Archive | September, 2010

BRT & Chamber Sue Over Proxy Access

As expected, the U.S. Chamber of Commerce and Business Roundtable filed a legal challenge to the SEC’s proxy access rules requiring a corporation to include in its proxy materials director nominees put forward by a shareholder (or group of shareholders) who have owned three percent or more of company stock for at least three years. Eugene Scalia and Amy Goodman of Gibson, Dunn, and Crutcher LLP will be counsel to the Chamber and Business Roundtable on this litigation.

In a petition for review filed in the U.S. Court of Appeals for the District of Columbia Circuit, the Chamber and Business Roundtable charge that the rule is arbitrary and capricious, violates the Administrative Procedure Act, and that the SEC failed to properly assess the rule’s effects on “efficiency, competition and capital formation” as required by law. In adopting the rule, the SEC:

  • Erred in appraising the costs that proxy access would impose on American corporations, shareholders, and workers at a time our economy can least afford it. For example, the Commission essentially disregarded numerous commenters who explained that the rule will be misused by special interest investors such as labor union pension funds and state pension funds;
  • Ignored evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rule as leverage to further their special interest agendas;
  • Claimed to be empowering shareholders, but actually restricted shareholders’ ability to prevent special interest shareholders from triggering costly election contests; and
  • Claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.
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Eat Faster, or Be Eaten

The operators of HKEx want to extend their four-hour trading day by as much as 90 minutes. Currently, stock trading at 10 a.m. and runs until 4 p.m., interrupted by a two-hour lunch break.

As this article in the WSJ points out (Hong Kong Exchange’s Plan Hits a Breakwall, 9/26/2010):

Competitively, the exchange needs to do everything it can to make itself user friendly as more Chinese companies, the main source of new listings in Hong Kong, opt for domestic listings. Hong Kong also will face new, stiffer competition from Shanghai once plans to allow international companies to list in the mainland become a reality.

James McRitchie, the Publisher of will be in Hong Kong in late November and/or early December. Contact for engagements.

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Transfer agents have launched The site is designed to remove the “wall that’s preventing your company from gaining direct access to your shareholders” by urging shareowners to comment on the SEC’s proxy plumbing concept release. The comment period ends October 20.

List of helpful resources. Among the most influential responders: the Shareholder Communications Coalition; Study of the OBO/NOBO System, prepared by Alan L. Beller and Janet L. Fisher, with Rebecca Taub for the Council of Institutional Investors; and the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce. (New website promotes proxy plumbing changes, Inside Investor Relations, 9/27/10)

Frankly, I haven’t decided how I’m coming down on some of these issues. I’m torm between the advantages that go to those with direct registration (such as obtaining a real proxy, instead of a VIF) and the idea that voters and votes should be kept confidential so that corporate management can’t unduly influence votes.

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1% Transaction Tax

Today, over 60% of all trading on Wall Street exchanges is done by computers – all programmed to compete to get the fastest execution of their trades at the best price.  Each trade generates a commission so the most trades make the most money.  The latest “innovation” is “high-frequency” or “flash” trading, where the computer programs run so fast that they can trade stocks, bonds or commodities thousands of times per minute.  These computers are so fast that they can “see” other orders in line before they are actually traded.  This allows bonanza profits from the proprietary trading of Wall Street banks and hedge funds such as D E Shaw, advised by Larry Summers, now US President Obama’s chief economic advisor. We support stronger reforms than those in the US Congress (More Advice for Summiteers on Reforming the Global Casino, Hazel Henderson). Many argue a 1% tax on all financial transactions can slow down and reduce the staggering volumes of trading today while raising valuable revenue. (NSFM opinion: Case for Financial Transaction Tax, 9/27/10)

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Sebastian Mallaby reviews Robert Reich’s latest book, Aftershock: The Next Economy and America’s Future (Fairer Deal, NYTimes, 9/24/10). Reich argues that the stagnation of middle-class buying power has been a drag on growth in the American economy.

At some point in the not-too-distant future, Reich warns, C.E.O.’s may find that limousines are being purposely scratched and mobs are picketing their offices.

According to Mallaby, Reich sees at least part of the cure in measures such as:

  • a more progressive income tax, including negative taxes for anyone earning below $50,000
  • a top income-tax rate of 55 percent
  • income from capital gains, now taxed at 15 percent, taxed at the same rate as income from salaries
  • wage insurance — temporary compensation for workers who take big pay cuts when they shift jobs
  • investments that make public transportation and Medicare more available.

I haven’t read the book, but the arguments and solutions appear quite reasonable to me. Mallaby agrees to a point but questions wether economic resentments will really take hold. He concludes with an amusing bit of history.

Toward the end of the Depression, in the late 1930s, a sociologist named Alfred Winslow Jones conducted field research around the violently strike-prone factories of Akron, Ohio, expecting that bitter industrial conflict might have created equally bitter class divisions. To his surprise, he found little evidence of such polarization.

Thus reassured, Jones migrated from sociology to journalism to finance. Ultimately, in a twist that Reich might grimly appreciate, he invented a fantastically profitable investment vehicle. He called it a “hedged fund.”

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Symantec Audio-Only Meeting Gets National Coverage

At last, there have been a couple of articles in the national press on the Symantec Corp. virtual-only meeting. First, Ross Kerber reported for Reuters, Shareholder meetings via Web mute dissident voices (9/24/2010) Kerber observed,

Soon movies might be the only place to hear pointed outbursts from investors. This year more than a dozen companies moved their annual meeting to online-only settings where they can rephrase or ignore contrarians.

Bruce Herbert, Steve Schueth, U.S. Proxy Exchange, CalPERS and CalSTRS were mentioned as opposing the move. Symantec claimed the fact that it included a pointed question on its performance during the online meeting, provided evidence it wasn’t stifling dissent.

Then on 9/26/2010 the New York Times published Gretchen Morgenson’s Questions, and Directors, Lost in the Ether.

Unlike other companies that broadcast video along with audio, Symantec held its meeting as audio-only — making it impossible for investors to observe the goings-on or see which Symantec executives had decided to make themselves available.

Symantec management read and answered only two questions from shareholders and failed to answer a question from Bruce T. Herbert, chief executive of Newground Social Investment. Morgenson also quoted several Symantec shareowners who were displeased with the audio-only meeting and she focuses on the fact that not all Symantec directors “attended,” although she was unable to find out who the missing directors were.

Morgenson mentioned the recent shareholder forum by Gary Lutin.

PARTICIPANTS in the forum have proposed these standards of fairness involving electronic shareholder meetings: a company should provide all shareholders with a reasonable opportunity to ask management questions relating to director elections and other matters to be decided at a meeting; a company should present those questions or views to management publicly so other shareholders can consider them; and, finally, a company should generate responses to these questions from managers or directors so other shareholders can consider them as well.

Morgenson ended her article with important observations from Lutin.

Most corporate managers also like being able to learn what interests their shareholders so they can respond before decisions are made. But it’s important to be alert to abuses that hide questions. If you want the marketplace to work, investors need to see which managers deserve their support.

Not mentioned in the article is the fact that Glyn Holton, of the United States Proxy Exchange (USPX), initiated the protest against Symantec. USPX appears to be on the threshold of building on the work of Lutin by

drafting a white paper detailing the legal, technology and procedural issues raised by virtual meetings. That will be followed with a members forum through which shareowners will draft shareowner-approved guidelines for the conduct of virtual meetings. Find out more and how you can be involved on our Virtual Shareowner Meetings page.

Long-term, we cannot address the issue of virtual meetings one company at a time. There are approximately 13,000 annual meetings in the United States each year. At some point, the trickle of corporations experimenting with virtual meetings will become a torrent. We need a comprehensive solution.

To that end, the USPX has formed the Coalition to Preserve Shareowner Meetings to pursue a two-pronged strateg:

1. Hold an on-line forum to draft shareowner-approved minimum guidelines for the conduct of virtual and/or hybrid meetings, and

2. Agree to sanctions the shareowner community will impose on corporations that conduct virtual meetings not in accordance with those guidelines.

