Archive | January, 2011

Law Professors Submit Amicus Brief in Proxy Access

A group of 36 law professors — including Harvard Law School Professors Victor Brudney and John Coates — joined an amicus brief responding to the arguments advanced by plaintiffs in the case (Business Roundtable and Chamber Of Commerce v. SEC). As the brief notes, the law professors do not hold the same views on the merits of or underlying policies behind Rule 14a-11, and differ on many issues concerning corporate governance and corporate law and policy. But the law professors are in agreement that Rule 14a-11 does not violate the First Amendment.

Among other things, the law professors’ brief points out that all of the First Amendment arguments advanced by plaintiffs would argue against the constitutionality of the SEC’s long-standing Rule 14a-8, which the Business Roundtable and Chamber of Commerce specifically chose not to challenge. More substantively, the brief emphasizes, shareholders are not “outsiders” or “third parties” to a corporation, but play a crucial role in a corporation’s “internal governance.” Shareholders would have undisputed rights to speak at a shareholder meeting — which the proxy rules attempt to reproduce for companies with widely dispersed shareholders. Perhaps most importantly, the Congress and the SEC have for over 70 years regulated securities by requiring disclosure. To subject the federal securities laws to strict First Amendment scrutiny would eviscerate the capital markets and impede capital formation at a moment when the nation’s economy most needs new investment.

via Law Professors Submit Amicus Brief in Proxy Access Case — The Harvard Law School Forum on Corporate Governance and Financial Regulation.

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CII Files Brief Supporting SEC Proxy Access Rule

The Council of Institutional Investors filed a brief strongly supporting the Securities and Exchange Commission’s (SEC) “proxy access” rule, rebutting claims of business groups seeking to overturn the rule.

The Council’s CII TIAA-CREF et al amicus brief 01-27-11, filed with TIAA-CREF and 14 other pension funds, was submitted January 27 in the U.S. Court of Appeals for the D.C. Circuit, in Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission.

“Proxy access will make companies more responsive to their shareowners and more vigilant in their oversight of management,” said Ann Yerger, executive director of the Council of Institutional Investors, an association of public, union and corporate pension funds with combined assets in excess of $3 trillion. “This basic shareowner right is widely accepted in many countries. U.S. investors deserve this same, fundamental protection.”

Proxy access gives shareowners a meaningful voice in corporate board elections by letting them place their nominees for director on the company’s proxy card when they are dissatisfied with the board and want to run their own candidates. This allows investors to avoid the often-prohibitive cost of distributing their own proxy materials to other shareowners. The SEC last August approved a rule granting certain long-term investors proxy access at U.S. public companies. But the rule was not put into effect because of the Business Roundtable-Chamber lawsuit.

The Council’s brief argues that the benefits of proxy access far outweigh the costs, citing enhanced communication between investors and management in countries where proxy access is permitted. The increased dialogue “keeps directors in touch with market sentiment which strengthens board independence, reduces risk surprises and improves corporate governance,” the Council and pension funds contend. The brief also dismisses business claims that the proxy access rule will saddle corporate boards with special-interest nominees

See also, CalPERSattachment-CIIpublicationEqualAccess (an attachment to a CalPERS Board meeting agenda from years ago).

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Investors Challenge Companies with Chamber Directors

Many investors have been deeply concerned over a number of actions by the U.S. Chamber of Commerce, particularly lobbying and actions that undercut environmental and sustainability initiatives that are supported by numerous forward looking companies. Yet many of these same companies sit on the Board of the Chamber and participate in making and supporting their policy and programs.

In letters sent to 35 major companies serving on the Board of the U.S. Chamber of Commerce (the Chamber), 44 investors and investment organizations, representing approximately $43 billion in assets, urged company managements to evaluate their role and to assess the risks and benefits of Board membership. In particular, the investors pointed to the significant risks posed by misalignment between company and Chamber policy objectives as well as the Chamber’s aggressively partisan role in electoral politics.

The Chamber has been criticized by many in recent years for its obstructive positions on climate change legislation, the healthcare and financial reform bills enacted in 2010, and most recently, for its partisan political spending reported to be $75 million in the 2010 elections.

The open letter was led by Walden Asset Management, a division of Boston Trust & Investment Management Company. Timothy Smith, Walden’s Senior Vice President and Director of ESG Shareowner Engagement stated,

This coalition of concerned investors, including investment firms, mutual funds and religious investors as well as Common Cause and the AFL-CIO, believe the Chamber’s work and message often contradicts what companies tell their investors and customers about their progress to protect our planet and act as responsible corporate citizens.

This investor outreach is especially timely since in November the Chamber announced a new anti-regulatory campaign, an initiative requiring the organization to raise millions of dollars from its membership. The Chamber’s effort focuses on weakening, delaying or defeating new laws and regulations, such as those promulgated by the Environmental Protection Agency to regulate climate warming greenhouse gases. The Chamber bylaws state clearly:

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.

