Step Into the Corporate Governance Way Back Machine for September

Time to step into the way back machine to see what we were writing about 5, 10 and 15 years ago. Five years ago @ Corporate Governance, I was pleading for readers to send comments to the SEC on their proxy access proposals. 30,000 letters wasn’t enough, in my opinion.

A shareholder proposal calling for a “say-on-pay” vote by shareowners on executive compensation at Activision Inc. (ATVI) filed by As You Sow received 69% of the vote at the company’s annual meeting held in Beverly Hills, California.  This may be the highest vote result so far of about 50 say-on-pay proposals voted on by shareowners this year.  Activision is a publisher of video games including Quake, Doom and Guitar Hero, and is currently all the news for its purchase of Bizarre Creations Ltd., the UK studio behind the popular Project Gotham Racing title. (Activision to Purchase U.K.’s Bizarre Creations, WSJ, 9/27/07) Conrad MacKerron, Director, Corporate Social Responsibility Program at the As You Sow Foundation, criticized the company for providing outrageous perks like paying the mortgages, Medicare taxes, and even pet-sitting for executives. 

Wired (9/25/07) carries the following interesting article: A Reporter Exposes Fishy Stocks. His Boss, Mark Cuban, Trades on the Findings. An investigative reporter, Chris Carey, is financed by Mark Cuban, “the infamous founder and Dallas Mavericks owner,” to reveiw corporate filings and regulatory documents to come up with companies that are essentially pumping their stock without the fundamentals. Cuban then shorts the stocks and Carey posts his findings to Posts are infrequent, since the investigations take most of his time, but they appear effective in driving down share price by exposing scams.

The Weinberg Center for Corporate Governance at the University of Delaware will host a panel discussion, Director Term Limits: Necessity or Performance Hindrance?, moderated by Charles M. Elson on Thursday October 11, 2007.

Five former outside directors of Just for Feet Inc. in March 2007 agreed to out-of-pocket payments of $41.5 million, topping $24.8 million in 2005 by former WorldCom outside directors and $13 million by directors of Enron.

According to the Wall Street Journal, “such payments are still rare. Courts in Delaware, where many big companies in the U.S. are incorporated, generally protect directors from liability for mistakes as long as they acted in good faith, under the business-judgment rule. When directors are found liable, or agree to settle, the company’s directors’ and officers’ insurance typically covers most of the cost. In the case of Just for Feet, court filings show that only $100,000 of liability insurance remained available for the trustee’s lawsuit; most of it was exhausted by the company’s officers in settling a shareholders’ lawsuit.” (Settlement in Just for Feet Case May Fan Board Fears, 4/23/07)

Ten years ago @ Corporate Governance, Securities and Exchange Commission Chairman Harvey Pitt proposed changes to proxy rules in a speech before the Council of Institutional Investors. Pitt suggested eliminating SEC rule 14a-8(i)(7). This rule allows companies to omit from their proxy statements shareowner proposals that deal with “ordinary business,” or matters that are of concern to management, not shareowners. (see SEC Chair Proposes Eliminating Ordinary Business Exception in Proxy Rules,, 9/25/02)

Support for our petition to open the corporate proxy to shareholder nominations and elections continues to grow. eRaider (later defunct), for example, has now followed suit with their own petition and I expect there will be several more. Electronic comments to the SEC that specifically mention Rulemaking Petition File No. 4-461 in the subject line of an e-mail to Mr. Jonathan G. Katz appear to get posted to an SEC comment page in about a week. If you mail a comment and it doesn’t get posted, please let us know.

The SEC’s proposal would require mutual fund companies to

  1. disclose their proxy voting guidelines;
  2. provide a full listing of their voting record twice a year to the SEC;
  3. discuss and disclose proxy votes inconsistent with the Fund’s voting guidelines and
  4. disclose to shareholders the availability of information about its proxy voting policies and procedures, as well as its voting record.

The Commission proposal will include the requirement that mutual funds make their voting records available, upon request, within 3 working days, to any investor seeking that information. The information will also be made available on the SEC website on the EDGAR Filing System.

Fifteen years @ Corporate Governance, a New York Times report on new IRS data showing that exec pay rose 182% between 1980 and 1995 while revenue rose 129.5%, profits 127%, and taxes 114% during the same period. However, the IRS understates the rise in exec pay because the heavy use of stock options delay tax deductions, often until after retirement. Graef Crystal told the Times the value of options awarded but not yet exercised by CEOs at the 1,000 firms he tracks was $9.9 billion last year in contrast to $1.1 billion they did exercise. Exec pay increased 29% faster in the 1st year after the 1993 law limiting compensation to $1 million for non-performance related pay went into effect. Robert Monks, of LENS, told the Times “the simple truth is that executives are setting their own pay.”

I offer the following which I expect to see in Dilbert soon (if you have trouble with the formulas ask a scientist or engineer):
Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.
Work/Time = Power and since Knowledge = Power and Time = Money, then
Work/Money = Knowledge
Solving the equation for Money we get Work/Knowledge = Money
Therefore, as Knowledge approaches zero, Money approaches infinity regardless of Work done. Conclusion: The less you know, the more you make. (ed. Who says we don’t have a sense of humor at Corporate Governance?)

The September/October Employee Ownership Report, Michael Brown, CFO of Microsoft, says that Microsoft went public not to raise capital (it didn’t need it even back then) but to provide liquidity for the 85% of its employees who were owners. The issue also contains a primer on the Black-Scholes model of valuing options drawn from one of NCEOs publications, the “Stock Options Book.”

The August 9th edition of The Economist looks at strikes at “employee owned firms such as UAL and UPS. Why would employee owners strike their own firm? In the case of UAL, the 20,000 flight attendants are not owners. At UPS 27,000 supervisors and managers own a combined 29% of the firm, whereas 60,000 nonmanagement employees own less that 3% and part time employees own an insignificant amount. “Giving all employees a chance to own a stake in their company can be a unifying, productivity-boosting strategy; making shares available only to a select group will simply deepen existing divisions.” However, they also warn that “even the most equitable share-ownership schemes will flounder if workers feel they still have no say in how their firm is run.” The NCEO says that 9,500 firms, such as UAL and UPS, are on average enjoying a 10% faster growth rate because of employee ownership and participation.

In our opinion, if this is so for “employee owned” firms like UPS, it is even more true with respect to companies where the CEO is an owner but the average employee is not. Today when firm specific human capital contributes so much more heavily to the bottom line, it is important that workers be owners and decision-makers as well.

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