LA Trustees Roundup 2012: Corporate Governance

As Laura Berry mentioned at the conference, this is an event to recharge your batteries. It is great to learn what others are doing. Of course, the list of things I need to do grows exponentially every time I attend one of these gatherings of mostly California public pension funds. Disclaimer, disclaimer, disclaimer: Nothing I report is a quote. Opinions expressed don’t represent the views of respective organizations and may not even represent the views of those attending the event. Provocation may be intended

State Treasurer Bill Lockyer couldn’t make it to the event, so we heard from his frequent representative on the CalPERS and CalSTRS boards, Grant Boyken. I can’t quote him exactly but he said something to the effect that while the Dred Scott decision turned people into property, Citizens United turned property into people. Fifty-seven companies, or almost three-fifths of the largest publicly traded companies in the United States, now disclose their direct corporate political spending and have adopted board oversight, or they prohibit corporate spending on politics. The two companies that prohibit any spending are Colgate-Palmolive and IBM. See CPA-Zicklin Index of Corporate Political Accountability and Disclosure done in conjunction with the Center for Political Accountability.

Something like 88% of retail shareowners are in favor of greater disclosure. Now, if we can just get the issue on the proxy everywhere and get retail shareowners to vote. SEC Commissioner Luis Aguilar recently made an eloquent plea that public companies should be required to disclose their spending on political campaigns. Read his Shining a Light on Expenditures of Shareholder Money.

Please send e-mails in support of the petition by prominent academics requesting the SEC to develop rules requiring public companies to disclose to shareowners the use of corporate resources for political activities. Write to

All submissions should refer to File Number 4-637.  This file number should be included on the subject line if e-mail is used and that is the method I recommend.  The SEC posts all comments on petitions to the Commission’s Internet website. Last I looked, they had received about 70,000. Yours can help make the difference. Don’t know what to say? Use mine as a template. It is quick and to the point.

Regulatory and Political Environment

Richard Ferlauto

Richard Ferlauto

Rich Ferlauto spoke of his role at the SEC – critiquing regulatory efforts, investor knowledge testing and outreach and traffic cop directing people to the right place. We’ve got a retirement crisis with a $6 trillion deficit to meet the financial needs of baby boomers so that they can live in retirement at the same level they lived while working. See the SEC’s Office of Investor Education and Advocacy.

Financial literacy is limited and problematic. People have difficulty understanding risk. Dodd-Frank was supposed to double the SEC’s budget. It hasn’t; but at least they’ve gotten modest increases. There are 3,000 employees; 1 for every $88 trillion in assets. They need to do more to regulate financial advisors and are considering a self-regulatory organization or, perhaps an expansion of duties for FINRA.  Proxy access decision by DC court increased the level of review going into rulemaking. Industry lives in the building, ready to provide binders full of information. More is needed on the benefits of regulation and the complexities of new technologies in finance.

Alan MacDougall

Alan MacDougall of PIRC spoke of current discussions in the UK around their “comply or explain” system. Maybe there needs to be some real teeth. The Financial Reporting Council is worried about the overwhelming power of proxy advisors but has done no report on the causes of the financial crisis. MacDougall discussed various studies, including: High Pay Commission, Fair Pay Commission report, Davis review on the lack of women on boards, Short-termism and the Kay interim report, and discussed some of the complexities of the UK banking system, which made them sound as fouled up as ours.

Eric Knight of Knight Vinke delved into the Eurozone crisis where debt levels have reached 87% of GDP, while those in the US are even higher at 165% of GDP. Deficits are about half of those in the US but European banks haven’t recovered and are under-capitalized. In Germany, the largest banks are leveraged at about 100 to 1, whereas in the US it is more like 20 to 1. A large proportion of the Eurozone debt is held by banks (35%). Germany needs to reflate economy and import more but they are afraid of inflation, so have left that task to France and Italy. 65% of German exports go to Europe. If the Euro fails, German banks would fail immediately. One of the problems I gathered was that in Europe, the cost of leveraging is hidden… the cost of debt doesn’t increase with leverage so the cost of equity is considered “risk free.” The return on equity is assumed to be about 12%. My conclusion? It’s complicated.

Sarah Mason, of Occupy LA was on the panel and offered  some inspirational words for the 99%. I didn’t realize she was the young woman on the cover of Time magazine when she spoke. She wasn’t wearing a mask at the Roundup.

Corporate Governance Key Issues for 2012- Moderated by Henry Jones

John Keenan with AFSCME  discussed AFSCME’s proxy proposals. Read more here. At the banks they are asking for disclosure of contributions and procedures, including money to trade associations. He also discussed how trade association are used as a kind of money laundering device (my words, not his). For example, those opposed to healthcare could contribute to the Chamber without disclosing and could look innocent as the Chamber did their lobbying.