Adam Kanzer, General Counsel at Domini Social Investments commented,

The Chamber claims that its board members set policy, and yet the Chamber’s policies often directly contradict the policies of the companies serving as board members. We’re asking companies to face these contradictions and address them. If they tell investors that a particular policy objective is important to the business, we think it is fair to ask why the Chamber is working to achieve the opposite outcome. As the Chamber commences an aggressive program challenging new and necessary regulation, being a silent or passive member of the Chamber Board is not responsible governance.

The following companies received the letter (Sample Letter to Companies with Board Members on Chamber Board): Accenture, JPMorgan Chase, Alcoa, Lockheed Martin, Allstate, 3M, , Anheuser-Busch, Melaleuca, A.O. Smith, New York Life Insurance, AT&T, Peabody Energy, Caterpillar, PepsiCo, Charles Schwab, Pfizer, ConocoPhillips, Ryder System, CVS / Caremark, Southern Company, Deere, Spencer Stuart, Dow Chemical, State Farm Insurance, Duke Energy, The Travelers Companies, Eastman Kodak, United Parcel Service, Emerson Electric, Verizon Communications, FedEx, WellPoint, International Business Machines, Xerox Corporation.

As Ron Freund, of the Social Equity Group, pointed out in a recent post (Shareholders Can End Political Ad Secrecy) that TV stations run several risks when they accept political hit ads from sources that don’t fully disclose contributors. Companies whose members sit on the Chamber Board could face similar liabilities.

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Shareowners Speak Louder in 2011

Passive or apathetic investors, take vote [note] : Now your votes  have actually begun to mean something. More so than ever, shareholders can truly feel like they’re part owners of public companies.

That makes now the perfect time for a push for better corporate governance policies. As it turns out, large institutional shareholders are striking while the iron’s hot this year. (In 2011, Shareholders Speak Louder Than Ever,, 1/26/2011). See also: Don’t Toss that Proxy.

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CalPERS Election and Candidate Forum April 26

400 P StreetCandidate Forum

As we have during the last two CalPERS elections, PERSWatch will sponsor a candidate forum so that members and the general public can meet and ask questions of the candidates. The forum for the Member-At-Large candidates will be held on April 26, 2010 from 6:00 p.m. – 8:00 p.m. in the CalPERS auditorium at 400 P Street, Sacramento. The “CalPERS Candidates’ Forum” will be moderated by the League of Women Voters of Sacramento County.

Notice of the Forum will be highlighted in the Spring edition of the CalPERS PERSpective. CalPERS will also include notice in the ballot package. A video of the Forum will be archived on the CalPERS and PERSWatch websites. We are delighted to be sponsoring this event and are thrilled that all eight candidates have agreed to participate.

Please, no food, drinks or campaign materials will be allowed in the auditorium. Continue Reading →

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Financial Crisis Inquiry Commission Releases Report

Download the report in full or by section. Analysis of the report is just starting to come out. I probably won’t have a chance to read it for quite some time but others are beginning to analyze:

A deeply divided U.S. investigative panel issued a scathing critique of the culture of deregulation championed by Former Federal Reserve Chairman Alan Greenspan, saying the government had ample power to avert the financial crisis of 2007-2009 and chose not to use it. (Divided crisis panel blames Greenspan, Wall Street, Reuters, 1/27/11)

In more than 500 pages, the first official government report into the financial crisis casts blame widely – accusing the Federal Reserve of having “neglected its mission” by not piercing the housing bubble, while finding that Goldman Sachs had understated its benefit from the government bail-out of AIG. (US crisis inquiry finds turmoil was ‘avoidable’, FT, 1/27/11)

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Do the Opposite

I’m old enough to remember the Seinfeld episode where George does the opposite. Finally, after realizing his every instinct in life has been wrong, George Castanza resoles to do the opposite and things finally begin to turn around for him. A similar strategy, contrarian investing, can work for investors as well. A recent edition of Investment News provides examples of two bits of supporting research.

The surest way to profit from takeover speculation in the stock market is to bet it’s wrong. When analysts say ‘sell,’ it’s time to buy, data show.

Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent. (How to play takeover rumors? Bet against them – Investment News.)

Following the advice of equity analysts may be perilous to your profits. Although companies in the S&P 500 that analysts loved the most saw their stocks rise 73% on average since the benchmark for U.S. equity started to recover in March 2009, those with the fewest “buy” recommendations gained 165%, according to data compiled by Bloomberg. (When analysts say ‘sell,’ it is time to buy, data show. (When analysts say ‘sell,’ it is time to buy, data show.)

Contrarian investors might do even better by using activist strategies to unlock value that goes unrecognized by analysts.

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Shareholders Can End Political Ad Secrecy

This month marks the first anniversary of the landmark Supreme Court Citizens United decision striking down restrictions on independent political spending by corporations and unions. But heated national debate continues. Major controversy has erupted over independent or third party organizations channeling secret donations into the elections. President Obama strongly criticized the decision, stating that it would “open the floodgates for special interests, including foreign corporations, to spend without limit in our elections.”

