Archive | August, 2010

Climate Change Disclosures

Yesterday, Michelle Leder had an interesting post, Climate change, baked goods and Sara Lee … at  ESG disclosures concerning global climate change are increasing in 10-k and 10-Q filings. Leder cites Molson Coors disclosure in its recent 10-Q:

While warmer weather has historically been associated with increased sales of beer, changing weather patterns could result in decreased agricultural productivity in certain regions which may limit availability or increase the cost of key agricultural commodities, such as hops, barley and other cereal grains … Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. Climate change may also cause water scarcity…

See also, Beer, Cheesecake And Climate Change, NPR’s Planet Money, 8/30/10. Hat tip to the CEO of Sustainability Risk Advisors, Mark Tulay, who alerted me of Leder’s post through the Social Investment Forum. Listen to Tulay on Sea Change Radio: Socially Responsible Investment Community Reacts to BP Deepwater Disaster.

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Altman Done With New Corporate Proxy Clients

The Altman Group, a proxy firm founded by 35-year industry veteran Ken Altman, has revealed it will not accept new corporate proxy clients. Deep-pocketed competition in the US proxy space and an exodus of top talent have prompted the Altman Group to focus on other areas, including its main business doing proxy work for mutual funds and closed-end funds. Altman’s exit from the US corporate proxy business coincides with the entry of Alliance Advisors. (Altman shifts course away from US proxy, Inside Investor Relations, 8/19/10) We’ll miss them and hope Altman continues to lend his talents and opinions to important subjects like proxy plumbing reform.

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AFSCME Seeks Muni Bond Victims

Apparently, the SEC is going to hold a field hearing in California in late September… probably in the Bay Area. AFSCME is looking for people who lost money investing in municipal bonds (eg. Vallejo). They would like them to testify at the field hearing and can provide training on what to expect and how to be most effective. Contact Scott Adams. See SEC Steps Up to the Muni Plate, The Bond Buyer, 6/17/10 for additional background.

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Open eMail to NYSE Re Blank Votes

Janet Kissane, SVP & Corporate Secretary
NYSE Euronext Legal & Government Affairs

Dear Ms. Kissane:

Earlier this month the NYSE announced it intends to amend NYSE Rule 452 to prohibit members from voting uninstructed shares if the matter to be voted on relates to executive compensation, including “say-on-pay” proposals, at meetings occurring after July 21, 2010. An exception will be made for those meetings on which the NYSE has issued a “may vote” ruling prior to July 21. As you know, the driver for this amendment is Section 957 of Dodd-Frank, which also prohibits voting of uninstructed shares by member organizations in the election of directors (excluding companies registered under the Investment Company Act of 1940) and in other matters as determined by the Securities Exchange Commission (“SEC”). I would like the NYSE to recommend to the SEC that NYSE members be also be prohibited from voting all uninstructed proxy items on shares with some instruction. Continue Reading →

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Video Friday

This Week in the Boardroom generally has interesting videos every week. The 8/26/10 post, New Proxy Access Rules, featured TK Kerstetter, CEO & President, Corporate Board Member; Scott Cutler, Executive Vice President, NYSE Euronext and Stephen Lamb, Partner, Paul Weiss. Be sure to check out prior editions, such as the 8/5/10 interview with Kenneth Bertsch, Executive Director, Morgan Stanley Investment Management, providing institutional shareowner views.

Corporate governance’s last chance saloon: Peter Butler (FT, Jul 27 2010) Peter Butler says the UK’s new Stewardship Code offers a chance to get it right and if shareowners can’t do so it will open the door to heavy regulation and litigation. (4m 9sec)

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Proxy Access Concerns

I received the following from Andrew Shapiro, President, Lawndale Capital Management, LLC yesterday afternoon.

This morning, the SEC released and approved final rules relating to Proxy Access. These rules were a bit changed from earlier comment releases and greatly limit practical use of the new rule. The full adoption release (451 pages) can be found at

I haven’t come close to reading the full release yet but several opinions come to mind.

First and foremost, I am most pleased with and grateful that the SEC passed rules making it easier for shareholders of companies to submit 14a-8 shareholder proposals providing for proxy access rules that can be stronger and superior to the minimal and weak proxy access standard the SEC has passed this morning. Of course it is important that state laws support and provide for any stronger proxy access rule passed by shareholders to be mandatory and enforceable, not advisory.

Criticisms of the minimalist SEC Proxy Access rule itself.

Criticism 1) The idea of exempting small company boards from the increased accountability that proxy access might provide shareholders is frankly #ssbackwards. Shareholders of smaller companies, having already lost corporate governance protections from various other small company exemptions (e.g. certain Sarbanes Oxley provisions, etc) are most in need of proxy access to offset the more prevalent dysfunction found in small company board’s governance.

Criticism 2) There are substantial fixed costs to conduct a traditional proxy contest to force accountability upon a poorly governed company’s board, regardless of that company’s size. This is a huge barrier to shareholders and entrenchment protection for bad boards and management’s of smaller companies. The costs saved for shareholders of smaller companies via the implementation of proxy access serve a far greater proportional savings and reform role than they do in larger company contests.

Criticism 3) One particular aspect of proposed exemptions from proxy access for smaller issuers is the definition often proposed for “small company” which measures “public float” [generally of less than $75MM.] Use of “public float” to measure an issuers size rather than straight market capitalization exacerbates the basic problem.

The more shares held by those “affiliated” with the issuer, the higher the overall market cap of the issuer that would gain the exemption and the more issuers that will be exempted from proxy access. Yet it should be quite obvious that the more shares held by affiliated parties, the greater likelihood of an insular, dysfunctional and completely unresponsive board.

Here’s how why or how this point works:

  • Company A – $75MM market cap or lower (no matter what the “affiliated” ownership is – exempt from proxy access
  • Company B – $80MM market cap and NO “affiliated” ownership – subject to proxy access;
  • Company C – $110MM market cap company but with 35% “affiliated” ownership means market float of only $71.5MM (100-35%affiliated = 65% public times $110mm market cap)

Thus this larger small company is also EXEMPT. Yet with 35% insider ownership, the accountability mechanism of proxy access is most necessary.Note again – with such high insider ownership in Company C, above, passage of a shareholder 14a-8 proposal to establish an even stronger proxy access rule (where it would seem most needed) is almost impossible.

Criticism 4) The amount of director representation allowed under proxy access is limited to only 25% of a board rounded down. This means that, with boards of 7 or less directors, only ONE director can be nominated via proxy access. Note, with a director’s motion requiring a second to even get entered in a Board’s minutes, there is very limited influence a single director may bring to a board room, especially the most dysfunctional boards. The % membership cap should have been 33% or rounded up with a minimum of nominees always being TWO directors.

Criticism 5) This rule will not greatly alter the amount of disruption, economic and otherwise, that takes place with proxy contests nor meaningfully reduce the number of traditional proxy fights. It is not being duly considered that 50% of the vote is still required to elect alternative nominees, whether on the company proxy via proxy access or on an alternative slate proxy. When the limited amount of director representation allowed under proxy access is coupled with the access rule’s restrictions against subsequently seeking additional representation (even when the additional director numbers comprise far less than change of control), the benefits of proxy access are not compelling when compared to the board representation with no strings attached available for the same 50% majority vote.

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Model CSR Reporting

The John Lewis Partnership’s 2010 Corporate Social Responsibility (CSR) report, A shared passion, summarizes the business’s progress during 2009/10 at

The report includes an update on the Partnership’s commitments to dealing fairly with suppliers, selling responsibly sourced quality products, making a positive difference to the communities in which it operates and reducing its impact on the environment. The examples of the co-owners’ shared passions, and the loyalty and support of customers, suppliers and business associates, help to demonstrate how the Partnership continues to offer a better and more sustainable way of doing business.

Highlights include:

  • Waitrose and John Lewis exceeding targets to improve shop energy efficiency
  • New Responsible Development Framework to govern and guide building projects
  • Setting out its ambition to achieve an absolute reduction in carbon emissions by 2020, despite looking to double the size of its business during that time
  • Reducing emissions from transport by 6.3%, relative to sales, since 2005/06
  • Charitable and community contributions totaling £7.9 million, equivalent to 2.59% of pre-tax profitGRI
  • Waitrose named UK’s most compassionate supermarket 2009/10
  • John Lewis achieving its target to sell 100% FSC-certified garden furniture.

For the first time this year, the report is aligned with the Global Reporting Initiative’s G3 Sustainability Reporting Guidelines, at a self-declared Application Level C.

The John Lewis Partnership’s 70,000 permanent staff – known as Partners – own 29 John Lewis shops, 231 Waitrose supermarkets, an online business, a direct services company (Greenbee), a production unit and a farm, with a combined turnover of nearly £7.4 billion last year.

A model system for developing key performance indicators (KPIs) relevant to mandatory UK sustainability reporting has been put forward in a new research report which can be downloaded from Ethical Performance who also summarized the above report the the John Lewis Partnership.

The company was one of many I studied under a grant from the National Institute of Mental Health about 30 years ago, when I was looking for the ideal form of corporate governance. In the case of the Partnership, employees were very lucky to have a founder, John Spedan Lewis, who thought beyond his own family (much like Billionaires Giveaway: Who is Worthy?).

Lewis was careful to create a very forward thinking governance system, including a Constitution, that would allow the firm to be competitive and democratic, giving every Partner a voice in the business they co-own. Billionaires of today might leave a greater legacy by adopting democratic principles to govern their own companies rather than by donating their riches to charities that often address the externalized costs of businesses.

See also, csr-reporting, CSR Reporting: What Investors Want, and Sustainability and CSR Reporting: There’s An App For That. A Letter to SAP and the future.

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Proxy Access: Private Ordering with High Threshold Minimums

Since filing the initial 21st century petition for proxy access in 2002 with Les Greenberg, I have written extensively on the need. With the 3-2 vote by SEC commissioners, as most expected, it will soon be a reality… in time for at least a portion of the 2011 proxy season. What we proposed back in 2002 was essentially what the Chamber, BRT and other rear-guard organizations have been calling “private ordering.” Let each company decide. Of course, ours was based on what shareowners would propose and pass, not simply on what an entrenched board and management might install without a shareowner vote.

