Archive | February, 2011

University of Delaware: Fellowship & Online Course for Directors

The Weinberg Center for Corporate Governance has won funding to begin a yearlong fellowship for research into such issues as CEO pay and has created an online training course for board directors.

The Edgar Woolard Fellowship (funded by the Investor Responsibility Research Center) — named in honor of the former DuPont Co. CEO — will fund the research of 21-year-old university senior Craig Ferrere, a finance major who is looking to find better ways of matching executive pay with performance.

Ferrere said he aims to find analytical tools that measure an executive’s worth more objectively and more accurately than peer comparisons, which has been a primary cause of escalating pay.

Earlier this year, Charles Elson, director of the Weinberg Center, helped put together an Internet multimedia course on the complex legal and philosophical dynamics of being a board member.  “How to Be(come) a Director” was commissioned by the National Association of Corporate Directors, with the goal of teaching the essentials of board governance: ethics, accountability and competence.

The self-paced course costs $395, and includes video presentations from Elson and other experts. In today’s corporate world, a savvy, capable board is critical, Elson said, but directors can come to the role without adequate appreciation for the balancing act they’ll be expected to pull off.

via University of Delaware fellowship funds research on corporate governance | The News Journal |

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Few Whistleblower Tips: Let's Try Publicity

The SEC’s new whistleblower program is attracting far fewer tips than expected, despite richer rewards, just 168 complaints alleging corporate fraud in the first 6½ months of the program’s existence, a lot less than expected by Steven Kohn, executive director of the National Whistleblowers Center. (SEC Whistleblower Call Draws Few Tipsters, Kaja Whitehouse, New York Post. February 23, 2011 via Stanford Law School’s Securities Class Action Clearinghouse.

One problem might be that few potential whistleblowers know about the program. Here’s some basic information from the SEC website:

On July 21, 2010, the President signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Act”). Among other things, the Act establishes a whistleblower program that enables the Securities and Exchange Commission to pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action, as defined by the Act.

The SEC has 270 days from the date of enactment to issue final regulations implementing the whistleblower program and is in the process of preparing a rule proposal. Compliance with the regulations will be a prerequisite to an award, so please check back for information concerning the regulations if you wish to be considered for an award.

The Act provides that “information provided to the Commission in writing by a whistleblower shall not lose the status of original information . . . solely because the whistleblower provided the information prior to the effective date of the regulations, if the information is provided by the whistleblower after the date of enactment.” If you wish to submit information regarding a potential violation of the federal securities laws, please use our online form. If you do not want to submit the information electronically, our address is: SEC, 100 F Street NE, Washington, D.C. 20549-5631. You may also send a fax to 202-772-9235.

The Act expressly prohibits retaliation by employers against individuals who become whistleblowers under SEC rules and provides them with a private cause of action in the event that they are discharged or discriminated against by their employers in violation of the Act. In addition, OSHA’s Office of the Whistleblower Protection Program continues to administer the whistleblower protection provisions under the Sarbanes Oxley Act of 2002.

You can also easily find attorney’s looking to help whistleblowers file by doing a Google search on something like SEC whistleblower program need lawyer. More likely, maybe federal securities laws are no longer being violated, or maybe potential whistleblowers just don’t know they can be entitled to a 10%-30% share of anything the SEC recovers over $1 million, based on their tips to the SEC that find firms caught breaking the law. Please help spread the word.

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California Corporate Governance Network

Another resource added to the Internet:

The California Corporate Governance Network was developed to create a coalition of California pension plans to advocate for corporate governance best practices. Within California there are several pension plans that range in size from the largest two state plans to the local county funds. Collectively these plans provide for the investment and retirement needs of thousands of public employees and educators in California. With the common goal of providing sustainable benefits for our plan participants, along with our responsibilities as fiduciaries to our members, we developed this network to function as a cohesive unit to achieve the following goals:

  • Strengthen communication across public pension funds in California
  • Share corporate governance policies and practices
  • Encourage the adoption of best practices and proxy voting procedures
  • Support government reforms and litigation towards improving the governance of companies in which we invest
  • Educate and enhance awareness of the general public about corporate governance and its importance

Quick resource for finding policies of CalPERS, CalSTRS and Los Angeles County Employees Retirement Association (LACERA) governance policies. Also has a good calendar on corporate governance events. I’m eager to see how this new site develops and have added a permanent link on our Links page under Institutional Investors.

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Progress but IFRS Delayed in India

The government notified 35 accounting standards with a view to update Indian accounting norms in line with the global audit practice IFRS.

The companies, however, will be given time to adjust to the new accounting standards as government has now deferred the implementation of the International Financial Reporting Standards (IFRS) beyond April 1 this year.  Govt notifies 35 accounting standards in line with IFRS, Business Standard, 2/26/2011.

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Delaware Chancery Should Refocus

Governance practitioners should be aware of two very recent Delaware Chancery cases which are likely to have a significant effect upon business practices. In the first, Air Products and Chemicals, Inc. v. Airgas, Inc., et al and In re Airgas Inc. Shareholder Litigation, Civ. Act. Nos. 5249-CC and 5256-CC February 15, 2011, the Delaware Chancellor in a well reasoned 158 page discourse containing 514 footnotes, upheld the indefinite use of the so-called ‘poison pill’ takeover defense mechanism against a challenge that it infringed upon shareholder rights to decide for themselves whether to accept an above-market bid for their company. In the second, In re Del Monte Foods Company Shareholder Litigation , Consol. C.A. no. 6027-VCL February 14, 2011, a Vice Chancellor restricted the ability of investment bankers in M&A situations to act as both adviser to the target company and agent for the purchaser in connection with procurement of financing for the same transaction.

Airgas was explained as follows by Chancellor Chandler:

[T]his case brings to the fore one of the most basic questions animating all of corporate law, which relates to the allocation of power between directors and stockholders. That is, when, if ever, will a board’s duty to ‘the corporation and its shareholders’ require [the board] to abandon concerns for ‘long term’ values (and other constituencies) and enter a current share value maximizing mode?

Thus, there should be little doubt as to the legitimacy of the use by a board of a pill to resist a takeover bid, even one which appears to be advantageous to shareholders. Of course, such use requires that directors be genuinely independent and properly informed in connection with their adoption and use of the pill. Prof. Lucian Bebchuck offers an interesting alternative, An Antidote for the Corporate Poison Pill, of avoiding/eliminating classified boards as a way of mitigating the shareholder disenfranchisement caused by the use of the pill.

