Archive | November, 2010 WayBack Machine

Recently, we closed down the first fourteen years of posts on the website and are currently in the very slow process of posting many of the old pages to the new blog. You can find these under the Pre-2010 tab at the top.

Ten years ago at a few highlights reported were as follows:

  • Gerald F. Davis and Michael Useem make a convincing case for convergence, not among nations but among firms with higher stock market valuations. To survive global industry consolidations, many such firms will seek a listing on American stock exchanges, and will thereby become subject to US legal standards. In their paper, “Top Management, Company Directors, and Corporate Control,” the authors point to the need for further research in five key areas.
  • Progress is being made by shareholders. One small measure of success is the recent favorable votes on shareholder sponsored resolutions. During the 1999-2000 season they garnered an average 22.6% vote, compared to an historical average of 5%. Governance related proposals won an average of 36.5%. (Strategic Compensation Research Associates, as reported in the November edition of Directorship)
  • Years ago the Department of Labor (DOL) ruled that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets (see “Avon” letter). According to a recent article in Institutional Investor Magazine (10/1) pension funds are Passing the Buck on their responsibilities. “More than one third say they believe that voting doesn’t make a difference.” “Only 4.2 percent of funds polled say that they have ever tried to place an issue on a proxy ballot, and just 1.6 percent indicate that they have ever voted in favor of a social issue.” According to Institutional Investor Magazine, pension funds could “find themselves liable if a socially motivated action proved costly. Respondents unanimously say that social issues are not a shareholder’s responsibility.”

Five years ago a few highlights:

  • The Securities & Exchange Board of India, or SEBI, Friday said it wouldn’t extend the date for complying with Clause 49 of the Listing Agreement, a new guideline which requires listed companies to have at least half of their board members as non-executive directors. To date, only 20 companies of the 5,000 that are listed have complied with norms on corporate governance.
  • Broc Romanek’s Blog notes that Coca-Cola adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive’s annual base salary and bonus.
  • Specific Investment And Corporate Law by Margaret M. Blair and Lynn A. Stout argues the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.
  • Democracy and the Evolution of Corporate Governance by Pierre-Yves Gomez and Harry Kornine finds that corporate governance has indeed evolved to make increasing use of democratic procedures. Viewed over the long-term of two centuries of capitalist development, corporate governance is seen to have successively incorporated enfranchisement, separation of powers and representation. In conclusion, they consider the implications of basing the study of corporate governance on the question of stakeholder consent and the practice of corporate governance on the procedures of democracy.
  • The Shareholder Activism Handbook, by Jay Eisenhofer and Michael Barry is the most comprehensive guide to shareholder activism that I have ever seen. Yes, the book provides a fairly comprehensive chapter on filing shareholder resolutions – discussing the history and evolution of rule 14a-8, how to file, what types of resolutions can be excluded, no action letters, cases, proxy solicitation, communications between shareholders, bylaws amendments, etc. Yet, that’s only one chapter out of 16.
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Bank Pay Worse?

According to a soon to be released report by The Corporate Library for CII, some financial firms actually rewarded executives after the crisis with “massive salary increases,” including four Wells Fargo & Co. officials who saw their base salary at least triple from 2008 to 2009, according to the report. Wells Fargo, Citigroup Inc. and Bank of America Corp. each “exploited a loophole” in rules triggered by the Treasury Department’s bailout of financial firms in late 2008 by paying salaries ranging from $3.3 million to $9.9 million, the report added.

The group recommended that U.S. financial firms tie pay even more closely to future performance. The practice is more common at non-U.S. banks, where bonuses depend on whether an employee maintains his performance. Mr. Hodgson also suggested that clawback provisions be toughened beyond the material loss, fraud or earnings restatements that trigger them now.

via Did New Rules Worsen Pay Situation? –, 10/29/2010.

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How Corporate Governance Changed in 25 Years

Boards still prefer active CEOs as directors. The difference now is that boards are finding it difficult to recruit active CEOs for director spots. More than 50 percent of CEOs in the S&P 500 serve on no outside boards. Only 26 percent of new directors in 2010 are active CEOs, vs. 53 percent a decade ago. Boards are having to look elsewhere for talent and are recruiting more retired CEOs, more divisional presidents, and more functional leaders. Boards also say they are searching for women and minorities, who remain insufficiently represented.

via How Corporate Governance Changed From 1986 to 2010 – BusinessWeek.

In my experience, the biggest change has been the fading influence of CEOs on the choice of directors. Whereas twenty-five years ago, many hand-picked their own monitors. Today, they typically only have veto power. Still, even with all the changes noted by Spencer Stuart, directors still seem to identify much more closely with management than with shareowners. They have also been very slow to recognize it doesn’t take a CEO or former CEO to make an excellent board member.

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Markets Learn

In new empirical research, Alma Cohen, Charles C.Y. Wang, and I show how stock markets have learned to price anti-takeover provisions. This learning by markets has important implications for both managements of publicly traded companies and their investors…

while investors can no longer profit by basing their trading decisions on standard anti-takeover provisions, our findings leave open the possibility that an investment strategy based on other features of corporate governance might be worthwhile. Thus, managements should not dismiss governance reforms that are potentially valuable, but that investors are not yet focused on, and that markets do not yet price.

via Pricing Corporate Governance by Lucian Bebchuk – Project Syndicate.

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Video Friday: John Bogle on Index Funds & Corporate Governance

Bogle sees Index Funds, which hold 25% of all stock, as the best hope for governance. However, he acknowledges free rider problem, potential conflict of interests for offending clients. Hopes we will gradually break down the barriers. These are the funds that have held for three years or more, so these are the funds that will have proxy access.

Bogle would like funds to introduce resolutions requiring 75% of shareowner vote in order to make political contributions. They should vote in the interest of their shareowners, not their managers. Corporations shouldn’t be controlled by their agents.

