Author Archive | James McRitchie

November 2004

Monks Pessimistic on Governance Reforms

In an interview published in the Nov-Dec/2004 issue of The Corporate Board, Robert A.G. Monks, probably the most influential corporate governance leader, expressed his opinion that most of the recent reforms, including Sarbanes-Oxley, have been “box-ticking.” “Genuine change has been persistently obstructed.”

Pressed on Sarbanes-Oxley, Monks did admit it contained two provisions that may turn out to have been important:

  • Whistleblower provisions – A corporate system that conforms to the public must allow “conscientious people” to “invoke cases of abuse without losing their jobs, or facing endless litigation. Under state (corporation) law, that would have never happened.”
  • Audit certification provisions – Companies must now certify statements “fairly represent the financial condition of the company.” According to Monks, they “can no longer simply bully the auditor to accept the numbers – they have to put their necks on the line.”

Regarding the SEC’s proposal to allow shareholders to nominate board candidates, Monks indicated it represented merely the appearance of change because “there has never been a set of circumstances where anybody could comply with the Donaldson proposal.” In frustration, he said that “In every other country, shareholders have an absolute right to call a special meeting of the shareholders, and a majority can discharge any director with or without cause.”

He sees more Enrons and WorldComs as the price we must pay for a “corporatist government” and believes it will change only when those controlling businesses want it to. “Governance reform is like psychotherapy — the patient cannot do it involuntarily.” (Robert A.G. Monks: Turning of the Governance Tide?)

A recent commentary by Michael J. Mandel predicts that “if the current rate of expansion continues, in a mere 10 years China will be the largest economy, followed by the U.S. and India.” (Does if Matter if China Catches up to the U.S.?, BusinessWeek, 12/6/04) Perhaps when that time draws near, corporate CEOs will see the need for greater democracy in American businesses.

It seems more likely that businesses chartered in Delaware increasingly recoginize themselves to be international, not American. As such, many are already in perfect harmony with China’s current form of governance. Cynicism, corruption, and repression abound. Corruption and conflicts of interest undercut our ability to reform governance in either system or even fund basic public services. Institutional mechanisms for resolving corruption and conflicts of interest (such as lawsuits, the press, and government bureaucracies) are increasingly restricted, co-opted, inaccessible, unresponsive, and inadequate. What form will growing resentment and frustration take?

New Corpgov Indexes

The 11/15/04 edition of Pensions & Investments reported that Institutional Shareholder Services and Glass, Lewis & Company plan to launch rival corporate governance indexes soon.

ISS teamed with FTSE Group to create the FTSE ISS Corporate Governance index series covering 4,000 stocks based on FTSE’s governance rating and weighting. Their advisory committee will be chaired by William Crist, a professor at California State University (Stanislaus) and former chair of CalPERS.

Glass Lewis collaborated with Lucian Bebchuk, Alma Cohen and Allen Ferrell of Harvard to create the Glass Lewis Shareholder Rights index (see “Recent Announcements”), which will overweight companies in the S&P 500 with good corporate governance and underweight those with poor governance. (Corporate governance gets place with indexes)

We expect funds based on both indexes to outperform over the long run and believe their experience will be critical in determining just which corporate governance practices best correlate with long-term value.

CalPERS to Fight for Wide Adoption of California Emissions Standards

CalPERS Board President Sean Harrigan and California Controller Steve Westly have written a letter to the board urging it to use its financial clout in order to major auto makers to drop their threat to fight a new California rule forcing the auto industry to build vehicles that emit about 30% lower global-warming emissions by 2016, according to the Wall Street Journal (Calpers to Be Asked to Push Car Makers on Emissions, 11/22/04).

The state’s new emissions standards aim to curb auto emissions of gases such as carbon dioxide. Several Northeastern states, as well as Canada, are considering similar moves.

The letter is aimed specifically at the Alliance of Automobile Manufacturers, a large Washington-based trade group that includes General Motors, Ford Motors, DaimlerChrysler, Toyota, Volkswagen, BMW, Mitsubishi, Porsche and Mazda. CalPERS has over $838 million invested in these companies. The group has argued that the measure would raise the price of automobiles while not actually offsetting worldwide emissions. It also argues that only the federal government has the power to regulate emissions, and thus California is overstepping its bounds. 

If the auto makers don’t accede to the California rule, CalPERS “should prepare to aggressively engage companies on this issue, including enlisting other investors in our efforts and pursuing proxy battles,” Westly and Harrigan write in their letter.

We urge CalPERS to press the issue. What good are earnings from auto companies if global warming creates an environment where insurance rates go through the roof and the world becomes less hospitable? For more on climate risk, see the Investor Network on Climate Risk (INCR).

SRI Dispute Hits Wider Press

Paul Hawken, one of the most respected members of the sustainability movement criticized the socially responsible investment industry. “Either the industry has to reform in toto (or rename itself), or that portion of the industry that wants to maintain credibility must break off from the pretenders and create an association with real standards, enforceability and transparency,” said the Natural Capital Institute (NCI). When Wal-Mart, McDonald’s, Pfizer, and Microsoft are all deemed socially responsible, who’s left to screen out? See Socially Responsible Investing: How the SRI industry has failed to respond to people who want to invest with conscience and what can be done to change it.

But what about all those shareholder resolutions and all their contributions to corporate governance? These disputes have been common within the SRI community for years. Now with “Has social investing lost its way?” appearing in The Christian Science Monitor (11/15/04), the dirty laundry is out.

Wider discussion of the issues will lead to better disclosure. Some funds will hold the best environmental performers in each sector. Others will hold 10% in bad actors so they can try to reform them and 25% in microcaps to bet on the future. Let a thousand flowers bloom.

Then we’ll need a rating service, like Morningstar, to help us sort out the differences, not just risk and return but how they are helping. SRI is maturing. We hope to see the day when all funds are SRI. Then disputes can be all about which strategies are most effective in generating wealth in a way that is sustainable for the enviornment and brings dignity to the human endeavor.

Russian Progress Slow

Russian companies have made little progress in improving corporate governance in recent years due in part to a weak judiciary and instability in ownership rights aggravated by the Yukos affair, according to Standard and Poor’s.

An OECD/World Bank report released in 2002 set out 40 recommendations for improving corporate governance in Russia. Of those, “no progress was observed on 17, little progress on 14, some progress on eight and major progress on only one,” Standard and Poor’s said. (Paltry progress in Russian corporate governance, Business Day Newsletters, 11/11/04)

Sarbanes-Oxley Impact

The annual review of board practices by Korn/Ferry finds Sarbanes has had a significant impact. Two years ago, only 41% of American firms said they regularly held meetings of directors without their CEO present; this year the figure was 93%. Yet, progress has been slow in other areas:

  • Separate CEO/Chair. 14% in 2002; 23% in 2004.
  • Staggered Boards. 63% in 2001; 60% in 2003.

According to the Economist, “Anyone who expected the scandals of 2001 to bring about rapid change in the balance of power between managers and owners was, at best, naive.” (Staggering: Things are slow to change in America’s boardrooms, 11/11/04)

Dividing Roles Pays

Merrill Lynch’s Richard Bernstein examined the returns of the 100 largest stocks in the S&P 500 based on market capitalization from 1994 through the second quarter of this year. The portfolio was rebalanced every quarter over the decade. Companies that split the two top executive jobs made up about a fifth of the sample. Those a “split” strategy had average returns of 22% vs 18% for stocks with a single chairman and CEO. The strategy paid off even more for tech stocks. (Outperform with split leadership, The Record, 10/25/04)

During the 2004 proxy season, investors submitted 40 independent chair resolutions, according to ISS data. While no resolution received a majority vote, those proposals received at least 35% of the vote at Allergan Inc., J.P. Morgan Chase & Co., Kroger Co., Louisiana Pacific Corp., PG&E Corp., Sempra Energy, United Technologies Corp. and Verizon Communications Inc. Look for more resolutions in the upcoming proxy season to split roles. (Independent Board Chairs Remain a “Priority,” ISS Friday Report, 10/11/04)

While many CEOs worry that giving up the chairmanship will limit their power, Jack Creighton, currently vice chairman of Unocal, believes that the separation of the two roles offers chief executives tangible advantages: time, valuable advice, and freedom from the need to run meetings, to name just a few. (Splitting chairs: Should CEOs give up the chairman’s role?, McKinsey Quarterly, 11/11/04) How to separate the roles of chairman and CEO

Majority Rules

During the recent International Corporate Governance Networkconference Delaware Vice Chancellor Stephen Lamb recently told institutional investors that Delaware law allows shareholders to enact bylaws requiring majority votes in director elections.

During the 2004 proxy season, shareholders introduced resolutions calling for affirmative majority elections at ChevronTexaco and Bristol-Myers Squibb. ISS opposed the measures, in part, because they could “diminish the likelihood of a successful open access campaign by providing for an increased vote requirement in the election of directors.

With Bush’s reelection and the likelihood that Donaldson will be leaving the SEC, many view the majority vote approach as a possible compromise to open access. The primary proponent of majority voting is Joseph Grundfest, a Stanford law professor and former SEC commissioner. In acomment letter to the SEC, he urged majority voting as an alternative to the proxy access proposal.

Ann Yerger, deputy director of the Council of Institutional Investors, told The Friday Report, “Access reform should be supplemented, but not replaced.” While majority voting would allow investors “to get rid of directors they are dissatisfied with,” it does not alleviate the significant cost and difficulties that investors now face in trying to promote their own directors though a proxy contest.

Richard Ferlauto, director of investment policy at AFSCME, said his pension fund doesn’t plan to introduce any majority-voting resolutions as it files director-nomination proposals at dozens of companies. “We think it is very important that shareholders have the right to nominate directors,” he told The Friday Report. (Majority Elections Proposal Gains Renewed Interest, ISS Friday Report)

We, at CorpGov.Net, believe the SEC’s open access rule is already so compromised that enactment would represent only minor progress. However, it would be a step in the right direction. We should not be sidelined by the majority vote issue, which can be taken up individually at each company and requires no rule change. Sure, Watchdogs Fear Red-State Rollback, but we won’t be going to sleep, just strategizing for the next round. If we have to wait four more years, maybe the changes will be that much greater when they come.

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Shamrock Governance Fund LP

Shamrock Holdings Inc., which manages investments for Roy Disney’s family, set up a new corporate governance fund, according to news reports and documents filed with the SEC.

The new fund, based at Roy Disney’s office in Burbank, Calif., filed with the SEC on Oct. 21 under the name Shamrock Governance Fund LP. The filing described the fund as a private partnership “formed to make equity and equity-related investments in the U.S.” The fund said it hopes to attract as much as $1.25 billion and has received $220 million from five investors so far. It is expected the fund will invest in troubled companies and will try to boost performance by pushing for improved management and board oversight. (Roy Disney builds fund on Eisner fight, Bloomberg News, 11/11/04)

CalSTRS Says No to Torture

California’s Controller Steve Westly, a CalSTRS trustee, called on the giant pension fund to ban investing in companies that suborn torture or hide their employees’ role in it. The measure was adopted and sent a clear signal to defense contractor CACI International Inc. A U.S. Army report in August found that three CACI employees working as prison interrogators were involved in prisoner abuses at Abu Ghraib prison. (CalSTRS takes anti-torture stand, Sacramento Bee, 11/5/04)

Bloated CEO Pay

California’s Treasurer Phil Angelides warned four U.S. companies, “It’s time to stop the big egregious payouts to executives.” “Too often we see executives pulling down big pay packages while their (company) stock is going down.” Angelides, a likely candidate for governor in 2006, its on the boards of both CalPERS and CalSTRS, which have combined assets of $286 billion. Together, the funds own about 1% of outstanding shares in four targeted companies:

  • UnitedGlobalCom Inc., a Denver broadcasting and cable television company with extensive overseas operations. Last year, the top five executives received $42.5 million in compensation and 89% of the company’s stock options. The company’s stock is down 11.9% over the past five years.
  • UnumProvident of Chattanooga, Tenn., paid $28.4 million and issued 83% of options to executives. The stock is down nearly 70%.
  • AES Corp., a utility based in Arlington, Va. It paid $9.7 million to top executives and issued 62% of equity options to them. Share prices are off 60.2%.
  • Omnicare Inc., a pharmaceutical supplier based in Covington, Ky., which paid $42.8 million to executives and gave them 59% of options. While the stock has risen 19% in the past five years, it has trailed competitors by 52%.

As we have reported before, executive pay is likely to be among the biggest issues during the coming proxy season. (Angelides warns 4 firms to curb CEO pay, Sacramento Bee, 11/10/04)

“Independent directors are the cornerstones of corporate governance. But excessive remunerations paid to them has made a mockery of their independence. An analysis of 2004 compensation data showed independent directors of top 200 companies are being paid £97000 for barely 7 days work in a year. Would you expect such directors to give independent and unbiased advice?” asked Dr Madhav Mehra in his keynote address at the ASEAN Round Table 2004 organised by Singapore’s prestigious Institute of South East Asian Studies. (Keynote address by Dr Madhav Mehra at the ASEAN Round Table 2004)

Benchmarks On The Way

The Open Compliance and Ethics Group, a nonprofit focused on providing universal guidelines for integrated compliance and ethics programs, announced it would administer an extensive benchmarking study regarding corporate governance, compliance, and ethics programs. The study will analyzing over 125 attributes, including organizational structure, processes, program metrics, planning, and budgeting information. Once released, the survey will enable companies to compare their own practices to industry standards. (Comparables Hard To Find, But That May Change, Compliance Week, 11/9/04)

The OCEEG is headed by Scott L. Mitchell and its advisory board includes an impressive list of senior leaders from the corporate and academic communities. The OCEG draft Framework is designed to enhance organizational value by providing universal guidelines for integrated compliance and ethics programs that:

  • enhance the integrity and ethical culture of an organization
  • incorporate effective governance, compliance, risk management, and integrity into all business practices
  • measure effectiveness and performance both internally and against an objective, external benchmark

The guidelines address the full lifecycle of planning, implementing, managing, evaluating, and improving integrated compliance and ethics programs. By establishing guidelines, rather than standards, OCEG provides a tool for each company to use as it sees fit, given its size, scope, structure, industry and other factors that create individualized needs.

National Green Pages

Co-op America’s National Green Pages has just been released. Billed as “America’s premier directory of qualified green companies — companies with demonstrated commitments to social and environmental responsibility,” all companies in the Green Pages have been screened and approved by Co-op America as operating in ways that solve — rather than cause — environmental and social problems. These business adopt principles, policies and practices that improve the quality of life for their customers, employees, communities, and the planet.

This is an important source of information to locate resources such as theSocial Investment Forum, which focuses on national policy issues that strengthen shareholder rights and empower socially responsible investors. The program also serves as a clearinghouse and networking hub on social shareholder advocacy, and works to protect the shareholder resolution process as an effective tool for corporate accountability. The program educates and mobilizes financial professionals and investors around key SRI policy initiatives, offers an active listserv for shareholder and SRI policy advocates, and alerts investors to emerging regulatory issues.

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Launched: Amsterdam Research Centre for Corporate Governance Regulation

ARCCGOR is located within the Department of Political Science at the Vrije Universiteit Amsterdam (Free University Amsterdam). The Research Centre provides a forum for academic interaction between scholars from various institutions and should enhance the visibility of research on corporate governance regulation to the wider public.

Three PhD projects seek to explain the current transformations of corporate governance regulation from a political economy perspective. The 3 projects focus on:

  • The transformation of corporate governance regulation in the European Union.
  • The effects of external factors on the development of corporate governance structures in Central and Eastern Europe.
  • The global regulation of corporate governance standards by private actors and in particular the latter’s role in setting accounting standards.

De-Stagger: Raytheon Says Yes, Boeing Says No

From activist John Chevedden:

At approximately the same time that a Raytheon November 2, 2004 press release announced that Raytheon would take steps to de-stagger its board (one-year term for all directors), Boeing said it would not de-stagger its board in a November 1, 2004 letter.

The Boeing announcement followed 4 majority shareholder votes supporting this topic.

Year Rate of Support (based on yes and no votes cast)
1999 51%
2002 50.5%
2003 56%
2004 59%

The Council of Institutional investors recommends adoption of any shareholder proposal which wins but one majority shareholder vote. Boeing apparently feels that 4-times this threshold is not enough.

World Bank Debunking Myths

Myth 1: Poor countries are necessarily corrupt, while the rich world is a model of integrity. This Myth, in turn is linked to the following related myths:

Myth 1a: For a transaction to be corrupt, it necessarily ought to be illegal.
Myth 1b: The measurement of corruption ought to focus on the extent of bribery, in the public sector.
Myth 1c: Multinationals headquartered in rich OECD countries do not bribe abroad.

In the governance chapter of the just released Global Competitiveness Report of the World Economic Forum, these notions are challenged. Based on a very recent enterprise survey of 8,000 firms in over 100 countries, it addresses a number of governance challenges afflicting not just emerging economies, but wealthier countries as well. It extends the conventional measures of corruption to also measure the prevalence of ‘legal corruption’ (challenging the common focus on merely equating corruption with illegality and/or bribery). On this new measure, some rich countries appear to be rather challenged, rating below the tigers of East Asia, for instance. Further, the current conventional wisdom on practices of multinationals abroad is also challenged.
These findings have implications for defining, measuring, and interpreting corruption indices, as well as for the importance of complementing particular legal initiatives (such as adoptions of international conventions) with concrete follow-through mechanisms.

The new work is entitled “Corruption, Governance and Security: Challenges for the Rich Countries and the World.” Reactions and feedback welcome, as well as suggested additional ‘Myths’ for this series.

CorpGov Job Opening

F&C is looking to recruit a senior corporate governance specialist to join its 13 strong Corporate Governance and SRI team. The successful applicant would be responsible for implementing F&C’s voting and engagement policy with respect to governance and SRI across global holdings. Key priorities would be corporate governance voting, company consultations and reporting to clients. Interested parties should send a CV to [email protected] by 12th November 2004.

F&C is also looking to recruit an Analyst for a corporate governance voting and SRI research role. The ideal candidate will have two years relevant work experience and strong skills in research, analysis and the written word. Fluency in one or more foreign languages is an additional advantage. For a full job description and details of the application procedure, please e-mail [email protected] by 22nd November.

Both positions are based in London.

F&C Asset Management is an institutional asset management company based in London, United Kingdom, with offices in Amsterdam, Boston, Dublin, Edinburgh, Frankfurt, Lisbon and Paris. F&C serves the insurance, pension fund and retail markets and manages approximately £118 billion (as at 31/08/04).

The Best Defense

The best defense may be a good offense. Following recent news reports about directors and officers at large companies having questionable conflicts of interests, Mark Anson, Chief Investment Officer, sent a letter to Fortune 100 CEOs asking for the following specific information:

The name of any entity in which any present director or member of senior management has an economic interest that has done any business with the company;

The nature of the business relationship; and

Any policies or procedures that the company has in place governing these transactions.

Conflicts of interest can affect decision making and threaten shareowners interests and the long-term viability of public corporations,” said Anson. “Corporate directors and senior management have a duty of loyalty to the corporations they serve. Personal economic interests of a director or senior management should not influence in any way their corporate decisions.”

Donaldson’s Legacy

SEC Chairman William H. Donaldson has been a true reformer. He took the reigns of a demoralized agency in February 2003, after the well-publicized resignation of Harvey Pitt amid political controversy. Under his leadership, the SEC has hired hundreds of new accountants and attorneys, with more still being added.

Donaldson’s legacy to date includes four dozen rules on issues ranging from mutual fund governance and disclosure to requiring hedge funds to open their books to the SEC. Now that Bush has been reelected, the question remains, will he finish the job?

His most far-reaching proposal clearly was the Security Holder Director Nominations, S7-19-03, which the Business Roundtable, the U.S. Chamber of Commerce, and the administration oppose and just about all investors support. On 11/8/04 Donaldson will give a speech entitled “The New Imperative for Good Governance” at the CEO Track and CEO Summit. Will shareholder access to the corporate proxy for the purpose of nominating directors still be the new imperative…or will it be a quick resignation? One simple vote could finally move the rights of shareholders forward on this most important issue, originally raised by the SEC in 1942.

According to a report in the Washington Post,

Among the arguments for quick action is the makeup of the SEC itself. The term of Democrat Harvey J. Goldschmid, one of the strongest voices for shareholder reform at the SEC, expired months ago. Officials at Columbia University, where he has long taught, have said they expect him back in the classroom no later than August 2005.

Friends say it is unlikely that Goldschmid would agree to forfeit his tenured position at the law school to remain at the SEC past that date, unless he were to become the agency’s chairman — which is no longer an option with Sen. John F. Kerry’s presidential election loss. Presidents traditionally appoint a chairman from their own party.

“It’s absolutely critical for us to get it done before [Goldschmid] leaves, because he’s been the voice of reason,” said Patricia K. Macht, a spokeswoman for the California Public Employees’ Retirement System, which supports the director-nomination proposal. “I couldn’t think of any rational reason why this issue should be strung out for another 12 months, or even another nine months.” (Election Puts Time Crunch on SEC, 11/4/04)

Speculation is rising; see, for example, Will There Be a Shift at the SEC?(Los Angeles Times, 11/4/04) The consensus is that “Bush’s reelection and the prospect of a more business-friendly successor to Donaldson suggest a drift back to the SEC’s pre-Enron agenda, with a focus on less-controversial reforms, such as streamlining disclosure requirements.”

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New Proxy Service: Backbone?

PROXY Governance, a wholly-owned subsidiary of FOLIOfn, says it will be fully operational by 1/1/05, for the 2005 proxy season. Initially, it will provide proxy recommendations and voting services for approximately 700 companies, including all the S&P 500 and all publicly-traded companies in the Fortune 500, accounting for more than 85% of total U.S. equity market capitalization. For the 2006 season, PROXY Governance will expand its coverage to include all companies in the Russell 3000 Index.

Instead of reviewing proxies and recommending votes on an issue-by-issue basis (one-size-fits-all), PROXY Governance will conduct its analysis and provide recommendations on an “issue-by-company” basis. It will view proxy issues in the context of company-specific factors, taking into account various factors, such as an individual company’s financial performance relative to its industry, its business environment, the strength of its management and corporate strategy, and the quality of its corporate governance, among other factors. PROXY Governance believes this approach is most effective in supporting the growth of corporate value, which is the ultimate basis for shareholder wealth.

Another unusual feature is that PROXY Governance is structured to “ensure that its policies and voting recommendations are free from all conflict.” The firm’s policy and analysis staff is “responsible to” PROXY Governance’s independent Policy Council, made up of prominent individuals from outside the company with extensive experience in corporate governance. This accountability is designed to ensure that staff support the mission of building long-term shareholder value. The Policy Council also serves as an appeals panel with the authority to hear appeals from companies and other issue proponents who wish to question PROXY Governance’s recommendations. The Policy Council can recommend reversal of a given proxy recommendation if it believes the recommendation is not in the best interests of increasing long-term shareholder value.

We, at CorpGov.Net, believe PROXY Governance holds great potential. Will it be realized? Much will depend on the independent Policy Council composed of the following:

  • Dennis R. Beresford, a professor of accounting at the University of Georgia. From January 1987 through June 1997, he was Chairman of the Financial Accounting Standards Board.
  • Scott A. Fenn, former President and CEO of the Investor Responsibility Research Center.
  • James K. Glassman, resident fellow at the American Enterprise Institute, recently launched Investors Action, which aims represent investor interests in the public-policy arena.
  • Joseph Hinsey, IV is a professor emeritus at Harvard. He was Consultant to the American Law Institute’s Corporate Governance Project — a fifteen-year undertaking that culminated in the 1993 publication of a two-volume work titled Principles of Corporate Governance.
  • Robert E. Litan is Vice President for Research and Policy of the Kauffman Foundation, and Senior Fellow, Economic Studies, of The Brookings Institution.
  • Erik R. Sirri is a professor of finance at Babson College. He was previously the Chief Economist of the U.S. Securities and Exchange Commission.
  • William C. Steere, Jr. is Chairman of the Board, Emeritus, of Pfizer, Inc. He has been a member of the Pfizer, Inc. Board of Directors since 1987.

According to a report in Pensions&Investments, a bulk subscription for members of the Business Roundtable (BRT) enabled the firm to become operational a year before previously expected. Although PROXY Governance has structured itself to avoid conflicts of interest, a representative of ISS points out the initial funding from the BRT could be considered just such a conflict, since the organizations 160 CEO members are by invitation only. According to Gregory P. Taxin, CEO of Glass Lewis, although ISS has conflicts of interest (by selling services to corporations), those at PROXY Governance “may top them by selling to CEOs. They are financing his business. They paid for a service before there was a product, before there was a staff or anything, and call that buying. I’d call it investing.” “If the investor backers and customers are CEOs, it will be difficult to provide objective advice to shareholders on how to negotiate with CEOs. BRT acknowledges buying the subscriptions but denies any ownership or creditor interest. (Ex-SEC commissioner’s firm joins proxy-voting service fray, 11/1/04)

Early dependence on the BRT may, indeed, lead PROXY Governance to be reluctant to speak out. I interviewed Mr. Ron Kuykendall, Vice President of Corporate Communications. Unlike ISS, whose representatives have called shareholder access to the proxy (to nominate directors) the Holy Grail, PROXY Governance has no plans to take a position on the issue. The BRT is one of the proposal most ardent opponents. We hope PROXY Governance will provide leadership in this area and others, rather than simply providing cover for mutual funds and investment advisors who must now disclose and justify their votes. We hope they will be both profitable and an important addition to the dialogue on how to achieve good governance and better investment returns.

What Directors Think

Corporate Board Member, with PricewaterhouseCoopers, released their third annual “What Directors Think” study with 1,279 directors of public companies sharing their thoughts on pressing boardroom issues. A few of the highlights:

  • As boards’ time demands continue to increase, the unofficial title of “professional director” in which individuals sit on six or more boards is quickly fading. In 2003, only 33% of CEOs and 16% of outside directors were limited to additional board seats, compared to 43% and 29%, respectively, in the 2004 survey findings. The survey asked if there should be limits on the number of outside boards on which directors could serve; 71% said yes.
  • Board evaluations are becoming more commonplace. In the 2004 survey, 73% of respondents said their boards were formally evaluated, compared to 50% in 2003 and only 33% in 2002. In addition, 35% of respondents said their boards evaluate individual directors on a regular basis, compared to only 23% that did so in 2002.
  • Even with Section 404 looming, confidence is increasing – 82% of directors believe their company is prepared to implement Section 404 on internal control reporting. However, only 50% of directors surveyed think Section 404 internal control reporting requirements will make a difference in the quality of their company’s financial statements; and less than half (44%) think Section 302 certification of financial statements by the CEO and CFO will make a difference.
  • More than three-fourths (77%) of directors surveyed think the Sarbanes-Oxley Act should be revisited by Congress to correct some of the unintended consequences.
  • The average director spends 19 hours per month on board matters, up from 14.1 in 2002.

In addition to survey results, the issue also includes dozens, perhaps hundreds, of comments on crucial issues of the day. For example, regarding the open access proposal from the SEC, D. Pike Aloian, Managing Director of Rothschild Realty, says “Very few people I know, myself included, would want to stand for election to a board if there is a chance they would not be elected….market forces are suggicient to encourage boards to respond appropriately to their shareholders….”  Timely issues and information from Corporate Board Member.

Plan Sponsors Wary of Conflicts of Interest

According to a survey by Plansponsor, more than 85% of plan sponsors want advisers to be free of conflicts when they recommend which asset managers, including mutual-fund companies, should run the retirement plans’ money. The other 15% say some conflicts are acceptable, as long as they are disclosed.

Good Times for Corporate Tax Cheats

The IRS is conducting fewer corporate audits this year and recommending that audited companies pay less in additional taxes, according to IRS data examined by Syracuse University’s Transactional Records Access Clearinghouse (TRAC).

Despite public statements by IRS Commissioner Mark W. Everson that the agency would get tougher on corporate tax cheats, the pace of corporate audits is running substantially below the record-low levels registered in fiscal year 2003.

TRAC compared data for fiscal 2003 with the annual rate for the first six months of fiscal 2004 (ending March 31 of this year). It found that this year, the IRS was conducting 26% fewer audits and spending 30% fewer hours examining corporate tax returns. Not surprisingly, the additional taxes recommended as a result of those audits are 36% lower this year than last — a total of more than $4.3 billion less for the first half of fiscal 2004.

Smaller corporations, with up to $10 million in assets, are being treated even more leniently by the IRS. The number of small-company audits is down 45% this year — though the time for each of these audits has increased 17%.

The IRS Oversight Board — an independent body established by Congress to maintain watch over the policies and practices of the agency — said flatly in its fourth annual report that the decline in enforcement programs aimed at business was a “serious and ongoing problem that threatens the very integrity of our tax administration.”

Another Wild Proxy Season? Forecast for 2005

When: Wednesday, November 3, 2004, 4:00 – 5:15 pm, eastern time
Record levels of “withheld” votes against directors. Lots of majority votes on shareholder proposals. More proxy fights than ever before. The 2004 proxy season campaign was the wildest proxy season ever – and the outlook for next year is “more of the same.” This webcast will recap what transpired during the 2004 proxy season – and predict what to expect next year. Join these experts:

  • David Drake, Senior Managing Director, Georgeson Shareholder Communications
  • Pat McGurn, Sr. Vice President and Special Counsel, Institutional Shareholder Services
  • Greg Taxin, Chief Executive Officer, Glass Lewis & Co.

Among the topics of this program are:

  • Hot topics for investors in 2005. What will be the influence of shareholder access?
  • Influence of “just vote no” campaigns. How did shareholders vote on shareholder proposals?
  • How will the new mutual fund disclosure rules impact mutual fund votes?
  • New areas addressed by ISS and Glass Lewis in their 2005 voting guidelines.

How to access the webcast program:  Visit and click the link on the webcast. You need either Real Player or Windows Media to listen to the webcast. An audio archive of the webcast will be posted immediately after the program. A transcript will be posted several days after the webcast. Cost: Free to TheCorporateCounsel.netsubscribers. The cost for non-subscribers is $295. However, if you are not a subscriber and are interested in the program, take advantage of their no-risk trial by sending them an email at [email protected] – or calling 925.685.5111.

We look forward to learning more about

Risk Of Not Disclosing Environmental Risk Rises

Writing in the November 2nd edition of Compliance Week, Karen M. Kroll argues that several events may signal a sea change in the way corporate executives report environmental liabilities in their SEC filings. She mentions the SEC’s new interpretation of “triggering events” that require an 8-K filing, and the FASB’s issuance of guidance concerning FAS 143, as well as the push from institutional investor members of the Investor Network on Climate Risk.

Effective 8/23, the definition of a “triggering event” changed to include several environmental liabilities, such as disposing of idle property that required sanitization. If the cost of the clean up would be material, management would have to issue an 8-K. FASB changed how contingencies are to be accounted for, “if you’ll have to incur costs upon the retirement of a long-lived asset, you have to estimate the cost now and present it on the financial statements”…even if there is no pending regulatory enforcement.

Instrumental in raising the bar has been the Rose Foundation for Communities and the Environment, especially their report “Fooling Investors and Fooling Themselves.” (New Regulations, Compliance Week, Standards Influencing Environmental Disclosures, 11/2/04. Clickhere to subscribe.)

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GRI Guidelines Set Sustainability Reporting Standards

Risk & Opportunity: Best Practice in Non-Financial Reporting,” from SustainAbility, the United Nations Environment Program, finds that only three reports of the Top 50 assess the balance sheet implications of key environmental and social risks, despite this information being increasingly important to analysts, investors, lenders, insurers and re-insurers.

The sixth international review of corporate environmental and sustainability reports is the first in partnership with Standard & Poor’s – and the first to explore the link between credit ratings and the quality of companies’ governance and disclosure of non-financial risks. Over 350 reports were submitted and 50 were selected by an international independent expert committee for a full analysis. The top three overall are Co-operative Financial Services (UK), Novo Nordisk (Denmark) and BP (UK). 47 out of the 50 top reporters are using the Global Reporting Initiative (GRI) Guidelines. (Companies Fail to Identify Key Environmental and Social Risks,, 11/2/04)

Researcher Advocates Director Understudies

Dr. Mark Tregoning’s research, Corporate Governance: Directors’ Characteristics and Performance and Diversity in Australian Boards, covered the 114 of the largest public companies in Australia and suggests boards should look outside traditional venues for new directors, including nonprofit organizations.