Bill Patterson with the CtW investment Group discussed their initiative to get James Murdock (son of Rupert) off the Sotheby’s board.  The UK’s Guardian recently referred to James Murdoch as a ‘dead man walking‘ following a recent shareholder vote.

Richard Metcalf of LIUNA discussed the growth in private markets and suggests we are spending a disproportionate amount of our time on public markets, given their growth. We need to fight for more transparency in private markets. It is up to us. They have developed survey mechanisms to look at the political contributions of money and fund managers. Responsible contractor policies are important and Metcalf had several examples. It is also critical to monitor “responsible” contractor provisions once obtained.  Nothing makes limited partners more nervous that general partners talking with each other. Transparency, responsible contractors, political disclosures. We need to engage and to find beter ways to enforce. RFPs should require disclosure of such policies.

Anne Simson

Anne Simpson of CalPERS used Apple as an example of moving the bar. Last yearr 73% voted for majority vote. This year 80.3% and Apple finally relented.  CalPERS engaged 94 companies in their majority vote campaign… 77 adopted. We did it by working together. Apple is the biggest company in world, so getting them on board was key. Such policies need to be written into contracts with fund money managers to ensure implementation. Coordinate. CalPERS staff speak personally to other large shareholders. Remember, 1 in 5 shares are now held internationally.

Fiduciary Responsibilities

Hugh O’Reilly said we need to look more at the funded position of plans, as well as the rate of return. Higher risk doesn’t necessarily lead to higher reward. Focus on making sure the promise is met. Ontario fund is managed similar to our Taft-Hartly funds, with 50/50 union/government representation on board. We ned to not only protect our members who work in the public sector, we need to follow workers when they leave to the private sector. Your duty is to meet the promise of a secure retirement.

Bill Sokol

Bill Sokol also emphasized that greater risk isn’t correlated to greater return. Alternative hedge funds are often repackaging old products with new paint and the same old engines. 60-70% of trading is now by computers. 2/3 of daily trades are by computers based on pre-programed algorithms… untouched by human hands. Berkshire Hathaway bumps when Anne Hathaway, the actress, gets press. Nonsense isn’t filtered out. He spoke of the prudent man standard of ERISA, as essentially “lemmings rule” because it requires fiduciaries to act like other fiduciaries. That 1974 rule was based on the 1959 model Restatement of Trust Law.

In 1994 there was a 3rd Restatement of Trust Law drafted by the National Conference of Commissioners on Uniform State Laws. This is basically the current standard fiduciaries should be following. Section 2 is the heart of it, setting out the Standard of Care; Portfolio Strategy; Risk and Return Objectives. Subdivision (c) sets out a list of usual considerations, such as economic conditions, tax consequences, expected total return, needs for liquidity, etc. The interesting consideration is that in subdivision (c)(8):

an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries

Sokol drew our attention to this provision and I think we need to draw it to the attention of our funds and their members. What “special value” does any specific investment have to one or more of the beneficiaries? We’re not just looking at money, not just the pension itself, but other benefits that fiduciaries are obligated to consider and to provide.  Sokol argued these could be clean air, clean water, inexpensive living quarters, healthy food, efficient public transportation, convenient places to exercise, continuing education, a healthy local economy to grow old in, etc.

I plan to push my retiree association and my pension to survey members about these issues. Such a survey would serve double duty. It would educate members as to the fact that our trustees have a fiduciary duty to consider such special value benefits when making investments. It would also help our pension fund trustees determine which are most important to members and would offer something of a shield to fund managers. If questioned as to why they made a specific investment, survey results would also help defend the fund’s actions. “We surveyed our members and ninety percent of respondents ranked xyz as a high priority.”

Corporate Governance Key Issues

Aeisha Mastagni, says CalSTRS voted on 2350 say on pay proposals and voted against about 500.
They rote letters to 120 offering an opportunity for engagement. CalSTRS published Lessons Learned: The Inaugural Year of Say-on-Pay. This year they are especially looking at pay for performance alignment, the general quality of CD&A disclosures, multi-year performance periods and vesting periods of equity awards, and will more closely  evaluate peer groups.   Red flags include: CEO base over $1M, excessive perquisites, same metric for short and long, high CEO to NEO ratio, autorenewing employment agreements. In 2012 board should be eliminating gross-up, perquisites, and choosing peer groups by aspiration. Summary compensation table vs realizable pay models. CalSTRS uses corporate governance to mitigate portfolio risk.