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Indian Conference Seeks Enforcement of Competition

The recent two day International Conference on Competition Law that concluded in New Delhi found that governments that work too close to big business protect old technology and prolong recession. In times of recession businesses plead for protective measures to cushion them from aggressive competition. Receding demand forces them to cut jobs and add to the burgeoning unemployed figures. Protectionist measures create entry barriers, starve new technology start ups and prevent job creation, thus setting in motion a vicious cycle that prolongs recession. Free and open competition helps radicals to lead the charge to creative destruction in which only the best survive.

The experts advocated development of a National Competition Policy to precede industrial policy providing  clarity, cohesiveness and direction to the competition laws. It would help create a buy-in among various sectors and define roles and expectations of state and non-state actors, thus making  enforcement of competition law easier and more effective. The experts that had come from all over the world, including chairmen of competition authorities, found Indian Competition Act 2002 a perfect ideal for inclusive growth, but rusting because of non-use.  They were surprised that while the Indian Competition Act provided the toughest penalties for cartels, India  has the lowest capture rate because of  inadequately trained staff,  lack of  training in modern investigation techniques and lack of political will. The conference concluded

cartels are a conspiracy against the common man and its pernicious effect is visiting on rising food prices. There needs to be a national campaign against cartels. In regard to detection, today’s technology can be a great ally. Best way to catch is dawn raids not for discovering  sacks of gold but grabbing all computer equipment. The hard disc will tell all. What is needed  is the will to carry out search and seizure.

In his inaugural address Dr Veerappa Moily, the Law Minister  of India called for vigorous application of competition laws.  He advocated national legislation to extend the scope of the completion law to prevent  anti-competitive conduct in professions, farmers, and rural cooperatives. He said the law should be used not just to promote free competition but also to protect small players and cottage industries to bring about a truly level playing field.

In his keynote address Mr  Salman Khurshid, Minister for Corporate Affairs, asserted  that the competition policy and law should aim to provide socio economic justice. It should harmonise the twin objectives of protection and free enterprise. Competition policy should promote good corporate governance and bring about boardroom reform.

Madhav Mehra

In his theme address Dr Madhav Mehra the founder president International Academy of Law and the driving force behind the event warned,

India’s growth narrative is linked to the dreams and hopes of its youth. With average age of an Indian under 26 years, India is one of world’s most aspirational economies.   This has potentially catastrophic consequences . If Indian youth does not find jobs, it becomes  an  easy target for  terror groups. Terror from within is far more lethal than terror from outside. By protecting intellectual property, regulating mergers, curbing cartels and abuse of dominance widens the economic base and unleashes corporate energy triggering  an explosion of innovations that enables new technology radicals to overthrow  incumbents and  drive inclusive growth. History of modern industrialization has revealed that no real innovation has come from dominant industry. It has always been from the outside. The upstarts and radicals have succeeded after protracted battles. He said closeness of the businesses with government militates against innovation and inclusive growth. What we need  is fast, fearless  and furious enforcement for fair and open competition regime with proactive participation from  executive, legislative and judiciary.

Earlier Justice Pasayat, chairman competition appellate tribunal said “An overriding aim of competition law  is to promote economic justice. Justice is the only weapon that can secure stability to society and provide sustainability to business. As Pope Paul VI said “If you want peace, work for justice.” Competition law is essentially an instrument that helps us achieve that elusive goal.”

The valedictory address was delivered by Justice Altamash Kabir of Supreme Court of India. He said competition law in India is a public policy challenge and not just a legal argument. It needed understanding of both law and the socio-economic context. “We need to use competition law to remove entry barriers to allow innovators and free enterprise to succeed and redeem the aspirations and dreams of our youth.”

The Conference was organized jointly by the International Academy of Law and the UK based World Council for Corporate Governance in association with the Law Society of UK and the Competition Appellate Tribunal of India. Eminent speakers included several cabinet ministers such as Dr M Veerappa Moily, Minister of Law & Justice, Shri Salman Khurshid, Minister for Corporate Affairs, Prof K V Thomas, Minister for Consumer Affairs , other luminaries such as Mr Arun Maira Member Planning Commission,  Justice Altamas Kabir, Judge Supreme Court of India, Mr. Fali S. Nariman, an international authority on jurisprudence and Justice Pasayat  Competition Appellate Tribunal of India who was also the chairman of the steering committee. Overseas experts and law firms included Sir Christopher Bellamy of Linklaters,  Chairman of UK’s Competition Appeal Tribunal and judge EU General Court, William Blumenthal of Clifford Chance and a former General Counsel, Fair Trade Commission of USA and several Chairmen of Competition authorities worldwide.

The publisher of will be in Kolkata, India in mid to late December and may have some availability for meetings. Contact James McRitchie.

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Corporate Governance Guidance for Unlisted Firms

The Institute of Directors (IoD) launched the first ever Corporate Governance Guidance and Principles for Unlisted Companies in the UK. Key Features of the Guidance and Principles:

  • This briefing provides guidance for unlisted companies on the issues involved in designing an appropriate corporate governance framework. It also presents a set of governance principles that can be followed or not. This remains a voluntary decision of each unlisted company.
  • Fourteen principles of good governance are presented on the basis of a dynamic phased approach, which takes into account the degree of openness, size, complexity and level of maturity of individual enterprises. A dynamic approach towards governance is essential, since governance frameworks must evolve over the life cycle of a business.
  • The principles provide a governance roadmap for family owners or founder-entrepreneurs as they plan the development of their companies over the corporate life cycle. These principles may be relevant for subsidiary companies and joint ventures as well. Even state-owned companies or social enterprise organisations can be inspired by the best practices laid down here.

via Corporate Governance guidance for unlisted companies launched by IoD, sponsored by Deloitte – IoD Press Office, 11/22/2010, where you can download the principles.

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Journalism that Enables Democracy: Support VoterMedia for Kight Foundation Grant has applied for a $200,000 grant from the James L. Knight Foundation in the Sustainability category, which is for new economic models supporting news and information. New ways of conducting and consuming journalism require new ways of paying for it. The Knight New Challenge is open to ideas for generating revenue, as well as ways to reduce costs. Entrants publish free open-source code for others to use as well. is led by Mark Latham. He and other volunteers are creating a new  economic model for supporting pubic interest journalism in voter communities, beginning in student unions and municipalities. My hope is that once VoterMedia takes hold, it will spread to corporate governance as well.