Aside from Gary Lutin, members of the Social Investment Forum and public pension funds have mostly taken the lead in this area. We need others, especially retail shareowners to step up to the plate. I hope readers of will join in those efforts by sending concerns and advice to [email protected]. I encourage individual shareowners, institutional shareowners and interested parties to join this newly forming coalition to participate in the forum and other activities. Join the USPX today. Member dues are modest and fund important activities.

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Consulting Solicitation by CalPERS for Corporate Governance Analysis

CalPERS posted a new Consulting solicitation. Solicitation: 2010-5478 Global Equity General Consultant Services Spring-Fed Pool on 9/23/2010.

Description: The California Public Employees’ Retirement System (CalPERS) seeks to establish a Global Equity General Consultant Services Spring-Fed pool to provide services, tools/technology, and data needs to the Investment Office (INVO), Global Equity Unit for a term of up to five years. The spring-fed pool structure will allow CalPERS the ability to request services for its resource needs and to add firms on a regular basis throughout the duration of the pool. CalPERS objective is to have access to a high number of quality firms in various specialized areas of expertise, including but not limited to: Strategic Portfolio Analysis; Portfolio Analysis, Monitoring and Reporting; Model Research and Development; Financial, Investment Banking and Accounting; Corporate Governance Analysis; Investment Due Diligence; and Hedge Fund Administration. The selected firms will represent the best of class within the investment industry. Register by November 9, 2010 by 3 pm PT.

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Video Friday: Niall Ferguson & “Wall Street” the Sequel

Niall Ferguson: Empires on the Edge of Chaos – via Fora.Tv- Throughout history the rise and fall of empires isn’t slow or cyclical, as we like to think, but arrhythmic…it mostly happens very, very suddenly. America is a superpower on the edge of chaos, according to economic historian and author Niall Ferguson. U.S. debt levels, he says, and its unwillingness to address the problem, has put it in the same category as other great empires which have collapsed throughout the ages. Ferguson argues the world is changing. There’s the rise of authoritarian China as a super-power; a Keynesian president leading a weakened United States; the re-emergence of democratic India as a great power; the continued decline of Japan; and the probability of continued global economic instability ahead. (Thanks to, 9/19/2010)

Also catch, “Wall Street” the Sequel: What’s Changed? (Portfolioist, 9/23/10) Hear from corporate governance and movie expert Nell Minow, New York Times blogger and financial advisor Carl Richards, and socially-responsible investor Paul Herman on the movie’s impact and lessons.

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NYSE-Sponsored “Commission on Corporate Governance” Outlines Key Governance Principles

NYSE Euronext (NYX) today released the final report of the NYSE–sponsored Commission on Corporate Governance.  The Commission on Corporate Governance, chaired by Larry W. Sonsini, Chairman of Wilson Sonsini Goodrich & Rosati, is a diverse and independent commission established in the fall of 2009 to examine core governance principles that could be widely supported by issuers, investors, directors and other market participants.

The 10 core principles outlined by the NYSE-sponsored Commission on Governance are as follows:

  • The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;
  • Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;
  • Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;
  • Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;
  • While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;
  • A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;
  • The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;
  • The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;
  • The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;
  • The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.
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Chamber Calls for Transparency and SEC Oversight of 3D Program

In comments to the SEC on proxy plumbing issues, the US Chamber of Commerce expresses concern that:

Directors, who are implicitly or explicitly beholden to an individual, or to a special interest group, may have a conflict of interest with the fiduciary standards that directors must adhere to. A potential example of this is the CalPERS 3D Program… It is unclear what if any safeguards are in place under the 3D Program to insure that members of the pool of shadow directors adhere to their fiduciary responsibilities, if elected to the Board, and not act in the interest of a particular individual or a specific group. Accordingly, the CCMC believes that the 3D Program should be required to become transparent in its operations and publicly disclose among other things:

  • The extent and purpose of the 3D Program and what shareholder interests it is advancing;
  • The process that the program grants membership in its director pool, including the involvement of third parties in that process, the questions candidates are asked, and the responses candidates provided, as well as any assurances the candidate provided, or which were made to the candidate,
  • The names and affiliations of recruited shadow directors and their qualifications;
  • Any political contributions made by a shadow director to any CalPERS board member;
  • Any award and amount of any contracts or investment business by CalPERS to a shadow director;
  • Any award and amount of any contracts or investment business by a CalPERS board member to a shadow director; and
  • Any personal relationship between any CalPERS board member and any shadow director.

Any other organization that would seek to use the 3D pool of shadow directors should have to issue similar disclosures as listed above. Additionally, we believe that appropriate supervision should be given by the SEC to insure transparency and disclosure whenever such a list of potential nominees is drawn up by a group or groups that may be engaged in an effort to use the newly promulgated proxy access rules or combine short slates.

CalPERS and CalSTRS have a third party handling the database, and an advisory panel of experts, including companies, to steer the project. It’s therefore an arms length facility. Of course, any director nominated to a company board would serve under the same duties as any other director.

When similar suggestions were brought up in comments on proxy access rulemaking, it was pointed out that several go well beyond what is required for candidates involved in actual proxy contests that could result in a change of control. Why should proxy access candidates and their sponsors, who can’t take control, face more stringent requirements?

It might be interesting to see similar disclosures (and more) with respect to candidates vetted by current corporate boards and CEOs, as well as oversight by the SEC of that process. And how about transparency of the operations of the Chamber of Commerce? Talk about “shadow” governance…

I’m all for transparency, as long as long as the rules are principles based and apply to all sides. I would love to see forums where institutional and retail shareowners can ask questions of all board candidates before voting their proxies, like the recent forum CalPERS candidates participated in. (see Video Friday, 9/7/2010)

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CorpGov Trends at Largest US Public Companies

2010 Corporate Governance of the Largest US Public Companies General Governance Practices (Shearman & Sterling LLP, pdf) The survey provides a wealth of data concerning board practices at the top 100 companies. A few highlights with a focus on issues of significance to shareowners:

  • 82 have implemented some form of majority voting in uncontested director elections, up from 75 last year. In light of the fact that the Reform Act does not include a majority voting requirement with respect to uncontested elections, it is likely that majority voting will receive a great deal of attention during the 2011 proxy season.
  • Independent directors constituted 75% or more of the directors on the boards of 88 of the Top 100 Companies surveyed this year. The CEO was the only non-independent director at 59 of the Top 100 Companies.
  • Fifteen of the Top 100 Companies have a Chief Risk Officer. In addition, the boards of directors of eight of the Top 100 Companies have a risk committee, and nine of the other Top 100 Companies have a risk committee generally comprised of members of management.
  • Separate individuals serve as CEO and chair of the board at 30 of the Top 100 Companies, but of these companies only 11 have adopted an explicit policy of splitting the two offices. The chair is independent at 17 of the 30 companies with a separate chair. All 70 of the Top 100 Companies that have combined the offices of CEO and chair of the board have appointed a lead independent director.
  • Of the Top 100 Companies, only six have a Shareholder Rights Plan or “Poison Pill.”
  • Of the Top 100 Companies, 20 have a Classified or Staggered Board of Directors.
  • Of the Top 100 Companies, 69 disclosed transactions in which the company was a participant and in which a related person had a direct or indirect material interest.

Shareholder proposals for Removal of Supermajority Voting Requirement, Director Elections by Majority Vote and Shareholder Action by Written Consent all had an average level of support of over 50%. Most frequently submitted shareowner proposals:

  • Independent Board Chair
  • Two Nominees for Each Director Position
  • Cumulative Voting for Directors
  • Annual Election of Directors
  • Redemption of, or Shareholder Vote on, Poison Pill
  • Director Elections by Majority Vote
  • Removal of Supermajority Voting Requirement
  • One Vote Per Share
  • Certain Shareholders Can Call Special Meetings
  • Reincorporate in North Dakota
  • Shareholder Action by Written Consent
  • Succession Policy
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CorpGov Bites

Lots of news I haven’t had time to fully digest but that I find interesting. Hat tip to SIF members for sending me several of these.

Charade at Symantec (USPX) On September 20, 2010, Symantec Corporation set the pathetic precedent of being the first Fortune 500 company to hold a virtual-only annual meeting without shareowner-approved safeguards to protect participant rights. From the start, the USPX has recognized that the issue of virtual annual meetings cannot be addressed one corporation at a time. There are approximately 13,000 annual meetings held in the United States annually. At some point, the trickle of firms that incorporate virtual technology into their meetings will become a flood. The USPX is organizing shareowners in a comprehensive response. We are drafting a white paper detailing the legal, technology and procedural issues raised by virtual meetings. That will be followed with a members forum through which shareowners will draft shareowner-approved guidelines for the conduct of virtual meetings.