Polls showed that 80 percent of Americans opposed the decision.

In reaction, the House passed disclosure legislation but it failed in the Senate. As a result, millions of dollars in undisclosed donations poured into the 2010 elections. The Chamber of Commerce alone spent a reported $75 million to unseat primarily Democratic members of Congress who opposed Chamber policies.

With government stalled, it will be up to private citizens to take action. Some groups have called for companies to disclose their donations. But since the largest share of these secret donations goes to buy expensive TV ads, the focus should be on the major broadcast and cable TV companies. There is another way to end donor secrecy:

Shareholders should file resolutions requesting television companies to refuse ads from groups which don’t provide full disclosure of donors.

Ironically, the concentration of TV ownership makes this approach practical. A handful of publicly traded companies dominate the US media landscape. These include GE/Comcast (NBC), Disney (ABC), CBS, News Corp (Fox),and Time Warner

People assume that stations must run these ads since the Communications Act of 1934 requires that broadcasters grant “reasonable access” to airwaves for political speech. However, that rule has typically been applied to candidates for political office, not independent groups. Regulations governing direct candidate advertising don’t apply. The FCC has no rule prohibiting stations from refusing such ads.

Stations frequently do refuse political ads. In a case involving anti-war ads, the Supreme Court ruled that “the Communications Act…does not require broadcasters to accept editorial advertisements.” Indeed, during 2008, some TV network affiliates refused to run anti-Obama ads.

Further, since stations have the discretion to refuse the ad, they are no longer shielded from liability for the accuracy of the ads, just as with a commercial product.  In a Congressional race, a Denver TV station stopped running a third party ad stating that the sponsor failed to substantiate its claims.

Given this legal liability risk, shareholders must weigh the possible financial impact to their company of running such ads without full transparency. Currently, third party ads only have to disclose the sponsor’s name, contact information and key officers.

A second issue for shareholders is that the station’s association with ads funded by secret donations could harm the company’s reputation and potential profits. This happened to the Target Corporation, which became the object of a boycott after disclosure of a donation to an organization running ads supporting an anti-gay marriage candidate.

Finally, public distaste for secrecy, combined with the potential for foreign influence over US elections, is more reason for the media to adopt disclosure policies. Without full disclosure, shareholders can clearly claim that there is no way for companies to eliminate legal and financial risk. This shareholder claim is expressly affirmed in the proposed Congressional DISCLOSE ACT,

The American people have a compelling interest in knowing who is funding independent expenditures …to influence Federal elections… (D)isclosure of the funding sources… can provide shareholders, voters, and citizens with the information needed to evaluate the actions by special interests seeking influence over the democratic process. (emphasis added.)

It is time for shareholders to stake their claim AND FILE shareholder resolutions.

© Copyright Ron Freund  January 2011. Ron Freund is Director of Corporate Responsibility for the Social Equity Group, a California socially responsible investment firm.

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Financial Crisis Inquiry Commission Release Forthcoming

The Financial Crisis Inquiry Commission will deliver its report on the causes of the financial crisis, which has devastated our economy and so many families, on January 27 to the President, Congress and the American people. The report will contain facts and evidence from the Commission’s more than year-long investigation – including 19 days of public hearings, an analysis of hundreds of thousands of documents and interviews with more than 700 witnesses. The report will also include the Commission’s findings and conclusions as to the causes of the financial crisis based on this inquiry.

I fear Michael Hirsh may have been correct that Angelides wasted his first hearing by calling in the biggest Wall Street CEOs. That made good press but, as one observer noted, it was like “making Richard Nixon the first witness in the Watergate hearings.” Better to start with those on the front line. Hopefully, that mistake was overcome in further investigations by the Commission. Real reforms during the Depression didn’t really take shape until after Pecora delivered his report. Perhaps the Commission’s report will have a simila response. One can hope.

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Belgian Companies to "Comply or Explain" Re Women on Boards

The Belgian Corporate Governance Commission (CGC) has implemented gender diversity into its governance code on a ‘comply or explain’ basis. Listed companies are encouraged to increase the number of women serving boards to at least 30% within seven years. The Confederation of British Industry sent a similar request last year in its submission to Lord Davies’ review into the shortage of women on UK company boards. (Belgium backs 30% gender target, PIRC Alerts, 1/25/2011. See also: Women on Board: The Norwegian Experience)

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Vermont State Senator Seeks to Redefine Persons as Human Beings

Vermont, state senator Virginia Lyons introduced a bill to seek an amendment to the US Constitution providing that corporations are not persons. The movement is in reaction to the Supreme Court’s  Citizens United decision, which allows unlimited corporate spending in elections as a form of “free speech” for the corporate “person.” According to dissenting Justice John Paul Stevens:

Corporations have no consciences, no beliefs, no feelings, no thoughts, no desires. Corporations help structure and facilitate the activities of human beings, to be sure, and their ‘personhood’ often serves as a useful legal fiction. But they are not themselves members of ‘We the People’ by whom and for whom our Constitution was established.

