A (BPA) at Coca-Cola won 21.9% of shareowner votes, and resolutions addressing oil sands development in Canada won substantial vote totals as well.

Kropp interviewed Laura Berry of the Interfaith Center on Corporate Responsibility (ICCR) whose members filed a total of 308 shareowner resolutions this year, addressing issues across the ESG spectrum. After years of attempting to convince financial companies to disclose the manner in which they collateralized derivatives, only to have the resolutions disallowed by the SEC, ICCR members were finallysuccessful in having the resolutions included on proxy ballots. Resolution filed at Goldman Sachs, Bank of America, Citigroup, and JP Morgan Chase requested that the companies “ensure that the collateral is maintained in segregated accounts and is not rehypothecated. (taking in collateral as guarantees on derivatives trades, and then using it as collateral for their own transactions)

Members are also “connecting the dots” on health care, asking, “do companies go on record saying they support universal health care, and then underwrite the US Chamber’s efforts to derail it?” Some retail shareowners are beginning to see some value in voting but “I don’t think the average retail investor really understands how to be a citizen investor yet.” “Institutional investors are beginning to understand the connection between lack of transparency and investment risk.” “Those of us who think about social and human capital have been working on these issues for such a long time,” Berry said. “Now, we owe it to the issues to move beyond our circle and make our case to mainstream investors.” (Higher Shareowner Votes Are Encouraging, But Not Enough to Change the System)

Kropp finished up by interviewing me for a post entitled, Will 2011 Be a Watershed Year for Corporate Governance? Speaking to a largely CSR audience I stressed the fundamental importance of corporate governance to any chance of winning on social and environmental issues. Pay attention to the rules of the game. In that regard, the most important development was Apache v. Chevedden where Apache won the battle but lost the war and the Dodd-Frank bill.

I was on a call with the Social Investment Forum yesterday where a panel was also discussing the 2010 proxy season. Conrad MacKerron and the folks at As You Sow put together a great recap. Two measures were passed with record high votes on sustainability/GHG emissions (60% at Layne Christensen) and climate change (53% at Massey Energy).  In 2000, no majority votes on CSR resolutions… none even above 40% and only 6 above 20% out of 266 resolutions (average vote of 7%). This year, 2 majority votes, 17 above 40%, 88 above 20% out of 361 (average 19% vote). MacKerron attributes to:

  • Activists making better financial arguments
  • Increased environmental awareness
    • Recognizing true vs. externalized costs
    • Calculating environmental and reputations risk
  • More mutual fund and pension fund support
  • SEC Staff Legal Bulletin in October 2009 made it harder for companies to omit resolutions on environmental or health risk assessment

On the call, Sanford Lewis mentioned that SEC staff would likely issue another legal bulletin in the fall. Comments to Meredith Cross, Director, Division of Corp. Finance, might be helpful. For next year, he sees more focus on risk evaluation, enterprise risk management and better coordination between funds to avoid duplication. Paul Hodgson sees even bigger wins for shareowners, with proxy access, expanded say on pay, continuing work on majority voting… an “era of shareholder activism.”

For much more, see post by Lejla Hadzic and Eric Shostal, More Shareholders Call for Political, Climate Risk Disclosure: A Post-Season Review of 2010 Environmental and Social Proxy Proposals, RiskMetrics Group, 7/15/2010. See also Should shareholder proposals serve as an early warning system for emerging risks and retail challenges? by Sanford Lewis and SIF proxy season recap call by Paul Hodgson.

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SEC Creates New Mailboxes for Dodd-Frank Rulemakings

With an agenda full of mandated studies and rulemaking related to the Dodd-Frank Act, the SEC is trying a new approach to obtaining public input: Inviting public comment on a number of topics even before they get started through a number of e-mail boxes. Staff will also “try to meet with any interested parties who seek to meet with us,” according to Mary Schapiro. (SEC Open For Dodd Frank Rulemaking Comments, ComplianceWeek, 7/27/10) The Commission will post all submissions sent to the e-mail boxes. See also, SEC Offers “Comment Letter” Field Day – But Also Limits Staff Meetings,, 7/28/10.

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Minow v Minow

Nell Minow claimed another award recently. The University of Chicago gave her an Alumni Association 2010 Professional Achievement Award. In her coverage, Meg McSherry Breslin includes this interesting bit of history concerning a run in with her father, Newton Minow, the former chairman of the Federal Communications Commission and a senior counsel at the Chicago law firm Sidley & Austin.

The elder Minow ran afoul of his daughter’s long-running efforts to get corporate directors to take their jobs more seriously. While working with the Aon Corporation to strengthen its board, Nell Minow realized one of the directors—her father—had missed far too many board meetings. She didn’t hesitate to call him to task.

“She called me one day and said, ‘Dad, this is going to be one of the hardest conversations I’ve ever had with you,’” recalls Newt. “She said, ‘We advise our clients never to vote for anybody who hasn’t attended 75 percent of the meetings.’ I said, ‘You’ve got to be kidding me! I’m your father!’”

Newt Minow was voted in regardless that year, but he proudly claims he’s never missed a board meeting since. “And I believe what Nell is doing is correct,” he says. “Boards clearly are better today than what they were.”

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Shareholder Value Review in Your Future?

Wealth Creation: A Systems Mindset for Building and Investing in Businesses for the Long Term (Wiley Finance) by Bartley J. Madden combines several concepts like systems theory, lean production, Deming’s Plan-Do-Check-Act learning cycle, key performance variables (metrics) and a valuation model with greater emphasis on the cost of capital (including human capital) into a “competitive life-cycle” view of the firm.

Companies that adopt Madden’s methodology may be able to overcome Schumpeter’s model of high innovation followed by competitive fade, maturity and eventual failure. Shareowners are more likely able to key in on valuation issues using a longer-term perspective and are likely to be less startled with earnings surprises.

Madden argues against “fair value” accounting, arguing that a measure of economic return should express what was received, against what was given up. That can’t be properly measured if the original cost outlays are unavailable but supplementary information on estimated market value would be a plus.

Although he recognizes the need to account for intangibles (especially around human capital), he provides little guidance in this area other than recommending that whatever definitions are utilized should be tagged using XBRL to enable fine-grained analysis. However, one slim volume can’t be faulted for not providing detailed guidance to every step in a recipe.

The book includes a helpful chapter on corporate governance where he calls most management arguments against greater shareowner involvement like their supposed short-termism “a smoke screen because the plain fact is that CEOs want to either hand-pick board members, or at least have veto power over nominees.”

One idea of Madden’s that deserves to catch fire is the “shareholder value review” (SVR), where boards demonstrate in the annual report how they are fulfilling their duty to shareowners to create wealth. Such reviews would include three key elements:

  1. A description of the valuation model used to connect the firm’s financial performance to its market value, plus a description of how the firm is organized and managed in order to nurture a performance-oriented culture.
  2. Value-relevant track records that chart the wealth-creation/dissipation performance for each of the firm’s major business units.
  3. A description of each business unit’s strategy and the related rationale for planned reinvestment or downsizing if the unit has no reasonable plan for well-above-cost-of-capital economic returns.

Again, Madden emphasizes use of XBRL in facilitating the ability of both directors and shareowners to be able to drill down through life-cycle track records to perform customized analysis.  Shareowners have recently had some success in filing resolutions requesting that companies include various environmental reports in their annual reports. It would be interesting to see shareowner proposals seeking inclusion of SVRs and their eventual use by funds such as CalPERS in developing their focus lists of underperformers.

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New Resources: Sustainability Quotes, Crisis Timeline, Cal Corp Law & Proxy Access Avoidance

Quotes – The Business Case for Sustainability & CSR Reporting: Selected Quotes from the Business Community July 2010. Tim Smith of Walden Asset Management, offered up  a helpful resource providing a selected set of quotes from CEO’s and company CSR reports on the business case for Sustainability and CSR reporting highlighting how they contribute to shareowner value.   Business leaders explain in their own words why their companies are stepping up on Sustainability issues and how they contribute to the business and its bottom line. The research was done by Carly Greenberg, a Summer Associate at Walden and a student at Brandeis University. You can download it from the Socially Responsible Business/Investments section of our Links page.

Sullivan & Worcester recently announced a free resource for law and corporate librarians, researchers and reporters. The Financial Crisis Timeline is a full chronological directory of the Federal Government’s actions relating to the financial crisis since March 2008. Links take the user to government press releases or government web pages.  You can also find on our Links page in the History section, for future reference. (Hat tip to Dan Boxer, University of Maine School of Law)

Keith Bishop, a partner in Allen Matkins, recently started a blog devoted to California corporate and securities law issues. For future reference, you can find it on our Links page in the Law section. As I recall, Bishop first came to my attention after 1991, when the Rules Committee of the California Senate appointed him the Senate Commission on Corporate Governance Shareholder Rights and Securities Transactions.

For companies seeking to aviod proxy access, J.W Verret (Truth on the Market) posted the second of two strategies. Proxy Access Defense #1 involved adopting poison pills.

In Selectica, summarized by Pileggi here, the Court held valid a poison pill with a 4.99% trigger.  At first glance this seems to be a great twist for those of us who remain skeptical of the federal government’s intrusion into this foundational issue of state law.  Boards could just lower the pill trigger to 4.99%.  Then even to the extent shareholders could afford to obtain a 5% interest in a company, those who did not already own a 5% interest at the time of the pill’s adoption would not be able to obtain an interest sufficient to nominate onto the corporate proxy.