As reported elsewhere, Proxy Access Is In (Lucian Bebchuk and Scott Hirst, Harvard Law School, 8/25/10).

Under the rule, a shareholder (or shareholder group) would need to hold more than 3% of the company’s shares for more than 3 years to be eligible to use the rule to place director candidates on the corporate ballot. These eligibility requirements, together with the rule’s procedural requirements, will place substantial limits on its use. (To illustrate, according to data put together by CalPERS, the 10 largest public pension funds together hold less than 2.5 percent at Bank of America, Microsoft, I.B.M. and Exxon Mobil.)

It should also be noted, the “First to File” rule was replaced with a “Size Matters” rule. As Bebchuk and Hirst indicate, “To the extent that these limits prove excessive, we hope that the SEC will reconsider the thresholds set today.” The limits are excessive but the SEC also voted to amend Rule 14a-8 to enable shareowners to include, on corporate proxies, proposals related to election and nomination procedures, like we could for many years until the SEC reinterpreted that rule, without a rulemaking or even notice, to prohibit such proposals. AFSCME v AIG led to a brief window of opportunity for shareowners when the court overturned that illegal action by the SEC. However, under Cox, the SEC they then changed the rule to prohibit private ordering by shareowners, even suggestions for private ordering, which is essentially what nonbinding resolutions do.

It is very important to have a base threshold. The new Rule 14a-11 puts entrenched managers and boards on notice that they are slightly more likely to be held accountable. Shareowners may be able to nominate and elect up to 25% of the board. While that doesn’t give them any real power to move the corporation in a different direction without the consent of the already entrenched, at least they’ll have a front row seat and will be able to make arguments, if they can get a second. Existing board members might just begin to get the feeling they are accountable to shareowners… not just fellow board members and the CEO.

One of the most important clarifications regarding the revised Rule 14a-8 is contained in footnote 674 of the release, concerning what is meant by a proposal under 14a-8 that may “conflict” with 14a-11.

Under the Proposal, Rule 14a-8(i)(8) would allow shareholders to propose additional means, other than Rule 14a-11, for inclusion of shareholder nominees in company proxy materials. Therefore, under the Proposal, a shareholder proposal that sought to provide an additional means for including shareholder nominees in the company’s proxy materials pursuant to the company’s governing documents would not be deemed to conflict with Rule 14a-11 simply because it would establish different eligibility thresholds or require more extensive disclosures about a nominee or nominating shareholder than would be required under Rule 14a-11. A shareholder proposal would conflict with proposed Rule 14a-11, however, to the extent that the proposal would purport to prevent a shareholder or shareholder group that met the requirements of proposed Rule 14a-11 from having their nominee for director included in the company’s proxy materials.

What the SEC has done is establish “private ordering” with a very high floor. Within a few years, we can expect to see 100s of proposals calling for more reasonable thresholds and holding periods, as well as allowing a greater proportion of shareowner nominees. Corporate governance activists have been given a new focus. Just as we have been struggling to obtain majority vote standards, we will now be fighting for more reasonable nomination requirements. To the John Cheveddens and Ken Steiners of the world I say, “Time to gear up; may a thousand access proposals bloom.” Start with small companies where the SEC has delayed implementation of Rule 14a-11 and where, on average, corporate governance reforms are furthest behind. Have an access proposal ready for next year? Please share it.

See also Pesky shareholder activists gain influence: After years of battling futilely to rein in corporate boards, ‘gadflies’ are winning votes, LATimes, 8/23/10; Speech by SEC Chairman: Opening Statement at the SEC Open Meeting; SEC Approves Final Proxy Access Rule, RMG, Ted Allen, 8/25/10; In 3-2 Vote, SEC Finally Adopts Proxy Access Rule, Compliance Week, 8/25/10; Social Investment Forum Welcomes Federal Proxy Access Rule, 8/25/10; press release,, 8/25/10; ProfessorBainbridge, 8/25/10; The Conference Board blog, 8/25/10; S.E.C. Makes Access to Proxy Ballots Easier, NYTimes, 8/25/10; Jim Hamilton’s World of Securities Regulation, 8/25/10; Activist Shareholders Get a Louder Voice, Sarah Morgan, SmartMoney, 8/25/10; The SEC Adopts Proxy Access,, 8/26/10; The Promise of Access, theRacetotheBottom, 8/5/10. And here’s a paper of mine published by the Corporate Board in July 2003, Toward Democratic Board Elections; Proxy Access & Shareholder Citizenship: The Quest for Inclusion, Marcy Murninghan, 8/26/10.

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Investment Clubs Get Moxie

BetterInvesting, the nonprofit association serving the retail investor primarily through education and investment clubs, announced a strategic partnership with Moxy Vote. BetterInvesting will promote the use of Moxy Vote’s free online proxy-voting service. According to Kamie Zaracki, CEO of BetterInvesting:

We’re excited to work with Moxy Vote. Since 1951, our association has been advocating that investors aren’t simply holders of stock shares — they’re owners of companies who should participate in the ownership by voting their proxies. Moxy Vote makes this easier for retail investors by providing a single site for maintaining proxy information, voting and obtaining information on the issues from their 40 participating Advocate organizations. This partnership will help us fulfill our mission of providing sound education that helps shareowners make better investment decisions.

In their press release, Moxy Vote co-founder Mark Schlegel says:

BetterInvesting has served the investment education needs of more than 5 million people over its history and as a result brings a wealth of experience and insight on how Moxy Vote should market its services to retail investors. Moxy Vote wants to put more information into the hands of retail investors, who hold 30 percent of publicly traded shares, and give the so-called little guy a needed voice in the boardrooms of the companies they own.

This is an excellent development that could very well strengthen both organizations and the overall clout of shareowners IF the partnership is fully embraced by both. I have little doubt that Moxy Vote stands ready to serve but will BetterInvesting actually begin to stress the importance of proxy voting or corporate governance among its members. Do a search on their site for proxy voting or corporate governance and you find virtually nothing.

BetterInvesting has traditionally emphasized how to analyze and buy stock and mutual funds. Little effort has been devoted to what investors can do as owners. For example, I haven’t seen any evidence the organization spends any effort describing governance basics, such as analyzing CEO compensation, possible advantages of annual director elections, why the move to majority voting requirements, how to file a proxy resolution or even what resources are available to help you decide how to vote proxies. If investment club members begin to see themselves as owners, rather than speculators, the partnership could be truly transformative. We should all be watching to see how both organizations follow through.

I hope this is just the start. BetterInvesting could also form partnerships with groups like the United States Proxy Exchange (USPX) and USPX, for example, is training members on how to present proxy proposals at annual meetings so that proponents don’t have to bear the expense of flying across the country to make a 2 or 3 minutes statement at annual meetings. If investment clubs took on this effort with USPX, we could soon have “field agents” at every annual meeting. Investment clubs could also rate and provide seed funding to bloggers and others who provide investor education. Those rated at the top would get the most funding. See prototype.

According to the press release:

Since 1951, BetterInvesting, the brand identity of the National Association of Investors Corporation, has helped over 5 million people become better, more informed retail investors. BetterInvesting, based in Madison Heights, Mich., helps its members build wealth through local, regional and national learning events as well as through Web-based tools, software, member publications and online resources. As the nation’s largest nonprofit organization dedicated to investment education, it provides investing knowledge and practical investing experience through local investment clubs, local volunteer chapters, online courses and an active online community. BetterInvesting and its subsidiary, ICLUBcentral, currently serve over 120,000 investors.

Moxy Vote offers a free online platform at that simplifies the proxy voting process for retail investors. It does this by providing information on the issues at stake and offering the functionality to actually process a vote. Shareholder Advocates can rally like-minded shareholders to vote alongside of them for their causes.  Moxy Vote has been profiled in the Wall Street Journal, New York Times, Investor’s Business Daily, Kiplinger’s and a number of other publications. It has also received favorable reviews from industry experts such as Nell Minnow, Jim McRitchie and Mark Latham.

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Corporate Board Member

Several interesting articles in the current issue of Corporate Board Member. Nice to see coverage there of the Proxy Disclosure blog by Mark Borges, part of the group. Borges spend four years as special counsel at the SEC’s office of rulemaking before joining the Mercer consulting firm. Regarding the new pay disclosure rules,

In the first year especially, it benefits you to be a little bit more explicit. Presumably, if you establish a strong baseline it will keep things in check.

In an article on Best- and Worst-Paid Boards Among the S&P 500, interesting to see Republic Services paid the highest and total shareowner return was 17% in 2009, whereas Fastenal paid the least and shareowner return was 22%. Thankfully, most of the five high paid runner up boards did better for their shareowners than did the five runner up low paid boards.

That article was followed by one by Bruce Ellig who argues that most board members aren’t paid enough. At least part of the basis of his argument is that directors should be paid something close to the same rate per day worked as the CEO. Ellig also argues agains paying board members in stock options, in part because the

terms are either too short for a meaningful measurement or longer than the company might wan to tacitly commit to a director’s continuing on the board.

One answer to a series of questions caught my eye. Who should approve director pay?

Shareholders—but they don’t. Instead, boards typically approve their own compensation, possibly after an analysis by an outside consultant that the board itself paid for. Doesn’t this seem strange? The CEO doesn’t approve his pay package, nor does anyone else in the company. Why should the board members?

The situation wasn’t always like this. Until relatively recently, company insiders were the big majority on boards, and they didn’t collect retainers. But they did vote on how much to pay the few outsiders among them. Reforms have reversed this to where unpaid insiders are few and the paid outsiders set their own pay.

They shouldn’t, of course. Shareholders should be asked to approve the package of director retainers, annual incentives, and stock awards, along with the formulas used to calculate them. This kind of transparency, the same that’s demanded by advocates of a say on pay for executive comp, should include a narrative in the proxy describing how the board put together its compensation figures.

Giving shareowners a say over the pay or directors makes much more sense than giving shareowners a say over CEO pay. Directors in a sense report to shareowners, CEOs do not.

Also interesting to me is the article How’s Your Company Really Doing? I’ve been a long-time proponent of measures like economic value added, EVA. Now “EVA Momentum” addresses some of the problems inherent in EVA like ratios that can be gamed and turnaround situations where companies are or were losing money. Of course past momentum doesn’t necessarily reflect what investors expect about performance going forward but it looks like a useful measure for both board and investors to consider.