With proxy access and say on pay, this is no time to decrease direct contact between shareowners and corporate officials. We need more dialog, not less.

Epistolary Pistols Fired in All Directions (Deal Flow Media, 9/21/10) touches on several initiatives:

  • Knott Partners bluntly told the board of Westway Group that extending warrant expirations for two board members looks like a breach of fiduciary duty.
  • Lawndale Capital made no bones about telling toolmaker P&F Industries that it should part ways with chairman and chief executive Richard Horowitz when his employment contract expires. Analysis of executive compensation. P&F site.
  • Alimentation Couche-Tard remonstrated Casey’s General Stores in a statement that says the company is trying to confuse shareholders.
  • letter from The D3 Family Funds to RadiSys Corp.’s chairman placed the company’s stock performance in a compassionate light and suggests plans for responding to sour market conditions: “If you have lemons, make lemonade.”

Will New Proxy Rules Pose Board Risks? (CFO, 9/22/10). “My guess is that we will not get completely hare-brained people going on boards of directors,” Timothy Hearn, partner with Minneapolis-based law firm Dorsey & Whitney. Duh.

Wall and Main Streets — The Pensioners’ Perspective (theStreet, 9/22/10) Eric Jackson blogs on CII’s latest conference. Neel Kashkari of Pimco on the “new normal.”

Reality check: 90% of investor relations websites ignore social… (SocialMedia, 9/22/10). More than 90% of 200 investor relations websites reviewed by IR Web Report in the past month failed to direct investors to these channels.

Access to the Mutual Fund Proxy (HLS corpgov blog). Jennifer Taub highlights the little discussed analysis of the SEC’s proxy access rulemaking on mutual funds as issuers.

The SEC estimated at investment companies there will only be six director nominees under 14a-11 per year and half of these would be at closed-end funds. Under 14a-8(i)(8) the SEC estimated a total of 24 shareholder proposals regarding procedures for including shareholder nominees for director in the proxy. Concludes Taub,

Adding some competition to the board nomination process may increase board dependency upon fund shareholders. This may create more bargaining power in board negotiations with fund advisers over fees, expenses and other related matters. Given that boards are loathe to use the “nuclear option” and fire the fund adviser, gaining extra leverage to negotiate more strongly on behalf of fund investors is essential.

Since mutual funds hold 24% of US corporate equity, changes in how they are governed could have a multiplier effect, even more so than proxy access at other corporations.

Hiring A Chinese Employee Without A Chinese Entity. Good Luck With That. (China Law Blog, 9/22/2010) “Under Chinese law, only Chinese entities are allowed to have employees based in China. in addition, China does not generally allow for the hiring of independent contractors.”

Singapore: shareholders’ access to company financial information (Corporate Law and Governance) The Singapore High Court gave judgment earlier this month in Lian Hwee Choo Phebe v Maxz Universal Development Group Pte Ltd. [2010] SGHC 268, available on Singapore Law Watch here. It provides an excellent overview of recent case law concerning Section 216 (personal remedies in cases of oppression or injustice) of the Companies Act (Cap. 50, 2006 Rev Ed), against the background of the Court of Appeal decision Over & Over Ltd. v Bonvests Holdings Ltd. [2010] 2 SLR 776. It also discusses the extent to which shareholders have access to company financial information.

Outbound Acquisitions by Indian Companies (India Corporate Law, 9/18/10) Professor Afra Afsharipour‘s  Rising Multinationals: Law and the Evolution of Outbound Acquisitions by Indian Companies argues that Indian corporate law plays a number of important roles in the emergence of Indian multinationals. First, legal reforms since economic liberalization have set the stage for outbound acquisitions by Indian multinationals. Second, Indian legal reforms and legal history have shaped outbound acquisitions both in terms of transaction structure and transaction size. Third, legal constraints on Indian firms’ mergers and acquisition activity impose substantial restrictions not only on the methods that Indian multinationals use in pursuing outbound acquisitions, but also on the future potential of Indian multinationals. Reforms are needed.

French companies improve corporate governance disclosures (Manifest, 9/20/10) 2010 AMF report finds some of the key findings on corporate governance are:

  • 60% of companies reporting non-compliance with some of the AFEP/MEDEF Code’s provisions, with one-fifth of these not including any explanations;
  • An average of 55% of boards are comprised of independent directors, while 88% of audit committees and 79% of compensation committees are chaired by an independent director. Some companies in the same however did not identify which directors the board considered to be independent;
  • 9 companies in the sample have introduced (or intend to introduce) a lead independent director or deputy chairman with responsibility for governance;
  • Two-thirds of companies undertook a board evaluation during the year.

The SEC and Diversity in the Boardroom: Commissioner Aguilar Speaks (theRacetotheBottom) Jay Brown offers additional insight in a multipart series. “Directors are nominated and vetted by the board. They typically run unopposed. Unsuprisingly, boards tend to self perpetuate, with little shift or change in diversity or background. This is, in short, an example of market failure.”

Sexual Harassment — and the Board (The Bloxham Voice, 9/13/10) Did you know that if current statistics remain static, the likelihood your daughter will be sexually harassed at work is 1 in 4 (and your son slightly less than 1 in 10) according to a Vanity Fair poll in its October 2010 issue – p. 92.

The New Fiduciary: Stewardship and Sensibility (9/21/10) How will investor boards respond to these new demands and duties that fundamentally reshape their role as fiduciaries? Marcy Murninghan discusses changes in financial regulations that place new responsibilities on institutional investors, requiring new forms of engagement, education, and behavior. Short but comprehensive, especially with the links. UK’s Stewardship Code is key as far as I’m concerned. The US would do well to learn.

How institutional investors should step up as owners (McKinsey Quarterly, 9/2010) A movement is afoot in Canada, France, the Netherlands, the United Kingdom, and other markets to encourage institutional investors to become better “stewards” of the companies they invest in, by adopting a more active and long-term stance.

Thinking beyond the public company (McKinsey Quarterly, 9/2010) Broker–dealers, and investment banks remained partnerships or sole proprietorships until recently for good reason. Skilled salaried managers with good information could defraud their companies, customers, and shareholders by trading on their own account and engaging in other forms of self-dealing. To keep the incentives of such firms aligned with those of society, managers had to be owners, and their ownership stakes had to be illiquid and constitute a large percentage of their net worth.

At the grassroots level, would-be microfinanciers and community bankers should seriously consider mutual forms, such as credit unions, that accommodate social goals more readily than joint stock companies do. Modest steps such as these toward a broader portfolio of organizational forms might help rebalance risk and reward in these volatile times.

Charging Forward (Columbia Law School, 9/2010) Excellent summary of the financial crisis. After reading it, at least we’re slightly ahead in our response than were our predecessors after the Great Depression. I’m hoping we’ll have another substantial round of legislation after the Financial Crisis Inquiry Commission‘s report in December. However, an even greater split in Congress wins could forestall progress. People just don’t realize what was averted. We may be in for a long period of stagnation and decline if little more is done.

A Drop in the Bucket (Columbia Law School, 9/2010) Conventional wisdom says the campaign finance decision rendered in Citizens United v. Federal Election Commission is destined to change the world—or at the very least elections as we know them. Corporations equated to humans! Elections overrun by foreign money and influence! Democracy hijacked! Perhaps a closer look is in order.

Citizens United could just be the jolt that wakes up a sleeping public. Disclosure, when it comes, will at least bring some influences into consciousness. So far, it looks like shareowners will be battling corporation by corporation to require a vote on excessive political spending, more frequent say on pay, majority vote requirements for directors, and lower thresholds for proxy access… just to name a few. If Congress can’t even muster the votes to repeal the Bush tax cuts on the wealthiest 2% when the divide between rich and poor is greater than ever, it is hard to know when corrective measures will come. We already have less mobility between income quintiles that just about any other developed country and the highest proportion in poverty since records have been kept. The dominant voice of corporate CEOs in politics doesn’t seem to be doing much for the well-being of our economy and Tea Partiers seem more intent on throwing things and people overboard than sitting down and working out solutions. Hopefully, it won’t have to get too much worse before reasonable cures are applied. Full disclosure seems like a reasonable step everyone should be able to agree to.