Even after enactment of Dodd-Frank, Verret speculates this tactic might work at most companies, since the threshold being considered by the SEC for small companies is 5%. The latest strategy offered up by Verret in Proxy Access Defense #2 is even more insidious:

The Delaware General Corporation Law gives the board and the shareholders the co-extensive authority to adopt bylaws setting the qualification requirements necessary to become a director.  There is very little case law interpreting this provision, other than the general rule from Schnell v. Chris-Craft that powers granted to the corporation may not be used in an inequitable manner.  Qualification requirements based on experience, education, and other background-like variables would likely survive scrutiny, particularly where they are adopted well in advance of a threatened proxy fight.

The key element in such a bylaw would be that the Board would serve as the ultimate interpreter of the provisions.  For example, a qualification provision could require directors to have 20 years of experience at a comparable company in the same line of business.  The Board, then, would determine whether that requirement has been met, and only after the proxy contest has actually happened.  Under the holding in Bebchuk v. CA, a shareholder challenge to such a facially neutral bylaw would likely not even be justiciable until a shareholder nominee actually won the contest.  And yet, the prospect that the Board will invalidate the director may discourage nominees in the first instance.

I wonder if Professor Verret also offers advice on how to circumvent tax codes, the Occupational Safety and Health Act, or the Americans With Disabilities Act. Harvard must be pleased to have such a distinguished scholar. Hopefully, most companies will seek to work with their shareowners but I suppose there will always be companies like Apache that may find Verret’s strategies appealing. No, I’m not adding these posts to our Links page. Hopefully, they will fall under the category of fantasy.

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TCL & GMI Merge

Two of my favorite corpgov organizations announced a merger today. Governance Metrics International has merged with The Corporate Library, “uniting the two leading global corporate governance research and risk ratings firms.”

This merger creates the world’s leading independent firm dedicated to the development and sale of corporate governance risk ratings, governance advisory and analytical services and a suite of online global ESG information products and services for the investment market…  Following the merger, our clients will have an in-depth, global resource for addressing ESG risks, supported by the demonstrated expertise of both companies’ senior analytical teams.  The combined company covers more than 5,400 of the world’s largest companies with in-depth data, ratings, and other analytics.

It appears there will be no immediate change to systems or products but that they will be  exploring potential opportunities for integrated services and products driven by market demand. See press release and FAQs. I thought they were each fantastic, doing very important work. I can’t wait to see what synergies develop. Congratulations to all involved and I’m delighted to see that familiar staff will continue under CEO Richard Bennett.

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Annual Elections & Short-Termism

Annual elections of directors, do they ensure accountability to shareowners or encourage companies to concentrate too much on short-term returns. I was surprised to read the following in Responsible Investor (UK: stewardship elusive as pension funds buck governance code, 7/21/10):

Hermes, Railpen and the Universities Superannuation Scheme – with combined assets of £106bn (€126bn) – have written to companies in the FTSE 350 saying they would back them if they ignore the Financial Reporting Council’s recommendations on annual elections. The trio are worried that annual elections – a key, though controversial, plank of the FRC’s new Corporate Governance Code – could lead to a “short-term culture” and undermine collective decision-making.

The article goes on to say the National Association of Pension Funds, Confederation of British Industry and Standard Life Investments also favor terms of three years. The Council will review the code in three years, should US investor groups do the same?

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Crisis of Capitalism

The Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) has posted an animated lecture by sociologist David Harvey, which asks if it is time to look beyond capitalism, towards a new social order that would allow us to live within a system that could be responsible, just and humane. I found it both informative and entertaining… but then my training was also as a sociologist. Hat tip to Cliff Feigenbaum of the GreenMoney Journal for bringing to to my attention.

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Dodd-Frank Webinar

President Obama just signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Time/CNN coverage). The Act contains a number of governance-related provisions that will affect all U.S. public companies—and their boards, and is likely to increase the influence of shareowners in corporate governance matters almost immediately. The NACD and Weil, Gotshal & Manges are putting on a complimentary webinar to help you understand the bill’s likely impact. Although focused on boards, I’m sure it will be very informative to shareowners as well. Registration. Overview of the act. Friday, July 30, 2PM-3:15PM (Eastern time)

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More Reports on the 2010 Proxy Season

Florida SBA. Several reports on the results of the proxy season piled in yesterday. One came from Florida’s State Board of Administration (SBA). During the fiscal year ended June 30, 2010, they executed votes on 3,568 public company proxies covering 28,284 individual voting items, including director elections, audit firm ratifications, executive compensation plans, mergers, acquisitions, and other management and shareowner proposals. The SBA voted for, against, or abstain on 73.3 percent, 24.8 percent, and 0.1 percent of all ballot items, respectively. Of all votes cast, 26.1 percent were against the management-recommended vote, down from 31.1 percent during the same period ending in 2009. Key voting items included:

  • Director Elections—Board elections represent one of the most critical areas in voting since shareowners rely on the board to monitor management. The SBA supported 73.2 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about candidate independence, attendance, or overall board performance. The SBA policy is to withhold votes from directors who fail to observe good corporate governance practices or demonstrate a disregard for the interests of shareowners. Some of the highest director opposition in 2010 occurred at the following companies: AGCO Corporation (Francisco Gros received 68 percent withhold vote), Helix Energy Solutions Group (Bernard Duroc-Danner received 71 percent withhold vote), Interline Brands (Gideon Argov received 60 percent withhold vote), Kopin Corporation (David Brook received 68 percent withhold vote), and Skywest, where three directors received a majority of opposition votes (including Ralph Atkin with 76 percent against, Ian Cumming with 63%, and Steven Udvar-Hazy with 55% opposition).  The Board reelection at Massey Energy was notable, with three individual directors narrowly receiving majority support after harsh examination by a large group of the company’s investors. The SBA voted to withhold support for each of the directors mentioned above.
  • Executive Compensation—The SBA considers on a case-by-case basis whether a company’s board has proposed or implemented equity-based compensation plans that are excessive relative to other peer companies or plans that may not have an appropriate performance orientation. As a part of this analysis, the SBA reviews the level and quality of a company’s compensation disclosure—believing strongly that shareowners are entitled to comprehensive disclosures of compensation practices in order to make efficient investment decisions. Over the last fiscal year, the SBA supported 32.7 percent of all non-salary (equity) compensation items—while supporting 93.8 percent of shareowner resolutions asking companies to adopt an advisory vote on executive compensation (a.k.a., “Say-on-Pay”), 61.6 percent of executive incentive bonus plans, and 38.9 percent of management proposals to adopt restricted stock plans in which company executives or directors would participate (33.3 percent for the amendment of such plans).  Compensation-related votes of interest in 2010 included the shareowner proposal to adopt say-on-pay at Chesapeake Energy, which received 56.0 percent support, including that of the SBA. In contrast, a management proposal to ratify executive pay at Motorola received only 45.7% support, with the SBA voting against the compensation structure. The Motorola vote was historic because it was the first advisory compensation vote at a U.S. company to fail to achieve majority investor support. At Comerica Incorporated, the SBA supported the proposal to recoup unearned management bonuses (i.e., adopt “clawback” provisions), which received 54 percent shareowner support.
  • Audit Ratification—Auditors are responsible for safeguarding investor interests and assuring financial statements are presented fairly; therefore, auditor independence and impartiality are paramount in maintaining public trust. The SBA supported over 96.0 percent of ballot items to ratify the board of directors’ selection of external auditor. Votes against auditor ratification are cast in instances where the audit firm has demonstrated a failure to provide appropriate oversight, when there have been significant restatements in the financial statements, or when significant conflicts-of-interest exist, such as the provision of outsized non-audit services.
  • Environmental & Sustainability Reporting— Companies have begun developing policies to improve their environmental sustainability in order to implement new environmental regulations, achieve cost savings, ensure safe operations, and use their resources as efficiently as possible. Increasingly, the SBA has supported general sustainability reporting requirements and improved environmental disclosures issued by companies in its portfolio. Improved corporate reporting allows investors to better gauge a firm’s potential environmental risks and business practices. The SBA supported 93.3 percent of shareowner resolutions asking companies to publish sustainability reports and 72.2 percent of shareowner resolutions asking companies to produce reports assessing the impact on local communities.

SBA continues to post proxy voting records on its website. This real-time vote disclosure occurs in advance of all annual shareowner meetings, normally within a few hours of the proxy vote being cast. Voting information is fully searchable based on date, calendar range, company name, and SBA portfolio. Voting data covers every publicly traded equity security for which the SBA retains voting authority (which excludes most foreign securities). The SBA’s current and historical proxy votes can be viewed here.

Pax World. Pax World Management LLC, investment adviser to Pax World Funds, announced that during the 2010 proxy season it withheld votes from 74 board slates because those companies did not nominate any women directors.

Pax World’s proxy voting guidelines provide that it will generally withhold votes from, or where possible vote against, all board slates that do not include women.  Pax World then sends a letter to the board chair and CEO of the company, letting them know the reasons why Pax did not support their board and encouraging them to embrace gender diversity.  In its follow-up letter to companies, Pax World urges them to address gender diversity on their board by adopting nominating committee charter language specifically establishing that gender diversity is part of every director search. Said Pax World President and CEO Joe Keefe,

We believe gender diversity on boards is vitally important.  When women are at the table, the discussion is richer, the decision-making process is better and the organization is stronger.  Companies that embrace gender diversity and women’s empowerment are, in our view, simply better long-term investments.

There is a significant body of research supporting the belief that companies that are successful in promoting women to the most senior levels of business tend to outperform their peers that do not. A 2007 Catalyst study on board diversity and financial performance, for example, found that those companies with the highest proportion of women on their boards of directors outperformed those with the lowest percentage of women by 66 percent on the basis of return on invested capital.

The value of board diversity has long been promoted by many prominent institutional investors and is increasingly being recognized by regulatory bodies worldwide. Most recently, the U.S. Securities and Exchange Commission adopted a new rule on proxy disclosure that included, among other changes, a requirement that companies disclose whether and how their nominating committees consider diversity in identifying board nominees.