Laura Berry

Laura BerryInterfaith Center for Corporate Responsibility is 40 years old with 300 members. It started with apartheid and divestment and was adversarial. Currently, they are using a more collaborative model. In 2012 they only have 186 proxy proposals filings. Foreclosure proposals and political transparency are their biggest issues. The S in ESG is what they emphasize. Laura also recently participated in the Hudson Institute’s Better-For-You-Foods Conference (see Laura’s presentation about 55 minutes in).  See list of ICCR proxy resolutions. Fracking, supply chain, and many other issues covered. Their publication, The Corporate Examiner, writes for the 99%.

Brandon Rees – AFL-CIO has several initiative in the pertroleum industry. In order to increase profits they must act socially respoinsilby. After BP oil spill, AFL-CIO asked for enhanced transparency around OSHA and environmental concerns at other oil companies as well. If something is not measured, it isn’t managed. Won majority vote at TESORO.  See their list of key votes and proxy voting guidelines.

Alan MacDougall, PIRC  – Discussed the duty of directors to shareowners. Bankers failed. PIRC is looking into individual performance of board members, which they find is critical. They are also looking into share buy-backs and conflicts of interest. There is little evidence that directors can predict when shares are undervalued, so rationale for buy-backs is often not credible. Companies are often changing pay schemes for 3 yars running, making up for prior failures. They have moved away from fundamentals. PIRC also looking at the extent to which capital is lost in acquisitions. M&A activity is often waste. Share price should be underpinned by tangible assets. Growth rather than balance sheet is important and renumeration policy should reflect if the company is entrepreneurial or stable. See recent press on PIRC.

photo of Renaye Manley

Renaye Manley

Renaye ManleySEIU – Over time corporations have reduced their contribution to the tax pool from 30.5% in 1950s to 7.5% today. That’s not fair to us and is not fair to companies that pay their fair share. We challenge you to sponsor and support proposals seeking full disclosure of corporate lobbying.

Diversify Corporate Boards

Controller John Chiang – Chiang was successful in getting legislation requiring placement agents to register as lobbyists. With regard to getting greater diversity on corporate boards, we’re seeing some success with companies we have engaged with through CalPERS and CalSTRS but we still meet huge institutional resistance. It is a major transitional opportunity. ROE, sales, investment capital — Catalyst studies show that three women on the board can make a real difference.

Anne Simpson, CalPERS – CalPERS is looking for diversity in skill sets, gender, age, nationality, race, etc. on the corporate board of companies they invest in. She covered a bit of 3D (Diverse Director Database) history. We’re developing a pool of talent we can turn to. Leadership, talent, experience — not just CEOs of Fortune 500.  Go to to enter information into the database or to subscribe to services. 3D will bring strategic advantages, such as making group think less probable, which would be good for risk management. We want more creative tension – a real debate in the boardroom. Friction, yes but also fire, light and brilliance. Getting names into the pool is key.

Simpson offered smaller funds the ability to partner with CalPERS on shareholder proposals.   Majority vote, succession planning, elimination of staggered boards, tenure, term limits. We need to be refreshing boards to create openings for diversity and proxy access. She told us that the 3D database drills down to expertise, so it is a complex database and should be quite useful.

Anne Sheehan, CalSTRS – Women hold only 16% of board positions. Only 3% are women of color. 6.8% are minority men. Fortune 500 with 3 or more women on the board had 83% more ROE, 73% return on sale and 112% better ROI.  CalSTRS is asking companies for greater diversity on their boards. They Filed proposals every year on the issue, beginning in 2008. Diversity of mindset is what is most important. Success has increased a little more each year. 2009 filed 8 withdrew 6. 2011 filed 8 and all agreed. One company asked for access to the database.  Both the House and the Senate do a better job of reflecting society than does the corporate world. Women control most of the consumer spending. They are the shoppers, so it doesn’t make sense to shut them out of boards. In Norway 40% of board members are women. France set a goal of 40% by 2017, Germany targets 30%, Netherlands 30%. She listed many more. SEC now requires disclosure but the US is still lagging with regard to actual diversity on corporate boards.

It was a great two day event. See day two on retirement security issues. Nice to renew friendships and acquaintances. I was especially delighted to meet Argus Cunningham and Maggie Spivey there from They are still building out their product but from what I’ve seen it will be transformative.

Maggie Spivey

Argus Cunningham

Our goal is to develop a large and robust information exchange platform that will connect individual and institutional investors, publicly-traded corporations, and affiliate members within a transparent forum.

I saw them demonstrating their platform to a number of pension fund employees and was happy to see that Florida SBA and others have signed up. Good to see them sticking around for the second day as well. As I’ve written elsewhere (Sharegate Launches in Beta: Social Media to Facilitate Shareowner Action), their system has gotten me excited about the prospect of taking straw polls of actual shareowners, especially prior to submitting shareowner proposals. I expect that will bring a whole new meaning to shareowner forums.

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