Why Humanity Comes First at Work: Learning About Bridges to 21st Century Socialism (Solidarity Economy, 09/19/2010) Nice diary of a trip to Mondragon Cooperative Corporation, a 50-year-old network of nearly 120 factories and agencies, involving nearly 100,000 workers in one way or another, and centered in the the Basque Country. Brings back memories for me of when I headed California’s Cooperative Development program. A greater diversity of corporate forms would foster greater innovation in all.

Why CSR is Essential in the Real World of Business (, 9/20/10) The Chinese wall separating markets and politics is a myth, one perpetuated by special interests who cynically call for government to solve social problems while working behind the scenes to undermine it. One response by outraged citizens would be to pass legislation that clearly states that corporations are not persons and have no right to free speech. A more modest alternative would be to require corporations to account in detail for every lobbying dollar they spend.

Institute to sanction members on corporate governance (Next, 9/23/10) The Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) has said it would prosecute its members who violate corporate governance rules in the country.

Pension funds declare support for FRC’s Stewardship Code (RI, 9/23/10) A group of 11 UK pension funds with combined assets of £180bn (€210.1bn) have written to the Financial Reporting Council expressing their support for the new Stewardship Code. The funds said they hoped the “next stage of development” should cover other asset classes beyond public equities and address the absence of an independent monitoring mechanism to assess investors’ adherence to the principles.

Conservative governance thinking (PIRC Alerts, 9/23/10) Highlighted Conservative Treasury select committee member Jesse Norman MP as one to watch. His four proposals for reform are –

  • To make institutional investors legally accountable for the
  • proper exercise of voting rights;
  • To make it easier for shareholders to nominate directors;
  • To give non-executive directors alone responsibility to choose remuneration consultants and auditors;
  • To require trustees to act solely in the long-term interests of their beneficiaries.

UK to review governance regime to favour “responsible shareholders” (RI, 9/22/10) UK Business Secretary, Vince Cable, has announced a “comprehensive review” into corporate governance and short-termism this autumn in a bid, he said, to put responsible shareholders “back in the driving seat”. Campaigning group FairPensions said Cable’s comments should be welcomed but pointed out that shareholders lack the necessary tools to be active owners because they have limited access to the necessary data from companies about forward-looking risks.

Complimentary Pearl Meyer & Partners Compensation Planning Survey. All participants in the Compensation Planning Survey will be eligible to run unlimited custom analyses of the data free of charge! Simply select the organizations of most interest to your firm using our on-line reporting system – you’ll get back a timely custom report displaying the survey totals as compared to your peer group and your organization.  The online custom report feature will be ready for your use by mid-October.  Once this tool is available, participants will be notified via email. Click here to complete the brief online questionnaire. Also get their client alert on Dodd-Frank.

Ceres and CalPERS Announce Initiative to Accelerate Corporate Action on Global Sustainability Challenges (CSR Press Release, 9/22/10) The initiative will include roundtables and forums in California and other parts of the country with companies and investors. Much of the activity will evolve around The 21st Century Corporation: Ceres Roadmap for Sustainability (pdf), a comprehensive Ceres report that outlines the urgency, vision and competitive advantages for companies to fully embrace sustainability and 20 key expectations for achieving such a goal.

UN body calls on all institutional investors to disclose RI stance (RI, 9/21/10) UNCTAD found almost half the world’s largest funds disclose at least one or more indicators based on the United Nations Principles for Responsible Investment. But no evidence could be found of RI practices at 51 of the top 100 funds, representing $3.4trn assets (or 39%) of the 100 funds’ total AUM. UNCTAD observes that as well as improving the accountability of companies to shareholders, policy makers should consider “improving the accountability of institutional investors to their beneficiaries.” See 95-page report (pdf), the Investment and Enterprise Responsibility Review.

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Protesting Symantec's All-Virtual Meeting

Steven Towns, writing for Seeking Alpha (Questioning Symantec’s ‘Virtual’ Shareholder Meetings, 9/20/2010) joined CII, CalSTRS, CalPERS, USPX and others in objecting to an all virtual meeting held buy Symantec. This follows up on Ted Allen’s September 16, 2010 article for RiskMetrics, Investors Object to Symantec’s Virtual Annual Meeting, my post of September 7, 2010 (also on and USPX’s page of resources on the issue with copies of letters sent.

Bruce Herbert of Newground Social Investment tuned in to the meeting and apparently found it frustrating. I’ll give it a few days to see if anyone else in the press reports on the virtual-only meeting or maybe Herbert will blog about it. If not, I’ll give Symantec at least one more post. I urge all readers and all funds to write to Ms. Corcos of Symantec protesting the virtual-only meeting. Please cc USPX. See this USPX page for sample letters.

In an e-mail to me and others, Corcos indicated “Symantec received a Low Concern rating on each of the four categories that RMG evaluates:  Board Structure, Compensation, Shareholder Rights and Audit.”  Maybe RMG also needs to hear from shareowners.

Corcos goes on to say: “If stockholders preferences change, we will reconsider hybrid models for future meetings.” I take that to mean, if enough protest they will switch to a hybrid model. Shareowners should keep bombarding them with letters and e-mails until they publicly announce next year’s meeting will be a hybrid one. That will deter other companies from moving to virtual-only meetings.

Gary Lutin’s Shareholder Forum has done a great deal to date trying to come to grips with the various issues through his leadership and that of Avital Louria Hahn. I anticipate USPX, which intends to hold additional ongoing forums on the topic, will build on their work and extend it, developing a broad consensus among shareowners of best practices.

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CalPERS Bonuses

The AP’s Cathy Bussewitz has done a very good job on a topic that I warned needed more attention. (AP Investigation: Calif. pension bonuses examined, 10/21/2010)

CalPERS’ plunging value came as stock values tumbled around the world, the state’s economy suffered its worst decline in decades and basic state services faced severe budget cuts.

Virtually all of CalPERS’ investment managers were awarded bonuses of more than $10,000 each, with several earning bonuses of more than $100,000 during the 2008-09 fiscal year. The cash awards were distributed as the fund lost $59 billion.

This makes CalPERS seem very bad. However, as the article goes on to point out, CalPERS was following normal practices at public pension plans. They’ve improved since then but could probably still use some additional reform. Maybe the AP article will result in a further reexamination of bonuses as CalPERS, other pension funds, and corporations.

In my March 2009 testimony to the CalPERS Performance and Compensation Committee, I warned:

CalPERS’ bonus structure suffers, to some degree, from characteristics frequently criticized in the corporate sector. Like options grants to corporate executives, CalPERS bonuses are structured with no downside risk, only upside gain. Additionally, adjustments or “clawback” provisions are needed to recoup unearned bonuses…

Additionally, it is my understanding that CalPERS annual bonuses are weighted (1 year performance counts 10%, 3 year 40%, and 5 year 50%) and that adjustments to fund valuation aren’t applied retroactively. If there is no mark-to- market accounting, staff might be getting performance bonuses based on a bubble. While the 1, 3, and 5-year bases give greater weight to long-term performance, since negative points aren’t considered, there is really no penalty for artificially spiking performance.

CalPERS should award negative points for under-performance and should subtract these from positive basis points. Payments should also be delayed to ensure performance reflects market, rather than book, value. This is especially important for real estate, alternative investment and other managers where value isn’t measured minute by minute, as it is with most equities.

Think about paying on a one or two year delay. Spread payout even more or scale it back if CalPERS is in a down cycle or the employee quits. In fact, if they quit, perhaps they should forgo their final year of performance pay. These reforms would not only better align pay with performance, they would decrease staff turnover and guard against a possible public relations nightmare.

CalPERS responds:

CalPERS Board has made some changes to the compensation program to increase accountability. The new features include: the Board can defer, cut or eliminate performance awards if the fund’s fiscal year absolute return is less than zero percent, or for any other reason.

