Archive | October, 2010

Do Independent Directors Cave to Shareowner Pressure, Creating Higher Risk?

Interesting article in The Economist (Corporate Constitutions, 10/28/2010) on the recent revolution in corporate governance.

in 2009 less than 12% of incoming CEOs were also made chairmen, compared with 48% in 2002. CEOs are held accountable for their performance—and turfed out if they fail to perform, with the average length of tenure dropping from 8.1 years in 2000 to 6.3 years today. Companies have turned to a new class of professional directors, and would-be directors sign up for bespoke courses at business schools because Sarbanes-Oxley makes them personally liable for the accounts that they sign.

While Nell Minow and other corporate governance activist point to the recent financial crisis as evidence more reforms are needed in this direction, The Economist cites research by David Erkens, Mingyi Hung and Pedro Matos, of the University of Southern California (Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide), which found “the proportion of independent directors on the boards was inversely related to companies’ stock returns.” Institutional owners pushed firms to take more risks and independent directors appear to be more subject to their pressure.

However, the same authors also point out that the evidence from Asia suggests that greater external monitoring has produced better performance. The Economist concludes,

Good corporate governance on its own cannot make up for a toxic corporate culture. Reformers should continue to experiment with systems of checks and balances. But they would also profit from spending less time drawing up ideal constitutions and more time thinking about intangible things such as firms’ values and traditions.

In my opinion, this provides further evidence for the value of the UK’s newly introduced Stewardship Code… something the US would do well to study and modify for our own use.

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UK Looks at Short-termism

UK’s Secretary of State for Business, Vince Cable, launched a consultation into corporate governance and whether failures in that process are stoking a trend for short-termism in investment that damages the long term interests of companies and many of their investors.

Vince Cable, BBC photo

The consultation will examine allegations that publicly quote companies are being run in order to create short-term spikes in share value, rather than for the long-term benefit of the company, the economy and its longer term shareholders. Said Cable,

The paper I am issuing today is a call for evidence from across the corporate world and beyond to examine whether the system in which our companies and their shareholders interact promotes long-term growth – or undermines it. I want a serious examination and debate into the role of investors and the time horizons over which they operate; the factors influencing board decisions; the reasons for the growth of directors’ pay; the impact of the investment chain; why returns from equity have reduced; and why takeovers that are economically damaging still take place.

Comments can be submited via “the response form.” The form can be submitted by letter or email to: Adam Gray Long-term Focus Consultation Corporate Law and Governance Department for Business, Innovation and Skills 1 Victoria Street London SW1H 0ET [email protected].

The consultation provides a nice very brief overview of history and regulatory framework. Key questions posed include:

  1. Do UK boards have a long-term focus – if not, why not?
  2. Does the legal framework sufficiently allow the boards of listed companies to access full and up-to-date information on the beneficial ownership of company shares?
  3. What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
  4. What are the most effective forms of engagement?
  5. Is there sufficient dialogue within investment firms between managers with different functions (i.e. corporate governance and investment teams)?
  6. How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publically how they have voted?
  7. Is short-termism in equity markets a problem and, if so, how should it be addressed?
  8. What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions? What are the benefits and costs of possible actions to encourage longer holding periods?
  9. Are there agency problems in the investment chain and, if so, how should they be addressed?
  10. What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
  11. What are the main reasons for the increase in directors’ remuneration? Are these appropriate?
  12. What would be the effect of widening the membership of the remuneration committee on directors’ remuneration?
  13. Are shareholders effective in holding companies to account over pay? Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?
  14. What would be the impact of greater transparency of directors’ pay on the linkage between pay and meeting corporate objectives performance criteria for annual bonus schemes relationship between directors’ pay and employees’ pay?
  15. Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
  16. Should the shareholders of an acquiring company in all cases be invited to vote on takeover bids, and what would be the benefits and costs of this?

This seems to me to be a very positive step. I’d like to see the SEC in the US issue a concept release, perhaps even more focused on the issue of short-termism, or perhaps this is something their yet to be reconstituted Investor Advisory Committee could initiate. I think we’ve been too focused on liquidity and not enough on encouraging long-term investment.

Also of interest, UK Takeover Panel Publishes Review of Takeover Rules (HLS Forum on CorpGov and Fin Reg, 10/30/2010). “amendments to the Code will clarify that target boards may “take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders,” primarily employees of the target company.  Offeree companies will “not be limited in the factors they may take into account in giving their opinion” on a bid, and the Code will be amended to require disclosure of additional information so that “the offeree company board and all other interested constituencies [can] consider the long term effects of an offer on the merged business in all circumstances.”

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Diehr Elected: Another Candidate Forum Planned

George Diehr has been officially re-elected to the board of administration of CalPERS, as the state elected member. Diehr received 77.5% of the votes; Inderjit Kallirai received 22.4%. Only 28,373 votes were cast by state and Cal State University employees out of about 340,000 eligible voters. We tried to boost interest and voting by holding a candidate forum, also sparsely attended. (see Candidate Forum coverage)

Diehr, who was first elected to the CalPERS’ board in 2002 is vice president of the board and chairs the powerful investment committee. Rob Feckner, current president of the CalPERS board and the school representative, and Priya Mathur, public agency representative, both ran unopposed and were already declared winners.

With the recent resignation of Kurato Shimada, there will be another election at CalPERS next spring. With no incumbent running and since the seat is elected by all members of the system, I expect much higher interest and intend to sponsor another candidate forum.

I may ask candidates a number of questions in advance of the forum so that potential voters and the public have a better understanding of their positions on the issues even before a forum is held. I did this before the 2009 Forum. (see CalPERSCandateResponses2009, a pdf file file with Q&A from 2009). Please send your suggestions for candidate questions, as well as ideas about Candidate Forum sponsors and format via email or by posting comments here (You must register before posting comments. No spam will be posted. To register, see bottom right column under Administration.)

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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.
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Video Friday: Pattanik on India, Chevron's "We Agree" Campaign

Devdutt Pattanaik takes an eye-opening look at the myths of India and of the West — and shows how these two fundamentally different sets of beliefs about God, death and heaven help us consistently misunderstand one another.

Chevron’s “We Agree” Ad Campaign

Environmental and human rights activists have revealed the various leaks that permitted them to wreck the recent launch of Chevron’s ultra-expensive new “We Agree” ad campaign. The revelations came with the announcement of a new print and video contest that, for a few dollars, continues the fight against Chevron’s mega-millions in a no-holds-barred PR smackdown. (One video, submitted by the comedy troupe Funny or Die, is already cracking up online legions, as are a large number of print submissions. An upcoming billboard alteration contest promises to up the ante yet further.)