Using the VoterMedia Internet platform, voters allocate community funds to competing media sources, primarily blogs. Although funding generally flows through governments, funds are allocated by voters, preventing those governments or incumbent politicians from controlling the media.

Allocated funds can lead media to become a more effective check and balance on the government, engaging voters, increasing accountability and reducing the risk of corruption, like the recent scandal in the city of Bell, California. Voting provides a crowd-sourced reputation system for media sources. The same model could encourage much more in-depth coverage of corporations than we currently see from sources such as ISS and Glass-Lewis, who can only spend a short amount of time on each of thousands of companies they cover because of limited resources, paid by a comparatively few number of shareowners instead of the whole community.

Please review VoterMedia’s grant application and leave feedback on the James L. Knight Foundation site in the comment field. Your suggestions can help improve the proposal, since proposals can be revised base on your feedback. Take a look at the other proposals as well and vote for your favorites. Although you must register with the Knight Foundation site to leave comments or rate proposals, the process only takes a minute or two. Like commenting on an SEC proposal, such as proxy access, your actions here could have great importance.

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Hong Kong Brokers Lose Two-Hour Lunch

Hong Kong Brokers to Lose Two-Hour Lunch as Exchange Extends Trading Times – Bloomberg, 11/22/2010.

More than half the respondents to a separate survey by shareowner activist and former exchange director David Webb said they favored a one-hour break. Instead, the exchange’s board approved a switch to 90 minutes from March 7, and to one hour in March 2012, so people can get used to it. Open up a little earlier, the trading day will be extended to 5 hours and 30 minutes by 2012 from 4 hours current.

The main exchanges in the U.S., U.K., Australia and Germany operate for 11 hours a day, without a break. This looks like one area where China appears willing to lag behind.

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Evelyn Y. Davis Donation

The Seattle-based Swedish Medical Center announced it received an unrestricted $100,000 gift from nationally known shareholder advocate Evelyn Y. Davis and the Evelyn Y. Davis Foundation.  Since establishing her Foundation in 1989, Davis – who is from Washington, D.C. – has now made significant donations across the country to leading medical centers, nationally prominent universities, and various arts organizations.

A shareholder in more than 80 corporations, Davis has been attending shareholder meetings since 1960. She began her investment career with securities inherited from her father and is the editor of Highlights and Lowlights, a corporate newsletter dealing with corporate governance and related financial issues. (Sacramento Bee, 11/20/2010)

While Ms. Davis is to be congratulated for making such a generous donation, I hope she and others will also consider future donations to organizations that would help continue her life-long devotion to increasing the rights of shareowners. A few recommendations: Proxy Democracy,, and  US Proxy Exchange (USPX).

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CorpGov Bites

ISS Issues 2011 Policy Updates – Blog, 11/22/2010. Broc Romanek provides highlights of ISS policy changes.

Dan Harris provides readers with his recent speech on Emerging Market/China Outsourcing Issues, China Law Blog, 11/21/2010. Also interesting, The China Rich….Are Not Like Us?, 11/19/2010.

Jones, Renee M., Will the SEC Survive Financial Regulatory Reform? (November 18, 2010). University of Pittsburgh Law Review, Vol. 71, No. 3, 2010; Boston College Law School Legal Studies Research Paper No. 211. Available at SSRN. Jones argues President Obama’s reform proposals (the “Obama Plan”) threatens the SEC’s long-term prospects.
The proposal to expand the executive branch’s role in oversight over financial institutions may represent the beginning of an incremental encroachment on SEC authority. Similarly, the proposed Consumer Financial Protection Agency could absorb a portion of the SEC’s traditional investor protection role. In the end, the SEC’s survival depends on whether its leadership takes effective action to restore its credibility andregain the public trust in the years to come.

On October 21, 2010, the Securities and Exchange Commission announced enforcement actions against Office Depot, Inc. and two executive officers for violating Regulation FD by selectively conveying to analysts and institutional investors that Office Depot would not meet analysts’ earnings estimates. (SEC Enforcement Action Under Regulation FD For Implicit Communications To Selected Analysts, Corporate Securities Law blog, 11/17/2010)

Across a matched group of more than 2,000 North American CEOs, annual pay climbed a slight 1.63 percent for the year. When increasing the pay scope to also include option profits and vested stock, compensation declined slightly, by 0.28 percent. Indeed, while we anticipated a second straight year of pay declines as of this spring, it’s evident that pay more or less stayed the same for the matched group as a whole.

(CEO Pay is Treading Water, The Corporate Library, 11/16/2010)

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NACD Wants SEC to Back Off Say-on-Pay Provisions

In response to the SEC request for comment on say-on-pay rules, the National Association of Corporate Directors (NACD) issued formal concerns, cautioning against dependency on regular, yes-or-no votes.

NACD’s opinions are grounded in its more than 30 years of proprietary research across a broad range of board leadership and corporate governance topics, insights expressed through confidential peer exchanges with its membership spanning F100 through mid-cap and small cap companies, and best practices detailed in its Blue Ribbon Commission reports. NACD’s comments were reinforced by a national survey that drew 280 responses from its members.

Representing the voice of its more than 10,000 corporate director members, NACD urges the SEC not to issue universal requirements, but to allow companies to determine the most appropriate means of communicating with and seeking feedback from shareholders as a more effective governance practice. Additionally, NACD provided the SEC with specific views on frequency of say-on-pay votes, say on golden parachutes and other matters pertaining to executive compensation on behalf of the director community.

NACD appreciates the symbolic value of say-on-pay. However, we believe it is a poor substitute for dialogue. It is much more valuable to have shareholder communication well in advance of plans or votes on plans. Say-on-pay is a yes-or-no, backward-looking vote that may have little utility except to express a very general shareholder view of a pay plan already in effect,

the Association wrote in a letter signed by Honorable Barbara H. Franklin, chairman of NACD and former U.S. Secretary of Commerce, and Ken Daly, NACD’s president and CEO.