Julie Connelly argues Proxy Access: Worth Little More Than a Hill of Beans. I wouldn’t go that far buy it is clear that proxy solicitors, attorneys, public-relations counsel and even pay for director candidates may cost a whole lot more than writing, printing and mailing your own proxies. Maybe so, but I think shareowners will actually be less confused by proxies that list more than one candidate for some positions than they are when getting two proxies for the same company. I think that may up the retail vote. Connelly notes,

Nickolay M. Gantchev, an assistant professor at the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, studied 1,492 campaigns launched by 200 hedge funds between 2000 and 2007. He discovered that fewer than 5% turned into actual proxy contests. Either the dissidents went away or the warring parties reached some kind of agreement.

Will proxy access encourage a significant increase in worthy board candidates? It could, because some portion of their expenses will be defrayed by the company. But board-nominated directors will still have the edge. The board’s real challenge is to put together the best team it can. And to extol the value of that team in, yes, the proxy.

Finally, one tidbit in a side-bar surprised me. In Mind Your Manners in China’s Boardrooms, Craig Mellow notes it is sometimes tricky for foreigners serving on Chinese boards to avoid sounding bossy. On the other hand, he quotes something refreshing from Susan Wang, who sits on the audit committee of Suntech Power,

They may not like pushy foreigners, but they’re freewheeling in offering dissent. “They’ll actually commit to paper a remark like ‘I totally disagree with this strategy,’” says Wang. “Directors are far more cautious on U.S. boards.”

That’s behavior I’d like to see more of here in the US.

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Video Friday is a website that helps a community connect with its elected leaders, by letting voters allocate community funds to competing blogs. It motivates the bloggers to become community media. In this video, students at the University of British Columbia talk about how VoterMedia has helped their student union, which is called the Alma Mater Society, or AMS. In the not too distant future, we hope to be viewing videos of shareowners discussing how VoterMedia and various bloggers have helped transform their companies.

No matter what you think of the following protest at a Target store, expect to see many more like it as a result of the Supreme Court decision of Citizens United. If anything good comes out of that decision it will likely be that it raises awareness of corporate influence over politics. Now, maybe many more will favor reforms to limit their influence. Until then, just as news programs are starting to divide between left and right, we can expect shoppers to channel their money to whichever side they believe is politically correct. See also, 3 shareholder groups call on Target, Best Buy to review political giving after Minn. donations, LATimes, 8/20/10.

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Internal Auditing in Context

Internal auditing received a giant boost with the passage of the Sarbanes-Oxly Act in 2002, which requires company officers signing SEC reports to attest they have implemented the necessary internal controls to ensure they are informed of any material impact over financial reporting. SOX made it mandatory for many companies to determine financial reporting risks, design ways to manage risks, fix problems creating such risks, analyze the effectiveness of control measures taken, re-test and re-document.  Internal auditing got another boost with the financial crisis of 2008. Now, internal auditors could be ready to step up to the plate, becoming the board’s skeptical counselor and trusted advisor.  Swanson on Internal Auditing: Raising the Bar by Dan Swanson can help guide them in that critical role.

After ten years as an auditor, I turned my focus to what I felt were the broader issues of corporate governance. Swanson shares that interest but remains focused on auditing. Much of his writings for Compliance Week, EDPACS, and the Institute of Internal Auditors have been at the forefront of issues like enterprise risk management, overall governance and board interface, compliance and ethics, as well as what is known as IT governance. Swanson covers these and many other topics here in a way that few can with a writing style far more engaging than any of the auditors I ever had the personal pleasure to work with. (see contents)

Key for most auditors are the work papers, especially the point sheets, which reference every finding to the criteria or standard used in evaluation. While Swanson is no rogue auditor, neither is he wearing the blinders I found all too common when I was practicing in the profession. Perhaps one factor is his familiarity with so many auditing models and standards, which can provide conflicting guidance and which he discusses liberally but not to the point of confusion.

While others have called the book a road map, I see it as a key or legend, helping readers interpret the many symbols found on a plethora of maps – tying them together or pointing out their eccentricities. He tells you where to find the most common standards (with ample reference to website addresses) but the book’s real strength lies in his tips. For example, build into the internal audit charter a statement “about the auditor’s open and free access to all information across the organization.”

While many other audit books offer good advice regarding the provision of objective assessment, those who read Swanson could well become catalysts for change – advocating for improvements in an organization’s governance structures and practices. That’s where I used to get into trouble.

While working for the State Controller of California, one of my audit trails led to the Department of Finance. They threw up procedural barriers and got into the Constitutional issues of one branch of government auditing another. I took a vacation day and used the Public Records Act to obtain documents that clearly showed Finance had been making a mistake that cost the State a small fortune in lost federal revenue because of the way they were counting claims processed electronically. Auditors unaware of the big picture would have missed it.

Swanson will help you see the big picture and many of the small details. Twenty years on, I hope there are more auditors interested in viewing auditing in the larger context.

Buzz: Other reviewers, familiar to many readers of, have also praised the book. Here’s just a small sample:

“In Swanson’s hands… internal audit becomes the lantern of Diogenes, illuminating accountability, responsibility and control.” Jon Lukomnik, Sinclair Capital LLC

“…provides concise commentary on strategic issues regarding the way internal audit is established, planned and performed.” Scott Mitchell, CEO of OCEG

“Internal auditing and information security are inextricably intertwined. Dan Swanson is highly qualified to write on the first and uniquely credentialed to write on the second.” Alexandra R. Lajoux, NACD

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CorpGov News Bites

CalPERS. A report from consultant Wilshire Associates found that activist involvement by CalPERS increased returns at many of  the 142 “Focus List” companies. Prior to the pension’s involvement, the companies’ returns averaged 83.3% below their various benchmarks; afterward they yielded returns 12.7% above the benchmarks. Although the cumulative 12.7% is not as high as past results, their corporate governance program still much more than pays for itself. From the report:

Most investment resources in the industry continue to be focused on identifying small misvaluations in publicly traded stocks. This is, perhaps, unfortunate since investors are not earning a satisfactory return on the manager fees and brokerage costs they pay, given the evidence showing that the public stock markets are fairly efficiently priced. However, the evidence is equally clear that many corporate assets are poorly managed and that resources spent on identifying and rectifying those cases can create substantial opportunity and premium returns for active shareholders.

CalPERS announced several actions to address concerns raised by the City of Bell salary controversy, including:

  • Posting audit reviews of public agency membership and payroll data submitted to the retirement system
  • Highlighting significant findings of public agency reviews and regularly report them to the CalPERS Board
  • Establishing procedures and guidelines for CalPERS working-level staff to notify supervisors and senior management of unusually high compensation and salary increases such as those that occurred in Bell

In addition, CalPERS helped establish the Public Employee Compensation and Benefits Task Force, which includes CalPERS staff and representatives public employer organizations, League of California Cities, California State Association of Counties, employee and labor organizations, legislative staff and other, focusing on:

  • Options for providing greater public disclosure of public employee compensation, benefits, and other information related to total employee compensation and benefits
  • Options regarding caps on total compensation that can be considered for retirement purposes
  • Options for mitigating the impact of excessive salaries on the retirement costs of a public employee’s previous public employers and other public agencies in the same liability risk pool

CalPERS had previously announced plans to review the compensation of CalPERS-covered employees who earn $400,000 or more per year in salary.  Phase two of the review will look at CalPERS member salaries of $245,000 per year and above.

On September 7, 2010, from 6:00 p.m. – 7:30 p.m., the Sacramento Central Labor Council and will host a “CalPERS Candidates’ Forum,” moderated by the League of Women Voters of Sacramento County. The forum will be held in the CalSTRS Boardroom at 100 Waterfront Place in West Sacramento, next to the pyramid. We’re trying to arrange for free parking but haven’t confirmed that yet. This is your opportunity to meet and question the candidates. A video of the forum will be archived on the CalPERS website.

Citigroup. Nice item by David Reilly in the WSJ (Citigroup’s Paltry Debt Penalty, 8/17/10) He sides with U.S. District Judge Ellen Segal Huvelle who refused the SEC’s proposed $75 million settlement with Citigroup over the bank’s failure in 2007 to disclose sub-prime mortgage risks. Goldman Sachs recently paid $550 million for a lesser offense but the SEC only wants $75 million from Citigroup. Why go after only two Citigroup executives for the paltry sums of $100,000 and $80,000 and why should shareowners pay for the execs alleged missteps?

The problem is Citigroup shareholders, under current rules, couldn’t necessarily oversee their company. That is partly due to the difficulty in challenging board directors… For shareholders to be held accountable, the SEC has to let them act more like owners.

Unfortunately, even under the SEC’s most probable proxy access rules shareowners may just have a better view of wrong doing and their money sliding away, since even under the best of circumstances they will only get to nominate 1/4 of the board.

Climate Change. With extreme weather mounting and Congress dithering, WRI report outlines what we can do now to reduce GHGs. The summary, “Everything You Need to Know About Global Warming in 5 Minutes,” by Boston investment manager Jeremy Grantham of GMO does a great job of ticking off the causes, consequences, and controversies surrounding climate change. (The Go-Getter Approach to Climate Change, 17 August 2010,

Cooperatives. If sustainable technologies are about the what of the living economy, local and shared ownership designs are about the who: who will own the productive capacity of the nation, who will control it, and who will benefit from the wealth created. Minwind Energy is an example of shared ownership, an emerging, broad category of ownership design in which ownership is shared among individuals (as in cooperatives or employee-owned firms) or between individuals and a community organization (as in a community land trust, where families own their homes while a nonprofit owns the land they stand on). (A Different Kind of Ownership Society, via Yes! Magazine, Marjorie Kelly and Shanna Ratner, 8/3/10)

Corporate Governance. It is no longer realistic to look to government to rectify problems caused in the private sector, or to simply ignore such problems and their broader consequences. We all need to look for innovative ways to avoid such problems, such as using the governance process to do so. (Why Corporate Governance Matters to Everyone, Marty Robins, The Huffington Report, 8/17/10)

With the specter of dramatic regulatory changes hovering over them, U.S. public companies have been acting aggressively to streamline corporate governance practices and establish their executive compensation priorities, according to Shearman & Sterling’s eighth annual Corporate Governance Surveys of the 100 largest U.S. public companiesKey corporate governance findings include:

  • Majority voting in uncontested director elections has been implemented in some form by 82 of the 100 largest companies, up from 75 last year and from just 11 as recently as 2006.
  • Despite amendments to NYSE Rule 452 implemented last year (eliminating broker discretionary voting in director elections), no director standing for reelection at one of the 100 largest companies failed to receive majority support this year.
  • The number of Top 100 Companies at which the CEO is the only member of the board of directors who is not independent increased significantly, rising to 59 this year from 49 last year.
  • The number of Top 100 Companies with classified boards, of which there were 54 in 2004, declined to only 20, and of those 20, more than one-third were either in the process of declassifying their boards or received approval from their shareholders this year to do so.
  • Seventy-one companies disclose they maintain an executive compensation clawback policy (an increase from 56 companies in 2009 and 35 in 2007  — representing a 103% increase in four years). This will become increasingly significant, as the new Dodd-Frank Act mandates clawbacks if a material restatement would have affected the amount received.
  • There was a decrease in the overall number of compensation-related shareholder proposals; however, advisory say-on-pay policies continued to be the most prevalent proposal. In addition, the survey suggests that companies cannot assume that their say-on-pay advisory resolutions will pass. For example, three public companies (including one Top 100 Company) failed to win majority support in the 2010 proxy season.