Chevron’s plan for the “We Agree” offensive was first leaked to Amazon Watch over a month ago, when ecologist blogger Lauren Selman received a casting call to appear in one of Chevron’s new split-screen television ads. Selman used the information she gathered to help Amazon Watch, the Rainforest Action Network, and the Yes Men pre-empt Chevron’s insulting PR campaign. (Read Selman’s blog post here.)

Another leak came shortly after, when Chevron’s ad agency, McGarryBowen, asked DC street artist César Maxit if he could help wheat-paste the new Chevron posters. Instead, Maxit sent the Chevron files to the Rainforest Action Network and helped build their campaign. (See video here.)

The activists’ continuing efforts are ensuring that Chevron’s PR strategy backfires severely, as media continues to highlight Chevron’s poor environmental and human rights record. That’s exactly the point, say the activists: to raise public awareness around Chevron’s abuses in Ecuador and elsewhere, and ultimately force Chevron to do something about them.

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Bainbridge Guide to Dodd-Frank

In his paper, The Corporate Governance Provisions of Dodd-Frank, Stephen M. Bainbridge  provides a brief overview of the seven principal corporate governance provisions of The Wall Street Reform and Consumer Protection Act of 2010 (better known as “The Dodd-Frank Act”).

  1. Section 951 creates a so-called “say on pay” mandate, requiring periodic shareholder advisory votes on executive compensation.
  2. Section 952 mandates that the compensation committees of reporting companies must be fully independent and that those committees be given certain specified oversight responsibilities.
  3. Section 953 directs that the SEC require companies to provide additional disclosures with respect to executive compensation.
  4. Section 954 expands Sarbanes-Oxley Act’s rules regarding clawbacks of executive compensation.
  5. Section 971 affirms that the SEC has authority to promulgate a so-called “proxy access” rule pursuant to which shareholders would be allowed to use the company’s proxy statement to nominate candidates to the board of directors.
  6. Section 972 requires that companies disclose whether the same person holds both the CEO and Chairman of the Board positions and why they either do or do not do so.
  7. Section 989G affords small issuers an exemption from the internal controls auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act.

The paper elaborates further on each provision and provides a useful guide.

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Diehr Wins in Low Turnout CaPERS Election

George Diehr has been officially re-elected to the board of administration of CalPERS, as the state elected member. Diehr received 77.5% of the votes cast; Inderjit Kallirai received 22.4% of the eligible vote. Only 28,373 votes cast by eligible state and California State University employees out of about 340,000 eligible voters. I did my part to try to boost voting by holding a candidate forum, also sparsely attended. (see Video Friday coverage)

Diehr, who was first elected to the CalPERS’ board in 2002 is vice president of the board and chairs the powerful investment committee. Rob Feckner, current president of the CalPERS board and the school representative, and Priya Mathur, public agency representative, both ran unopposed and were already declared winners. (Diehr wins re-election to CalPERS board, P&I Daily, 10/27/2010)

With the recent resignation of Kurato Shimada, there will be another election at CalPERS next spring. With no incumbent running and since the seat is elected by all members of the system, I expect much higher interest and intend to sponsor another candidate forum. I may ask candidates a number of questions in advance of the forum so that potential voters and the public have a better understanding of their positions on the issues. Questions for candidates from readers are welcome.

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Shareowner Response to Virtual Annual Meetings

For almost a year, the United States Proxy Exchange (USPX) has spearheaded a shareowners response to the threat (and opportunity!) of virtual annual meetings. The immediate concern has been corporations hosting virtual-only annual meetings without shareowner-approved guidelines or safeguards to ensure all participants’ rights are upheld.

When intel announced plans to hold a virtual-only meeting, we convinced them to change course and hold a hybrid (both live and virtual) meeting instead. We organized a letter writing campaign to protest Symantec’s virtual-only meeting. When that attracted national media attention, Symantec promised to hold a hybrid meeting next year.

While our movement has had success challenging inappropriate virtual-only meetings, we cannot continue to do so 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 is organizing a three-pronged shareowner response:

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

  2. Actively encourage corporations to hold hybrid annual meetings, so long as they do so according to the guidelines, and

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

We have formed a group (currently composed of Brett Davidson, Glyn Holton, Michael Malamut, Jim McRitchie, and Steven Towns) to organize this response. Their first step is to draft a white paper to identify issues and opportunities raised by virtual meetings. The white paper will not propose any guidelines or answer questions. Rather, it will pose questions, asking how shareowners feel they should respond to issues and seize opportunities. We hope the white paper will be ready in six weeks, at which time we will invite member comments. Based on member comments, we will draft possible guidelines for the conduct of virtual meetings, which members will edit, debate, and ultimately vote on in a members forum early next year.

Plans are coming together rapidly. This is extremely important work, and we need your help! Please contact Glyn Holton to join the organizing group.

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Change in USPX Memberships

The United States Proxy Exchange (USPX) is a young, rapidly growing grassroots organization. We are experimenting, trying new things and learning. Just in August, we launched memberships for our supporters. This has been an enormous success, but based on early feedback, we are making a change.

We had planned on accepting corporations or other organizations as institutional members. However, we have changed our minds. We think it is important that we be able to cooperate with some of the organizations that represent institutions, but there were indications that, if we sought to make their members our members, they would view us as competitors. Henceforth, we shall accept only individuals as members.

In no way will this impact the work we do or the people who are involved in our organization. We will continue to reach out to institutions and ask them to participate in our campaigns.

Ours is a sophisticated membership, and we encourage individuals who work for institutions to join our organization as members. Can you afford $3.95 a month? If you are not already a member, please join today.

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LexisNexis Top 25 Business Law Blogs of 2010

Quite frankly, I didn’t think of as a “business law blog” until being nominated. It seems like a reasonable category, as long as I don’t have to go to law school! Of course, now I’d love readers to vote to top honors. First, you must register. That’s free and doesn’t result in sales contacts. Once you are logged in, you can then vote.

However, far more important than voting, would be getting familiar with the 25 blogs. Several are new to me, so let’s size up the competition in alphabetical order. Differing opinion than my two minute assessment? Send me an e-mail or post a comment.