The study focused on the relationship between directors and financial performance, changes in board demographics and the level of diversity among directors. He found that 40% of directors were retired CEOs but found no correlation between a retired CEOs previous success and their ability to add value as a director.

Tregoning concluded that there may be a tendency for boards to “window dress,” by appointing “qualified” directors that would be acceptable to the market. “Second, there may also be a tendency for former CEOs not to place alternative views and strategies on the table should the company’s managing director be a peer.” However, contrary to popular opinion about boardrooms being homogenous “old boys’ clubs,” Tregoning found a significant level of variety.

Diversity, however, was no guarantee for maximizing a board’s abilities. The “one size fits all” “best practice” approach of recommending a majority of independent directors could actually hamper a company’s performance. In the end, he advocates that those outside the narrow sectors of accounting, finance and general management not be overlooked. Another suggestion was to establish trainee boards, where potential future directors, such as senior employees, would work with sitting directors in an almost understudy capacity. (Boardrooms need the right mix: study, The Sydney Morning Herald, 11/1/04)

Businesses Can Learn From Government

In their recent article, Running business like government, Bryane Michael and Randy Gross argue that listed companies could learn plenty about transparency and accountability from public sector reformins. In their study of Tempe’s governance, they identified several points which have a bearing on the study of corporate governance:

  • A city council (akin to the board of directors) has resources separate from the city manager (the CEO). While the city manager hires almost all city personnel, the council hires the manager, city attorney, city clerk and judge. Councils have their own administrative aides, so they are capable of getting independent advice. In the hierarchical firm, the CEO often exercises leverage over employees, stakeholders, and board members.
  • The dichotomy between hyper-competitive business and sluggish government is not as true as some commentators portray. Over 80,000 local governments in the US are in competition to attract businesses, financing, and residents. While businesses often operate in a highly competitive environment, many operate in stable niche markets, ‘cash cow’ industries, and in oligopolistic markets.
  • Transparency can work, even in a competitive environment. City council meetings are open to the public, available on the internet, and minutes are made publicly available. Individuals have extensive rights to address the city government. Such access extends to financial transparency, where all public accounts are available online.
  • Stockholders who vote for corporate board members have a few select paragraphs of information. Council members, by contrast, stand in a competitive election, hold a detailed record up for scrutiny, and are generally accessible.
  • The lowest salary for a city employee is approximately $25,000 for a custodian. The highest salary is approximately $150,000 for the city manager – a ratio of 6:1. In the US corporate world, the ratio of highest to lowest paid is closer to 500:1.

New Resource: The Corporate Governance Institute (ICG)

The ICG at the Indiana University’s Kelley School of Business posted their Internet site. The ICG is dedicated to the study, dissemination, and application of best-in-class corporate governance principles. “We at the ICG firmly believe that effective, responsive corporate governance establishes and maintains practices designed to enhance the profitability of the enterprise, increase long-term stakeholder value, reflect the principles of independence, link compensation to performance, and assure transparency in its transactions. Corporate governance, at its best, is a sustainable competitive advantage…While many issues in corporate governance remain controversial, the objective of the ICG’s program is to acquaint participants with their governance options, their implementation, best practices, and their consequences.” So far, the site has minimal substantive content.

EU Convergence

The European Commission has set up a European Corporate Governance Forum to examine best practices in Member States with a view to enhancing the convergence of national corporate governance codes and providing advice to the Commission. The Forum comprises fifteen senior experts from various professional backgrounds (issuers, investors, academics, regulators, auditors, etc.) whose experience and knowledge of corporate governance are widely recognized at European level.

Internal Market Commissioner Frits Bolkestein said: “The more national corporate governance codes converge towards best practice, the easier it will be to restore confidence in capital markets in the wake of the scandals that have shaken trust in some European companies, including traditional “blue chips.” Broad convergence not only strengthens shareholders’ rights and the protection of third parties, such as creditors and employees, it makes it easier for investors to compare investment opportunities. That leads to a more efficient allocation of capital, which matters to everyone because it is the basis for creating growth and jobs. The time is ripe for this initiative, as many Member States are reviewing their own corporate governance codes. The Forum with its distinguished membership, will be well placed to help build consensus on key issues. This work is not a precursor for a European corporate governance code, but it is a drive to raise standards across the board. The Forum will help us achieve this without bulldozing national traditions or forcing anything down anyone’s throat.”

Donald Nordberg, of EDGEvantage, says speeches by the officials were rather general, but from the floor there was a determination to prevent the Sarbanes-Oxley Act from intruding too far into European practice. So far, the wave of concern over corporate governance worldwide has seen soul-searching and box-ticking in the boardroom. Dutch finance minister, Gerrit Zalm, predicted that the spotlight will now shift from directors to shareholders. “I think that we will witness a shift of emphasis in the codes from rules of behaviour for board members to rules of behaviour for shareholders, especially large institutional investors, like pension funds and mutual funds.”

Not, perhaps, a stunningly prescient remark, according to Nordberg, in view of how the problems in the fund management industry have turned the tables on some institutional shareholders. But if this presages regulatory activity in Europe akin to the widening shareholder access to the boardroom or greater transparency of funds towards their beneficial holders, that might be more important. Zalm welcomed the Forum’s mission to promote greater convergence of governance codes around the European Union, though he argued it is still a matter for national governments. (speech)

CEO Pay Continues as Major Issue

Average pay for top American CEOs and board chairmen has soared from $479,000 to $8.1 million in the last quarter century, as measured in annual surveys by Business Week magazine, the only source that goes back that far. The pay of average (non-management) workers over that time, as measured by the U.S. Bureau of Labor Statistics, hasn’t even kept up with inflation.

If average worker pay, which is now $26,899, had risen like CEO pay, it would exceed $184,000. If the minimum wage had risen at the same rate, it would now be almost $45 an hour. A 2002 Harris Poll found that 87% of respondents felt that executives “had gotten rich at the expense of ordinary workers.”

“There’s such a gap between what the CEO makes and the top five people under him. And what about the other employees who are far under that? It demoralizes them,” said Roger Raber, CEO and president of the National Association of Corporate Directors. “There’s a big difference between athletes, movie stars, rock stars and CEOs,” Minow said. “CEOs are the only ones who pick the people who set their pay. The other categories are the ultimate in pay for performance.”

Even the Business Roundtable, an organization of the country’s top 150 companies, said last year that it shares the public perception that “some executives have reaped substantial financial rewards in the face of declining stock prices and staggering losses to employees and stockholders.”

A 2003 survey of some 1,000 directors by Towers Perrin found that at 80% of companies, management was involved in hiring the compensation consultant that would recommend their pay level – an automatic conflict of interest.

The Corporate Library, in its March 2004 analysis, found that 377 of the S&P 500 companies were led by a CEO who was also the board chairman. Most of the other board members, the report found, had a business relationship with the CEO. Yet, by exchange definitions, most directors are now “independent.”

The Catholic Fund is launching at least 10 shareholder challenges a year. Last year, one of their targets was Alcoa Inc., whose chief executive officer, A.J. Belda, they determined had earned $14.6 million in 2002. They proposed the Pittsburgh-based aluminum manufacturer do a 10-year study of how executive and average worker pay at the company has changed. The board of directors voted down the proposal last year and again this year. However, the company did lower the pay for its CEO by some $5 million. We predict many more such proposals next year. (In a generation, gap separating compensation of chiefs, others widens, Milwaukee Journal Sentinel, 10/9/04)

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October 2004

Disney Moves For No-Action

Walt Disney Co. (DIS) has notified the SEC it intends to exclude the shareholder resolution to allow shareholder nominees on thie proxy from its 2005 ballot, arguing the proponents are out of legal bounds, according to a report in WSJ ( Disney Seeks To Thwart Pension-Fund Bid For Vote On Dir., 10/28/04)

“The company respectfully requests the staff of the division of corporation finance of the commission confirm that it will not recommend enforcement action to the commission if the company excludes the proposal from its 2005 proxy materials,” a Wachtell lawyer wrote, in the so-called no-action letter to the division.

In the past, SEC lawyers have shown a willingness to allow such non-binding resolutions, as long as they are precisely drafted to mirror the agency’s original proposal. But according to Disney, the resolution doesn’t precisely follow the SEC’s original rule proposal. For one thing, those who subitted the resolution don’t quite hold 1% of Disney’s shares.

Among other arguments, Disney makes a seemingly hyper-technical point in a footnote, noting that the SEC has been sympathetic to such arguments in the past. In the footnote, Disney notes that the SEC’s rule proposal says shareholders holding 5% for “at least” two years would be eligible to submit a director nomination, but the pension resolution calls for a nomination from shareholders holding 5% for “more than” two years.

“As a result, the proposal by the sponsors would deprive those who hold the requisite number of shares of company common stock for exactly two years to be a nominating shareholder, contrary to the shareholder nomination procedure in the commission’s proposed rules, and as a result, the proposal is properly omitted,” Disney’s lawyer wrote in the footnote.

The footnote cites a decision earlier this year by the staff of the SEC blocking a similar proposal at Qwest Communications International Inc.’s (Q) annual meeting. As submitted to Qwest, the non-binding resolution urged the board to allow investors holding “at least 5%” of the stock to float a nominee in the company’s proxy materials. But the company argued – and the SEC agreed – that, in order to be a fitting ballot resolution, qualified shareholders had to own “greater than 5%” in line with the exact language of its proposed rule.

The four funds — CalPERS, the New York State Common Retirement Fund, AFSCME Pension Funds, and the Illinois State board of Investment — should hold firm on Disney and should widen their net to others as well.

Dissidents Will Change Board Dynamics

The 4th quarter edition of Directors & Boards carries a cutting edge article on evolving boardroom etiquette. James Kristie’s introduction to “Dissidents, and dissent, in the Boardroom” notes the topic of dissident directors takes on heightened focus in the context of the SEC shareholder access proposal. The article provides an edited version of a discussion by nine experts who gathered at the University of Delaware’s John L. Weinberg Center for Corporate Governance where Charles Elson is the Director. What follows are just a few statements that grabbed my attention; there are many more.

Frank Balotti, a prominent attorney, who recently represented a dissident, noted “The dissident was kept out of the decision-making process by the board, which formed a committee consisting of all directors other than the dissident.” Of course, that was where all the work got done. Interestingly, even though his client was basically a eunuch, the company’s stock price dramatically increased because investors didn’t know it and anticipated change.

Stephen Lamb, who serves on the Delaware Court of Chancery, asked if a dissident has to fight to get information, who pays for it? Frank told him the first thing boards do when dissidents join is “change the by-laws to make it so they are no longer mandatorily obligated to indemnify if you have to bring a suit against the company.”

David Ikenberry, a professor at the University of Illinois in Champaign, has researched 350 cases of companies involved in proxy contests. If you had invested a dollar in the average company where dissidents gained control of the board, it would be worth 20 cents 12 months later. Why so poorly? This is probably due to the fact that dissidents are only getting involved in the worst cases.

Ralph Whitworth, of Relational Investors, suggested that “to give control of a board to a dissident would seem to b the most desperate situation – one where the shareholders have thrown up their hands and said, ‘Sure, let’s let these folks give it a try.’” That is much different than turnaround situations he has been involved in as a minority board member. He raised one infrequently used tool; board members have the right to state their dissenting views in the proxy.

Peter Langerman, of New Jersey’s Division of Investment, said that explaining on the record why board votes are split would be another way for dissidents to drive shareholders crazy.

There was also a good discussion around muzzling dissidents with confidentiality agreements – where that is appropriate, and where it isn’t. Attorney Gilchrist Sparks suggests the need for an evolving code of conduct in that area.

Elson summarized, dissident directors “may not be such a bad thing as a way to encourage a sort of non-group-think within the boardroom.” “We’ll have to work our way through it, but it is remarkable that we are having this conversation today with this level of agreement.”

Surely, there will be many lessons along the way, but as Whitworth observed, Sarbanes-Oxley did nothing to change the fact that “incumbents make out the ballot, they nominate the slate, they send out the ballot, you sign it, you send it back to them, they have somebody count it, they tell you how the vote turned out – and, whether you vote for the slate, against the slate, or vote not at all, you get the slate.” The proposed SEC rule would begin to change that and boards will evolve. I’m betting that dissidents will sharpen performance, lead to a longer-term perspective, and broaden the horizons of boards to new dangers and new opportunities.

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AFSCME Resolute

The American Federation of State, County and Municipal Employees (AFSCME) Pension Fund and Connecticut Retirement Plans and Trust Funds have filed an annual meeting proposal aimed at giving shareholders a greater voice in electing directors at Halliburton, according to the WSJ. The proposal is aimed at beginning a process that could ultimately give shareholders the right to nominate up to two new board members on the company’s annual meeting ballot, according to the report. The Halliburton resolution calls upon the company to essentially become subject to a non-binding version of the currently stalled SEC rule proposal.

The resolution follows similar efforts by AFSCME and public pension funds last year at Marsh & McLennan Cos. (MMC) and more recently at Walt Disney Co. (DIS). In the past, the SEC has been willing to allow such non-binding resolutions, as long as they are precisely drafted to mirror the agency’s original proposal. The goal “is to test and promote the use of proxy access as a tool for shareholders to use at companies whose boards we believe have failed,” said Richard Ferlauto, director of pension investment policy of AFSCME. Expect many more similar resolutions. (AFSCME, Conn. Pension Funds File Halliburton Proposal, 10/27/04)

A copy of the shareholder proposal is below.

RESOLVED, that stockholders of Halliburton Company (“Halliburton”) ask
that Halliburton become subject to the stockholder right of access to the
company proxy statement afforded in the SEC’s proposed Rule 14a-11 (the
“Rule”), which would (a) allow a stockholder or group that has held over 5% of
Halliburton’s outstanding common shares for over two years (“Nominating
Stockholder”) to nominate a specified number of candidates (“Nominees”) who
are independent from the Nominating Stockholder and Halliburton for election
to Halliburton’s board of directors and (b) require Halliburton to allow
stockholders to vote for Nominees on Halliburton’s proxy card and to make
certain disclosures regarding Nominees in Halliburton’s proxy statement.
In the case of Halliburton, the Rule would allow a Nominating Stockholder
to nominate two Nominees, because Halliburton’s board currently has 11
members. However, Halliburton’s bylaws set the board size range from eight to
20 directors. In the event that Halliburton’s board is expanded to 20
directors, the Rule would allow nomination of three Nominees.

Currently, the process for nominating and electing directors is a closed
system, with incumbent boards determining whom to nominate and stockholders
ratifying those choices. Although stockholders may use their own proxy
materials to advance director candidacies, the expense and difficulty of doing
so means that such challenges are rare outside of the hostile takeover
The SEC has proposed to provide stockholders with the opportunity to
nominate director candidates using the company proxy statement under certain
circumstances. One circumstance is when holders of a majority of shares
voting approve a stockholder proposal asking that the company provide such
stockholder access. The proponents of this proposal do not own 1% of
Halliburton’s stock, as required under the Rule to trigger access
automatically. Thus, adoption of this proposal would not require Halliburton
to include shareholder-nominated candidates.
We believe that Halliburton’s corporate governance will benefit if
stockholders are empowered to nominate director candidates and that now is an
appropriate time to seek greater board accountability to stockholders.
Halliburton is confronting several serious compliance challenges. Its
Kellogg, Brown and Root subsidiary is facing charges that it overbilled the
Defense Department in Iraq. The Department of Justice and the SEC are
investigating whether payments to a consultant with ties to Nigerian officials
from a Halliburton affiliate were bribes that violated the U.S. Foreign
Corrupt Practices Act; a conviction under the FCPA would cause Halliburton to
be barred from bidding on federal contracts. A grand jury in Houston is
investigating Halliburton’s use of a Cayman Islands subsidiary to do business
in Iran, which U.S. companies are prohibited to do.
In addition to these problems, Halliburton’s financial performance has
been subpar. Halliburton’s stock underperformed both the S&P 500 and an index
of peer group companies over the five-year period ending on December 31, 2003,
according to Halliburton’s 2004 proxy statement. We believe a stockholder-
nominated director would be valuable as Halliburton addresses all of these
We urge stockholders to vote for this proposal.

Global Warming, the New Tobacco

CalPERS, CalSTRS, many pension fund members of the Investor Network on Climate Risk, and others are beginning to screen at least portions of their portfolios for environmental risks, such as global warming. According to WSJ, “this pressure raises the possibility that certain industry segments — coal-burning utilities, for instance — could be viewed as inherently risky because of their exposure to climate-change regulations.” (State Pension Funds Press Firms to Review Climate-Change Risks, 10/28/04)

In July, eight states and other entities sued to require power companies to reduce their emissions of carbon dioxide. Last month California’s Air Resources Control Board passed rules to govern future emissions of carbon dioxide. The Russian parliment voted to ratify the Kyoto Protocol and beginning next year, companies operating in Europe will be suject to new limits.

Is earning money by investings in companies that contribute to making the world less habitable consistent with fiduciary duty? Will “socially responsible” money around the world shift from Exxon Mobil and Chevron-Texaco (the new tobacco) to BP? Why invest in death, even if denied, when there are other options?


The WSJ notes a growing backlash against SEC activism in “Back Off! Businesses Go Toe-to-Toe With SEC,” 10/27/04. As large scale corporate scandals have slowed (with exceptions, such as Marsh & McLennan and Fannie Mae), business associations have grown bolder. Will their activism totally erupt if Bush is reelected?

For the first time in history, the U.S. Chamber of Commerce sued the SEC, alleging it lacks authority to require that 75% of mutual fund board members be independent, as well as having an independent chair. Other upsetting issues:

  • Required registration of hedge-fund advisers
  • Threat of requirement to expense stock options

Of course, the biggest threat of all is the SEC proposal to allow shareholders to place nominees on the corporate proxy. If enacted, the rule could put nonperforming CEOs out of business altogether. That’s why the Chamber and the Roundtable sponsored a coalition to keep shareholders weak, atttempting to create the illusion of shareholder opposition to the rule. Shareholders for Growth collected anti-rule comments and ran newspaper ads opposing the rule but apparently has very few real shareholder members.

Public Citizen, a consumer-advocacy group, released a study outlining a massive lobbying campaign to pressure the Bush administration into killing the proposal or at least watering it down. Forty-nine executives from corporate members of the Roundtable, the Chamber’s board of directors or both, each raised at least $100,000 for the 2000 and 2004 Bush campaigns or the Republican National Committee, and a few raised more than $300,000, according to Public Citizen. Federal disclosure forms show the Roundtable itself spent more than $12.8 million lobbying the federal government, including the White House, in 2003 and the first half of 2004.

The WSJ article ends with “Regardless of whether the Chamber is successful, the collective threats are already having some impact. While Mr. Donaldson moved ahead successfully with his plan to register hedge-fund advisers, the proxy proposal is at a standstill. Although Mr. Donaldson moved away from the original proposal in favor of a modified rule, so far, he has been unable to get consensus from his four fellow commissioners on how to proceed.”

Let’s take another look at that Public Citizen report, Corporate Cronies: How the Bush Administration Has Stalled a Major Corporate Reform and Placed the Interests of Donors over the Nation’s Investors. Highlights include the following:

  • The 2002 corporate crime wave cost investors $7 trillion in market value.
  • In October 2003, the SEC proposed the shareholder access rule.
  • Multiple SEC officials told four separate reporters that the Bush administration dispatched Treasury Secretary John Snow, former chair of the Business Roundtable, to let it be known the White House does not want the rule to proceed.
  • The 205 corporations opposed to the shareholder access rule, members of the Roundtable and Chamber, as well as 43 unaffiliated corporations and their employees contributed $55.5 million to Bush’s campaigns, the Bush-Cheney Inaugural Committee and the RNC during the past three election cycles. Many qualified as qualified as “Rangers,” “Pioneers” or “Super Rangers” rounding up at least another $8.3 million.
  • Many of the corporations opposed to the shareholder access rule epitomize the types of corporate governance problems the rule is designed to address – such as questionable but lucrative financial relationships between top executives and the board of directors, exorbitant CEO pay packages, and a poor record of responding to shareholder concerns. In fact, 46% received a “D” or an “F” grade from the Corporate Library. The report expands greatly on why. This portion will make shareholders want to the check ratings before investing.
  • The report documents millions of dollars in fees paid to lobby against the rule on several fronts.
  • Departing from his earlier position that he would move forward without a unanimous vote, Donaldson now has said the SEC will not issue a final rule until it reaches “meaningful consensus” and that any further action is unlikely before Election Day. However, since Donaldson serves at the pleasure of the President, there is no guarantee that even a compromised rule will move forward if Bush is elected.

From the Executive Summary, “This is a classic case of money and access winning out over what is in the best interest of average citizens.” This is an important report that should be supported. I urge readers to become members of Public Citizen.

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Overgovernanced or Lacking a Turbocharger?

It is tough going when you only have a few clients and the only one going public with its rating is under investigation for accounting problems. That is the circumstances faced by Standard & Poor’s corporate governance service after all the publicity given to its 9 out of 10 rating to Fannie Mae (FNM). “One possible explanation for the cool corporate response thus far is that the service exists amid a blur of rating and consulting services at a time when boards are ‘overgovernanced,’ when they least need it, said Raymond Troubh, who sits on nine boards. “To have a rating done by an outside agency doesn’t make any sense. It’s a waste of money and a waste of time.” ( It’s Slow Going For S&P’s Flagship Governance Service,WSJ, 10/26/04) However, that’s what investors need. Only an outside agency will have the proper objectivity to compare what they find with best industry practices.

Perhaps the more fundamental problem is letting the company disclose their score only if they want to. George Dallas, who manages S&P’s global governance services, says that once Fannie Mae’s accounting treatments are settled, S&P will revisit its rating. If they drop, will Fannie Mae announce its new score?

We encourage S&P to continue in the corporate governance ratings business but they may need to rethink their business model. One place to look would be to the innovative design Mark Latham has developed for shareholders to hire “infomediaries.” See especially his most recent paper on “Turbo Democracy: Voting to Improve Voter Information.” An evaluation of corporate governance by a firm hired by owners will carry much more weight than one hired by the managers and board being evaluated. TheCorporate Monitoring Project clearly has the better model.

Better Analysts

Institutional Investor reports that brokerage firm research departments have experienced an unprecedented upheaval since Spitzer’s $1.4 billion settlement over tainted securities research. “Budgets have been slashed, paychecks chopped, analyst ranks pruned.” Analysts are now younger, move vigorous and more motivated to dig into work. Nearly one in five of the magazine’s 2004 All-America Research Team members is new to the team. “Almost 70 percent of those responding to the supplemental survey sent with the All-America team questionnaire say that sell-side analysts today are more objective and accurate — and less subject to conflicts — than they were before the regulatory crackdown.” (The 2004 All-America Research Team, October 2004)

Two Canadian Trends for Directors

Fairvest’s Corporate Governance Review reports that 34 of the S&P TSX 60 Index companies provided disclosed details of individual director attendance at board meetings. “We can only hope that the more detailed disclosure will eventually be actionable on proxy ballots as more companies adopt individual director elections. The ratio of ballots only allowing voting of a single slate has fallen from 80% in 2002 to 66% in 2003 to 50% today. Another major trend in Canada is the move away from director stock options. Twenty-five companies have officially eliminated them but it appears that only 10 out of the 60 disclosed making grants this year. (Where to Draw the Line? September 2004)

Moskowitz Prize Awarded

A groundbreaking analysis of 52 studies looking at the link between corporate social responsibility and financial performance is the recipient of the Social Investment Forum’s 2004 Moskowitz Prize for outstanding research in the field of socially responsible investing.

Entitled “Corporate Social and Financial Performance: A Meta-Analysis,” the study by
Marc Orlitzky, Frank Schmidt and Sara Rynes scrutinizes more than 50 academic reports and concludes “there is a positive association between corporate social performance and financial performance across industries and across study contexts.” The study authors note that this link “varies (from highly positive to modestly positive) because of contingencies, such as reputation effects, market measures of financial performance, or corporate social performance disclosures.”  The study also found that corporate social performance was a better predictor of financial performance using accounting measures than market-based ones.

“This analysis provides strong evidence of what many people have suspected all along — that corporate social responsibility does indeed have a measurable impact on the financial bottom line,” said Social Investment Forum President Tim Smith. “That a survey of so many studies by so many respected individuals supports this view is a major finding that validates the core thinking of socially responsible investing.”

Retirement Delayed

A new Gallup survey finds more than half (57%) of all investors expect to retire after the age of 62, compared with 47% a year ago, and just 36% in 1998. Nearly all (89%) of non-retired investors expect to do some kind of work after retirement, compared to 56% of currently retired investors who did so immediately after they retired. (Employees Rethinking Retirement: Survey,, 10/19/04)

Pay for Performance? Not

According to a compensation survey conducted by Mellon Financial Corp., while more than one-third of companies review board members’ performance, only 6% tie pay to results. Most companies that evaluate directors’ performance use both peer review and self-evaluation methods. The range of criteria includes overall contribution, business knowledge, industry awareness, committee work contribution, and board participation.

The median “total direct compensation” for directors is $130,120. The typical pay mix is 54% cash, 37% options (using Black-Scholes methodology), and 9% full value shares. (For much more and to read the full survey, see “Few Companies Tie Directors’ Compensation To Performance,” Compliance Week, 10/19/04)

Governance Awards in Kenya

Tainted by the Goldenberg and Euro Bank scandals, which resulted in disappearance of billions of taxpayer’s money, Kenya has not enacted major corporate governance reforms but they are giving out awards for good governance. A joint effort of the Institute of Certified Public Accountants of Kenya (ICPAK), the Capital Markets Authority and Nairobi Stock Exchange aims at promoting excellence in financial reporting, sound corporate governance practices, corporate social responsibility and environmental reporting in the Kenyan corporate sector. It is known as the Financial Reporting (FiRe) Award and this year went to Imperial Bank Ltd.

UAP Insurance Company was second and Brooke Bond (K) Ltd placed third. Kenya Anti-Corruption Commission chief Aaron Ringera who was the chief guest during the award event, said financial reporting should be truthful for “confidence of those who rely on such information to remain steadfast.” Corporate failures in the world, he said, were not as a result of incompetence, but lack of integrity, accountability and transparency. (Firms Honoured for Good Corporate Governance, The Nation, 10/19/04)

CalPERS on Chopping Block

Alarmed by the spiraling cost of public pensions, Assemblyman Keith Richman, R-Granada Hills, plans to propose 401(k)-style retirement plans for public employees in California.

The measure is unlikely to pass the Legislature, which is dominated by Democrats and is sure to be resisted by public employee unions and those favoring high quality public employees.

“Public pensions have been and are a very good deal,” Richman acknowledged. “They’re such a good deal that they’re bankrupting lots of our governmental entities. “By moving to defined-contribution pension plans like private workers (have), governmental agencies can save money, increase their budgeting predictability and not incur any new unfunded liabilities.”

The California Public Employees Retirement System (CalPERS), one of the largest single pools of investor money in the world, manages almost $168 billion in assets and pays out $6 billion in pension benefits every year. But in recent years, the system has been a growing drag on the taxpayers, as it has dipped into the state general fund to make up for investment shortfalls in a weak market. This year, the shortage is $2 billion.

A study by the state Legislative Analyst’s Office as part of its budget analysis found that California’s retirement benefits are far more generous than those of comparable states. A California employee who earned $60,000 in salary and retired at age 65 would receive a pension of $46,500. A comparable retiree in Texas would get less than $41,000, and less than $29,000 in Florida or Illinois. The study recommended the state explore a defined-contribution plan.

Not discussed in newspaper accounts is the fact that many public employees are paid substantially less than their counterparts in the private sectors, especially those with higher skills, such as scientists, engineers, and managers.

Richman intends to introduce a constitutional amendment when the Legislature convenes in December. The plan would be the only option for new public employees, while workers already in the CalPERS system would be given the option to stay or switch. If, as expected, lawmakers refuse to put it on the ballot, he said, he will start a signature-gathering effort to qualify it as an initiative. Richman is eyeing a run for state treasurer in 2006, a position with a seat on the board of CalPERS. (State pension face-off: Assemblyman aims to KO current CalPERS plan, set up 401(k)s, Los Angeles Daily News, 10/17/04)

A better option would be to examine the surge in the number of public safety employees who get a far more generous package, 3% times number of years in service at age 50. Safety employees should be limited to those who must carry a gun and pass stringent physical fitness tests.Another area for savings would be to crack down on the number of employees retiring on fraudulent disabilities, Many of whom then take other jobs.

CalPERS Fails to Disclose

CalPERS fails disclose the management and advisory fees it pays to private equity and hedge funds. They’re being sued by the California First Amendment Coalition (a group of news organizations). Two years ago, CalPERS resisted a similar call for transparency but later settled and now discloses performance results for its 300-plus private equity funds quarterly.

The Wall Street Journal editorializes that what’s been revealed seem to involve cronyism:

  • Yucaipa Companies. Head, Ron Burkle, has been a generous political donor to two board members — Willie Brown, and Phil Angelides. Another board member, Sidney Abrams, who has done actuarial consulting for Mr. Burkle. Returns have been negative.
  • Grove Street Advisors. Fund managers have contributed to Angelides and California Comptroller Steve Westly. Returns are negative.
  • Premier Pacific Vineyards. Co-chief executive, Richard Wollack, an Angelides supporter. Investments are under water.
  • Progress Investment Management, a Willie Brown supporter with negative returns.
  • CIM California Urban Real Estate Fund. Kurato Shimada, a board member, took two years off to work for the marketing firm and lobbied board members to invest $125 million in opposition to staff advice. After pocketing his placement fees, Shimada rejoined the board. WSJ reports that returns have been triple-digit positive.

WSJ argues that, “Perhaps all of these investments only look like conflicts of interest and they are all worthy on their merits…Given that most of these investments have so far been dogs, the question of fees is even more relevant.” (Calpers and Cronyism, WSJ, 10/18/04) CalPERS should follow there own good corporate governance advice and fully disclose. Additionally, we need to close the revolving door and tighten campaign funding laws to discourage what too closely appears as pay to play.

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O’Neil on Bush

Ron Suskind’s The Price Of Loyalty relates former treasury secretary Paul O’Neill’s experience in George W. Bush’s White House. At one meeting, Bush apparently advanced the view that the uncertainty then overshadowing the American economy was due to “SEC overreach.” Is it any wonder the SEC rulemaking to allow shareholders to place director nominees on the proxy continues on hold?

O’Neill presents a picture of the President as one who doesn’t make decisions based on a sound discussion of ideas, doesn’t like his own ideas challenged, and doesn’t let inconvenient facts get in the way of what is politically expedient. According to O’Neill, the White House headed off attempts to tighten up regulations on CEOs following the Enron debacle because “the base was upset.” He isn’t too kind to Dick Chaney either, quoting him as saying “Reagan proved deficits don’t matter.” Can we really afford four more years of the Bush Administration? (Ex-treasurer warns the madness of King George must be stopped, 10/17/04, The Sunday Herald)

Proposal to Test Disney Ballot

CalPERS, the New York State Common Retirement Fund, the American Federation of State, County, and Municipal Employees Pension Funds (AFSCME), and the Illinois State Board of Investment, which own more than 18 million shares of Disney stock, filed a shareholder proposal with the SEC to give shareowners the right to nominate directors at Walt Disney. It calls for a group of shareholders to be able to nominate up to two directors on Disney’s 11-member board and have them included on the company’s proxy. If it receives a majority of votes in 2005, they could nominate the two directors for the 2006 annual meeting.

The shareholder proposal filed at Disney is similar to one put forth by AFSCME and other public pension funds last year at Marsh McLennan, following news of scandals at its Putnam subsidiary. The funds withdrew the proposal after Marsh McLennan nominated Zachory Carter, a former federal prosecutor to its board. (see The Disneyland Report, Four Public Pension Funds File Shareowner Resolution to Name Disney Directors)

A copy of the Disney shareholder proposal follows:

RESOLVED, that shareholders of The Walt Disney Company (“Disney”) ask that Disney become subject to the shareholder right of access to the company proxy statement afforded in the SEC’s proposed Rule 14a-11 (the “Rule”), which would (a) allow a shareholder or group that has held over 5% of Disney’s outstanding common shares for over two years (“Nominating Shareholder”) to nominate up to a specified number of candidates (“Nominees”) who are independent from both the Nominating Shareholder and Disney for election to Disney’s board of directors and (b) require Disney to allow shareholders to vote for Nominees on Disney’s proxy card and to make certain disclosures regarding Nominees in Disney’s proxy statement.