Economy. Biflation, generally defined as inflation and deflation occurring simultaneously in different parts of the economy—specifically, rising prices for commodities that trade in global markets and falling prices for things bought with credit domestically, like homes and automobiles. (Is ‘Biflation’ Real?, Newsweek, 8/16/10)

Electronic Board Meetings. Despite the obvious advantages of using technology and moving to electronic meeting management, few companies have achieved buy-in and taken board meetings to an electronic platform. Some have, however – and South Jersey Industries (SJI) is one such early adopter. (Best practice: establishing an electronic meeting management process, Corporate Secretary, 8/17/10)

Global Corporate Citizenship. Prof. Surinder Pal Singh outlines how global corporate citizenship rests on four pillars: values; value protection; value creation; and evaluation. These four pillars not only underpin the long-term success and sustainability of individual companies, but are also a major factor in contributing to broader social and economic progress in the countries and communities in which these companies operate. Along with good governance on the part of governments, they offer one of our greatest hopes for a more prosperous, just and sustainable world. (The Concept of Corporate Citizenship in a Global Environment, Political Wag, 8/17/10)

As the US markets continue to debate whether we are still in a recession, on the road to recovery, or headed for a double recession, the Indian government is busy imposing regulations to boost corporate philanthropy and social responsibility. In an economy that continues to post steady growth despite upheavals across Europe and the U.S., India Inc. is increasingly facing scrutiny for its role—or notable absence—in the social and environmental growth of the country. (Forcing CSR in India: Is Regulation the Answer?, The CSR Blog, 8/16/10)

Green Chemistry. Two California departments within Cal/EPA are working to identify “chemicals of concern” in consumer products. Eventually, they will push companies to substitute less toxic chemicals and maybe even ban some of those that are killing us now.

Greenest Campuses. 162 American colleges and universities rated by the Sierra Club. Also includes first steps on Chinese campuses.

Proxy Plumbing. The Shareholder Communications Coalition consisting of the Business Roundtable, National Association of Corporate Directors, National Investor Relations Institute, Society of Corporate Secretaries and Governance Professionals, and the Securities Transfer Association prepared a PowerPoint presentation to explain its recommendations for reforming the proxy voting and shareholder communications rules. “This presentation document is intended to help public companies, investors, and other interested parties understand how the proxy system can be improved to benefit all stakeholders.” This is an important initial assessment of feedback on the SEC’s proxy plumbing concept release. I suspect I will disagree with several parts but I heartily endorse their call to:

  • Do away with the VIF and replace it with a proxy card.
  • Pass voting authority directly to beneficial owners.
  • Enable beneficial owners to transfer their proxy authority back to their brokers or bank (e.g. client directed voting) or to another third-party.

Research in Progress. Stanford’s Rock Center for Corporate Governance and the Corporate Secretary’s organization are conducting a survey “to get some hard data and research on what companies are actually doing and hopefully figure out once and for all what elements of governance reform actually lead to improvements and which do not.”

SECRebecca Files finds that cooperation with the SEC through forthright disclosure of a restatement (e.g., disclosures reported in a timely and visible manner) increases the likelihood of being sanctioned, perhaps because it improves the SEC’s ability to build a successful case against the firm. However, both cooperation and forthright disclosures are rewarded by the SEC through lower monetary penalties. (SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter?, SSRN, 7/14/10)

The SEC settled its suit with New Jersey over securities fraud by issuing a cease-and-desist order, which the state accepted without admitting or denying the findings. No penalties were imposed. According to the SEC NJ claimed it had been properly funding public workers’ pensions when they had not. The SEC has a special unit looking into more public pension disclosures. (Pension Fraud by New Jersey Is Cited by S.E.C., NYTimes, 8/19/10)

The S.E.C. said the fraud began in 2001, when New Jersey increased retirement benefits for teachers and general state employees. New Jersey did not have the money to put behind the new benefits, but every year after that, the state treasurer certified that the pensions were being funded according to the plan.

The SEC finally confirmed they will consider adopting proxy access rules on 8/25. Still no word on threshold, holding period, small issuer exemption. next Wednesday, August 25th at an open Commission meeting. No word on how the big question marks – the ownership threshold and holding period – will be resolved. Sunshine notice. The U.S. Chamber of Commerce has retained Eugene Scalia, the son of U.S. Supreme Court Justice Antonin Scalia, to review the forthcoming SEC rules for a potential legal challenge. (SEC Plan to Pry Open Corporate Boards May Face Challenge, Bloomberg, 8/11/10) J. W. Verret of the George Mason University School of Law has already proposed more than a dozen way to circumvent the law in his paper Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank.

Shareowner Engagement. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, power has shifted to shareholders.  The 2011 proxy season is a game-changer as the rules require boards to seek shareholder support for compensation programs and even directorship candidates. (Directors, Do You have a Shareholder Engagement Program?, Karen Kane Consulting, 8/12/10)

United States Proxy Exchange (USPX).  The USPX is a non-government organization dedicated to facilitating shareowner rights, primarily through the proxy process. They are structured as a chamber of commerce but unlike a typical chamber of commerce—which represents corporate executives—the USPX represents shareowners. Membership includes both institutional investors and sophisticated retail investors—many of whom have finance, corporate or legal expertise from their careers. Together, they work to promote an environment where engaged shareowners create value through the corporations they own. Check out their new website. Please join me; sign up for membership.

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Boardroom Insider

Ralph Ward’s Boardroom INSIDER, August 2010 edition, offers boards quick analysis and advice on what they should be doing now with regard to the Dodd-Frank Act.

While no one in business likes more regulation, Dodd-Frank should be no new Sarbanes-Oxley. On its governance provisions, at least, there’s a sense that the law isn’t trying to lead a crusade, but rather catch up with one already on the march.

One tip for selling your pay plan is to focus less on peer pay levels and more on the actual results an exec has delivered for your company. “A lot of boards go to shareholders using comparables,” notes Dian Greisel, founder of the Investor Relations Group. Instead, show “how we set performance, and that shareholders should want a CEO who is incentivized.”

Ralph Ward authored of the following books: The New Boardroom Leaders: How Today’s Corporate Boards Are Taking Charge, Saving the Corporate Board: Why Boards Fail and How to Fix Them, Improving Corporate Boards: The Boardroom Insider Guidebook and 21st Century Corporate Board. If your board isn’t getting his newsletter, you’re losing out. Each issue offers news you can use.

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CorpGov WayBack Machine

Stepping into the WayBack Machine, here’s just a few of the issues we were covering in the past.

Ten years ago:

“The last time someone voluntarily gave up power was in 1800, when George Washington did it,” said Les Greenberg. Greenberg wants shareholders of cafeteria operator Luby’s to vote in favor of removing anti-takeover devices, electing directors annually and canceling bonuses for management if sales, profits or the share price decline. Oh, and he’s also running for the board. San Antonio Express-News writer Bill Day observed that “a decade after democracy finally sprouted in Russia, Eastern Europe and South Africa, it makes sense that a pro-democracy movement would be pushed in corporations.”

Executive compensation expert Graef Crystal continues to hammer on excessive compensation. By 2015 the ratio of the average executive’s pay to that of the average worker will approach that which existed in 1789, when Louis XVI was king of France. “And you know what happened to Louis XVI,” he says. “And by the way, they got his wife, too.”

Since 1971, this socially responsible mutual fund has made their voting results available to shareholders upon request. Now, with the help of Proxy Monitor, Pax World has taken the next step, joining Domini Social Investments in posting their proxy voting decisions.

Five years ago:

Compensation for directors of large US companies was up 18% in 2004, according to Mercer Human Resource Consulting. Blog reported that two more companies have entered the fold: Circuit City and ADP.

Wilshire Associates told CalPERS the $190 billion fund’s annual target list of underachievers generated an extra 15.3% in stock value over a five-year period, a dramatic drop from 54% in 1995. < One of the most common questions we get from readers is: “How do I get on a corporate board?” Now, Directors & Boards devotes almost an entire issue to that subject.

The Corporate Monitoring Project’s Mark Latham scored a very respectable 11.4% affirmative vote for a recent proxy advisor proposal. Similar to previous resolutions by the Project, it called on Metro One Telecommunications to hire a proxy advisory firm for one year, to be chosen by shareowner vote.

Amnesty International USA (AIUSA) launched Share Power to facilitate the ability of individuals to voice their concerns to institutions that hold investments and are required to vote proxies on their behalf.

In “Tocqueville at 200” a recent Wall Street Journal editorial badly misinterprets Alexis de Tocqueville’s vision. (7/29/05, page W13) Although concerned about possible tyranny by majorities, central to his democracy are three defining elements: equality of rights, separation of powers, and representatives engaging in public debate. For a better take, download Democracy in Corporatia: Tocqueville and the Evolution of Corporate Governance by Pierre-Yves Gomez, Unité Pédagogique et de Recherche Stratégie et Organisation and Harry Korine, London Business School, 10/2003. Magnifique!