  • Awards only given to staff employed by CalPERS at the time the award is to be paid, except in the case of involuntary separation without cause.
  • Eligible employees must be in compliance with all regulatory requirements and ethics and conflict-of-interest policies.
  • CalPERS can also require repayment of a performance award, with interest, if within three years of the payment it is discovered the employee was not entitled to the award because of a policy violation.

While these are improvements, in my opinion they still should:

  • Award negative points for under-performance and subtract those from positive basis points.
  • Delay payments by two years.
  • Claw back based on accounting adjustments, not just policy violations.
  • Substantially reduce bonuses in the case of employees who are terminated or quit.

Update: Apparently the AP article was written without taking into account new changes to bonuses at CalPERS. You can see draft documents here. They may have changed somewhat before being adopted by the Board. I only took a few brief moments to scan but still believe my recommendations are appropriate.

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Fair Pay, Fair Play: Very Good Advice on Pay but Poor Sociology

Robin Ferracone hits the right buttons in her new volume (Fair Pay, Fair Play: Aligning Executive Performance and Pay) when she describes how to develop of an “alignment” report that can be used by boards and shareowners to ensure executive pay will be judged as “fair.” She also interviewed the right people to work in a reasonable degree of wisdom from the perspective of shareowners. However, she falls short in glossing over high executive pay as a potential problem, a “myth.” 

That’s understandable, given that she is a pay consultant. Shouting out that most CEOs are overpaid isn’t likely to win clients, since most compensation committee members still look to CEOs and other incumbent directors, not shareowners, to hold them accountable… although that may be changing. The book is clearly aimed at compensation committees but shareowners will also find the book useful, once they get past some of the contradictions in Ferracone’s analysis as an amateur sociologist and into the tools she has developed to better align pay with performance.

Warren Buffett, who doesn’t use compensation committees or consultants at Berkshire Hathaway thinks the best way to effect irresponsible board members and overpaid CEOs is to embarrass them. Nell Minow advises that stories on overcompensated CEOs loudly name all members of the compensation committee.

In contrast, Ferracone hopes that “solid and consistent analysis, not embarrassment” using her “Alignment Model” will lead corporations to “self-monitor and adjust their executive pay practices, and that voluntary reform will obviate the need for additional government intervention and allow government to go back to helping solve other problems in our society, such as issues in education and the environment.” Yes, and if companies would just take the necessary steps voluntarily, governments won’t have to mandate measures to address global climate change. We can all imagine it; but will it happen?

As a result of the recent financial crisis, many investors have seen their 401(k) plans reduced to 200½(k) plans. Those who haven’t lost their jobs and still hold some equity in their homes count themselves lucky. Ferracone’s says, “The notion that America’s wealthy people have become wealthier by virtue of seizing the wealth from others instead of creating it is just simply misguided logic.”

The rich may not have “seized” our wealth at the point of a gun, but they did largely take control of our government through false advertising… dramatically reducing their own taxes, overturning laws and regulations designed to guard against fraud and externalizing corporate costs, filling regulatory agencies with executives who believe companies will “self-monitor.” Citizens United further entrenches CEO power, since they spend company funds to install candidates friendly to their own entrenched power.

The rich now bring home the largest proportion of income since the 1920s. One out of seven Americans lives below the poverty line, while the top 2% fight to retain Bush tax cuts amounting to $700 billion over 10 years. Upward mobility in the USA is now lower than in almost all other developed economies. The only industrialized democracy with a higher concentration of wealth in the top 10% than the United States is Switzerland. (Poverty Rises as Wall Street Billionaires Whine, Huffington Post, 9/18/10; Wealth, Income, and Power by G. William Domhoff, updated August 2010)

The American Dream was based on a growing middle class and the prospect that by working hard, you could rise from log cabin birth to business tycoon or President. While the dream is still alive, myths often take time to die.

Ferracone wants to dispel myths, but she focuses her pitch at helping boards find that zone of acceptability, where pay is aligned with value delivered. High pay can still be justified, even in a “say on pay” environment.

While Ferracone’s alignment model is a surer route to justifying pay at most companies than putting up the pirate flag of Larry Ellison or hiding behind all-virtual shareowner’s meetings, such as that held by Symantec, I can’t give Ferracone a free pass as myth buster, even though her actual discussions on how to pay for performance are on target.

According to Ferracone, the vast majority of CEOs are not overpaid. Their compensation, adjusted for company size, industry, performance and inflation, has been virtually flat over the last 15 years, only increasing 1.6 times. Productivity gains alone account for all but $400,000 of the increase.

Investors agree. “About 75% of the investors surveyed by the Center On Executive Compensation in 2008 said that they had no real concerns about the levels of executive compensation in the United States.” Who are the members of the Center? They are the chief human resource officers of 300 of the large companies. They work for the CEOs! (See their comments to the SEC requesting a narrow view on Dodd-Frank) Who were the investors surveyed? They were the top twenty-five institutional U.S. equity investors. Many, like Goldman Sachs, JP Morgan, and Morgan Stanley were the same “investors” who took the financial services sector from 20% of the economy to 40% before the crash, through bets on synthetic derivatives and other nonproductive “investments.”

Even after driving the world economy to the abyss and being bailed out, the CEOs of many of these large investment firms still got huge bonuses. Ask the beneficial owners if CEOs are overpaid; you’ll get a different response. They didn’t put “say on pay” or a requirement to report pay ratios into the Dodd-Frank bill because 75% of the biggest institutional investors surveyed had no concerns. They did so because beneficial owners and average Americans are outraged.

Unfortunately, the American Dream and the personal aspirations of too many CEOs are built around the trinity of wealth, power and fame. These superficial values have become too embedded in the American consciousness. As we strive to resolve the financial crisis, we would do well to examine the need for a constructive shift in values. (See, for example, Corruptions of the American Dream: Wealth, Power and Fame by Joseph Yumang, a graduate student at Saint Mary’s College Of California). CEOs should be looking more to their mission, rather than their pay, to measure their success. Having one’s mission of dying with the most toys and money should no longer be socially acceptable.

Ferracone contends people are angry because a small percentage of companies have distributed excessive pay packages, which she rather arbitrarily defines as companies paying at the 95th percentile or higher…  coupled with low performance.  Yes, it is hard to argue that outlier CEOs paid anywhere from 15 to over 250 times median performance-adjusted pay deserved what they got.  Does that mean those who weren’t outliers earned their pay?

No, not even according to Ferracone.  Many companies say that they align pay with performance, but most don’t know whether, in fact, they’ve achieved alignment. Only 8% of variation in Performance-Adjusted CompensationTM (i.e., compensation after performance happens) is explained by variations in performance, defined as Total Shareholder Return (TSR); on the other hand, 30% of variations in Performance-Adjusted CompensationTM (PACTM) is explained by differences in company size, 11% is explained by industry, and 51% is unexplained. With only 8% explained by performance, how can Ferracone argue the vast majority of CEOs are not overpaid?

In a study Ferracone herself conducted, she found the vast majority of board directors and executives feel as though greater government intervention will not only not solve the Alignment issue, but could make matters worse. Is this supposed to be a revelation? Of course they don’t want government intervention.

Ferracone does offer some degree of balance in her Epilogue. She notes, “executive compensation should mostly be a matter that is between shareholders and the executives they employ.” Government “needs to make sure shareholders have the rights they need to appropriately influence the companies in which they are invested.”

Unfortunately, the first right she goes on to mention is the ability to buy and sell shares in a level exchange process. While that’s important, the “Wall Street Walk” encourages poor pay alignment, since if the investors who are unsatisfied walk away the more passive investors who are left are unlikely to take action regarding pay abuses.

She adds that shareowners “need to be in a position to elect board directors and vote on key proposals that affect their equity.” Good, but I would have felt better if she had inserted the word “nominate” with regard to selecting directors. Those interviewed by Ferracone for the book overwhelmingly indicated that retention is an overblown argument for increasing executive pay.  Most CEOs identify strongly with their companies and generally won’t leave companies because of pay. If true, why are so many of them paid so much? Of course, the problem isn’t just incentives for CEOs. After all, traders at AIG Financial Products practically brought the entire economy down, and none were senior executives.