Del Monte was explained by Vice Chancellor Laster as intended to deal with situations where a financial advisor to a buyout target surreptiously associates with a potential bidder in order to provide financing, while receiving fees from both:

“[A]lthough Barclays’ [the target’s advisor] activities and nondisclosures in early 2010 are troubling, what indisputably crossed the line was the surreptitious and unauthorized pairing of Vestar with K.K.R [potential bidders]. In doing so, Barclays materially reduced the prospect of price competition for Del Monte.”

This case will be of interest mainly to investment bankers and other financial advisors to takeover targets. It tells us that such intermediaries must not ‘two time’ the situation by affiliating with a potential buyer, at least without full disclosure and consent of all concerned, and perhaps not at all. In M&A situations, boards of targets may wish to obtain warranties from their advisors that they will not engage and have not engaged in such practices with respect to their transaction.

The author’s concern is not with the reasoning or outcome in either situation, which seems sound. Rather, it is with the manner in which Delaware jurisprudence has developed, to emphasize such analysis to the exclusion of consideration of the manner in which boards oversee management in situations not involving M&A transactions. One sees constant honing of Delaware law applicable to such situations, even in cases such as these where neither Airgas nor Del Monte have any systematic importance, but much less focus on the need for strong governance in the ‘ordinary course.’ To the author, if the last several years illustrate anything about the need to improve governance, it is that the greatest threat to the economy comes not from these “major corporate transactions,” but from flawed conduct of “everyday” business.

Subjecting actors in these relatively minor M&A situations to this sort of intensive scrutiny, while subjecting the Citigroup board to less scrutiny despite the significance of Citigroup to the economic meltdown send the wrong message to all concerned.

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Worried About Women on Boards? Don't Be

A U.K.-government-commissioned review by former trade minister Lord Mervyn Davies into board diversity, published Thursday, recommended FTSE 100 boards should aim for a minimum 25% female representation by 2015, up from 12.5% in 2010. Unlike Norway and Spain, Lord Davies doesn’t believe in setting hard quotas. Worryingly, he doesn’t rule them out if a business-led approach doesn’t yield change. (HEARD ON THE STREET: Corporate U.K.’s Limited Gene Pool –, 2/24/2011)

Worryingly? The “shallow pool of candidates” is pure bunk. Directors don’t need to be CEOs or exCEOS. As I heard about the Norwegian experience last year at ICGN, brining women on boards increased qualifications. (ICGN Day 1: Coverage, 1/16/2010) “In Norway, which instituted a 40% requirement, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up.”

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Apple Invesotrs Win on Majority Vote

Apple tasted defeat at its annual meeting yesterday when CalPERSs, the California pension fund, saw its resolution in favor of majority voting for directors passed by shareholders. (Apple Loses Investor Vote, 2/24/2011)

At Apple’s annual meeting on Wednesday, about 74 percent of votes cast favored a proposal by Calpers that unopposed candidates for the company’s board receive a majority of votes to win election, according to the fund. (Apple succession call nixed, board rule OK’d | Reuters, 2/23/2011)

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Bebchuk on Airgas

In a major decision issued last week, William Chandler of Delaware’s Court of Chancery ruled that corporate boards may use a “poison pill”—a device designed to block shareholders from considering a takeover bid—for as long a period of time as the board deems warranted. Because Delaware law governs most U.S. publicly traded firms, the decision is important—and it represents a setback for investors and capital markets. (Lucian Bebchuk: An Antidote for the Corporate Poison Pill –, 2/24/2011)

Lucian Bebchuk’s op-ed discusses the recent ruling by the Delaware courts that corporate boards may use a “poison pill” to block a takeover bid from being considered by shareholders for as long as the board deems warranted. The decision is a triumph for the poison pill and antitakeover defenses but represents a setback for investors and the capital markets.

The piece explains the substantial costs imposed on investors and the market for corporate control by the expansive freedom boards enjoy to block takeover bids. Bebchuk argues that institutional investors should seek to ensure that public firms self-commit not to block an offer favored by shareowners for too long by removing any classified boards in place. Doing so would produce considerable benefits for investors and capital markets.

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Shareholder Democracy is Essential

John Carney, the business journalist, doesn’t like shareholder democracy. He argues that reforms, such as say on pay rules, which give shareholders a non-binding vote on executive compensation, won’t improve corporate governance anymore than electoral reforms have improved our government.

But his views are based on antiquated notions about shareholders, and a distorted view of democracy and capitalism. Here is some of what he overlooks: (Why Shareholder Democracy is Essential | BNET, 2/23/2011) Minow rebuts Carney point by point.

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Review: Presenting to Boards

Presenting to boards is just like presenting to any other group, right? Wrong. Most boards suffer from attention deficit disorder. Many of the members of most boards that I have encountered won’t sit through a presentation of more than a few minutes without disruption. You’ll need to focus like a laser on your main points; you must expect to get interrupted and be able to go in whatever direction feedback warrants. Your ability to do so is important both to the board (you wouldn’t be on the agenda if it wasn’t important) and to your career (don’t miss your opportunity to raise your level of importance to the firm).

For those who have never made board presentations, the author provides a very basic primer that will help you to get to know your audience. For those with more experience, McLellan provides organizing principles, both generally around several standard presentation types, as well as quick tips and “tales from the trenches.” Although the book lacks depth, most readers will pick up several pointers in a few minutes. Like your own ideal presentation to the board, the author doesn’t waste your time but covers the essential highlights.

The book is Presenting to Boards: Practical Skills for Corporate Presentations (Volume 1) by Julie Garland McLellan.

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Addressing CEO Pay

Regarding CEO pay, Nell Minow recently wrote, “there is a little flicker of light at the end of the long, dark tunnel of outrageous pay.” Her signs of hope:

  • Required advisory “say on pay” (SOP) vote. Last year after a “no” vote,  Occidental Petroleum’s board reduced the pay package for CEO Ray Irani and announced his retirement. Shareowners have voted down pay plans at several companies already. Additionally, “Some companies are adjusting their pay plans in anticipation of a new level of scrutiny by shareholders, tightening pay-performance links and getting rid of especially unpopular compensation components like “gross-ups” (paying the executive’s taxes).”
  • Shareowners at four of seven companies proposing a triennial say when on pay (SWOP) vote instead voted for an annual vote.
  • The UK may soon require new additional disclosures.
  • “Groups like Public Citizen are working to remove further legislative and regulatory obstacles to shareholder oversight on pay and disseminating information on the bonuses of bailout-company executives.”
  • The FDIC is moving forward with rules to requiring pay-performance links in bank executive compensation as part of insurance risk assessment.

