Archive | April, 2011

April 2003

California Supreme Court Ruled CalPERS in Violation

The California Supreme Court has ruled that CalPERS violated several state laws. The decision also extends to CalSTRS, the nation’s 3rd largest pension fund.

According to the press, the justices let stand a January appeals court ruling in a lawsuit brought by former state Controller Kathleen Connell who had challenged the authority of the pension fund’s 13-member board to boost salaries for about 30 investment managers.

“This is a significant setback for Calpers, its members and all public pension systems in California,” said CalPERS spokesman Brad Pacheco. “It cuts through the hearts of our ability to attract and retain investment staff of the caliber needed to generate investment returns and to minimize costs.” However, for the near term CalPERS will circumvent the ruling, allowing the investment managers to keep their jobs and current salaries using a paper shuffle. Pacheco said Calpers would put the managers in temporary positions for the remainder of the year. “If we didn’t have in-house managers we would have to rely on outside managers who would be more expensive and the cost would be borne by taxpayers,” Pacheco said.

The pay raise for money managers was seen by some as a mere cover story at the time the Board voted to ignore state law and raise their own pay. The press bought their press office spin and continues to do so. The Board’s more self-serving action barely got a mention. At the time they awarded themselves a pay raise, part of the logic was that not raising their pay would be a violation of their fiduciary duty because CalPERS would be unable to attract qualified candidates for the Board.

Ironically, that logic came shortly after the Board dropped a controversial rulemaking, which would have restricted ballot statements of Board candidates to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incumbent Board members voted to prohibit “candidates’ opinion or positions on issues of general concern to the system’s membership.” A Sacramento Bee editorial said “the vote by CalPERs incumbents muzzles challengers in ways that risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.”

Right after CalPERS voted to amend regulations to raise their own pay, in volition of limits specified by the California Government Code, I filed for a determination on the legality of the regulations with the Office of Administrative Law. This was the poor man’s route to a legal judgment that has been recently terminated because of California’s budget crisis.

Within a few weeks of my filing, former state Controller Kathleen Connell filed a lawsuit charging that CalPERS had violated California’s statutes by raising the daily payments to board members for attending meetings. The lawsuit also charged CalPERS with awarding pay increases that exceeded state limits for civil service employees and that additional laws were violated.

Interestingly, the current CEO of CalPERS, Fred R. Buenrostro, Jr., was Connell’s CalPERS point person when she brought (carried to the California Supreme Court by Westly) the lawsuit was filed and was active in urging the Board to see the error of their ways. Now he finds himself in the difficult position of attempting to obey the Supreme Court’s judgment, while, at the same time, pleasing the CalPERS Board. Fortunately, there has been turnover on the Board, so maybe it is not an impossible task. I think the majority of the current Board agrees that CalPERS must, at minimum, strictly adhere to the law. (Ruling against CalPERS, Sacramento Bee, 4/30/03 and Calif. court rules Calpers wage increases illegal , Reuters, 4/29) CalPERS is expected to soon sponsor legislation for the salary increases.

Angelides Targets Executive Pay Abuses

At upcoming board meetings of California public pension funds CalPERS and CalSTRS, California Treasurer Phil Angelides will propose guidelines that would apply to the 1,000 largest companies in which the funds invest, barring investment by the funds in companies that reserve stock-based compensation for senior executives.

Angelides said his goal was to use the pension systems to spur broad-based compensation plans that go beyond top executive officers. “Broad-based equity compensation plans create enduring value for the corporations that adopt them,” said Angelides.

Under his plan, CalPERS and CalSTRS would only invest in companies that grant less than 5 percent of their total equity compensation to the top five executives and give less than 25 percent of shares awarded as pay to executives and directors of the company. The guidelines would also call on companies to provide a vesting schedule for stock options of at least four years.

Angelides didn’t name any of the companies that would be impacted. However, a 2002 analysis by executive compensation consultant Frederic W. Cook & Co., showed that Target, Tenet Healthcare, and Qwest Communications awarded around 30 percent of stock options to the top five executives and about 20 percent to their CEOs.

While I agree that broad-base plans help firms generate more wealth and both funds will benefit if companies they invest in follow Angelides’ guidelines, divestment may not be the answer, unless it is part of an overall plan to trim firms with the worst corporate governance practices from portfolios in order to give CalPERS and CalSTRS more clout with those remaining. Divestment will drive the price of the stock down, just as the funds are selling. Additionally, it and leave the funds powerless to get the companies to change once they’ve divested. It’s like moving your residence if you disagree with the mayor. Moving costs money. A better strategy might be to team with others who are dissatisfied and elect board members at these corporations that will either reign in the CEOs or replace them.

On April 14, 2003, the Securities and Exchange Commission (SEC) announced it would consider possible changes to proxy regulations “to improve corporate democracy.” Staff will examine “procedures for the election of corporate directors” and issue a report by July 15th, after consulting with “pension funds, shareholder advocacy groups, business and legal communities.” New rules could be in place by next year’s proxy season. CalPERS requested the SEC to take this action. Instead of threatening to sell, CalPERS and CalSTRS should threaten to elect board members that will represent the interests of shareholders. (California treasurer takes aim at executive pay, 4/17/2003, Reuters)

Good Governance Improves Performance

A study by GovernanceMetrics International, an independent corporate governance ratings agency, confirms the correlation between corporate performance and an attention to governance.