  • The Business Law Blog – start ups and small business don’t especially interest me as a topic but I like how he’s laid out his blog.
  • Business Law Post – legal aspects of operating new and growing businesses. Long post on how to choose state of incorporation for start-ups. More relevant to corpgov.
  • Business Law Prof Blog – several law professors on various issues. Now we’re getting into greater depth. I’ve been here before and will return again.
  • California Corporate & Securities Law – I haven’t found a better source for California law and his focus isn’t quite that limited. We’ve shared concerns on CalPERS rulemaking. Not many others focused there. Already on my blogroll.
  • Compliance Building – mostly real estate private equity firms. Not my cup of tea but I also see articles on SEC complaints and California placement agents. I’ll be back.
  • Conference Board Governance Blog – Gary Larkin writing for the Conference Board. I wish I had such backing. He gets nominated after one year; its taken me 15. Bittersweet. I’m a frequent visitor. On my blogroll.
  • The Conglomerate – another law professor blog. I’ve been here before and will be back but haven’t added to my blogroll. Not targeted enough for me… my time’s running out so I try to stay focused.
  • – chronicling and instigating efforts to make corporate governance more democratic. Fifteen years to get nominated. Go ahead and vote now. If I get more ad revenue I can cover more conferences.
  • – Fantastic resource from Broc Romanek and Dave Lynn. Not only on my blogroll, I also have a widget on with a streaming feed from them… plus daily e-mails, Twitter, great database and really stupid surveys. Better stop before I lose too many votes.
  • Corporate Law and Governance – UK, Aston Business School, corporate law and governance insights. On my blogroll. If I wasn’t so damned focused on the US, I’d visit more often. Great insights with a more international flavor.
  • The Corporate Library Blog – Again, jealous of their resources… but wouldn’t want to live in Portland, Maine. Getting paid to do good work; how great is that? Terrific site for trends corporate governance trends, risk analysis and sustainable investing. On my blogroll. Everybody already knows these heroes + if they changer their name to AAA111 Corporate Library Blog, they’ll be at the top of the alphabetical heap… so vote
  • Delaware Corporate and Commercial Litigation Blog – Francis Pileggi offers Delaware business litigation case summaries primarily from the Chancery and Supreme Court. A little too specialized for my daily reading but excellent source for Delaware law.
  • The D&O Diary – again, a little too specialized for my daily reading. Great on topic.
  • FCPA Compliance and Ethics Blog – ditto. When I need info on FCPA compliance,  risk management, tax issues, trade secrets… good source.
  • FCPA Professor – ditto again. Too specialized for me. Looks good on topic.
  • Harvard Law School Forum on Corporate Governance – I couldn’t compete against Harvard Law, so I became a guest contributor. If they get any more contributors or list any more awards, they won’t have any room for posts. Of course, they’re on my blogroll.
  • The Investment Fund Law Blog – Legal issues facing investment fund managers and investors. 15 contributors. This one is new to me. I subscribed to learn more. Looking for it to develop further.
  • M&A Law Prof Blog – Corporate Takeovers, Mergers and Acquisitions. Again, too specialized for me but I see some interesting commentary here.
  • Nancy Rapoport’s BlogSpot – Broader focus but too much like Facebook page from my brief look. I’ll check back someday.
  • New York Business Litigation and Employment Attorneys Blog – Probably too much on general practice for me but some interesting posts on Dodd-Frank. I’ll give it another look.
  • PLI Securities Law Practice Center – Lots of contributors. They’re on my blogroll. I should visit more often.
  • Race to the Bottom – I like the concept of a faculty/student collaborative, although most posts are by Jay Brown. Goes into more depth on issues of interest to me than any other Blog on the list (except Harvard Law, which has an extensive list of contributors). Great insights.
  • SEC Actions – SEC investigations, Civil and Criminal Enforcement Actions, Class Actions and Internal Investigations. Not my focus but great resource.
  • SEC Tea Party – Commentary on SEC Administrative Opinions. What’s in a name? Not my cup of tea because not my focus. New to me. I’ll check back.
  • Securities Law Prof Blog – I think this is a new one for me but looks familiar and somewhat interesting. I subscribed and look forward to getting to know the blog better.
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Corporate Governance Does Not Belong in the Home!

The increasing concerns of institutional investors and their advisors around reimbursement of new executive hires for losses on home sales necessitated by relocations, summarized in an excellent article by Joann Lublin of the WSJ of October 25, 2010, entitled “Shareholders Hit the Roof Over Home-Loss Subsidies” is confusing, to say the least. It’s certainly desirable that large shareholders are becoming more vigilant in their oversight of boards and management. However, I don’t see what is accomplished through a focus on this item.

As an illustration of the current situation, Patrick McGurn of ISS states that “Home loss provisions are a hot-button issue with our institutional clients.”

This may be, but I think it is unproductive. I’m a lot more concerned with management and board performance, as it translates into company performance, than I am with pay per se. To the extent pay is relevant, this should be on account of either its overall incentive effects regarding performance or whether it has any connection to “market value” for the position in question. Simply protesting this (or any individual) item of someone’s pay package has nothing to do with company performance. It makes no sense to address any individual line item for someone, without addressing their aggregate pay and assessing its implications and level.

Money being fungible makes it pointless and counterproductive to protest reimbursement for a home sale loss, if the beneficiary’s overall package is well structured for incentive purposes and in line with the market. If a corresponding increase in salary or bonus would not prompt shareholder protest, why should a protest result from the name of the payment? Similarly, if there is good reason to protest total compensation, the rationale still exists, notwithstanding the formal designation of a portion of it. Good performance relative to total pay should not lose its luster because of a home sale provision … and vice versa! For new hires, there will be little opportunity to evaluate performance, so the incentive structure and “fit” in the market will need to be closely evaluated.

All of this being said, it seems curious that the topic even exists. Such provisions make it more costly to hire someone who recently purchased a home, and is now required to relocate than someone who is similarly qualified but purchased their home 10-15 years ago, and still has some profit, or who has been renting during the same period. A given position is worth what it is worth in the market, and should not have its value tied to the housing status of its occupant any more than to such person’s marital status.

With the crying need for improved governance in order to avoid future financial meltdowns and corporate scandals, I suggest that a fundamental step in this direction would be an increased focus on aggregate performance and compensation and a reduction in concern with specific items, irrespective of what the analyst thinks of any of them.

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End to Forum Shopping?

The always creative Joe Grundfest, a Stanford Law School professor and former SEC commissioner, proposes that public companies adopt charter provisions to select in advance the forum where shareholder litigation would occur… Delaware, in most cases. He argues:

Forum selection clauses are common in commercial agreements. They are also broadly respected and readily enforced, even when characterized as contracts of adhesion. In contrast, forum selection clauses in charters and bylaws governing intra-corporate disputes are exceedingly rare. This presentation, which accompanied the 2010 Pileggi Lecture at the University of Delaware, documents the incidence and evolution of forum selection clauses in publicly traded entities. It analyzes the specific language used in these provisions, observes that these provisions tend to arise in distinct clusters, and suggests that the incidence of these provisions has increased dramatically (though off a small base) since the recent Revlon decision in Chancery. It also explores the causes of the divergence in incidence, and considers whether forum selection clauses are likely to be enforced by the courts. The analysis concludes that forum selection clauses should be enforceable whether included in a charter or bylaw, and should bind all shareholders, without regard to whether they were adopted pursuant to a shareholder vote or whether the shareholder acquired stock before or after adoption of the provision.