In the case of Disney, the Rule would allow a Nominating Shareholder to nominate up to two Nominees, because Disney’s board currently has 11 members. However, Disney’s bylaws set the board size as a range from nine to 21. In the event that Disney’s board is expanded to 20 or more directors, the Rule would allow nomination of up to three Nominees.


Currently, the process for nominating and electing directors is a closed system, with incumbent boards determining whom to nominate and shareholders ratifying those choices through their proxy ballots. Although shareholders may use their own proxy materials to advance director candidacies, the expense and difficulty of doing so means that such challenges are rare outside the hostile takeover context.

The SEC has proposed to provide shareholders with the opportunity to nominate director candidates to appear in the company proxy statement under certain circumstances. One circumstance is when holders of a majority of shares voting approve a shareholder proposal asking that the company provide such shareholder access. The proponents of this proposal do not own 1% of Disney’s stock. Thus, adoption of this proposal would not automatically lead to the inclusion of candidates nominated by 5% of Disney’s shareholders.

We believe that Disney’s corporate governance will benefit if shareholders are empowered to nominate director candidates, and that now is an appropriate time to move in the direction of greater accountability to shareholders. Last year, holders of 45% of shares withheld their votes from CEO Michael Eisner for his reelection to Disney’s board in a protest against Disney’s unsatisfactory performance and the lack of independent leadership on the part of Disney’s board. Subsequently, the board separated the positions of CEO and Chairman, and more recently, Mr. Eisner announced he would step down from his position as CEO, but not until 2006.

In our opinion, giving shareholders the ability to nominate director candidates on Disney’s proxy statement will make Disney’s board more responsive to shareholder interests. Such responsiveness is especially important now, in the context of a search for Mr. Eisner’s successor. We also believe that allowing shareholders access to Disney’s proxy materials may help strengthen the board’s monitoring ability.

We urge shareholders to vote for this proposal.

It will be interesting to see what happens. Unfortunately, the SEC has interpreted Rule 14a-(8)(i)(8) to exclude proposals, which relate to an election for membership on the Company’s Board of Directors. Even if the SEC finally moves on its Security Holder Director Nominations, S7-19-03rulemaking, the pension funds admit they don’t hold a large enough percentage of the stock to qualify their proposal. Still, the funds are pushing in the right direction. Disney could always wake to the need to listen to its shareholders. Apria adopted changes necessary to allow shareholders to place board nominees on the proxy. As long as shareholders push back, there is hope for increasing corporate accountability.

SEC to Examine Exec Pay Reporting Requirements

The Washington Post reports that the SEC is considering “new rules that would require greater disclosure — in plain English — of the true costs of retirement packages and other forms of executive compensation.” One change would be to require better disclosure of executive pensions and supplemental executive retirement plans, or SERPs. Currently, they aren’t required to disclose the yearly increase in value of such plans in compensation tables.

In addition, although firms generally calculate pension plan payments based on an executive’s years of service, they are often given credit for many extra years…something shareholders can’t check without wading through fine print or reading executive biographies to determine how long an individual actually has worked at a company.

The Post points out that firms are not required to include pay to former executives in compensation tables and that retirement payouts generally are unrelated to performance measures. Even if a company collapses because of decisions the retired executive put into place. Another area needing reform is reporting the real value of non-cash perks to current and former executives, such as the use of corporate jets, limousines and apartments.

Paul Hodgson, a senior researcher at the Corporate Library, says boards are asking for the total value of compensation. “For those boards that have requested and been given the total cost, most have had what is being called a ‘holy cow moment,’ as in ‘Holy cow, we’re paying them that much?’ ” Hodgson said.

“Meanwhile, even as shareholder groups embrace the possibility of stronger compensation disclosure, many say the most significant change to address the pay issue is one the SEC is already struggling with: giving shareholders a stronger hand in selecting corporate directors.” No regulatory reform can do more than giving shareholders the power to be their own watchdogs by holding directors accountable. (Donaldson Expects Rule Changes on Executive Pay, 10/12/04)

Council Updates Exec Compensation Policy

The Council Council of Institutional Investors updated its policy on executive pay on October 1, 2004. “The compensation philosophy should be clearly disclosed to shareowners in annual proxy statements…Best practices would include shareowner approval of the compensation philosophy…The compensation committee should establish performance measures for executive compensation that are agreed to ahead of time and publicly disclosed.” The compensation guidance is the most modified component of its latest corporate governance policies, which also urges that boards by chaired by independent directors.

The world’s most powerful shareholder watchdog is based in Washington, D.C., representing more than 145 corporate, public and union pension plans with more than $3 trillion in assets. Although its policies are influential, they are not binding on members. Under the new guidelines (see bottom of page), companies would provide a single table to detail all expected payments to executives under retirement and deferred compensation plans, with a dollar value of any additional perks or benefits payable after retirement, along with a full description of performance measures and benchmarks used to determine annual incentive compensation and disclosure about stock option dilution.

CalPERS, a prominent CII member has already made it known that inflated corporate salaries and proxy access are two of the main headline issues likely to give off most heat during the 2005 proxy season, which are likely to be a focus of the pension fund giant this coming Spring.

CII’s new policy says that if benchmarking is used for executive compensation, peer group companies should be disclosed – and if the peer group is different from that used to compare overall performance, describe the differences between the groups and the rationale for choosing between them. Targets for each compensation element relative to the peer/benchmarking group and year-to-year changes in companies composing peer/benchmark groups should be disclosed. The rationale for paying salaries above median of the peer group should also be addressed.

Compensation committees should also set “appropriate limits on the size of long-term incentive awards,” and generally steer clear of so called “mega-awards,” as “they may result in rewards that are disproportionate to performance” the Council urged.

According to the Wall Street Journal, the Council’s new polices are “being released at a time of growing concern by investors about excessive executive payouts and whether companies are being as transparent as they could be. In one recent example, public pension fund investors slammed Anthem Inc.’s (ATH) acquisition of Wellpoint Health Networks Inc. (WLP) because of what they said were vague disclosures about excessive golden parachutes. At the same time regulators are taking a closer look at compensation disclosures. The Securities and Exchange Commission is considering updating its own rules.”

Broc Romanek, editor of was quoted, saying the Council has “done a tremendous job advancing the ball regarding responsible compensation practices,” perhaps because, as he reports on his own blog, “it includes many elements that we recommended in our 12 steps to responsible compensation practices.” The former SEC staffer said there’s an increased interest in “practical” advice, noting that more than 1,000 have signed up for an upcoming executive compensation conference to be broadcast on the site. Their October 20th Conference will also be available via video/audio webcast. (CII Updates Executive Compensation Policy, Blog, 10/7/04) (Institutional Investors Seek More Executive Pay Disclosure, Wall Street Journal,10/8/04)

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China: Booming but Risky

The Economist reports that venture capitalists, who invest in very young companies, and private-equity firms, which specialise in buy-outs, are catching on in China. While total foreign direct investment grew only slightly, private-equity inflows doubled. Several partnership have done well but how do they get their money out? Stockmarket listings are generally limited to state firms. Investors typically have to hold their shares for for years. The realities of business in China continue to be corruption, poor corporate governance, a weak rule of law, and plain old fraud.

However, ChinaEquity, set up by Chao Wang, a former Morgan Stanley banker, and China Enterprise Capital, run by Peter Jeva Au, who made a fortune from his stake in Harbin Brewery, are helping to evolve a local industry. (Milking it, 10/7/04) For an analysis of possible reforms, seeCorporate Governance in China: Then and Now by Cindy A. Schipani and Liu Junhai (part 2).

UK Women Blocked

A new survey by Deloitte shows that despite 70 per cent of FTSE 350 companies making changes to their board composition in the past 12 months, there has been no increase in the number of female board members.

The report shows that just 3 per cent of executive directors and 8 per cent of non-executive directors are women. (Gender two steps behind as corporate governance occupies boardrooms, Personnel Today, 10/6/04)

Shareholder Rights Index

Later this year, fund managers and pension plan sponsors will be able to plow their money into a custom-designed version of the Standard & Poor’s 500, dubbed the Shareholder Rights Index. The creators of the index reckon that by leaning toward shareholder-friendly companies and lightening up on governance laggards, the returns should be better. The firm developed the index in collaboration with Harvard law and economics professor Lucian Bebchuk, director of the law school’s corporate governance program. (Investors Can Make Governance Bet on S&P 500-Based Index, AP News, 10/07/04)

NAIC Under Investigation

The National Association of Investors Corp. (NAIC) is based outside Detroit and was founded 53 years ago with a mission: teaching investment clubs how to find companies with good management and good corporate governance. But do the leaders of the NAIC practice what they preach? Richard Holthaus, NAIC president and CEO, drives a Cadillac Escalade leased by the NAIC, which also pays his country club dues. His total compensation package is worth $404,367.54 a year, the same as the chief executive of the American Red Cross, an organization with about 200 times the NAIC’s budget. In fact, all seven of NAIC’s officers get cars and private club memberships.

According to CNBC, At least half the NAIC board members, or their friends, have some sort of outside relationship with NAIC. Board Secretary Lewis Rockwell, an attorney, collected $64,310.77 in legal fees from the NAIC last year on top of $209,089.69 the association paid to his law firm. CEO Holthaus came to the NAIC from the public relations firm Fleishman Hillard. Since he arrived, the fees paid to Fleishman Hillard have more than doubled to nearly $200,000 in fiscal 2004.

Ralph Seger joined the board in 1954 and wrote a column in the association’s magazine, started a stock advisory service that members could buy, and began demanding information about where the NAIC’s money was going and why. “I asked questions,” he says. “I took my fiduciary responsibilities very seriously.” In March, he became the only board member in the group’s history to be removed.

Finance Committee Chairman Chuck Grassley is investigating “self-dealing, buying expensive cars, paying outrageously high salaries.” (Did an advocate for investors turn on them?, MSN Money, 10/8/04) I certainly hope the organization can be cleaned up. If so, perhaps it could take on the role of “killer bees,” once taken by United Shareholders Association. By coordinating shareholder action they could enhance shareholder value. (A Requiem for the USA (United Shareholders Association): Is Small Shareholder Monitoring Effective?)

Pay in Question

Average pay for top American CEOs and board chairmen has soared from $479,000 to $8.1 million in the last quarter century, as measured in annual surveys by Business Week magazine, the only source that goes back that far. The pay of average (non-management) workers over that time, as measured by the U.S. Bureau of Labor Statistics, hasn’t even kept up with inflation. If average worker pay, which is now $26,899, had risen like CEO pay, it would exceed $184,000. If the minimum wage had risen at the same rate, it would now be almost $45 an hour.

In just one generation, the United States has gone through a virtual revolution in what is considered fair pay for top executives vs. workers. Jim Collins, author of “Good to Great,” found no correlation between levels of executive compensation and company performance in a study of 1,435 corporations.

Even the Business Roundtable, an organization of the country’s top 150 companies, said last year that it shares the public perception that “some executives have reaped substantial financial rewards in the face of declining stock prices and staggering losses to employees and stockholders.” (In a generation, gap separating compensation of chiefs, others widens, Milwaukee Journal Sentinel, 10/9/04)

Goldschmid Condems Stall

SEC Commissioner Harvey J. Goldschmid says a lack of action on theSecurity Holder Director Nominations, S7-19-03 rulemaking has “made it a safer world for a small minority of lazy, inefficient, grossly overpaid, and wrongheaded CEOs.” “The worst instincts of the CEO community have triumphed.” Goldschmid told an audience at anInvestor Responsibility Research Center meeting on corporate governance that he remains “cautiously optimistic” that the commission can reach an agreement that would maintain the “integrity” of the original plan. (Commissioner Condemns SEC Inaction, Washington Post, 10/9/04)

93% Of IT Execs Unaware Of SOX Responsibilities

Chief information officers and other senior information technology executives surveyed are unaware of their IT control-assessment responsibilities under Section 404 of Sarbanes-Oxley Act, according to software developer Obian Inc. John Logan, president of Obian, said the survey of 286 IT executives “incorrectly think that by merely identifying and assessing the risk and control activities of their corporation’s financial reporting systems—just as they did to meet the Dec. 31, 2003, deadline for Sec. 302 compliance—that they’ll meet the requirements of Sec. 404.”

Logan blamed the lack of awareness to the “vast confusion” regarding what is required. While guidelines have been published, auditing firms are still interpreting them and building their own suite of even more detailed IT control tests, he said. Companies would be foolish, however, to use this uncertainty as an excuse for inaction. (Compliance Reporter, 10/5/04)

Spitzer Stumps for Kerry

Eliot Spitzer, headed to Florida to stump for presidential candidate John Kerry. Florida is a popular destination for New York retirees and Spitzer is especially popular with small investors because of his investigations of Wall Street corruption and mutual fund malfeasance.

“The irony is that the Bush administration claims to be the force for the ‘ownership society’ and yet they are the ones who failed repeatedly to respond to the breakdown in ethics and integrity in the marketplace,” Spitzer told the AP. “They are the ones who repeatedly turned a blind eye when there were issues screaming out for attention,” the attorney general added. Spitzer has been mentioned as a possible U.S. attorney general in a Kerry administration. (Spitzer heads to Fla. to stump for Kerry,, 10/7/04)

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Business Professors Knock Bush

George Bush, the first president with an MBA, was sent an open letter 10/4/04 by 169 concerned business-school professors saying Bush’s economic policies are taking the country in the wrong direction. The academics, including two Nobel laureates, are especially critical of the budget deficit, projected at more than $400 billion.

The idea for the letter began in the faculty offices of Harvard Business School, where Bush earned his diploma in 1975. The architects were Harvard professors of a required, first-year MBA course called Business, Government and the International Economy, which teaches the ins and outs of responsible fiscal and monetary policies and the ways in which politicians’ decisions can impact society. (For Bush, a Blast from the Ivory Tower,, 10/8/04)

Fannie Mae Keeps Reform in Spotlight

The unfolding government investigation into Fannie Mae’s accounting may have destroyed the hopes some business leaders had of watering down the corporate reforms. CEOs had complained about the cost in money and time of complying with recent reforms. However, continuing scandals may make a rollback more difficult, even if President Bush is reelected.

Fannie Mae, one of the largest financial institutions in the United States, faces investigations by the SEC and U.S. Justice Department, as well as class-action shareholder lawsuits. “The papers are full of reasons for continuing concern. It does not seem to go away, does it?” said Richard Koppes, an attorney with Jones Day in San Francisco and an elder statesman in corporate governance circles.

Joining Fannie Mae under a cloud in recent weeks are American International Group Inc., Citigroup, Tommy Hilfiger Corp., Cardinal Health Inc. and Krispy Kreme Doughnuts Inc., among others. “Any time you see allegations at large-cap companies, it only spurs on the drive for general governance reform, and makes it more difficult to argue that the system as it currently stands works correctly,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Sensing the rising discontent over the summer, one of the country’s top regulators went on the offensive at a gathering of corporate secretaries. “Should we really forego these benefits?” asked Alan Beller, SEC’s director of corporate finance. “And does anyone really believe that corporate America would have obtained and provided these benefits without the legislative and regulatory reaction of 2003 and 2004? I, for one, do not.” (Fresh Scandals Could Thwart Reform Backlash,, 10/2/04)

Corporate America as Defendant: What Happened?

That was the title of a talk by William McLucas, former director of enforcement for the U.S. Securities and Exchange Commission and Penn State alumnus. “The question in the minds of most people is ‘What’s going on in the marketplace? Is the whole system broke, is it corrupt, or is it both?’ … One thing I think is true is that we didn’t go to bed three years ago with a marketplace in corporate America that was transparent, well-run and ethical and perfectly fine and then wake up the next morning with a system that was broken and corrupt and flawed and populated by greedy people. These problems really evolved over a period of time.” (William McLucas at the Forum, the Faculty/Staff Club at the University Park campus).

“These were not bad people,” McLucas said. “They looked in the mirror and saw themselves as creative, innovative, bright … and, at some point, entitled.” He offered no hope of a permanent end to corporate scandals, though he said the Sarbanes-Oxley Act was the most dramatic piece of securities legislation since 1934. “These problems did not evolve overnight,” he said, and aren’t likely to go away anytime soon.

McLucas, who led investigations at Enron Corp. and WorldCom Inc., now defends companies against SEC actions. He is also often hired to advise companies on how they can improve ethical standards. (The Friday Report, ISS, 10/08/04)

ISS Makes Data Available

Institutional Shareholder Services, the world leader in corporate governance research and data provides academics the Corporate Governance Quotient (CGQ) database for U.S. and International companies. Academics worldwide are studying corporate governance of corporations to understand its importance and relationship with financial measures. Corporate Governance research is the fastest growing topic being researched today.

Board Service More Attractive

Half of the corporate directors who attended a program offered by Columbia Business School Executive Education say that serving on a corporate board is more attractive now, as compared to five years ago. Among the reasons cited are greater responsibilities and challenges plus an enhanced sense of professionalism, according to Ethan Hanabury, Associate Dean of Executive Education at Columbia Business School. Most directors say 8-12 is the ideal board size. (more) Also reported in Sept./Oct. edition of The Corporate Board.

The next “Accounting Essentials for Corporate Directors” course will be held October 18-20, 2004 in New York City. For further program details, please contact Ms. Liz Schultz , 212 – 854 – 7613.

Asia Watch

The Asian Corporate Governance Association recently released the latest version of “CG Watch,” their annual survey of corporate governance in Asia. Titled “Spreading the word: Changing rules in Asia,” the report covers corporate governance standards in 10 Asian markets and 450 large listed companies.

The correlation between good corporate governance and share-price outperformance continues to hold for the medium term (three to five years), but is not particularly strong over the short term (12 months) for a variety of cyclical and sectoral factors.

The top three markets this year were, once again, Singapore, Hong Kong and India. The top ten companies in Asia scored an average of 81%. They were: Infosys (India), CLP Holdings (Hong Kong), Esprit (Hong Kong), HSBC (Hong Kong), Wipro (India), Public Bank (Malaysia), Kookmin Bank (Korea), KT Corp (Korea), TSMC (Taiwan) and Siam Cement (Thailand). The highest score went to Infosys–87%. (ACGA News) Disclosure: James McRitchie, the publisher of CorpGov.Net has investment in Infosys and Wipro.

On October 23, 2004, the Hong Kong Society of Financial Analysts will hold a seminar titled: “Does Investor Relations Add Value?

Amalgamated Bank Wins at Massey Energy

Its shareholder proposal on executive compensation has been adopted by Massey Energy Company. The new policy requires shareholder approval for severance agreements that provide benefits in an amount at least three times an executive’s annual salary plus bonus. Such generous severance packages are commonly referred to as “golden parachutes.”

Amalgamated Bank’s LongView Collective Investment Fund filed shareholder proposals urging a shareholder vote on golden parachutes in 2002 and 2003, with the latter proposal receiving a 72.5% “yes” vote. Despite this support, Massey’s board was unwilling to permit a shareholder vote on all pay packages that met the Fund’s criteria, but carved out a loophole for pay packages deemed “in the best interest of the company.”

The Fund objected to this loophole as vague and likely to undercut the principle of a shareholder vote. For the 2004 shareholder meeting, LongView submitted the proposal as a binding bylaw amendment. Although the bylaw proposal received 70% of the votes cast, it was not formally adopted because Massey requires shareholder-proposed bylaws to receive support from 80% of the outstanding shares. Nonetheless, in response to a follow-up request from the Fund, Massey’s board recently advised Amalgamated Bank that the board had decided to adopt the Fund’s proposal in response to the “expressed wishes of a majority of the shareholders.”

This is the third golden parachute policy that has been implemented this year following action by the LongView Funds. Earlier, NSTAR adopted the reform prior to its annual shareholder meeting, prompting the Funds to withdraw the resolution. Corning, Inc. implemented the reform over the summer following a majority vote by its shareholders at the annual meeting. In 2003, Union Pacific, Sprint Corporation, and AK Steel adopted similar LongView proposals.

Founded in 1923, Amalgamated Bank invests workers’ retirement savings through its LongView Funds. With $9 billion in assets under management, LongView works to enhance shareholder value through corporate governance reforms at portfolio companies.

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CorpGov Bits

A survey by Moody’s Investors Service of more than 160 of the largest US and Canadian corporations finds that one out of four companies still offer executive compensation based on formulas that promote a short-term focus or an unhealthy appetite for risk from a creditor perspective. Moody’s cited oversight challenges, ranging from the independence and effectiveness of the internal audit function, to lack of enterprise risk-management systems, at approximately one out of three companies it has reviewed.

According to a report in the Wall Street Journal, only 76% of eligible workers participated in 401(k) plans this year, compared to 80% last year. Apparently, the market decline of recent years, allegations of improper trading practices and fund fees may be scaring young employees away. (Employee 401(k) Participation Slip, 10/6/04)

In Hill & Knowlton’s annual Corporate Reputation Watch study, only 8 percent of senior executives surveyed believe the task of complying with the new financial disclosure and corporate governance standards poses a real challenge. During the past two years 59 percent reviewed and enhanced compliance and disclosure standards and procedures; 40 percent put processes in place to ensure greater independence and accountability of their board; 35 percent introduced ethics-related employees training; and 28 percent reviewed and changed their auditor relationship. In addition, 25 percent restructured executive compensation, 24 percent separated the role of chief executive and chairman, and 10 percent created a chief ethics officer or similar role. (Poll: Complying with Corporate Governance Reforms Not That Tough, WebCPA, 10/1/04)

Institutional Shareholder Services named Randall S. Hancock Executive Vice President and General Manager of its Global Research business unit. (Institutional Shareholder Services Names Head of Worldwide Research, press release,10/5/04)

All EU listed firms should publish full details of individual directors’ pay and give shareholders a say over executive pay packages, the European Commission recommended. Shareholders should give prior approval to companies’ share-based pay schemes, such as share options, and called on firms to include a “sufficient” number of independent board members, without specifying what that entails. (EU Urges Firms to Fully Disclose Executive Pay, Reuters, 10/6/04)

The Roadmap for Compensation Committees offers a free twelve step approach to responsible compensation practices. Worth checking out. While you’re there, you’ll see a “one stop” resource for responsible executive compensation guidance withe practice pointers, model language, etc. compiled with the help of 90 thought leaders.

  • Step One: True Independence—When a Director’s Pocketbook and Reputation are “On The Line”
  • Step Two: The Role of the Compensation Consultant—The Need to Tell It Like It Is—And Like It Should Be
  • Step Three: Calculate—and Tally Up—Each Component of Executive Compensation
  • Step Four: Deferred Compensation—Problems with Annual “Interest”and Total Accumulated Amounts
  • Step Five: SERPs—A Four Letter Acronym?
  • Step Six: Perks—Trouble Is Brewing on Multiple Fronts
  • Step Eight: Surveys, Benchmarking and Peer Groups—Misleading the Compensation Committee (and Shareholders)
  • Step Nine: Directors Must Take Charge and Reassess, Modify, And Even Roll Back Years of Built-In Excesses
  • Step Ten: And So Many Other Things To Address – Correcting the Past
  • Step Eleven: The Art of Minute-Taking—The Plaintiffs’ Bar is Watching
  • Step Twelve: The Importance of Your Proxy Disclosures—and the Need to Go Beyond S-K

October 20th Conference, ISS accredited, at the San Francisco Marriott and via video/audio webcast to desktops, boardrooms and conference rooms around the nation. Who Should Attend: Every Compensation Committee member (and every advisor)—including Directors, CEOs, CFOs, HR heads, lawyers, corporate secretaries, accountants, stock plan administrators and consultants. Every person responsible for implementing executive and equity compensation plans or who counsels or advises boards, audits records, prepares minutes or prepares proxy statement disclosures.

UCLA Anderson School of Management: Director Training and Certification Program

Held October 20 – 22, 2004 at the UCLA Anderson School of Management, the Eighth Director Training and Certification Program is designed to rapidly educate corporate directors and officers of pre-public and newly public companies on SEC regulations, FASB considerations, Exchange rules, auditing issues, financial disclosure, and current best practices in corporate governance. The program features more than a dozen world-class experts who cover every aspect of being a successful director. ISS accredited.

The program also features three stand-alone board committee modules on Audit, Compensation, and Governance & Nominating, which may be taken separately or with the UCLA Director Training and Certification Program.

Too Late to Advise Bush?

“Incomplete Agenda, an editorial in the 9/20/04 edition ofPensions&Investments calls on President Bush to do two things:

  • Push for immediate adoption of the SEC proxy access proposal. In keeping with Bush’s “ownership society,” which would allow individuals more control over retirement assets, “he has to provide a way for shareholders to hold corporations – namely, directors – more accountable.” Bush should tell SEC commissioners that ownership “means allowing investors a direct say in the nomination of at least some directors, as called for under the SEC proposal.”
  • Require a review of fiduciary issues concerning proxy voting at pension plans and come up with an appropriate solution, such as disclosure of votes, that will guard against conflicts of interest and ensure voting is done in the beneficiaries’ interest.

The editorial also suggests that we hear from Senator Kerry. Bush has not publicly weighed in on the access issue. However, Kerry has. In a statement submitted to the AFL-CIO he said, “I believe that additional actions are necessary to ensure that corporate boards of directors are accountable to investors. For example, I strongly support the recent U.S. Securities and Exchange Commission (SEC) action to increase the shareholder voice in executive compensation practices. I also believe that the SEC should allow long-term significant investors to have a voice in the selection of a portion of a company’s board of directors.”

P&I also reports that a survey of its readers shows Bush with 58.6% support and Kerry with 33.6%. Maybe it is time P&I’s editorial stand set its readers straight. Instead of offering advice to Bush, maybe they should endorse Kerry. Since direct access is the keystone reform needed to protect shareholder interests, P&I would be continuing its strong tradition of informing its readers what action is required to meet their fiduciary responsibilities.

Throughout the summer, Donaldson kept announcing he would push forward: “The need for action,” he says, “can’t stop for partisan politics.” (Fortune, September 20, 2004) Yet, during President Bush’s innately appealing discussions of an “ownership society,” he has consistently failed the perfect opportunity to signal to shareholders that he endorses the idea of giving them a greater stake in selecting corporate directors. Can we really expect him to now focus on this issue in the final weeks of his campaign when he has failed to do so for almost four years?

Absent real accountability to long-term investors, directors will never be independent of management. No matter what bright line rules are adopted, boardroom politics and information flows will lead directors to inevitable psychological dependence on management…unless there is real accountability to shareholders. The SEC’s modest access rule would at least push in that direction.

Stephen Davis, of Davis Global Advisors, recently called on shareowners to form “an investor-class version of, the powerful, web-based mobiliser of grassroots political activism. Without it, director election reform is jammed at the SEC.” (Politics and money: a volatile mix, Financial Times 8/9/04)

According to Davis, “the only meaningful currency of federal politics, as any K Street lobbyist knows, is the ability to deliver one or both of two staples: votes or campaign contributions.” If Kerry gets elected, look for passage of the SEC proposal. If Bush is reelected and the SEC fails to act, we will mobilize for the next election cycle. Discussions are already underway to form a type organization to push for the rights of shareholders in the nomination and election process. There’s no going back.

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September 2004

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September 2004

Losing? Change the Rules

That appears to be the thinking of Sparton Corporation (SPA). The electronics-manufacturing company held a special meeting on 9/24/04 but when it didn’t get the results it wanted, they decided to abruptly adjourn and postpone the vote for three weeks “to permit the balance of unvoted shareowners to express their votes.” Imagine if federal or state officials decided to hold the polls open beyond their previously scheduled time because they didn’t like the results? Cries of outrage would be heard in every news venue. Yet, this lack of democracy in corporate elections has gotten virtually no coverage by the press.

I did see one article, “Sparton voting issue on hold,” in the 9/25/04 Jackson Citizen Patriot. Are corporate elections of such little consequence that how they are conducted is of little or no consequence to the larger society? Where is the outrage? If there was any doubt about Sparton’s commitment to good governance before this action, there can be no doubt now that changes are needed in both Sparton’s board and in the laws and regulations governing all corporate elections.

Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC, which owns more than 7 percent of Sparton’s common stock.

New Lens Fund Coming

Robert Monks and John Higgins, chief investment officer and chairman of Ram Trust Services, are shifting their focus. Instead to buying shares of poorly managed companies and pressing reform, Lens Governance Fund, will invest in well managed firms. Governance measures will be used as an additional layer of analysis, on top of price, earnings, sales momentum, business cycles and other common measures. Ideally, the fund wants to invest in low-priced stocks of well-managed companies and to short sell high-priced stocks of poorly run firms. They expect to set up a hedge fund in another year after getting more experience with the model using inside funds. (Investors use governance in portfolio, Portland Press Herald(Maine) 9/24/04)

Advise and Consent

In “Advise and Consent: An Alternative Mechanism for Shareholder Participation in the Nomination and Election of Corporate Directors,”Joseph A. Grundfest, Stanford Law professor.Grundfest argues we should look to Article II, Section 2, of the Constitution for answers to the current debate over shareholder access to the ballot. That provision preserves for the Executive the initiative to select cabinet members but guards against appointing unqualified cronies because of the requirement that a majority vote by the Senate is required for confirmation.

Instead of the SEC’s proposed weak rule that would make it easier for large shareholders to nominate a token number of directors if “triggering events” occur, Gundfest recommends that a number of disabilities attach to a director’s service if a majority of shareholders withhold their votes. Disabilities could include not being considered independent, limit indemnification of such directors, and otherwise dissuade them from serving. Delayed effective dates would allow time to “cure” the election by obtaining a minimum percentage of written consents from shareholders who previously withheld votes. Such cures might come by adopting governance reforms or nominating and electing new directors.

To support his argument that shareholders should be limited to identifying suboptimal governance, while incumbent boards and management resolve the problems identified, Grundfest cites examples, such as the case of Dick Grasso at the NYSE, William Webster at the PCAOB, and other CEO replacement.

Grundfest cites the following advantages of the advice and consent model.

  • Reduces probability of election being hijacked by shareholders with a special-interest agenda.
  • Reduces probability of divisive boards.
  • Eliminates need for SEC to define qualified nominees, triggering events and two-election cycle.
  • Would create a federally uniform system not dependent on varied state laws, which may prohibit direct nomination of directors by shareholders.
  • Reduces coordination costs of disaffected shareholders.

Grundfest also lists several disadvantages of his proposed advice and consent model.

  • Special interest agendas can have broad legitimate social support.
  • Shareholders may occasionally pick a preferred candidate that is superior to any compromise acceptable to the incumbent board.
  • No guarantee shareholder and management will reach a consensus.
  • Subset of shareholders that works out a deal may make only smallest possible concessions.

Critique. Grundfest’s idea is a creative compromise. However, his arguments require a real leap in logic. The President is elected by the people (via the electoral college), whereas boards of directors hire CEOs. The cabinet works for the President but the CEO is supposed to work for and be evaluated by the directors. Grundfest’s real world examples are of CEOs, not directors. Now if he wants to propose advise and consent for hiring CEOs, let’s talk.

Howard Dean Speaks Out

According to Howard Dean, if we want more and better jobs, a fair trade policy, better behavior by corporate leaders, more pay equity between those who work and those who lead and better corporate morals, we need to make that happen by doing the following:

  • Insist that Congress stop voting for trade agreements with no enforceable labor or environmental standards.
  • Government contracts should be preferentially given to real American companies, particularly defense contracts.
  • Create stronger federal enforcement of corporate accountability to shareholders.
  • Open the election process for directors of publicly owned corporations so investors can easily nominate and elect outside directors. Public ownership of companies should mean public majorities on the boards – in other words more outside directors that are not hand picked by CEOs.
  • Hold CEOs accountable for what they say. If pay packages for workers are determined by merit and by results, so should the pay packages of corporate leadership. Hypocrisy leads to disrespect, which undermines any organization.

Next Year’s Targets

The following top Fortune 500 companies are a potential focus for 2005 shareholder proposals according to John Chevedden. For links to further information, John Chevedden can be contacted at[email protected].