Gavin Anderson, CEO of GovernanceMetrics, said his firm studied one, three and five-year returns of companies in the Standard & Poor’s 500-stock index and found that stocks of companies at the top of the firm’s ranking outperformed the index in a meaningful way. Those ranked lowest significantly underperformed the index.

In the S&P 500, the average decline of a stock for the three years ended March 20, 2003, was 2.3%. The index itself fell much farther because it is weighted by capitalization, and large companies that declined significantly had a bigger impact. But the five companies earning the firm’s highest score rose 23% on average. The top 15 companies averaged total returns of 3.4%.

To identify good governance, GovernanceMetrics takes roughly 600 measures. These include labor practices, environmental activities, workplace safety approach and litigation history. They also look for anti-investor practices, like instituting poison pill provisions to prevent takeovers and keep management entrenched.

TIAA-CREF Holds Back on Democracy Issue

ISS Friday Report for April 25th carries an interview with Peter Clapman, chief counsel of corporate governance at Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIA-CREF). Clapman said the SEC’s upcoming review of proxy rules ought to focus on how companies nominate directors–not on giving shareholders nominating power. “We want to work very hard to improve the quality of nominating and corporate governance committees.”

Clapman’s comments reflect a more moderate view than that taken recently by the Council of Institutional Investors and others, including this editor. His position appears similar to the one expressed by theConference Board’s Commission on Public Trust and Private Enterprise in which John Biggs, Chairman, President and CEO of TIAA-CREF, participated. When asked if TIAA-CREF would use nominating power that might arise from SEC reforms to effect corporate governance reforms, he said it was “too premature to think about that.”

Meanwhile a long-standing campaign for TIAA-CREF to invest five to 10% of social choice account assets ($200-400 million) in companies that are models of social and environmental responsibility drags on. Some are beginning question the amount of democracy within TIAA-CREF itself. Expect a resolution on the issue at a future TIAA-CREF meeting.

Options Fiction to End?

For years, the voices of reason have advocated expensing stock options. I recall Robert A. G. Monks likened the current practice to a favorite Abraham Lincoln joke. How many legs does a dog have if you count the tail? Four; counting the tail doesn’t make it a leg.

Not counting the cost of stock options doesn’t make them free. It is clearly a transfer of wealth from existing shareholders. The current accounting practice contributed greatly to the abuses of Enron and others, with CEOs profiting from short term swings, while long term investors and most employees got left behind.

The Financial Accounting Standards Board finally found its legs and voted unanimously that stock options should be treated as an expense when issued. The board hopes to start discussing what accounting method(s) should be used by the end of May. According to the Wall Street Journal, they’re shooting for an exposure draft by the end of the year, with March 2004 as the target date for a final standard.

The measurement issue will be a significant challenge but at least it is now clear that something closer to honesty is desired. Let’s hope Congress doesn’t block their move again. The April 25th ISS Friday Report says the California delegation is active in sponsoring legislation to keep the current system alive.

The International Accounting Standards Board released its concept proposal in November; we shouldn’t go it alone. While the move will reduce earnings at many companies, high tech firms, the 74 companies in the Standard & Poor’s 500-stock Index that now voluntarily expense options will find themselves ahead of the pack, just where they should be by taking the initiative before being forced to do so. (Accounting Panel Faces Puzzle: How to Measure Options’ Value, WSJ, 4/24/03)

SEC Takes Up Democracy in Corporate Governance!

The Securities and Exchange Commission announced that SEC staff will review current regulations on director elections and submit possible changes to the full commission by July 15th.

Currently, only candidates nominated by a company are included on the proxies distributed to shareholders. If a shareholder group wants to run its own opposing slate in a contested election, it can cost hundreds of thousands of dollars.

Although the SEC upheld a previous decision that allowed Citigroup to refuse a shareholder vote on changing the process to elect board members, the announcement to review regulations and to consider making corporate elections democratic was hailed by corporate governance activists. “There is a desperate need for shareholder democracy and today’s decision was an important step in that direction,” AFSCME Pension Plan Chair Gerald W. McEntee said in a statement.

Les Greenberg, of the Committee of Concerned Shareholders, and James McRitchie, editor of CorpGov.Net, who petitioned the SEC last August said they “hope the Commission will fully consider small shareholders, as well as huge pension funds, when regulations are redrawn.” Their proposal would use the low thresholds of proxy resolutions for shareholder nominations. Anyone who has held at least $2,000 of stock for a year would be able to nominate a director and have that person’s name appear on the corporation’s ballot. “Entrenched Managers and Directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with Directors chosen by shareholders,” said Les Greenberg.

“If the SEC wants investors to do a better job of monitoring, it has to give them the tools to adequately police companies,” said Patrick McGurn, special counsel at Institutional Shareholder Services. After Greenberg and McRitchie filed their petition last summer, McGurn called the movement for an open ballot the “Holy Grail of corporate governance.”

Sarah Teslik, executive director of the $3 trillion Council of Institutional Investors, which represents large pension funds, called the announcement “the biggest thing that has come out of the commission in my 20-year career” as a corporate governance advocate. A recent background paper by CII indicated the petition to the SEC by Greenberg and McRitchie to amend Rule 14a-8 had “re-energized” the “debate over shareholder access to management proxy cards to nominate directors and raise other issues.” See Equal Access – What Is It? Teslik said she expected companies to wage a vocal campaign to make sure reforms did not give too much weight to shareholders, and to demand other changes.

If the SEC grants proxy access, it will be the equivalent to the American Revolution for shareholders,” said Deborah Pastor, vice president of, which petitioned the SEC last September to reform the director election process.