Ferracone’s firm, Farient Advisors LLC, is one of a growing number of pay advisers that sprung up to meet the needs of compensation committees that don’t want to be seen as conflicted by hiring the same firm that simultaneously works for management. That’s certainly a positive step in the right direction, as is Ferracone’s discussion of how to align pay and performance.  Ferracone moves beyond Corporate America’s Pay Pal (NYTimes, 10/15/10) by wanting to be the shareowner’s pay pal too. If both sides converge around her Performance-Adjusted CompensationTM that would be another good move.

Yonca Ertimur, Fabrizio Ferri and Volkan Muslu offer some further hope in their paper, Shareholder Activism and CEO Pay (download pdf). They studied a sample of 134 vote-no campaigns and 1,198 non-binding shareholder proposals related to executive pay between 1997 and 2007 and found that shareholders are sophisticated enough to identify firms with excess CEO pay, both when targeting firms and when casting their votes.

Proposals that try to micromanage level or structure of CEO pay receive little or no voting support. Instead, shareholders favor proposals related to the pay setting process (e.g., subject certain compensation items to shareholder approval). These proposals are also more likely to be implemented. In some cases, compensation-related activism has a moderating effect on CEO pay levels. Firms with excess CEO pay targeted by vote-no campaigns experience a $7.3 million reduction in total CEO pay. The reduction in CEO pay is $2.3 million in firms targeted by proposals sponsored by institutional proponents and calling for greater link between pay and performance. (Hat tip to Stephen Davis for tweeting about the study.)

Perhaps the increasing power and sophistication of shareowners, combined with somewhat more neutral firms, like Farient Advisors LLC, will make the difference. Probably even more important, is the need for a shift in cultural values so that CEOs are driven by more altruistic missions than simple greed.

See also, Executive Compensation and Corporate Governance in Financial Firms: The Case for Convertible Equity-Based Pay (pdf) by Jeffrey N. Gordon, July 2010 and What’s your CEO really worth? INSEAD’s Corporate Governance Initiative creates a model, 9/22/2010.

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What the HP Episodes Tell Us About Governance

The events following the dismissal of Mark Hurd at HP illustrate why I have so vehemently advocated introduction of a result orientation into governance law (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule). As we know, Hurd was dismissed in early August in the wake of revelations of his involvement with a female HP contractor which may have included the filing of erroneous expense reports. He was paid about $35 million in cash and stock in accordance with contractual severance provisions.

In rapid succession, HP made two large acquisitions at prices well above prior market prices (HP’s Acquisition Binge Continues With ArcSight Deal). Hurd accepted a position as co-president of Oracle and Sam Palmisano, IBM’s CEO, strongly criticized Hurd’s management of HP by stating that he had drastically deemphasized research and development, IBM’s Chief Thumps H-P, WSJ, 9/15/2010.

All of this indicates that the HP board was more focused on the peripheral matters of Hurd’s relationship and expense reports than on his business strategy, which appeared to have been a short-sighted one leaving technological gaps in its offerings. We have seen too many situations where this was the case. The financial sector is a perfect example of where boards, while they may have utilized proper process, appeared to disregard highly questionable business strategies which led to disaster.

Obviously, HP has not suffered the same fate as Lehman, Bear Stearns, Citigroup, etc. Nevertheless, the spate of acquisitions coupled with Palmisano’s observations suggest that there may have been reason for concern (and perhaps actual concern) with underinvestment in the business. This makes the HP board’s focus on peripheral matters so distressing. The relationship with the contractor was irrelevant to the company’s business prospects, while the expense issue, which would have necessitated dismissal if there were clear evidence of fraud, was quite ambiguous and did not come close to this level. The payment of the large severance suggests that the board agreed that there was no clear evidence of misconduct. Apparently, no action would have been taken but for the personal indiscretions, despite much more fundamental concerns.

For governance to genuinely improve in this proxy access era, we’ll need boards to critique business strategy being pursued by management for coherence and common sense, to voice objections when necessary, and to take strong action when such objections are not heeded. As a general counsel who has experienced the problems resulting from an overly involved public company board, I emphasize that this does not mean board involvement in day to day business decisions, which must remain the province of management as a matter of efficiency and to avoid undermining management authority and credibility.

It does mean the board familiarizing itself with management’s strategy at a high level and determining if it makes sense in the first instance or, even if it did, if changing circumstances warrant fundamental changes. If management is going to be dismissed or sanctioned, it must be on account of matters which have a bona fide impact on shareholder value. Whether or not there are personal indiscretions, management must be held accountable for the direction of the company and the results of its stewardship

The HP board was apparently unwilling to act with respect to Hurd’s business strategy and acted only when peripheral matters, which are arguably minutiae, became public and embarrassed the company. Financial industry boards never acted against management which was plainly on the wrong track, because none of these peripheral matters presented themselves. The societal consequences are clear. Going forward, we need a focus on what really matters.

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Section 342 of the Dodd Frank Act — Office of Minority and Women Inclusion

The following is from a speech by SEC Commissioner Luis A. Aguilar. Hat tip to Broc Romanek for bringing it to our attention.

Congress has made clear that efforts to recruiting and promote employees from all backgrounds are efforts that the SEC, and all other financial regulators, should be undertaking. In particular, Section 342 of the Dodd-Frank Act contains a clear Congressional mandate for the SEC to establish a new Office of Minority and Women Inclusion. This Office will be responsible for “all matters of the agency relating to diversity in management, employment, and business activities.” The Director of this Office is tasked by statute with a broad mandate to develop standards for:

  • equal employment opportunity and racial, gender, and ethnic diversity of workforce and senior management;
  • increased participation of minority-owned and women-owned businesses in programs and contracts of the agency; and
  • assessing diversity policies and practices of regulated entities.

The new legislation specifically directs the agency to take affirmative steps to seek diversity in the workforce at all levels and includes steps that the SEC must undertake as a part of its outreach efforts. This new Office must be established within six months after the legislation went into effect — which means that this Office will have to be up and running in a matter of months. The SEC must by law undertake to increase diversity at every level of the agency’s workforce and I look forward to this new Office leading the charge.

In addition to government agencies needing to do better, financial market participants in the private sector also need to do more to achieve diversity in the workplace. The lack of diversity in the financial services industry is particularly acute. A 2006 Equal Employment Opportunity Commission report on employment in the financial services industry found that the percentage of African American and Hispanic managers and professionals was lowest in the securities sector (4 % and 3%, respectively).

Even more troubling, the GAO recently published a study finding that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008. According to EEOC data cited by the GAO, in 2008 white males held 64% of senior positions, African-Americans held 2.8%, Hispanics 3%, and Asians 3.5%.

Clearly, the industry must do substantially better. Moreover, the financial services industry serves as an important pipeline into corporate boardrooms across this country. Improving the diversity statistics in the industry will significantly expand the pool of candidates for board seats.

For additional information on the mandate, see Wolters Kluwer’s Dodd-Frank Act requires Office of Minority and Women Inclusion for covered agencies, 8/24/2010.

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SEC Access and Dodd-Frank Calendar

The SEC published Rule 14a-11 providing proxy access in the Federal Register (.pdf).  The rule is effective 60 days after being published in the Federal Register, or November 15, 2010. Any issuer whose one year anniversary for mailing date is prior to March 15, 2011 will not be subject to a proxy access campaign in 2011. (Hat tip to The Murninghan Post and commentators) Application of the new access rules to the smallest public companies (“smaller reporting companies” under SEC rules) will be deferred for three years from the effective date. From the release (2010 proxy season transition rules):

Rule 14a-11 contains a window period for submission of shareholder nominees for inclusion in company proxy materials of no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting. Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees for a particular company is open after the effective date of the rules. For some companies, the window period may open and close before the effective date of the new rules. In those cases, shareholders would not be permitted to submit nominees pursuant to Rule 14a-11 for inclusion in the company’s proxy materials for the 2011 proxy season. For other companies, the window period may open before the effective date of the rules, but close after the effective date. In those cases, shareholders would be able to submit a nominee between the effective date and the close of the window period.

Here’s a Compliance Week article on the SECIAC, SEC Committee to Get a Makeover Due to Dodd-Frank, 9/13/2010.

From the SEC, Implementating Dodd-Frank Wall Street Reform and Consumer Protection Act — Upcoming Activity. (Hat tip to Doug Chia via Twitter)

The deadline for comments on proxy plumbing is fast approaching, Concept Release on the U.S. Proxy System. See language and comments here.