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His Lips Are Moving: Deception During Conference Calls

Back in July I posted a question on Compiled Audio/Video Files of Conference Calls: Does anyone know of a resource that contains video and audio files for company conference calls, annual meetings, etc.? I was following up on the potential next phase Stanford University researchers could take in their study of lying CEOs, Detecting Deceptive Discussions in Conference Calls by David F. Larcker and Anastasia A. Zakolyukina. Readers came through and I added a short subsection called “Earnings/Conference Call Research” to the Wall Street Research section on the Links Page.

Earnings/Conference Call Research

Thanks for your responses. Since then, the WSJ picked up on the research with the cleverly titled, How Can You Tell If A CEO Is Lying? (8/11/10), which of course, elicited comments like

  • He is employed?
  • His lips are moving?
  • he is still breathing!

Humor aside, the researchers found that answers of deceptive executives during conference calls:

have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use significantly fewer self- references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words…

We find that our linguistic classification models based on CEO or CFO narratives per- form significantly better than a random classifier by 4% – 6% with the overall accuracy of 50% – 65%…

In terms of future research, it would be useful to refine general categories to business communication. It would also be desirable to adapt natural language processing approaches to capture the context of word usage for identifying deceptive executive behaviors. Finally, it would be interesting to determine whether portfolios formed on the basis of our word-based measure of deception generate future excess returns (alpha) and/or help eliminate extreme losers from a portfolio selection.

Soon after the WSJ article appeared, John Palizza posted Using Computers to Predict if a CEO is Lying at Investor Relations Musings, 8/12/10.

It will be interesting to see if investors pick up on any of this while parsing conference call answers. The Q & A session is already the portion of the call that gets the most scrutiny, and this research will only help to bring more focus to the area.

Then Dominic Jones posted  a very informative How hedge funds analyze your earnings calls on his IR Web Report (8/13/19). Seems the CIA and Goldman Sachs are out ahead:

And that’s exactly what firms like Goldman Sachs and S.A.C. Capital Advisors have done for years, using experts trained in CIA-style deception detection techniques and advanced software developed in Israel that analyzes executives’ voices for signs of stress.

Jones goes on to note that Broker, Trader, Lawyer, Spy: The Secret World of Corporate Espionage, by CNBC reporter Eamon Javers, explains how Business Intelligence Advisors get hired for as much as $800,000 a year by some of the biggest names on Wall Street. BIA claims that since 2001, they have analyzed over 50,000 Q&As, over 4,000 earnings calls across more than 1,500 companies in more than 30 countries using their model, which also takes tone into account, something you can’t get in a transcript.

Jones goes on to cite an earlier study, The Power of Voice: Managerial Affective States and Future Firm Performance by William J. Mayew and Mohan Venkatachalam, which found that negative emotions detected in executive’s voices predict that companies are more likely to miss consensus forecasts during the next three quarters than they did in the previous three.

In a somewhat related post, CEO’s online video mea culpa boosts investment — study (8/16/10), Jones cites another study that found when CEOs take responsibility for financial restatements via online video, investors’ trust in management rises and they recommend larger investments in the firm. (Using Online Video to Announce a Restatement: Influences on Investor Trust and Investment Decisions by professors Brooke Elliott, Frank Hodge, and Lisa Sedor)

I’m hoping all this will be fodder for a couple of young linguistic students I know, one studying in Sweden and the other in Canada. Maybe if they apply themselves during the next decade or so I can visit them in their future mansions… or at least they might be able to pay off those college loans they’re accumulating.

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Billionaires Giveaway: Who is Worthy?

I’m sure many recall the recent spate of articles on the results of a request by Bill and Melinda Gates and Warren Buffett to get billionaires joining in something of a movement to promise at least half of their fortunes to charity. (Pledge to Give Away Half Gains Billionaire Adherents, NYTimes, 8/4/10) One report noted, “Many billionaires taking the pledge have already been active in philanthropy in everything from genetic and cancer research to education, gun control and libraries and the arts.” (U.S. billionaires pledge fortunes to charity, Reuters, 8/4/10)

My wife and I are likely to do the same with our “fortune,” if there is any money left when we die. We haven’t published our The Giving Pledge letter yet but we have been researching where our money might go. While I haven’t read through all the billionaire letters yet, I didn’t see any so far that emphasized corporate governance reforms. (Note to Readers: If you see any such evidence, please send me a hyperlink to the letter.

Through much of my career, I’ve been concerned with the idea that businesses and bureaucracies could be better designed to avoid externalizing costs and to ensure that employees are fully engaged, so that organizations meet their maximum potential. Even if billionaires embrace The Giving Pledge (I think they should), more money around the world is still more likely to be invested in businesses than is given to charity.

Much more attention should be paid to how we can use our charitable contributions to leverage where those investments go and how those making investment decisions behave. With that in mind, I’d like to suggest a few charities to those billionaires and anyone else writing up their pledges or wills that could influence the fundamental rules of capitalism, who controls our resources and what is considered not only when investing, but more importantly, when owning a company.

  • Interfaith Center on Corporate Responsibility. For 40 years the Interfaith Center on Corporate Responsibility (ICCR) has been a leader of the corporate social responsibility movement. ICCR’s membership is an association of 275 fait-based institutional investors, including national denominations, religious communities, pension funds, foundations, hospital corporations, economic development funds, asset management companies, colleges, and unions. ICCR and its members press companies to be socially and environmentally responsible. Each year ICCR member institutional investors sponsor over 200 shareholder resolutions.
  • Investor Suffrage Movement. Educational organization aimed at empowering shareowners. Their “field agent” program helps shareowners file proxy resolutions and saves activists hundreds of dollars in travel expenses by simply getting volunteers to stand up at annual meetings and support resolutions.  From t-shirts to building a proxy exchange database, their focused on involvement.
  • National Center for Employee Ownership. NCEO serves as the leading source of information on employee stock ownership plans (ESOPs) and other forms of employee ownership. Employee owners, who are also involved in meaningful participation in management decisions, are building more democratic businesses from the ground up.
  • Proxy Democracy provides tools to help investors overcome informational hurdles and use their voting power to produce positive changes in the companies they own. They help shareowners vote their shares by publicizing the intended votes of institutional investors with a track record of shareholder engagement. They also help mutual fund investors understand the voting records of leading funds, making it possible to purchase funds that represent their interests and pressure those that don’t.
  • is an advocacy site aimed at getting shareownrs to lobby Congress on various issues. Users can also share announcements and commentaries with others. There is great emphasis on the site concerning the responsibilities of ownership and very little on stock picking.
  • United States Proxy Exchange is dedicated to facilitating shareowner rights, primarily through the proxy process. The USPX is structured like a chamber of commerce. Unlike a typical chamber of commerce, which represents corporate managers, USPX represents shareowners. The group has been instrumental in protecting the rights of shareowners, recently in the case of Apache v Chevedden.
  • is a public interest project for improving voter information and elected leader accountability in the world’s organizations — governments, corporations, unions, nonprofits etc. — by allowing participants to rate and reward information platforms based on value added. Kind of like an instant Consumer Reports for elections.

You can find much more about these worthy organizations by searching or by going to each organization’s web site. Contributing to any one or all of these organizations can multiply the impact of every dollar contributed, since they each seek to influence corporate behavior and corporations are our dominant institutions. As Monks and Minow noted, with only the slight exaggeration suitable for book covers, “Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.” (Power and Accountability) Your contributions can reshape our world by harnessing their power for good.

Also of interest, last week’s “Here & Now” interview Mike Lapham, Director of UFE’s Responsible Wealth project and their discussion of the [possibly] soon-to-expire Bush tax cuts, the estate tax and The Giving PledgeListen to the full interview online today (fourth story from the top: “Some of the Nation’s Wealthy Say ‘Tax Me More'”).
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Attention SEC Commissioners: Read Compliance Week Before Deciding on Access

I hope Commissioners read How to Improve Governance at Small Companies by Stephen Davis and Jon Lukomnik, Compliance Week, August 10, 2010. They’ll soon be making a decision with regard to proxy access. As I’ve mentioned on this blog several times, small companies shouldn’t be exempted… that’s where much of the abuse in corporate governance occurs. I’ve lost money at several companies where the founder got a sweetheart deal with the board on retiring that essentially drained the companies of future revenues for years.

Davis and Lukomnik point to P&F Industries, a maker and importer of pneumatic tools and builders’ hardware. The founder passed the job of CEO onto his son, Richard Horowitz, and the board has awarded $13.5 million in cash compensation during the last 10 years, more than twice the $6.3 million in cumulative profits.

They go on to describe efforts by two shareowners, Andrew Shapiro of Lawndale Capital Management and Timothy Stabosz, to make a difference. While they’ve apparently made some headway, they might have been able to do much more with proxy access. Shapiro is quoted in the article:

It’s a great example of why small companies ought not be exempted. Proxy access could have helped me in the case of P&F because there is such a substantive retail base.

They also quote Stabosz:

The story of P&F industries is a story of no one attending shareholder meetings in past years.

Shareholders need to act like shareowners. They are much more likely to do so if they have the tools needed to hold board members accountable. Proxy access could be the best tool in the box.

Disclosure: The publisher of, James McRitchie, has investments with Diamond A Investors L.P. headed by Andrew Shapiro.

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2010 Board Member Election & Candidate Forum

The CalPERS Board of Administration consists of 13 members – six elected by members, three are appointed, and four are “ex officio” representatives.

A State Board member election will be held this fall. The term of office will be January 16, 2011 – January 15, 2015. You are eligible to vote if you are an active CalPERS State member (employed at a CalPERS-covered agency) on July 1, 2010. A ballot package will be mailed to your home September 3, 2010 and you can vote for a candidate through October 1, 2010. (More Information.)

Elections for the Public Agency and School seats won’t be held, since the incumbents, Rob Feckner and Priya Mathur, are unopposed. Request for certification of their election will be submitted to the Secretary of State, along with the unofficial election results of the 2010 State Board Member Election, in October 2010.