“These are all welcome signs that compensation is finally being seen as an essential element of securities analysis and risk management, and that’s what markets are all about.” (The Days of Outrageous CEO Pay May Be Ending | BNET, 2/14/2011).

High CEO pay is symptomatic of a host of issues. An important one for me is income inequality. It seems to me that a disappearing middle class is not good for America. This seems to be a concern of many, but we still seem to be heading in the wrong direction. For some interesting research on American opinion in this area, see The Return of Dan Ariely: The Survey Results Are In (, 2/7/2011). His conclusion:

Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.

From Eagle Rock Proxy Advisors, most companies are generally recommending that shareholders vote for say-on-pay votes once every three years. Here is a snapshot of overall board recommendations/ intentions for recommendation at the beginning of the season:

All Companies32%8%52.7%7.3%
S&P 50021.7%8.7%65.2%4.3%

As we previously reported, shareowners are pushing for the annual option, so I expect many more rejections of triennial proposals. See “Say on Pay” to be Annual.  Timothy Smith, Senior Vice President, Director of ESG Shareower Engagement at Walden Asset Management recently sent out an e-mail noting he is among many strongly opposed to the triennial proposals by management and is “frustrated that we even had to have a frequency vote (thanks to Idaho Senator Crapo’s midnight amendment).” But the surge of votes for annual say when on pay SWOP is “helping investors pay more attention to the value and use of SOP votes. In the end this frequency vote may help solidify the importance of SOP to investors vindicating the initiative AFSCME, Walden and others started 6 years ago.”

Yes, with SOP and SWOP votes this year and companies reporting the ratio of executive pay to the average of all employees for the first time, the topic of CEO pay may come into focus more this year than in the past and shareowners will now at least have the power to voice their opinion.

However, I see little evidence that any of the current measures address the “Lake Woebegone” effect documented by Rachel M. Hayes and Scott Schaefer. According to those researchers, “no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO’s pay package to lag market expectations.” (CEO Pay and the Lake Wobegon Effect, December 11, 2008, Journal of Financial Economics (JFE) Their analysis suggests SOP votes might be counterproductive. Before SOP was required by Dodd-Frank, many voices warned it would simply provide boards and managements with cover for a continued upward spiral.  Hayes and Schaefer offer up a “potential solution to the problem of shareholder myopia.”  Delegate pay decisions to directors and motivate them through contracts “to take a longer-term view.” But isn’t that what we’ve been trying all along? Clearly, something more is needed.

India’s Sonia Jaspal does a good job of citing some of the more more relevant papers and issues that have received too little attention to date. (The Negative Impact of CEO Pay & Power on Corporate Culture and Governance, 2/15/2011) Jaspal’s concern was apparently set off by a recent study conducted by Economic Times of India, which showed that in 2009-2010 CEOs of top companies earned 68 times the average pay of employees, up from 59 times their prior year. To Americans facing a pay disparity of 264 (with a high point of 558 in the year 2000), the differences in India may seem paltry. (Mind the Compensation Gap,, 1/26/2011)

Many of us “feel” an injustice when CEOs earn so much more than average workers, but Jaspal points to academic studies that show the potential impacts are more harmful to society than simply hurt feelings.

When Executives Rake in Millions: Meanness in Organizations.  “Higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers.” Some powerful executives perceive those with lesser power as sub-human. They demonstrate reduced empathy, being inclined to objectify and dehumanize others through behaviors such as sexual harassment and an increase likelihood of  unethical and corrupt behavior.

Jaspal also points to another real impact of this dehumanization, “the fact that CEOs who fired the maximum number of employees during recession in US, received the biggest pay packets.”  They apparently felt little remorse in benefitting from the tragedy they impose on others. “The social and psychological consequences of income disparity are borne by the society” and the consequences may be greater in the United States than it is in India because of the much larger average disparities.

An article published by The Economist titled The psychology of power: Absolutely looks at experiments that appear to confirm Lord Acton’s dictum that “Power tends to corrupt, and absolute power corrupts absolutely.” According to the studies, “The powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own… It is not just that they abuse the system; they also seem to feel entitled to abuse it.” Researchers conclude that “people with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want.”

Of course The Economist comes to a different conclusion than many of us would: “Perhaps the lesson, then, is that corruption and hypocrisy are the price that societies pay for being led by alpha males (and, in some cases, alpha females). The alternative, though cleaner, is leadership by wimps.” I’d say the lesson, instead, highlights the need to ensure leaders remain accountable, knowing corruption and hypocrisy will not be tolerated.

We keep Searching for a Corporate Savior in our CEOs but ending up with charismatic narcissists, with too many focused on short-term profits when we know we should be promoting CEOs from within to move from Good to Great.

Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies by  the Committee of Sponsoring Organizations of the Treadway Commission found that CEOs were involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. The average period of fraud was 31.4 months. Why Do CFOs Become Involved in Material Accounting Manipulations? shows that 46.15% of CEOs involved in fraudulent activity benefitted financially from accounting manipulations. “CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives.” Since CEO performance and benefits are measured by financial numbers submitted to the stock market, CEOs rationalize the need to report fraudulent financial numbers to protect their own positions.

Based on this analysis, Jaspal makes the following recommendations (I’ve taken liberty to reword some slightly.):

  • The law should place a limit on the number of times CEO pay can excede the pay of average workers. This will ensure some balance is maintained.
  • Because studies show that some powerful people tend to dehumanize their underlings and studies on emotional intelligence indicate that emotionally intelligent people are aware of their own and others emotions and drivers, we should explore methods to keep CEOs emotionally connected.
  • Since research found that women are less likely to feel a sense of entitlement or power we should appoint more women  CEOs to maintain a balance and keep senior management grounded.
  • Independent board members should be included on compensation committees. “This will ensure that a realistic view is taken of CEO and other top executives’ salary. Basing salary structures on performance rather than favorable circumstances is required.” (This is already the norm in the United States; unfortunately, it doesn’t appear to “ensure a realistic view.”
  • Employees may be empowered by forming trade unions and using whistle blowing lines inside and outside the organization. (Again, we have this in the United States and the whistle blowing tools are improved under Dodd-Frank.)
  • Last but not the least, the public should play an active role in curtailing income disparities. The issues should be brought to government and media attention. (Name and shame seems to have little impact but perhaps heightened awareness of the issues will lead to real sanctions.)