“The current rules concerning shareholder proposals and director elections are clear and we are enforcing them as such, but the time has come for a thorough review of the proxy rules and regulations to ensure that they are serving the best interests of today’s investors, while at the same time fostering sound corporate governance and transparent business practices,” said William H. Donaldson.

The review will address shareholder proposals, director elections, proxy solicitations, shareholder takeovers of boards through proxy fights, and disclosure requirements imposed on large shareholders and groups of investors.

It will be a “top-to-bottom review” of the rules, said Alan Beller, director of the corporation finance division, in an effort to improve corporate democracy. He indicated that if the SEC then decided to draft new rules, they could be in place in time for next year’s season of annual meetings.

The SEC will solicit the opinions of pension funds, shareholder advocates, Corporate America, and the legal community. CEOs and entrenched managers who are accountable to no one are likely to mount a concerted lobbying campaign. They have consistently opposed investors’ efforts to gain anything like “equal access” to the official company ballot.

I am convinced this is potentially most important reform in corporate governance during my lifetime. Researchers have found that “firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions.”

The movement to more democratic forms of corporate governance by empowering owners is important not only for creating wealth; it cuts directly to our ability to maintain a free society. As Monks and Minow have noted, with the slight exaggeration suitable for book covers, “Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.” (Power and Accountability)

The keys to creating wealth and maintaining a free society lie primarily in the same direction. Both require that broad-based systems of accountability be built into the governance structures of corporations themselves. By Ending the Wall Street Walk, and accepting the responsibilities that come with ownership, institutional investors have the potential to act as important mediating structures between the individual and the dominant institutions of our time, the modern corporation. CalPERS, CII, Pax World, Domini, Calvert, Citizens and others have already taken the lead in many areas. This reform will further empower their efforts and will awaken other investors to their role as responsible citizens.

American workers have approximately $6 trillion in retirement assets such as pensions, stock plans and 401(k) savings plans. Who controls these assets? Who executes voting rights? How do the workers benefit? The answers to these questions will be raised as the SEC investigates the lack of democracy in corporate elections. Let’s stop fighting the symptoms of undemocratic corporate structures and start participating in the institutions which most shape our modern society.

I urge readers to e-mail comments to Mr. Jonathan G. Katz, Secretary, SEC on this important issue. Put Petition File 4-461 in the subject line and include your name and professional affiliation. If attaching a document, indicate the format and please cc: [email protected] &[email protected] See SEC Rulemaking Petition File No. 4-461. Also comments e-mailed to the SEC. Press Release: Petition for Democracy in Corporate Elections. You may also want to look at the SEC’s Instructions on Submitting Comments and see the SEC’s press release on their upcoming review.

For press coverage see: The Key to Director Independence, SocialFunds, 4/1/03; SEC Ponders Corporate Democracy, CBS MarketWatch, 4/14/03; S.E.C. to Review Policy on Board Elections, New York Times, 4/15/03; THE MARKET: Is “shareholder democracy” an oxymoron?, Kansas City Star, 4/13/03; Other view: Dab of democracy in boardrooms, Thomas W. Joo, Sacramento Bee, 4/4/03;DEMOCRACY IN CORPORATE ELECTIONS, Shareholder Action Network, 8/2/03. See SEC press release. Please let us know by e-mail if you spot additional articles.

McDonough to Head Public Company Acccounting Oversight Board

The Securities and Exchange Commission unanimously selected Federal Reserve Board executive William J. McDonough to lead the new panel designed to reform the accounting industry after two years of scandals that devastated the stock market.

McDonough, 68, has served as president of the New York Federal Reserve Bank for the past decade, a position that afforded him close contact with Wall Street and the international investment community. He has long
dealt with difficult economic issues, and has been mentioned as a possible successor to Fed Chairman Alan Greenspan.

Although McDonough has sat on the boards of various charities, including the New York Philharmonic and the Carnegie Corporation of New York, he has not served as a director of a public company.

Under the Sarbanes-Oxley law, the commission is supposed to certify the accounting board is up and running by April 26.

His appointment drew widespread praise from Capitol Hill; from Eliot Spitzer, the New York attorney general; and from the American Institute of Certified Public Accountants, the trade group that bitterly fought
government regulation and was said to have tried to block the appointment of Mr. Biggs. The Institute yesterday called the McDonough appointment ‘a critical step in moving the process forward.’

The appointment of Mr. McDonough will be for a five-year term. Under the law, he could be named by the S.E.C. to another five-year term. Unlike most people he said, “I adore accounting theory. I think it
is one of the most interesting things that one can get involved in.”

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Corporate Governance: Financial Service Firms

Federal Reserve Board Governors Susan Schmidt Bies is scheduled to participate in “Corporate Governance: Implications for Financial Services Firms” panel at the Federal Reserve Bank of Chicago’s 39th Annual Conference on Bank Structure and Competition, on May 8th at the Fairmont Hotel, 200 North Columbus Dr. For registration contact: Regina Langston at 312 322 5641 or [email protected]. Information: Douglas Evanoff, 312 322 5814 or [email protected]; hotel: 312 565 8000

Vanguard Sues

The Vanguard Group mutual fund filed a civil suit against Citibank and Salomon Smith Barney, alleging the firms fraudulently sold it $70 million of worthless Enron bonds.

Vanguard claims that the two firms collaborated to disguise the defunct energy trader’s mounting debt to Citibank using commodity investment accounts, which were used to back Enron bonds. Those bonds were then sold to investors, including Vanguard, and turned out to be worthless after Enron went bankrupt in 2001, the lawsuit alleges.