Pax World claims to be the only mutual fund in America that focuses on investing in companies that are global leaders in promoting gender equality and women’s empowerment.  They also established the Pax World Women’s Advisory Council, which is comprised of nationally-known leaders and experts on women’s issues.  The Council assists Pax World in its efforts to advance women and gender equality through the Pax World Global Women’s Equality Fund.

Additionally, Pax World is currently co-leading an investor initiative, in collaboration with the United Nations Principles for Responsible Investment (UNPRI), Calvert Asset Management Company and other institutional investors, focusing on gender equality in corporate leadership and related corporate best practices.  The goal of the engagement, which targets companies in 10 countries in North and South America and Europe, is to encourage the representation of women on boards of directors and in senior management and to promote greater disclosure by companies on the topic of gender equality.

Pax World is also encouraging companies worldwide to endorse and take steps to implement the Women’s Empowerment Principles, a joint initiative of the United Nations Development Fund for Women (UNIFEM) and the United Nations Global Compact (UNGC). Pax World recently sent letters to the chief executive officers of 82 companies held in its Global Women’s Equality Fund, urging them to embrace these principles, which guide the private sector in promoting gender equality in the workplace.

Netflix Now with Woman on Board. Calvert Asset Management and the Connecticut Retirement Plans and Trust Funds (CRPTF) announced the successful resolution of their joint shareholder proposal on board diversity filed with Netflix (NFLX).  The company finally named its first female director effective July 1.  Ann Mathers, an entertainment industry veteran who has served in senior finance roles at Pixar Animation Studios, Walt Disney and Paramount Pictures.

Calvert and the CRPTF filed their resolution on December 1, 2009, asking Netflix to take every reasonable step to ensure that women and minority candidates are in the pool from which Board nominees are chosen and to publicly commit itself to a policy of board inclusiveness. In March 2010, Netflix incorporated language in its corporate governance and nominating committee charter making gender and race a factor in considering board candidates.  The firm announced it would add Mathers to the board on June 16th. Said Barbara J. Krumsiek, President & CEO of Calvert Group,

Netflix has affirmed Calvert’s belief that shareholder value and corporate bottom lines are enhanced by an independent and diverse board.

Connecticut State Treasurer Denise L. Nappier, principal fiduciary of the $23 billion CRPTF, said,

In this economic climate, boards should take every reasonable step to preserve and enhance long-term financial performance. Given the compelling business case for board diversity, the addition of a woman to Netflix’s board of directors is an important and strategically sound step in the right direction.

Both Calvert and the CRPTF have made significant commitments to shareholder advocacy on the issue of board diversity. Calvert began its board diversity initiative in 2002, after new listing requirements mandated an increased number of independent directors.  Since 2001, Treasurer Nappier has filed over a dozen shareholder resolutions on corporate board diversity at a number of companies, including Danaher Corporation and Apple.

Retail Investors Filed Most of 2010’s Majority-Backed Proposals, by Therese Doucet of ISS Publications. After reaching a record high in 2009, fewer governance proposals filed by shareholders obtained majority support this season. As of June 30, 119 (31 percent) of the 384 proposals that went to a vote (and where results are available) garnered majority approval, down from 154 (or 36.6 percent) of the 421 proposals on the ballot during the first six months of 2009, according to ISS data. However, this season’s majority-approval percentage still exceeded the 26.7 percent rate in 2008 and 23.6 percent in 2007.

Individuals filed at least 60.5 percent (72) of the majority-supported proposals, up from 47.4 percent during the first six months of 2009 and 45.2 percent during the same period in 2008. Of the 13 identified retail investors who filed successful proposals this season, the most active were: Gerald Armstrong (with 22 majority-backed proposals); John and Ray Chevedden (21 combined); William and Kenneth Steiner (14 combined); and members of the Rossi family (six). In six cases, companies did not disclose the identity of the proponent.

Unions were the second biggest category of successful proponents, with ten labor pension funds filing 19 (16.0 percent) of the majority-supported proposals. The United Brotherhood of Carpenters submitted the greatest number of these, with five of its proposals winning majority approval. The third most prolific category of proponents was public pension funds. Six funds filed 15 (12.6 percent) of the majority-supported proposals, with New York City’s pension funds responsible for one-third of those.

The continued success by individual proponents is notable, because they generally don’t have the resources to mount public relations campaigns or enlist support from other investors. Retail activists have mostly pursued well-established and widely accepted governance reforms, such as board declassification. Labor funds generally offer several new proposals each season, and it’s uncommon for a first-year resolution to attract more than 50 percent approval.

Declassification resolutions were the most numerous among this year’s majority-supported proposals, with 26. Proposals to eliminate or reduce supermajority voting requirements were the next most popular with 22. The third most successful were the 16 proposals seeking majority voting in uncontested board elections.

Proposals seeking the right of shareholders to call special meetings and to act by written consent each received 11 majority votes, on par with the performance of “say on pay” proposals, which found majority support at 12 issuers. In addition, there was majority approval for three golden parachute proposals, two poison pill resolutions, and an independent board chairman proposal at Ameron International.

A couple of the majority-supported proposals were on less common topics. Investors at Comerica gave 53.9 percent support to a proposal by the Service Employees International Union to recoup unearned management bonuses. Shareholders at Whole Foods Market gave 53.4 percent approval to a proposal from Amalgamated Bank’s LongView Funds to amend the company’s bylaws to allow for director removal. FirstEnergy and Allstate saw the most shareholder proposals win majority support, with three proposals each. At both companies, investors supported proposals to restore the right of shareholders to call a special meeting and to act by written consent. FirstEnergy’s shareholders also supported a proposal for a majority vote to elect directors from an undisclosed investor, and Allstate’s shareholders supported a “say on pay” proposal from AFSCME and Calvert.

Pay Enablers. In their report, Compensation Complicity: Mutual Fund Proxy Voting and the Overpaid American CEO, AFSCME, The Corporate Library and analyzed mutual fund voting patterns on compensation issues in 2009. They found that mutual funds voted in favor of management proposals on changes to executive pay policies at a rate of 84 percent, and ratified executive pay packages at a rate of 77 percent. According to AFSCME Pres. Gerald W. McEntee,

Given the bailout and dismal performance of many companies, investors in mutual funds should be outraged that their assets are being used to ratify CEO pay that in too many cases was undeserved and unearned. Mutual funds hold over 25 percent of the market capitalization of all U.S. companies, and the ten largest fund families manage more than half of all mutual fund assets. These 800 pound gorillas need to start throwing their weight around to demand that CEOs get paid only when they perform.

The mutual fund industry’s four greatest “Pay Enablers,” reported as most consistently enabling runaway CEO pay, were Barclays, Northern, State Street and Vanguard.  According to the authors’ analysis, Barclays was the most enabling, supporting management compensation proposals 96 percent of the time, while its support for shareholder proposals was under 2 percent. The merger of Barclays and BlackRock last year created a mutual fund family with unprecedented power to constrain runaway pay; however, the combined voting record of the merged firms ranks as near the most “Pay Enabling,” along with mutual fund giant Vanguard. ( Barclays would argue that instead of opposing management compensation proposals they discipline board members by voting against compensation committee members where it appears the committees have been ineffective.)

Schwab, BNY Mellon, Dreyfus, Fifth Third and Legg Mason were the funds most likely to vote to rein in pay.  ( Unfortunately, the report did not include SRI funds like Domini, Calvert and others which were even more likely to vote to rein in pay.) These “Pay Constrainers” voted for shareholder proposals designed to tie executive compensation to long-term performance at an average rate of 91 percent. These funds also voted against members of board compensation committees at companies with pay problems at a higher rate than other funds.

The average level of mutual fund support for management proposals on compensation issues was 84 percent, unchanged from 2008. The average level of support for the categories of compensation-related shareholder proposals was 56 percent, a significant increase from the 40 percent in 2008.  Mutual funds were less willing to vote against directors over compensation issues, increasing the average level of support for certain directors from 48 percent in 2008 to 50 percent in 2009.  Mutual funds supported management-sponsored Say on Pay proposals at a rate of 77 percent. director Tracy Stewart said, is pleased to be part of this effort to inform all owners, including the retail shareowner market about mutual fund voting patterns on pay issues. The mutual fund industry plays a critical role in protecting retirement security. Retail investors choosing mutual funds for their 401(k)s and pension assets need to understand how these assets are being affected by mutual fund policies and proxy voting decisions. is glad to educate investors about the proxy voting records of mutual funds on CEO pay, and tools such as those available at make this task much easier.

According to Beth Young, Senior Research Associate at The Corporate Library,

In spite of surveys showing a majority of institutional investors find CEO pay excessive, mutual funds on the whole remained supportive of management positions. Although the overall support for shareholder proposals to reform compensation practices did increase, the wide disparity among funds in voting on compensation proposals indicates that some fund families employ a hands-on approach, while others take a decidedly more passive role in voting on executive compensation issues.

“Compensation Complicity: Mutual Fund Proxy Voting and the Overpaid American CEO” examined the voting records of 25 of the largest mainstream mutual fund families on executive compensation-related proposals at corporate annual meetings from July 1, 2008, to June 30, 2009. The report ranked the fund families according to how they voted in director elections, on management compensation proposals, and on shareholder compensation-related proposals in several different categories including shareholder advisory votes on CEO pay, equity-holding requirements and limiting severance payments.

The Report offers two action recommendations:

  1. Retail investors in mutual funds, which calls Citizen Investors, should critically evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses. New tools such as those available at make this task much easier. ( For example, see their ranking of votes on: director elections, executive compensation, corporate governance, and corporate impact.  Please send them a donation to support their work. Another excellent source of information is Jackie Cook’s Fund Votes.)
  2. Investors should consider shifting their investments from fund families whose voting practices and records are not responsible to fund families with more responsible practices and records, provided the fee and performance characteristics of the funds are comparable. If more responsible fund families are not available — for example, because the investor’s investment is made through an employer-sponsored benefit plan with limited investment choices — the investor should lobby for expanded choices.