It is a nice list. I certainly agree with the idea of keeping CEOs emotionally connected, appointing more women CEOs, and getting the government involved in reducing income gaps. However, for the most part Jaspal’s recommendations don’t provide much guidance for shareowners entering the proxy voting booth. The one exception is placing a limit on the number of times CEO pay can exceed the pay of average workers.

Institutional investors have developed a plethora of guidelines and scorecards for voting down CEO pay. For example, section 3 of the CalPERS Global Principles of Accountable Corporate Governance, which contains too much to cover in this brief post but here are a few examples:

  • To ensure the alignment of interest with long-term shareowners, executive compensation programs are to be designed, implemented, and disclosed to shareowners by the board, through an independent compensation committee.
  • Executive contracts be fully disclosed, with adequate information to judge the “drivers” of incentive components of compensation packages.
  • A significant portion of executive compensation should be comprised of “at risk” pay linked to optimizing the company’s operating performance and profitability that results in sustainable long-term shareowner value creation.
  • Companies should recapture incentive payments that were made to executives on the basis of having met or exceeded performance targets during a period of fraudulent activity or a material negative restatement of financial results for which executives are found personally responsible.
  • Executive equity ownership should be required through the attainment and continuous ownership of a significant equity investment in the company.
  • Equity grant repricing without shareowner approval should be prohibited.
  • “Evergreen” or “Reload” provisions for grants of stocks and options should be prohibited.

We can find many more lists, but again they don’t seen to be too helpful for the average investor who isn’t going to hire a proxy advisor or put a lot of time into analyzing the proxy. Last year, the Council of Institutional Investors issued a brief paper, Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay aimed at addressing this issue. “Many investors, however, lack the time and resources to do deep dives on compensation at each of the hundreds of companies in their portfolios. They need rules of thumb to identify executive pay programs that are ticking time bombs.” That statement might even ring truer for retail investors holding a dozen or fewer companies. Again, even CII’s “top 10” are too extensive to list here because many items are broken into multiple items. Here are the top 10 with much of that elaboration stripped away:

  1. Do top executives have paltry holdings in the company’s common stock and can they sell most of their company stock before they leave?
  2. Does the company lack provisions for recapturing unearned bonus and incentive payments to senior executives?
  3. Is only a small portion of the CEO’s pay performance-based or is the basis a single metric?
  4. Are executive perks excessive or unrelated to legitimate business purposes?
  5. Is there a wide pay chasm between the CEO and those just below?
  6. Stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date.
  7. Did the CEO get a bonus even though the company’s performance was below that of peers?
  8. Does the company guarantee severance or change-in-control payments not in the best interest of shareowners?
  9. Does the disclosure fail to explain how the overall pay program ties compensation to strategic goals and the creation of long term shareowner value?
  10. Does the firm advising the compensation committee earn much more from services provided to the company’s management than from work done for the committee?

Key to the the usefulness of CII’s advice is how easily answers can be obtained by individual retail shareowners. A second major concern is even if all this advice is followed, how will we ratchet down the Lake Woebegone effect and decrease the growing disparity between the rich and the rest of us? That seems important if we are to move from a culture of narcism, where many of the rich feel entitled to break the law and treat underlings with disrespect.

Members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I think it is likely to revolve around the issue of what pay packages to vote down. Most retail shareowners don’t subscribe to ISS, Glass Lewis or other services that can rapidly assess pay packages. We need simple metrics so that we can gather all the information we need to vote in just a few minutes. Three possible examples:

  • Pay that is over 100 times average pay.
  • Pay that takes more than 5% of a company’s net profit.
  • Majority of those disclosing votes in advance on recommend against.

For less than $4 a month, your voice can be heard by joining in this important effort.

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Increased Investor Engagement

The first comprehensive analysis of the engagement between investors and public U.S. corporate issuers finds a notably high and increasing trend of engagement.  Yet, there is a disconnect between investors and issuers in basic areas such as the time frame of engagement, the definition of a successful engagement and, by implication, what engagement itself means.

“The State of Engagement Between U.S. Corporations and Shareholders,” commissioned by the IRRC Institute and conducted by Institutional Shareholder Services Inc., reveals that engagement is either a priority or a non-event for investors:  asset owners and asset managers were most likely to report either that they had engaged with more than ten companies in the previous year, or that they had not engaged at all.

A power shift is underway and issuers are now more willing to engage.  Nearly nine out of ten public companies report having had at least one engagement with its investors during the prior year. Previously, routine engagement referred to quarterly discussions about earnings and corporate strategy that occurred in company-designed forums such as conference calls and analyst meetings.  Today, engagement has become a year-round exercise involving dialogue on topics such as executive compensation, boardroom independence, and sustainability through a variety of channels including conference calls, meetings, e-mails, public announcements, telephone calls, and regulatory filings. The report’s key findings are as follows:

  • The level of engagement between issuers and investors is high. Approximately 87% of issuers, 70% of asset managers and 62% of asset owners reported at least one engagement in the past year.
  • The level of engagement is increasing. Some 53% of asset owners, 64% of asset managers, and 50% of issuers said they are engaging more.  Virtually none of the investors and only 6% of issuers responded that engagement is decreasing.
  • Amongst investors, engagement is either a priority or a non-event.  A bimodal, or “barbell,” distribution was evident, with 28% of asset owners and 34% of asset managers reporting engagements with more than ten companies. On the other hand, about 45% of asset owners and 43% of asset managers indicated they did not initiate any engagement activity whatsoever.
  • Despite the headlines that result from high-profile conflicts between issuers and investors, the vast majority of engagements between issuers and investors are never made public. About 80% of issuers said most engagements remain private, as did 72% of asset owners and 62% of asset managers.
  • Asset owners, asset investors, and issuers do not always agree on what constitutes “successful” engagement. While all three groups believed constructive dialogue on a specific issue was a success, issuers were materially more likely than investors to think that establishment of a contentious dialogue was a success. An even more dramatic difference was that about three quarters of both asset managers and asset owners defined either additional corporate disclosures and/or changes in policies as a “success” while only about a third of issuers agreed.
  • Engagement is most likely to lead to concrete change by issuers in areas where shareholders are broadly in agreement, such as declassification of the board of directors or the elimination of poor pay practices, than in areas where shareholders’ views diverge, such as the need for an independent board chair.