Privately held firms might best adopt elective forum selection provisions prior to an IPO, and publicly traded firms can adopt forum selection provisions in their charters or bylaws. Obtaining majority shareholder support for a charter amendment may be easier than some observers expect. If a corporation determines that it prefers not to amend its charter, board action is sufficient to amend the bylaws, as recently demonstrated by Chevron. The benefits of adopting a forum selection provision will likely exceed the costs for most entities. If this calculus is correct, there should be a large increase in the incidence of intra-corporate charter or bylaw forum selection provisions in coming years.

Read further discussion of the concept by Steven M. Davidoff (A Litigation Plan That Would Favor Delaware, NYTimes, 10/26/2010) who clarifies the provision would only be effective for state law claims, such as those  involving breaches of fiduciary duty, not federal claims such as securities fraud charges. Watch for the number of companies with such provisions to quickly spike well beyond the current 23 companies. This move is likely to cut down the incidence of litigation; will shareowners still be protected? For additional background, see Are Delaware Courts “Losing” Cases on Delaware Corporate Law Filed Elsewhere, Delaware Corporate and Commercial Litigation Blog, 4/27/2010.

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Help With Say on Pay

Towers Watson launched an online survey tool to help companies better understand their shareholders’ views and perceptions on their executive compensation programs.

Dodd-Frank requires publicly traded companies to conduct periodic shareholder votes on their executive pay programs, including how often to conduct say-on-pay votes. In preparation for the say-on-pay era, many companies are trying to engage their key shareholders in a dialogue about executive compensation and related issues. According to Eric Larré, a Towers Watson consulting director who spearheaded the survey’s development:

For most U.S. companies, giving shareholders a say on pay will be a new experience when the 2011 proxy season arrives.  And most companies are still trying to determine how to address the shareholder engagement process. This survey offers shareholders an easy way to express specific views that Congress and the SEC determined they were entitled to communicate via the proxy process.

The Towers Watson online survey tool allows shareholders to complete a questionnaire and provide their views on a wide range of executive compensation programs and issues including pay philosophy, performance measurement, pay levels, governance and shareholder preferences regarding the frequency of future say-on-pay votes. The questionnaire consists of both multiple-choice and open-ended questions. Companies receive a detailed report summarizing shareholders’ responses, including an analysis of differing views of shareholders and what percentage of all company shareholders the respondents represent. Said Larré:

Many companies are concerned about say on pay, and want to avoid the embarrassment and reputational damage resulting from negative or less-than-favorable shareholder votes on their pay programs. They are also concerned that the actual proxy voting process, which allows only for a yes or no vote, will provide little insight into shareholder views of a company’s program and the hot buttons that can spark negative votes. Our survey is a simple, cost-effective way for companies to engage with key shareholders and gain the insight needed to help enhance shareholder support for their pay programs. The institutional investors we consulted in developing the survey are also looking for an efficient way to make their views and concerns known, so this survey tool benefits everyone involved in the process.

Of course, the survey is designed to help companies gain more shareowners support for say on pay votes but I believe its development signals a shift and I expect many more such tools designed to increase communication between boards and shareowners. (Fact Sheet) Hat tip to Gary Lutin’s Shareholder Forum for bringing this new to our attention.

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New Direction for Corporate Secretaries?

I don’t normally write about people switching jobs in the world of corporate governance but Kenneth A. Bertsch joining the Society of Corporate Secretaries and Governance Professionals as their new President and Chief Executive Officer may be one of those more noteworthy moves.

Over the course of my 15 year involvement in corporate governance, I have never seen the Society as a progressive force. Now, there is that potential. Bertch has broad (and deep) experience, from his early days at the Investor Responsibility Research Center and TIAA-CREF to his more recent experience as managing director for Moody’s Investors Service and his current job as executive director, corporate governance at Morgan Stanley Investment Management.

Finally, the Society has a leader who can not only communicate with the various stakeholders but can also deeply identify with shareowners.

The Society’s members support corporate boards and CEOs regarding disclosure, compliance, listing and other corporate governance requirements. They provide educational programs, develop best practices, provide data and constructive comments… and they occupy a very difficult position between CEOs and boards. With boards increasingly accountable to shareowners, although not nearly as great a shift as some of us would like, it is good to know the CEO of the Society at least has a very good understanding of shareowner expectations.

For example, under Bertch, I would not expect the Society to continue to push the very closed version of Client Directed Voting first proposed by Stephen Norman in 2006. Looking back at the origins of the concept, on October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting in the election of directors. Two months later in December 2006, Steve Norman presented his proposal to allow managers to essentially recapture broker votes. (see An Open Proposal for Client Directed Voting)

Congratulations Mr. Bertch. Not many years ago, the Society changed its name to reflect its growing emphasis on corporate governance. I fully expect Bertch’s appointment to accelerate that shift and that now the Society will play a more substantial role in bringing stakeholders together by creatively helping us to adapt to a quickly changing environment.

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Enhancing Shareholder Value: What's Hot in M&A and IP

Wilson, Sonsini, Goodrich & Rosati

It had been months since I’d attended an SVNACD breakfast meetings. Top talent was on hand, both among the panelists and in the audience. The facility at Wilson, Sonsini, Goodrich & Rosati was great. Sorry about photo quality… first time working with a new camera that I may not keep.

As usual, my notes are cryptic, without much of an attempt to thread coherent sentences. I’m tempted to say the following is for entertainment purposes only, but that would be too escapist. Corrections, comments and better photos are welcome.

My purpose is to provide readers with a sense of what was discussed and highlight a few areas. It may help you know what to investigate further and you’ll be that much more incentivised to attend in person to get answers to your concerns.  Continue Reading →

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Video Friday: Economic Outlook & TARP Hearing

Watch, as BNY Mellon’s Chief Economist Richard Hoey presents a summary of his October update.

We continue to expect a broad sustained global economic expansion over the next several years with the fastest growth in those countries in the strongest financial position (largely in the developing world) and the slowest growth likely in those countries with a debt hangover (largely in the developed world).

Another part of his message, although people are having a tough time digging out of debt, corporations have dramatically improved their positions. Profits have improved substantially, they refinanced their debt at lower cost and have been “cautious” about expanding capacity.

Also, panel II of a hearing of the congressional oversight panel
 subject: executive compensation restrictions for companies that received troubled asset relief program funds chaired by: Senator Ted Kaufman (D-DE).