2010 CalPERS Candidates’ Forum


On September 7, 2010, from 6:00 p.m. – 7:30 p.m., the Sacramento Central Labor Council and will host a “CalPERS Candidates’ Forum,” moderated by the League of Women Voters of Sacramento County. The forum will be held in the CalSTRS Boardroom at 100 Waterfront Place in West Sacramento, next to the pyramid. This is your opportunity to meet and question the candidates. Email James McRitchie for more information.

A video of the forum will be archived on the CalPERS website. We are delighted to be cosponsoring this event and are delighted that all candidates, even those who have no opposition, have agreed to participate. This is your opportunity to meet the candidates and to ask them all those tough questions. No reservations are required, just show up.

For those of you who attended last year’s forum, this year will be different. We expect to have many more in attendance, since all candidates have agreed to participate and since it will be held in the CalSTRS boardroom, a very convenient location for many. Please be sure to arrive a few minutes before 6 pm. Seating is limited to 95 people. Sorry, no food or drinks (other than bottled water) are allowed in the CalSTRS boardroom. Please bring a pen or pencil. All questions presented to the candidates must be in writing and will be screened and sorted by League volunteers.

One way to ensure you are kept up-to-date is to join the PERSWatch mailing list using the form at the top of the column to the right. We will not share your e-mail address with others and we won’t barrage your in-box with e-mail.

Parking Update (8/25/10): CalSTRS provides about 30 spaces in the uncovered lot in front every evening for the public and there is more than enough free street parking to handle the rest of those expected to attend. parking is also available in the covered garage at the rate of $1 per half hour. However, there will be no attendant on duty when the forum ends, so you will need to use your credit card to pay in order to exit the parking building.

If planning to park in the uncovered lot in front of the building, don’t arrive earlier than 5:00 pm or about 5:10 pm. That’s when the arm will be lifted. In addition to a few spaces on Waterfront Place, there is an entire block of free spaces on the other side of the building (E Street), more street parking on the circle leading into the back side of the Ziggurat building garage, and apparently a free row of spaces in the Zig garage (back side) – lots of choices.

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Who May Sue You and Why: How to Reduce Your ERISA Risks, and the Role of Fiduciary Liability Insurance

Chubb asked the ERISA-experienced law firm of Morgan Lewis & Bockius, LLP, along with Alison L . Martin of Chubb’s Specialty Claims Department, to write this free booklet to help customers and brokers understand the potential liability that fiduciaries face in today’s litigious environment. Some of the most significant litigation concerning retirement plans includes:

  • “Stock drop” (Enron-style) cases under defined contribution (ESOP and 401(k)) plans, alleging plan fiduciaries acted imprudently in offering an employer stock fund or misrepresented the risks associated with investments in a plan sponsor’s stock;
  • “Fees and expense” cases alleging that the plan fiduciaries breached their obligations to the plan and its participants by charging or permitting excessive fees and expenses for plan services provided by third parties, such as investment management, recordkeeping, and asset custody;
  • Investment imprudence cases alleging that plan fiduciaries breached their duties to invest plan assets prudently, breached their duty of loyalty, had conflicts of interest, and/or engaged in prohibited transactions;
  • “Anti-cutback” cases alleging that benefits (such as severance or pension adders) were promised and vested under the plan document and improperly cut back in anticipation of a change in control or during a time of corporate penury;
  • Claims that plan administrators have otherwise acted in contravention of plan or statutory provisions, such as violating plan rules limiting which expenses the plan can pay or the kinds of distributions the plan may make, or violating the statutory benefit accrual or vesting rules; and
  • “Cash balance” cases alleging that the cash balance pension plan itself violates ERISA prohibitions against age discrimination, or results in unfair annuity calculations or inappropriate benefit freezes upon conversion.
  • Class action welfare plan cases which can also take various forms, including:
    • Retiree medical cases alleging that the plan sponsor or the plan fiduciaries improperly changed or terminated post-retirement medical benefits; and
    • Medical premium cases alleging that premiums are excessive or that fiduciaries breached their duties by failing to apply sufficient scrutiny to the cost structure attendant to benefits.
  • Miscellaneous class action claims involving benefit plans, including:
    • ESOP claims alleging stock was improperly valued, plan fiduciaries engaged in prohibited transactions or other conflicts of interest, and/or corporate changes disadvantaged ESOP participants;
    • Misrepresentation or omission claims, such as that the employer failed to inform employees it was about to adopt severance or early retirement benefit improvements that were under “serious consideration” at the time of their separation or retirement;
    • “Alternative” worker claims alleging that some workers (such as independent contractors and leased employees) were inappropriately excluded from plan participation;
    • Long-term disability plan claims alleging that the plans were not administered in accordance with their terms (e .g ., terms offsetting Workers’ Compensation and other benefits received under other benefit programs); and
    • “Discrimination” or retaliation claims, under ERISA Section 510, alleging that groups of individuals were selected for adverse employment actions (such as layoffs or termination of employee status while on disability) in order to prevent them from becoming eligible for or receiving medical and/or other benefits.
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Who Will Pay for CDV/AVI?

Interesting article, Who Will Pay for Client-Directed Voting?, at the Securities Industry Blog on August 10, 2010, asks:

Will the SEC approve it? Even if it did, who would build the technology to implement it and who will pay for it? Or, maybe the answer is would the SEC approve it without knowing that someone would be prepared to build it?

Take a look at, it is already there. Apparently, Proxy Governance says they can upgrade their voting platform for institutional investors at an “incremental cost” to accommodate retail investors. We can see from the comments posted on proxy plumbing at the SEC’s site, Proxy Governance has been in talking with commissioners. It reportedly needs $5 million just to get started and an additional $7 million to $20 million to operate each year.

One thing I wish people who report on this topic would get right is the originator of the idea. Yes, as reported in the Securities Industry Blog,  Steven Norman generally gets credit for coining the term, “client directed voting,” which the SEC reframes as Advance Voting Instructions. Once it looked like broker-votes would be eliminated, he came up with an idea to give shareowners a very limited number of options that would allow their broker to continue to vote on their behalf, having been directed to do so by the client.

Many years before, Mark Latham, a member or the SEC’s Investor Advisory Committee, proposed a much more comprehensive system at least as far back as the year 2000. “The Internet Will Drive Corporate Monitoring” and other papers on the Publications page, which proposed a market-driven framework to help investors vote more intelligently. Coming from the standpoint of educating voters or recapturing their votes for management led to substantially different models.

Yes paying for a system is a key issue but is already doing it. could do easily with a minimum of financial help. The key is opening the process to competition by allowing proxies to be delivered to whomever is designated by the shareowner.

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. 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.

For more, see my comments to the SEC on proxy plumbing dated Jul. 16, 2010 and my post, An Open Proposal for Client Directed Voting on the Harvard Law School Forum.

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Capitalist Tool Misses Point on SRI

When Does Socially Responsible Investing Go Too Far?, an advice item at Forbes (“the capitalist’s tool”) on money and ethics misses a major point. A reader writes in that his wife “has become passionate about social and political issues and asked that we not invest in companies she believes are bad corporate citizens.” Her list has grown so long there are few companies left. Jeanne Fleming and Leonard Schwarz advise it is “irresponsible of Julia to be indifferent to the costs associated with doing what she wants… you need to sit down with Julia, explain how the lines she’s drawn are incompatible with your family’s investment objectives and discuss how you might relax the rules underlying her list.”

Here’s my take: By black-listing companies she thinks are immoral, Julia isn’t helping to change them, she is simply letting them get away with murder… or whatever crimes she thinks they are committing. If caring people like Julia refuse to buy a company’s stock, it makes the situation worse. Companies with no Julias will  have owners who only think of short-term gains, putting additional pressures on companies to externalize costs and generally behave badly.

The husband seeking advice should be told that active ownership is more powerful than hiding their heads in the sand. Take a look at websites like, and You will soon learn that power lies in engagement, not in denial.

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Walden Proposes Spit Chair/CEO at HP

Walden Asset Management filed a letter and resolution (WaldenHPLetterSepChairCEO8-10-10) with HP seeking separation of CEO and chair positions. Given the recent resignation of Mark Hurd (Mark Hurd’s Termination from HP: Case Study), timing seems ripe and important as HP searches for a new CEO. Walden cites Chairing the Board: The Case for Independent Leadership in Corporate North America by the Millstein Center for Corporate Governance and Performance at Yale’s School of Management. HP should take this opportunity to transition to this growing successful model of corporate governance and leadership.

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ESOPS Gain at Indian IT Firms

Indian IT firms are witnessing a significant jump in attrition levels.  Retention has become a key challenge. Several IT firms are set to implement Employee stock option plans (ESOPs), reports Bibhu Ranjan Mishra from the Business Standard. Infosys discontinued its ESOP policy in May 2003, saying “the employees are not keen on it.” However, in June this year, when Infosys Employee Welfare Trust announced the distribution of equity shares to those eligible, at least 140 employees serving notice periods withdrew their resignations overnight. (ESOPs back in IT firms to reduce attrition, SiliconIndia, 8/11/10)

Over the years, the US-based National Center for Employee Ownership (NCEO) has conducted and reported on research on employee ownership and corporate performance. The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much. (Research on Employee Ownership and Corporate Performance) Indian IT firms might do well to combine their ESOPs with participative management programs, which will give employees even more reason to feel they have a meaningful long-term role in their company.

A survey by the ESOP Association and the Employee Ownership Foundation found 23% of respondents said their Employee Stock Ownership Plan (ESOP) was created to provide an additional employee benefit, and another 21% stated the attraction of the employee ownership concept as the reason. Eighty-four percent of respondents agreed that the ESOP improved motivation and productivity, and 78% of companies advertise the fact that they are employee owned through Web sites, in company literature, and in marketing campaigns, according to a press release. (Majority of ESOP Sponsors Offer another Retirement Plan,, 8/11/10)

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Do Weak Governance and Unclear Accounting Rules Explain the Explosion in Corporate Buybacks?

Corporate buybacks are now a daily news item. In 2007 US companies spent an astounding one trillion dollars on stock buybacks that exceeded dividends paid and accounted for two-thirds of net income that year.  Since 2000 those same companies distributed three trillion dollars to shareholders through buybacks.

By any measure, these amounts are staggering and evidence a substantial distribution of cash to shareholders, which might otherwise be put to other uses, like investing in new technologies and creating jobs!

exclaimed Paul Griffin, who recently completed research with Professor Ning Zhu focusing on why executives and boards spend these substantial sums. Their work was recently published in the June 2010 issue of Journal of Contemporary Accounting & Economics, titled “Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence.”