The study was conducted as an online survey of approximately 161 institutional investors and 335 issuers based in the United States from March to May 2010, followed by in-depth follow-up telephone interviews with 21 investors and 22 issuers in August and September 2010. For each respondent, the level of engagement was assessed in terms of subject matter, frequency, participants, measurements of success, and impediments. The study also evaluated how the volume and the success of engagement have changed over time and are likely to change in the future. The survey defined engagement broadly – as direct contact between a shareowner and an issuer allowing each respondent some flexibility to define the term. Interview participants were provided anonymity to encourage candor. The full report is available at and

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Star Power Economy May Lead U.S. to Ruin

You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass…  make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don’t feel real; you don’t see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally…  — this whole American Dream thing recedes even further from reality.

(Why Isn’t Wall Street in Jail? | Rolling Stone Politics, Mat Taibbi, 2/16/2011) Between 2007 and 2009, Wall Street profits were up 720%, unemployment was up 102% and the value of home equity in American went down by 35%. According to the Congressional Budget Office, average household income for the top1% has risen from about $500,000 to almost $2 million. For most of us, it has been relatively flat.

According to Jacob Hacker and Paul Pierson, politicians don’t respond to the concerns of voters, they respond to the relative power of the organizations that represent them. Labor has been on the decline, while the power of the Business Roundtable and the Chamber of Commerce has surged.

An article published by The Economist titled The psychology of power: Absolutely looked at a series of experiments that confirm Lord Acton’s dictum that “Power tends to corrupt, and absolute power corrupts absolutely.” “The powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own… It is not just that they abuse the system; they also seem to feel entitled to abuse it.”

Researchers conclude that “people with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want.”

Alan Downs 1997 book describing corporate narcissism (Beyond the Looking Glass: Overcoming the Seductive Culture of Corporate Narcissism) found that high-profile corporate leaders such as “Chainsaw” Al Dunlap literally have only one thing on their minds: profits. According to Downs, such narrow focus may bring short-term benefits, but it ultimately drags down employees and companies… as well as entire countries, at least that would be my take.

Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs by Rakesh Khurana pointed to another thread in the same cloth of American capitalism, charisma and reputation have begun replacing management experience and industry expertise as the primary qualities we search for in a CEO. Succession planning at many corporations is weak. Boards often only take any real action after deterioration has begun to set in. When the the recruiting process begins, they are pressured to take decisive action, seeking an outside savior.

Investors may have contributed to the problem. By insisting on “independent” outside directors (I prefer my directors “dependent” on shareowners through nomination and election), we now have boards with little knowledge specific to the business itself. Recruiting has changed from getting a real fit between the companies needs and the CEO’s talents to one of attracting a high class celebrity with charisma, generally one with plenty of bargaining power to match.

Yet, we know corporate saviors are few in number. Steady progress, building from the inside without all the glamor is much more likely to pay off and is the more prudent model, as documented in Good to Great by Jim Collins. Companies that far outperformed their competitors were generally those where CEOs weren’t charismatic and were recruited from within based on their known capabilities.

We seem to be betting the farm on charismatic bankers and CEOs who offer the promise of easy money. What happened to hard work and middle class values? They’re disappearing, along with the middle class itself.

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How I Voted at Apple

There was never any question in voting my shares of Apple. Egan-Jones Proxy Services, Glass, Lewis & Co. LLC, and ISS Proxy Advisory Services all endorsed a majority vote election standard proposed by CalPERS for unopposed board candidates. Who wouldn’t? If shareowners can’t make the nominations, they should at least be able to turn out directors who fail to represent us. The management of Apple insists that one vote in favor of a director should be enough to get elected. That doesn’t seem reasonable to me.

I also voted in favor of the Laborers’ International Union’s measure to have directors issue an annual report on CEO succession planning. Certainly, with Jobs getting a liver transplant in 2009 and talking another medical leave, it is high time the Apple board gave serious thought to succession plans.

Ten resolutions on succession planning have been submitted so far this proxy season and I’ll be supporting all I can vote for.  I’m a little surprised to see only CalPERS reporting out their votes on Apple at CalPERS also reported their votes on their site, the first of at least 300 this proxy season. If we’re lucky, maybe they’ll start reporting in advance for all their proxy votes.

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Shareholder Democracy: A Bad Idea?

At the corporate governance level, the problem is that things like say-on-pay introduce complicated elements into proxy elections. These complexities make it difficult for ordinary shareholders, typically equipped with only a passing interest and knowledge of the issues at hand, to form preferences, much less vote their preferences. (Why Shareholder Democracy Is a Bad Idea – CNBC, John Carney, 2/18/2011)

Carney goes on to say that shareowners are too simple-minded to use rank-choice voting.

By Carney’s logic, we’d all still be peasants because the King is the only one with time to figure out what is in our best interests. Thankfully, democracy took hold… although we are still far from living in a truly democratic world since corporations are so powerful and so undemocratic.

Ordinary shareowners are increasingly turning to,, and to help them sort through “complex” issues. Don’t turn the clock back. Hard to believe that while people all across the world are in the streets expressing their desire for democracy Carney tries to convince readers that corporate managers know best.

As for rank-choice voting (instant run-off or alternative vote), even children at the age of five can pick there top three and rank them. I can’t wait to start using the system when I vote for corporate directors. Imagine having choices, let alone having to go through the complex task of ranking them!

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Transform the Nominating Committee

There are important advantages to a shareholder/stakeholder-based nominating committee:

  • It ensures that the shareholders as a whole elect directors from a list of nominees with the societal, industry and other essential expertise and contacts, desired not only by the owners, but also by other critical stakeholders.
  • It requires only a limited time commitment (to the nominating committee) from high-powered stakeholders.
  • It breaks the monopoly of power that develops on boards and nominating committees dominated by a CEO/Executive Chairman.
  • It increases the chances of getting strong sparring partners onto the board, because the directors owe their loyalty, not to the CEO/Chairman, but to the stakeholder representatives on the nominating committee.