In addition to the survey, NACD cited recent board research indicating that dialogue between companies and institutional investors is increasing.  Additionally, say-on-pay votes for early adopters has been substantially positive, calling out the potential for say-on-pay voting to become a meaningless and burdensome ritual for companies and shareholders alike. According to the organization’s letter, “NACD would urge caution in the area of rulemaking. Compensation terms can be interpreted in an overly broad manner, regulating areas that are best left alone.”

Issues also under SEC consideration where NACD offered an opinion include:

  • Small company exemption: NACD strongly supports an exemption on say-on-pay for small companies (those with less than $75 million in public float), as the compliance and paperwork requirements are particularly costly for small businesses that can less easily absorb the cost. Notably, 73 percent of respondents in the director survey indicated preference for small business exemption.
  • Superclawbacks in financial institutions: NACD encourages the SEC to work alongside it in serving as a “voice of reason” when identifying standards and process for whether directors and officers of a company are in fact “substantially responsible” for insolvency. NACD has concerns of this rule being misused for “witch hunts.”
  • SEC disclosure rules regarding compensation consultant conflicts: NACD urges caution that a consultant for an independent board committee should not be considered in conflict just because it performs a significant amount of work. The key point is that the same consultant does not also work for management, a position long-held by NACD and first raised in its 2003 Blue Ribbon Commission report.
  • Recovery of executive compensation: NACD has serious concerns that this provision is ripe for abuse, and may unfairly target honest executives whose compensation and bonus was reasonably earned. NACD recommends an exemption for companies that obtain shareholder approval for retention of the originally rewarded compensation.
  • Disclosure of pay for performance and pay ratios of CEO to median pay of all other employees: Pay for performance, as detailed in the Report of the NACD Blue Ribbon Commission on Performance Metrics: Understanding the Board’s Role, is a value that has long been championed by NACD and practiced by its members. Boards of directors should be able to express how they link pay to performance. However, NACD cautions that companies should be provided the flexibility to describe their philosophy in their own terms, and disclosures should be allowed to vary. NACD commends the SEC for its decision to postpone implementation of pay ratio rules until after the next proxy season. The median pay figure can be highly misleading for a number of reasons, particularly for a global company.
  • Exemption for newly public companies from issuing a say-on-pay vote: With 72 percent of directors indicating preference for exemption, directors believe road shows for IPOs already offer investors ample opportunity to evaluate compensation packages. Furthermore, these requirements place a focus on process during a critical growth phase of a newly public company.
  • “Golden parachute” plans during exceptional corporate transactions (e.g., mergers and acquisitions): NACD does not believe it is necessary to require disclosure during M&A periods above and beyond what is required of companies in general. However, NACD strongly supports disclosure requirements for any newly named executive officers of the company following a merger or acquisition, a view supported by 79 percent of directors surveyed. Any senior executive at a target company joining the leadership of an acquiring company is important, and stockholders have the right to know about leadership.
  • Disclosure of previous say-on-pay: Aligned with 79 percent of surveyed directors, NACD recommends that only the most recent say-on-pay vote should be disclosed. In the current proposal, issuers are required to consider “previous” votes on compensation, but the proposal does not offer a specific definition of “previous.”

“NACD represents the collective voice of the director, and we urge the SEC to closely consider these clear messages coming from America’s boardrooms as it continues to implement new regulations,” said Daly.

I was never a big fan of say on pay to begin with but if we’re going to have it, personally I can’t see carving out so many exemptions as NACD recommends. In my experience, small companies are in greater need of corporate governance “guidance” than many large companies. If the paperwork is burdensome, that should be addressed by reducing paperwork requirements, not through exemptions. Sometimes I wonder if NACD represents the needs of the shareowners its members represent or the more parochial interests of its members… operating like a union for directors. Your thoughts?

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Corruption Challenges India

Sonia Gandhi Acknowledges Corruption Problem In India « Sonia Jaspal’s RiskBoard. Mrs Sonia Gandhi, Congress President during her speech at Teen Murti House on the 10th Indira Gandhi Conference titled ”An Indian Social Democracy: Integrating Markets, Democracy and Social Justice,” acknowledged the problem of corruption and the moral challenges facing Indian society.

“This is not a matter of choice. It is a known fact that unequal societies cannot achieve their full potential or even sustain a high level of growth indefinitely. In other words, islands of prosperity in a sea of deprivation can only give rise to storms of conflict and instability,” she said.

“But the story of India’s contrasts is well known: Ability, aspiration and achievement coexist with injustice, inequity and inequality. We have more millionaires than ever before, alongside millions who struggle for two square meals a day.”“This is not a matter of choice. It is a known fact that unequal societies cannot achieve their full potential or even sustain a high level of growth indefinitely. In other words, islands of prosperity in a sea of deprivation can only give rise to storms of conflict and instability,” she said.

“But the story of India’s contrasts is well known: Ability, aspiration and achievement coexist with injustice, inequity and inequality. We have more millionaires than ever before, alongside millions who struggle for two square meals a day.” (Our moral universe is shrinking: Sonia Gandhi, News India Times, 11/19/2010)

(I’ll be in India during much of December; contact for availability.)

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Video Friday: Estate Tax & Madisonian Democracy

Andrea Coombes of The Wall Street Journal MarketWatch blog talks estate tax with venture capitalist and tech company founder, Jerry Fiddler, in this video interview. Fiddler “consider[s] it a point of pride to be able to pay back into the public good…[not] a point of pain.”

Noam Chomsky: A Critique of Madisonian Democracy – On Corporations

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Broadridge Smokes Their Own Dope

The rudimentary software Broadridge offers corporations for running virtual annual meetings disenfranchises shareowners. This was on display when Symantec Corp. hosted a virtual-only annual meeting with the software in September. It was again on display yesterday.

There is an old saying that cautions “never smoke your own dope.” Broadridge didn’t heed that advice yesterday when they held their own annual meeting as a virtual-only meeting using their own software. The result was more technical problems, more disenfranchisement and more promises to “look into the problem”.