According to a ABC News poll, 76% of Americans oppose the Citizens United decision. (Vermont Is Gearing Up to Strike a Major Blow to Corporate Personhood, Ban It Statewide | AlterNet.)

Corporate Sponsored Judges

Time to get on board by signing the petition. Here’s the full text of the petition:

  • “Corporations aren’t people and shouldn’t be able to corrupt our democracy. We need as many state legislatures as possible to get behind the call for a constitutional amendment to reverse the Citizens United ruling.”

We’re asking every state legislator in the country to back adopting resolutions supporting the only remedy we have left to correct the Supreme Court’s Citizens United decision: a constitutional amendment clarifying that corporations are not people.

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Shareowner Rights By Country

Shareowner Rights across the Markets: A Manual for Investors from the CFA Institute compares the rights of shareowners in 10 developed markets and 12 emerging markets in both brief tabular form and through detailed explanation. Each report summarizes current practices, recent developments, legal and regulatory frameworks by jurisdiction, as well as providing helpful references to local organizations and regulators for each country. Download the entire report or by individual country. We’ve also added a link to the International Corporate Governance portion of our Links page so that you can easily find this valuable resource at a later date.

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Responsible Investor: Manifest to Enter US Market; UN Global Compact Gets Tough

UK-based proxy voting and research firm Manifest Information Services, which numbers the Swedish AP buffer funds among its clients, is planning to enter US market.

Manifest, whose US partner Proxy Governance International (PGI) withdrew from the market late last year, will begin marketing in the US shortly, said Chief Executive Sarah Wilson.

Manifest’s move comes at an interesting time, with the Securities and Exchange Commission’s new proxy access rules facing a legal challenge from the US Business Roundtable and Chamber of Commerce. (UK proxy firm Manifest planning to enter US market, Responsible Investor, 1/24/2011).

The United Nations Global Compact has expelled more than 2,000 companies for “repeated failure” to communicate their progress in integrating its sustainability principles into their operations.

The move reflects a stricter enforcement procedure against firms. The Global Compact said it has now booted out a total of 2,048 firms – the number was reached following the recent expulsion of more than 200 companies. This was at the end of a 2010 moratorium on expulsions in less developed countries. That leaves 6,066 active Global Compact participants in 132 countries. The target is for 20,000 participants by 2020.

The Global Compact is a framework for businesses that are committed to aligning their operations with 10 principles covering human rights, labor, environment and anti-corruption. (UN Global Compact expels more than 2,000 companies in enforcement drive, Responsible Investor, 1/24/2011). If you’re near Standard, you may want to attend the following discussion: The U.N. Global Compact: Principles for Businesses in Human Rights, Labor, Environment and Anti-Corruption, Sponsored by the Arthur and Toni Rock Center for Corporate Governance, Thursday, February 2nd, 2011, 12:45 PM – 2:00 PM, Room 190, Stanford Law School.

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"Low-Cost" Activism More Effective Since Enron

Ferri, Fabrizio, ‘Low Cost’ Shareholder Activism: A Review of the Evidence (December 1, 2010). Research Handbook on the Economics of Corporate Law, Claire Hill & Brett McDonnell, eds., Elgar Publishers, Forthcoming. Available at SSRN.  Ferria looks at studies of shareholder proposals filed under Rule 14a-8 and shareholder votes on uncontested director elections. He finds that “collectively, these studies suggest that low-cost activism has become a more powerful tool, capable of driving governance changes at target firms, promoting market-wide adoption of governance practices, and influencing key policy reforms.”

The decisions of proxy advisors appear to be key in many of the outcomes. Here are a few interesting tidbits:

  • A puzzling result in Choi et al. (2009) is that proxy advisors do not seem to take into account the conduct that led to a withhold recommendation for a director at firm A in issuing a recommendation for the same director at the annual meeting of firm B. Consistent with this result, Ertimur et al. (2010a) report that none of the directors of firms involved in the backdating scandal received a WH (withhold) recommendation from ISS/RM when up for election at another firm (and they were not penalized in terms of votes withheld), even when ISS/RM recommended to withhold votes from them at the backdating firm. If proxy advisors and shareholders do not take into account directors‘ conduct at other firms when, respectively, issuing recommendations and casting votes, then the reputation penalties for monitoring failures are limited.
  • Studies suggest that shareholder dissatisfaction expressed through director elections is followed by value-enhancing choices and a reduction in agency costs.
  • Ertimur et al. (2010b) find significant voting support for proposals aimed at affecting the pay setting process (e.g., proposals requesting shareholder approval of large severance payments), lower support for proposals aimed at micromanaging pay (e.g. proposals to adopt specific levels and structure of pay) and almost no support for more  ̳radical‘ proposals arguably reflecting objectives other than shareholder value (e.g., proposals to link executive pay to social criteria or to abolish incentive pay).
  • Shareholder proposals have become an effective activism tool in prompting firms to modify their governance practices. Firms are more likely to expense stock options (Ferri and Sandino 2009), declassify boards (Guo Kruse and Noel 2008; Cai et al. 2009), and remove poison pills (Akyol and Carroll 2006; Cai et al. 2009) after receiving a shareholder proposal requesting these actions.