Witnesses: Professor Kevin Murphy, the University of South Carolina’s (sic/means University of Southern California) Marshall School of Business; Professor Frederick Tung from Boston University School of Law; Rose Marie Orens, a senior partner at Compensation Advisory Partners; and Ted White, strategic advisor for Knight Vinke Asset Management and the co-chair of the International Corporate Governance Network Executives Remuneration Committee. (538 Dirksen Senate Office Building, Washington, DC. 12:21 P.M. EDT, today, 10/21/2010. FNS subscription required.)

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CalPERS Boosts Transparency: Will Post Travel Expense Claims

Taking another step to increase transparency, the CalPERS Board has approved publishing on the CalPERS website all travel expense claims and statements of economic interests submitted by Board Members and key staff personnel. The travel information will be posted online within one month of the date of reimbursement. The statements of economic interest – known as Form 700s – will be posted by the end of the month following the month in which the filing is received by CalPERS. The new policy takes effect January 1, 2011.

For someone who frequently criticized the CalPERS Board and staff about this issue for many years (not in the last few years), this is a huge development. CalPERS sets a new, much higher, ethical standard with this move. CalPERS seems to be taking to heart the idea of leading by example.

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CorpGov WayBack Machine: Political Power, Dilution, 1st Virtual Fight, Fiduciary Capitalism

Five years ago we discussed Political Power and Corporate Control: The New Global Politics of Corporate Governance by Gourevitch and Shinn. Here are just a few of their observations:

  • Blockholding and minority shareholder protections are negatively correlated.
  • Minority shareholder protections and share price are positively correlated.
  • Blockholding dips after increased minority shareholder protections are likely the result of sales by “new money” entrepreneurs, rather than old money blockholders (who may fear the tax collector).
  • Blockholding may be preferred when uncertainty is high.
  • State-owned enterprises are the most aggressive users of ADRs.
  • Money flows toward firms and countries that provide shareholder protections. “No other group can have quite this direct an effect on the economy…the economic vote of investors counts greatly against the mass of votes in elections.”
  • Where job security is strong, diffusion is weak, and minority shareholder protections are weak.
  • Weak intermediate institutions of finance, investment, pensions and stockmarkets are correlated with little voice for shareholder rights.
  • “The U.S. Securities regulation system assumes that institutional investors and reputational intermediaries are the agents of investors.” “Yet it has become increasingly clear to many observers that these private actors have multiple, complex incentives…”
  • “As much as 10 percent of the total ownership of U.S. public firms was transferred from the existing stockholders to senior managers through stock option grants between 1990 and 2000.”

Ten years ago, we reported that S&P 500 shareholder earnings-per-share experienced dropped 6% due to dilution from options, according to a Bear Stearns report sited by Investor Relations Business (10/23/2000), up from 4% in 1998 and 3% in 1997. Investors in the semiconductor industry were hurt the hardest, with a 43% aggregate decline due to stock options.

In another item, Les Greenberg, an arbitrator for the National Association of Securities Dealers, filed documents with the SEC to formalize a proxy fight to get himself and four others elected to Luby’s 12-member board in January. A 10/24 Wall Street Journal article, “Online Grousing Over Luby’s Escalates to Proxy Solicitation,” indicates no previous proxy solicitation organized over the Internet has ever reached the SEC stage before. The dissident slate and supporters met on a Yahoo Internet board and includes two former Luby’s vice-presidents, a daughter of one of the companies cofounders and an investment manager.

Hawley, James P. and Andrew T. Williams, The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic, University of Pennsylvania Press, 2000. Some of the ideas discussed include the following:

  • Institutions could slim down their portfolios. Holding larger proportions in each firm would encourage further monitoring and a sharing of such responsibilities.
  • Shareholders could encourage corporations to purchase the services of monitoring firms to provide an independent analysis of proxy issues (see the Corporate Monitoring Project).
  • Split chair and CEO positions.
  • Include suppliers, employees and other key stakeholders more directly as shareholder and on boards.
  • Revise SEC rules to loosen barriers to collective action.
  • SEC, banking and state insurance regulators should impose a “statement of obligations” with respect to proxy voting similar to the Department of Labor’s Avon letter and subsequent guidance.
  • Ban broker voting. Non-votes would not be counted.
  • Guarantee full proxy-voting rights to employees in ESOPs by amending ERISA.
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Only a Few Hours Left to Comment to SEC on Proxy Plumbing (updated)

On July 14, 2010 the Securities and Exchange Commission voted unanimously to issue a concept release seeking public comment on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency. Today is the last day to comment within the formal timeline. Looking through the comments posted thus far, here were some of the more interesting for me:

  • Niels Holch, Executive Director, Shareholder Communications Coalition – More than any other group, probably helped establish the framework of the SEC’s release.
  • James McRitchie, Sure, I’ll plug my work:
  • Mark Latham, Innovative market-based solutions. Open client directed voting, competitive funding for proxy advice, the need for the proxy communications system to be kept outside corporate management’s control — taking the opposite position from many on this last issue but with sound reasoning.
  • John C. Wilcox, ICGN. Need for dematerialization of shares, establish guidelines for identifying the beneficial owner or “ultimate investor” entitled to exercise voting rights, supports further development of open client directed voting
  • Glenn H. Davis, CII. Favors a robust system of client-directed voting, data-tagging for proxy–related materials
  • Wachtell, Lipton, Rosen & Katz. Calls for proxy advisory services to be regulated and increase disclosures, a very closed form of client directed voting that essentially brings back broker votes
  • Keith Bozarth, SWIB. Does not favor changing private OBO status

Broc Romanek, highlights some other comments at this morning.  Time is running out.

USPX just provided comments, which attempts a more comprehensive question by question response. A few creative highlights:

In an honest election, votes that aren’t cast should remain not cast. You don’t offer those votes up to whomever would like a little extra suffrage: “Unused votes! Who wants ’em?” That, essentially, is what the post-reconciliation and hybrid methods do, at least as described in the Concept Release.

We define a reconciliation method as “accurate” if it reproduces the result that would be obtained if, instead of the current system of street name registration, a direct registration system prevailed, with individual shares tracked through clearance and settlement to individual beneficial owners. With an accurate reconciliation method, as so defined, there will never be over-voting of any sort. Votes won’t be recycled, as defined in our response to question 1. No investor will be denied a vote because someone else’s trade failed to settle. Investors’ interest in fair, undistorted corporate elections will be protected.

The Commission should enforce this right (to withhold proxies) by allowing shareowners to prevent anyone from voting a proxy on their behalf. One solution would be to do away with Rule 452 entirely. Another would be to provide a check box on all proxies or VIFs allowing shareowners to withhold their proxy.