These companies have one or more of the following poor governance practices:

  • Poison pill
  • Staggered board
  • Super-majority vote

These companies were selected from the top 50 of the 2003 Fortune 500 companies. The Fortune 500 ranking precedes the company name. Shareholder proposals to reverse these practices often receive more than a 50% shareholder approval rate. This information has been provided by Mr. Chevedden and is believed to be correct and current.

7. ConocoPhillips (COP) – Poison pill, Staggered board
16. McKesson Corp (MCK) – Poison pill, Staggered board
17. Cardinal Health (CAH) – Staggered board
19. Kroger (KR) – Poison pill, Staggered board
21. Boeing (BA) – Staggered board
22. AmerisourceBergen (ABC) – Poison pill, Staggered board
23. Target (TGT) – Poison pill, Staggered board
27. Time Warner (TWX) – Super-majority vote
28. Procter & Gamble (PG) – Super-majority vote, Staggered board
29. Costco (COST) – Staggered board
31. Dell (DELL) – Poison pill
32. Sears – Staggered board
33. SBC Communications (SBC) – Super-majority vote
34. Valero Energy (VLO) – Poison pill, Staggered board, Super-majority vote
35. Marathon Oil (MRO) – Staggered board, Super-majority vote
36. MetLife (MET) – Staggered board, Super-majority vote
37. Safeway (SWY) – Staggered board
38. Albertson’s (ABS) – Poison pill, Staggered board, Super-majority vote
39. Morgan Stanely (MWD) – Poison pill, Staggered board, Super-majority vote
40. AT&T (T) – Super-majority vote
41. Medco Health Solutions (MHS) – Staggered board, Super-majority vote
43. J.C. Penney (JCP) – Poison pill, Staggered board, Super-majority vote
44. Dow Chemical (DOW) – Staggered board, Super-majority vote
45. Walgreen (WAG) – Poison pill, Super-majority vote
46. Microsoft (MSFT) – Super-majority vote
47. Allstate (ALL) – Super-majority vote
48. Lockheed Martin (LMT) – Super-majority vote
50. Lowe’s (LOW) – Poison pill, Staggered board, Super-majority vote

Governance Settlements Growing Trend

Applied Micro Circuits Corp. is the latest company to agree to corporate governance changes as part of an overall settlement of a shareholder lawsuit. After three years of negotiations, the company agreed to add two new independent directors to its board, a requirement that two-thirds of the board and all board committees be composed of truly independent directors and a separation of the positions of chairman and chief executive officer in order to ensure that these positions will be held by different individuals.

The September issue of Compliance Week carries an interesting article on Darren Robbins who also successfully completed deals that called for governance changes at more than a half-dozen companies, including Sprint, Occidental Petroleum, E-Trade, JDN Realty, Prison Realty and Hanover Compressor. (Lerach Coughlin’s Robbins Plays Hardball With Governance Weapon) Robbins works closely with Robert Monks, The Corporate Library and Richard Bennett to identify the source of each company’s governance failures. Lerach is currently litigating with Massey Energy over board independence and environmental failures.

Compliance Week subscribers can download the complaint against Applied Micro Circuits, as well as the Hanover Compressor complaint and settlement, which has become something of a model.

High Ratings Correlate

Twenty-six companies – 20 American, five Canadian, and one Australian – out of 2,588 global companies monitored by GovernanceMetrics International (GMI) received top corporate governance marks.  As a group, these companies outperformed the S&P 500 Index for each of the last one (4.9%), three (8.3%) and five year periods (10.0%), as of August 31, 2004. (See Good Governance Has Upside on Stock Price, 9/7/04,

Teslik To Leave CII

Sarah Ball Teslik is the new Chief Executive Officer of the Certified Financial Planner Board of Standards Inc. After serving for 16 years as the executive director of the powerful Council of Institutional Investors, Teslik will step into her new position at the CFP Board no later than January 1, 2005. (Head of Council of Institutional Investors is Named New CEO of CFP Board, 9/21/04,

CII said the petition Les Greenberg and I filed (Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors: SEC Rulemaking Petition File No. 4-461) “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” Teslik’s leadership was vital to moving CII’s forward on shareholder access to the proxy. I hope she will carry that issue with her to the CFP Board.

SEC Offers Guidance On Shareholder Proposals

On 9/15/04 the SEC’s Division of Corporation Finance published its third legal bulletin on the topic of shareholder proposals. The bulletin focuses primarily on parts of Rule 14a-8, which addresses when a company must include a shareholder’s proposal in its proxy statement. Companies can seek staff concurrence to modify or exclude statements where:

  • Statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation;
  • The company demonstrates objectively that a factual statement is materially false or misleading;
  • The resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires—this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result; and
  • Substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote.

Companies bear the burden of demonstrating that a proposal or statement may be excluded. (SEC Staff Updates Guidance On Shareholder Proposals, Complance Week, 9/21/04)

ISS Joins Opposition to Sparton

Institutional Shareholder Services, has joined Lawndale Capital Management, LLC and Glass Lewis & Co. in recommending against a Sparton Corp. (SPA) proposal at a special shareholder meeting to held on 9/24 to eliminate cumulative voting. Lawndale holds a 7.6% stake in Sparton, believes the ISS analysis is material information which should be provided to Sparton shareholders. Lawndale also noted that ISS’ analysis was critical of Sparton’s new shareholder communication policy, that Sparton’s corporate governance quotient rating was near the lower third of its peers. Lawndale said it may nominate its own director candidate at the annual meeting if the firm can’t resolve its corporate governance concerns. (Lawndale: ISS Recommends Voting Against One Sparton Proxy Proposals, DJ Newswires, 9/13/04)

In an era requiring improved governance and shareholder representation on corporate boards, Sparton’s call to remove cumulative voting rights from shareholders and tighten shareholder notice requirements for shareholders to nominate director candidates is the wrong move. I urge readers to vote AGAINST these proposals.

Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC. An amended 13D filing with the SEC can be found at real-time EDGAR providers or directly in SEC’s Edgar database.

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DC = Poor

survey by Mercer Investment Consulting finds defined contribution pension plans rising, but the rates of contribution are well below published estimates of the savings level needed for a comfortable retirement. Plan sponsors in both Canada and the US are increasingly offering a greater range of investment vehicles, most notably of which are “pre-mixed” funds that target risk through asset allocation and specific-year payouts through lifecycle funds. Some 63% of US plan sponsors now offer these types of vehicles, up from 25% in 2000. Only 45% of Canadian plan sponsors offer pre-mixed funds. (Mixed Up,, 9/15/04)

GAO and DOL: Opposing Views

The Government Accountability Office GAO) released a report in August that is getting a lot of buzz entitled Pension Plans: Additional Transparency and Other Actions Needed in Connection with Proxy Voting GAO-04-749, August 10, 2004.

Its recommendations are as follows: If the Congress wishes to better protect the interest of plan participants and increase the transparency of proxy voting practices by plan fiduciaries, it should amend ERISA to::

  • require fiduciaries develop and maintain written proxy-voting guidelines;
  • include language in voting guidelines on what actions the fiduciaries will take in the event of a conflict of interest; and
  • annually disclose votes as well as voting guidelines to plan participants, beneficiaries, and possibly also to the public.
  • give the Secretary of Labor the authority to assess monetary penalties against fiduciaries for failure to comply with applicable requirements.
  • amend ERISA to require that, at a minimum, an independent fiduciary be used when the fiduciary is required to cast a proxy vote on contested issues or make tender offer decisions in connection with company stock held in the company’s own pension plan.

The report also recommends the Assistant Secretary of the Employee Benefits Security Administration (EBSA):

  • conduct another enforcement study and/or take other appropriate action to more regularly assess the level of compliance by plan fiduciaries and external asset managers with proxy voting requirements. Such action should include examining votes, supporting analysis, and guidelines to determine whether fiduciaries are voting solely in the interest of participants and beneficiaries, and
  • enhance coordination of enforcement strategies in this area with the SEC.

I didn’t find anything earth-shaking in the recommendations. The GAO offered a reasoned incremental approach. However, what was amazing was DOL’s response to the report. It certainly got Robert AG Monks fired up. The former Administrator of the Office of Pension and Welfare Benefit Programs had the following to say:

The arguments are familiar to any first year law student: there is no problem; there is no reason to find out if there were problems; even if there were a problem DOL doesn’t have legal authority to deal with it; even if Congress provides the authority DOL should not investigate. Beyond all this, DOL looked into the problem in 1986. The whole world knows of the financial disaster for pensioners since then except for DOL which finds “…the diversion of needed resources to an enforcement study that we have no reason to believe will find significant non-compliance with ERISA would be an inappropriate use of resources.”

And there’s more at RAGM.COM. DOL may not have reason to believe they will find non-compliance, but we do. In DOL’s most recent report (issued in 1986), only 3 of the investment managers (out of 12) surveyed automatically reported votes to their clients. “The managers who did not send their reports indicated that few clients ever requested a written report.” Only 35% of the plans could provide evidence that they performed substantive monitoring of their delegated authority. Only one of the investment managers reviewed appeared to have been engaged in anything like prudent shareholder activism.

As I wrote on in 1996, “the incentive of earning higher returns does not appear to outweigh the fear many pension fund trustees probably have that such involvement (in active shareholder voting) will alienate the members of the corporate and political communities to which they often owe their positions.” DOL has still never taken an enforcement action for a pension fund that failed to vote in the interest of beneficiaries.

Yet, the head of the mutual fund industry’s main lobby group said he supported calls for pension funds to disclose how they cast their proxy votes. “If pension funds had to do this, it would eliminate some of the concerns the industry had about this,” Paul Schott Stevens, president of the Investment Company Institute told journalists in Boston, according to Reuters. If mutual funds have to report how they voted, why not pension funds? Maybe they will help force the issue.

Fighting Terrorism By Adopting the Tactics of Terrorists

Three cheers to Barry B. Burr of Pensions&Investments for his article “Misleading Methods” in the 9/6/04 edition of that vital publication. has long called on public pension funds to investigate their investments to ensure they are either minimizing investments in companies doing business in countries linked to terrorism or using their governance clout to make changes. However, we decry the reported tactics of the Center for Security Policy in Washington.

The Center’s mid-August report, “The Terrorism Investments of the 50 States,” was based on research gathered, at least in part, by Bryan Auchterlonie who identified himself as a graduate student when soliciting information from funds, instead of his connection to the Center. Burr’s article raises questions as to Mr. Auchterlonie’s student status, his employment status with the Center and more. According to Gary W. Findlay, of the Missouri State Employees Retirement System,

First we received a request for information from someone who maintains that he is “a graduate student at Johns Hopkins University studying socially responsible state and local pension investing.” We provide the information requested and excerpts from it are later presented in a report with a highly prejudicial title prepared by an alleged think tank.

The think tank shares a mailing addressed with an organization (Conflict Securities Advisory Group) that has been desperately attempting to market a product they maintain is useful in assessing terrorism risk in non-U.S. investments. Just before the CSP report is issued, a U.S. senator sends letters to the directors of the funds included in the CSP report, reminding them of the need to avoid investing in companies that may be supporting terrorism….When I was contacted by the CSAG about possibly subscribing to their service, they told me that they “are not arsonists who are in the fire extinguisher business” (their words not mine).

The story only gets worse and is well worth reading. The tactics of CSP and CSAG, who share the same office suite, certainly appear to undermine the credibility of their research and services. That’s too bad, especially given the importance of the subject.

Position Available: Sr. Research Associate, Corporate Governance

The Conference Board seeks a Senior Research Associate to design, conduct & present research studies on corporate governance & institutional investment trends for senior executivess at major U.S. and global companies. Requires a graduate degree in related field along with 5-7 years research experience, strong computer skills & an ability to work independently while being part of a research team. Salary $80,000 plus benefits package. Equal Opportunity Employer.  Contact Chris Plath ([email protected]) at the The Conference Board’s Global Corporate Governance Research Center with resume and salary history.Founded in 1993 and now a core division of The Conference Board, the Governance Center is committed to helping corporations enhance their governance processes, inspire market confidence, and facilitate capital formation in today’s globally competitive marketplace.

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AFL-CIO Reports on Mutual Fund Voting

The AFL-CIO Report, Behind the Curtain: How the 10 Largest Mutual Fund Families Voted when Presented with 12 Opportunities to Curb CEO Pay Abuse in 2004, examines proxy vote reports by the nation’s mutual fund companies. Mutual fund companies reported on 8/31/04 for the first time how they cast their proxy votes at the public companies in which they invest on behalf of their mutual fund shareholders. Because mutual funds own 22% of all U.S. corporate stock, their proxy votes on such issues as CEO pay and director elections can be decisive. The scores ranged from a high of 100% for American Century to a low of 20% for Putnam.

Fidelity, the nation’s largest fund family and the most vocal opponent to proxy vote disclosure, ranked 9th out of 10, with a 25% score. Vanguard, the other leading opponent to proxy vote disclosure, ranked 2nd in the survey with a 75% score. Although the SEC rule does not require mutual funds to disclose business relationships with portfolio companies, research indicates that, of the 120 proxy voting decisions in this survey, 25 involved a mutual fund advisor that has a business relationship with the portfolio company. These widespread conflicts of interest not only underline the importance of transparent proxy voting by mutual funds, but also point to the need to enhance the SEC rule to require mutual fund advisors to disclose business relationships with portfolio companies. Key Findings:

  • When it comes to voting proxies on proposals involving CEO pay abuses, there is significant variation among fund families. The scores in our survey ranged from a high of 100% for American Century to a low of 20% for Putnam. Putnam was also the only fund that failed to cast a vote at a portfolio company included in this survey (Putnam did not vote on a CSX shareholder proposal to rein in golden parachutes or on any other issue subject to a vote at CSX’s 2004 annual meeting).
  • The survey results indicate that the SEC rule requiring mutual fund proxy vote disclosure appears to have had a significant impact on the voting practices of some fund families. In the 1990s, mutual funds reflexively voted with management, regardless of the best interests of their mutual fund investors. While this still appears to be the case at some fund families, others appear to be increasingly willing to oppose management when necessary to protect long-term shareholder value.
  • Fidelity, the nation’s largest fund family and the most vocal opponent to proxy vote disclosure, ranked 9th out of 10 in our survey with a 25% score. Fidelity voted against all eight shareholder proposals to rein in runaway CEO pay, but also opposed three of the four management proposals.
  • Vanguard, the other leading opponent to proxy vote disclosure, ranked 2nd in the survey with a 75% score. Vanguard was one of only two mutual fund families that voted against all four management proposals seeking excessive executive compensation (American Century was the other).
  • There was only one proposal for which all of the mutual fund families holding the stock voted in the same way. Nine fund families voted against a management proposal seeking to renew the Stock Incentive Plan at Broadcom (American Funds did not hold the stock). This is perhaps no surprise, since an overwhelming majority (89 percent) of Class A shares voted against the plan. As The New York Times observed about Broadcom, “just when you thought you had seen the most outrageous transfer of shareholder wealth to executives through stock options, along comes a company that tops them all.” Unfortunately, the proposal passed over the objection of outside shareholders because the company’s dual class stock structure gives insiders disproportionate voting power.
  • One shortcoming of the SEC rule is that it does not allow investors to determine whether a conflict of interest compromised their mutual fund’s proxy vote at a particular company, since the rule does not require mutual funds to disclose their business relationships with the portfolio companies. Research indicates that, of the 120 proxy voting decisions reported in this survey, 25 involved a mutual fund advisor that has a business relationship with the portfolio company. Fidelity maintained the most business relationships (8), followed by Capital Research and Management (as advisor to the American Funds) (5), and Vanguard (4).
  • These widespread conflicts of interest not only underline the importance of transparent proxy voting by mutual funds, but also point to the need to enhance the SEC rule to require mutual fund companies to disclose business relationships with portfolio companies.

Corporate Governance Key to Malaysian Plans

Prime Minister, Dato’ Seri Abdullah Haji Ahmad Badwi masterplan to make integrity the cornerstone of his administration includes corporate governance. (see Malaysia Launched The National Integrity Plan and The Malaysian Integrity Institute, ASRIA, 7/19/04) The plan outlined 5 objectives:

  1. To continuously and effectively combat and reduce incidence of corruption, malpractices and abuse of power;
  2. To enhance efficiency in the delivery system of the civil service and to reduce unnecessary bureaucracy;
  3. To improve corporate governance and business ethics;
  4. To strengthen the family institution; and
  5. To improve the quality of life and the well-being of the society.

US Tops Governance Survey

GovernanceMetrics International said its latest survey data on 2,588 global companies found that 26 companies receiving the highest score of 10.0 outperformed the Standard & Poor’s 500 stock index total return by 10% over the last five years.

Over a three-year period the companies outperformed by 8.3% and over one year they outperformed by 4.9%. The 26 companies included 20 American companies, five Canadian and one Australian. GMI said the companies also outperformed when measured against the Morgan Stanley Capital International World Index.

“This suggests a correlation between corporate governance practices and portfolio returns when measured across a number of variables and across a multi-year period,” GMI Chief Executive Gavin Anderson said in a statement.

Anderson said that U.S. companies as a group had improved ratings over the past two years, with the average rating rising to 7.2 from 6.5. He attributed the better showing in part to the Sarbanes-Oxley Act, a U.S. law that required a series of accounting and corporate governance reforms.

Comparing nations, U.S. companies had the highest overall average rating, 7.23. Canada was second with a 7.19 score, followed by the UK with a 7.12 rating and Australia with 6.73. Greek companies had the worst overall average rating, 2.93, followed by Japan, with 3.57.

Examples of the 26 companies with the highest rating included Eastman Kodak in the United States, Suncor Energy in Canada and Westpac Banking in Australia. (Study links governance and stock price, Reuters, 9/7/04)

Corporate Governance Law Courses Increase

The Wall Street Journal reported that “In recent years, business schools have added or revamped courses on ethics in response to the wave of corporate scandals. Now, law schools are getting into the game, particularly as third-year students who began studies shortly after Enron Inc.’s (ENRNQ) collapse seek instruction on the proper role of a corporate lawyer.” Demand is heavy at the following:

  • Tulane University
  • Seattle University
  • Duke University
  • Ave Maria School of Law in Ann Arbor, Michigan
  • Rutgers University School of Law at Camden
  • American University
  • Seattle University law school’s newly created Center on Corporations, Law & Society

We would be interested in hearing from students and these and other law schools. What’s good and what’s missing from your program? Any thoughts on recent developments? (At Law Schools, Students Flock To Governance Courses, 8/27/04)

Renewed Call for Corporate Disclosure of Political Contributions

The San Jose Mercury News has joined those calling on the SEC to require publicly traded companies to disclose all their contributions in corporate filings. “Last year, the Department of Labor required unions to provide more detailed disclosures about their political donations and lobbying activities. As a result, rank-and-file members know which politicians and causes are benefiting from their union dues. It’s a basic right that shareholders in America’s corporations ought to enjoy too.”

If you are a stockholder consider this, the Center for Responsive Politics says that in this election cycle alone, corporations have given more than $54 million to “527 organizations” like, Swift Boat Veterans for Truth, and others. Shouldn’t you know where your money is going? (see Stockholders are giving — but to whom? 9/5/04, editorial)

See Which Funds Contribute to Global Warming

The nonprofit Results For America will hold a live phone-based news conference on September 8, 2004 to unveil a powerful Web site at (viewable beginning 1:30 PM 9/8/04) where investors in America’s top 24 equity mutual funds can see if their funds are “endangered by financial risks associated with global warming.” The research data contained in Web site is provided by KLD Research & Analytics (KLD), “the country’s premier provider of third-party corporate social research.”

The Web site will display key KLD research findings on the largest holdings of Fidelity, Vanguard, American Funds, Dodge & Cox, and others.  The company-specific findings will show which top mutual fund holdings may put shareholder wealth in jeopardy due to global warming financial risks, as well as those companies that have taken progressive actions to deal with climate change issues.

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SEC Should Look to Europe

David F. Morrison’s editorial in the August issue of Insights:The Corporate and Securities Law Advisor reminds us that “In business, if not in our politics, America should have the open-mindedness to realize that the actions we take will have effects outside our borders, and that there are lessons to be learned from experience other than our own.” In “Shareholder Proxy Access — America Should Not Go It Alone Again,” Morrison joins those asking the SEC to delay its rule on shareholder access to the proxy for the nominating directors. However, Morrison’s plea is not for a perpetual delay, like the BRT, but is an intelligent call to study “real world experience in other countries, the optimal balance between that process, shareholder voting rules (majority versus plurality voting) and proxy access.”

Morrison notes recent changes – 1) stock exchange listing standards requiring a nominating committee composed entirely of independent directors and 2) SEC rules that require shareholders to be informed of the criteria the nominating committee uses to select candidates. “Reports are that nominating committees and shareholders are communicating, that there is a new dialogue and that the old system of the CEO dominated nomination process has been changed for good.” (Of course, one reason for this is the pending access rule.)

Unlike critics of shareholder access, Morrison suggests take a at Europe. The director nomination process in the US now assures a nomination process controlled by independent directors. (Although, as we have often seen, independence doesn’t preclude the CEO’s college roomates or golfing buddies.) In some European countries nominating committees are recommended, but neither the Combined Code in the United Kingdom, nor the Bouton report in France, recommend full independence. “The Bouton report in fact recommends that the CEO be actively involved in the work of the nominating committee.”

Plurality vs. Majority Voting.
Grundfest, Veasey and Millstein made quite a splash by recommending that instead of access to the proxy, directors should be elected by majority vote and that withhold votes should be counted as no votes. The UK has long had this approach. France, Germany and various other European jurisdictions are no different. “In each of the three countries, shareholders can vote for or against a nominee, and election requires that the yes votes outnumber the no votes.”

Proxy Access. Proxy access

  • “In the UK, 100 or more shareholders holding shares representing on average GBP 100 of paid in capital, or shareholders with 5 percent or more of the voting rights, can require a company to circulate a resolution for discussion at a shareholders’ meeting.
  • In France, shareholders holding a specified percentage of shares (which is calculated on a degressive scale and would approximate 1.4 percent of the share capital of a company with Euro 100 million of share capital) and certain qualified shareholders associations that have held their shares in registered form for two years and who hold 1 percent or more of the shares can send proposals to the board which must be included in the resolutions submitted to shareholder vote.
  • In Germany, shareholders can submit counter proposals to the company until two weeks before the date of the annual meeting.

In each of the three countries the shareholder proposals can include a nominee for a director.”

Morrison notes that “it is astounding that, in the avalanche of commentary and discussion that has been triggered by the proxy access proposal, the experience in other countries is given such short shrift,” being mentioned only twice during the full day of roundtable discussions.

Clearly, our adventure in Iraq must give us pause. Perhaps it is better to listen closely to our allies. If we can set similar standards, business, and perhaps politics, can be run more smoothly.

Cintas and Walden Settle Suit

Cintas (CTAS) dropped a controversial defamation lawsuit filed againstWalden Asset Management and Senior Vice President Tim Smith. When the lawsuit was first filed in January, it sent a chill through the activist investor community, including some board members of CalPERS, who feared it would open the floodgates for litigation against shareholders speaking their minds at company meetings.

As part of the settlement, Smith acknowledged that accusations that a Haitian vendor used by Cintas was a “poster child for sweatshops” apparently were not an accurate reflection of the situation at the facility. Smith, had relied on outside research. “As I am sure you can understand,” Smith wrote, “Walden is not in a position to monitor directly the workplace conditions of companies or their suppliers.”

As part of the settlement, Walden provided Cintas with a copy of materials containing the allegations, though officials would not describe the origin of the information.In his letter, Smith said he was “pleased to learn” that allegations he made about the facility “do not present an accurate profile of working conditions at this plant or of Cintas’ commitment to and compliance with its code of conduct and supplier monitoring program.”

By next Aug. 31, Cintas said it would post on its Web site a summary of supplier audits for the previous year, corrective actions requested by the company, supplier response and a summary of terminations because of noncompliance. (Cintas plans labor report on suppliers, The Cincinnati Enquirer, 9/3/04; Cintas Settles Defamation Lawsuit Vs. Walden Asset Mgmt, WSJ, 9/3/04)

U.S. Chamber Challenges SEC

The U.S. Chamber of Commerce on filed a lawsuit seeking to overturn the SEC’s rule requiring mutual fund boards of directors to have an independent chair. The rule also requires 75% of the directors to be independent. The rule takes effect Sept. 9, but funds have until December 2005 to comply. The suit was filed in both the District of Columbia’s U.S. District Court and U.S. Court of Appeals. The rule is/was(?) projected to knock about 80% of sitting chairmen off of the fund boards they lead. Trust the Chamber to speak out in favor of continuing conflicts of interest.

Virtual Meetings

Without little publicity, several states have joined Delaware to allow companies to hold their annual meetings solely online. In 2001, the Michigan Corporate Statute was amended to provide for shareholder meetings to be held “solely by means of remote communication” unless otherwise restricted by the articles or bylaws (see MCLA Sections 450.1405(3) and (4). Oklahoma also amended Section 1056 of its Corporations Code in 2001 to permit a meeting consisting solely of remote attendance. Both of these provisions are essentially the same as Section 211 of the Delaware General Corporation Law.

Maryland also now allows for meetings by remote communication, but with a twist. Maryland law provides that the board shall provide a physical place for a meeting of the shareholders at the request of a shareholder (see §2-503 Corporations and Association Article, Annotated Code of Maryland. In contrast, Delaware’s §211 gives the board sole discretion and doesn’t provide a right of shareholders to request a physical meeting site.

Highlighted by the fact that companies are required to disclosure the nature of director attendence at their meetings, holding a pure online meeting continues to be dangerous from an IR perspective. (Update on Ability to Hold Online Annual Meetings, Broc’s Daily Blog, 8/31/04, We need a national policy set down by the exchanges and the SEC, not this patch-work of state statutes.

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CEO Pay Linked to Outsourcing and Political Donations

CEOs at companies that outsource the most US jobs are rewarded with bigger paychecks, according to a new report, “Executive Excess 2004: Campaign Contributions, Outsourcing, Unexpensed Stock Options and Rising CEO Pay.”

Average CEO compensation at the 50 firms outsourcing the most service jobs increased by 46% in 2003, compared to a 9% average increase for all CEOs at the 365 large companies surveyed by Business Week.  Top outsourcers earned an average of $10.4 million in 2003, 28% more than the average CEO compensation of $8.1 million. From 2001 to 2003, the top 50 outsourcing CEOs earned $2.2 billion while sending an estimated 200,000 jobs overseas.

Political contributions also appear to pay off.  CEOs of the 69 companies that sponsored this summer’s Democratic and Republican National Conventions saw their pay jump 52% in 2003, far outpacing the 9% raise for the average large company CEO. Similarly, the 38 CEOs who have personally raised at least $100,000 for either the Bush or Kerry presidential campaigns earned an average of $15.2 million in 2003, 88% more than the average large company CEO.

One sign of the political clout of corporate leaders is the current effort in Congress to block new rules that would require corporations to report all stock option grants as expenses in their financial statements.  Current accounting rules have encouraged lavish options grants to executives.  The report calculates that corporations have claimed an estimated $3.9 billion in tax deductions related to stock options exercised by 350 leading CEOs since 1997.

After two years of narrowing, the CEO-to-worker wage gap is rising again. The CEO pay to worker pay ratio reached 301:1 in 2003, up from 282:1 in 2002.  If the minimum wage had increased as quickly as CEO pay since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.

One rationale for high CEO pay is that CEOs bear tremendous risks and responsibilities for their companies, yet the report found that CEOs are far more financially secure than those risking their lives in war.  Average CEO pay is 56 times more than the pay for a US Army general with 20 years experience ($144,932) and 634 times more than the pay for a starting U.S. soldier ($12,776).

The good news is that public pressure is beginning to have an impact. More investors than ever have demanded greater accountability from CEOs at shareholder meetings.  Richard Grasso, CEO of the New York Stock Exchange, was forced to resign due to public outrage over his $140 million pay package.  A number of companies and CEOs, including seven detailed in the report, have voluntarily supported fairer pay plans.  The report also includes recommendations on how tax and corporate governance regulations could be reformed to help narrow the pay gap.

“Executive Excess 2004” profiles the CEO pay practices and political contributions for the 15 companies that outsourced the most US service jobs: United Technologies, Citigroup, Oracle, Bank of America, Cognizant Technology Solutions, Morgan Stanley, Intuit, SBC Communications, Conseco, JP Morgan Chase, Sprint, Bank of New York, Time Warner, General Electric, and American Express.

Bank of America, for example, cut nearly 5,000 US jobs while outsourcing up to 1,100 jobs to India in 2003.  In July 2004, the firm announced that it planned to cut another 12,500 U.S. jobs in the next two years.  Meanwhile, CEO Kenneth Lewis received $37.9 million in compensation in 2003, nearly 110 percent more than in 2002. Bank of America’s PAC has made $576,319 in contributions in the 2003-2004 election cycle.

The outsourcing of service jobs to low-wage countries has further widened the pay gap between workers and their bosses.  Currently, the pay gap between U.S. CEOs and American call center workers is 400:1, while the gap between U.S. CEOs and Indian call center workers is 3,348:1.

While the authors do not assert a direct cause and effect relationship between outsourcing or political donations and higher pay, the correlations are troubling.The study was authored by Sarah Anderson, John Cavanagh, Chris Hartman, Scott Klinger, and Stacey Chan. “Executive Excess 2004” is the eleventh annual CEO pay study by the Institute for Policy Studies and United for a Fair Economy.  The Institute for Policy Studies is an independent center for progressive research and education in Washington, DC. United for a Fair Economy is a national organization based in Boston that spotlights growing economic inequality. The authors conclude with several excellent recommendations for change:

  • End the Tax Breaks for Excessive CEO Pay
    • Limit the deductibility of executive compensation that exceeds a certain multiple of average worker pay.
    • Eliminate the deductibility of executive pension, health, insurance and other perks not broadly available to other employees.
    • Require that options be expensed.
  • Give shareholders and workers more authority and more information on executive compensation.
    • Require shareholder approval of executive severance plans that exceed more than one year salary and bonus.
    • Give shareholders the right to nominate directors directly.
    • Institute European executive pay controls.
    • Tighten reporting requirements on executive pay.
  • The report also outlines a number of voluntary actions businesses have taken.
    • John Chambers, Cisco Systems, lowered his annual salary to $1 with no bonus when Cisco was facing layoffs of 8,500 employees. (Disclosure: the publisher of CorpGov.Net owns stock in Cisco)
    • Aaron Feuerstein, Malden Mills, kept workers on the payroll after their plant burned down and saw dramatic productivity increases after rebuilding.
    • John Mackey, Whole Foods Market, eschews executive-suite perks and limits his salary to no more than 14 times the pay of the average frontline employee. All employees can qualify for stock options, and 94% go to nonexecutive staff. (Disclosure: the publisher of CorpGov.Net owns stock in Whole Foods)
    • James Sinegal, Costco Wholesale, has a simple partition separating his work area from his co-workers. He fields his own incoming calls and receives $350,000 in salary, about eight and a half times as much as a fulltime checkout clerk and roughly double the salary of a Costco warehouse manager. (Disclosure: the publisher of CorpGov.Net owns stock in Costco)

For hard copies or to set up interviews with the co-authors, call 617-423-2148 x13 or e-mail [email protected].

Sell Side Corporate Governance Analysis Moves Market

According to the Wall Street Journal, Goldman Sachs released a report titled “A Look Within Corporate Governance,” grading 14 technology companies. Companies that got poor marks from Goldman Sachs appear to have immediately moved to improve their disclosure practices. “The quick response to the Goldman report…has sparked debate over whether equity analysts should spend more time on corporate governance, a broad term that basically boils down to running an efficient, profitable business that’s accountable — and forthcoming — to investors.”

Goldman claims that 2/3s of companies cited in its report approached the firm’s analysts with plans for improved disclosure. Best scoring companies in the report were EMC, IBM, Dell, and Veritas. Lowest scoring firms were QLogic, Lexmark International, Sun Microsystems, Emulex, and Brocade Communications. Perhaps we will soon be talking about the “Goldman-Effect.” (On Governance, Wall Street May Carry Big Stick, 8/31/04)

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Other People’s Money Conference (update: cancelled)

Fiduciary responsibility may well be the missing link in modern day corporate governance practices, with so much wealth concentrated in the hands of so few Trustees, who nevertheless remain, with rare exception, passive owners.