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Video Friday

Through, I had the distinct pleasure of sponsoring a second CalPERS Candidate Forum (the first was last year), thanks to co-sponsorship by the Sacramento Central Labor Council, facilitation by the League of Women Voters of Sacramento County, use of the CalSTRS Boardroom, video by CalPERS and cooperation from 2010 State Board Election candidate Inderjit Kallirai and incumbent George Diehr, as well as unopposed School incumbent Rob Feckner and unopposed and Public Agency incumbent Priya Mathur. As I indicate in the opening video, my hope is not only that such forums will become routine at CalPERS but that CalPERS will push similar forums at corporations facing director election contests either through proxy access or the normal route.

Q&A Part 1

Q&A Part 2

Closing Statements and Conclusion

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Candidate Forum

Through, I had the distinct pleasure of sponsoring a second CalPERS Candidate Forum (the first was last year), thanks to co-sponsorship by the Sacramento Central Labor Council, facilitation by the League of Women Voters of Sacramento County, use of the CalSTRS Boardroom, video by CalPERS and cooperation from 2010 State Board Election candidate Inderjit Kallirai and incumbent George Diehr, as well as unopposed School incumbent Rob Feckner and unopposed and Public Agency incumbent Priya Mathur. As I indicate in the opening video, my hope is not only that such forums will become routine at CalPERS but that CalPERS will push similar forums at corporations facing director election contests either through proxy access or the normal route.

Q&A Part 1

Q&A Part 2

Closing Statements and Conclusion

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Response to Bainbridge Critique of Lead Director Commentary

In his post, Separating the CEO and Chairman of the Board, Prof. Stephen Bainbridge of UCLA Law School takes issue with my post on this site of 9-14 (Lead Directors: 2nd Best or A Valuable Tool?) in which I advise readers to consider the discussion of lead directors contained in Joann Lublin’s WSJ article of 9-13-10.

The dialogue continues, I take issue with Prof. Bainbridge for several reasons:

  • Contrary to his assertion, I did not say that splitting the CEO and Chairman roles is best practice, but merely that it is considered by many to be.
  • He correctly notes that studies go both ways as to the benefits of such a split. However, I suggest that in today’s environment where missteps at large firms may have such severe external consequences, such studies conducted during prior periods are less probative than would have been the case even a few years ago. Indeed his own reference to the Coates study indicates that the case for such separation is likely to be greater at large firms than at smaller firms.
  • Contrary to his apparent understanding, the purpose of my post was not to advocate for splitting the roles, but simply to indicate the potential benefits of lead directors as an alternative method of improving governance in situations where a complete split is not desired or not possible and illustrate how the concept has worked in practice.
  • Prof. Bainbridge correctly argues that an independent chairman may acquire too much power of their own:

Turning from the benefit side to the cost side of the equation, even if splitting the posts makes it easier for the board to monitor the CEO, the board now has the new problem of monitoring a powerful non-executive Chairman. … In other words, if the problem is “who watches the watchers?,” splitting the two posts simply creates a second watcher who also must be watched.

A lead director structure may be an intermediate step which mitigates this risk while still enhancing oversight of a CEO holding both positions, and reducing the likelihood of large companies going out of control in the manner which we have recently seen in the financial industry.

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CalPERS Gets Hotline

CalPERS announced two significant reforms designed to restore confidence in CalPERS and ethical conduct – the establishment of a Senior Level Enterprise Risk Management Office and  the launch of a new Ethics Helpline to identify fraud and waste.

The CalPERS Board of Administration approved the new Office of Enterprise Risk Management to identify risks in the pension industry. The Helpline will enable the pension fund to receive tips, concerns, and information regarding possible instances of wrongdoing – including possible allegations of fraud, waste, abuse, conflicts of interests, safety violations, harassment, or other misdeeds. According to Board member George Diehr:

Recent events on Wall Street, pension fraud in this state, and even allegations of wrongdoing at CalPERS have taught us that managing risk and ensuring accountability across the enterprise are critical to our effectiveness today and tomorrow. It’s a new day at CalPERS, and these additional tools for managing CalPERS are being added to a very important list of efforts we have undertaken in the last 12 months to restore confidence, integrity, and accountability to all that we do.

Other improvements include:

  • Co-sponsorship of legislation (AB 1743) that will require placement agents to be subject to strict gift limits, campaign contribution prohibitions, and be prohibited from receiving compensation contingent upon any CalPERS investment decision;
  • Tough rules for communication between Board Members and staff about investment proposals;
  • Authority to discipline Board Members who violate policy;
  • The pursuit of information and a special review to ensure CalPERS has not been victimized by placements agents; and
  • A ban on gifts to employees from business partners and potential business partners

The Ethics Helpline is designed to open the doors widely to those who might have information about possible instances of wrongdoing.  It will operate 24 hours a day, online and on the phone. It will be operated by Ethics Point, a specialized company with a strong track record for managing similar hotlines. It has more than 2,300 clients in 300 industries and its specially trained staff handles reports from 120 countries in more than 150 languages. The Helpline number is toll-free (866) 513-4216 or TTY (866) 294-9572. Service is also available on the Web at

Clearly steps in the right direction so that CalPERS can better practice the good corporate governance it preaches.

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Possible Reversal of Fortune for Bebchuk on Proxy Access

Pom Talk (New Proxy Rules Already Impacting Pending Litigation, 9/15/10) reports the SEC’s new proxy access rules, enacted on August 25, 2010 but not yet published in the Federal Register, have already found their way into court.

Based on the rule changes adopted by the SEC, the Second Circuit recently remanded Bebchuk v. Elec. Arts, Inc. to the Southern District of New York for reconsideration of its previous dismissal of the case.  We’ve previously commented on the new rules here and here.

The Electronic Arts matter arises from a proposal by Harvard law professor Lucian Bebchuk to amend the company bylaws and establish a procedure for the placement of shareholder proposals into company proxy materials.  Opponents of the proposal noted that it potentially ran afoul of the SEC proxy rules as they then existed:

Professor Bebchuk’s proposal is significant, in part, because it would enable a company’s shareholders to amend the bylaws to permit shareholders to submit director nominees for inclusion in the company’s proxy statement, even though proposals relating to the election of directors are excludable under Rule 14a-8, the SEC’s shareholder proposal rule.   Accordingly, the proposal represents an effort to gain “proxy access” – that is, access to a company’s proxy statement for the purpose of nominating directors.

The District Court agreed with that reasoning and granted EA’s motion to dismiss; holding that Bebchuk’s proposal was excludable under Rule 14a-8(i)(3) as contrary to the SEC’s proxy rules.  See Bebchuk v. Elec. Arts, Inc., No. 08-5842-cv (2d Cir. Sept. 13, 2010).  Now, nearly two years after that District Court dismissal, the Second Circuit has ruled that the SEC’s changes to the its proxy rules “may bear on the issues presented in this appeal” and the case should be remanded for reconsideration.

Addendum: Proxy access is now published. (Proxy Access: Today It’s Published in the Federal Register – March 15th is D-Day, The Corporate Counsel, 9/16/10).

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Help Get Nominated

Each year, LexisNexis honors a select group of Business Law Blogs. I’m not sure how well fits that category but we’ve been nominated and could use some publicity for our campaigns to end the practice of blank votes on proxies automatically going to management, ensure directors are increasingly dependent on shareowners (proxy access), move funds in the direction of practicing the governance they preach, fight virtual-only shareowner meetings that fail to follow best practices agreed upon by shareowners, protect the right of shareowners to submit resolutions without facing SLAPP suits, provide advice to the SEC on documenting share ownership to file resolutions, etc. Yes, we report on trends but we also try to make them.

LexisNexis is still taking nominations during a comment period that ends on October 8.  We’re not on the list of initial nominees, so our status is more tenuous than other very worthy blogs. We’ve been nominated by a comment from John Gillespie, who along with David Zweig authored Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions. LexisNexis will select the top 25 based on their review and the comments from their Community members. After LexisNexis announces the Top 25 Business Law Blog honorees, they’ll ask their Community to vote for Top Business Law Blog of the Year and we’ll be asking for your support.