  • Ertimur et al. (2010c) report an implementation rate of 31% for proposals winning a majority vote and only 3% for proposals receiving between 30% and 50% of the votes cast.

  • Ertimur et al. (2010c) report a rate of implementation of 40-42% of majority vote proposals in 2003-2004 versus 16%-24% in 1997-2002.

  • There is little doubt that shareholder proposals and shareholder votes have become a more effective tool in the post-Enron period (see also Section 2.2), with boards listening to shareholder ―voice‖ more than ever before.
  • Cuñat et al. (2010) find that approved shareholder proposals yield an abnormal return of 1.3% over the ones not approved, with a more pronounced price reaction for proposals related to anti-takeover provisions.

A recent example of such activism can be found at Zoran: Shareholder Activist as Catalyst, SeekingAlpha, 1/23/2011.

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Intuit's Annual Meeting

Mathew Rafat attended Intuit’s (INTU) annual shareowner meeting on January 19, 2011. He is the only shareowner I know of who regularly reports on what goes on at the annual meetings he attends. In this post he doesn’t discuss proxy issues or resolutions, so I presume there was nothing of note. Still, if you’re a Intuit shareowner, you may find it interesting.  (via News From Intuit’s Annual Meeting: Evolving Software, Focusing on India – Seeking Alpha.)

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Wal-Mart Gives New Meaning to Fat City

Yes, those of you who follow my disclosures may have noted that I recently added Wal-Mart. Yes, I bought it because Wal-Mart has because they have been going greener and because of the recent news that Wal-Mart Pledges to Promote Healthier Foods, WSJ, 1/20/2011.

Then I read “researchers found that one new Walmart supercentre per 100,000 residents meant an average weight gain of 1.5 pounds per person sometime over a 10-year period dating from the store’s opening. It also boosted the obesity rate by 2.3 percentage points, meaning that for every 100 people, two who weren’t obese ended up in that category after a superstore opened.

“I think the most obvious story is that Walmart lowers the price of foods and a lot of the foods it has big price advantages on are the processed, inner-aisle types of food that aren’t that good for you,” explains the researcher from the University of North Carolina, Greensboro. (Study: When New Walmarts Open, People Get Fatter, The Consumerist, 1/19/2011)

At least I’ll be able to vote in Wal-Mart’s elections and will be able to introduce resolutions. Although with the number of shares the Walton’s own, proposals by shareowners aren’t likely to get a majority vote. Still, I’m hoping to have more influence as an owner than as an outside critic and if Wal-Mart is serious in its commitment we may just find that in a few years when Wal-Mart enters a community residents lose weight.

Continue Reading · Database of Shareowner Proposals

The Manhattan Institute for Policy Research’s Center for Legal Policy, a conservative, market-orientated think tank, launched a new proxy monitoring resource: This searchable database of shareowner proposals at the 100 largest U.S. companies over the past three years could be a valuable resource for management and shareowner activists alike. Sort through the data by company, industry, proponent and proposal type.

The Center intends to expand the database over time. For example, in three mouse clicks you can see that there were 32 shareholder proposals on executive compensation submitted to companies in the health care industry between 2008 and 2010. Want to know what proposals John Chevedden, Ray Chevedden and the Chevedden Family Trust have placed in front of shareowners? allows you to quickly identify 32 and to pull them up with a few clicks. Interested in reviewing the resolutions on executive compensation? You can quickly identify 217 and read each.

I found such a valuable tool, I’ve added it to our links page under both Proxy Voting/Monitoring and Shareowner Action.

Hat-tip to ProxyMonitor: A New Shareholder Proposal Proxy Access Monitoring Tool, 100 F Street, 1/20/2011.

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Compensation Committees Should Include Employee or Shareowner Representatives

The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.

In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy. Alan MacDougall, PIRC’s managing director, said:

Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.

PIRC also calls for the UK Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote. According to MacDougall.

There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.

To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.

PIRC is the largest independent European provider of corporate governance, proxy voting and corporate social responsibility investment research and advisory services. Their clients include pension funds and fund managers with combined assets of over £1.5 trillion.

In books such as Going To Extremes and Why Societies Need Dissent, Cass Sunstein has explored group decision-making. His research into decisions made by US judicial panels with political appointees found that if the panel is made up solely of Democrats they take more ‘liberal’ stances on issues than their individual views would predict, and Republicans shift to a harder conservative position. PIRC believes that a similar process may occur where remuneration committees are comprised of individuals who share the same views on high pay.