Vanguard said its funds were duped into buying the bonds through “false and misleading'” financial statements, in which Citibank failed to disclose Enron’s true financial situation and its own role in the deals. Vanguard said the scheme was discovered as the result of U.S. Senate hearings on Enron over the last year.

Citigroup, the parent company of Citibank, and Salomon Smith Barney did not comment on the lawsuit but Citigroup testified that it “acted at all times in the good-faith belief that the transactions complied with existing law and standards.” (Mutual Fund Market News, 4/14/03)

The suit demonstrates one method mutual funds can use to increase their effectiveness in monitoring. Along with recent rules requiring mutual funds to disclose their votes, it is another good sign that mutual funds may be moving to improve corporate governance.

Donaldson Calls for Broader Director Candidate Pool

SEC Chairman William Donaldson testified before a Senate Appropriations subcommittee that companies need to look beyond the usual suspects for director candidates. Fritz Hollings (D-S.C.) said that in the early 1960s, boards were composed of “drinking buddies.” Today it appears that CEOs have a three-year term to “get the stock up, take the money, and run.”

Donaldson said that board members need to determine how many boards they can realistically serve on given the heightened responsibilities and time commitment that such service now requires. He sees a need for a new professional cadre of directors  — both young people, better trained in new efforts by business and law schools and the NYSE, and older people not previously given the chance. These directors should expect more responsibility and to spend more time at their jobs. This will mean serving on fewer boards and, where they do serve, hiring corporate officers who understand the enhanced role of today’s board.  

The New York Stock Exchange, law schools, and other institutions are providing director training for such candidates, and Donaldson said the SEC supports their efforts. “We want to help them do that [train directors], and we intend to help them do that,” he said. Donaldson was appearing before the subcommittee in support of a fiscal 2004 budget request of $841 million for the SEC, the largest amount ever requested for the agency. Its budget in 2002 was officially $438 million but supplemental appropriations brought it to an operating level of about $540 million. (see New SEC Chief on Track?, The Motley Fool, 4/9/03; SEC Chief Says Director Candidate Pool Should Be Deeper, ISS Friday Report, 4/10/03)

ACGA Website Launched

The Asian Corporate Governance Association (ACGA), a non-profit membership organization based in Hong Kong and operating around Asia has launched its website and has been steadily adding content to it. It contains updated news on corporate governance in Asia, such as the elections for the board of Hong Kong Exchanges and Clearing (HKEx) where Oscar Wong, CEO of BOCI-Prudential Asset Management and David Webb, a leading commentator on corporate governance in Hong Kong and its most outspoken retail shareholder activist, are trying to give minority shareholders representation for the first time.

The site also includes coverage of codes and rules, and information about what ACGA itself is doing, such as are up to, such as assisting investors developing corporate governance screens and creating the ACGA Quick Assessment, a cost-effective and efficient tool for assessing the governance practices of companies.

Content has not been completely uploaded but we see that it will be extensive. They are certainly building a firm foundation to create a strong and sustained voice for corporate governance reform in Asia.

SEIU Win at HP

Hewlett-Packard shareholders have approved a non-binding resolution calling for management to submit senior executives’ severance packages to investors for approval. The company says it will consider the recommendation, the outcome of which was initially deemed “too close to call” after Wednesday’s annual meeting. The measure was introduced by the Service Employee International Union in the wake of a $14.4 million pay package that former Compaq chief executive Michael Capellas received when he left HP last November. The company says board members will give the shareholder recommendations “due consideration.”

“Due consideration is like code for saying we’ll do nothing, or we’ll talk about it in the elevator between now and the next annual meeting,” said John Chevedden, an investor and shareholder advocate in Redondo Beach, Calif., who helped draft the shareholder-approved rule related to poison pills which also passed. (see H-P shareholders are ‘due’ respect. Commentary: Board should honor shareholder wishes,, 4/9/03)

Free DOL Guides

The Department of Labor has launched elaws Advisors, an online labor law tutorial, to provide DOL’s customers with access to clear, consistent and timely information about the laws affecting America’s workplaces. DOL also provides a free 102-page Employment Labor Law Guide on the department’s main laws and regulations for employers needing introductory information on wages, benefits, safety and health, and nondiscrimination policies for their businesses. For the booklet, call 866-4-USA-DOL.

SRI Funds Spared Outflows

While domestic equity mutual funds posted outflows of more than $27 billion during 2002, socially responsible investing (SRI) mutual funds saw net inflows of more than $1.5 billion, according to Lipper Inc. During the first months of 2003 the trend continues. (From SRI funds, a more sophisticated tack, The Christian Science Monitor, 4/7/03)

Poison Pill Resolution Passes at HPQ with 55%

The shareholder proposal called for a shareholder vote on any future poison pill.

Activist John Chevedden points out the Hewlett-Packard position on the proposal was defeated at their April 2nd annual meeting in spite of:

  • The company’s special solicitation of shareholders, per its March 21 filing with the SEC
  • The company terminated its poison pill on Jan. 21, 2003
  • HPQ great expertise in soliciting shareholders to change their votes.

Two other proposals had strong showings:

  • Shareholder vote on golden parachutes – “Too close to call”
  • Expense stock options – 45%

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Scott Adams Lampoons CEOs

Dilbert creator, Scott Adams, has been poking fun of CEO excesses. A recent strip showed a CEO trying to blend in as an “average guy” another pokes fun of recruitment. Apparently, the imperial CEO is not dead in the popular press.