A shareholder/stakeholder-based nominating committee would need specific rules of committee governance to integrate the different perspectives on desirable nominees. Moreover, the increased diversity on the board would complicate the life of the chair in getting the board to work together. However, the board does not have a management role; it does not have to be an integrated team. It has to perform the conflicting roles of both supporting and monitoring management. Especially for the latter role, sadly lacking during the lead up to the crisis, more useful diversity and less harmony is needed on the board.

To improve public trust in business, the search for board directors has to extend beyond the world of top executives, to look for other kinds of nominees in touch with the critical stakeholders, who can bring their perspective into the boardroom and involve management in creating long term value, rather than short term gain. To get this in a systematic way, the nominating committee needs a transformation. (Improve Public Trust in Your Company: Transform the Nominating Committee | Business Ethics, Paul Strebel, 2/14/2011)

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Save SEC & CFTC Budgets: Write Congress Via

If you loved the Great Recession and Bernie Madoff, you’ll probably endorse proposed funding cuts to the SEC and CFTC. If you’d like to avoid another financial disaster and think investors should be protected, go to to send a message to your Congressional representatives to oppose the cuts. I did; its quick and easy. I hope you will too.

Last Friday, House Republicans released their proposed 2011 Continuing Resolution (CR) to fund the government for the balance of the 2011 fiscal year, once current funding runs out on March 4th. Included are proposed cuts of $25 million from the $1.12 billion budget of the SEC and $56.8 million from the $168.8 million budget of the CFTC. Additionally, efforts are afoot in the U.S. House to impose even more dramatic slashes to fiscal year (FY) 2012 spending, rolling back funds to 2008 levels. For the SEC, that would mean a steep cut of about $200 million. The SEC Inspector General testified last week that such a drastic reduction would force the SEC to lay off 600 employees. For the CFTC, FY 2012 funding would drop by nearly a third to roughly $110 million…

Specific examples of SEC and CFTC tasks that would be directly endangered by meat-ax budget cuts in the 2011 CR and for FY 2012 include the following:

  • The CFTC has been given the job of creating a regulatory regime for and providing oversight of the vast, multi-trillion-dollar over-the-counter derivatives market — a market many times larger and more complex than those it already oversees.
  • The SEC shares responsibility for swaps market oversight and has also taken on an expanded role in policing credit rating agencies as well as hedge funds and private equity funds.
  • The SEC’s budget shortfall would have the effect of either delaying or even halting fiduciary rulemaking. The agency was asked by Congress to look at the effectiveness of existing rules governing brokers and investment advisers as part of the Dodd-Frank. Without money for staff to help implement a common standard and follow up on complaints, the SEC won’t be able to enforce it.

EarthTimes seems to have the best coverage of this story. See their full coverage, complete with quotes, at, CFA and CII Launch Web Push To Save Crucial SEC, CFTC Financial Market Oversight From Budget Cuts. Listen to audio from the news event that was held yesterday.

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Shareholder Activism in U.S. Public Companies, 1900-1949

“Offensive shareholder activism” involves buying up sizeable stakes in underperforming companies and agitating for changes predicted to increase shareholder returns. Though hedge funds are currently highly publicized practitioners of this corporate governance tactic, there has been no analysis of the extent to which managers of U.S. public companies were faced with challenges of this nature during the first half of the 20th century. This paper correspondingly examines instances during this period where investors engaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurring between 1900 and 1949. Our findings indicate that offensive shareholder activism, while not commonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlier decades. We explain our results by reference to a simple model of offensive shareholder activism and argue that the ebb and flow of takeover activity may have been the primary determinant of the trends we observe…

It is widely assumed that with respect to corporate governance historically “market control over the allocation of U.S. corporate resources stands out as a recent phenomenon.”67 Under this view, it was not until the 1980s that an “expansion and empowerment of the shareholder class” shifted “interest group power from managers to shareholders.” It was at this point, according to the received wisdom, that the norm of shareholder primacy achieved pre-eminence, fostered initially by the rise of the hostile takeover bid and reinforced in the 1990s by the growing influence and power of institutional investors.

The rise of institutional investors, combined with a strong corporate governance counter-reaction to the building of conglomerate empires in the 1960s and revelations of widespread corporate kick-backs and bribes in the 1970s, no doubt reshaped relations between executives, directors and shareholders of U.S. public companies.70 This does not mean, however, that those running U.S. public companies in earlier eras were entirely insulated from investors inclined to take aim at firms with the intention of orchestrating changes designed to improve returns. The activist hedge funds of today lacked direct antecedents during the first half of the 20th century, as only rarely did collective investment vehicles initiate activism campaigns. Nevertheless, our research into shareholder activism during this period has uncovered numerous instances where investors targeted public companies and built up a sizeable stake with the intention of either launching a proxy contest or seeking to obtain outright voting control. Underperforming public companies no doubt have faced in recent times investor-driven discipline that is more robust than would have been the case during the period we have focused on. However, our research indicates the difference may have been one of degree rather than kind.

Cheffins, Brian R. and Armour, John, Offensive Shareholder Activism in U.S. Public Companies, 1900-49 (February 11, 2011). University of Cambridge Faculty of Law Research Paper No. 11/09. Available at SSRN. Hat tip to Jason Schloetzer.

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Join's Campaign to Save SEC & CFTC Budgets

A major Web-based campaign to save the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) from the impact of proposed budget cuts will be launched at 1 p.m. Wednesday (February 16, 2011) by in cooperation with the Consumer Federation of America (CFA) and the Council of Institutional Investors (CII).

The U.S. House is currently looking to slash budgets of the SEC and CFTC, which would be forced to scale back operations and dismiss hundreds of employees at the same time they are seeking to implement pro-investor reforms mandated by the last Congress in the wake of the recent U.S. financial crisis.

The new campaign, spearheaded by, will mobilize small and large investors to get actively involved in urging Congress to avoid making cuts that would cripple the leading federal agencies responsible for ensuring that America’s financial markets operate in a fair and open fashion. The new effort by is one of a number of emerging pushes by a variety of important groups to protect investors and the integrity of the capital markets by shielding the SEC and CFTC against unwarranted budget cuts. ( To Launch Major Campaign To Save SEC, CFTC in the Face of Budget Cut Proposals – FierceFinance)

News event speakers will be:

  • Tracy Stewart, executive director,;
  • Barbara Roper, director of investor protection, Consumer Federation of America; and
  • Jeff Mahoney, general counsel, Council of Institutional Investors.