Most of the problems with today’s proxy system arise because of the current system whereby shares are immobilized by DTC and shareowners trade security entitlements. This system was intended as a temporary stop-gap in the 1970s, when it was implemented. At the time, technology to support an automated direct registration system didn’t exist. Today, that technology could easily be implemented. Rather than keep patching the broken-down system of DTC and immobilized stock certificates, perhaps resources should be invested in a comprehensive direct registration system. That would solve many problems with the current proxy system, including that of confirming votes.

The OBO/NOBO distinction should be scrapped. Shareowners should not be allowed to refuse direct corporate communications.

We have serious reservations about allowing anonymous investment in public corporations. We understand this is a foundational issue, but we believe the time is long overdue for public debate on the question.

We believe it is in the public interest that individuals not be allowed to finance corporate activities—with their potential to produce enormous good or enormous evil—anonymously. We understand some believe anonymity is important for the conduct of certain speculative trading activities. We are unimpressed and remind the Commission that its mandate says nothing about facilitating speculative trading.

Disclosure of all beneficial owners would not harm investors. It should occur more frequently than annually and include information on the length of time shares were held, which would facilitate proving ownership for purposes of Rule 14a-8 and proposed Rule 14a-11. We are not concerned about disclosures impairing speculative trading strategies.

It would also be helpful for the Commission to establish guidelines for identifying the beneficial owner or “ultimate investor” entitled to exercise voting rights. For example, full voting rights should be passed to 401(k) plan participants for holdings in the employer’s company.

Banks and brokers should not be offering their retail clients options such as “always vote with management”, “always vote against management” or “vote according to this third party’s recommendations”. Rather, they should be offering their clients the single option of transferring their proxy to a voting platform that would then make all the same options—and many more—available to them.

Because the voting platforms would receive proxies—and not VIFs—they could pass client votes directly to vote tabulators, bypassing the expense and inevitable errors associated with passing votes back to the client’s securities intermediary and then on to Broadridge.

We have serious concerns about rudimentary forms of client-directed voting that would have shareowners making elections such as “always vote with management”, “always vote against management” or “always abstain”. We call such rudimentary forms of client-directed voting “zombie voting”. If offered on proxy voting platforms along side of more robust options, we believe these rudimentary options would be little-used, posing little problem. If offered at the bank or broker level, as part of only a limited suite of options for client-directed voting, we believe these rudimentry options would be quite widely used, causing systemic problems.

Another form of client-directed voting mentioned in the Concept Release would allow shareowners to elect that their shares be voted according to recommendations— or pre-announced votes—of some third party. Again, we believe such options would be appropriate if offered through a proxy voting platfform. If offered at the bank or broker level, they will pose unique systemic issues. In particular, they will likely lead to violations of Rule 13(d).

Rule 14a-2(b)(6) should be revised to provide for discussion of issues related an issuers proxy up to the date voting closes.

We believe all VIFs should be replaced with discretionary proxies.

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Moving Corporate Governance Out of the Fraternity House

Perhaps it takes the mass media to illustrate the skewed focus of corporate law. Here we have the [at least for now] CEO of Tribune Company, Randy Michaels, under fire for a lot of superficial things, such as an alleged frat house atmosphere in the company, while his role in the company going into and staying in bankruptcy during his three year tenure wasn’t enough to bring about such scrutiny or cause the board concern about its own exposure. It took a misstep by one of his subordinates in circulating an offensive video and public disclosure of a ‘frat house’ atmosphere to bring things to this point. (Tribune Co. CEO Randy Michaels: I have not resigned, Chicago Tribune, 10/19/2010)

But sources said board members were concerned that Michaels had publicly embarrassed an iconic Chicago institution, made many of its employees uncomfortable, and had aggravated an already-tortuous 22-month-old bankruptcy process at a highly delicate stage.

In light of those issues, board members also were becoming concerned that the behavior of Michaels and his management team might open them up to legal action over their fiduciary duty to protect the company, the sources said.

To be clear: the juvenile hijinks are wrong, probably illegal and ill-befitting of an executive of a major public company. However, they and the public embarrassment and employee discomfort are a peripheral matter in the grand scheme of things and have nothing to do with return to shareholders, or in this case, creditors, which should as a matter of law, be the board’s focus. Something is wrong with a scenario where a board is motivated to act in accordance with its fiduciary duty only when raucous behavior comes to light, and had no such motivation in the face of poor financial performance resulting in a protracted bankruptcy, and drastic loss of market share.

Something needs to be done about our corporate law environment when CEO’s who have enough sense to avoid personal indiscretions (or keep them private) get a pass on poor strategy or execution, and their performance is subjected to real scrutiny only when juvenile antics come into public view. Similarly, boards should have at least as much legal exposure when they don’t hold management accountable for a lousy job with their core functions as when they don’t react to personal level foolishness.

It’s a curious legal environment indeed when an HP CEO who presided over a doubling of shareholder value and a Tribune CEO who presided over a bankruptcy filing and deterioration of business value during the process suffer the same fate on account of extracurricular personal indiscretion. It’s also a reflection of a system that needs drastic updating to take substantive performance into account as part of directors’ fiduciary duty.

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Proxy Access Update

As previously reported, after being sued by the Business Roundtable and the Chamber of Commerce, the SEC stayed new Rule 14a-11 and amendments to Rule 14a-8 regarding “proxy access.” According to an October 15 client alert from Reed Smith:

On October 8, 2010, the petitioners and the Commission jointly filed a Motion for Expedited Consideration with the court. The motion seeks court approval of a briefing schedule negotiated by the parties that calls for the petitioners’ opening brief to be filed by November 30, 2010, and contemplates that briefing will be completed by February 25, 2011. The motion also requested that oral argument be scheduled in the case on the earliest available date following the completion of briefing. In the Motion, the parties jointly stated that the stay granted by the Commission pending review by the court, even with the review being on an expedited basis, necessarily means that the Commission’s rule changes will not be available for use by shareholders during the 2010-2011 proxy season, but that expedited review would help ensure that outstanding uncertainty about the rules’ validity will be resolved before the 2011-2012 proxy season.

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Don't Miss Opportunity to Level Playing Field in Corporate Elections

As many of you know, I petitioned the SEC last year to change the rule that allows blanks on a partially filled proxy or voter instruction forms (VIFs) to go to management and have also complained to the SEC about Broadridge’s failure to impartially identify proxy proposals on VIFs (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration and “Corrected” Ballot at Altrea Tips Votes to Management).