Elson Stages Corporate Governance Series

Charles Elson, Woolard Professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark, and will feature nationally recognized experts on a variety of issues.

Sessions will meet from 9:30-10:45 a.m., Thursdays, beginning April 10 and concluding May 8, in 125 MBNA America Hall. Members of the campus community and the public are invited to attend, and if interested should call the Weinberg Center for Corporate Governance at (302) 831-6157.

The opening panel on April 10 will look at audit committee reform and financial misconduct. On April 17, the panel will discuss corporate governance guidelines. The panel April 24 will consider corporate law and the impact of increasing federalism on Delaware’s corporate franchise. The state has long been a haven for incorporation and has developed a unique and important place in corporate law both nationally and internationally. The final panel May 8 will consider the role of the dissident director. Panelists include experts from businesses, academia, pension funds and the press. (See Corporate governance series will open April 10)

Transparent Companies Yield Better Returns

Companies that voluntarily disclose more detailed information about their corporate governance practices yield higher shareholder returns than less transparent companies, according to a new study by Sibson Consulting and Spencer Stuart based on 2001 annual reports and proxies of 385 large- and mid-sized public companies, most of which were released in the first half of 2002.

The study measured how many of 52 non-mandated disclosures companies made, ranging from information about director peer reviews to whether or not the company has formed a governance committee. Companies only disclosed 4.7% of the 52 items; large companies disclosed 8.2%, compared with mid-sized companies, which disclosed 3.9%.

Companies with governance committees disclosed 7.2 percent of the items, identifying nearly three times as many governance practices and polices as those companies that hadn’t formed a governance committee.

Higher scoring companies had significantly higher median five-year shareholder returns than lower-scoring companies, according to the report. Pfizer Inc. ranked first in the report’s governance transparency metric, followed by Harleysville Group Inc., Household International Inc., which is being acquired by HSBC Holdings, Eli Lilly & Co. and Hawaiian Electric Industries Inc. (Yahoo! News, 3/31/02)

Mutual Fund Directors Earned More in 2002

As the profit of mutual fund investors tumble, mutual fund directors got an aberage 8% pay raise in 2002. Director pay at the top 50 fund companies increased 8%, with $113,000 their median compensation, according to Management Practice.

Putnam had the highest-paid directors. For example, John Hill, vice chairman of First Reserve, a private equity company specializing in energy, made $388,250 last year. Fidelity directors still earned a lot by industry standards, however, pulling in an average $262,450 last year. That is down slightly from an average $266,050 in the previous year, according to regulatory documents. Janus directors made between $94,000 and $184,000 last year, less than they earned in 2001, when they each pulled in $185,000, filings showed.

Yet George Martinez, co-founder of FundWatchDog, say that, “today, there’s a lot more responsibility resting on their shoulders than there has been historically, especially with a lot of regulations coming down the pike in the last 18 months.” (Mutual Fund Market News, 3/31/03)

Donaldson Calls for Boards to Rein in Executive Pay

SEC Chairman William Donaldson called on corporate boards to rein in pay and perks for CEOs, saying that “In some cases, the CEO has become more of a monarch than a manager.”

Donaldson told a group of business leaders that investor anger has been made worse “by the perception and, in many cases, unfortunately, the reality that those at the top have not shared their loss — that those at the top have continued to enjoy massive salaries, bonuses and perks unrelated to performance.” Donaldson, who earned $18.7 million three years ago as chairman of Aetna Inc. did not propose any specific reforms. Instead, he told companies and directors that there was no one-size fits all reform.

Treasury Secretary John W. Snow left CSX Corp. last month with a $68.9 million pension — a lump sum of $33.2 million, plus $2.9 million a year. That’s even more than the $2.1 million of salary and bonus he made last year. CSX defended Snow’s benefits as “consistent with executives of other Fortune 500.” Meanwhile, CSX paid nothing at all in federal income taxes on its $934 billion in U.S. profits over the past four years. (The Corporate Reform Weekly: Citizen Works’ look at the Campaign for Corporate Reform,Volume II, #12)

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Hess: How I Voted

Hess is one of the stocks in my portfolio. Their annual meeting is coming up May 4. Today is the last day to vote on the platform. had two funds voting, covering all the issues. has four advisors or compilations of advisors offering opinions. I voted on the platform and went with “SRI Pros Cause,” which “consists of professional investment organizations that practice socially responsible investing (SRI).” I am happy to see them voting Continue Reading →

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EMC: How I Voted

EMC is one of the stocks in my portfolio. Their annual meeting is coming up May 4. Today is the last day to vote on the platform. had three funds voting, covering all the issues. has eight advisors or compilations of advisors offering opinions. This time, several are comprehensive. I voted on the platform and went mostly with management and Florida SBA. However, I did vote Continue Reading →

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SEC Seeks Comment on Investor Education

On April 19, the Securities and Exchange Commission published a request for public comment on the effectiveness of existing investor education efforts as part of a review mandated by the Dodd-Frank Act.

Section 917 directs the SEC to conduct a study of retail investors’ financial literacy and submit its findings to Congress by July 21, 2012. Among other things, Section 917 states that the study must identify “the most effective existing private and public efforts to educate investors.”

The Commission is seeking public comment to better understand the details and effectiveness of current programs, and help ensure that the study includes all Continue Reading →

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CalPERS Candidate Forum

As some of you may know, during the last 25 years I’ve run for the CalPERS Board more than anyone, raising issues like gifts, placement agents and generally fighting for higher ethical standards. For years, I tried to get elections regulated by the Fair Political Practices Commission and covered by newspapers.