Phone-based news conference (with full, two-way Q&A) at 1 p.m. EST on Wednesday, February 16, 2011 by dialing 1 (800) 860-2442. Ask for “Save the SEC/CFTC Campaign” news event. A streaming audio replay of the news event will be available on the Shareowner’s Website as of 4 p.m. EST on February 16, 2011.  Please join in this important effort to keep the SEC and CFTC strong. Regulations mean little, without enforcement.

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Hands-On Investing

From the title, I was hoping the New York Times was actually going to profile investors who give as much thought to ownership as they do to buying and selling. (Financial Advisers Want Hands-On Investors –, 2/9/2011)

United Capital Financial Partners to serve people who had $500,000 to $10 million, but to really concentrate on clients with $1 million to $2 million. Still, he said he would take on clients only if they were willing to take an active role in managing their money.

Making people take responsibility for managing their wealth is now emerging as a shared goal of both the brokerage firm and the advisory community.

So far, so good. Maybe clients with a reasonable cushion will want to be involved with the companies they invest with, thinking beyond the next quarter.

“When we started United Capital, we realized people have the wrong financial goals,” said Brandon Moss, a managing director in the firm’s Dallas office. “They want to beat the S.& P. 500. If after this, they still say, ‘Let’s beat the S.& P. 500,’ then we haven’t done a good job of creating the right financial goal.”

Great, I thought, the firm wants to help its clients realize money is a tool, not an end in itself. However, when I read to the end it turns out, the bottom line was asset allocation.

She remained engaged in managing her money for one simple reason: she wanted to have enough to live out her retirement and not be a burden to her family. If that does not get people involved, what will?

How about the idea that she can “not be a burden” to not just her family but to humankind in general? Maybe by helping their client be involved as an owner in the companies she invests in, United Capital could help her do far more than she has dreamed for decades. Aging baby-boomers, especially those with the target $1-2 million to invest, could learn to reach back to the ideals of their youth. They can certainly invest to beat or approximate returns of the S&P 500, or to take a less risky path. They can also use those dollars invested to amplify their voice, transforming the world into a better place for their families and other families as well.

To the investors attracted to the model of being “hands-on,” I would recommend that you spend a little time investigating other sources of investing advice, such as Newground Social Investments. You might also want to check out the United States Proxy Exchange, which is helping investors utilize what levers investors have to transform how corporations are governed. Consider working with them and other organizations, such as

Find working to transform the rules too distant or theoretical? Then consider spending some time with those who are primarily focused on environmental and social issues. The Interfaith Center for Corporate Responsibility has been working for forty years to achieve “a global community built on justice and sustainability through transformation of the corporate world by integrating social values into corporate and investor actions.” Hands-on investing can be so much more than not burdening your family. Think bigger; get your feet wet too.

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Cambridge Launches Masters Degree in Corporate Law

The University of Cambridge has announced its first entirely new degree in Law since the 19th century with the launch of a Master’s degree in Corporate Law (the MCL).

The MCL will begin in the academic year 2012-13 and will operate as a full-time nine-month programme, offering students the opportunity to engage in a detailed study of the legal and regulatory framework in which companies are governed and financed.

The MCL will cover key fields such as corporate governance, the regulation of financial markets and pensions, offering a wider and more diverse range of corporate courses than a typical Masters degree programme.

The course, in addition to offering in depth analysis of legal rules, will provide students with the opportunity to understand how “real world” corporate deals are structured and run.

The MCL will be taught by the Cambridge Law Faculty’s team of corporate lawyers, widely recognised as one of the strongest in the field. The intake will be approximately 25 students per year.

Applications will be accepted from September 2011. Further information is available on the MCL webpage on the Law Faculty’s website. Wow, corporate governance is helping Cambridge move from the 19th to the 21st century. With their help, maybe this will be the century we shift focus to governance. Bob Tricker has often proclaimed the 19th century the entrepreneur’s, 20th century management’s, and 21st that of governance.

We certainly see focus swinging to questions of legitimacy and effectiveness in wielding power worldwide. By the time the 22nd century dawns, corporate power may actually be exercised “in a way that ensures both the effective performance and appropriate social accountability and responsibility… rooted in rigorous and replicable research,” as Tricker envisions. We should all welcome University of Cambridge’s new program.

Activism is an attractive alternative to takeovers as a way to push through corporate change. Two out of three mergers fail to make money for the buyer, and the failures can be spectacular, as seen with AOL Time Warner or the purchase of ABN Amro. The disaster that followed the ABN Amro takeover makes contested takeovers especially unlikely in the financial services industry, leaving activism as the only avenue for change. (Forget corporate governance – vive la révolution, Financial News, 2/14/2011)

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Encourage Home Ownership, Not Tax Avoidance

We should recognize the dire consequences of our nation’s tax policy, which encourages consumers to amass huge levels of debt when buying a home. Why not reward borrowers who have more equity in their homes instead?

One way to do this would be to provide tax credits to borrowers based on the amount of their down payments. Such a system could be graduated so lower- and middle-income borrowers benefited most, while upper-income borrowers received far less or nothing at all. (Planning a Better Way Than Fannie and Freddie –, 2/12/2011)

Gretchen Morgenson’s idea would be much less risky than proposed recommendations by Treasury. Get Americans to think like Canadians… putting 10 to 20% down on their home purchases. If abolishing tax credits for mortgage interest payments is another “third rail” for politicians, let’s phase them out by encouraging prudence and thrift. In the end, maybe we’ll start focusing on more productive, less resource intense, investments.

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Nominate Rising Stars of Corporate Governance 2011

Nomination Deadline is MARCH 31, 2011. Click to Nominate a Rising Star!

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.

A selection committee (comprised of leaders from the International Corporate Governance Network, Millstein Center for Corporate Governance & Performance, Open Compliance & Ethics Group, and Weil Gotshal & Manges) will assess candidates on criteria such as: past accomplishments and thought leadership; future projects and endeavors; reputation among existing industry leaders; and potential to influence the industry in the future.The selection committee reserves the authority in considering and applying the judging criteria.

Nominees must be under 40 years as of June 15, 2011. Candidates can be based anywhere worldwide, but must possess a record of outstanding performance in corporate governance that marks them from their peers. Rising Stars will be acknowledged at a special reception on June 15, 2011 as part of the annual Yale Corporate Governance Forum.