In addition to a powerful slate of speakers that includes some of today’s most prominent and important thinkers on the subject, the OPM conference will immerse attendees in a challenging hypothetical case study that will serve to highlight and illuminate the key issues facings today’s Fund Managers and Trustees.

This looks like an excellent opportunity to network with others concerned with the fiduciary responsibilities and standards of pension fund managers/directors and mutual fund managers/directors in an intimate setting.

Have lunch with Ann L. Combs, Assistant Secretary of the Employee Benefits Security Administration, who heads an agency that oversees approximately 700,000 pension plans with nearly $5 trillion in assets and another 6 million health and welfare benefits plans. Have dinner with Sean Harrigan, President of CalPERS (California Public Employees’ Retirement System), the largest public pension fund in the US and one of the most important forces in advancing corporate governance for decades. Be entertained by Andy Borowitz, winner of two 2003 Dot Comedy Awards for Best Overall Humor and Best Satirical News. I loved his book, Who Moved My Soap?: The CEO’s Guide to Surviving in Prison.

October 6-8 in colorful Portland Maine, hosted by The Corporate Libraryand the University of Southern Maine School of BusinessLearn More.Register.

Labor Seminar

The US Department of Labor’s Employee Benefits Security Administration (EBSA) will hold its first seminars to assist employers, pension plan administrators, and other benefit professionals comply with federal employee benefits law. The one-day seminar will offer information and one-on-one help on how to utilize the Voluntary Fiduciary Correction Program (VFCP) to self-correct potential violations of the Employee Retirement Income Security Act (ERISA). The seminar will be held on September 20, 2004, at The Curtis Center in Philadelphia, and is open to employers, accountants, plan fiduciaries, third party administrators, attorneys, and anyone with concerns about their responsibilities in administering employee benefit plans. Reservations are on a first-come, first-served basis. For MORE information contact Gerald Weslosky of the EBSA Philadelphia office by phone at (215) 861-5318 by fax at (215) 861-5347, or e-mail to [email protected]. (, 8/31/04)

Failure to Disclose in Germany

Only nine of Germany’s top 30 listed firms disclose how much they pay, individually, their top executives, even though all 30 signed up two years ago to a corporate-governance code that strongly recommends such a pay breakdown. Brigitte Zypries, Germany’s justice minister, has threatened to put the requirement for individual disclosure into law if the big 30 firms do not comply by next summer. (Keeping stumm, 8/19/04, The Economist)

The Secret is Out

Your mutual funds have been voting against your best interest in many cases. As of now, they will have to think twice about doing so because they have to file form N-PX with the US Securities and Exchange Commission (SEC), disclosing how they voted the proxy ballots of the companies held in their portfolios. For all but a few SRI funds, this will be the first time they are revealing their proxy voting records. Try finding their voting policies though.

For coverage, see As Mutual Funds Prepare to Reveal Proxy Votes, Guideline Disclosure Acts as Acid Test,, 8/31/04); The right to know, Boston Globe, 8//31/04); Funds reveal their votes, San Francisco Chronicle, 8/31/04).

Open-end and closed-end fund advisors must file the new form N-PX annually with the SEC, detailing all of the votes made (and not made) over the past 12 months ending June 30. Investors can request the information and advisors must make it available. The easiest way to do so would be to post the information to their Web site, but many, including Vanguard, have not done so. The N-PX form requires advisors to give a brief description of each proposal for voting, the date of the meeting, whether the proposal was from management or a shareholder, and the fund’s vote or abstention. Funds must also include in each prospectus a statement of additional information regarding the policies, procedures and guidelines that fund management uses to vote these corporate proxies.

Now we need someone to compile all this data into an easily usable format that facilitates fund holder communications to fund advisors and managers.

Asian Business Dialogue on Corporate Governance 2004

The Asian Corporate Governance Association will hold its Fourth Annual Conference–the “Asian Business Dialogue on Corporate Governance 2004“–in Shanghai on Thursday, October 28, 2004.

The theme of this year’s event is “Strengthening Asian Capital Markets through Better Governance,” with a special focus on China. Topics to be discussed include:
1. SOE governance: the changing role of the state as dominant shareholder
2. Institutional investors: creating a catalyst for good governance in China
3. Independent directors: how to be effective in China
4. Privatisation and public offerings: instilling good governance early.

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Continue Reading ·

The Recurrent Crisis in Corporate Governance

The Recurrent Crisis in Corporate Governance The Recurrent Crisis in Corporate Governance pushes the edge of mainstream thought in this growing discipline. Authors Paul W. MacAvoy and Ira M. Millstein, giants in the field, have well deserved reputations as practitioners and scholars. This thin volume will quickly guide the course for progressive board members concerned with building solid companies, rather than future Enrons.

Although MacAvoy and Millstein stop short of urging direct nomination of directors by shareholders, the author’s do recognize the real benefit of boards being truly independent from the CEO. “The independent and professional board is the ‘grain in the balance’ of survival in the long run.” Continue Reading →

Continue Reading ·

August 2004

ESOPs Beneficial

Nearly nine out of 10 (88%) companies said creating employee ownership through an ESOP (employee stockownership plan) was “a good decision that has helped the company.” Asked to quantify how the presence of an ESOP improved business performance, 65% of survey respondents indicated a better performance in 2003 relative to 2002, according to the Employee Ownership Foundation’s 13th Annual ESOP Economic Performance Survey.

Looking at other business measures, 70% of the survey sample indicated that revenue increased in 2003, compared to 30% indicating revenue did not increase.  Additionally, 64% indicated that profitability increased, while 36% indicated that profitability did not increase. “Time and time again, the results demonstrate creating employee-owned companies through ESOPs is good business,” said Foundation President, J. Michael Keeling.  “Creating more ownership by employees should be national policy.” The 2004 EPS was distributed to The ESOP Association’s approximately 1,300 company members in June 2004.  The results are based on approximately 375 responses.

Women Make Better Investors

Sex and the City: study shows that the female investor makes more profits than males.

  • Women prefer sensible stocks that always provide reliable, if modest, returns. Men prefer more volatile stock, such as the technology stocks.
  • Women create balanced portfolios spread across the market that will always give returns somewhere, as opposed to men, who tend to put all their eggs in one basket.
  • Woman tend to research their investments carefully, rather than blindly follow hot tips picked up in male bonding circles.
  • Women will often pick local companies, sometimes for sentimental reasons, but which will usually provide something in return.
  • Women, more used than men to balancing domestic budgets and the cut and thrust of supermarket pricing, understand better the economics of the wider marketplace.

US studies have shown that women also tend to buy and hold longer than men, spending less on expenses.

Corporate Monitoring Project Proposals Gaining

The Corporate Monitoring Project’s proposals received their highest-ever level of shareowner support this year, as disclosed in recent 10-Q filings.

  • Voting Leverage Proposal. Won average voting support of 8.2%, quite respectable for an innovative idea on its first time out. It appeared in the proxies of Visteon [VC] and Calpine [CPN].
  • Proxy Advisor Proposal. Supported by 20.1% of shares voted at Oregon Steel [OS], breaking its previous record of 17.8%. At USEC [USU] it earned 8% of the vote, for an average this year of 14%, compared with a 6.7% average for previous years.

Mutual Fund Votes to Watch

Beginning on August 31st mutual funds are required to disclose their votes. “To help prepare investors for the new disclosure of fund voting practices, Pax World Funds, home to America’s first socially responsible mutual fund, issued the following list of five key shareholder resolution categories that investors should follow:

  • Annual election of directors. Every member of a publicly traded company’s board of directors must stand for re-election. The two most popular approaches to this process are classified boards (with votes on individual directors every three years) and annual election. Directors are the shareholders’ representatives, acting on their behalf in meetings with management. If directors are standing for election each year, it increases their accountability. If a director is not doing his or her job, the individual can be removed more quickly under an annual-election system. This is an issue on which shareholder pressure can make a big difference. Consider the case of Avon: a shareholder resolution filed in 2003 asked for the board to be elected annually. Despite getting 80.5 percent backing from shareholders, management ignored the vote. In 2004, Pax World Funds co-filed the same resolution. Three days before annual meeting, Avon’s board changed course and decided to go with annual elections. Pax World Funds joined Walden Asset Management in withdrawing the resolution and declaring victory for its shareholders. Other recent votes were held at SBC Communications, Gillette Company, and Procter & Gamble.
  • Separation of chairman of the board and CEO positions. The CEO is management’s top representative. The chairman of a board is supposed to be the ultimate shareholder representative. So, there is an inherent conflict of interest when the positions are combined. In some smaller corporations, it may be done effectively, but the larger the company, the greater the need for two different people in the jobs. This is an increasingly important and high-visibility issue when it comes to responsiveness to shareholder needs. In 2004, the most famous battle of this sort occurred at Disney, where dissident shareholders convinced the board to strip CEO Michael Eisner of his title of chairman. This division of duty recently also happened at Dell, but it is extremely rare in the absence of intense pressure from shareholders. Such resolutions have been considered recently at Long’s Drug Stores, General Electric, Citigroup, ExxonMobil, and Safeway.
  • Risks associated with global warming. Experts agree that global warming is real and that means companies have to start dealing with a host of financial risks associated with climate change. Reinsurers already have indicated that they are not prepared to pay claims related to litigation concerning global warming. Recent regulatory and state legal actions – including carbon rules and lawsuits filed by state attorneys general – also create an uncertain situation in which companies that fail to adopt global warming strategies, including reduced use of fossil fuels, development of cleaner alternative energy sources, etc., put shareholder value at risk. ExxonMobil is just one of more than a dozen large and small energy industry companies that have faced such resolutions in recent years. In a major breakthrough this year, a number of leading U.S. utilities bowed to pressure from shareholders and agreed to take initial steps to address the impact of global warming on shareholders. Look for even wider support for global warming proxy resolutions in 2005 from state treasurers, pension fund managers and other institutional investors, as major players in the market demand. Major resolutions have been filed recently at Ford Motor, General Motors, American Electric Power, TXU, Xcel Energy, Cinergy Corporation, ExxonMobil, Southern Company, Anadarko Petroleum, Unocal, Apache Corporation, and Chubb Corporation.
  • Independent auditors. Shareholders need an unbiased party to scrutinize and report on management’s books. With the rise of tax consulting, auditors now find that their loyalties are torn by competitive pressures. The guideline used by Pax World Funds is that if more than 25 percent of revenue from clients at an audit firm comes from non-audit activities, then the independence of the firm is suspect. Investors should be concerned about this issue because the absence of an independence auditor means an important check and balance on management is missing from the system. Resolutions calling for independent auditors have been filed recently at JP Morgan Chase, Lockheed Martin, and American Electric Power.
  • Board diversity. The narrowing of perspectives in corporate America can lead to a “groupthink” atmosphere in which major opportunities are missed to avoid problems and to increase shareholder value. The reality is that there are far too few women and minorities represented on the boards of America’s corporations. The board of directors should reflect employees, shareholders, stakeholders and community in which the company is operating. Resolutions calling for enhanced board diversity have been filed recently at FMC Technologies, Danaher Corp, Grant Prideco, Kinder Morgan, North Fork Bancorporation, Skywest, Smith International and Werner Enterprises.

Disclosure of votes is likely to help the growth of socially responsible and corppporate governance funds.

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Fiduciary Ranking of Mutual Funds

Morningstar Inc. has debuted a system for ranking mutual funds based on best governance practices. They are starting with 500 funds and will rate about 1,500 more funds in the coming months. Among top-ranked funds using the new fiduciary rating system are the Turner Small Cap Growth Fund, the Weitz Value Fund and the Third Avenue Small-Cap Value Fund.

Morningstar drew on data from public filings, a proprietary Morningstar survey and other research by fund analysts. The grades are meant to be used as a tool, along with other information available to fund investors in making such decisions.

The letter grade assigned to each fund is based on the fund’s score in five key areas.

  • Regulatory Issues: They examine each firm’s record to determine if it has run afoul of regulators in the past three years. They look at the gravity of the allegations and the subsequent reforms undertaken. For example, while Strong and AllianceBernstein both get dinged for their role in the fund scandals, Morningstar thinks the latter has done a far better job of addressing its problems than Strong has. As such, AllianceBernstein scores higher than Strong on this factor.
  • Board Quality: For far too long, fund boards have looked the other way as investment-management firms have launched lousy funds, hiked expenses, or left underperforming managers on the job. Morningstar thinks boards such as PBHG’s could be doing a better job, since they allowed expenses to be raised at  PBHG Clipper Focus PBFOX, despite sizable growth in assets. They are taking a close look at factors such as the number of funds that directors oversee, the relationships between directors and fund firms, and the performance of trustees in looking after fund shareholders’ interests. Morningstar also examines whether trustees are investing alongside fundholders. For example, all ICAP board members are paid in fund shares.
  • Manager Incentives: Over the past few months, Morningstar has been asking fund companies to complete a survey detailing the structure of fund managers’ pay as well as the level of their investment in fund shares, since performance incentives can have a strong influence on the way a fund is run. A fund manager who is paid to beat an aggressive benchmark over a one-year period, for example, might be inclined to take much bigger risks than he or she otherwise would. Morningstar also give points to managers who invest in the funds they run. Managers who invest alongside fund shareholders are also more likely to pay much closer attention to issues like expenses and taxes than ones who do not. Morningstar doesn’t think it is a coincidence that firms like Longleaf Partners, which requires that all employees invest in Longleaf’s funds, have shown themselves protective of fund shareholders’ best interests.
  • Expenses: The amount that a management company charges fund shareholders often speaks volumes about the priority the firm accords the interests of fund shareholders versus those of company stakeholders. Morningstar has recently been critical of fee hikes at Evergreen. How do a fund’s expenses stack up relative to its peers? Is the firm passing on economies of scale as it grows? The scoring for this factor is within category and within distribution channel because they want to compare apples to apples.
  • Corporate Culture: Here, Morningstar looks for tangible evidence that a firm has a deep-rooted understanding of its role as a fiduciary. This is the most subjective component of the grade by virtue of the sheer number of factors that can influence the depth of a firm’s commitment to its fundholders. Analysts examine the quality of shareholder reports, a firm’s willingness to close funds at appropriate asset levels, and the pattern of new fund launches. Do fund companies place the long-term interests of fund shareholders front and center where they belong. Morningstar also looks at a firms’ usage of redemption fees and the ability to retain key personnel. Firms that embody these principles, such as Davis Advisors, score highly, while firms that fall short, such as Van Kampen, score poorly.

Next, they should rate funds based on their votes in corporate election…are they voting in the best interest of long-term shareholders?

Auditors Coming Forward

The Public Company Accounting Oversight Board, established by Congress two years ago to shore up investor confidence, has been receiving anonymous tips from current and former employees of corporations and accounting firms for months. The new system of online filing and a toll-free phone line is designed to be more “user-friendly” and enhance public awareness, said Claudius Modesti, the board’s director of investigations and enforcement. There may be a fair number of problems to report. William J. McDonough, the board’s chairman, told Congress in June that its limited inspections of the so-called Big Four accounting firms uncovered “significant” problems in their audits of companies’ books.

Next Step in Political Reform

California’s Treasurer, Phil Angelides, and CalPERS President, Sean Harrigan, are calling on the SEC to force companies to compile all political contributions by corporations into a single report and make it available to shareholders. Currently, companies report political contributions in separate reports to each state and federal elections office. By making the information more readily available, such contributions would be more open to shareholder scrutiny. Others endorsing the proposal are state treasurers of Oregon, Iowa, New York, Maine, Kentucky, North Carolina, Connecticut and Vermont, and the New York City comptroller. (CalPERS urges unified political-gift disclosure, Sacramento Bee, 8/26/04)

CA Will Seek Return of Money IF Generated by Evil Deeds: Independence Questioned

Computer Associates shareholders rejected a proposal to seek the return of millions of dollars paid to executives driven out of the company in the wake of an accounting scandal, according to preliminary figures. Cornish Hitchcock, representing proponent Amalgamated Bank’s Long View Collective Investment Fund, told those attending the annual meeting the proposal was based on the “simple principle” that “if you didn’t earn it, you shouldn’t keep it” and that “avoidance is not a good strategy.” According to a report in the Wall Street Journal, he was greeted with sustained applause. (CA Holders Vote Not to Seek Cash Of Ex-Executives , 8/26/04)

Chairman Lewis Ranieri told shareholders the board hadn’t yet made a decision but that CA would seek the money back if the board determined it was “generated by evil deeds.” That seems like too high of a standard.

“Independent director, ” Walter P. Schuetze, was paid $125,000 in “additional director fees” for “his extraordinary services in connection with the audit committee investigation concerning the company’s prior revenue recognition practices.” According to a recent article in the New York Times, Schuetze was a partner at KPMG for more than 20 years, then a chief accountant at the SEC. Before joining the CA board in 2002, he served as a consultant to the company on financial matters and received $100,584 in fees and expenses in fiscal 2002.

Last summer, with prosecutors investigating CA accounting practices, the company authorized the audit committee of its board to conduct an “independent investigation.”

The NYTimes article goes on to note, “Typically, when there is an internal investigation, a board hires independent experts to conduct it. Since Mr. Schuetze led the one at Computer Associates, he then, as chairman of the audit committee, had to review the adequacy of his own inquiry. That presents a potentially glaring conflict…Investors, meanwhile, are left to wonder if the independence that they need from their directors is the independence they are getting.” (Just a Friendly Group of ‘Independent’ Directors, 8/29/04)

In our opinion, “independent directors” should be nominated by shareholders.

Director Compensation Up 19%

Companies increased their total director compensation by 19% in 2003 (median total comp was $140,350) and paid more to lead directors ($27,160) and audit committee members (62%), according to a recent survey of director pay trends by Towers Perrin. Six percent of companies eliminated meeting fees in favor of a single cash retainer, while the number of companies paying board meeting payments decreased from 70% to 66%. Companies are decreasing their use of stock options, with only 54% of companies in the study using them in fiscal 2003 compared to 63% in fiscal 2002. Additionally, 12% of companies eliminated their annual stock option grant and 30% of companies increased the full-value share portion of their total annual/recurring stock. The percent of companies awarding restricted stock to their directors jumped six percentage points to 28%, with 68% of companies giving some form of full-value shares (restricted, common or deferred) to their directors in fiscal 2003 – up from 63% in 2002.

GovernanceMetrics Acquired

State Street Global Alliance, LLC, has acquired a minority interest in GovernanceMetrics International (GMI), a New York-based global corporate governance research and ratings firm that publishes corporate governance ratings on more than 2600 companies in 21 markets. State Street Global Alliance is a strategic venturing partnership jointly-owned by State Street Global Advisors (SSgA) and the Dutch pension fund ABP.

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CalPERS Should Add An Ounce of Prevention By Surveying Members

CalPERS, the biggest pension fund in the US, should take a page from its own guidelines and open a dialogue with its members on large issues. This will ensure the board doesn’t stray too far from the will of its members, will help the Board solidify its base, and will better guard against political backlash.

As I wondered the halls of the Capitol in Sacramento during the recent budget crisis, I heard suggestions from several members of the Legislature that CalPERS had outlived its usefulness, that public employees should be weaned away from a defined benefit plan. Legislators were sure such an action would help the State balance its budget. They were little concerned with the fact that defined contribution plans don’t often provide adequate benefits or that they are not cost effective.

CalPERS has come under attack in the press from the Republican Party, the Business Roundtable, and the U.S. Chamber of Commerce for its corporate governance activism. They have charged that “It’s the Union, Stupid!” CalPERS’ corporate governance reform ideas are driven, by unions, according to its naysayers and CalPERS should be put down.

We have survived the latest budget crisis but, unless care is taken, the great power CalPERS wields can create a political backlash that could undo one of the greatest forces for working people in America and a dependable source for a dignified retirement for over one million members and beneficiaries.

Most members of the System applaud the Board’s activism and many of the stands they have taken to advance more democratic forms of corporate governance. Additionally, we are delighted that the System’s top performing portfolio during the past year was its investment in activist corporate governance funds, which earned 53.5%. However, just as CalPERS has acknowledged, in adopting its Governance Guidelines, that stimulating a healthy debate is important for the development of good corporate governance, a healthy debate could strengthen CalPERS itself. Let CalPERS, once again, set an example to be emulated by other pension funds and mutual funds by educating and dialoguing with its members.

Under “Shareholder Rights,” CalPERS’ Governance Guidelines indicate that:
• No board should enact nor amend a poison pill except with shareowner approval.
• All equity based compensation plans should be shareowner approved. All material changes to existing equity based compensation plans, including repricings of any form, should be shareowner approved.

The State Constitution requires directors to be responsible fiduciaries, focusing on good investment returns, not the personal aspirations of its directors. Given the 53.5% return CalPERS gained on active corporate governance funds last year, the Board should have no problem justifying its actions. However, an ounce of prevention wouldn’t hurt.

Just as CalPERS recommends that certain corporate governance changes should be put to the vote of shareholders, CalPERS itself should at least check in with its members from time to time, either with formal votes or informal surveys. If they had done so on several recent hot-button issues, they might be facing a loss hostile environment today. Additionally, by doing so, they educate members and set a positive example that could help move markets.

Let’s look at a few items that could have benefited by such attention. Prior to this proxy season CalPERS approved new proxy voting guidelines that included voting against any director who approved non-audit work by the company’s auditors. This is a common conflict of interest. Had the Board put this out for healthy debate among members, surely many would have asked about the consequences of such a position.

If they were told the policy would lead CalPERS to vote against directors at almost all of the roughly 1,800 companies in which it owned shares, the policy may have been reformulated. What about allowing only tax consultation non-audit work? How much would that have narrowed the field? Members are proud of the stands CalPERS has taken; but most would rather save their fund’s clout for battles it has a possibility of winning, instead of ceremoniously withholding votes from investment luminaries such as Warren Buffett.

Additionally, criticism of its attempt to oust Safeway’s Steven Burd might have been significantly muted if CalPERS had asked members if it should be withholding votes from the CEOs and directors of companies that have underperformed peers over the last several years, especially if they suffered substantial labor strife or other factors that mitigate against quick turnaround. (Safeway’s stock had declined 66% at a time when the average blue-chip stock was down about 17%.)

Since CalPERS recently voted to place more of its money in a modified index, the Board might have also asked members if they thought it was better to invest in the Wal-Mart model of severe cost cutting, including labor expenses, or to invest disproportionately in companies like Costco, which pay employees higher wages, have less turnover and sell more product per square foot of store space.

I’m convinced the vast majority of CalPERS members, who are union members themselves, would vote to support the Costco model, if the fundamentals are good. Such investments are likely to provide not only good returns to members as beneficiaries but also higher tax revenue to the State and possibly higher salaries to public employees while they are working. The Pension Welfare Benefits Administration, which regulates pension funds, has emphasized since 1988 that such collateral benefits may be considered, if the investment is otherwise “equal or superior to alternative investments available to the plan.”

Another issue I’d like to see surveyed on this short list would be expensing stock options. Nearly every activist US institutional investor favors proposed Financial Accounting Standards Board rules that would compel corporations to count stock options as an expense.

Expensing options can help tame runaway executive pay, usher in international accounting standards and bolster the integrity of financial reporting. Executive option grants dilute holdings. Boards often react to drops in stock price by lowering the exercise price of grants, thus severing the link between pay and performance. Pay inequality generated by options often leads to less cooperative work environments, higher turnover and lower product quality.

Yet, CalPERS remains silent on the issue, probably due to the need of ex-officio members of the Board to raise campaign contributions in Silicon Valley. While members can certainly appreciate the need for politicians to raise money, that individual need should not interfere with doing what’s right for the long-run. Board members have a fiduciary duty to support expensing stock options.

Such surveys can also be a means of educating members about the fact that CalPERS is a universal owner. As such, their fiduciary duty becomes not just one of monitoring individual firms but also portfolio-wide effects. Seen from the owner of just one firm, for example, externalizing costs onto society through pollution or minimizing health care to employees is consistent with wealth maximization.

However, a universal owner experiences the full impact of these societal costs on its portfolio and has a responsibility, derived from the duty of care, to oppose policies that create negative externalities. That’s why CalPERS must take an interest in acting as a “socially responsible investor.”

Increasing its dialogue with members on these major issues and others may just add an ounce of prevention when CalPERS directors are accused of putting their own political or personal considerations ahead of their fiduciary mandate. Of course, directors risk not getting the answers they want but reformulating a few policies will hone their skills and will ensure more wide-spread support. Having over a million members and beneficiaries supporting the Board’s actions can’t hurt.

CalPERS May Disclosure Proxy Discussions

Board members called for a study into a rule that would require public disclosure of talks between trustees and investment officers over proxy decisions. The move was sparked by state Controller Steve Westly, a former eBay executive, after questions arose about whether he had a role in the fund’s June proxy vote for an eBay stock option plan that gave 9% of the company’s stock options to its top five executives – a move inconsistent with a board policy that sets a 5% limit. Officials said Westly did not influence their decision.

State Treasurer Phil Angelides said he was dismayed by the position and wondered if their decision was influenced by outside sources. Westly said a disclosure policy would answer critics who contend CalPERS’ proxy decisions have been motivated by politics. “We need to bring more sunshine to CalPERS,” Westly said. “I want to make sure staff is doing the right thing without undue influence.”

A proposed policy could be ready for review in October. (Sacramento Bee, 8/17/04)

CalPERS Investments Get High Value for Dollars Spent

CalPERS added more value to its investment portfolio at less risk and at a lower cost than other large public pension funds over the five-year period that ended December 31, 2003. Cost Effectiveness Measurement, Inc. (CEM), an information and advisory company, reported that CalPERS saved $144 million compared with its peers by paying less for consulting, custodial, and active investment management services. It cost $413.2 million to run the pension fund’s portfolio in 2003, compared with a peer benchmark of $557.1 million.

“Vote No” Study Results

Do Board Members Pay Attention When Institutional Investors ‘Just Vote No’? by Diane Del Guercio, Laura Wallis, and Tracie Woidtke (August 2004), appears to have been motivated in part by the debate around the SEC’s proxy access rule (Security Holder Director Nominations, S7-19-03). According to a recent note from Del Guercio to the publisher, “what the debate seems to lack is large sample evidence on whether existing tools available to shareholders are sufficient in prodding boards to be accountable to shareholders.” The study examines 150 ‘vote no’ or ‘withhold the vote’ campaigns from 1990 to 2003.

They examined directly some of the assumptions behind common arguments of both proponents and critics of the rule change. For example, they examine whether vote no campaigns appear to be motivated by ‘special interests’ with agendas inconsistent with maximizing shareholder value. They found that vote no campaigns do not appear to be motivated by special interests, but rather, by poor prior performance and board resistance to shareholder proposals receiving majority shareholder vote support.

Additionally, they find that campaigns appear to be ineffective in eliciting pro-shareholder board and governance changes at target firms. In fact, we find evidence that these firms are more likely to add management friendly charter provisions and takeover defenses following a campaign. Overall, we conclude that shareholders require a more potent tool to prod resistant boards to respond.

Take-away for pension funds and unions (according to CorpGov.Net).

  1. Since “vote no” targets subsequently add management entrenchment devices, they should be more selective in targeting.
  2. Since proxy advisors got significantly higher votes in their campaigns (and also with proposals by others which they endorse) and since these campaigns resulted in the highest percentage of significant subsequent actions, CalPERS and others would be advised to negotiate endorsement by such advisors prior to going ahead.

Changes at Hermes

According a report in the Financial Times, Peter Butler and Steve Brown left their posts at Hermes Focus Asset Management (HFAM) after Hermes Pensions Management CEO Tony Watson decided to limit HFAM’s independence. Butler and Brown are the founding directors of HFAM.

Hermes, a high-profile corporate governance activist, often used its £40 billion of assets to lobby for boardroom changes.  Last year, HFAM’s First Focus fund grew by 48%. Butler and Brown are believed to be considering setting up a new fund management operation once the details of the departure are sorted out, according to FT.

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Where’s Our

In a powerful essay (Politics and money: a volatile mix, Financial Times 8/9/04) Stephen Davis, of Davis Global Advisors, calls on shareowners to form “an investor-class version of, the powerful, web-based mobiliser of grassroots political activism. Without it, director election reform is jammed at the SEC.”

According to Davis, “the only meaningful currency of federal politics, as any K Street lobbyist knows, is the ability to deliver one or both of two staples: votes or campaign contributions.” The Business Roundtable has delivered the money and “proxy access” is probably dead unless Kerry wins in November.

“The shareowner community has vast potential to rally votes or generate mass targeted contributions, since funds represent the interests of tens of millions of American citizen-savers. But the closest equivalent to the Business Roundtable is the Council of Institutional Investors, which has neither a mandate nor an ambition to serve as a populist tribune of the investor class. Instead, it is mainly a networking vehicle for fund officials.”

So where’s our allows shareholders to research and discuss pending proxy votes but doesn’t appear ready to take on the task of getting out political votes based on shareholder rights. The Social Investment Forumhas done a great job of rallying the SRI community to support proxy access by facilitating the composition and delivery of supporting e-mail and letters but they also appear unlikely to get out the vote for Kerry based on his endorsement of proxy access. Any nominations to embrace this task? Who is ready to start a corporate governance political action committee to run issue ads on bringing democracy to corporate elections?

Dalton to Head Indiana University’s Institute for Corporate Governance

BusinessWeek hail’s Dan Dalton as a “debunker of conventional wisdom” (A Different Kind Of Governance Guru, 8/9/04) because he suggests that many favored governance reforms don’t lead to better financial performance. What doesn’t work? According to Dalton:

  • Separation of CEO and board chair
  • Equity holdings by CEOs and directors
  • Independent directors
  • Small boards

Many of Dalton’s findings come as no surprise to many in the movement to improve corporate governance. “Independent directors,” as defined by the current rules aren’t really independent…they aren’t nominated and elected by shareholders and many owe their position to entrenched boards and managements.

Dalton’s real talent may be overstating the position of corporate governance advocates and then undercutting their supposed positions. For example, in Institutional Investor Activism: Follow the Leaders? (1996)Dalton appears to argue that a company’s financial performance is more important than its governance practices. No rational person would argue otherwise but that does not mean governance practices cannot make a difference.

Dalton’s research in the area has made a significant contribution to the ongoing debate. Although he sees no correlation between “independence” and performance, he does advocate that boards have their own resources and budgets to hire outside counsel. So, he obviously believes true independence can make a difference. We welcome Indiana University’s new Institute for Corporate Governance and look forward to providing information to our readers on their efforts.

Amalgamated Punches Holes in Golden Parachute

Corning Incorporated announced it will seek shareholder approval for future senior executive severance packages that exceed certain limits. The change was in response to a proposal brought by Amalgamated Bank’s LongView Collective Investment Fund, which won 65% of the votes cast at the April 29th annual meeting.

LongView’s proposal asked for shareholder review of future senior executive severance agreements, commonly known as “golden parachutes.” Corning’s compensation committee and board of directors adopted the policy on July 21, 2004. The shareholder review process will occur for any new senior executive severance agreement with benefits that exceed 2.99 times annual compensation of base salary plus bonus. LongView filed the proposal at Corning following the 2002 award of a $10 million severance package to a former CEO. Corning is the fifth company to adopt LongView’s parachute proposal since 2003. NSTAR adopted a reform prior to its annual shareholder meeting, prompting the Funds to withdraw the resolution. In 2003, Union Pacific, Sprint, and AK Steel adopted similar LongView proposals.

Sparton Does the Opposite

In an era requiring improved governance and shareholder representation on corporate boards, Sparton Corp. (N-SPA) has called a special meeting on short notice (record date 8/9/04) attempting to remove cumulative voting rights from shareholders and also to tighten shareholder notice requirements for shareholders to nominate director candidates. I urge readers to vote AGAINST these proposals.

Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC. Lawndale and its affiliates own over 7.5% of Sparton.

7/30/04 Preliminary Proxy for September 24, 2004 special meeting

Direct link to all Sparton filings

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July 2004

Broadcom Settlement Pushes Democratic Corporate Governance

Under the settlement agreement, the cable modem chip maker will be one of only a few US companies that guarantee a board member will be nominated directly by its shareholders.