Retail investors in mutual funds should critically evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses.  New tools such as those available at make this task much easier. Investors should consider shifting their investments to fund families with more responsible practices and records, provided the fee and performance characteristics of the funds are comparable. This is the fourth report produced by The Corporate Library and AFSCME examining mutual fund proxy voting patterns and CEO pay.

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Annual Meeting Conduct

In the past we have reported on various outrages that have sometimes occurred at annual meetings, like when Whole Foods Markets denied an opportunity for a shareowner proponent to to present their resolution before the vote was taken in 2006. Months later, they issued the following response (Hole Foods Digs Out, 7/2006):

After researching common practices with regard to the presentation of shareholder proposals at annual meetings, we have decided to allow some form of presentation during the formal portion of next years(sic) annual meeting from shareholders who have properly submitted a proposal which has been included in out proxy statement… and will work with our voting agent to improve the timing of the release of the final voting outcome for all proposals.

Broc Romanek has done a great service to both issuers and shareowner activist by publishing a recent survey regarding annual meeting conduct. Now companies won’t have to bother “researching common practices.” (Survey Results: Annual Meeting Conduct, Blog, 7/20/10)

1. To attend our annual meeting, our company:

  • Requires pre-registration by shareholders – 5.9%
  • Encourages pre-registration by shareholders but it’s not required – 13.2%
  • Requires shareholders to bring an entry pass that was included in the proxy materials (along with ID) – 5.9%
  • Encourages shareholders to bring an entry pass but it’s not required – 11.8%
  • Will allow any shareholder to attend if they bring proof of ownership – 57.4%
  • Will allow anyone to attend even if they don’t have proof of ownership – 33.8%

2. During our annual meeting, our company:

  • We hand out rules of conduct that limit each shareholder’s time to no more than 2 minutes – 20.9%
  • We hand out rules of conduct that limit each shareholder’s time to no more than 3 minutes – 26.9%
  • We hand out rules of conduct that limit each shareholder’s time to no more than 5 minutes – 4.5%
  • We announce a policy that limits each shareholder’s time to no more than 2 minutes (but rules are not handed out) – 7.5%
  • We announce a policy that limit each shareholder’s time to no more than 3 minutes (but rules are not handed out) – 3.0%
  • We announce a policy that limit each shareholder’s time to no more than 5 minutes (but rules are not handed out) – 0%
  • There is no limit on how long a shareholder can talk (subject to the inherent authority of the Chair to cut off discussion at any time) – 37.3%

3. For our annual meeting, our company:

  • Provides an audio webcast of the physical meeting, including posting an archive – 25.0%
  • Provides an audio webcast of the physical meeting, but does not post an archive – 7.4%
  • Has provided an audio webcast of the physical meeting in the past, but discontinued that practice – 1.5%
  • Is considering providing an audio webcast of the physical meeting but haven’t decided yet – 4.4%
  • Provides a video webcast of the physical meeting (or is considering doing so) – 1.5%
  • Does not provide an audio nor a video webcast of the physical meeting – 60.3%

4. At our annual meeting, our company:

  • Announces the preliminary results of the vote on each matter (unless special circumstances arise such as a very close vote) – 92.7%
  • Doesn’t announce the preliminary results of the vote on each matter – 7.4%

I don’t recall if Romanek has been doing this survey for several years but it would be nice to know which way some of these items are trending. I would fully expect more companies are offering webcasts but are they becoming more restrictive or less restrictive concerning entry passes and how long a shareowner can talk? More importantly, are meetings open to the press (if so, does anyone bother to attend?) and is the Q&A portion of meetings becoming longer or shorter?

The NIRI also conducted a similar unscientific poll, which also breaks down some information on what shareowner proposals have been submitted and acted on. However, because of the small sample size, it isn’t very helpful on those types of questions.  Hat tip to Gary Lutin for bringing the NIRI poll to our attention.

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Posting Begins for Proxy Plumbing Comments

The SEC has begun posting public comments regarding their Concept Release on the U.S. Proxy System. I will probably focus my own review on Part IV, section B. “Means to Facilitate Retail Investor Participation.” I sent in a set of initial comments dated 7/16/10, which focus on the need for an An Open Proposal for Client Directed Voting, basically a reprint from my post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010.

By posting these comments early, my hope is that others who plan to comment on the Release will read my comments and will be swayed that an open form of what the SEC’s terms “Advance Voting Instructions” is preferable to a restricted form with just a few options. What I would like to avoid is a lot of comments similar to those of Frederick D. Lipman of Blank Rome LLP, who in an otherwise candid and intelligent email said,

I would love to be able to permanently direct my broker to just vote in favor of all management proposals, subject to my ability to revoke that instruction. I would also like the ability to permanently instruct the board of directors’ chosen proxy agents to vote in favor of all management proposals, subject to my ability to revoke that instruction.

While Lipman doesn’t say what his default voting for shareowners proposals should be, I can easily imagine he would have his broker vote against them all, since elsewhere in the email he expresses his concern that “a loud and active corporate governance constituency” could “hijack the shareholder approval process.”

This could occur, for example, if only 20% of the outstanding shares actually voted and they were able to secure the votes of 10.1% of the outstanding shares. In effect, we would be allowing the corporate governance constituency and other activist shareholders with a separate agenda to control the election of directors and other important issues affecting all investors in the company.

Lipman indicates that “If for some reason I decide that I do not like the company, I sell the stock and do not try to change the corporate governance structure. I believe that my attitude is similar to the attitude of most individual investors.”

He may be right concerning the attitude of most individual investors but I think that is simply because as Lipman admits, even though he is the lead author of Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations and Executive Compensation Best Practices (Wiley Best Practices), he does “not have enough economic interest in any of my investee companies to spend the time and effort to analyze their corporate governance situation.”

I don’t find reading proxies a cost effective use of my time either but I don’t subscribe to the idea that shareowners should sell their stock rather than try to “change the corporate governance structure.”

Yes, it can take a lot of effort to submit a shareowner proposal yourself or to run a proxy contest. Unless you hold a large stake in a company, it probably isn’t worth the expense to the individual investor. However, if someone else is undertaking those activities isn’t it worth some very small investment of time to evaluate whether or not they would be likely to improve an already pretty good company?

I urge those who may comment on Part IV, section B to first take a look at sites like and These sites are currently in an nascent stage, but they could eventually allow you to align your votes with an organization that reflects your values, even if those values are simply to make as much money as possible in the short-term.

Right now, those announcing their votes in advance are mostly SRI funds like Calvert and Domini or public funds like Florida SBA and the Ontario Teacher’s Pension Plan. As more funds see there is power in announcing their votes in advance because they sway additional proxies we can fully expect more traditional funds like Barclays Global Investors and Vanguard to also announce in advance.

These funds all have access to proxy monitoring services and spend considerable resources actually reading the proxies. Isn’t it preferable to align your votes with a shareowner that shares your values but independently evaluates management than it is to simply trust and vote with management?

I own BP stock but would have welcomed proposals that would have focused management attention more on risk after the Texas oil refinery explosion. Maybe that would have reduced the likelihood of the current Gulf spill. Even the best managers can often benefit from shareowner input. It seems to me they are more likely to get such input if we have an open process for advance voting instructions than one with very few options.

As I publish this post, I just received an email from Lipman’s iPhone: “I have no problem with expanding the choices.” I hope that sentiment is widely reflected in future comments to the SEC.

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Dodd-Frank, End of Middle Class & Clownfish

I’m off reading the SEC Concept Release on the U.S. Proxy System, aka proxy plumbing, so no time to cover news. Be sure to download Mark Latham’s helpful Table of Contents with page numbers in doc or pdf format. Broc Romanek has all the coverage of the Dodd-Frank bill that I need… although it will be a while until I get around to reading the “condensed 605-page version.” (US Senate Passes the Dodd-Frank Act: What You Need to Do Now, 7/16/10)

Just to keep us all inspired to continue working on a Friday: From, 22 Statistics That Prove The Middle Class Is Being Systematically Wiped Out Of Existence In America and 15 Appalling Facts About Wealth And Inequality In America. If that isn’t enough, there’s Increased CO2 Causes Clownfish to Lose Sense of Smell, Swim Toward Predators (,  7/7/10):

Researchers at James Cook University simulated CO2 levels within the range predicted for the end of the century with clownfish larvae.  The experiments tested their behavior at increasing concentrations.   At 550 ppm of CO2, the current concentration, larvae were able to detect a predator and swim in the opposite direction, but as the concentrations rose to 700 ppm, only half the larvae swam away, with the other half swimming toward a predator.

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Enter's WayBack Machine

In July 2000 we reported reaction to Delaware’s new law which allows corporations to hold shareholder meetings solely in cyberspace. Karen Hampton of Ford said webcasting of meetings will increase. Charles Elson, of the Center for Corporate Governance at the University of Delaware, indicated he likes to “see people eye-to-eye. Yet the world is changing.” Larry Hamermesh, a law professor at Widener University said meetings could get out of control “if you have 5,000 people online who all want to be heard.”

Many seem to miss the point. I don’t know of anyone who opposes Internet broadcasting of the meetings or voting online. Of course it’s easier for shareholders to attend online and all companies should facilitate access. The problem isn’t that meetings will get “out of control.” By meeting solely in cyberspace it will be much easier for management to ensure there are no unexpected or embarrassing questions, no surprises. When 5,000 shareholders online want to be heard, someone will need to select which questions will be addressed. Prescreening and prescripting become much more likely. Management will be more in control of the process than ever before. In 2010, as more companies ramp up toward virtual meetings, we finally seem to be grappling with some of the issues.