First, let me caution that, if you ever attend a Broadridge-hosted virtual meeting for the first time, don’t try to log in five minutes before the meeting starts. You will never make it. There is a two-step process that has you first create an account with Broadridge and then sign-in to the virtual meeting. Just reading the lengthy terms of agreement will take twenty minutes.

Shareowner L. Jacobs granted me a proxy to attend yesterday’s meeting on her behalf. Usually, a grant of proxy is documented with a formal letter, which one presents for inspection before entering an annual meeting. Broadridge’s web interface afforded no means to present my credentials. I dutifully held mine up to the forward facing camera on my computer monitor. At least I could say I tried.

The next challenge was a declaration on the Broadridge website:

In order to participate, you must be validated stockholder of Broadridge Financial Solutions, Inc.. [note to Broadridge, yes you have a typo.]

The site said nothing about attending as a proxy. It provided no means to sign on as a proxy. Ever mindful that rights not exercised are rights lost, I navigated the log-in as best I could, ultimately signing on as if I were Jacobs.

Here is the screen I saw next. Take a good look at it, because it is all I saw for the next hour:

The minutes ticked by. Was the meeting delayed? Anxiousness about whether the interface would work gradually turned to a sickening realization that it was NOT working. This is how disenfranchisement happens. No one tells you “You are disenfranchised”. It unfolds indirectly. A polling place never opens, for reasons not explained. Or you show up to vote, but your name is not on the voter list. Or you try to log onto a virtual annual meeting, but the interface doesn’t work.

Did Broadride even know there were problems? Were they delaying the meeting while problems were fixed? I felt alone. If a tree falls in the woods where no one can hear, does it make a sound?

I couldn’t access the meeting with either my Safari or Firefox browsers. Both browsers displayed the same blank “Loading Presentation” screen. Refreshing either browser did not help.

I got on the phone and spent the next fifteen minutes talking to three different people at two different Broadridge numbers, trying to fix the problem. I don’t want to get anyone in trouble, so I won’t mention names. One person I spoke to didn’t know if the meeting was in progress. She checked and confirmed it was. Another told me “They are having a problem at the moment, so it is not your computer. It is a problem with the system itself … there are a lot of people having problems with it right now.” The conversation that followed was troubling:

Glyn – “Do we know when it will be fixed?”

Support person: “No. They are working on it, but they haven’t said when.”

Glyn: “Oh …”

Support person: “There are a lot of people that are having problems with it right now.”

Glyn: “Is there any way to let people know when the meeting will be held?”

Support person: “The meeting is still going on. It is just having technical difficulty.”

Glyn: “The meeting is going on?!”

Support person: “… yes.”

Glyn: “They are conducting the meeting while people are not being able to participate! Is that correct?”

Support person: “Uh … hold on.”

I tried dialing the phone number for shareowners to call in questions to the meeting. I provided Jacobs’ control number and stated I was acting as her proxy. The question & answer session was already in progress, and I could hear over my phone the chair answering a question. He was saying something about investors entrusting Broadridge to provide “mission critical services”. It would have been funny, except he was right. Investors have no say in the matter. We are forced — by Wall Street, by the corporations we invest in, and by the SEC — to rely on Broadridge for mission critical services.

When it was my turn to speak, I asked if the chair was aware people were having difficulty logging in. He said he wasn’t aware of the problem. I asked my question while he had people look into the matter. After answering my question, he announced that four people had reported problems to technical support, and three had been resolved. That sounded different from what the technical support person had told me. Basically, he was saying I was the only person who couldn’t log on.

The chair went on to answer more questions, and my phone line went dead. I was once again cut off from the meeting. I called technical support again. I spoke to a different person who told me the Broadridge software only supported certain versions of Windows Explorer and Firefox. I was using Safari and Firefox on a Mac. Perhaps the software didn’t support browsers on a Mac, but I thought it unlikely. If the problem was with the browsers, I would have expected each browser to fail in its own unique way. The fact that both browsers displayed identical “Loading Presentation” screens suggested they were working fine, and that the problem really was with the Broadridge system.

On the other hand, if Broadridge knowingly does not support Safari — which most Mac owners use — that is shocking. There was no warning on the virtual meeting website. Is Broadridge providing “mission critical services”, or are they keeping up appearances? A situation is emerging with Broadridge’s virtual annual meetings that is similar to that with Broadridg’s proxy services. Both are “mission critical”, but there is a lack of transparency. Anecdotal evidence suggests the “proxy plumbing system” is a shambles, but there is no transparency. Anecdotal evidence suggests virtual-only annual meetings are a shambles, but there is no transparency.

Broadridge has a reputation problem. This is what I tried to point out in the question I called into the meeting yesterday. They publicly take no stance on whether corporations should offer hybrid or virtual-only meetings. But through their actions and leadership on the issue, they promote virtual-only meetings. After all, they could have avoided controversy and held a hybrid annual meeting.

There are some 13,000 annual meetings in the United States annually. Providing technology for conducting these as hybrid meetings could be a wonderful new market for Broadridge. Rather than seize this opportunity, they are floundering in the controversy over virtual-only annual meetings. As long as that controversy continues, many shareowners and corporations will resist their technology. Broadridge should do what makes business sense and what is ethically right. They should facilitate only hybrid meetings, at least until the technology is advanced enough that shareowners trust it. Until such a time, shareowners need to stand together and oppose virtual-only annual meetings. The alternative is disenfranchisement.

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Exchange Leverage

Stock exchanges can enhance corporate environmental, social and governance (ESG) disclosure and performance by applying ESG standards within IPO and ongoing listing rules, corporate governance codes, and by offering ESG-related traded products.

A September 2010 paper by EIRIS, a global provider of ESG research, reviews the increasing role that stock exchanges play in enhancing corporate transparency and performance on sustainability issues. (Hat tip to SIF for bringing this to my attention.)