The agreement gives shareholders the ability to nominate candidates for one seat on the board, requires the board to obtain shareholder approval prior to granting executive stock options, mandates shareholder approval for the repricing of certain options held by directors and senior executives, and requires a majority of the members of Broadcom’s board of directors be independent. The pact also calls for the election of a lead independent director with broad authority and power.

Also included are enhanced internal controls, including mandatory quarterly financial reviews and the implementation of an internal audit function, as well as restrictions on the adoption of defensive measures and anti-takeover devices absent shareholder approval, including measures such as shareholder rights plans and the implementation of staggered board elections.

Four of the 63 settlements reached in class-action shareholder suits so far in 2004 have produced governance reforms, according to Bruce Carton, executive director of securities class-action services for Institutional Shareholder Services.

Secure Retirement a Thing of the Past?

The Center for Retirement Research at Boston College reports that 2002 pension participation was lower than it was in 1979. Some 46% of non-agricultural wage and salary workers, aged 25 to 64, in the private sector participated in a pension plan in 2002, down from 51% in 1979.

Men experienced a sharp decline at all earnings levels, correlated with a drop in union membership and employment by large manufacturers, while participation among women actually increased during the period driven primarily by more a shift to full time employment. In the top quintile of earnings, 65% to 70% of workers of both genders participated in pensions while that number plummeted to about 15% for men and 10% for women in the bottom earnings quintile.

The Empire Stikes Back

Nell Minow, cofounder of The Coporate Library and the most quoted and quotable of corporate governance experts recently noted, “We’re in the part of the movie where the empire is striking back.” “Certainly the corporate community is coming back very strongly to roll back or prevent reform.” Will corporations continue to be ruled by the “dark side” or will more democratic values finally be embraced?

The fact that the House voted to override a rule to require companies to expense stock options is not a good sign. The House vote was 312-111, with 198 Republicans and 114 Democrats voting for H.R. 3574 that would block a proposal by the Financial Accounting Standards Board, which would dramatically reduce the reported earnings of many big companies, especially those in the high-tech industry. Failure to expense stock options has often allowed such companies to report overinflated profits instead of losses.

Even Federal Reserve Chairman Alan Greenspan, far from a wild-eyed radical, told senators “I would be most concerned if Congress intervened.” Joining him are William Donaldson, Warren Buffett, and all of the Big Four accounting firms. The House-passed measure would limit required expensing of options to those owned by a corporation’s top five executives. It also would allow newly public companies to delay expensing for top executives in the first three years.

FASB Chairman Robert Herz said last month they may delay a final rule because corporate America already is facing deadlines to implement other new regulations enacted in 2002 in response to recent scandals.

New proxy access rules, Security Holder Director Nominations, S7-19-03,are also stalled. The rule, which would have allowed shareholders to place their own board candidates on company ballots in extremely limited circumstances, has been held back by SEC Chairman William Donaldson who appears to be caving due to pressure from the Business Roundtable, Chamber of Commerce and other CEO dominated organizations.

Lynn Turner, head of research at proxy adviser Glass Lewis and a former chief accountant of the SEC is quoted in TheSteet as saying “We’ve probably seen as much of a gain as is going to occur. Now the question becomes how much of that gain sticks.” “What’s indisputable is that business is pushing back hard,” said Rich Ferlauto, the director of pension and benefit policy for the American Federation of State, County and Municipal Employees union. “We haven’t stepped back from our agenda at all. There’s no going back.” (Backtracking on the Road to Corporate Reform,, 7/20/2004)  Perhaps a new Administration would help.

Independent Directors Lower Fraud

A study published in the May/June edition of the Financial Analysts Journal found that having a high proportion of autonomous directors correlates with a drop in fraud. Board Composition and Corporate Fraudalso found the presence of “gray” directors, such as family members, increased the likelihood of wrongdoing.

ICGN Seeks Executive Director

“While the Board will expect the Executive Director to have plenty of ideas and initiative, it is important that the successful candidate does not see this as a political platform.” See the job specifications under What’s new…

Proxy Access Rule

On July 8th Phyllis Plitch, reporting for Dow Jones, said that “despite intense corporate lobbying, a Securities and Exchange Commission proposal to give shareholder director nominees a place on the corporate ballot is still alive.” The basis for the statement is remarks made by Martin Dunn, deputy director of the SEC’s division of corporation finance, at the American Society of Corporate Secretaries’ annual conference. “I don’t think it’s dead, I think it’s a work in progress.” We, and others have speculated the rule is dead until at least after the presidential election.

While CorpGov.Net has never taken a position on a government election, choosing instead to focus on corporate governance, we are seriously considering an endorsement of the Kerry/Edwards ticket. The Republicans on the SEC, other than Donaldson, have indicated their clear opposition to even the watered down Security Holder Director Nominations, S7-19-03 proposal. Jonathan Peterson reports in the LA Times, “opposition from the Republican-oriented business community is passionate. In contrast, both Sen. John F. Kerry, the expected Democratic nominee for president, and his chosen running mate, Sen. John Edwards, have endorsed the idea.”

Is Donaldson going to stand up to the U.S. Chamber of Commerce, which blasted the proposed rule as an attempt by unions and public employee pension funds to gain new leverage over corporate America? The Business Roundtable placed ads in major newspapers signed by chief executives of 40 large corporations, warning that the proposal would erode the independence of directors. (Shareholder Plan a Flash Point for SEC, 7/13/04) Of course, CEOs fear directors that will be independent from them and also accountable to shareholders. Or, as Charles Elson, head of the Center for Corporate Governance at the University of Delaware, stressed recently at the ICGN, directors need to be “independent of management, not independent of shareholders.” We still doubt the rule will move forward until after the elections and we are beginning to believe they will move forward only if Kerry and Edwards are elected.

CalSTRS Ups Profile

The Sacramento Bee reports that California Controller Steve Westly is pushing California State Teachers’ Retirement System to pressure the nation’s largest corporations to tie executive compensation to their companies’ long-term financial performance.

“When you have huge executive compensation at poor performing companies, something is wrong. This is no time to be giving people raises,” said Westly, a trustee of CalSTRS as well as the state’s other major public pension fund, CalPERS. Westly’s proposal for CalSTRS calls for:

  • Linking a large share of executive compensation to major performance goals.
  • Requiring shareholder approval of pay policies.
  • Calling for three-to five-year reviews of compensation programs.
  • Detailing executive contracts in easy-to-understand language.

In addition, Westly is asking CalSTRS to create a “watch list” to expose companies with excessive CEO pay packages. He also wants to promote companies with the best compensation programs.

“Good performance should be rewarded,” Westly said, though “you want to make sure you’re not rewarding poor performance at shareholder expense.”

Trustees of the $114 billion fund voted unanimously to start mapping out a game plan to corral huge compensation packages for high-level executives at the nation’s largest corporations. The trustees’ goal is to get companies to enact standards that keep executive pay in check.

“We want to send a proactive message that any company that is even close to being involved in products or services involved in torture is something we should not be profiting from,” Westly said. “We will not invest in companies that did not adhere to the Geneva protocols on torture.”

Executives from defense contractor CACI International Inc. plan to huddle with CalSTRS and CalPERS next month to explain the company’s role providing interrogators to Iraq prisons. The torture allegations could cause financial risk for the funds, which own a combined 286,982 shares in the company based in Arlington, Va. (Controller targets exec pay, 7/7/04,CalSTRS weighs anti-torture policy, 7/8/04)

Donaldson, We’re Still Waiting

The Washington Post editorialized that the SEC did the right thing when it voted to make the boards of mutual funds more independent. “Mr. Donaldson’s Next Move” should be to move forward on the proposal to provide shareholders with the right to place director nominees on the corporate proxy in very limited circumstances.

“The chief result of this new rule would be that large institutional shareholders — especially the nation’s corporate-governance-minded public retirement funds — would gain a new tool to pressure managers. Companies that pay top executives lavishly despite mediocre performance would be the prime targets.” And the Business Roundtable, which represents those managers quite understandably wants them to continue to have a monopoly, along with the boards they tend to dominate, on nominating candidates for directorships. .

The Post doesn’t mention that institutional ownership of the S&P 500 has grown from 56% in the mid-nineties to 65% as of May 2004. However, the Post does observe, “It seems hard to imagine that an objective observer could oppose this proposal. Shareholders are the owners of public companies, after all.” Only slightly more than half (56%) of CEOs themselves recently reported that their directors were well prepared for board meetings. Even fewer – just 40% – said directors made an effort to learn about the company outside of board meetings. (Shareholder Activism Intensifies Spotlight on SEC Director Nomination Proposal, On Board, June 2004)

Can anyone really believe that directors nominated by shareholder would be less conscientious?

The Corporation: The Pathological Pursuit of Profit and Power

Joel Bakan has authored a book as well as a documentary movie. No, the movie isn’t as entertaining as recent documentaries by Michael Moore but Bakan isn’t overtly trying to influence current elections. Bakan briefly describes the historical evolution of the corporation from its small beginnings in the 1600s to its banishment by the English Parliament in 1720 through to its current domination of government and society.

Major points:

  • Corporations pursue their own economic interest regardless of harmful consequences to people and the environment, externalizing its true costs.
  • Governments have abdicated control by freeing corporations from legal constraints and granting authority over society through privatization.
  • Corporate social responsibility. Although it accomplishes much, it is often a token gesture, and temporary, masking the corporation’s true character.
  • Corporate governance, no matter how reformed, appears to leave us with an undemocratic one share, one vote, not one person, one vote.

“Dodge v. Ford still stands for the legal principle that managers and directors have a legal duty to put shareholders’ interests above all others and no legal authority to serve any others.”

Shareholders can’t be held liable for the corporation’s actions because of limited liability. Directors are protected because they have no direct involvement in the decisions leading to crimes. Executives also escape liability unless they are proven to have been “directing minds.” That leaves the corporation itself and Bakan argues in favor of revoking charters.

“The notion that business and government are and should be partners is ubiquitous, unremarkable, and repeated like a mantra by leaders in both domains.” “Partners should be equals. One partner should not wield power over the other.” “Democracy, on the other hand, is necessarily hierarchical. It requires that the people, through the governments they elect, have sovereignty over corporations, not equality with them.”

Robert Monks sees pension funds as a “proxy for the public good” but Bakan argues that it is still one share equals one vote. Asked if Monks had reduced harms caused by corporate externalities at many companies he has helped reform, “his simple answer was ‘No.’”

“Deregulation is really a form of dedemocratization, as it denies ‘the people,’acting through their democratic representatives in government, the only official political vehicle they currently have to control corporate behavior.” The rising dependency on nongovernmental institutions as a substitute for governmental regulations is socialism for the rich and capitalism for the poor. “The corporations get all the coercive power and resources of the state, while citizens are left with nongovernmental organizations and the market’s invisible hand.”

“The corporation is not an independent ‘person’ with its own rights, needs, and desires that regulators must respect. It is a state-created tool for advancing social and economic policy. As such it has only one institutional purpose: to serve the public interest.”

In the final analysis, Bakan says he would rely on improving the regulatory system.

  • Staffing enforcement agencies at realistic levels, setting fines at a deterrent level, bar repeat offenders from government contracts, and suspend the charters of flagrant violators.
  • Regulations based on the precautionary principle.
  • Allow local governments to play a greater role in regulations, since they are “more willing and able to forge alliances with citizens groups around particular issues.”
  • Protect and enhance trade unions, as well as environmental, consumer, human rights and other organizations.
  • Phase out political donations by corporations and place tighter restrictions the on revolving door of personnel.
  • Proportional representation to encourage disillusioned citizens to participate.
  • Create a robust public sphere to protect that which is too precious to leave to corporate exploitation.

Although most of Bakan’s major points are valid, I’m not ready to give up trying to make corporations more democratic from within or more socially responsible through public and investor pressure.

Pension funds are something of a proxy for the public good and many are not run on one share one vote. At CalPERS, for example, members elect about half the board and the other half are elected by the public or are appointed by elected officials. Although it isn’t ideal, it comes closer to one person one vote than most other institutional investors and CalPERS has a record of fighting for many of the type of reforms Bakan advocates.

SRI funds may not operate as democratically as CalPERS or have as long an investment horizon (which considers externalities) but they do raise public awareness of needed reforms.

Bakan seems to want it both ways with nongovernmental organizations. On the one hand he says they are powerless, on the other he wants them protected and enhanced. Pushing regulations to the local level seems likely to result in deregulation and local governments compete for corporate crumbs.

What is clear is that corporations must be accountable to the larger society or else we’re all in trouble. Government is our only hope when it comes to protecting the commons, like reducing the magnitude of global warming. However, we’ll need all the tools in our bag to get the job done. Saying we need to give government the power to regulate doesn’t make it so. Yet, Bakan’s analysis does well to point to the fact that corporations are social constructs that must be channeled to serve the public interest. Perhaps the book and the movie will inspire action. Buy from


Mutual Fund Voting Policies Studied

Burton Rothberg and Steven Lilien, both of Baruch College in New York, examined voting policies at the 10 largest mutual fund families to get clues as to how funds will vote when they have to start disclosing next month. Included in the study were Fidelity, Vanguard, American Funds, Putnam, Janus, Franklin Templeton, AIM/Invesco, T. Rowe Price, Morgan Stanley Dean Witter and Oppenheimer.

Most oppose poison pills, want auditors free from conflicts of interest and oppose repricing of stock options. However, “Morgan Stanley funds generally vote with company management on major issues. The funds, for example, support management in the selection of directors, with no requirements on board independence.”

Most troubling to the International Herald Tribune writer was the fact that only four of the fund families in the study – Vanguard, AIM/Invesco, American Funds and Putnam – describe in their policies how they deal with personal conflicts of interest, such as when they hold shares of companies that are also their customers in other businesses – for example, a division that administers a 401(k) or other investment plan. (Study sheds new light on fund voting policies, 7/6/04)

Act Now to Reject “The Stock Options Accounting Reform Act”

Citizen Works is advising its readers to tell Congress to stand up for honest. In July the so-called “Stock Options Accounting Reform Act”  (HR 3574) is expected to come up a full House vote. It would block the Financial Accounting Standards Board (FASB) from implementing a common-sense rule to require that stock options be counted as expenses. Currently, stock options are the only major form of compensation that does not have to be counted as an expense, that due to the intervention by Congress in the mid-nineties.

The terrible bill panders to big-donor technology companies that want to be able to continue to mislead investors and the public by failing to account for stock options. Congress needs to hear from citizens and small investors. Tell your Representative to stand up against more Enron-style accounting. Tell them that you are counting on them to support FASB’s plan to require stock options to be expensed.

Sample letter to your Representative on HR 3574:

Full details on the proposal to expense stock options:

Complete resource on Stock Options:

Last week, 23 international institutional investors representing $3.5 trillion worth of funds (including the leading pension funds and investment management funds in Canada, Norway, and Sweden), sent a letter urging FASB to stand firm in expensing options. “International investors have collectively lost billions from recent US corporate scandals, including ones resulting from fraudulent and misleading financial statements,” said the letter. The investors said that financial reporting should be shaped by a goal of comprehensive information, “not by what results in the most attractive reported numbers.” (Citizen Works’ Corporate Reform Weekly, July 5, 2004)

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The Corporation

Fortune magazine (7/12/04) ran a “face off” on the Canadian documentary, The Corporation, which is now showing in the US. One of the movie’s central themes is that if the corporation were a person, he/she would qualify as a psychopath (incapacity to maintain enduring relationships, amoral, callous, deceitful, ignores any social and legal standards to get its way, and does not suffer from guilt, while mimicking the human qualities of empathy, caring and altruism). Fortune says the film is “more balanced than your typical lefty screed.” They asked four leading businessman for their opinion of the film and their average rating was 3.5 out of 4 stars.

Although it seen by far fewer than Michael Moore’s “Fahrenheit 9/11” film, it certainly is worth viewing for anyone trying to improve corporate governance and behavior. More important, we need to encourage the average American to attend.

Concerned Shareholders of Leisure World

The battle for democratic governance extends to Senior citizens at Leisure World in Seal Beach who are battling for their right to see financial records, including expense reports and how much management is paid.

Leisure World, where the average age is 77, is divided into 16 geographical areas run “mutual corporations,” each headed by elected residents. Representatives from each mutual board elect the Golden Rain Foundation Board, an umbrella group that governs the entire community.

In 2002 administrators banned dog walking, forcing residents to carry their dogs from their homes to their cars and drive their pets outside Leisure World’s boundaries for exercise. Resident soon learned that Leisure World wouldn’t give them information which they are entitled to under state law:

  • Why monthly fees increased $30 this year and why the fees still cover a mortgage they say has been paid.
  • How much Leisure World pays contractors to landscape most of the 533-acre property, including the golf course.
  • How much management is paid.

And, of course, there are the typical conflicts of interest. For example, the landscaping contractor is one of the development’s joint owners.

They’re fighting back through lawsuits. Armed with copies of the California Civil Code, the California Corporations Code and Leisure World’s bylaws, the band of residents sought financial penalties from Golden Rain Foundation for each violation. So far, the board has been fined $1,400 — $200 for each plaintiff. The judge then advised the to keep requesting the information. If they don’t get it, he’d see them back in court. (See Rebelling Now a Senior Activity at Leisure World, LATimes, 7/4/04. See alsoAmerican Homeowners Resource Center to learn more about rights in an HOA.)

BRT Appears to Call the Shots

As the ISS Friday R

eport (7/2/04) noted, “Delays appeared likely this week on two key reforms: the SEC’s proposed rule on shareholder access to director nominations, and the Financial Accounting Standards Board’s (FASB’s)proposal to require expensing of options.” The press often reports on the “shareholder revolution.” In reality, the Business Roundtable still seems to be calling the shots. Clearly, we need to turn up the volume and demand our rights. Concerned shareholders must unite! Perhaps a recent commentary in BusinessWeek will help (see “Earth to Silicon Valley: You’ve Lost this Battle,” 7/12/04)

Donaldson Waivers: Time to Dump Bush?

As reported by the New York Times, William H. Donaldson, chairman of the SEC appears in a near paralysis regarding a proposal to permit large shareholders to nominate a limited number of independent directors to corporate boards. “The deadlock all but dooms prospects for the rule to be adopted in time for the new proxy season that begins early next year.”

Last summer and last fall, Donaldson embraced the broad outlines of the plan, but he has since become lukewarm in the face of opposition from the Chamber of Commerce and the Business Roundtable. The measure is clearly supported by the two Democratic commissioners, Roel C. Campos and Harvey J. Goldschmid and opposed by two other Republican commissioners, Paul S. Atkins and Cynthia A. Glassman. Donaldson’s vote is key to enactment.

According to the report, “the fate of the proposal could be determined by the outcome of the election.” Donaldson still supports the concept of giving institutional investors more of a voice at troubled companies, but wants to find a “middle route that addresses the worries on both sides.”

Unfortunately, the key dispute is about power. Will shareholders continue to be at the mercy of entrenched CEOs and boards or will they finally have some voice in nominating one or two directors? The proposal is to take a baby step in the direction of democratic corporate governance. However, for the powers that be, even that step is too much. They are afraid that even token changes can eventually lead to revolution.

If changing presidents is what is needed then investors might be better off throwing their considerable weight behind John Kerry. If a little democracy is good for Iraq, it is certainly good for corporations. (S.E.C. at Odds on Plan to Let Big Investors Pick Directors, NYT, 7/1/04) However, first we need to know where Kerry stands on democracy in corporate governance. So far, all I’ve found is his statement that “the SEC should allow long-term significant investors to have a voice in the selection of a portion of a company’s board of directors.” (see Corporate Accountability…middle of second paragraph)

Additional fodder, care of Citizens Works:

“The Securities and Exchange Commission last week announced an investigation into possible accounting fraud at EasyLink Services Corp., a company where SEC chairman William Donaldson formerly served on the board of directors. Donaldson served on the audit and compensation committees. He has recused himself of dealing with the case.

At issue is how the technology company booked $3 million worth of barter deals related to advertising in 2000. EasyLink said that the $3 million under scrutiny was not “material” to its financial statements.

EasyLink, formerly known as, converts paper documents into e-mails. During the dot-com boom, its shares were worth as much as $271. Today they are worth $1.63. As head of EasyLink’s compensation, While on the compensation committee, Donaldson voted to forgive a $200,000 loan to the company’s chief executive when the company was struggling financially.

For more, see: “EasyLink Ad Deals Probed; SEC Chief Recuses Himself,” by Carrie Johnson of the Washington Post.” (Citizen Works’ Corporate Reform Weekly, July 5, 2004)

Maybe at this point Donaldson will be more concerned with saving his own skin, rather than leaving a legacy that would have at least been a foot in the door to shifting power.

Goodyear Shareholder Proposal Wins 48% Support

A shareholder proposal subjecting any future Goodyear (GT) poison pill toshareholder vote wins 48% shareholder support. This poison pill vote proposal won 48% of the yes and no votes at Tuesday’s 9:00 a.m. shareholder meeting in Akron. This is a particular strong vote because Goodyear responded to this proposal by terminating its poison pill early – June 1, 2004.

  • Yes votes: 43,277,892 (48.5%)
  • No votes: 45,863,791

A poison pill enables management to flood the market with stock to thwart a potentially profitable bid for company stock. Contact: John Chevedden, 310-371-7872.

Robert J. Keegan, who is also president and chief executive officer of the nation’s largest tiremaker, won a three-year term with 84.5% of the vote. He has been on the board since 2000 and chairman since last July and was paid a $1 million salary plus more than $500,000 in bonuses and other compensation. Newly elected Goodyear directors Rodney O’Neal and Shirley D. Peterson board are reported to own no stock.

Goodyear has cut 6,000 jobs, acknowledged accounting errors that cost it $280 million, lost a combined $2 billion in 2002 and 2003, recently reported its loss in the first quarter narrowed to $76.9 million on record quarterly sales of $4.3 billion, and spent more than $3 billion on restructuring.

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Open Letter to WSJ

James Miller’s “What Would Adam Smith Say?” (Wall Street Journal, 6/29/04) claims that Smith wouldn’t favor the new SEC rules requiring mutual funds to have an independent board chair. According to Miller, rational self-interest requires funds run by inside managers.

However, One need look no further than one of Smith’s most famous quotes to surmise that not only would he favor an independent chair, he would also lift the SEC’s prohibition against share/fund holders from using the corporate/fund proxy to nominate directors.

In criticizing corporations directed by managers, Adam Smith said, “The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own …. Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company.”

Under Smith’s logic, there could be no better directors, including the chair, than those chosen by shareholders from their own ranks.

Dems Push Access to Proxy

Six key Democratic members of Congress called for the Securities and Exchange Commission to issue new rules that would provide large investors more access to the process of nominating a board of directors.

The representatives see such a measure as a deterrent to scandal. “Adoption of this rule would prove to be a powerful tool in preventing corporate fraud, as well as restoring beleaguered investor confidence,” said the letter to SEC Chairman William Donaldson, which was released by Michigan’s John Dingell, according to Reuters. Besides Dingell, the letter was co-signed by Massachusetts’ Barney Frank and Edward Markey, New York’s Carolyn Maloney, Colorado’s Diana DeGette and Maine’s Tom Allen. (Democratic Reps. Weigh In on Proxy Rules,, 6/30/2004)

William H. Donaldson’s Remarks to Directors College

Consider the situation faced by a sizeable group of shareholders who are committed to the long-term prospects for a certain company, but who confront a company management that refuses to respond to, or even communicate about, the shareholder group’s concerns. The dilemma is that the shareholders have only two practical choices. First, they can choose to cease being committed to the long-term health of the company; in other words, they can sell their stock. Under this choice, they would be forced to give up their belief that with some modest changes in company direction, the company could be more successful in its markets and could therefore be an extremely productive investment over the longer term.

Their second – and only other – choice is to wage an extremely expensive proxy fight. This contest could be for the entire board of directors or for only some seats on the board – a so-called “short slate.” In either case, the proxy fight takes on the trappings of a contest for control. Under this choice too, therefore, the shareholders would be forced to give up their belief that modest changes in company direction could produce the long-term benefits they seek. Instead, they are forced to divert the company’s resources away from the business they’re building, to the proxy fight they’re waging – the last thing the shareholders really want for the company’s future.

The proxy access proposal under consideration by the SEC is an attempt to find a middle ground between the extreme choices of forcing shareholders to give up their long-term interest in the company and sell their stock, on the one hand, and forcing them to wage a wasteful proxy fight on the other. It is an attempt to find a middle ground that would, under certain restrictions and limitations, provide shareholders having a true interest in the long-term health of the company, with a more effective proxy process that gives them a better voice in this nomination and election of the board of directors. In essence, it is an attempt to encourage management and long-term shareholders to communicate more effectively with each other about the company’s future.

The current proposal is important, but complex and controversial. Unfortunately, the controversial aspect threatens to overshadow the importance of what the Commission is trying to accomplish. There are strongly held views on all sides of this issue. While we welcome the expression of all views – that is the essence of our notice and comment rule-making process – the escalating, shrill, and fearful rhetoric on all sides of this issue has drowned out thoughtful discourse and comment. Those who believe that our proposal is a serious and unwarranted threat to the operation of boards and those who believe that our proposal does not go far enough in giving shareholders a more effective proxy process have gone well beyond the bounds of thoughtful and sensible comment.

For example, some proposed offering the company a chance to “cure” the shareholder communication problem on its own – that is, if a majority of shareholders withheld their vote for an incumbent director, the board nominating committee would be empowered to replace the “withheld” director with a new director more acceptable to the shareholders. In response, a prominent publication quoted someone summarizing the proposal like this: “If Bozo A gets voted down, the nominating committee can substitute him for Bozo B.” Similarly, a corporate governance activist has derided this idea as doing no more than replacing “Tweedledum with Tweedledee.”

On the other side, the Business Roundtable has said this one modest change in the proxy rule would, and I quote, “put companies, shareholders, and the economic recovery at risk.” The U.S. Chamber of Commerce has said that the proposal “could seriously impair the competitiveness of America’s best companies [and] put proprietary business information at risk.”

That this is an election year doesn’t help. Reports that this is a partisan political issue miss the point entirely. Republicans and Democrats alike are on all sides of this issue. Politics must not be allowed to drive the public debate or the Commission’s deliberations on this matter, or any other. The imperative here is to approach this issue – like all others – in a thoughtful, measured way and to try to do the right thing for the corporations and shareholders who own them.

I remain committed to responsible and constructive change in this area, and will proceed thoughtfully and carefully. Our goal is the right course, rather than a hasty, less thoughtful course. We will not be forced to act in the face of an artificial deadline. However, after 60 years of repeated Commission consideration of this topic, the time has come for sensible, balanced, and constructive debate leading to action designed to improve our proxy process for the nomination of directors.

So I would encourage you – and the companies you serve – to avoid unproductive rhetoric and focus rather on the central problem the proposed rule addresses – how to find a middle ground between the extreme choices of forcing shareholders to give up their long-term interest in the company and sell their stock, on the one hand, and forcing them to wage a wasteful proxy fight on the other. Let’s not mock those who struggle to find this middle ground. And let’s not proclaim the end of American economic competitiveness if any such middle ground were found. Instead, I would ask you and your companies to provide thoughtful, meaningful input that will help the Commission arrive at an effective, workable solution that will benefit investors, our companies, and our markets. Frankly, they deserve nothing less. (Speech by SEC Chairman: Remarks from Directors College at Stanford University Law School, William H. Donaldson, Chairman, U.S. Securities and Exchange Commission, Stanford, CA, June 20, 2004, Full Text)

Morrison’s Coefficient

According to Don Morrison, “there is a negative correlation between executive pay and common sense. The higher the conpensation, the bigger the blunder” and the “greater the temptation to think you’re the smartest guy in the room.” The results can be catastrophic.

In “Don’t Always Rely on the Smartest Guy in the Room” (Corporate Board Member, July/August 2004), Morrison also discuses “commitment and consistency.” “You do something that looks reasonable, and the result of that act leads you to take another reasonable-seeming step, and so on until you arrive at a disaster you didn’t anticipate because you got there one reasonable step at a time.”

Another explanation for Enronic behavior is “fiduciary co-dependency.” “Your accountant lets you get away with actuarial whoppers because she knows that if she doesn’t, you’ll get a new accountant, who will let you tell even bigger porkies because she doesn’t want to be replaced by a more pliable bean-counter either.”

Give Managers Ownership But Not Votes: or Do the Opposite

“Voting ownership is bad, economic ownership is good,” summarizes the results of a study that compared hundreds of dual-class companies with the larger universe of single-class companies from 1994 through 2001. “What you’d really like to do is give managers a lot of economic ownership in a company, but no votes, which is the opposite of what you see in most dual-class companies.” Metrick conducted the study with Paul A. Gompers, professor of business administration at Harvard Business School, and Harvard economist Joy Ishii. Their paper is entitled, Incentives vs. Control: An Ana lysis of U.S. Dual-Class Companies.

Executives and other insiders who own large blocks of their companies’ shares work harder to boost share prices, benefiting all shareholders. At the same time, insiders with large blocks of votes can become entrenched – using voting clout to stave off outside shareholders’ efforts to replace them if they perform poorly.

The study found that large ownership stakes in insiders’ hands do tend to improve corporate performance, while heavy control by insiders weakens it. Company values improved as insider ownership rose, with the effect reaching a peak when insider ownership reached 33%, based on their share of “cash flow” such as dividends. As insider ownership grew from zero to 33%, Tobin’s Q grew by about 15%. The effect levels off as ownership exceeds 33%, probably because of the wealth effect. Insiders become so rich they have dwindling interest in accumulating more and prefer corporate strategies that emphasize safety over performance.

Growth in insiders’ voting power had the opposite effect as growth in economic stakes. Tobin’s Q declined as insider’s voting power grew, with the loss bottoming out as their voting control reached 45% of the votes available to be cast. As voting power grew from zero to 45%, Tobin’s Q fell by 25%. “This is consistent with the entrenchment effect of voting ownership, i.e., the more control that the insiders have, the more they can pursue strategies that are at the expense of outside shareholders,” the authors write. (The Effects of Dual-class Ownership on Ordinary Shareholders[email protected])

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June 2004

American Firms Scarce at UN

After going it almost alone in Iraq, with a “coalition of the willing,” both George W. Bush and John Kerry appear to recognize the need to work with the Uited Nations and broad coalitions. When will American corporations learn the same lesson? Just 70 of the 1,500 companies that have signed onto the UN Global Compact, which promotes standards for human rights, labor, environmental and anti-corruption standards. With all the standards American firms are required to follow, one might think they would want to encourage corporations based in other countries to raise their standards.

Companies from about 70 countries have signed on, including 330 French firms and 93 from India. About half are from developing nations. The pact is strictly voluntary and advisory; there are no penalties or enforcement; perhaps that’s the problem.

Twenty major investment companies — including Banco do Brasil, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley — have endorsed “connecting financial markets” to environmental, social and governance criteria, and agreed to bring other actors in the financial world into play on making these factors standard components in the analysis of profitability and investment decision-making.  The 20 companies control $6 trillion in assets.

UN Secretary General Kofi Annan told a recent gathering: “I ask you all to work together – business, civil society, labor and governments – and to work with the United Nationa, so reduce the global risks we all face and to realize the promise of a fairer, more stable world.”  We have to start somewhere.

The Cost of Entrenched Boards

Lucian Bebchuk and Alma Cohen investigated empirically how the value of publicly traded firms is affected by arrangements protecting management from removal. A majority of U.S. public companies have staggered boards that substantially insulate the board from removal via a hostile takeover or a proxy contest. (Program on Corporate Governance, John M. Olin Center for Law, Economics, and Business, Harvard Law School, Olin Paper No. 478) They find that:

  1. Staggered boards are associated with an economically significant reduction in firm value (as measured by Tobin’s Q);
  2. There is evidence consistent with staggered boards’ bringing about, and not merely reflecting, a lower firm value; and
  3. The correlation with reduced firm value is stronger for staggered boards established in the corporate charter (which shareholders cannot amend) than for staggered boards established in company bylaws (which can be amended by shareholders).