Also ten years ago, we reported that the Investment Company Institute is paid by companies in the industry.  Half of the dues come out of shareholders’ pockets. Yet, 39 of the 45 members of ICI’s governing board work for fund-management companies. The other six are “independent directors” of member funds. Individual investors are being “taxed” but we have no representation. In 2010 the picture remains much the same. Take a look at the current ICI board and tell me who represents individual investors?

Five years ago, in July 2005, I brought reader attention to James McConvill’s The False Promise of Pay for Performance: Embracing a Positive Model of the Company Executive, largely a critique of Bebchuk and Fried’s Pay Without Performance. Bebchuk and Fried ask how we can improve that link, while McConvill is more focused on increasing executive productivity through other means. Both areas warrant attention. Even though we know a decision may be wrong, we tend to go along with the majority to stay in their good graces, resulting in a “reputational cascade.” How we are socialized and the words we use have real world impacts. Do we really want to reinforce the notion that CEOs should be primarily driven by the acquisition of personal wealth? Placing too much emphasis on external rewards, such as pay, may have the effect of diminishing internal incentives to do our best. McConvill’s research finds a stronger correlation between democracy and happiness than wealth and happiness.

We also reported that President Bush’s nominee to head the SEC, Congressman Chris Cox, has among the worst anti-consumer records in Congress. As a private attorney, Cox helped William Cooper peddle his Ponzi scheme to the public, costing small investors as much as $130 million. The US Senate Banking Committee is holding a 7/26/05 confirmation hearings on Cox. Cooper went to jail; Cox went to Congress. Ask your Senator to subpoena Cooper and Cox’s billing records to find out what Cox really did or didn’t do for Cooper. How would the world of finance changed had he not been confirmed?

Five years ago, we also noted CII’s support for changes that would “presumptively provide for the election of directors by a majority of votes cast for and against, unless otherwise provided in the certificate of incorporation or the bylaws.” “The benefits of this change are many: it democratizes the corporate electoral process; it puts real voting power in hands of investors; and it results in minimal disruption to corporate affairs—it simply makes boards representative of shareowners.” Five years later we’re still fighting for majority vote on a company by company basis.

Also five years ago, Institutional Shareholder Services, the nation’s largest proxy advisory firm, has reportedly agreed to pay more than $10 million to acquire the Investor Responsibility Research Center, which was founded in 1972, has been struggling to compete since becoming a for-profit entity four years ago.

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Do Directors Get Adequate Support?

For the past few months, Alex Todd of Trust Enablement Incorporated, has been conducting a survey to determine to what extent corporate directors feel they are receiving sufficient support to perform their duties.  Although he has already compiled interim results, the survey will remain open in order to obtain a sufficiently large sample size for a more granular analysis by corporate structure and director role.  All participants will receive a copy of the summarized findings. I urge all directors to complete the survey, which only takes a few minutes.

As of the end of June 2010, 59 responses had been received, with approximately a 60% to 40% distribution from directors of for-profit vs. not-for-profit companies respectively.  Two thirds of the responses were provided by non-executive directors.  Mr. Todd is urging more response from directors of government agencies, co-operatives, and family businesses, which have been under represented to date.

The survey finds distinct difference in responses of directors serving on boards of for-profit and not-for-profit companies but findings are aggregated until larger numbers allow higher confidence for reporting according to type, size, corporate structure, etc.

Overall,  it appears directors feel their boards could benefit from more director engagement, professional development, and information resources.  At the same time, corporate boards appear to be averse to investing in director development resources, especially new and innovative ones.

In summary, (download survey summary):

  1. Three quarters of boards do not have a director development budget.  For those that do, the average was just over $8,000 per director (ranging from $1,000 to $25,000), only about half of which was actually spent.  What was spent, was used mostly for informal director education, such as seminars and workshops.
  2. Although all or most directors arrive to board meetings fully prepared, about a third reported all or most directors to be only occasionally or rarely prepared.
  3. More than half of directors reported they rarely of occasionally make use of additional resources beyond directors’ briefing binders, despite most occasionally or frequently having unanswered questions while preparing for meetings; most frequently they want to know what else they should consider before taking a position on an issue.
  4. More than 40% of directors report that at least  one or a few directors on their board are insufficiently engaged, and have insufficient knowledge and intellect to perform their duties.  However two thirds report that all or most directors exhibit professionalism in the boardroom, despite almost half reporting that at least one or a few directors do not apply appropriate board procedures nor make use of a sufficient variety of information sources, with more than a quarter reporting the same for all or most directors.
  5. Formal and informal director education top the list of most desired resources to help directors do their job.  There is also interest in having access to support services from internal corporate staff, self-serve online information and research services, live on-demand director Q&A support resources, and access to external subject matter experts.
  6. Impact on board performance, provider credibility, and compliance requirements top the list of board criteria for approving additional director development resources.
  7. Two thirds of directors felt it unlikely that their boards would be willing to BETA test an innovative new services to help directors do their job better.  Half of those would only consider doing so if the service were endorsed by a trusted internal source, such as the board chair or corporate secretary.
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Shorting the Least Transparent

24/7 Wall St. reviewed the performance of 50 companies Audit Integrity rated “Least Transparent” in the month of June, including three with“Insider Trading.” Among the largest companies in the list, the average return was a negative 8.6% in June compared to a drop of 7.75% for the Russell 1000. Smaller companies fared worse, with an average return for June of a negative 13.83%.  (The 24/7 Wall St. Fifty Least Trustworthy Companies in America, A Look Back, 7/13/10. Hat tip to Sanford Lewis.)

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Hedge Fund Avoids Shareowner Vote on Sale

Activist hedge fund Strategic Turnaround Equity Partners (STEP) is taking legal action against Detroit-based United American Healthcare Corporation (UAHC). UAHC apparently amended its bylaws so it did not need approval from regulators and shareowners to issue in excess of 20% of its shares to Pulse Systems. STEP portfolio manager Gary Herman branded UAHC as “the company with the worst board in America” and said:

They have entered into a series of transactions that have significantly impaired the value of the company and caused cash to go out the door to a related party. This whole series of events is rotten through and through. The board of directors have not acted in the interests of shareholders. On top of all that, UAHC has not held an annual meeting in over 600 days… The transactions with Fife are wrought with self-dealing and at the expense of shareholders. The company violated every principle of its fiduciary duty and loyalty to the shareholders and the company. We will pursue all the parties involved with these transactions to the fullest extent of the law.

STEP filed a lawsuit in Detroit to compel UAHC to hold an annual meeting so shareowners can vote on its proposed slate of directors. A similar case filed in a federal court was dismissed on what Herman calls “a technicality,” with the judge indicating the case should be heard in a state court. RiskMetrics Group has advised shareholders to vote in favour of STEP’s proposed nominees. (Hedge fund takes legal action as proxy battle intensifies, Hedge Funds Review, 7/12/10 – hat tip to Andrew Shapiro)

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Proxy Plumbing Concept Release

As expected, the SEC met this morning and unanimously approved a concept release on revamping portions of the U.S. Proxy System. There is a 90-day public comment period for this release. The SEC staff will collect comments and, if they deem it necessary, make a recommendation to the SEC commissioners for a rule change or series of rule changes in this area.  I will be preparing comments around several issues and would welcome input and feedback from readers of the blog.


Last year, SEC Chairman Mary Schapiro directed the Commission’s staff to undertake a comprehensive review of the U.S. proxy system – the system that governs the way in which shareholders can vote their shares regardless of whether they attend shareholder meetings.  Today, more than 600 billion shares are voted at more than 13,000 shareholder meetings every year.

In the three decades since the Commission last conducted a comprehensive review, there have been dramatic changes affecting the operation of that system.  Those include technological innovations, changes in the nature of stock ownership, consolidation of proxy distribution service providers, growth in other types of proxy service providers, and new financial products.

What is the U.S. proxy system?

The U.S. proxy system governs how investors vote their shares on matters presented to shareholders at shareholder meetings.  Most investors vote their shares by proxy – that is, they give authority to someone else to vote their shares according to their instructions.  This means that investors can vote their shares without having to attend shareholder meetings.

Many investors are “record owners” – that is, their names are listed in the company’s shareholder records – and they can vote their shares directly by granting a proxy.  The vast majority of investors in U.S. companies, however, hold their shares in “street name” – that is, in customer accounts with a securities intermediary, which is usually a broker or bank.  To vote their shares, these investors, who are also known as “beneficial owners,” typically give voting instructions to their securities intermediary or to a third party (known as a “proxy service provider”) retained by the securities intermediary to receive voting instructions on its behalf.

In turn, the securities intermediary will reflect the beneficial owners’ voting instructions when executing its proxy for shares held in its customer accounts.  Ultimately, proxies from record owners and proxies from securities intermediaries (reflecting voting instructions from beneficial owners) are delivered to a vote tabulator to determine the outcome of the vote.

What issues does the concept release address?

The concept release, which requests comment on matters relating to the U.S. proxy system, is organized under three general areas:

  1. Accuracy, transparency, and efficiency of the voting process. See, for example, my May 15, 2009 petition to the SEC regarding blank votes.
  2. Communications and shareholder participation.
  3. Relationship between voting power and economic interest.

The specific matters covered in those areas are:

Over-voting and under-voting of shares:  At times, a broker-dealer – or other securities intermediary – may cast more votes, or fewer votes, than the number of shares that the intermediary actually holds. This imbalance results from the way securities transactions are cleared and settled in the U.S. markets.