When a company engages in stock buybacks (buying its own stock) it removes stock from the market thus increasing earnings per share and, hopefully, stock price.  Buybacks are meant to benefit all shareholders, but Griffin and Zhu found that weak governance and unclear accounting allow companies to tilt the playing field in favor of their executives, who receive additional compensation because the buyback makes their stock options more valuable.  Previous research did not show a reliable relation between higher CEO stock option compensation and the decision to engage in a buyback. Explained Griffin,

This is how managers can receive additional compensation, and for some, especially in recent years, this aspect of compensation has been sky-rocketing. Few people are aware that these buybacks are being used to enhance CEO compensation, and certainly not the regulators.

The researchers also discovered a positive relation between CEO insider selling following a buyback and the number of shares repurchased, also consistent with governance not protecting outside shareholders.

Professor Paul A. Griffin is an internationally recognized specialist in the areas of accounting, financial valuation and the role of information in security markets. He has published extensively in leading accounting and finance journals, and has written research monographs for the Financial Accounting Standards Board and case books on corporate financial reporting.

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Increase Liability Disclosures

(Endorse our investor sign-on letter by sending an e-mail with your name, title and organization to [email protected])

Should Companies Disclose More Information To Investors About the Liabilities They Face?

by Sanford Lewis, Counsel, Investor Environmental Health Network

When investors are unaware of impending financial pain at  the companies in their portfolios,  they often face expensive surprises.  Financial accounting  rules are supposed to arm investors with information to avoid these shocks, but the failures are many and notorious –  the collapse of Enron and  WorldCom,  subprime lending,  and massive bankruptcies  from asbestos product  liabilities.

Guidance for disclosure of pending liabilities  in financial statements  is provided by the Financial Accounting Standards Board (FASB).   After a proposal for reform in  2008  met stiff  opposition  from corporate lawyers, the board has issued a new draft  in July  2010, this time with a proposal that would avoid disclosure of legally privileged or prejudicial information.

At issue: corporate financial statement disclosures on liabilities

Financial statements are required to disclose  potential future losses, known to accountants as “loss contingencies.”    The  FASB concluded in 2008 that its current  contingent liability reporting standards  failed to provide investors and analysts with  sufficient information regarding the likelihood, timing, and amount of liabilities.

This is a  tricky  policy arena to negotiate. On the one hand, investors need good information; on the other hand, investors and companies do not want to  arm plaintiffs  with information to win higher recoveries  as a result of providing better information to investors.  Therefore,  legal and auditing professions have  carefully  tiptoed around one another  on disclosure  related to ongoing litigation.  Through their professional organizations they established a so-called “treaty,”  limiting the degree to which lawyers would disclose liability projections to auditors and companies for purposes of investor disclosure.

But in 2008 the FASB issued draft reforms  that would have  upset that delicate arrangement. Most notably, the draft would have required companies to disclose their attorneys’ worst-case liability projections. FASB was flooded with letters from corporate lawyers urging them not to     go forward with the plan.

So FASB went back to the drawing board.  On July 20, it issued a proposal  (Comments due by August 20) that  eliminates the “worst-case projection”  proposal, but does require companies to disclose more nonprivileged information, such as providing links to company pleadings and disclosure of expert witnesses’ liability estimates.

More About The Revised FASB Draft

Contrary to the 2008 proposal,  companies would be allowed to continue the controversial practice of disclosing only their estimate of the “known minimum” of liabilities where there is uncertainty as to the  most likely outcome.  Such an estimate  is unreliable for investors — the final liability in lawsuits  is often dramatically larger  than this figure — but it protects  corporate  positions in litigation.

Instead, the proposal seeks to require disclosure  only of non-privileged information, and places the responsibility with investors to use that information to develop their own estimates of the potential magnitude of liabilities.  As guidance to companies it includes the  logical principle that more information should be disclosed and made available  as a case proceeds. This makes sense, since more is known later,  but without specific operational guidelines about  precisely what information must be disclosed when  it will be hard for companies to act on this requirement.

The new proposal could provide  better guidance. For instance it could clarify that disclosed information should include the amount of settlements or judgments issued in similar cases at other companies. The need for such benchmarking could be explicitly  specified.

Scientific Literature Disclosure but Not for Longer Term Liability Risks

The July  2010 proposal adds a new requirement that disclosure may be triggered by new science that indicates “potential significant hazards related to the entity’s products or operations.”   However, it may have only limited impact, because it focuses on whether those studies lead to a requirement to accrue liability amounts, rather than  also triggering  aqualitative disclosures relevant to longer term risks.

Remote but severe liabilities

Liabilities judged by  a company to be “remote” would only be require disclosure if they have potential for severe impact and are either “asserted” claims  (lawsuits filed) or relate to other  potential claims that the management has concluded  are both likely to be filed and resolved unfavorably to the company. In practice, this means that even  the most severe long-term issues will seldom be disclosed.

This  perpetuates the tendency of companies to underestimate the likelihood of  longer-term, severe financial threats. Enron, the subprime lending crisis, and asbestos liabilities are three examples of longer-term liabilities that were not disclosed until it was too late. Such large issues loom undisclosed for many years, with eventual catastrophic consequences for investors. Yet under the proposed FASB standard, companies are allowed to avoid disclosing such severe long-term threats if they characterize the claims filed in litigation as “frivolous” or if there are as yet no asserted claims.

How to Comment to FASB

Endorse our investor sign-on letter  by sending an e-mail  with your name, title and organization to [email protected].

You can also submit your own comment letter  to FASB by August 20, 2010 by emailing [email protected], File Reference No. 1840-100.  Those without email may send their comments to the Technical Director — File Reference No. 1840-100 Financial Accounting Standards Board, Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116.  Contact Sanford Lewis at 413 549-7333 or [email protected] if you have questions.

Note that the FASB has received requests to extend the commenting deadline, but will not decide on an extension until August 18, 2010.  We will notify  the investing community if we learn that the deadline is extended.

Post republished on with permission: The Investor Environmental Health Network  (IEHN) is a coalition of investors concerned with risks and opportunities associated with toxic chemicals in corporate products and operations.  IEHN  has previously   participated in revisions of the contingent liability disclosure standard with comments on the 2008 exposure draft,  outreach to investors for additional shareholder engagement, and by participating in the FASB stakeholders’ roundtable on this topic  in March 2009.   Our report, Bridging the Credibility Gap: Eight Corporate Liability Disclosure Loopholes That Regulators Must Close (2009) raised many of the issues relevant to  need for reform of the  FASB contingent liability closure standard, as well as reforms needed in Securities and Exchange Commission disclosure requirements.

I had the pleasure of providing editorial and substantive advice to Sanford Lewis on his paper Don’t Ask, Don’t Tell: A Poor Framework for Risk Analysis by Both Investors and Directors (HLSCG&FR, 11/15/09).  Lewis describes a growing clash between the needs and duties of directors and investors to manage risks, and attorneys who advise “don’t ask; don’t tell,” in order to minimize corporate liability in any possible future litigation. He warns that a strategy based on culpable deniability serves no one well.

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Mark Hurd's Termination from HP: Case Study

It’s ironic that the same week Jim McRitchie reports on lingering opposition to and attempts to circumvent the new proxy access rules Funds Preparing Candidate Pool and Proxy Access Avoidance: Subversive or Accelerating Preemption?, in part because of concerns that directors elected in this manner will focus on extraneous matters and private agendas, we see the HP board – having no significant minority shareholder representation – force out its CEO, Mark Hurd, over matters having little to do with the results of his stewardship.  All of this illustrates the need for a sharpening of the focus of corporate law and corporate governance efforts to ensure  they serve the purpose of incenting management to emphasize maximization of bona fide shareholder value.

I don’t deny the HP board had little choice under existing law. If they had left Hurd in place amid the scandalous revelations, they would have faced criticism and litigation at every turn on a multitude of theories. That’s the problem: as I have argued on this site and elsewhere, existing law places too much emphasis on process and matters having nothing to do with corporate performance (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule). We need changes in the legal regimen to force boards to evaluate management on its business strategy and performance, as well as corporate compliance with legal obligations.

I’m not condoning what Hurd did, and the board could not and should not ignore it under any legal regimen without compromising the company’s compliance posture,  but it appears that by any overall metric he was a good CEO who, following the tumultuous, unfocused reign of Carly Fiorina, delivered excellent financial performance (H-P Chief Quits in Scandal, WSJ, 8/7/10) and created substantial shareholder value with the stock doubling during his tenure.

He was removed for what was ultimately a fairly minor personal indiscretion and de minimus problem with his expense reporting, which may have been handled by his assistant. I’m not sure what was accomplished through his removal other than an eight figure severance payout; the market cap of HP dropped by 8% (perhaps temporarily) when the news broke. One wonders if all concerned wouldn’t have been better off with a stern, private admonition from a board member to ‘knock off the garbage!’

Based upon what we have seen in the financial sector and the Delaware holding in the Citigroup case, it is doubtful if the board would have removed him this quickly if he had been pursuing a questionable business strategy resulting in poor results or heavy debt, encouraging aggressive accounting or overseeing activities resulting in legal claims by suppliers or customers. Witness the litany of cases where boards did nothing in the face of ever-more dubious strategy and results: AIG, Citigroup, WaMu, Merrill Lynch, Fannie/Freddie, Lehman, Bear Stearns, …. Need I ask which approach was better for society?

Indeed the board did not even remove him in the wake of the 2006 pretexting scandal, which in my estimation had more to do with the company’s integrity than the most recent episode.

As we move forward in the proxy access era, we all need to keep our eyes on the ball of corporate governance, namely, ensuring that firms are run for the benefit of shareholders.  Of course, this means proper oversight of management compensation and ethical compliance. However, it also means keeping things in perspective when management is performing competently, in pertinent areas. There is no question that this will require changes in law to incorporate a more substantive perspective. With the new focus on governance as a key tool of social policy, one hopes that doctrine will evolve to change the emphasis to where it needs to be for the field to drive beneficial social change.

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.