Some exchanges have already incorporated ESG reporting requirements in their listing rules and corporate governance codes. China’s Green IPO policy, which requires companies in 14 energy-intensive industries to undertake environmental assessments before initiating an IPO, is a good working example. Bursa Malaysia and the Johannesburg Stock Exchange are two of the leading exchanges that have incorporated mandatory ESG reporting requirements for all listed companies. The Australian Stock Exchange has incorporated an ESG disclosure requirement on a ‘comply or explain’ basis as part of its Corporate Governance Principles.

…Among the first indices on the market, the BM&F Bovespa ISE Index, the Dow Jones Sustainability Indexes, the FTSE4Good Index and the JSE SRI Index greatly contributed to the improvement of the ESG performance of companies and implicitly to raising the international profile of responsible investment.

However it is apparent that stock exchanges can do more… In June 2010, the UK’s Financial Reporting Council (FRC) revised the Corporate Governance Code to include engagement principles for institutional investors to take the ESG risks of their investee companies into account.

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Harrington Asks Banks to Stem Illicit Transactions

Harrington Investments, Inc. (HII), a socially responsible investment advisory firm filed shareholder resolutions at Citigroup, Bank of America and JP Morgan Chase, calling for the adoption of principles to stem illicit financial transactions which is the result of government corruption and bribery, tax evasion, money laundering, illegal arms deals and the movement of money by drug cartels. (download resolution in pdf)

The resolutions also request that the banks support broad public policies aimed at creating greater accountability for the identification of criminal money by significant non-bank actors in the financial system.

“According to Global Financial Integrity (GFI), the U.S. financial sector, especially international bankers, are under increasing pressure from government regulators to respond to the growing illicit movement of money throughout the financial system,” said Harrington.  “Shareholders, as principals, need to make sure that our agents, corporate executives and bank boards of directors, respond as responsible fiduciaries to protect our banks’ integrity and reputation by developing industry-wide standards.”

Heather Lowe, Legal Counsel and Director of Government Affairs for Washington, D.C. non-profit advocacy group Global Financial Integrity, commented that “These resolutions are all about reducing the risk that illicit funds even get to the banks, and if they do, making it easier for banks to identify the bad actors.  They are based on recommendations put forward Continue Reading →

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How I Voted at Hain, Cisco & Accuray

I waited too long to vote on the platform. However, even waiting until the day before the meeting, I was still only able to get minimal advice. I hearty thanks goes out to CalSTRS and their cooperation with At least they had announced votes for Hain and Accuray as I cast my votes this morning.

At Hain, I voted down the line with CalSTRS, withholding votes from director nominees Berke, Futterman and Meltzer, as well as voting against the long-term stock plan proposed by management. At Accuray, I would have voted with CalSTRS and management. However, the ProxyVote platform wouldn’t accept the control number provided to me by my broker. With all the proxy plumbing issues mentioned in the SEC’s concept release, I guess I shouldn’t be too surprised with this glitch. I contacted my broker. We’ll see how quickly they can resolve this.

Since not even CalPERS had announced votes at Cisco, I was on my own. I voted abstain on all the director nominees and other measures except that I voted in favor of the shareowner resolution on environmental sustainability reporting and steps to reduce possible human rights violations. Just as an experiment, I left one field blank to see if Broadridge had addressed the blank vote issue. They had not. After voting, a second page comes up asking to confirm my vote. At the top of that page, in very small print obscured by the gray background the following note appeared.  “*No vote entered.  Your vote will be cast as recommended by the soliciting committee.” And there was a small asterisk next to the vote I left blank.

Obviously, there is much work to be done to improve proxy voting. Here in voting three stocks, I was only able to obtain voting advice on two. On one of the stocks I ran into a proxy plumbing issue. I also confirmed that blank votes are still being turned over to management with only the most obscure warning. For more about that issue, see Don’t Let Companies Change Shareholders’ Blank Votes, HLS Forum on Corporate Governance and Financial Regulation.

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The Constitution in the Financial Crisis

The Stanford Constitutional Law Center’s fall conference addressed The Constitution in the Financial Crisis. The government response to the financial crisis raises a number of “constitutional” questions in a broad sense—basic questions about how the government is structured, what its role is, and how its decisionmaking power is allocated between branches and distributed over time. Unfortunately, I missed the first day but was able to attend and take these rough notes on November 12, 2010.

9:30 The Federal Reserve in Our Constitutional System

Larry Kramer

Moderator: Larry Kramer, Richard E. Lang Professor of Law and Dean, Stanford Law School. Panelists: John Steele Gordon (author); Allan Meltzer (Carnegie Mellon); John Taylor (Stanford); and Michael W. McConnell (Stanford).

In the government’s response to the financial crisis, a central role has been played by the Federal Reserve. Is the Fed performing a new function? Should we distinguish between its banking functions, its regulatory functions, and its effective spending power? What is the relation between the structure of the Fed—and especially its seeming independence of political actors—and its approach to policy? Is the Fed genuinely independent? If so, who determines its policies and priorities, and to what interests is it responsive? What are the lessons to learn from the history and antecedents of the Fed, such as the First and Second Banks of the United States? Does the Fed embody, or subvert, the Madisonian project? And is there any necessary relation between the structure of political and governmental institutions and the task of a central banker?

John Steele Gordon

John Steele Gordon: Thinks once the Fed has purchased other securities, it will be easier for them to do so in the future. Precedent has been set.  See also, Empire of Wealth: The Epic History of American Economic Power (P.S.) and Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt: Revised Edition.

Michael McConnell

Michael W. McConnell: The Federal Reserve Bank is independent of both Executive and Congress. Budgets are generally under the control of Congress and the Government Accountability Office (GOA) can audit. Not true of Fed. (However, I see section XI of Dodd-Frank gives the GAO authority to conduct a one-time audit of the Federal Reserves emergency lending during the credit crisis.) A few years ago, the Fed held $850-900 billion in reserves. When the latest announced round of quantitative easing has been realized, they will hold $1.7 trillion. Agreed with Taylor for the need for audit of Fed purchases of securities other than Continue Reading →

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Law Feed is a new blog feed… at least new to me. Nice to be able to scan news from multiple sources of your choice quickly. I see not on yet but requested addition, so expect it will be soon. Simple setup and use.