Some securities intermediaries, primarily broker-dealers, have developed methods to reconcile their records and allocate votes to their customers in order to avoid “over-voting.”  One of those methods, however, may result in “under-voting,” which occurs when investors who are allocated the ability to vote fail to do so, and other investors who do vote may be allocated a number of votes fewer than the number of shares they hold.

The concept release seeks comment on whether over-voting or under-voting is a problem, and if so, whether the method used by the broker-dealer to allocate votes should be disclosed, and whether the Commission should require the use of a particular method.

Vote confirmation:  The concept release explores the possibility of requiring vote tabulators, securities intermediaries, and proxy service providers to provide each other with access to vote data so investors and issuers can confirm that votes have been received and tallied according to investors’ voting instructions.

Proxy voting by institutional securities lenders:  Institutional shareholders often lend their securities, and shares on loan generally cannot be voted by the lender unless the shares are recalled.  Without sufficient advance notice of the matters to be voted on, lenders may not be able to recall shares in time to vote on matters of interest.  The concept release examines whether shareholders would be helped by requiring the agenda items at shareholder meetings to be identified earlier, so that lenders can make a decision to re-call their shares and vote on issues important to them.  In addition, the concept release explores whether mutual funds and closed-end funds should be required to disclose the number of shares that a fund votes at a particular meeting, in addition to how that fund votes.

Proxy distribution fees:  Stock exchange rules, last revised in 2002, establish the maximum fees that a member broker-dealer may charge an issuer as “reasonable reimbursement” for forwarding proxy materials.  In response to concerns about whether this fee structure continues to constitute reasonable reimbursement, the concept release discusses several potential actions, including having the stock exchanges revise the fee schedule or eliminate it in favor of allowing market forces to determine appropriate fees.

Issuers’ ability to communicate with beneficial owners of securities:  Some issuers have expressed concerns that they are limited in their ability to communicate directly with their shareholders.  These issuers cite the “street name” system of ownership, as well as rules allowing beneficial owners to object to having their identities disclosed to issuers, as reasons for this concern.  Among other things, the concept release seeks comments on whether to preserve, eliminate, limit, or discourage the use of objecting beneficial owner status.

Potential means to facilitate retail investor voting participation: The concept release presents several ideas that could potentially improve retail investor voting participation, including:

  • Improving investor education
  • Enhancing brokers’ Internet platforms
  • Permitting advance voting instructions for retail investors – See An Open Proposal for Client Directed Voting at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010.
  • Enhancing investor-to-investor communications
  • Improving the use of the Internet for distribution of proxy materials
  • Data-tagging proxy-related materials:  At the suggestion of the SEC’s Investor Advisory Committee, the concept release seeks comment on whether data-tagging proxy-related data, such as information relating to executive compensation and director qualifications, might enhance a shareholder’s ability to analyze issuer disclosures to make informed voting decisions.

Role of proxy advisory firms:  Some companies and investors have raised concerns that proxy advisory firms may be subject to conflicts of interest or may fail to conduct adequate research and base recommendations on erroneous or incomplete facts.  As a result, the concept release seeks comment on improving disclosure of potential conflicts of interest, enhancing regulatory oversight over the formation of voting recommendations, and requiring eventual public disclosure by proxy advisory firms of their voting recommendations in Commission filings.

Dual record dates:  Companies set a date – known as the “record date” – on which persons who are shareholders on that date are entitled to receive notice of a meeting and to vote at the meeting.  If a shareholder sells after the record date, that person (who no longer holds the shares) still has the right to vote.  This can mean that holders without an economic stake in the matter can influence the outcome of a vote.

Recent changes to state law, however, now allow for “dual record dates” – one for determining who is entitled to receive notice of the meeting and a later one for determining who can vote at the meeting.  The concept release requests comment on whether the Commission’s rules should be revised to accommodate dual record dates.

“Empty voting”: The concept release requests comment on whether “empty voting” and related activities are being used to inappropriately influence corporate voting results.  “Empty voting” occurs when a shareholder’s voting rights substantially exceed its economic interest in the company – that is, its voting rights are “decoupled” from its economic interest.  For example, if a holder of shares buys a put option to sell those shares, the holder retains voting rights on all of those shares, even though it has hedged away at least some of its economic interest.  Empty voting can also occur if a shareholder sells its shares after the record date of a shareholder meeting, but before the meeting.  In that instance, the shareholder retains the right to vote those shares, even though it no longer has an economic interest in those shares.  The release requests comment on, for instance, whether the Commission should consider requiring disclosure of decoupling activities as a possible regulatory response.

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An Open Proposal for Client Directed Voting

According to the SEC, “client directed voting” will be included in a forthcoming concept release on “proxy plumbing” issues and SEC Chairman Mary L. Schapiro now indicates review by the Commission is forthcoming (see this post on the Forum). It is critical that shareowners become familiar with this term. The SEC can shape their concept release to facilitate entrenchment, by essentially reestablishing a limited form of broker voting, or their framework can further the interests of shareowners and the larger society through an open and competitive system.


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

Retail investors are the principals in the principal-agent system of corporate governance. We are the beneficial owners of all equities – in the U.S., 25 to 30 percent via direct purchases, and 70 to 75 percent via our “ownership” of shares in mutual funds, pension funds and other intermediaries. The agents in our corporate governance system include CEOs, boards of directors, institutional investors, proxy advisory firms, compensation consultants, etc. An “Open Proposal” on CDV will improve the accountability of all these agents to the principals by empowering retail investors with better information and voting tools.

Since Stephen Norman coined the phrase in 2006, the concept of CDV is generally attributed to him and his work with NYSE’s Proxy Working Group. Looking back at the origins of the concept, on October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting in the election of directors. Two months later in December 2006, Steve Norman presented a proposal called Client Directed Voting to an investor communications conference.

The case for CDV was again made on the Harvard Law School Forum on Corporate Governance and Financial Regulation by Frank G. Zarb, Jr. and John Endean (available here). Similar to Norman, the voting options presented were severely restricted to the following: (1) in proportion to other retail shareholders; (2) in a manner consistent with the board’s recommendation; or (3) in a manner that is contrary to the board’s recommendation.

John Wilcox’s post several weeks later, Fixing the Problems with Client Directed Voting, helped to expand and popularize the concept beyond Norman’s initial concept with a much more open proposal.

Shareowners and the SEC would be well served to review the work of Mark Latham, a member or the SEC’s Investor Advisory Committee, who proposed something similar to CDV at least as far back as the year 2000. See The Internet Will Drive Corporate Monitoring and other papers on the Publications page). In stark contrast to Norman, Latham’s proposed system is open and competitive, using a market-driven framework. This post builds on his work, especially Latham’s recent post, Client Directed Voting Q&A, also found on the site.

How Open CDV Would Work

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

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

Engagement requires either a fiduciary obligation, which we won’t have for retail shareowners, the perception of value in the process (which may take years to establish) or passion around relevant issues. Of the three, passion around relevant issues will be the easiest to ignite.

Many third-party platforms or voting feeds will be designed around “issues,” rather than harder to understand policies and procedures. That will naturally appeal to a broader base of retail shareowners. More people will choose voting advice around policy concerns, like global climate change, than around procedural concerns, like whether or not the roles of board chair and CEO should be split.

A small but important percentage of retail shareowners will get more involved in helping to determine voting feed reputations. They will compare feed quality and issue/value identification by such means as creating focus lists at See, for example, this page.

Most retail investors will only pay attention to the best-known voting feeds. A small minority of institutional and retail investors, along with writers in the financial media, are likely to become the most influential opinion leaders helping to determine public reputations, and thus which of potentially hundreds of voting feeds deserve to be followed.

Investors should be able to choose voting feeds and instruct our brokers to implement them for our shares. That is powerful because it takes little time, yet can implement intelligent voting based on reputation – just as the reputations of carmakers and computer makers are widely available and influence our purchases.

There is already a healthy base of “brands” developing with Domini, Calvert, Florida SBA, CalSTRS, CalPERS and others announcing a growing number of their votes in advance of annual meetings. In addition, there are plenty of other sources of voting advice besides institutional investors, many of which focus on a limited number of issues and many can already be seen at

Moxy Vote has already built an open CDV platform on a relatively low budget. Proxy Democracy and Transparent Democracy can be readily enhanced to include voting capability if the SEC adopts additional data standardization and if cost reimbursement is forthcoming from issuers. See comments submitted by to the SEC here.

Essential Elements of Open CDV

The key issue in any open CDV system is to let shareowners control where their electronic ballots are delivered. Just as there is no question shareowners can control where hardcopy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party content providers an opportunity to compete and improve the quality of voting advice.

Additional elements for a more effective CDV system include:

  • A wide range of voting opinion sources that will eventually cover all issues;
  • Open access for any new opinion sources to publish their opinions;
  • Open access for shareowners to choose any opinion source for our standing instructions on voting;
  • Sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote (or by beneficial owners of funds that may choose to “pass through” their votes).

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

Third-party CDV systems, like Moxy Vote, will allow investors to create hierarchies of voting instructions. (Vote like X. If X hasn’t voted the item, vote per Y. If Y hasn’t voted, vote per Z, etc. Eventually, these systems could become very complex. Vote like X on issue A; vote like Y on issue B, also specifying defaults if either X or Y don’t have votes recorded.)

If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around “proxy assignments.” Proxies assigned to organizations or individuals, for example, could give annual meetings a new meaning. See Investor Suffrage Movement by Glyn A. Holton.

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

Impact of Open CDV

We are a long way removed from those days and advance notice requirements would preclude much of the activities Gilbert made famous. Voting at meetings is important, but having a say in setting the agenda on what will be voted on is even more powerful. If a significant number of proxies are assigned to others or thousands of shareowners routinely follow specific voting advisors or institutions, leading voices can actually begin to influence how agendas for annual meetings are set.