I recall testifying in the State Senate that Board members shouldn’t be allowed to accept gifts from those that do business with CalPERS. One of the Senators leaned over and said something like, “I’d bet you don’t think I should be taking gifts either, do you?” “That’s right,” I told him.

I was against gifts in either sphere but at CalPERS it was worse. At least the Senate disclosed its votes, so you could potentially track a reported gift and try to gauge if Continue Reading →

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Excess-Pay: Beyond the 2% Solution

Excess executive pay can impose substantial costs on companies and shareowners even if manipulation or misconduct isn’t involved. Executive pay is the biggest lightening rod in corporate governance, prompting Dodd-Frank to include clawback requirements, mandatory say on pay, and say when on pay votes, as well as the coming ratio between executive pay and the pay of a company’s median employee.

Jesse Fried and Nitzan Shilon’ s important paper, Excess-Pay Clawbacks, highlights the problem of “excess pay” to executives arising from errors in earnings and compensation-related metrics. Although addressed in part by Dodd-Frank, significant additional measures are still needed.

The paper examines excess-pay clawback policies in S&P 500 firms prior to Dodd-Frank.

We find that nearly 50% of S&P 500 firms had no excess clawback policy whatsoever. Of those firms with clear policies, 81% did not require directors to recoup excess pay but rather gave directors discretion to let executives keep excess pay. Of the remaining Continue Reading →

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Moody's Shareowners Vote to Split Chair/CEO

At the annual meeting of rating agency Moody’s Investors Service, a resolution calling for an independent Chairman of the Board was supported by 56% of shareowners. The resolution was co-filed by Hermes Equity Ownership Services (EOS) and the Laborers International Union of North America (LIUNA).”

Citing both the Corporate Core Principles and Guidelines of the California Public Employees’ Retirement System (CalPERS) and the Millstein Center for Corporate Governance and Performance, the resolution stated,

We believe that the recent economic crisis demonstrates that no matter how many independent directors there are on the Board, the Board is less able to provide independent oversight of the officers if the Chairman of that Board is also the CEO of the Company.

via Institutional Shareowner.

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Five Game Changers

CTPartners (AMEX: CTP), a leading global retained executive search firm, reported five major forces impacting corporate Boards, which include:

  1. The power shift from the Board to the shareholder. If Boards don’t take the lead on big issues like CEO compensation, Board structure, director competence and succession planning, shareholders will.
  2. Social media activism. Boards need to engage with new technologies or become their victims.
  3. The 40-something board. The average age of directors, 62 years, will shift downward because Boards need fresh ideas and faster-paced, tech-savvy directors to energize the boardroom.
  4. The impact of culture – Corporate and Board. Boards have to identify cultural barriers – entrenched behavioral patterns and deeply-held beliefs that are bogging companies down and inhibiting change – because corporate culture can sink or save a company.
  5. The power of talent and the rise of the CHRO on Boards. HR execs are upping their game, with many companies hiring Chief Human Resources Officers with high-profile business experience and skills.

From the Activist Shareholder to the 40-Something Board, Second Annual Board of Directors Human Capital Institute Names Five Big Changes Impacting Directors | Press Releases-

Next they’ll recognize that “human capital,” is based in the skills and knowledge not only of corporate managers but of boards, employees and shareowners alike.

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Berkshire Hathaway: How I Voted

Berkshire Hathaway is one of the stocks in my portfolio. Their annual meeting is coming up April 30 Again, I’m a little disappointed not to see more voting advice available at this late date. Where are Florida SBA, CalSTRS, CalPERS, and all those SRI funds? Only AFSCME is reporting so far on but they provide comprehensive advice on each item. has seven advisors offering opinions but none cover all the items on the proxy. That’s frustrating.

AFSCME has done more to advance the cause of proxy access, the Magnata Carta for Continue Reading →

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Don't Let Them Get Away With Stealing Elections

Glyn Holton’s How To Steal a Corporate Election informs us of recent outrages on how elections are tipped in favor of entrenched managers and boards. If you’ve taken the time to read his post, I urge you to take another five minutes to help remedy the situation.

To address the situation at American Tower Corporation (AMT) send e-mails to the Office of Chief Counsel at [email protected] and the Chairman at [email protected]. I also recommend you fill out the complaint form, since this will go to the Division of Enforcement, the office that could take action. I recommend you write something like the following (subject line: American Tower Corporation – Violation of Rule 14a-4(a)(3)):

American Tower Corporation (AMT) is utilizing a Voter Information Form (VIF), which includes Item 04. While it appears shareowners are being asked to approve the idea of say-on-pay votes (now required by Dodd-Frank), they are actually being asked to approve a say-on-pay vote.

SEC Rule 14a-4(a)(3) states the proxy “shall identify clearly and impartially  each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the Continue Reading →

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5th Analyst Call on Oxy Proxy

Do you have governance questions on Oxy’s proxy? This first ever ever “Fifth Analyst Call” shows promise. Let’s hope it gets widely adopted by many companies. F&C Asset Management and Occidental Petroleum invite investors to ask independent directors questions prior to voting at the annual meeting. The call is on Tuesday April 26th at 9:00 Eastern/14:00 GMT. It will be led by Aziz Syriani, Occidental’s lead independent director, and Spencer Abraham, the chairman.

The “Fifth Analyst Call” is open to all current investors in Occidental Petroleum but you must RSVP to get the call-in information. RSVP directly to Chris Stavros, Vice President of Investor Relations at [email protected]. Do it now.