Shareowners and/or employees on compensation committees could reduce the likelihood of group think. US firms and shareowners should consider similar options. ISS, CalPERS, John Chevedden and others please take note.

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"Say on Pay" to be Annual

I believe ISS/Risk Metrics created a policy on the Frequency of Advisory Vote on Executive Compensation (Management “Say on Pay”), a new proxy item required under The Dodd-Frank Wall Street Reform and Consumer Protection Act.

Their Recommendation: Vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.

Rationale for Update: The Dodd-Frank Act, in addition to requiring advisory votes on compensation (aka management “say on pay” or MSOP), requires that each proxy for the first annual or other meeting of the shareholders (that includes required SEC compensation disclosures) occurring after Jan. 21, 2011, include an advisory voting item to determine whether, going forward, the “say on pay” vote by shareholders to approve compensation should occur every one, two, or three years.

In line with overall client feedback, ISS is adopting a new policy to recommend a vote FOR annual advisory votes on compensation. The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent and timely manner. ISS supports an annual MSOP vote for many of the same reasons it supports annual director elections rather than a classified board structure: because this provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the majority of the information presented in the accompanying proxy statement for the applicable shareholders’ meeting. Having MSOP votes every two or three years, covering all actions occurring between the votes, would make it difficult to create the meaningful and coherent communication that the votes are intended to provide. Under triennial elections, for example, a company would not know whether the shareholder vote references the compensation year being discussed or a previous year, making it more difficult to understand the implications of the vote.

From my understanding, ISS held a conference call on the new policy. I wasn’t on the call but I understand 250 were. I also understand that during the call it came out that CalSTRS, State Street and Vanguard all support annual votes. CalSTRS was expected but State Street and Vanguard supporting annual votes is likely to mean greater success. Annual vote seems headed for the default position.

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KBR Channels Apache: Chevedden Sued Again

It’s a case of legal déjà vu for John Chevedden. The retired aerospace worker and shareholder activist is once again facing a legal challenge in his attempt to submit a proposal to shareholders of a public company. This time, it’s KBR.

Last year, Chevedden was sued by Apache Corp., which rejected his shareholder proposal because it said it couldn’t confirm he owned the company’s stock. Chevedden is an annual meeting gadfly, and companies view him with disdain. He owns small stakes in a host of companies, and he’s a prolific filer of shareholder proposals.

(KBR channels Apache, sues activist investor | Loren Steffy | – Houston Chronicle, 1/20/2011.) Steffy goes on to note that Chevedden’s “proposals are reasonable.” “The disturbing thing about the legal bullying being employed by KBR and Apache is that it could be applied to almost any individual shareholder.” (See notification to SEC.)

Steffy doesn’t mention it but Apache has also challenged Chevedden again. “Apache Corp. has renewed its battle with shareholder activist John Chevedden over the proof of ownership required to file shareholder proposals.” (Apache Plans to Exclude a Chevedden Proposal Again, RiskMetrics Group, 1/7/2011) Apache is attempting to again bypass the SEC’s no-action request process.

If KBR and Apache succeed, all shareowners will lose because this tactic of intimidation will be copied over and over again. How many shareowners will be willing to risk an expensive lawsuit with the largest corporations in America by simply filing a shareowner proposal? Who will defend them or Chevedden?

I’m hoping the United States Proxy Exchange will again take up Chevedden’s cause but these efforts take time and money. If you think shareowner rights are a cause worth defending, please consider joining USPX. For $3.95 a month you’ll help them defend the rights of all shareowners. (See also,
Rejected No-Action Request Clarifies Required Ownership Evidence and Apache v Chevedden: Postmortem.

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Video Friday: Opalesque Interview with Phil Goldstein and Andy Dakos

In this Opalesque TV interview, they sit down with shareowner activists Phil Goldstein and Andy Dakos, fellow principal of Bulldog Investors, to discuss the roots of the Bulldog and Opportunity Partners.

Learn about:
Phil Goldstein: Transition from civil engineer to legendary “value investor”
Foundation of Bulldog Investors
How do you define yourselves as “activist investors”?
To what extent can activist investors act as “catalysts” to help unlock value in an asset?

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SEC Files Brief in Proxy Access Challenge

The SEC submitted its initial brief in the case of Business Roundtable and Chamber Of Commerce v. Securities And Exchange Commission. The litigation was commenced by the Business Roundtable and the Chamber of Commerce to challenge the validity of the proxy access rules adopted by the SEC in August 2010. (SEC Submits Brief Supporting Validity of Proxy Access, Harvard CorpGov Forum, 1/20/2010) Below is a summary of the SEC’s argument:


1. Rule 14a-11 requires companies, under certain circumstances, to include shareholder nominations for director in the company’s proxy materials. The Commission adopted this rule to ensure that, to the extent practicable, shareholders can use the federal proxy process to meaningfully exercise the rights they have under state law to nominate and elect directors at an in-person shareholders’ meeting. There is nothing inconsistent or arbitrary about the Commission’s decision to allow shareholders to submit proposals to expand the proxy access provided by the rule but to preclude companies and shareholders from opting out of Rule 14a-11 in favor of a more restrictive access regime. Allowing shareholders to expand the proxy access provided by Rule 14a-11 furthers the purpose of that rule: advancing the federal interest in shareholders’ being able to exercise their ownership rights through the proxy process as effectively as they might have by attending a shareholder meeting. Allowing companies or shareholders to diminish the minimum level of access provided by the rule, in contrast, undermines the rule’s purpose.