More “Independent” Directors = Less Fraud

As the proportion of independent, outside directors on a board and its oversight committees increases, the likelihood of corporate fraud decreases, according to a study of U.S. companies published in the June issue of Financial Analysts Journal, a research publication for investment practitioners worldwide published by CFA Institute. The study also found that companies that had a board compensation committee tended to be more likely to commit or be accused of fraud – although, the fewer ties compensation committee members had with the company and its executives, the less likelihood there was of corporate fraud.

Compared to the non-fraud companies, companies accused of committing fraud:

  • Had a lower percentage of outside directors
  • Had a lower percentage of independent directors
  • Were less likely to have an audit committee of the board
  • Were more likely to have a compensation committee of the board
  • Had a lower level of independence on audit, compensation and nominating committees .

Their results support NYSE and NASDAQ requirements for independent directors and Sarbanes-Oxley Act requirements for audit committees. Regarding their finding that companies accused of fraud were more likely to have a compensation committee, the authors write, “The implication is that compensation committees have been ineffective in evaluating and properly rewarding the performance of top executives. They may also have designed compensation packages with dysfunctional incentives.”

Composition of the compensation committee was a significant mitigating factor. The more independent directors on the committee were of any other business or personal ties with the company, the less likelihood there was of corporate fraud.

The researchers did not find statistically significant differences between the fraud and no-fraud groups when they tested for:

  • board size
  • frequency of board meetings
  • frequency of audit, compensation and nominating committee meetings
  • existence of a nominating committee
  • financial performance of the company
  • the length of time that the CEO had served on the board
  • whether the president or CEO also served as chairman of the board.

The authors conclude that “the influence of the CEO on the board does not detract from its effectiveness in monitoring for fraud.”

AFL-CIO Presses for Expensing Stock Options

After the Enron collapse, ex-CEO Ken Lay, ex-CEO explained to Congress the biggest accounting loophole: not expensing stock options. While regulators have proposed to fix this problem, rich Silicon Valley executives are fighting to keep their stock options off the books. The AFL-CIO is letting its members know, “that’s bad news for the retirement savings of America’s working families who depend on companies having honest accounting.”

How much do these execs take home in stock options? A few examples follow:

  • Agilent Technologies, Edward W. Barnholt. $6,256,709
  • Autodesk Inc., Carol A. Bartz. $13,911,205
  • Cisco Systems, John T. Chambers. $214,088,550
  • Dell Computer, Michael S. Dell. $94,589,992
  • Genentech Inc., Arthur D. Levinson. $156,160,901
  • Intel Corp., Craig Barrett. $78,552,300
  • Qualcomm Inc., Irwin Mark Jacobs. $199,344,974
  • Sun Microsystems, Scott G. McNealy. $30,983,520
  • Valero Energy, William E. Greehey. $68,166,865
  • Xilinx Inc., Willem P. Roelandts. $54,732,771

Failure to expense stock options has widened the pay gap between CEOs and workers. Last year, the average CEO made 301 times the average worker’s pay, up from 42 times in 1980. Executives disproportionately benefit from stock options and this cost has been kept off the books. Worse, the failure to expense stock options has artificially boosted profit reports-making some under performing CEOs and companies look robust. Help fix this problem by urging the regulators to make stock option expensing mandatory. Get active.

Berkeley City Council Against Corporate Personhood

The City Council of Berkeley, California last approved a resolution to amend the U.S. Constitution to say that corporations should not enjoy the same constitutional protections and rights that real people enjoy. The resolution also supports amending the U.S. Constitution and the California Constitution to say that the First Amendment free speech protections should not apply to corporate expenditures.

As the resolution notes:

“WHEREAS, under the United States and California Constitutions, all sovereignty resides with “We the People,” such that people hold all inherent political power and government derives its power from the consent of the governed; government is created by the people and for the people for our health, safety, and welfare; our system of government is a representative democracy, through which the people govern; and “We the People” are entitled to inalienable constitutional rights to wield against oppressive governmental regulation; and”

“WHEREAS, “corporation” is not mentioned in the United States Constitution; our founders did not grant corporations rights; rights were reserved for natural people; historically corporations were created as artificial entities, chartered by state governments to serve the public interest, cause no harm, and be subordinate to the sovereign people; and yet by judicial interpretations, corporations gained personhood status, free speech and other protections guaranteed by the Bill of Rightsand the 14th Amendment;”

In approving this resolution, Berkeley becomes the third and largest municipality in the country to pass such a resolution, which is non-binding and only advisory. The other cities to pass similar resolutions are Arcata, California and Point Arena, California. Get active.

Virtual Shareholders Meeting

ICU Medical held its annual shareholders meeting solely online. Even though Delaware law has permitted virtual only meetings since 2000 and Inforte was the first (and only, until ICU) company to do so, Delaware companies have been loath to go that route due to fear of shareholder wrath. Last year, Seibel Systems backed off plans to conduct a virtual only meeting after shareholders saw the proxy materials filed by Seibel and complained. Learn more about virtual meetings

Anthem Proposal to Buy WellPoint

California State Insurance Commissioner John Garamendi said Friday that he wouldn’t support Anthem Inc.’s $16-billion acquisition of the parent of Blue Cross of California unless the Indiana company spends hundreds of millions of dollars on healthcare programs for California’s poor.

Garamendi said he believed the compensation figure could hit $600 million when stock options held by WellPoint executives were included — a potential windfall the insurance commissioner called “reprehensible.”

State Treasurer Phil Angelides said that public pension funds representing about $530 million of stock in Wellpoint and Anthem planned to withhold their votes on the transaction. Among the groups are the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the New York State Common Retirement Fund, the New York State Teachers’ Retirement System, the Los Angeles County Employees’ Retirement System and the Illinois State Board of Investment. (Garamendi Questions Costs of Deal to Buy Wellpoint, LATimes, 6/26/04)

Shareholder activist John Chevedden noted that a 19-member board of directors, which the New WellPoint proposes, is considered too large to be an effective board by corporate governance experts. Thus, there there could be a power vacuum which could be filled by powerful and unchecked Chairman of the Board. Additionally, shareholders will not be able to vote on the lavish golden parachutes as a separate ballot item. And there are unanswered questions. What is the preset value of the claimed $2 billion of savings which will not be realized for 10-years compared to the ultimate cost of $4 billion in transaction costs incurred now – which will require interest payments over 30 years? What percent premium will shareholders in the old Well Point will receive?

Investor Disputes Up

According to the National Association of Securities Dealers, investor disputes are on the rise. Last year, the most ever investor disputes were filed — almost 9,000 — and this year could see just as many or more. That’s almost double the number of disputes filed a decade ago.

“There’s always some joker willing to risk going to jail to steal $1 billion,” says Vincent DiCarlo, a former Securities and Exchange Commission attorney who now specializes in securities arbitration cases in private practice in Sacramento, CA. “When I was at the commission, it took me a long time to figure out how the system worked; the sanctions imposed didn’t deserve to even be called sanctions, and we were only able to bring a small number of cases.” He says the dysfunction stems mostly from the lack of liability and responsibility accorded to those entrusted with accountability: accounting and law firms.

The failings of auditors, lawyers and Wall Street firms to spot large-scale corporate fraud have been reported ad nauseam. From banking conglomerate Citigroup to auditor Arthur Andersen, huge fines have even been imposed. But what’s curious is the fact that no major reform has taken hold. Sure, there’s the Sarbanes-Oxley Act, which calls for more financial disclosures and accounting oversight for public companies. But those are matters between institutions. When it comes to investors, they’re left to arbitration. (Investors Fending For Themselves – Commentary: Time For Securities-Law Overhaul,, 6/14/04)

Candor Correlated With Share Price

A survey of 100 Fortune 500 by andBeyond Communications found a positive correlation between candid communication and superior share-price performance. Top-ranked companies boosted their share prices over a two-year period by 21.5%, while bottom-ranked companies saw only a 7.3% increase. A review of 2003 annual-report letters found that 87% of CEOs failed to candidly report their bottom-line performance. “As companies spend millions of dollars to comply with Sarbanes-Oxley, it is alarming that only 13 percent of the CEOs in our survey met this simple test of forthright investor communication,” said L.J. Rittenhouse, president of andBeyond. “Companies that offer generalities without meaningful and straight-forward explanations will never restore investor trust.” (Link Found Between Candor, Share Prices,, 6/15/04)

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Independent Chairs Mandated at Mutual Funds

In an attempt to curb conflicts of interest at mutual funds that resulted in trading and sales scandals at more than 20 companies, the SEC voted 3-2 to require mutual funds to have an independent chair. The move will mean big changes when the rule take effect in 18 months, at least on paper for the $7.5 trillion industry, since an estimated 80% of funds have boards led by insiders. (Independent Chairman at Mutual Funds: SEC Rule, SRI Media, 6/23/04) The question remains, will independent chairs and boards with 3/4 independent majorities really get control of their external money market managers? Putnam Investments’ board is chaired by an outsider. But the company, a unit of insurance broker Marsh & McLennan, was the first charged with fraud for having turned a blind eye to trading abuses.

Fidelity’s 292 funds fall under the purview of a sole board of trustees that has long been run by Edward C. Johnson III, its chairman and chief executive. While Johnson will give up his board of trustees chairmanship, “He will continue to provide day-to-day management oversight of the company,” Loporchio said. “This rule really does not change the way Fidelity Investments is run at all.” (SEC Bars Fund Employees From Serving as Board Chairs, LATimes, 6/23/04) Isn’t that reassuring?

Mercer Bullard, founder and president of Fund Democracy, thinks Chairman William Donaldson “is doing what’s necessary to prevent legislation.”

While requiring independent chairmen is “a good, meaningful step,” Bullard said that there are “much stronger steps” that the SEC may have sidestepped with this move. Those steps include requiring funds to include portfolio costs in expense ratios, to disclose fees in dollar terms in shareholder statements and banning companies from making “back-door” payments to brokers push their funds. Focusing on independent chairmen “is not going to be as transformative, but he (Donaldson) can score a lot of political points,” Bullard said. (Independent fund boards: A good first step, CBS MarketWatch, 6/23/04)

The primary changes are as follows:

  • Independent Composition of the Board. Independent directors will be required to constitute at least 75 percent of the fund’s board. An exception to this 75 percent requirement will allow fund boards with three directors to have all but one director be independent. This requirement is designed to strengthen the presence of independent directors and improve their ability to negotiate lower advisory fees and other important matters on behalf of the fund.
  • Independent Chairman. The board will be required to appoint a chairman who is an independent director. The board’s chairman typically controls the board’s agenda and can have a strong influence on the board’s deliberations.
  • Annual Self-Assessment. The board will be required to assess its own effectiveness at least once a year. Its assessment will have to include consideration of the board’s committee structure and the number of funds on whose boards the directors serve.
  • Separate Meetings of Independent Directors. The independent directors will be required to meet in separate sessions at least once a quarter. This requirement could provide independent directors the opportunity for candid discussions about management’s performance, and could help improve collegiality.
  • Independent Director Staff. The fund will be required to authorize the independent directors to hire their own staff. This requirement is designed to help independent directors deal with matters on which they need outside assistance. (SEC Release, 2004-87)

Quote of the Week

The Corporate Library features a quote of the week. This week’s quote is from Brian Heil, founder and CEO, ”It is very important for shareholders to vote their proxies. Many people think that it doesn’t matter. But, mathematically, your vote on a proxy is more important than your vote in a presidential election.” Considering the influence of corporations on politics, the quote is doubly true.

Free Bowne IPO Guidebook Available

Bowne Financial Print has released “The Initial Public Offering: A Guidebook for Executives and Boards of Directors” (Second Edition), authored by Patrick J. Schultheis, Christian E. Montegut, Robert G. O’Connor, Shawn J. Lindquist and J. Randall Lewis with the law firm of Wilson Sonsini Goodrich & Rosati.

The guidebook offers readers a practical view of the IPO process and provides helpful advice on how to conduct a successful IPO in today’s environment. It provides an overview of the legal framework governing the IPO process, including what issues to consider when contemplating going public, how to assemble the IPO team, how to prepare and file the registration statement, and what to do after a company has gone public.

This new second edition addresses a business, financial and legal landscape that has changed dramatically since the first edition’s publication in 1998. It also includes listing requirements of the NYSE and NASDAQ, a sample IPO timeline and a compliance calendar, as well as a summary of selected post-Sarbanes-Oxley SEC rules and analysis.

A printed copy of is available from Bowne or can be downloaded for free at

Anti-Corporate Quotes

The Alliance for Democracy, an advocacy group, is considering the following for protest banners:

  • President Grover Cleveland worried in 1888 that: “Corporations, which should be carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters.”
  • Thomas Jefferson: “The end of democracy and the defeat of the American Revolution will occur when the government falls into the hands of banking institutions and monied incorporations.”
  • Henry David Thoreau:  “There are a thousand fighting the branches of evil for every one who is hacking at the root of it.”
  • Frances Moore Lappe: “Growing up in America, we were taught that we inherited a democracy. No one told us that we ourselves had to create one.”
  • Supreme Court Justice Louis Brandeis: “We can have a democratic society or we can have great concentrated wealth in the hands of a few. We cannot have both.”
  • Riane Eisler: “Control over possessions and other humans is a substitute for the emotional and spiritual fulfillment missing from a system rooted in fear and force.”
  • Arundhati Roy : “It’s funny how the interests of American corporations are so often, so successfully, and so deliberately confused with the interests of the world economy.”
  • Molly Rush: “It is necessary to go back to some fundamentals in our history to understand how the modern corporations, initially a creature of the state, has managed to turn things around so that the state is a creature of the corporations.”
  • Janie Rezner: “Corporate power is the essence of  patriarchy with it’s ultimate goal of controlling everything in the world unencumbered by integrity or justice or compassion, or concern for life . . . .   with only greed and power as a guiding light.”

Frankly, I like the book cover quote of Monks and Minow: “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.” Creating structures to ensure accountability isn’t “anti-corporate;” it is pro-sustainability.

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ESOPs Popular

Out of 108 million people in the US who work in the private-sector, 21% own stock in the company they work for, showing the importance of employee stock ownership programs. Among unionized employees that level is even higher at almost 28%. The median value of the employees’ employer stock ownership is over one-fifth of annual pay. Ownership ranged from a high of nearly 60% of employees in computer services to a low of nearly 14% in agriculture/mining/construction, with percentages for durable manufacturing, wholesale, utilities, non-durable manufacturing coming in at approximately 30%, 23%, 55%, and 30% respectively.

In total, there are approximately 10,000 ESOPs in the US, covering 8 million employees (8% of the private sector workforce). These employees draw in excess of 3% of their total compensation from ESOP contributions. 10% – are in publicly traded companies. However, these companies employ approximately 50% of the nation’s 8 million employee owners. (Survey Confirms Employee Ownership is Wide Spread in America, Washington, DC, 6/17/04)

The ten largest ESOPS ranked by the numbers of participants are as follows:

  • Proctor and Gamble
  • Lifetouch, Inc.
  • Anheuser-Busch Companies
  • Amsted Industries
  • Parsons Corporation
  • Brookshire Brothers
  • Ruddick Corporation
  • Ferrell Companies
  • W.L. Gore Associates

Proxy Season Comparisons

ISS issued a summary of the proxy season to date and one result has been a flurry of analyses by the usual pundits. Keith L. Johnson of SWIBis quoted by Barry Burr in Pensions & Investments (All Investor Eyes on Busy Proxy Season, 6/14/04) saying, “There are a lot more shareholder resolutions.” Similarly, “It is probably the busiest we’ve ever seen in terms of shareholder resolutions and activism, ” according to Charles Elson, of the Center for Corporate Governance. ISS’ own Patrick McGurn calls this year “the end of the routine proxy season.”

Yet, Stephen Taub, of, looks at the same data and writes “Proxy Season Quieter in 2004, Says ISS.” (6/18/04) In 2003, the ISS recommended that votes be withheld from audit-committee members at several hundred companies because the audit firms were permitted to conduct non-audit work. For that reason, ISS recommended that clients vote against ratification of the outside audit firm for 7% of companies in 2003, but for only 4% of companies in the 2004 proxy season. The 2004 figures total fewer than 75 companies, including only three in the Standard and Poor’s 500, according to the ISS. reports that ISS urged clients to withhold voting support for director nominees at only 32% of companies this year, compared to 38% last year and 52% in 2002. Not only were there fewer recommended director vote withholdings, the 2004 season saw a 5%+ drop in shareholder proposals making it to the ballot and a 66% reduction in proxy fights compared to the more contentious 2003 season. (6/16/04)

Ralph D. Ward, publisher of online newsletter Boardroom INSIDER, sums up the proxy season in the succinct style which fans his growing reputation. He says the U.S. proxy season 2004 was “the most explosive in memory” — but the real investor victories happened far from the spring’s noisy annual meetings. “The season kicked off in March with Walt Disney CEO Michael Eisner drawing a shocking 45% ‘no’ vote on his board reelection. Then, activist megafund CalPERS, as a governance protest, ‘withheld its votes to reelect directors at 90% of the companies in its portfolio,’ the most famous being Warren Buffett on the board of Coca-Cola. At Safeway Stores, angry investors fought the reelection of chairman Steven Burd, and a record 200 proxy proposals on executive pay were filed at other corporations.”

Those were the noisy events widely reported in the press. “Yet for all the heat of these battles, almost all failed. Eisner has held on at the Magic Kingdom, CalPERS took major criticism for spreading itself too thin, Burd was easily reelected, and the handful of proxy issues that actually won a majority were ignored by management.” The real results, notes Ward, happened outside the annual meeting spotlight, “with backchannel pressure bringing many corporate surrenders on adding independent directors, expensing options, and rolling back poison pill defenses. Ward compares the 2004 proxy wars to the trench warfare of WW1.” “You have massive, bloody battles that seem to bring nothing but stalemate, while the real changes are triggered behind the scenes back home — through negotiation, political turmoil, and even revolution.”

New exchange listing standards have provided a “Rule Book” for companies and their investors. ISS points out that many of their withholds in 2002 and 2003 were levied at companies that were still in the corporate governance Dark Ages. “They lacked basic best practice ingredients like independent key committees and, in the case of many boards at small- and mid-cap firms, had no key panels in place at all. Additionally behavioral changes taking place within U.S. company boardrooms. Whether it is viewed as directors more diligently accepting their responsibilities to shareholders or, the threat of ballot access, good boards stopped ignoring majority votes on shareholder proposals and started voluntarily implementing positive change.

John Connolly, president and chief executive officer of ISS, added, “The ‘shareholders gone wild’ scenario fails to hold water with respect to ISS or the general proxy voting trends. The indicators tell a different story — a story of increasing constructive dialogue, awareness and understanding between companies and their shareholders. (Institutional Shareholder Services Releases Preliminary Proxy Season Review, 6/20/04) More companies that ever paying attention to ISS and availing themselves of resources such at’s 2004 Proxy Season Resource Center in order to be prepared.

Yet, investor votes continue to be ignored or circumvented by boards. True, Walt Disney directors took the chairmanship away from Eisner but they chose Eisner ally, ex-Sen. George Mitchell, as chairman, over the objections of several big institutional holders. At Gillette, 68% of the votes cast favored ending staggered board elections. “When a vote like that is ignored, you have to say governance isn’t working,” says Robert Monks. (see Experiments in Corporate Governance, WSJ, 6/21/04)

Behind the whole season has been the specter of the SEC’s rulemaking,Security Holder Director Nominations, S7-19-03. If that disappears or gets compromised into nothing worthwhile, the likelihood of a costly “revolution” would rise. It is obvious The Corporation is in need of reform. Either its owners start addressing issues, such as sustainability and fairness, or we will all pay a heavy price down the road.

FASB To Hold Public Roundtables On Option Expensing

The Financial Accounting Standards Board will hold public roundtables on its proposed stock-option expensing rule. The first meeting will be held on 6/24 at the Sheraton Hotel in Palo Alto, CA; the second will be held on 6/29 at the FASB headquarters in Norwalk, CT. The comment period ends on 6/30. (see Share-Based Payment—an amendment of FASB Statements No. 123 and 95) Both roundtables will be available via Webcast and will run from 9 a.m. to 1 p.m. (Compliance Week, 6/15)

Unfortunately, the Financial Services Committee of the House of Representatives voted 45-13 recently to restrict the option-expensing standard proposed by the FASB.

H.R. 3574, the Stock Option Accounting Reform Act, would require an economic impact study before FASB would be permitted to implement its proposed rule. In addition, the bill would require companies to expense only stock options granted to the top five officers. Small businesses would be entirely exempt from FASB’s rule; newly public companies could forgo expensing for three years.

FASB, which is expected to issue a final rule by the end of this year, backed off a similar proposal in 1994 under opposition led by theBusiness Roundtable. Don’t let it happen again. The bill next faces a vote in the full House, where, as of last month, the measure had 107 co-sponsors.

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CACI TACT on Hot Seat in California

CACI International Inc. (CAI) is facing growing pressure over its role in the Abu Ghraib prison scandal from California pension funds that own large stakes in the company, according to the Washington Post. Directors of CalPERS plan to meet today to discuss concerns about management controls, training, and legal procedures at CACI, while CalSTRS planning to discuss the issue at its July 7 meeting. CACI employs Steven Stefanowicz, an interrogator in Iraq who has been implicated in an Army report on prisoner abuses at the infamous prison. CACI’s stock has shed 16% since that connection was reported. (, 6/14/04)

CalPERS Targets Disney, Maytag and Others for Reform

CalPERS said Maytag’s board refused to implement shareowner proposals backed by majority votes. CalPERS said it wants Maytag to declassify its board by the 2005 annual meeting, seek shareowner approval of a poison-pill provision and adopt formal equity ownership requirements for its directors.

At the 2004 Maytag annual meeting Ray T. Chevedden sponsored a shareholder proposal to declassify its board. Nick Rossi sponsored a shareholder proposal to seek shareowner approval of a poison-pill provision.

The 2004 annual meeting marked the 6th consecutive year that the declassify proposal topic won more than 50% of the yes and no votes cast. This meeting also marked the 4th consecutive year the poison pill proposal topic won more than 50% of the yes and no votes cast. (Contact: John Chevedden, 310-371-7872)

SEC Caves to CEOs

The Wall Street Journal reports that Donaldson wants a compromise and he wants some access to be accomplished but he has “already agreed to eliminate another controversial provision that would have empowered small groups of shareholders to force votes on proposals to allow shareholders to nominate directors.”

“Mr. Donaldson is exploring a plan supported by some in the business community and at least one Republican commissioner that would give boards a chance to fix their problems before allowing voting shareholders to include their own nominees on corporate proxies, the ballots used in votes on company matters. Under the proposal, if more than 50% of cast votes are withheld from a board member, the board’s nominating committee could name a replacement. The plan may require companies to consult with shareholders about the replacement. Under one scenario, if more than 50% of the votes at the next annual meeting are withheld for the replacement, the company would have to include a shareholder-backed nominee on the ballot the following year.”

The alternate plan is apparently known internally as the “cure” proposal, because it gives companies time to cure their problems. Under the cure, shareholders would have a three year wait to effect even a minor change. The Business Roundtable appears to be in control. That is totally unacceptable to shareholders we have been in contact with. (SEC May Dilute Plan to Increase Holders’ Power: Under Pressure From Businesses And Resistance From Democrats, Donaldson Considers Alternative, 6/8/04)

2004 EDS Annual Shareholders Meeting

For proposal 3 — Shareholder proposal regarding classified board 340,292,471 shares were voted For this proposal, representing 88% of the votes cast, and 46,457,898 shares were voted Against this proposal or Abstained from voting, representing 12% of the votes cast.

For proposal 4 — Shareholder proposal regarding Rights Plans, 329,490,426 shares were voted For this proposal, representing 85% of the votes cast, and 57,260,039 shares were voted Against this proposal or Abstained from voting, representing 15% of the votes cast.

For proposal 5 — Shareholder proposal regarding Majority Vote, 345,397,692 shares were voted For this proposal, representing 89% of the votes cast, and 41,352,780 shares were voted Against this proposal or Abstained from voting, representing 11% of the votes cast.

Baker Hughes Shareholders “Win” Again

At the company’s annual meeting April 28, 90% of the shareholders attending backed proposal by Harold Mathis to make all its directors stand for re-election each year. Last year, his proposal got 85% of the vote. A majority of shareholders voted for it in each of the two previous years as well. Yet Baker Hughes still staggers its board elections, saying it is in investors’ best interest. (He’s big on democracy, even if corporations aren’tHouston Chronicle, 5/29/04)

Join Australian Corporate Governance Debate Online June 7

Shareholders will have more power over executive perks under corporate law changes proposed by Labor. Opposition corporate governance spokesman Stephen Conroy released Labor’s response to the CLERP (Corporate Law Economic Reform Program) Bill number 9, which is being examined by a parliamentary inquiry.

Senator Conroy said the government’s Bill failed in two main areas.

“It fails to sufficiently hold boards accountable and fails to sufficiently empower shareholders.”

He said corporate scandals such as HIH, Ansett and One-Tel, high salary packages to executives and termination payments in spite of poor performance, and the perceived failure of audit committees had outraged shareholders, employees and retirees.

Labor’s amendments would include prohibiting limited-recourse loans to directors and key executives and banning the payment of options, bonus payments and other retirement benefits (other than statutory superannuation) to non-executive directors. They would also require shareholder approval of termination payments which exceed one year’s salary and ensure the disclosure of the duration of contracts and equity value protection schemes.

“To further toughen the Bill, Labor will also move amendments in relation to audit reform, financial reporting, enforcement, shareholder activism, conflicts of interest and analyst independence,” Senator Conroy said. “We believe that there needs to be a greater balance where shareholders are able to take these things into their own hands and stop the sort of excessive corporate payouts, particularly when companies have failed.”

Online debate of possible reforms is being organized by the Australian Public Policy Research Network, moderated by its co-founder Dr. Richard Curtin. Anyone in the world can participate free of charge by registering on the APPRN web page. All participants are invited to vote on the importance of 14 suggested agenda items for reform that are presented in the discussion paper on ‘Agendas for reforming Corporate Governance, Capitalism and Democracy‘ prepared by Shann Turnbull.

SEC Vote Delayed

Fearing a 3/2 split vote might harm the SEC’s authority, the Commission’s has again delayed reforming boardroom elections. The Financial Timesreports to expect a vote in late June at the earliest, perhaps as late as August.

A second controversial reform is in the area of mutual fund governance, mandating independence of fund chairmen. “That plan is bitterly opposed by some of the largest fund groups in the US and some of the SEC’s Republican commissioners. A third controversial area is a plan to force hedge funds to register with the SEC. The SEC’s draft plans on boardroom elections are likely to be modified before they become formal regulations.” (SEC split delays vote on board election rules, 5/31/04)

Shell Governance Questioned

Sir Philip B. Watts, former chairman of Royal Dutch/Shell, was awarded a pay and option package worth more than $10.7 million in 2003, reports theNew York Times. Proven annual reserves were overstated by about one-fifth in each of the last six years.

The picture that has emerged is one of “an institution with lax controls and struggling to keep promises made to markets and investors, particularly in its exploration and production department.” (Shell Discloses a Large Pay Package for Its Former Chairman, 5/29/04)

Alfred Donovan goes much further, accusing Shell of hiring undercover operatives to deliberately intimidate shareholders. See

Little Guy?

A 5/24/04 Op-Ed article by former SEC chairman Arthur Levitt in the New York Times supports the SEC proposal to give qualified shareholders limited ability to place a director’s name on ballot for company’s board. Noting concerns of the Business Roundtable that a small number of shareholders would pursue narrow agendas at expense of most other investors, Levitt counters their pressure would be mitigated by the economic incentives of profitability and efficiency. Finally, they would have to win majority support for their candidate.

The SEC estimates the proposal would trigger nominations at only 43 of 14,484 public companies. Why so few? Because the SEC has proposed to limit nominations to shareholders with 5% of the company’s stock. Someone at the Times improperly entitled Levitt’s article “Let the Little Guy in the Boardroom.” What “little guy” holds 5% of a coproration’s stock? The largest public pension fund in the country rarely holds more than about 1%. Yet, CalPERS is typically referred to as the 800 pound gorilla (Google lists 101 such citations) not the “little guy.” More fact checking is needed at the Times.

It is also good to see Amy Borrus of BusinessWeek endorsing the SEC’s proposal (see Stick to Your Guns, Mr. Donaldson, 5/24/04). However, let’s not be mistaken, the proposal would do nothing for the “little guy.” It’s like the British offering the top ten landholders in the American colonies one seat in Parliament, if they can agree together on who to nominate. That’s hardly democracy…but it might be enough to postpone the revolution.

Upcoming Events

Corporate Governance Japan will hold its 179th Executive Luncheon Meeting at the Hotel Okura on June 17, 2004 from 12:00 p.m. – 2:00 p.m. Register directly with the Hotel Okura.
Speaker: Dr. Gregory Jackson, Fellow, Research Institute of Economy, Trade and Industry
“Japanese Corporate Governance in Transition: Toward a New Paradigm?”
The Atlantic Room (Main Building, first floor)

Institute of Governance, Public Policy and Social Research
Governing the Corporation: Mapping the Loci of Power in Corporate Governance Design
20-21 September 2004

How to Manage Corporate Responsibility in China
2-Day conference, New York, October 5 – 6 2004
Contact: Peter Carkeek, Conference Director:
Tel: +44 (0) 20 73 75 7160 / 1800 814 3459 ext 282
How to Manage Corporate Responsibility in Asia
2-Day conference, Hong Kong, October 14 – 15 2004
Contact: Peter Carkeek, Conference Director:
Tel: +44 (0) 20 73 75 7160 / 1800 814 3459 ext 282

Asian Corporate Governance Association
Fourth Annual Conference 2004
Shanghai, October 28th
Strengthening Asian Capital Markets through Corporate Governance
Highlights from Third Annual Conference

Random Bits

Broc Romanek, of noted that May 20th was the height of the proxy season with more meetings scheduled on that day than any other. His blog is an important source for anyone trying to keep up with SEC rules and guidance. They got everything from a pdf file of Spitzer’s complaint against Grasso (106 pages) to interviews with John Wilcox on Weaknesses in the Proxy Process and David Thornquist on Electronic Due Diligence in M&A. If you don’t subscribe, try the No-Risk Trial.

ISS’ Friday Report indicates the 61% withhold from 4 directors at Federated Department Sotres may have been the highest proportion of the season — and without an organized vote-no campaign. The result was probably a combination of ignoring previous majority votes on resolutions and the high proportion of institutional ownership. Subscribe.

CSR Academy, sponsored by UK Dept. of Trade and Industry, seeks partners for educational program. Contact[email protected].

Common thread to Ralph Ward’s Boardroom INSIDER this month… Boards are becoming more active in setting and approving the CEO’s strategy, in laying out the benchmarks of his performance, and making the job a truly “at will” position. Ward provides advice on defining the job, succession, and more.

Booz Allen Hamilton study of the world’s 2,500 largest publicly traded corporations finds companies that split CEO and Chairman roles have about 4-5% worse returns. Forced turnover of CEOs who were hired from outside the company reached striking levels in 2003; In North America, 55% of outsiders who left were forced to resign; in Europe, 70% left involuntarily. CEOs who had previously led other companies delivered returns for investors 3.7% per year lower than first-timers from inside the company. Get those succession plans ready! See summer 2004 issue ofstrategy+business magazine.

Tim Leech covers the Four Pillars of SOX 302, 404 and 906 in the 5/25 edition of Compliance Week. Companies must demonstrate conclusively that they have four “pillars” in place:
1. Macro Level Anti-Fraud Analysis;
2. Macro Level Assessment Against A Control Model;
3. Sufficiency Of IT General Controls; and
4. Reliable 10-K, 10-Q Accounts, Notes And Supplemental Disclosures.

A recent survey of more than 200 senior financial services executives by PricewaterhouseCoopers suggests that recent changes in corporate governance were driven by the desire to comply with regulations, rather than to improve institutions’ management tools, and that companies aren’t reaping the potential benefits. They “do not appear to have improved the quality of their dialogue with the stakeholders they picked out as critical — customers and shareholders and 43% did not regard their employees as critical stakeholders! See Accounting Today.

The Canadian Institute of Corporate Directors (ICD) is in the final stages of a central directors register that will be a one-stop shop for corporations and search firms looking for board members. If everything goes as planned, it should be up and running by Sept. 1.