If you have any questions about the “Fifth Analyst Call” initiative or the 14 domestic and international investors who  developed the concept of the Fifth Call, contact Elizabeth McGeveran, F&C Asset Management at [email protected] or Deborah Gilshan from Railpen Investments at [email protected].

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Kellogg: How I voted

Kellogg is one of the stocks in my portfolio. Their annual meeting is coming up April 29. I’m a little disappointed not to see more voting advice available at this late date (only 1 fund reporting on

The “Reduce Supermajority Vote Requirements” proposal is mine, so of course I was sure to vote for that one.

AFSCME has done more to advance the cause of proxy access than any other group in the last decade. Since they appear to put a reasonable amount of effort into researching proxy issues and Continue Reading →

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How To Steal a Corporate Election are plenty of ways to steal an election. Some require guns. Others depend on bribes. Perhaps the simplest involve misleading ballots. For its corporate election this year, American Tower Corporation (AMT) has produced a humdinger. Item 04 of their ballot (technically a VIF; I will explain this legal nicety some other time) gives shareowners the option of voting “for,” “against” or “abstain” for the following:


In years past, shareowners have placed similar “say-on-pay” items on other corporations’ ballots. These tended to garner strong support as shareowners, concerned about lavish executive compensation, sought an opportunity to weigh in. But last year’s Dodd-Frank financial reform act mandated say-on-pay votes at all public corporations. So why Continue Reading →

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Uncovering Erroneous Assumptions

Bartley J. Madden’s recent paper, Management’s Knowing Process and the Theory of Constraints, explores the brain’s capability for forming and re-forming neural circuits that constitute our perceptions of the “world out there.” Our “realities” are built up from specific and limited past experiences.

Managers and boards would do well to be more attuned to uncovering erroneous assumptions as an aid to more successfully dissolving internal conflicts, adapting early to changes in the external environment, and securing competitive advantage. Madden discusses the Theory of Constraints (TOC), as a proven Continue Reading →

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The Psychology of Cheating

Paradoxically, it’s often an obsession with fairness that leads people to begin cutting corners in the first place.

“Cheating is especially easy to justify when you frame situations to cast yourself as a victim of some kind of unfairness,” said Dr. Anjan Chatterjee, a neurologist at the University of Pennsylvania who has studied the use of prescription drugs to improve intellectual performance. “Then it becomes a matter of evening the score; you’re not cheating, you’re restoring fairness.”

… people subconsciously seek shortcuts more than they realize — and make a deliberate decision when they begin to cheat in earnest.

… Low-level cheating may be natural and even productive in some situations; the brain naturally seeks useful shortcuts. But most people tend to follow rules they Continue Reading →

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Immelt Stock Option Conditions – Real or Illusory Governance?

On one level, the recent action of General Electric in adding performance related conditions to the vesting of stock options recently granted to its CEO (GE Realigns Immelt’s Incentives, Barrons, 4/19/2011) would seem to reflect improvement in its governance. Tying CEO options to company performance can not be a bad thing for shareholders, so long as the performance criteria are not illusory and do not encourage aggressive accounting or a short term focus. The four year horizon for these criteria seems to make them meaningful.

However, on another level, these criteria beg the questions of what they really do for shareholders and whether they provide sufficient incentives to avoid the near-death experience caused by GE Capital in 2008-   i.e. are they an exemplar of good governance? In particular, the requirement that GE’s return on equity meet or exceed that of the S&P 500, by definition is a reward for mediocre performance. Immelt is paid a substantial salary and bonus for “base” performance, so it is unclear why simply meeting this minimum benchmark should warrant additional recognition. As a small GE shareholder desiring Continue Reading →

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The Board’s Role in Safeguarding Reputation

There is a good reason why Warren Buffett wrote in a recent memo to Berkshire Hathaway managers,

The priority is that all of us continue to zealously guard Berkshire’s reputation. We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.

At a recent Arizona Chapter meeting of the National Association of Corporate Directors, a panel of experts including Professor Charles M. Elson and Professor Robert E. Mittelstaedt expressed concern about the recent spate of insider trading scandals making headlines in national publications and what these ethical breaches may say about the core values of our society.

Management mischief and lax corporate cultures can lead to reputational damage, loss of revenues, higher legal fees, and possible fines and sanctions. As is typical in large organizations, senior leadership does not want to accept bad news. Small problems can be ignored and eventually lead to bigger problems that appear on the front page of a national newspaper.

In 2010, Johnson & Johnson was involved in at least 11 major recalls. Chief Executive Officer William Weldon maintains the company’s quality control issues have been “overshadowed by one company” (McNeil), and maintains “this is not a systemic problem.” At Johnson & Johnson, each division has its own culture. Weldon’s problem could be one of not having actionable intelligence at his fingertips to oversee J&J’s more than 250 companies operating in 60 countries.

The California Public Employees’ Retirement System (CalPERS) has also taken a hit to its reputation as a result of scandals involving Board members and placement agents. Recent efforts to prevent future scandals have yet to restore trust and confidence in the system.

How can the Board proactively safeguard the organization’s reputation? On an ongoing basis, the Board must independently verify that the organization’s performance is legal, ethical and sustainable by extending its inquiries beyond the senior leadership team and deep into the employee population of the organization.

The Board has fiduciary responsibilities best met by engaging an independent party to assess the efficacy of structures, policies, and systems on an ongoing basis to substantiate to external stakeholders that the organization is committed to the core values of integrity, transparency, accountability, and risk oversight.