2. The Commission carefully considered the likely economic effects of Rule 14a-11 and reasonably concluded that the rule’s potential benefits— including improved board performance and enhanced shareholder value—justify its potential costs. By thoroughly analyzing the record evidence and making informed predictive judgments where appropriate, the Commission fully complied with its obligations under statute and this Court’s precedent to apprise itself of the potential economic consequences of its rules. The Commission did not evade its responsibility to assess the rule’s potential costs by ignoring them or “blaming” such costs on state law. Rather, the Commission correctly recognized that the potential for some costs identified by petitioners and other commenters would exist whenever a shareholder nominee is nominated or elected—irrespective of Rule 14a-11—and then went on to thoroughly consider all of those potential costs. In particular, the Commission carefully considered (although not using the precise language petitioners prefer) the concern that government and union pension funds may use Rule 14a-11 as leverage to obtain concessions from companies unrelated to shareholder value, and concluded that the potential benefits from increased responsiveness of boards to shareholders justified these potential costs.

3. Investment companies are generally subject to the federal proxy rules and were properly included in Rule 14a-11. The Commission carefully considered differences in the regulation and governance structure of investment companies and reasonably concluded that these differences did not justify depriving investment-company shareholders of the proxy access rights provided by the rule.

4. Rule 14a-11 does not violate the First Amendment because the rule governs only internal communications—neither requiring companies to disseminate or subsidize the speech of third parties nor speak to the public at large. In any event, strict scrutiny does not apply to disclosures under the securities laws, and Rule 14a-11 withstands scrutiny under any lower standard.

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Restrictions on Pay Could Begin With Golden Parachutes

In case you missed it, SEC staff reversed course on a no-action request, clearing the way for Navistar shareholders to vote on a Teamsters’ proposal related to golden parachute agreements, which urges the board to adopt a policy of obtaining shareowner approval for future severance agreements that contemplate paying out more than two times the sum of an executive’s base salary plus bonus. Navistar argued that Dodd-Frank’s say-on-pay vote would substantially implement the proposal’s objective. The SEC staff agreed.

In their request for determination, the Teamsters cited Congressional intent that financial reform requirements not preclude shareholders from taking action on specific elements of executive pay and their request was granted.

SEC Staff Reverses Ruling On Teamsters Proposal – Compliance Week.

Shareowners might do well to contemplate introducing several such limitations on CEO pay at several companies. (see also, CEO Pay in an Age of WikiLeaks: Reporting, Rationale and Ratios and the members-only discussion at USPX.)

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Top Tweeters and Rising Corporate Governance Stars

Estelle Métayer of Competia has come up with the ranking below of “who is the most influential corporate governance tweeter in 2011” based on her Twitter list, those of her colleagues and their Klout scores.

#1 Rosabeth Kanter, rosabethkanter, Klout score 58

#2 Lucy Marcus, lucymarcus, Klout score 57

#3 Matt Kelly, complianceweek, Klout score 53

#4 Norman Marks, normanmarks, Klout score 49

#5 Estelle Metayer, competia, Klout score 48

#6 Fay Feeney, fayfeeney, Klout score 48

#7 Debra Beck, Npmaven, Klout score 45

#8 Frank Aquila, faquila, Klout score 44

#9 Nell Minow, nminow, Klout score 44

#10 Alex Todd, Trustenabler, Klout score 44

To see the whole list of 25, go to Competia. If you’re not following them now, you might want to expand your horizons. Corporate governance is such a broad field. If Ms. Métayer repeats the exercise, I would suggest she look at several days of posts to Twitter that include #corpgov.

Know a rising star on the list or not? The Millstein Center is now accepting nominations for its fourth annual global “Rising Stars of Corporate Governance.” This award recognizes people who, while young and possibly new to the field of corporate governance, are making their mark as outstanding analysts, experts, activists or managers. They may be at any of the many bodies that comprise the global world of corporate governance: corporations, academic bodies, institutional investors, auditors, advisory firms, rating agencies, proxy services, professional associations, and others. Click here to nominate a Rising Star by March 31, 2011.