To “talk up” or nominate your favorite Business Law Blog, you’ll need to be a registered Community member and be logged in. Registration is free and does not result in sales contacts. Once you are logged in, scroll to the very bottom of this page and enter your comments. In my dreams, the final voting would be among the following, in no particular order:

Of course, no sooner did I leave my comment than I thought of half a dozen more great blogs. Oh well, check out our blogroll (right side of any page) and links. It will also be great to check out all the LexisNexis nominees… another opportunity to expand our horizons.

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Lead Directors: 2nd Best or A Valuable Tool?

It’s common knowledge that separating the roles of CEO and Board Chairman (see Chairmen’s Forum) is considered by most the epitome of best practice, but is far from universal. In the wake of Sarbanes Oxley, many companies designated a genuinely independent director as a “lead director” to run meetings of non-management directors and represent independent directors in dealings with the CEO and with respect to review of the CEO’s performance. The NYSE and NASDAQ now require a comparable designation.

Joann Lublin of the WSJ on Monday September 13, 2010 had an excellent article on this topic entitled “Lead Directors Gain Clout to Counterbalance Strong CEO’s,” on the experiences of many lead directors and the value they are adding at companies such as NCR, E*Trade and Occidental Petroleum, and how they are seen by many as at least a viable alternative to independent chairmen. Specific roles and responsibilities are noted, as is the potential for lead directors to step into broader roles.

This article is an excellent “on the ground” discussion of how lead directors can improve day to day governance and well worth your time to read.

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Documenting Share Ownership to File Resolutions

Hoping to put an end to the efforts by certain executives to frustrate the ability of shareowners to submit proposals, I joined with John Chevedden and Glyn Holton in providing written advice to Meredith Cross, Director Division of Corporation Finance at the SEC, on a proposed staff legal bulletin interpreting Rule 14a-8(b)(2).

Our letter explains the confused decision in the Apache vs. Chevedden lawsuit and discusses how that should be addressed in any template providing instructions on how to document ownership when filing shareowner resolutions.  We also discuss increasingly common efforts to frustrate shareowner proposals based on the timing with which brokers or banks must document their eligibility.

Although an increasing number of proposals have been omitted on the grounds that investors failed to provide sufficient evidence of eligibility, in the vast majority of these cases there is little question that proponents actually did own qualifying shares. Their proposals were thrown out on technicalities. We hope that an SEC Bulletin will clarify the requirements, both for shareowners and issuers, so that we can all spend less time on procedural items that were never intended to present a barrier.

Read the letter; let me know what you think of it. What other efforts should be made by the United States Proxy Exchange (USPX) to protect the rights of shareowners? Join us.

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How I Voted at ACAS + How ProxyVote and MoxyVote Handle Blank Votes

Before voting American Capital Ltd. (ACAS) I checked at and saw how CalSTRS is voting. I voted with them against Harper, Lundine, Peterson, Puryer, stock option plan and against the issuance of convertible securities. CalPERS did not post how they are voting. I found no “advocates” at Although I would be happier knowing how others are voting or why CalSTRS is voting the way they are, I still trust their judgment with respect to how to vote than I do the soliciting committee at ACAS.

I also checked to see if the blank vote problem with respect to director elections had been modified at Broadridge’s ProxyVote. It hasn’t. Dodd-Frank requires the rules of the exchange to “prohibit any member that is not the beneficial owner of a security… to vote the security in connection with a shareholder vote…(with respect to the election of directors)… unless the beneficial owner of the security has instructed the member to vote the proxy…”  I don’t know if this lapse is because this provision of Dodd-Frank only takes effect when the Exchange changes its rules and they are approved by the SEC or what. (see Open eMail to NYSE Re Blank Votes)

When using Broadridge’s ProxyVote system, if I vote but fail to indicate how I’m voting on a director (or any other issue), the next screen shows that I’m voting for the director with a little asterisk next to my new vote and a note elsewhere on the screen indicating votes left blank are voted per the “soliciting committee.”

Voting on is slightly different, even though my understanding is that Broadridge still process the votes. At my ballot was pre-marked, all in favor of management. (I presume if one of my selected “advocates” recommended how to vote on the proxy that would override the default.).  At least on the system you can clearly see how your vote will be recorded on both the first and second screens and that there will be no blank votes, since if you don’t change the vote, it will be voted for management (per the soliciting committee).

I wonder if could legally set the default at Abstain, even though SEC Rule 14a-4(b)(1) says that “a proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the beneficial owner or security holder”? It seems to me that could consider that a “choice” specified by the beneficial owner, since they are warned and must check a box before finally approving their correctness of their vote before it is recorded.

Before going live with this post, I contacted and learned what I had forgotten when I set my preferences. Actually, their system does allow users to set defaults to vote with or against management or to abstain. I went back in and set mine to “abstain.”

How to: Login and go to “preferences.” At your preferences  page, look down the left hand side at the bottom under your priority cue – it says “Prioritize and manage” in a big red button – hit that button.  Then at the bottom of that page you will see a drop down menu; select always vote with, against or abstain. You get to choose.

While I wouldn’t want to set these limited preferences and forget them, I like this option much better than what Broadridge offers on ProxyVote.  At is is harder to space out because on the first screen I see everything filled out.  If I do space out, my “blank” votes no longer go to management, since I set my default to abstain.

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Video Friday

Meredith Whitney, CEO of Meredith Whitney Advisory Group LLC. In 2007, she was the first financial analyst to predict major losses for Citigroup, one of the nation’s largest financial services companies. Program from Sunday, September 5, 2010. Q&A CSpan. Hat-tip to The Big Picture.

The United States of Inequality: Introducing the Great Divergence by Timothy Noah, Slate, Sept. 3, 2010.

This Week in the Boardroom: 9/9/10, Board Preparation for Proxy Access with TK Kerstetter, President, Corporate Board Member and Scott Cutler, Executive Vice President, NYSE Euronext.

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Routes to Becoming a Director

Toronto’s Globe & Mail ran one of the better articles I have seen on the subject (How to land a seat on a corporate board, 9/7/10). It seems the Institute of Corporate Directors has seen a 25% rise in executives enrolling in its director education program, a series of courses to prepare graduates for serving on a corporate board (see Classes & Research). The article focuses on Sarah Raiss and how she came to serve on two corporate boards.

Raiss began preparing a decade ago, serving for years on boards in schools and hospitals to get experience and contacts. She went through the ICD certification program in 2006 and was recruited two years later. The article goes on to provide advice from Korn/Ferry International on what Board’s are looking for, as well as from a study involving interviews with managers and CEOs of 42 large U.S. industrial and service firms. As kiss-up as they sound, here’s the tactics they identified that lead to success:

  • Flattery as advice seeking: Congratulate an influential member about a recent success: “How were you able to close that deal so successfully?”
  • Arguing, then agreeing: “At first, I didn’t see your point but it makes total sense now. You’ve convinced me.”
  • Sidestream compliments: Praise an influential board member to his or her friends, hoping word gets back to them.
  • Get on a wavelength: “I’m the same way. I’m with you 100 per cent.”
  • Conform to opinions: Covertly learn of chairman’s opinions from his/her contacts, and then conform with their opinions in conversations with others who can influence the decision.
  • Point out connections: Reference religious or political connections the individuals have in common.

Now, with proxy access, there may be another way. I’m sure taking board training, having C-suite and nonprofit board experience are still positives, but maybe a little less kissing up will be involved.

CalPERS and CalSTRS are building a database of potential directors from diverse backgrounds. “The database is a gateway to a broader universe of untapped talent, which can be overlooked as a result of a narrowly focused board profile,” according to Ashley Taylor, who is heading up the project. Individuals have already begun submitting resumes to: [email protected].

Another option for CalTRS and CalPERS might be to explore directors who resigned in dissent from their board. Cassandra D. Marshall’s Are Dissenting Directors Rewarded? (August 28, 2010) used a hand collected sample of 278 boardroom disputes reported in 8-K filings during 1995-2006 and showed that firms which have disputes are small, highly levered, have poor profitability, and have boards dominated by management. For all types of directors across all types of disputes, directors who resign in protest experience a net loss in board seats of 85% over the five year period following the dispute. Although the market, often driven by entrenched managers and boards, don’t reward dissent, maybe funds seeking proxy access candidates will find a gold mine of individuals with backbone.

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