To safeguard the organization’s reputation, the Board can no longer rely on internal stakeholders alone and must trust, but verify. The Board can accomplish this by engaging an independent party to survey and solicit input from every employee to identify material weaknesses in internal control, compliance and reporting systems that can go undetected by traditional internal audit, risk, and compliance programs.

Finally, the Board should engage an independent party to rapidly elevate risk and operational intelligence to the C-Suite and Board to ensure senior leadership is willing to accept bad news from subordinates and address problems by initiating appropriate actions.

Failure of the Board to independently verify that the organization’s performance is legal, ethical and sustainable may easily have significant consequences in light of the proposed rules for implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934. As Mark Twain said,

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

Why risk paying a whistleblower millions when, with very little time and effort, you can create and maintain a culture where that doesn’t happen?


Guest post from Mark Rome of zEthics, Inc.. The Business Integrity Alliance is a joint venture between zEthics and Boundless, LLC, which provides organizations an independent assessment of corporate culture on an ongoing basis to safeguard an organization’s reputation.

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Confusion About Proxy Access Suit

Readers may have noted the WSJ’s lead editorial of last Saturday, Proxies vs. Profits, railing against the pending proxy access rules and supporting the appeal taken to the D.C. Circuit by the U.S. Chamber of Commerce and Business Roundtable.

However, the editorial misses the fundamental point of the issue: the pending rules do not guaranty anyone a board seat. All they do is allow ballot access. It is up to the minority holder seeking a seat to persuade enough other holders that their election will be beneficial to the corporation. If the rules served to guaranty anyone a seat, the WSJ points as to overriding of shareholder will, would be well taken, but this is simply not the case. By enhancing ballot access, the rules bolster shareholder choice; it is up to them how it is exercised.

The WSJ’s derisive tone toward the shareholdings or views of labor union pension funds is also curious coming from an organization with such conservative leanings. This view disregards the fact Continue Reading →

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Companies with Best Corporate Governance

As consumers increasingly clamor for companies to embrace social responsibility, good corporate citizenship is fast becoming a vital part of any business or stock’s success. Corporate Responsibility magazine recently released its “100 Best Corporate Citizens” list, in which it rated members of the Russell 1000 large-cap index on more than 300 different elements related to responsible behavior…

Today, we’ll look at corporate governance, which gets a 7% weighting. Dozens of companies got a top rating in this category, including: EMC, Boeing, Sherwin-Williams, Xerox, Abbott Labs, Consolidated Edison, Cisco Systems. To earn their high scores, the companies above engaged in a variety of good practices, including maintaining an independent audit and compensation committee, having an outside majority on the board, not having many directors serving on more than four boards, not employing poison pills as defenses against takeovers, and giving shareholders the right to call special meetings.

via The Best Citizens in Corporate Governance, Motley Fool, 4/14/2011.

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Go Directly to Court, Do Not Pass SEC, Prepare to Spend Thousands

Here’s a brief note I just sent to the SEC:

Dear Chairman Mary Schapiro and Mr. Greg Belliston:

On April 12 I alerted you to the fact that Kinetic Concepts has said they will exclude a shareowner proposal from Mr. John Chevedden even though the SEC refused to issue them a no-action letter. I warned that if the SEC does not enforce the law and require companies to meet the burden of proof required by 14a-8(g), we should expect a flood of copycats. Today’s bulletin from Duane Morris LLP & Affiliates can be expected to accelerate erosion of the SEC’s authority.

To those of us who believe that shareowners should have the right to submit proxy proposals, I can’t emphasize enough the importance of e-mailing your concerns to the SEC so that we maintain that right.

The title of the above referenced alert from the Duane Morris law firm is “To Seek Exclusion of Shareholder Proposals, Companies May Bypass ‘No-action Letter Request’ and Go Directly to Federal Court.” SEC rules regarding shareowner proposals have been in place since 1942. Is this a right we are willing to lose without a fight? Unless shareowners demand that the SEC take action, we can expect to have to fight our way through the courts each time we submit a proposal.

See Take Action: Sixty Years of ShareOwner Rights at Risk, Texas Secession Led by Apache, KRB and Kinetic Concepts, Apache: Too Big For SEC Rules?, and Will the SEC Enforce Rule 14a-8?.

Send quick e-mails to the Office of Chief Counsel at [email protected] and the Chairman at [email protected]. I also recommend you fill out the complaint form at, since this will go to the Division of Enforcement, the office that could take action. Your note could be as simple as the following:

I understand Kinetic Concepts informed the SEC they would exclude a shareowner proposal from John Chevedden even though the SEC rejected a “no-action” request from them on March 21. This company and others taking similar action have not met the burden of 14a-8(g), which required companies to demonstrate they are entitled to exclude proposals.

I believe taking action against Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.


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Don't Betray the Public Trust

Alan Hevesi, former New York state comptroller, was sentenced Friday to one to four years in prison for his role in the political influencing of investment business with the $140.6 billion New York State Common Retirement Fund, Albany.

via Hevesi gets up to 4 years for pay-to-play – Pensions & Investments, 4/15/2011.

While certainly not a solution to pension fund ethics, the board structure seems to me to be slightly less vulnerable than a single point of leadership.

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Video Friday: Joseph Stiglitz Discusses Elite 1% & U.S. Free-Fall

Of the 1%, by the 1%, for the 1%, Joseph E. Stiglitz in May Vanity Fair, discusses the fact that the top 1% now control 40% of our wealth.

The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance)…

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