At every turn, the deck seems stacked against retail shareowners, in favor of entrenched managers and boards. Now, with the enactment of Dodd-Frank, the SEC is seeking comments on provisions that require rulemaking by the Commission. Additionally, the SEC issued a Concept Release on the U.S. Proxy System with comments due October 20. These opportunities for comment offer our best chance to finally level the playing field in these areas.

Attached (at bottom of post) is a copy of the letter I sent to [email protected] twice yesterday, under two subject fields. One subject was “DF Title IX – Executive Compensation – voting by brokers.” The other subject line was “S7-14-10.” I hope some of you will also object to blanks fields going to management and VIFs that do not impartially identify proxy proposals. Remember, comments are due tomorrow, October 20th.

SEC. 957 of Dodd-Frank prohibits granting discretionary authority to brokers with respect to directors and executive compensation or “any other significant matter, as determined by the Commission.” If beneficial owners fail to provide instructions on how their proxies should be marked with respect to “significant” matters, no one should be empowered to vote on their behalf. The intent of that prohibition should extend to management in the case of blanks items on a partially completed proxy or VIF, as well as  brokers completing a totally blank proxy or VIF.  The SEC should use its rulemaking powers, not only to conform the provisions of Rule 14a-4 to the mandated and implied intent of Dodd-Frank but should also make a determination that all proxy matters are “significant.” After the complicity of auditors in abusive practices, such as those uncovered at Enron, no proxy item is insignificant.

The integrity of the voting system is critical. The SEC’s current rules send the wrong message to shareowners. They say, “don’t worry about voting. If you fail to submit a vote at all or you leave an item blank, we will allow your votes to be assigned to someone else… but not to someone of your choosing” regardless of possible conflicting or nonaligned interests of brokers, banks and corporate management.

The current rule does not reinforce a robust market or vigilance by shareowners. It does not send a message that voting is important. It is no wonder that shareowners then become shareholders, with only entitlements and no responsibilities, much like gamblers with betting slips. The Commission should encourage responsible ownership, not gambling.

The SEC should regulate the power relationships between actors in the market to provide a level playing field, not tip the balance to one party when the other fails to act. Instead, the SEC should remind each party of the importance of their respective roles. The current Rule 14a-4 misaligns interests by yielding disproportionate control to brokers, bankers, managers and boards, instead of educating and engaging shareowners.

(Thanks to the many individuals who reviewed and provided comments on the attached recommendations to the SEC.) blankvotesVIFs10-18

It should be noted that you can avoid much of the blank vote issue right now by always voting on They use  Broadridge’s electronic voting platform too and can’t submit a VIF back to Broadridge without populating (gathering a vote from a user) every item on a ballot.  However, their system lets you set up your own default, instead of automatically having your blank vote go to management.

To do so, simply log in to your account at MoxyVote, go to:

  1. My Profile
  2. Down the left column, hit the button that says “Prioritize and Manage”
  3. In about the middle of the page, you’ll see “Default Voting Positions” with the choice of voting
    1. abstain
    2. with the board’s recommendation
    3. against the board’s recommendation

I’ve got mine set to abstain whenever I leave an item blank. You may want to set yours differently. Using MoxyVote, at least you have a choice right now. You won’t find that at, the platform that most brokers send you to. Since most shareowners still use ProxyVote, we still need a change in the rules by the SEC regarding how blank votes are counted. Additionally, VIFs still need to follow the rules applicable to proxies, like providing an unbiased description of each item to be voted on. These descriptions will continue to slant votes to management unless the SEC requires a level playing field, so it is important to comment to the SEC about these issues.

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Kachingle: Pennies in Support

Want to help keep blogs like afloat? You can effortlessly contribute a few cents on each visit to the sites you choose by join Kachingle and automatically paying $5 a month via PayPal. Then, whenever you see a Kachingle Medallion on a blog, just mouseover the Medallion until it expands and click “Start Kachingling.”

Each day you come back, the Medallion will recognize you and count your visit.   Your money is then distributed to the participating sites you visit. depends on your pennies to pay our bills. Check out other participating blogs, such as:

The Center for Investigative Reporting, the nation’s oldest nonprofit investigative news organization, producing multimedia reporting that has impact and is relevant to people’s lives. CIR is now seeking to help lead the way in transforming journalism for the 21st century.

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Rating the Raters

I applaud CalPERS for proposing that credit rating agencies (CRAs) should be hired by investors instead of by corporate management. This proposal was in CalPERS’ October 4, 2010 comment letter to the SEC:

“Current legislation through the Dodd-Frank Act … appoints the Comptroller General through Section 939D, to study an alternative means to compensate the CRAs in order to create incentives for them to provide more accurate credit ratings, including statutory changes that would be required to facilitate the use of alternative means of compensation.

CalPERS believes an alternative payment model should include the following:

  • Issuers still pay for services rendered to obtain a CRA ratings. CRA revenues should be pooled and allocated to CRAs based on periodic voting process by “customers” – investor constituents.
  • The voting process will be administered through a “proxy like” process and paid by CRAs.
  • We believe this model should be transitioned over a 4-5 year period with increasing amounts of revenue at risk.
  • Revenue at risk to CRAs will:
    – Create a market based results oriented feedback loop to CRAs;
    – Motivate CRAs to improve and maintain ratings process as opposed to relying on regulator edicts and audits;
    – Motivate CRAs to be more conservative in ratings new financial instruments or companies professing new business models;
    – Align the interests of CRAs with investors, who are true customers or user of information as opposed to issuers.
  • Investors will utilize information gained from increased transparency and their customer experience to assess CRA relative skills, abilities and performance.”

This is similar to proposals I have made for investors to allocate corporate funds to competing proxy advisors. In my 2007 article “Proxy Voting Brand Competition” (available at, I suggested that organizations hired by investors in this way could also provide other services such as compensation consulting, finding potential candidates for board seats, and auditing financial statements. Like these services, the determination of credit ratings would be more trustworthy and effective if performed by organizations loyal to investors rather than to corporate management.

If the competition for investor-allocated corporate funds is open to all types of service providers, then investors can choose which services and providers are most valuable, thus maximizing the benefit of this system.

At, we have developed, tested and implemented methods for allocating funds by vote among competing service providers. There are many possible ways of designing such a system, and some work much better than others. The paper “Global Voter Media Platform” (at explains the factors that determine success, and describes our test implementations.

As we have seen in our shareowner proposal campaign, CEOs and boards generally oppose such reforms. This is not surprising, since the proposals would increase accountability of CEOs and boards, thus reducing their power. These reforms will need more support from investors, whether via proposals in corporate proxies or via proposals to regulators.

We welcome CalPERS’ powerful voice in the push for corporate accountability by aligning the incentives of “infomediaries,” such as credit rating agencies, with the investors they are supposed to serve!