An Open Proposal will increase both the quantity and the quality of voting by both retail and institutional investors. Ease of voting and the ability to align with valued brands will drive quantity. Increased quality will result from competition between voting opinion sources for reputation in the eyes of investors. Opinion sources will include institutional investors, retail investors, bloggers, activists and professional proxy voting advisors funded by new mechanisms discussed later in this article.

An Open Proposal will cause retail shareowners to engage in proxy voting because it offers several new and powerful ways for us to do so, while respecting our other interests and time constraints.

Additionally, institutional investors will begin to discuss their votes with each other more frequently, as well as with beneficial owners and funds. This is already happening. I have personally initiated such dialogues with several funds and have increasingly been met with a favorable response. As funds learn how and why other funds are voting, many are open to reexamining their own position.

Director elections in particular will be more closely watched, once shareowners gain a sense of empowerment. Prior to nascent CDV sites, we had little or no basis for voting against or withholding votes from individual directors. Soon we will be able to drill down through recommendations to discover which directors are over-boarded, miss meetings, have potential conflicts of interest, were on compensation committees that overpaid executives, etc. Funds will increasingly provide the reason for their votes, since that will drive more investors to vote with them. When a fund discloses not only their vote, but also the reason for their vote, investors get a better picture of their values and we begin to trust given “brands” as consistent with our own values.


Limiting CDV to only selected situations, like uncontested elections, would only lessen the benefits of CDV, so I don’t recommend imposing any such limits. It would be better not to establish any CDV through regulations that severely limits voting options, since once such systems are enacted they will be difficult to amend, given that those who benefit from such limitations will be in an even stronger position to fight opening up the process.

All matters should be eligible for inclusion in a CDV arrangement. All can be handled the same way, with the retail shareowner voting as per standing instructions to use specified voting feeds. Preferably, systems should allow users the ability to override standing instructions in any given situation. Competition among voting feeds will encourage those who create them to constantly improve their voting quality and reputation. One improvement is to adapt their analysis and voting decisions to the significant variation among proposals on any given matter. Another is to create industry specific analysis. Analysis could also vary by a company’s maturation and/or a great many other factors. Deeper levels of analysis are more likely with open CDV systems that enhance competition.

System Defaults

The default choice should either be whatever the shareowner selects or it should be a “not voted” vote, just like if a voter fails to mark an item on the proxy, that item should be left blank, although it is now often counted in favor of management. (See my petition to the SEC for a rulemaking on “blank votes” here)

Counting a blank vote as anything else would make mounting campaigns to deny companies a quorum much more difficult. Neither brokers nor anyone else should be permitted to vote on any ballot item in the absence of voter instructions (i.e., all items should be considered non-routine matters in NYSE rules).

Brokers/banks should not be forced to take on CDV design responsibilities. Other third-party specialist firms will probably do a better job. The key is to ensure that brokers or their agents deliver ballots to whomever the shareowner directs. Of course, it would also be a plus if brokers and banks would make their clients aware of the available options.

Competition for Funds Would Enhance CDV

I would recommend an ongoing competition open to providers of investor education, which would compete for funding allocated by retail investor vote. This could be limited to education about voting issues (informing CDV, providing voting opinions, organizing voting opinion data feeds, discussing reputations etc.), or voting could be included in a broader retail investor education competition. For more explanation, see Mark Latham’s Voter Funded Investor Education Proposal (November 30, 2009).

This would benefit all retail investors. Since the benefit is shared broadly, it should not be paid by individual retail investors, but rather through funds that we own collectively – corporate funds. There are several possible ways of arranging this. One example is Mark Latham’s Ultimate Proxy Advisor Proposal (June 1, 2010).

Under that proposal, companies pay voting advisors selected by their shareowners. Since there are no “free riders” and the advice is essentially paid for by all shareowners, we can pay much more for proxy research on our companies than current proxy advisors typically allocate. Additionally, the advice we get is less likely to be of a “box ticking” nature, more likely to be industry and company specific.

The SEC should encourage the development of shareowner selected proxy advisors by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to those who undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a company’s shareowners.

In the near term, the entrenched agents in our corporate governance system may try to prevent investors from using our funds to empower ourselves this way, so enabling regulations from the SEC and public funds may be helpful to get started. Public funds earmarked for retail investor education and advocacy could be used for the first such initiatives.


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

If the SEC publicly encourages the development of CDV, many organizations are likely to build the necessary systems. As previously mentioned, voting opinion websites have already started appearing (,, To enhance their quality, public funds earmarked for retail investor education and advocacy could be allocated by investor vote among such competing providers of tools for CDV.

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

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

The fees that Broadridge is charging to electronic voting platforms (RiskMetrics, Glass Lewis, ProxyGovernance, Moxy Vote, etc.) should be paid by the issuers as part of the overall collection costs (like postage). The electronic platforms, in this function, are merely an extension of the proxy distribution agent. However, I understand that Broadridge charges on the order of 10X for electronic vote collection from these platforms than it is permitted to charge the issuers.

If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less? Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners)

My understanding is that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year) and that electronic platforms are generally passing along these costs to voters. That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes and many more per ballot transactions, relative to shares voted.

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

The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like that should be sharing in this incentive, since shifting to electronic from paper voting saves money. That would be a simple way of beginning to address the cost issue. The most fundamental point regarding costs is that issuers should bear the actual cost of voting, not shareowners or CDV systems.


An open CDV system improves corporate governance because voting advisors will make it easier for shareowners to meaningfully participate in voting, without having to read through proxies. Open CDV systems do this by allowing shareowners to informally build individualized proxy voting policies, much like formal policies maintained by many institutional investors. Unlike many institutional investors, who may ponder over their voting policies for months, retail shareowners will mostly build default policies based on brand identification. Voting advisors, chosen by shareowners through competitive markets for shared information, will help make agents more accountable and democracy in corporate elections an emerging reality.

(Note: this post is reprinted from Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010 at 9:08 am)

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SEC Priorities

You’re reading this because you’re interested in improving corporate governance. It’s also pretty safe to believe that you are pleased with the sections of the almost final financial regulation bill that are intended to improve proxy access for minority shareholders. I hope that this means that you are also bemused and concerned by the recent pronouncement of SEC Chairman Schapiro (at the Society of Corporate Secretaries and Governance Professionals, no less) that the agency intends to take a close look at the rules for risk disclosure by registered companies (WSJ, Johnson, 7-10-10, SEC to Act Quickly on Risk Disclosure Issues).

I’m not against better risk disclosure by any means, but with everything the SEC now has on its plate on account of the new bill and otherwise, not the least of which is writing regulations to implement the new proxy access rules, (WSJ, Scannell, 7-12-10, SEC Enters Overdrive to Prepare for Overhaul) it makes little sense for it to voluntarily assume additional burdens. I’m also not sure that there is much wrong with the existing rules. Anyone who reads corporate disclosure documents can readily get a feel for the risk profile of the registrant right now. Perhaps the existing rules encourage or require overly detailed disclosure, which impairs the value of the material to the non-professional investor, but the information is still there for anyone who wants it and cares enough to sift through it. The plain English rules also facilitate use of the information. Ultimately, I don’t think the existing rules for disclosure of risks or other things are a serious problem or should be a high priority at this time.

I’d much rather see the SEC devote its scarce resources to what it states in the Scannell article are its top priorities – proxy access and market stability (not to mention prevention of Madoff-style fraud):

Agency officials, however, say they remain committed to completing two sets of high-profile rules: one that will allow shareholders to directly nominate director candidates using company ballots, known as proxy access; and several rules aimed at leveling the playing field in the stock market and shoring up perceived holes, such as banning so-called flash orders and creating a better way to track stock-trading information.

Now that so much headway has been made legislatively toward better governance, let’s hope the SEC keeps its eye on the ball during implementation. Some pithy comments to this effect from readers of this site to Chairman Mary Schapiro via e-mail, other Commissioners and staff would likely to go a long way toward making this the case.

Publisher’s Note: Thanks for guest post from 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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TIAA-CREF Annual Meeting

TIAA-CREF, the nation’s largest pension system and a leader in corporate social responsibility, has come under fire from a coalition of academics and activists who are questioning TIAA-CREF’s commitment on a range of social responsibility issues.

“TIAA-CREF’s tagline is ‘financial services for the greater good,’ but it seems like the only good they are concerned about is the bottom line,” said James Keady, Director of Educating for Justice and long-time active member of the coalition.

Coalition reps will be at the upcoming CREF annual meeting on Tuesday, July 20, 9:30 AM, at TIAA-CREF’s  NYC headquarters and plan to pressure TIAA-CREF to stop outsourcing  jobs overseas, firing whistle-blowers, investing in sweatshops, and paying its CEO 10 million dollars a year.

“After years of member lobbying, TIAA-CREF finally agreed to talk to some of the companies we have focused on,” said Keady.  “Unfortunately, TIAA-CREF’s method of ‘quiet diplomacy’ over the past five years has not led to any substantive changes.”

The coalition believes that TIAA-CREF can and should do more. Its Policy Statement on Corporate Governance reads, “While quiet diplomacy remains our core strategy…the TIAA-CREF engagement program involves many different activities and initiatives, including engaging in public dialogue and commentary…  engaging in collective action with other investors…  seeking regulatory or legislative relief…  commencing or supporting litigation.”  It is time for TIAA-CREF to get aggressive with these companies.

If you are a member of TIAA-CREF willing to attend the meeting, the coalition asks you to contact Neil Wollman. If you are not in the system, you can still send a personal message to CEO Roger W. Ferguson, cc  [email protected]. You also call 800-842-2733 or 212-490-9000 and ask for CEO Roger Ferguson and leave a recorded message.