According to the above cited WSJ article, Charles Elson, head of the Weinberg Center for Corporate Governance, praised HP directors for forcing out Hurd rather than simply allowing him to repay the disputed expense money. By falsifying expense accounts, he “committed a serious, career-ending error and there should be some financial consequences,” said Nell Minow, of The Corporate Library. (Mark Hurd Neglected to Follow H-P Code, WSJ, 8/8/10) Minow also posted the following and much more (The Real Mark Hurd Scandal at HP, TCL Blog, 8/9/10):

In order to do any business with the government (including eligibility for certain licenses to do business abroad), companies need to be able to demonstrate that they have ‘tone at the top’ ethics and compliance in place.  In the post-Enron, post-meltdown world, the government is not impressed with color brochures and fat books of guidelines.  They insist on seeing how violators are treated.  And if a middle manager would be fired for fiddling with his reimbursements, then the guy who’s been paid more than $100 million has to be fired, too… While most CEO contracts exempt poor performance as a reason for “termination for cause,” there is no reason to permit a departure following an ethics violation to be characterized as a resignation – when the result is a $50 million payout that would otherwise stay in the corporate bank account.

Minow later Tweeted: “HP settled a $50 million fraud claim with the government last week. Why isn’t that the news story?” Activist John Chevedden says, “The conduct of Hurd was compounded by the HP board giving him a humongous going-away present.” In my own opinion, “termination for cause” is currently defined much too narrowly.

I’ll close with the following from my friend Dan Boxer who assembled a few talking points for his U.Maine School of Law, Fall 2010 Governance, Ethics and Corporate Responsibility Seminar. DBoxer, Aug. 9, 2010.

And then there is the sad, and very recent, tale of HP and its now departed CEO and Chair, Mark Hurd, who resigned abruptly in early August of 2010. The governance and ethics experts are still sorting out the facts and the decisions which were made, or should have been made differently, by the Board. We will deal more with this in the ethics part of our class, but since we have already touched on required codes of conduct, some facts and commentary, followed by questions to ponder in class are appropriate at this point. Simply put:

  1. Mr. Hurd was viewed as wildly successful by the investment community and had done wonders for the stock price through tough financial discipline and new business efforts. He was also viewed as a non imperious, low ego kind of guy who stayed out of trouble and tolerated no inappropriate behavior.
  2. HP, and Mr. Hurd in particular, implemented, promoted and supposedly enforced with zero tolerance for violation, a model code of business conduct and ethics.
  3. A company contractor, through her attorney, sent a letter to Mr. Hurd alleging sexual harassment. He immediately turned the letter over to the General Counsel who sent it to the Board which began an investigation.
  4. The investigation found that Mr. Hurd did not harass the contractor, but that he had violated the code by having a nonsexual, non harassing dalliance (my word) with a female contractor and hiding the costs of dinner and travel in expense accounts (which he said were not prepared by him).
  5. The board immediately forced his resignation and he left with huge severance compensation. Here is a relevant excerpt from an HP official statement:

The H-P board asked for Mr. Hurd’s resignation in large part because of the conflict between his actions and the code of conduct, which he publicly championed in 2006 following a boardroom scandal, H-P said.

Mr. Hurd’s statement included a confession of sorts:

As the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at H.P.

6. The company stock lost $10Billion in value the next day and a lot more today.

This situation could be a course in itself and there are many more interesting facts not laid out above, or which remain to be learned. Nevertheless, the whole mess raises some interesting questions and teaches some good lessons which we will discuss. Here are a few:

  1. Codes of conduct and tough ethical standards don’t mean much if they are not followed or equally applied. However—should they be equally applied if the result is a massive loss of shareholder income? But if they aren’t equally applied, does the ensuing reputation for unfair and arbitrary application of company standards ultimately undermine the integrity of the company and create a rogue mentality which is worse for the shareholders in the long run?
  2. Human frailty, weakness, greed, lust, etc. cannot be contained by laws (SOX, etc.) or rules. So are we wasting our time enacting them?
  3. The Board knew that the stock would take a big hit, but showed real courage in confirming a zero tolerance culture and demanding Hurd’s immediate resignation. This is refreshing since we have seen so many examples of CEOs hanging onto their jobs when they have demonstrated questionable conduct.
  4. It would have been interesting to be a fly on the wall and hear the Board discuss whether its duty was to protect/maximize shareholder wealth (e.g.,stock price) vs. the obligation to other stakeholders, vs. the obligation to the company as an institution to be preserved for the long term, vs. balancing responsibilities to shareholders (among which there are long and short term interests) for both the short and long term?
  5. Was this actually a fire-able offense? In similar situations employees might well be required to go through sensitivity training, reimburse the company for questionable expenses or be placed on some sort of probation. Would Hurd have been treated less harshly if he were a top performer but not the public persona of the company? A lower level employee? Did the Board overreact? Should the top person who can affect the future of the company be cut more, or less, slack since he can affect so many careers and pocketbooks?
  6. What would the public disclosure requirements have been had the board sought to deal with this as an internal matter?
  7. Cynically, was the Board only “cutting its losses,” since it looks like it concluded it could have a public relations disaster and an unmanageable work situation with an ineffective and distracted CEO under various scenarios of keeping Mr. Hurd in place and then having the facts come out? Very recent information seems to indicate that the contractor was a former “soft porn” actress appearing in R-rated films. In other words, was the decision a purely business/economics one, not an ethical one? Did the board do the right thing for the wrong reason?
  8. Would things have been different if HP had split the roles of CEO and Chair?
  9. Did the board show a lack of courage and send the wrong signal when it agreed to pay massive severance (recognizing that this is a contract issue depending on the terms and they may have had little choice)?
  10. Ms. Fisher, the contractor, is a case study all her own in disingenuous and unethical behavior. According to today’s reports (Aug, 9, 2010) Ms. Foster put out a statement: “I was surprised and saddened that Mark Hurd lost his job over this,” Fisher said in a statement. “That was never my intention.” What did she think could be a likely outcome when she put the whole thing in motion, she hires a lawyer with a reputation for tough, no holds barred, aggressive attacks on powerful people in order to get money for her client?

Here is just a sample of some articles with the facts as known to date and some speculation about facts and ethics:

And here is the actual HP code of conduct.

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Question Re Broker Letter Dates: Collective Work

I see this blog as something of a collective work, since it started out as an internet site that simply shared a bunch of bookmarks and corporate governance items that needed attention. This post continues in that tradition and mainly goes out to those of you who have been submitting shareowner proposals for many years. It comes as a result of a review I am conducting with Glyn Holton of the United States Proxy Exchange and shareowner activist John Chevedden. Has the SEC changed its interpretation of when broker letters should be dated?

We all know what happened in the 2006 case of AFSCME v AIG. The court found the SEC had reinterpreted its own proxy rules without going out to public notice on the change or even informing the public. People had known about this for years. I mentioned it in a 5/26/2003 comment letter on the first recent proxy access proposal. Jane Barnard mentioned it in 1990 in her seminal paper, “Shareholder Access to the Proxy Revisited” (Catholic University Law Review, Volume 40, Fall 1990, Number 1). So, here’s another issue entirely, that I’d like readers to put to your memory banks.  Was there a similar reinterpretation by the SEC regarding the date of broker letters supporting shareowner proposals? If so, when did it occur?

I started submitting proposal sporadically beginning 1999. Frankly, I don’t recall that submitting a broker letter dated a couple of days before the date of my proposal was an issue.  However, earlier this year when I was reviewing Apache’s Brief on the Merits in Apache v Chevedden, they listed 30 no-action letters with what they claimed was  “near unanimous support … both before and after the staff’s issuance of the Hain Celestial no-action letter” for their position that documentation of beneficial share ownership must come from DTC or some other party listed on the stock ledger.

My review of the no-action letters cited by Apache found no indication that proof must come directly from DTC or another party listed on the stock ledger, either before or after Hain Celestial. More germane to this post, I also found that in fully one-third of the no-actions —  EQT Corp, Microchip Tech, Rentech, McGraw Hill (2008), Verizon, and IBM — proponents submitted broker letters that evidenced ownership prior to the date of the proposal. No-action was granted because Rule 14a-8(b) was interpreted as requiring verification from the proponent’s broker or bank “at the time you submitted your proposal,” not before. The same may also have been true of MeadWestvac and McGraw Hill (2007)  but I could not verify through Westlaw because of missing exhibits.

A recent ISS report indicates that 28 proposals this year, according to, were omitted on grounds that investors failed to provide sufficient evidence of eligibility. I would bet that a good portion of those involved broker letters dated before the proposal. Rule 14a-8(b)(2) imposes conflicting requirements on proponents. One is

… at the time you submit your proposal, you must prove your eligibility to the company …

The other is

… submit to the company a written statement from the “record” holder … verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year …

The first appears to require that a letter be obtained from the proponent’s bank or broker on or before the date on which a proposal is submitted — so that documentation is available “at the time” of the submission. The second requires that the letter be obtained from the bank or broker on or after the date of submission — so it documents that the proponent satisfied the ownership requirement “at the time” of the submission.

Since the language has some degree of ambiguity, I’m wondering if the SEC’s interpretation, the broker letters be dated the same day or after the proposal, is a recent one. Any recollection from readers, especially with supporting evidence, would be helpful. I see that on July 13, 2001, the Division of Corporation Finance issued Staff Legal Bulletin No. 14, which included the following:

In the event that the shareholder is not the registered holder, the shareholder is responsible for proving his or her eligibility to submit a proposal to the company. To do so, the shareholder must do one of two things. He or she can submit a written statement from the record holder of the securities verifying that the shareholder has owned the securities continuously for one year as of the time the shareholder submits the proposal…

If a shareholder submits his or her proposal to the company on June 1, does a statement from the record holder verifying that the shareholder owned the securities continuously for one year as of May 30 of the same year demonstrate sufficiently continuous ownership of the securities as of the time he or she submitted the proposal?

No. A shareholder must submit proof from the record holder that the shareholder continuously owned the securities for a period of one year as of the time the shareholder submits the proposal.

The Bulletin seems less ambiguous than the rule. Was this July 13 2001 substantively different than previous interpretations? Please e-mail me or leave a comment. Either way, any requirement that the broker letter be dated on or very close to the date of the proposal seems to me to be rather arbitrary… but that’s the subject of a future post.

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