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New Compendium Hits the High Points

Corporate Governance: A Synthesis of Theory, Research, and Practice (Robert W. Kolb Series) edited by H. Kent Baker and Ronald Anderson provides an excellent overview of contemporary issues in corporate governance with a primary focus on the relationship between managers and shareowners, as well as other stakeholders.

One of the more interesting and creative chapters is Alex Todd’s discussion of best practices. Like many, Todd observes that corporate governance is being overwhelmed by the complexity of its issues and environment. As we all know, one size does not fit all but how do you take into account all the variables?

Todd introduces the concept of “aspirational corporate governance” to facilitate both the diagnosis of current practices and for designing future best practices through a framework that considers requisite organization, requisite variety and adaptive capacity parameters.

Requisite organization, for example, varies according to work complexity. Todd argues that generally, managers at every incremental level of the hierarchy need to be able to see further than their subordinates. Likewise the collective cognitive capacity of the board should be at a higher level than the CEO, looking out 25 years, for example, rather than five.

Requisite variety seeks to minimize the number of choices needed to resolve uncertainty. Todd sees applications here for autonomous systems using network governance. Inputs might include advisory councils, employee assemblies, customer forums and supplier panels that provide quick feedback of the important interests of stakeholders.

Adaptive capacity involves balancing these systems in a state of dynamic disequilibrium. This could involve, for example, granting stakeholder a variety of voting rights.

Todd also discusses the fact that different governance practices are likely to be best for different stages. Those seeking a high valuation strategy will need to establish trust with investors, whereas early stage companies are more likely to favor revenue growth, usually associated with more management control.

He goes on to compare the AGG framework with OECD and NACD principles. Much of Todd’s work builds off that of Shann Turnbull, who also contributes a chapter to the volume. Turnbull discusses current failings and concludes that one option might be for corporations to establish their own firm-specific co-regulators to match the concerns of their stakeholders.

The role, cost, and intrusion of government into corporate activities would be displaced by corporations acting as co-regulators to further and protect the interests of citizens. Corporations in turn would need to distribute and share powers with their stakeholders and other citizens so these constituents could obtain power to protect themselves directly and/or though others to safeguard their interests.

The recommendation reminds me of the federal commission investigating the Deepwater Horizon oil spill, which urged an independent “safety agency” to oversee offshore drilling, increased funding for agencies that oversee spill response and planning, and an industry “safety institute” to audit safety practices of companies that drill offshore. Continue Reading →

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Are Proxy Access Bylaws Legal?

The highly respected California attorney Keith Paul Bishop seems to think it could be argued, depending on the state of incorporation (Are Proxy Access Bylaws Legal?, Corporate and Securities Law, 12/8/2011). Most need no reminder that in 2009 Delaware enacted legislation, H.B. 19, 145th Gen. Assem. (Del. 2009), to explicitly authorize proxy access bylaws.  Tit. 8, Del. Code § 112.

However, Bishop says that “California, in contrast, has enacted no such provision.  The current General Corporation Law would seem to rule out discriminatory bylaws.”  Indeed, at least two statutes mandate equality.  Section 400(b) provides:

All shares of any one class shall have the same voting, conversion and redemption rights and other rights, preferences, privileges and restrictions, unless the class is divided into series.

Further, Bishop points to Section 203, which provides:

Except as specified in the articles or in any shareholders’ agreement, no distinction shall exist between classes or series of shares or the holders thereof.

So, does that mean SEC Rule 14a-8 does not apply to corporations incorporated in California because it grants one set of shareowners (14a-8 holders) rights that differ from other shareowners? What about other SEC provisions that require disclosure of the disposition of director nominations for 5% shareowners?

Do the provisions cited by Bishop conflict with other provisions. For example, Section 211 of the California Corporations Code? That sections confers the authority to adopt, amend or repeal bylaws on the shareowners and on the board. The required vote of the shareholders is a majority of the shares entitled to vote. In addition, the articles of incorporation or bylaws may restrict or eliminate the power of the board to adopt, amend or repeal bylaws. Only the shareholders can change a bylaw changing the number of directors or the range of directors.

Bishop previously noted:

the ability of stockholders to bypass the board of directors and directly adopt bylaw amendments will be a function of state law. Nevada, for example, permits the articles of incorporation to include a provision that grants the authority to adopt, amend or repeal bylaws exclusively to the directors. NRS 78.120(2).

(see comment at bottom of this linked post) It looks to me that shareowners in Nevada can adopt bylaws but those bylaws can be overturned by the directors.

If proxy access really doesn’t apply to California corporations, why didn’t Bishop comment on the SEC rulemaking? Perhaps I missed it, or he missed his opportunity at that time.  As I recall, there have been thirteen proxy access proposals filed so far… seven as precatory measures, six as bylaw amendments. I haven’t checked to determine if any were corporations incorporated in California.



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Worker-Owned Cooperatives

“The worker-owned cooperative, an economic workplace model that has been around for decades is making a comeback. In some parts of the U.S. new coops are sprouting up, cutting unemployment rates and revitalizing economically depressed communities.”

via Can Worker-Owned Cooperatives Offer A Solution to Our Economic Woes? | La Prensa San Diego, 2/11/2011.

The corporate governance movement could learn important lessons from these cooperatives.

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Protect Your Pension

The Los Angeles Trustee Network invites a frank discussion of issues:

  • On February 28, Corporate Governance. What initiatives will help preserve our pension funds’ long-term value?  Have the risks to pension funds been clearly identified? Have the risks been mitigated?  If not, what are our priorities for this year and going forward?
  • On March 1, Tactics for Improving Pension Plans Sustainability. Attacks on the very Continue Reading →

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Don’t Toss That Proxy! Learn From CalPERS

Resolution MB 8/09, approved at CSEA’s last General Council, sought to expand on the leadership CalPERS has shown in the area of corporate governance by exploring how CalPERS could better influence the proxy voting of its own members and in helping us to evaluate which mutual funds vote in alignment with our own values and those of CalPERS.

In response to our request, CalPERS will be dramatically increasing the number of proxy votes they announce in advance in order to influence how we vote in corporate elections. This increased communication will be a two-way street. As members become more aware of how CalPERS votes, we may also have recommendations as to how they should vote. I would be happy to hear from CSEA members and other organizations that represent CalPERS members in that regard. Continue Reading →

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