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CEO Pay in an Age of WikiLeaks: Reporting, Rationale and Ratios

As has been widely reported, WikiLeaks will soon release thousands of documents revealing malfeasance, greed and incompetence at the highest levels of a major American bank, most likely Bank of America. According to WikiLeaks’ Julian Assange, this may be the biggest expose of unethical corporate behavior since the Enron scandal. (Facing Threat From WikiLeaks, Bank Plays Defense, NYTimes, 1/2/2011) For broader “leaks,” see Ex-Banker Gives Data on Taxes to WikiLeaks, NYTimes, 1/17/2011.

This will focus new attention on the subjects of greed, fraud and abuse at the highest levels of Corporate America. See Gary Larkin’s post, Wikileaks Episode Should be Wake-Up Call for Companies. (The Conference Board Governance Center Blog, 1/14/2011)

Last year’s Dodd-Frank bill includes Section 922, which provides that the SEC must pay rewards to whistleblowers who provide original information about violations of the federal securities laws that leads to successful enforcement actions resulting in more than $1 million in penalties. (Concerns Grow Over New Dodd-Frank Act Whistleblower Provisions). Additionally, a pay disclosure rule will require many U.S. companies to report the ratio of CEO pay to median employee pay in the annual proxy statements and also requires votes on corporate proxies concerning how often shareowners will have a “say on pay.”

A recent Towers Watson poll of 135 U.S. publicly traded companies found that 51% expect to hold annual say-on-pay votes, while 39% prefer the vote be held every three years, and 10% anticipate holding biennial votes. Meanwhile, nearly half 48% of companies surveyed are making some adjustments to their executive pay-setting process, while 65% are devoting more attention to explaining their programs in the Compensation Discussion & Analysis (CD&A). Some of the best advice for companies on these issues can be found regularly at, including a program today, The Proxy Solicitors Speak on Say-on-Pay.

Clearly, the issue of executive pay is one that stay with us for years to come but 2011 could set the tone, not just in America but around the world. One of the more interesting discussions I’ve read is in the recent posts of an an Indian blogger, Sonia Jaspal, who cites a recent report of COSO “Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies,” which states that CEOs are involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. (see Fraud Symptom 1- Insatiable hunger of CEO, Fraud Symptom 2- A Weak CFO, and Fraud Symptom 3 – Board’s failure to exercise judgment. We need mechanisms to reduce the likelihood of collusion between CEOs and CFOs, such as making directors and/or audit committee responsible for recruiting and terminating CFOs and not linking CFO pay to stock market performance.

Shareowners are also grappling with how to address the issues. Manifest, a UK-based proxy advisory firm has something of an advantage, since UK shareowners have had a say on pay for many years. See an example of relatively recent discussion at “Excessive” bonuses lead to higher dissent. Other sources of advice include books such as Money for Nothing: How CEOs and Boards Enrich Themselves While Bankrupting America and the classic Pay without Performance: The Unfulfilled Promise of Executive Compensation.

Members of the United States Proxy Exchange have initiated a forum to discuss where individual shareowners and USPX should come down on pay issues. Get in on the conversation for $3.95 a month, if only to monitor what direction this increasingly influential group will take. There are thousands of sites providing investment advice but USPX is one of only a few on investors as owners.

While I have often advocated that any any principles regarding limits should be grounded on academic research, it is difficult to envision a mass movement based on the complex formulas and principles contained in most CD&As, even if they may be grounded in research. Should founding CEOs be given a pass? I don’t think so. CEOs like Steve Jobs of Apple and John Mackey of Whole Foods can easily afford to work for minimum wages because they own a substantial portion of their companies. Their real pay comes through ownership, not by working.

CEOs will try to convince their boards they should be paid in the top 25% of their peers and we have the Lake Wobegon Effect. Since companies will be reporting the ratio of annual CEO pay to median annual total compensation for all employees, that number may drive a popular movement. What will be considered fair? 1 to 25? 1 to 50? 1 to 100? 1 to 200?

In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay of typical American workers, but that was a steep drop in the ratio from 2000 when CEOs earned 525 times average pay. With companies forced to report their ratios, expect more pressure than ever from shareowners in 2011.

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Directors Forum 2011: Directors, Management & Shareholders in Dialogue

Don’t miss this great conference in San Diego. 1/23-25. The conference starts with a keynote from SEC Commissioner Kathleen Casey. Sessions include the following:

  • “New Regulatory Developments – Good for Business or Not?”
  • “Managing Risk: Real Assessment? Or Deniable Plausibility?”
  • “Board/Shareholder Communications: Curing ‘The Cool Hand Luke Syndrome’”
  • “The Roles of Management and the Board in Developing a Company’s Strategies”
  • “The Evolving Role of the Director: Now a Full Time Job?”
  • “Shareholder Hot Topics”
  • “Current Issues in Executive Compensation: The Hype and Reality”

This forum brings top experts to one of the best venues in the country. One of the nicest features is the high ratio of speakers to attendees. Getting to ask your question or having a more lengthy conversation usually isn’t a problem. Make sure you also attend the “bonus” session covering regulatory and legal issues. See this year’s entire agenda, my coverage of Directors Forum 2010 and register now.

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