This guest post by Mark Latham, Founder of is also posted on his VoterMedia Finance Blog.

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Income Inequality & Distress

In Expenditure Cascades, based on census data for the 100 most populous counties in the United States, Adam Seth Levine, Oege Dijk and Robert Frank found that counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress, such as commute times, divorce rates and bankruptcy filings.

There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street… We need not reach agreement on all philosophical principles of fairness to recognize that it has imposed considerable harm across the income scale without generating significant offsetting benefits. (Income Inequality: Too Big to Ignore, NYTimes, 10/17/10)

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Financial Sustainability: Restoring Market Stability, Corporate Value & Public Trust (ICGN Mid-Year 2010)

Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice.  I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.

Sharing Perspectives Across the Atlantic. Phil Angelides, Lord McFall and moderated by David Pitt-Watson.

The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.

Phil Angelides

$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?

It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.

Lord McFall

Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.

Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →

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Video Friday: SRI Rockies Interviews & Simon Johnson on "Too Big to Save"

Joe Sibilia, CEO of CSRwire interviews several influential speakers at the 2010 SRI in the Rockies. The series is produced by First Affirmative Financial Network in partnership with CSRwire. Plan to join investors and investment professionals from the U.S. and around the world November 18-21, 2010 at the 21st annual SRI in the Rockies Conference at the JW Marriott Hill Country Resort & Spa in San Antonio, Texas.

Also of interest, Simon Johnson, a former chief economist for the International Monetary Fund and author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, says the recently passed Dodd-Frank Financial Reform Act does little to prevent the biggest financial risk of our time — banks that are becoming “too big to save,” either because potential losses could overwhelm government resources, or the public will refuse to sanction another large bailout. Either way, the world economy could crash. But preceding any crash, watch for a worldwide “meta-boom.”

Nobody in my mind can be taken seriously if they wish to discuss bringing the U.S. debt under control unless and until they’re willing to deal with these financial sector issues that again threaten to completely destabilize both our economy and the fiscal soundness of the government.

Watch the  interview with [email protected] The Coming Meta-Boom and Meta-Bust — One Economist’s View (10/13/2010)

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Reputation and the Board: Bridging the Gap

18 November at Henley Business School, University of Reading (UK)
The John Madejski Centre for Reputation Conference 2010
Conference exames the relationship between governance and corporate reputation, specifically in the recent financial crisis, with key speakers from the Royal Mail, Unilever, UK Pension Protection Fund, Chartered Institute of Securities and Investments, Financial Reporting Council, and Clydesdale Bank, amongst others.

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Disclosure & Board Oversight of Political Spending Weak: Contributions Negatively Correlated with Firm Value

A new study finds that while nearly 80 percent of S&P 500 companies have disclosed direct political campaign spending policies, 86 percent have no disclosed policies regarding indirect political expenditures. Additionally, only 20 percent of corporations disclose how much is actually spent and which organizations or causes receive the funds.

Key research findings include:

  • Nearly 80 percent of the S&P 500 companies have disclosed political campaign spending policies. However, only a distinct minority has stand-alone policies that are easily accessible and with clear descriptions of spending decision making and oversight. The publicly available language that companies use to describe their political spending is usually not precise, and rarely includes all types of political spending.
  • 86 percent of the S&P 500 does not have stated policies on indirect political spending via contributions to trade associations and non-profit interest groups that have become a key area of concern. Financials firms are notably less likely than other sectors to have any policies on indirect spending.
  • Less than one-quarter of S&P 500 companies require their boards to oversee political spending. Nearly all of those are the largest companies in America. Least likely to have oversight are smaller companies and companies in the Consumer Discretionary sector. Board oversight is more prevalent in the Health Care sector, which has been in the spotlight in recent elections and the subject of sweeping and controversial reform enacted in March 2010.
  • More than 80 percent of the S&P 500 companies do not provide information on actual contributions, as opposed to the policies that ostensibly control that spending. Almost all companies that do report are at the top end of the revenue scale. One-third of Health Care companies disclose spending but only about 10 percent do in three other sectors—Financials, Telecoms and Consumer Discretionary.
  • Only 52 companies indicated they do not use “independent expenditures” to advocate for or against the election of candidates.
  • About half of all S&P 500 companies provide some information on which company officers make spending decisions. This management transparency is most common among Consumer Staples companies. In contrast, Financial sector companies provide the least amount of information, even though Congress enacted significant and contentious reforms for the industry in July 2010.
  • Nearly 60 percent of S&P 500 companies spend shareholder money from the corporate treasury on political campaigns, while two-thirds have political action committees that spend money contributed by corporate executives. Utilities – amongst the most highly regulated industries – are more likely than any other sector to support candidates, parties and interest groups’ political committees. Information Technology companies are the least likely to spend in these categories.
  • Board oversight encourages disclosure of what companies do spend, but there is no evidence that such oversight affects spending.

The study was conducted through an examination of S&P 500 companies’ federal and state campaign contribution data and other publicly available information, combined with the results of a Si2 survey sent to each company. The report also includes two case studies and a short primer on the various types of political spending. The full study is available at and and is included in the IRRC sponsored Social Science Research Network Corporate Governance Network at (full press release)

On a related note, John Coates has a draft study, Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?, that found during the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value. These findings – together with the likelihood that unobservable political activity is even more harmful to shareholder interests – imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.

See prior post, Citizens United: Most Won’t Engage But Won’t Monitor Either, as well as Follow the (Corporate Campaign) Money @ the The Murninghan Post, 10/14/2010.

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The Pension Research Council

Registered users (free) can download full working papers in PDF format. The Pension Research Council has several new reports in their Working Paper Library: 2010 Series, including Implications of the Financial Crisis for Long Run Retirement Security, Ricardian Equivalence Under Asymmetric Information. and many more.

Also of general interest are presentations from their 2010 Symposium: Financial Literacy: Implications for Retirement Security and the Financial Marketplace, with titles such as the following:

  • “Making Savers Winners: An Overview of Prize-Linked Savings Products”Erik G. Hurst and Jonathan Guryan, University of Chicago Booth School of Business, Melissa Kearney, University of Maryland, and Peter Tufano, Harvard School of Business
  • “Financial Literacy, Ignorance and Stock Market Participation: Evidence from the RAND American Life Panel” Joanne Yoong, RAND Corporation
  • “Investor Knowledge and Experience with Investment Advisers and Broker-Dealers” Angela Hung, Noreen Clancy, and Jeff Dominitz, RAND Corporation
  • “How to Improve Financial Literacy: Some Successful Strategies” Diana Crossan, Office of the Retirement Commissioner, New Zealand
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