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2010 CEO Pay Survey

Corporate Governance Research Reports. A new report from The Corporate Library found that the value of CEO perquisites at S&P 500 firms declined by a median of 18% in 2009. Most notable was a clear drop in the number of CEOs who received tax gross-ups. The report titled, “The Corporate Library’s 2010 CEO Pay Survey,” is available for $125 from The Corporate Library’s online store and also examines the pay packages of the top ten highest-paid CEOs of 2009.

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DC Plans and Employee Input

The UK’s industry-led Investment Governance Group (IGG) recently published a best practice guidance for defined contribution (DC) pensions, which include six principles for DC schemes designed to encourage better investment governance and decision making by all stakeholders, including trustees, employers, advisers, providers, and members.

As I glance at this guidance it makes me realize how little I know about how my own plan is run and where opportunities for input are for plan participants. I contacted the administrator years ago, asking about how the funds vote their stocks and if the program has any requirements in that regard. The answer came back that they must be voted in the interest of fund holders (which, in practice, generally means in the interest of fund and corporate management).

I just got a statement the other day and was looking at how poorly my international investments have been doing this year. I concluded it is probably because the only options they offer are heavily invested in Europe and Japan, instead of emerging markets like China, India, Brazil and Indonesia.

How does your fund operate? The UK best practices guidance could be used as a framework for questions to understand how your program operates and what input you/we, as those who have invested our hard earned dollars, have in the system.

Ten years ago, James P. Hawley and Andrew T. Williams wrote extensively about “universal ownership” and the likely shift in norms (see The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic).

Since universal owners internalize positive and negative externalities of the firms in their portfolios and since they bear the consequences of firms’ norm based liabilities, their fiduciary duty requires universal monitoring of their portfolio. It is in their long-term interest and the interest (by definition) of their investors and beneficiaries to maximize the positive externalities of their holdings and minimize the negative externalities. This may create direct costs (e.g. pollution abatement, product and process redesign) for some firms and sectors of the economy, but will generate gains to other sectors and firms. However, as a general proposition, negative externalities impose costs on affected firms that outweigh – sometimes greatly outweigh – the benefit to polluting firms. Thus it is in the long-term interest of a universal owner, one that owns all firms, to pursue externality monitoring in an attempt to reduce negative externalities and to encourage positive externalities among portfolio firms. This should be combined with portfolio wide norm shift linked risk monitoring resulting in universal portfolio analysis and universal monitoring. (Norm Shifts, Center for the Study of Fiduciary Capitalism)

During the last ten years there’s been a shift away from defined contribution plans, where trusteeship is often held jointly with union or other employee based or elected representatives, toward DC plans where such influence is often less direct. While union and employee representatives seem to give a lot of thought to issues like the need to minimize negative externalities, many management dominated DC plans do not appear to do so. Movement in the direction of a more equitable and environmentally sustainable economy isn’t likely to come about on its own. Change depends on informed public participation, political will, and acquiring the democratic tools necessary so that those who invest our funds on our behalf are more fully accountable to us.

I’d love to hear from readers about their DC plans. If it is mostly invested in stock of the company you work for you, do they pass voting rights along to you? If your plan is like mine, with several fund alternatives, how are those funds chosen? What input opportunities are provided to you on that decision or others? Please let me know.

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Australia's Future Fund More Active

Responsible Investor (Australia’s Future Fund ups engagement and ESG integration, 11/10/2010) reports Fund “is planning more extensive direct engagement with investee firms – on top of taking greater account of environmental, social and governance (ESG) risks in its portfolio.”

Already, the quickly growing fund voted against company boards at 13% of resolutions during 2009. It is certainly becoming one to watch on the global scene.

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Staggered Boards Tend to Reduce Firm Value: More Evidence

Bebchuk, Lucian A., Cohen, Alma and Wang, Charles C. Y., Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment (November 2010). Available at SSRN. Abstract follows:

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards’ either bringing about or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In a recent and not-fully-anticipated recent ruling, the Delaware Chancery Court approved the legality of a shareholder-adopted bylaw that shortened the tenure of directors whose replacement was precluded by a staggered board by moving the company’s annual meeting up from August to January. We find that the decision was accompanied by abnormal and economically meaningful positive stock returns to firms with a staggered board, relative to firms without a staggered board.

The identified positive stock returns were especially pronounced for firms likely to be impacted by the decisions, because (i) their past annual election took place in later months of the calendar year, (ii) they are incorporated in Delaware or (iii) do not have supermajority voting requirements that make it difficult for shareholders to amend the bylaws. The identified positive stock returns were also especially pronounced for firms for which control contests are especially relevant because of their (i) below-industry return on assets, (ii) relatively small firm size, and (iii) absence of supermajority voting requirements making a merger of the company difficult.

Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. They are thus consistent with the policies of leading institutional investors in favor of proposals to repeal classified boards, and with the view that continuation of the ongoing process of board declassification by many public firms will enhance shareholder value.

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Resolutions Challenge Chamber Board Members on Political Expenditures

Investors recently announced filing of shareowner resolutions at several corporations with board members who also sit on the Board of the U.S. Chamber of Commerce, challenging these corporate boards to review their policies and oversight of political expenditures, especially through trade associations. The first filings are at Accenture, IBM, Pepsi and Pfizer.

The filers believe each of these companies has strong corporate governance records and is understandably proud of its leadership in corporate responsibility. In addition, IBM, Pfizer and Pepsi have strong vendor standards policies holding their suppliers to high standards of conduct through audits and engagement. However, according to Timothy Smith, Senior Vice President of Walden Asset Management and one of the lead sponsors of the resolutions:

Yet as Board members and major corporate contributors to the U.S. Chamber of Commerce they play a passive and compliant role, remaining silent while the Chamber reportedly poured $75 million into the 2010 election while working to unseat any member of the U.S. Congress who voted in favor of healthcare reform. The Chamber also works vigorously against legislation and regulation on climate change and financial reform. Ironically, the Chamber works to undercut the very leadership these companies demonstrate on sustainability.