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Proxy Plumbing in Three Parts

According to a post by Jeff Morgan of the National Investor Relations Institute (SEC Previews Proxy Mechanics Concept Release), tomorrow’s concept release from the SEC will consist of three parts (meeting to begin at 10 am EDT):

  1. Accuracy, transparency, and efficiency in the voting process: over-voting and under-voting, vote confirmation, voting and securities lending, proxy distribution costs including e-Proxy fees and client-directed voting.
  2. Shareholder communications and participation, including: the NOBO/OBO classification system, the need to increase retail investor participation in proxy voting, investor education, shareholder forums, whether e-Proxy has been successful, and the feasibility of data tagging proxy and vote filings.
  3. The relationship between voting power and economic interest of shares, and discuss proxy advisory services oversight, record date issues (dual record date feasibility) and empty voting.
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Risk, Sustainability & Responsibility

In the 21st century, corporate health and success are inextricably linked to the adequacy of security management. Poor security management can lead to operational disruptions and financial losses. For this reason, boards of directors need to take ownership of security in the same way they take ownership of other critical aspects of the business. To achieve long-term sustainability, security should be integrated into daily management activities and elevated to strategic concern… Investment in security can pay rich dividends to the organization in many ways, not only by enhancing reputation and market share but also by improving efficiency through operational cost reductions, minimized disruptions, and increased productivity.

Security as a Critical Component of Corporate Defense by Sean Lyons published as The Conference Board Executive Action Report, No. 330, July 2010, provides boards of directors, who tend to be removed from the conception and design of corporate defense management programs (CDMs), a top-down strategic approach that ensures a cohesive corporate culture attentive to defense issues. It aims to for reduce the typical silo-type mentality by promoting information-sharing procedures and collaboration across the enterprise through a four phase approach involving: Risk Identification, Risk Assessment, Risk Response, and Risk Monitoring.

Michael R. Young offers advice in The Board and Risk Management (The Corporate Board, July-August/2010). At the board level, risk management “best practices” have yet to be written. Although every company is different, “Expertise and sophistication can be strengthened by having a Chief Risk Officer report directly to the risk committee as well as to the CEO… such an approach might be the best way to capture the desired expertise and sophistication, while integrating information and perspectives.

From Transparency to Performance: Industry Based Sustainability Reporting on Key Issues, co-authored by Steve Lydenberg of Domini Social Investments, Jean Rogers of Arup, and David Wood Hauser of the Center for Nonprofit Organizations at the Harvard Kennedy School of Government, to devise a method to identify ESG factors that are most relevant to the full range of stakeholders, and can best promote improved corporate performance on vital social and environmental issues.

The report develops a system to identify key performance indicators (KPIs) by industry sector, with the goal of creating a regulatory regime with concise, comparable metrics that set a mandatory floor for sustainability reporting. The report applies this method to five sample industries to demonstrate how such a system might hypothetically be implemented within a US reporting context. These KPIs are based on three core principles — simplicity, materiality, and transparency.

To meet the dual challenges of comparability and practicability for establishing KPIs by industry and sector, the authors developed a six step method as follows:

  1. Assemble a broad universe of sustainability risks or opportunities that could apply to all industries.
  2. Select an industry classification system.
  3. Establish a definition of materiality to address non-financial issues.
  4. Apply the materiality test to the sustainability issues potentially applicable to each industry sector.
  5. Rank the materiality of these issues within each industry and establish a threshold that defines those issues that are key.
  6. Create a tailored set of key performance indicators for the most material issues for each sector.

The authors then apply the approach to six industries, chosen in order to represent a diversity of business practices. Five categories of impact were then evaluated at the sector or sub-sector level:

  1. Financial impacts/risks: Issues that may have a financial impact or may pose a risk to the sector in the short-, medium-, or long-term (e.g., product safety)
  2. Legal/regulatory/policy drivers: Sectoral issues that are being shaped by emerging or evolving government policy and regulation (e.g., carbon emissions regulation)
  3. Peer-based norms: Sustainability issues that companies in the sector tend to report on and recognize as important drivers in their line of business (e.g., safety in the airline industry)
  4. Stakeholder concerns and societal trends: Issues that are of high importance to stakeholders, including communities, non-governmental organizations and the general public, and/or reflect social and consumer trends (e.g., consumer push against genetically modified ingredients)
  5. Opportunity for innovation: Areas where the potential exists to explore innovative solutions that benefit the environment, customers and other stakeholders, demonstrate sector leadership and create competitive advantage.

Among the report’s key findings are:

  • Mandatory reporting regimes create better disclosure, which, when incorporating key sustainability performance indicators, can lead to better performance in those areas most crucial to stockowners, other stakeholders, and society.
  • Defining a limited number of KPIs that relate to core business activities can help contribute to a balanced reporting regime that serves the dual demands of comprehensiveness and practicability.
  • A method for identifying KPIs for all industry sectors that is simple, material and transparent can be developed and implemented with a reasonable degree of effort by oversight bodies.
  • Mandatory reporting on a basic of set of KPIs is ultimately necessary to fill varying disclosure needs of our diverse society and complete the convergence of financial and sustainability reporting.

Although both British Director accountability and American CEO primacy tackle the fundamental principal-agent problem, a basic comparative analysis of the British Codes and the American Sarbanes-Oxley Act reveals a relevant normative asymmetry. While the British regulations have been historically more prescriptive with the responsibilities of Executive and Non-Executive Directors, the American norms seem to point more clearly at the CEO and CFO as those ultimately responsible for corporate governance liabilities. (British Directors’ Accountability vs. American CEOs’ Primacy by Simon Kinsella, and Giampiero Favato)

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End of Middle Class in US

James Fallows reports something that rings true to me from the Aspen Ideas Festival, quoting some comments by Bharat Balasubramanian, an engineering executive from Daimler AG in Germany (Today’s Pithy, Cautionary Note on Economic Trends, The Atlantic, 7/10/10):

I will state that there will be a polarization of society here in the United States. People who are using their brains are moving up. Then you have another part of society that is doing services. These services will not be paid well. But you would need services. You would need restaurants, you would need cooks, you would need drivers et cetera. You will be losing your middle class.

This I would not see in the same fashion in Europe, because the manufacturing base there today can compete anywhere, anytime with China or India. Because their productivity and skill sets more than offset their higher costs. You don’t see this everywhere, but it’s Germany, it’s France, it’s Sweden, it’s Austria, it’s Switzerland…. So I feel Europe still will have a middle level of people. They also have people who are very rich, they also have people doing services. But there is a balance. I don’t see the balance here in the US.

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Populism Begins in the Boardroom

There is an intriguing place where we might begin the work of a renewed economic populism: in corporations, not the capital. If the goal of populism is the amelioration of life for the many, then President Obama could strike a confounding (in a good way) pose by calling on the private sector to take up an idea put forward this week by Fareed Zakaria: unleash a corporate stimulus. “The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets,” Fareed writes. “By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century. And yet, most corporations are not spending this money on new plants, equipment, or workers…[Such] investments would likely have greater effect and staying power than a government stimulus.” A populism that begins in the boardroom—that would really be change we could believe in. (The Right Kind of American Populism and Obama’s CEO Problem, Newsweek, 7/12/10).

I’m not sure Obama has the power to get the private sector to start spending. Congress certainly didn’t do a good job of tying bank bailouts to bank loans. However, I certainly agree with Jon Meacham and Fareed Zakaria, populism could begin in the boardroom.

Imagine a political system in which the incumbents get to select all election candidates, and voters have no choice but to vote for these nominees, or not vote at all. Such “democracy” rules the US proxy process by which investors elect corporate board members. Now, an “open ballot” movement among big shareholders is working to shake up how boards are elected.

The Magna Carta was drafted in response to the excessive use of royal power, while the move for proxy access stems from the abuse of power by management at Enron, WorldCom, Tyco and others.

The first clause of the Magna Carta guarantees “freedom of elections” to clerical offices of the English church to prevent the king from making appointments and siphoning off church revenues. A shareholder’s Magna Carta would prevent managers from having undue influence over corporate boards and will prevent them from using corporate coffers as their personal bank accounts.

Think markets and proxy contest are the answer? Who has enough to buy BP? Even after much of the wealth has been destroyed, the takeover and transition of poorly governed corporations back to profitability is also expensive, generally estimated to range between two to four percent of the value of the firm. There may be very heavy transaction costs for employees through layoffs, lost wages, increased divorce and suicide rates, as well as to communities in the form of lost taxes and charitable contributions. In contrast, the cost of proxy driven changeovers have run considerably below one percent.

In August of 1977, the Business Roundtable recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” Their memo noted such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” Now the BRT seems to think proxy access will be the end of the world.

In “Toward Democratic Board Elections,” published by The Corporate Board (7-8/2003) I noted, “After years of allowing shareholder proposals concerning elections, the SEC in 1990 issued a series of no-action letters ruling that proposals concerning board nominations could be excluded. Proposals by institutional investors were beginning to win majority votes. Perhaps the SEC realized failing to issue no-action letters could soon have consequences.” The court in AFSCME V. AIG came to the same realization three years later.

Competition for board positions has traditionally stimulated share value. Researchers have found that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions. Investors who bought firms with the strongest democratic rights and sold those with the weakest rights would have earned abnormal returns of 8.5 percent per year during a sample period.

It is paradoxical that the standard justification for autocratic practices in industry is its alleged efficiency, since empirical research results do not support that conclusion. Increased rank-and-file responsibility, increased participation in decision-making and increased individual autonomy are all associated with greater personal involvement and productive results.

The keys to creating wealth and maintaining a free society lie primarily in the same direction. Both require that broad-based systems of accountability be built into the governance structures of corporations themselves. By accepting the responsibilities that come with ownership, pension funds and other institutional investors have the potential to act as important mediators between the individual and the modem corporation. Indeed, populism that begins at the boardroom could change populists could believe in.

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