Adam Kanzer, General Counsel at Domini Social Investments and a filer of the resolution at IBM, said:

The Chamber of Commerce is an aggressively partisan organization that is standing in the way of solutions to our nation’s most pressing problems, from health care to climate change. We are asking why these companies would lend their good names—and their implicit endorsement— to the Chamber’s agenda, which often runs contrary to their own, stated policies and practices. We are simply asking them to do what directors are supposed to do – ask hard questions and exercise meaningful oversight.

The resolution sponsors argue that a company serving on the Chamber’s Board can be widely perceived as supporting and promoting its policies and programs, which can have a negative impact on a company with a strong reputation for good governance and corporate responsibility, since the Chamber’s own website says:

Directors determine the U.S. Chamber’s policy positions on business issues and advise the U.S. Chamber on appropriate strategies to pursue. Through their participation in meetings and activities held across the nation, directors help implement and promote U.S. Chamber policies and objectives.

The resolution is also expected to be filed with several other companies on the Chamber’s Board, which has over 100 members including, AT&T, Caremark, Caterpillar, Deere & Company, Dow Chemical, FedEx, JPMorgan Chase & Co., UPS, and Xerox. Stephen Viederman of the Christopher Reynolds Foundation, one of the sponsors of the Pfizer resolution said,

As Chamber Board members these companies need to stand up and be counted; clarifying which side they are on. If they differ with the political positions of the Chamber, they need to speak out and make their positions clear.

Controversy about the Chamber’s role in thwarting environmental and climate change legislation led Nike to withdraw from the Board; and PG&E, Exelon, Apple and Levi Strauss to withdraw their Chamber memberships in 2009. In addition, several local Chambers of Commerce have withdrawn their national affiliation.

To date, the 25 filers of these resolutions include a broad range of investors, including Walden Asset Management, Domini Social Investment, the Christopher Reynolds Foundation, Catholic Health East, Catholic Healthcare West, Green Century Balanced Fund, the Funding Exchange, the Needmor Fund, Missionary Oblates of Mary Immaculate, Sisters of Notre Dame Toledo Province, Catholic Healthcare East, the Tides Foundation, Boston Common Asset Management, Zevin Asset Management as well as several individual investors. The list of filers is expected to expand as the proxy season progresses.

I encourage readers to support these resolutions and consider filing their own wherever there are gaps, following the example of the SIF members mentioned above, Shareowner Resolution. Not sure how to file? Sign up for a free class with USPX.

Ron Freund, of the Social Equity Group, wonders if similar resolutions should be placed at major TV owners requesting policies which prohibit political ads from non-disclosed donations.

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Who Will Stand Up for the American Dream?

Frank Rich, citing Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class, concludes the growing divide between the superrich and the rest of us is the direct “result of specific policies, including tax policies, championed by Washington Democrats and Republicans alike as they conducted a bidding war for high-rolling donors in election after election.”

The top 1 percent of American earners took in 23.5 percent of the nation’s pretax income in 2007 — up from less than 9 percent in 1976. During the boom years of 2002 to 2007, that top 1 percent’s pretax income increased an extraordinary 10 percent every year. But the boom proved an exclusive affair: in that same period, the median income for non-elderly American households went down and the poverty rate rose.

Rich counters charges that increasing taxes on the superrich would reduce the ability of small business owners to create jobs. The Tax Policy Center found that only 2% of all small-business owners are in the top bracket. The yearly tax increase for those earning between $200,000 and $500,000? $700, not enough to hire anyone.

Robert Frank, author of Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich, analyzed the 400 richest Americans  and found a “hardening of the plutocracy” and scant mobility. Only 16 of the 400 were newcomers.

How does corporate governance come into play? Most of the superrich aren’t entertainers, sports stars or entrepreneurs. Instead, they are “corporate executives and managers — increasingly (and less surprisingly) financial company executives and managers, including those who escaped with outrageous fortunes as their companies imploded during the housing bubble.”

When Obama campaigned, he promised to increase taxes on the rich. As Frank Rich concludes, there are many ways to create a more equitable tax code, “but surely few, if any, are easier than eliminating a tax break that was destined to expire anyway and that most Americans want to see expire.”

Rich argues that even more critical than the debt issue – borrowing from our grandchildren to give the superrich a tax cut – is the vanishing American Dream of mobility.  (Who Will Stand Up to the Superrich?,, 11/13/2010)

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CalPERS’ 3D Advisory Committee

Keith Bishop reports, CalPERS’ 3D Advisory Committee May Be Appointed Soon « California Corporate & Securities Law. I don’t know what the application process is or if it is by invitation only but Mr. Bishop would be an excellent addition to the Committee.

Yes, a significant portion of the members should be drawn from those with board experience, especially those who have been nominated by shareowners. Such members will be in a good position to assess the skills needed to be a “dissident” directors who can not only best convey the wishes of shareowners but who can also work with existing board members.

However, Mr. Bishop would bring important experience from Senate Commission on Corporate Governance, Shareholder Rights and Securities Transactions, California Commissioner of Corporations and Interim Savings & Loan Commissioner, and other positions. Perhaps even more importantly, Bishop has been a strong advocate of transparency at CalPERS, as well as filing petitions with the Office of Administrative Law to ensure CalPERS follows legal requirements when promulgating regulations.

Bishop’s influence might reduce demand by the US Chamber of Commerce and perhaps others for SEC regulations covering the governance of such committees by taking the process out of the shadows, while ensuring candidates have the necessary skills, experience, and background to enhance long‐term sustainable value creation at companies where 3D candidates win board seats.

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Video Friday: Diversity Rocks Stanford

Diversity On Corporate Boards: When Difference Makes A Difference: The Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford.

Speaker: The Honorable Luis Aguilar, Commissioner, United States Securities and Exchange Commission

Speaker: Joseph A. Grundfest, W. A. Franke Professor of Law and Business, Stanford Law School; Senior Faculty, Rock Center for Corporate Governance, Stanford University

Speaker: Mary B. Cranston, Senior Partner, Pillsbury Winthrop Shaw Pittman LLP

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