Investigators have dismissed 80% of the 156 whistle-blower claims examined under Sarbanes-Oxley. Of 43 cases resolved on appeal, plaintiffs have prevailed only twice. According to Tamara Loomis, plaintiffs and their lawyers are still “testing the margins” by learning, for example, the statute does not apply retroactively. See Corporate Counsel, Whistle While You Work, 6/04.

More than 1/3 of S&P 500 companies are family controlled. See Corporate Board MemberThe Lucky Genes Club, 5-6/04.

A Time Magazine survey referenced by David Brooks in the New York Times (“The Triumph of Hope Over Self-Interest,” 12/03) may help to explain recent tax cuts.  The survey asked people if they are in the top 1% of earners.  Nineteen percent said they were.  A further 20% said they expected to be someday.  [Not only are all the inhabitants of Lake Wobegon above average – they are way, way above average.]

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May 2004

Buy Side Managers Favor SEC Proposal

Despite opposition from the Business Roundtable, nearly 80% of the 120 buy side portfolio managers and research professionals surveyed by Broadgate Consultants, Inc., believe the SEC’s proposals to give shareholders more power to nominate corporate board directors is a good step toward better governance. About three-quarters of respondents believed that the board structures of mutual funds are in need of reform.

Just over half of the respondents — 53% — believed that the Sarbanes- Oxley Act has been effective in promoting better corporate governance and protecting investors. (Press Release, 5/27/04)

Wake-up Call for Safeway

The company said 33.2% of shareholders supported a proposal that the chairman of the board be an independent director – a proposal that would remove the CEO from the chairmanship and against which Safeway management had recommended. Later in the meeting, Safeway said the final tally of shareholder votes withholding support of CEO Steven Burd’s re-election to the board of directors was 17%.

Credibility GAAP?

Should Generally Accepted Accounting Principles be set by the Financial Accounting Standards Board (FASB)? Anyone who has been awake for the last ten years knows the answer. As Liz Fender of the Financial Accounting Coalition for Truthful Statements (FACTS) said recently, “Congress interfered with FASB about 10 years ago and with all of the recent events that have shaken the public’s trust in the financial markets, we are surprised that they are once again contemplating such a move.”

Join with Facts, a broad coalition of 30 pension funds, consumer/investor groups and labor unions… urge Congress to stay out of the FASB’s process for considering a proposed rule requiring companies to expense all stock options. The coalition believes that accounting rules are best decided not by Congress but by FASB, an independent body charged with setting accounting standards. FASB has the expertise to fully evaluate accounting issues. It has an open, independent process for considering new accounting standards.

Less than two years have passed since the Sarbanes-Oxley Act of 2002 established a mechanism ensuring that FASB would be independently funded and free from any pressures from special interest groups. HR 3574 S. 1890, “The Stock Option Accounting Reform Act,” undermines this important reform by allowing Congress to succumb to pressure from special interests and override FASB’s independence. These bills would inject Congress directly into the accounting standard-setting process by mandating which stock compensation should be expensed and by what methodology, as well as establishing special exemptions for small businesses. Please let your representatives know you oppose HR 3574 and S. 1890.

Record at Alaska?

Four Alaska Air (ALK) shareholder proposals each exceed a 60% vote at their May 18, 2004 meeting. Could it be a record – 4 proposals each exceeding 60% at one meeting? Here’s the run-down per Steve Nieman, shareholder.

  • Proposal 3: Establish Simple-Majority–69.9% in favor
  • Proposal 4: Stockholder Rights Plan–69.3% in favor
  • Proposal 5: Shares Not Voted Not Counted–17.5% in favor
  • Proposal 6: Higher Standards for Lead Independent Director–25.3 % in favor
  • Proposal 7: Independent Board Chairman–31.7% in favor
  • Proposal 8: Establish Confidential voting–61.2% in favor
  • Proposal 9: Reporting Employee Stock Ownership–5% in favor
  • Proposal 10: Establish Cumulative Voting–62.4% in favor

How High Net-worth Individuals Can Improve Corporate Governance

1. Write to Mr. Jonathan G. Katz, Secretary, SEC supporting their rulemaking, Security Holder Director Nominations, S7-19-03. Let them know that instead of raising trigger levels, they should get rid of them altogether. True, the public comment period is over, but the SEC is still listening.

2. Let Maureen Nevin Duffy know you will subscribe to The Corporate Governance Fund Report if she restarts her publication. Duffy’s newsletter was primarily aimed at institutional investors “pushing back.” However, individual investors also found it was the best source for learning of the actions of activist funds, such as Herb Denton’s Providence Capital,Highfields CapitalWyser-Pratte Management, etc. Add your name to her mailing list.

3. Invest in governance funds. For example, I have investments with Andrew Shapiro who runs Lawndale Capital. Robert Monks is planning to launch a dedicated corporate governance hedge fund with John Higgins of Ram Trust Services. There are others.

4. Invest directly in companies with activist board members who are working to turn companies around. For example, I invested several years ago in Apria Healthcare and more recently in Valeant Pharmaceuticals International based on my confidence in the ideas of Ralph  V. Whitworth and Richard Koppes.

5. Join advocacy groups like Responsible Wealth, a national network of affluent Americans concerned about deepening economic inequality. While one of their main focuses is on tax reform, they are also very active in corporate governance.

6. Submit your own shareholder resolutions. I’m particularly fond of those submitted by the Corporate Monitoring Project. The premise of their proposals is that individuals often to not take the time to vote their proxies in their own best interests. Their resolutions are designed to use competing intermediaries — such as proxy advisors — to provide individual shareholders more widespread advice on proxy issues. These proposals fit nicely with the multi-year process contemplated by the SEC’s rulemaking, Security Holder Director Nominations, S7-19-03.

7. Encourage your mutual funds and pension funds to adopt policies to strengthen corporate governance. See, for example, the policies of CalPERS, which are now a bit dated but still a good place to start.

Separation of CEO and Chairs on Rise

Seagate Technology has joined the growing number of companies to separate the roles of the chairman and CEO. Earlier this year, Walt Disney Co., Dell Inc., and Oracle Corp. separated their top positions. According toInstitutional Shareholder Services, the percentage of companies that have separated the positions of chairman and chief executive officer increased from 45% in 2001 to 50.4% in 2003. But the biggest increases were in the small-cap sector; the S&P 500 and S&P 400 showed only incremental increases. According to the Corporate Library, 377 CEOs in the S&P 500 chair their own boards, compared with 394 last year.

Is CalPERS doing its real job or pursuing side agendas?

That’s the title of a recent piece in the Sacramento Bee by columnist Dan Walters who writes that CalPERS is part of a larger, nationwide effort by labor unions to gain leverage with corporations by wielding the investment power of public pension funds. Walters points to CalPERS President Sean Harrigan, who is also a high-level official with the UFCW, and the fund’s dispute with Safeway.

According to Walters, “The overriding issue is this: Should those who control public pension funds concentrate on improving investment returns and thus serve the interests of pensioners and taxpayers, or should they pursue other agendas that have little or nothing to do with their primary duties?”

Contrary to Dan Walters, there is no conflict between CalPERS serving the interests of members and fighting for worker rights.

Walters thinks that if Safeway were to continue to pay good wages, their “profits would plummet.” But CalPERS is looking to Costco as a model, not Wal-Mart’s Sam’s Club with which it competes. Costco pays workers 40 percent more and gives them better benefits. Their annual sales last year were about equal but Costco has one-third fewer employees. Six percent of Costco’s employees leave each year compared to 21 percent of Sam’s. Costco’s operating income was higher, as was their operating profit per hourly employee and sales per square foot.

Most CalPERS members are struggling to make the world a better place through public service. If CalPERS can earn good returns with collateral benefits, that’s a plus. Real estate loans to members have earned about 20% a year since the early 1990s. Is that a “side agenda” or smart growth? Safeway said they had to demand draconian cuts because of the competitive challenge posed by Wal-Mart. Yet, Costco shows companies can earn more while doing good. That’s a model CalPERS should continue to encourage. (disclosure: the publisher of is a shareowner of Costco)

This Week in Governance

Patrick McGurn of Institutional Shareholder Services gives out midterm grades on post-Enron reforms. Click here to listen to this audio report-card. A great new service from ISS.

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Gold’s 8 Rules for Board Accountability

In a recent speech to the Society of American Business Editors and Writers, Stanley P. Gold of Shamrock Holdings, Inc. provided this agenda for corporate governance reform:irectors must remember that their first duty is to speak for the owners of the enterprise – the shareholders, and that the CEO works for them, as the owners’ representatives, not the other way round. Despite encouraging steps in this direction there is still a long way to go to democratize boardrooms…but we must be sure we are going in the right direction.

  1. Each director should have to pass a reasonable proficiency test.

    I wasn’t surprised to learn that the majority of sitting directors cannot pass a simple exam on the meaning and impact of a balance sheet and profit and loss statement. Directors who are unable to effectively question assumptions, performance or strategies can easily be bamboozled and managed by the people they are supposed to oversee. If doctors, lawyers, and taxi drivers need licenses certifying their competency, then directors certainly do too. They should take proficiency tests as a prerequisite for eligibility to serve as directors of public companies.

  2. Directors should be required to have continuing education.

    Beyond basic proficiency to serve on public boards, directors should also have to annually attend further education classes to keep up to speed with new legislation, corporate law, marketing and management trends and relevant industry developments. Continuing education is a requirement of every licensed profession; it should be a requirement for every director of a public company.

  3. Each director should have to stand separately.

    Each and every director should be personally accountable for his or her performance and provide, in the proxy statement, a personal statement… in their own words…of what they have done and what they intend to achieve. Each director, one-by-one, should address shareholders at each corporate annual meeting and answer specific questions from the floor. We should not permit directors to hide behind the rubric of “the board.”

  4. Shareholders should be able to call for an extraordinary general meeting.

    This is a practice that works well in the UK… any meeting of the shareholders other than the scheduled annual general meeting is known as an extraordinary general meeting. The ability of the shareholders to call to account directors when they have acted improperly will be a significant deterrent against such conduct. The length of notice depends on the nature of the resolutions being put to the meeting. Such a mechanism provides shareholders with the ability to convene a meeting of the shareholders on matters they consider to be of pressing important to shareholder interests; they can use such an extraordinary meeting to oust one or more directors they deem inadequate. It usually requires the consent of between 5 to 10 percent to convene such a meeting.

  5. Shareholders need to be encouraged to be long-term investors.

    Tax policy should be used to craft economic policy. Capital gains tax laws, for example, should be amended to encourage longer-term holding of shares. A sliding scale that reduces the amount to tax over time will encourage shareholder/directors to think strategically about the longer-term outlook of the company, instead of focusing on the quarter-to-quarter results. More stability in the capital markets is good for all of us.

  6. Real world experience for directors.

    Directors are usually isolated from the business…they hang together in a corporate cocoon and hear only what management tells them. The independent directors should be required to meet twice a year with the largest shareholders without senior management present. This is what six large public pension funds are asking of the Disney board. Such interchanges should be institutionalized. The exchange of views and information would be valuable and illuminating for both parties and provide directors with an independent perspective on the business… as befits their independent role.

    They should also meet regularly with operational management to learn about the business first hand. This would also be a tremendous morale booster internally. General electric has shown the way here…they have mandated that each of their outside directors regularly visit the company’s operating centers, without senior management present.

    Even more helpful would be a visit to customers. Directors can place some reliance on expert studies, but without direct, personal experience of the business and the issues involved, they are shortchanging the shareholders. It would be of great help to directors to know what the company’s customers think of their products and services.

  7. Public directors.

    I think it would be helpful if boards of public companies included a couple of public directors, selected from an approved list compiled by the SEC or some other appropriate state or federal agency. This would bring a much-needed extra dimension to the boardroom in terms of the greater social purpose of a company; such public directors could voice the concerns of numerous stakeholders.

  8. There ought to be a limit on what the company can spend on the re-election of its directors.

    In a recent Disney “withhold campaign”, the Roy E. Disney family spent between $3-5 million. My best guess is that the walt Disney company spent over $35 million to re-elect michael eisner and george mitchell, as well as the other directors. They spent this out of the corporate treasury thereby using the shareholders’ funds to defeat the will of the owners. No where else in American life is the playing field so skewered toward the incumbent. To prevent this in the future, there ought to be strict spending limits on the use of corporate funds by incumbent directors.

California Republican Party Criticizes CalPERS

“Like Donald Trump after a long day of watching tycoon wannabes struggle to gain his approval, CalPERS board members are trying to hand out pink slips to the directors at 90% of the companies in which the fund owns shares,” begins an article posted on the Republican Party’s website entitled “CalPERS Puts Social Agenda Ahead of Profit.”

“In next year’s state budget, taxpayers will subsidize CalPERS to the tune of an estimated $2.6 billion, due in part to the fund underperforming the last three years. Given that CalPERS is responsible for providing retirement and health benefits to 1.4 million public employees, retirees and their families, you’d think getting a better return on their investment would be a top priority. Not quite.”

“The theory behind CalPERS’ attack on corporate boards is that directors should focus solely on maximizing returns. Yet CalPERS has invested billions in ‘economically targeted investments’ aimed at providing ‘collateral benefits to targeted geographic areas, groups of people or sectors while providing pension funds with prudent investments.’ If such investments fall short, of course, California’s taxpayers can be forced to pick up the tab.” (Forbes, May 10, 2004)

“How unfortunate that the 1.4 million people served by CalPERS – not to mention taxpayers – can’t sit across the table from the recalcitrant CalPERS board and shout, ‘You’re fired!'”

Yet, the article fails to provide any evidence that CalPERS members are unhappy with the strategy pursued by the Board. Far from viewing their Board as disobedient, I suspect that most members find their strategy of investments aimed at providing collateral benefits refreshing. As public employees, many CalPERS members spend their entire careers promoting environmental protection, health, and public welfare. If our pension fund can help make the world a better place, while earning good returns, why should we object? As I told a reporter from Investor’s Business Daily, “they take a long time frame. It doesn’t do any good after 20 years to have a good return if we’re all frying.” (Calpers Activism Hits Even Healthy Firms, 5/4/04)

Sure, CalPERS has been “underperforming the last three years.” They lost 7.2% in 2001, 5.9% in 2002 and gained 3.9% in 2003. However, the S&P 500 lost approximately 15% of its value during the last three years. Regarding economically targeted investments, CalPERS couldn’t tell me the record for all such investments but they could tell me that their real estate loans to members (which certainly has popular collateral benefits to members) have earned about 20% a year since the early 1990s.

Investments are going to have ups and downs. That would be true even if Republicans ran the CalPERS Board…but they aren’t likely to get that chance anytime soon, even with Arnold Schwarzenegger in the governor’s office.

French Shareowners Flex Muscle

While the SEC debates action on its access rule,” French shareowners in the bankrupt Eurotunnel gathered proxies for 60% of the equity and threw out the whole board. Unlike votes on directors at US corporations, French ones are binding. The new board has split the roles of chairman and chief executive. It remains to be if their measures can rescue value but at least there is no question shareowners have a voice. (, LIGHT AT THE END OF EUROTUNNEL AN ON-COMING TRAIN?)

OECD Governments Ratify Governance Code

According to a report by, the 30 member-governments of the Organization for Economic Co-operation and Development (OECD) have ratified – with modest changes – a controversial code of corporate governance that would give shareholders stronger rights in most of the member countries. When the draft was circulated in January its call for shareholders to be able directly to nominate directors sparked opposition.

The draft suggested, “Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the principles above, subject tosome possible exceptions to prevent abuse.” (emphasis added). The words “some possible” were dropped from the final text. Provisions to protect whistle-blowers, a call on institutional investors to disclose their voting policies and steps to reduce conflicts of interest throughout the investment process remain intact.

However, the code is only a recommendation. Donald Nordberg, reminds his readers “the previous OECD code, from 1999, was used mainly in developing countries outside the OECD area. But this code goes beyond many of the measures adopted in the major industrial powers that belong to the organization, even codes put in place after the Enron and WorldCom affairs sparked global interest in governance.” (GOVERNMENTS RATIFY TOUGH OECD GOVERNANCE CODE, WITH MINOR CHANGES, 4/22/04)

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April 2004

Self-Dealing at CalPERS

That appears to be the accusation of Neil Weinberg’s article,Sanctimonious in Sacramento, in Forbes magazine. This proxy season it is opposing some or all directors at 90% of the firms whose shares it owns. Yet, Weinberg contends “if the pension fund itself were held to the same standards it demands of corporate America, the board of Calpers might have to fire itself.”

State Treasurer Philip Angelides, Willie Brown, former San Francisco mayor, and former director Kathleen Connell, who was State Controller at the time, are all accused of accepting campaign funds from those doing business with CalPERS. According to the article, 18-year board veteran Charles Valdes chaired a philanthropy in the late 1990s that solicited donations from money managers who worked for CalPERS. Board member Kurato Shimada, took two years off through 2001 to work for a marketing firm lobbying CalPERS.

The article also cites CalPERS’ reluctance to disclose information on private equity investments and attempts by the board to entrench itself through election rules which favor incumbents. Our opinion? Yes, the CalPERS board isn’t perfect…but they are certainly moving in the right direction. Many of the transgressions cited are many years old and are less likely now. Yes, the CalPERS board has various conflicts of interest. However, few could argue that it is more open to such conflicts than pension funds of other states, which are often controlled by a single politician.

Yet, improvements can be made. Contributions to politicians by those doing business with CalPERS could be more limited, but the same could be said for political reform in general. The ban on lobbying a former employee could be lengthened to two years, instead of one. And, CalPERS’ own election rules could be reformed to at least require directors to be elected by a majority of those voting (one former director was elected by less than 6% of voters).

Corporate Governance Hedge Fund in Works

According to the Financial Times, shareholder activist Robert Monks is planning to launch a dedicated corporate governance hedge fund. (Shareholder activist to launch corporate governance hedge fund, 4/27/04)

The fund will short some of the world’s worst governed companies and is expected to be managed by John Higgins of Ram Trust Services, which currently runs $200m of assets on behalf of wealthy clients. An equal weighting of long and short positions is anticipated. “We are essentially trying to measure human capital,” said Higgins. Value added is expected to come from a careful analysis of corporate governance standards and practices, rather than market timing.

We wish them every success and will be looking into take a position in the fund if affordable.

Environmental and Sustainable Investing: The CalPERS Way

Highlights of a speech by Sean Harrigan President California Public Employees’ Retirement System at the Ceres Conference Boston, Massachusetts April 15, 2004.

No question, climate risk is a financial and a health security issue that affects everyone, including our 1.4 million CalPERS members and their families. CalPERS’ recent action has produced an unexpected result. Literally hours after we voted to commit $200 million in private equity funds to environmental investing, businesses began to knock our doors down with ideas and interest.

Our private equity staff just completed a year-long study of risks and rewards of investing in this area…and reached the following conclusions: That prospects for generating good long-term investment returns are excellent – long term. That the opportunities are both close to home in California and worldwide. Staff also found that leadership is being demonstrated in other states and in other countries. They are “green investors” – investing from both from an R&D standpoint and from a consumption standpoint.

These developing green technologies also suggest an opportunity to create new fair wage jobs. These new emerging companies can lead to thousands of new jobs in California.

Regulatory agencies are continuing to drive many present opportunities – and they are responsible for accelerating the development of new technologies and creating market opportunities. The Kyoto protocol is one of the most over-arching and influential drivers of environmental regulations. It has already had a substantial effect on world regulation. And in Europe and Japan, strict emissions standards combined with strong incentive programs have contributed to the growth in technology opportunities and markets.

Also helping to push along advances in green technologies are all the requirements designed to improve the quality of air we breathe, the water we use, and the soil that nourishes our agricultural crops. Again, these are opportunities that will be ripe for investment.

According to the market research firm Clean Edge, the current clean technology environmental market represents only 2% of the venture capital market. So today, when you compare it to other sectors, it is a new and emerging sector within the capital venture market. It is simply not possible to drop $200 million into the private equity markets quickly. We are thinking about hosting a conference in Sacramento in which we could attract investors from around the country and the world who may be interested in this area and who might be interested in working with us.

Wind generating capacity is expected to expand 15 times over in the next 20 years. The annual production of solar power has grown 150 percent in the last three years. Photovoltaic cell installations have increased by 450 percent in Germany over the last six years, and sales for fuel cells that power large generators are expected to reach $25 billion here by the year 2020. With all of this in the pipeline, is it any wonder why CalPERS is so interested in this program?

Later this year, I anticipate our staff will bring forward an analysis and possible recommendation regarding an “environmental governance” program. Similar to our corporate governance activism, this initiative could mean we would actively encourage companies — through dialogue, shareholder resolutions and other actions — to reduce environmental risks and liabilities.

We have begun to undertake a major audit of all of our real estate investments. We’re going to look behind the marble floors and fancy elevators and million dollar views of these buildings to see if they are doing all they can to use clean energy, be more efficient in their use of water, just to name a few, because we know they can reduce long-term costs.

We own 16 million square feet of office space and 96 million square feet of industrial space. I read recently that real estate companies with above average energy management performance tended as a group to outperform below average companies by about 34 percent. If that is true, we should be acting on this recommendation. Again, it certainly seems to make sense – both as an investor and in environmental terms.

In conclusion, I believe we have the know-how and technology to address climate risk, and we can do so while enhancing investment returns. But what we need today is the other important ingredient: leadership. We need investors, we need companies and we need policy makers to stand up and be counted.

It is gratifying to know that we may achieve our financial goals and also help repair the world’s fragile environment. We call this the double bottom line – achieving market rates of return while achieving a good result for the world community.

THE CORPORATION: Coming to a Theater Near You

Mark Achbar, co-director of Manufacturing Consent: Noam Chomsky and the Media, teamed up with co-director Jennifer Abbott and writer Joel Bakan to examine the far-reaching repercussions of the corporation’s increasing preeminence. Based on Bakan’s book The Corporation: The Pathological Pursuit of Profit and Power, this film is a critical inquiry into the corporation’s inner workings, history, controversial impacts and possible futures. Featuring interviews with Noam Chomsky, Michael Moore, Howard Zinn and many others, THE CORPORATION is coming to a movie theater near you. See it soon.

Uniform Dilemma

About 200 shareholders gathered for PG&E Corp.’s annual meeting nine days after the end of PG&E’s three-year utility bankruptcy. Shareholders were not thrilled with the suspension of dividends or the company’s $84 million retention-bonus program. After being named by Business Week as one of the worst executives of 2003, CEO Robert Glynn’s earnings of more than $17 million added insult to injury.

However, topping it all off was that while a number of shareholders were attempting to ask questions, Glynn essentially closed down the annual meeting with the introduction of 11 PG&E employees, most in uniform, who had recently been on active duty in the military. Shareholders found themselves in a dilemma, going along with the ploy or appearing to be rude to our military by insisting on their once-a-year right to ask questions. It isn’t appealing when politicians wrap themselves in the flag; it is even less attractive when CEOs do it.

The Corporate Library

I don’t imagine Newsweek often quotes Time magazine but our “competition,” The Corporate Library is so good we can’t fail to acknowledge the great job they’ve been doing of covering news in their weekly news briefs. Here are just a few recent highlights:

  • Pay for CEOs at 70 of the largest 100 US firms rose to USD14.1 million on average in 2003, according to data compiled by Bloomberg. This means that the average CEO pay is equivalent to 384 years of average US employee’s USD36,764 and 525 years of a production worker’s USD26,902 average. Total CEO pay, including stock options, bonuses, salaries and other awards rose 7.5% in 2003.
  • Citing a study by David Yermack, a New York University professor, that found personal use of company aircraft is “associated with severe and significant underperformance of their employers’ stock,” averaging 2% around the date of initial disclosure. Use of private aircraft by corporates jumped from an annual rate of 9 percent in 1993 to over 30% in 2002. “One might conjecture that the chief executives who consume excessive perks might be less likely to work hard, less protective of the company’s assets, or more likely to tolerate bloated or inefficient cost structures,” he said. The study looked at 237 companies in the 2002 Fortune 500.
  • A recently-released survey of the top 4000 public US firms by Deloitte & Touche found that 83% had an established code of ethics. Twenty-five percent, however, are not actively monitoring compliance. Only 55% had an ethics officer. Slightly more than half said ethics and compliance concerns were addressed with their board only after failure occurs. Ninety percent include shareholders, suppliers, customers and other related parties in their ethics codes, but only 52% actually give out the codes to these parties.
  • A new study by Independent Remuneration Solutions (IRS) found heads of the 10 biggest UK firms saw their pay packages grow by more than 12 times the rate of inflation for 2003 at 24%. Base salaries, said the IRS, accounted for only 16% of total remuneration, with the rest coming as bonuses, share options and pension contributions.

We also like their quote of the week: “Corporate scandals of recent years have clearly shown that the plethora of laws of the past century have not eliminated the less savory side of human behavior. Rules cannot substitute for character.” (Alan Greenspan, US Federal Reserve Chairman) From VOL 6 NO 10. Subscribe at News Briefs.

At, our retort to Chariman Greenspan would be that character cannot be known in advance and all the checkbox rules in the world won’t allow shareholders to hold directors accountable. The recent spate of new laws are mostly window dressing. What is really needed is the ability of shareholders to place their nominees on the corporate ballot, place resolutions dealing with elections in the corporate proxy and take collective action, such as that recommended by the Corporate Monitoring Project. We’d like to see The Corporate Library expand their services. Right now, the site primarily appeals to institutional investors. However, they could play an important role in mobilizing individual investors by facilitating the ability of individual investors to vote by “brand,” as described in Vote Your Stock by Mark Latham.

Vote No on Symbolism

CalPERS shouldn’t be backpedaling. “Warren Buffett is a great director,” said Pat Macht, the head of public affairs at CalPERS, after the huge pension fund cast “a symbolic vote” against him at Coke.

CalPERS had argued that Buffett is not independent because companies he controls do business with Coke and that Coke’s audit committee, of which Mr. Buffett is a member, allowed its auditors to do other work for the company. CalPERS should either hold all directors to the same standard or their policies and votes should allow for exceptional individuals, such as Buffett. We agree with Floyd Norris’ statement in the New York Times (Do Institutional Investors Deserve New Authority?, 4/23/04), “A vote against re-electing a director ought to reflect actual opposition to that candidate.”

CalPERS Adds India as Investment Possibility

CalPERS put India on its investment radar on April 19, two months after it said India failed to meet the necessary standards.  The Board voted to add India, the Philippines and Peru to its list of permissible emerging equity markets, according to a press release.

“These three countries have made significant progress and demonstrated that they now meet our high standards for investment,” said Sean Harrigan, President of CalPERS Board of Administration. “This is an example of our policy having a positive effect in the emerging markets.” CalPERS has around $2 billion invested in emerging market equities, while its total investments are to the tune of $166 billion.

Investment Committee Chairman Rob Feckner expressed support for the emerging country evaluation process and said, “we can and will do more to refine our process so that any emerging country that wants to be responsive to our standards has a timely opportunity to be considered.” The decision to include India and the other two countries was taken after a reassessment of their “scores” based on several parameters, including market efficiency, corporate governance practices, transparency, political stability and the labour practices of the markets concerned.

Sanjay Sachdev, managing director and CEO of Principal Asset Management Company, a leading player in retirement funds, said it would open the floodgates for other such funds to follow. “It’s a re-affirmation of the growth story in India and the steps we have taken to improve our market delivery system,” he said.   (, 4/21/04, CalPERS puts India on investment radar)

We see this as a positive step but would like to see CalPERS ranking both countries and companies within countries so that companies with excellent corporate governance are still eligible for CalPERS investments.

Corporate Monitoring Proposals, the proxy discussion site, is asking its readers, “Should shareowners be able to select a proxy advisory firm, paid with corporate funds, to provide research and voting recommendations to the shareowners?”

If you or your firm own shares in Calpine (CPN), Oregon Steel (OS), USEC (USU), or Visteon (VC) you should be aware the Corporate Monitoring Project has shareholder proposals at each company that deserve your attention and support. The premise of each proposal is that individual and institutional investors can coordinate their voting to make corporate management accountable to shareowners. This will increase stock returns, control CEO pay, and balance profits with social goals. The proposals, “Voting Leverage” and “Proxy Advisor,” are variations on the same theme: making shareowner voting more powerful by using competing intermediaries — institutional investors and proxy advisors respectively, to provide advice on proxy issues.

Given most individuals’ lack of time and expertise, professional recommendations can often sway their votes. The Voting Leverage proposal (CPN and VC) asks for a study and report on the feasibility of offering a convenient mechanism for individuals to copy the voting decisions of institutional investors on all matters put to shareowner vote except director elections. (Director elections are excluded here to satisfy SEC rule 14a-8(i)(8).). So for example, besides being offered a convenient choice of voting the entire proxy as the board recommends, perhaps shareowners could be offered a similarly convenient choice of voting the entire proxy (except director elections) the same way Domini Social Investments, the Calvert Group, Pax World or CalPERS votes its shares. Shareowners would be able to see how these “brands,” which have considerable research capabilities, vote and could then decide to join them.

Under the Proxy Advisor proposal (OS and USU), the Board of Directors would hire a proxy advisory firm for one year, to be chosen by shareowner vote, paid for with corporation funds. Having shareowners, rather than the Board, choose the proxy advisor would further enhance independence. Shareowners have a common interest in obtaining sound independent advice, but often insufficient private interest to justify paying for it individually (the “free-rider” problem). This proposal would provide owners with independent advice concerning future voting issues at minimal cost.

Both proposals fit nicely with the multi-year process contemplated by the SEC’s rulemaking, Security Holder Director Nominations, S7-19-03. Additionally, if that rule passes, I have hopes that in the future the SEC will allow Voting Leverage and Proxy Advisor proposals to include advice on director elections. That would certainly facilitate the move to corporate accountability. See for details: text of proposals, annual meeting dates/locations, links to proxies, board critiques of proposals, and proponent responses.

CalPERS Effect

With increasing publicity, such as a recent article in the Wall Street Journal(‘Calpers Effect’ May Give Lift To Underperforming Stocks, 4/20/04), the “CalPERS Effect” could become a self-fulfilling prophecy. The six companies, as follows, targeted by the pension fund last year have outperformed the S&P 500 and largely surpassed their peers: Gemstar-TV Guide International Inc., JDS Uniphase Corp., Manugistics Group Inc., Midway Games Inc., Parametric Technology Corp., and Xerox Corp. (The publisher has investments in Gemstar, see disclosures).

Companies named to its focus list between 1992 and 2001 saw stock gains of about 12% over the three months after being named to the list. Companies targeted by CalPERS between 1987 and 1999 outperformed the S&P 500 index by more than 14% over the five years after being listed. All the publicity around its shareholder activism isn’t hurting the likelihood the CalPERS Effect will continue, and perhaps accelerate, especially if the SEC provides greater access to shareholders to nominate directors. CalPERS would be smart to step up their investments in targeted firms before announcing their list. That way they would get more benefit from their heavy lifting.

Investments Increase

Assets in 401(k) plans increased 22% in 2003, reaching a record $1.795 trillion. That ends a three-year decline, according to the Society of Professional Administrators and Recordkeepers (SPARK). Participation rates were 78% among plans with more than $5 million in assets and 75% among smaller plans.

Exec Comp #1

Executive compensation has emerged as the top corporate governance issue this proxy season, according to a report in (4/13/04, Executive Compensation Emerges As Number One Corporate Governance Issue)

Institutional Shareholder Services (ISS) is tracking more than 300 pay and stock option related proposals this year and expects record levels of shareholder actions, especially when a disconnect between pay and performance is observed. “Clearly boards of directors have more work to do in producing compensation formulas that will satisfy shareholders and the public, indicates Bill Ide, Sr. Fellow of the Goizueta Directors Institute, which will sponsor their annual Goizueta Directors Institute summit, May 26 and 27 to address the compensation crisis and new mandates that seek to control executive pay.

The Financial Accounting Standards Board (FASB) has proposed that publicly-traded companies record as a compensation expenses all forms of share-based payments to employees, including employee stock options. “The FASB has done compensation committee members a huge favor by leveling the playing field,” states Patrick McGurn of Institutional Shareholder Services. “Now pay panels won’t be handcuffed by the current accounting rules’ bias against performance-based awards. Recent well-publicized changes in compensation practices at Microsoft, GE, IBM and other bellwether firms represent the first wave of the post-footnote reform era.” The FASB proposal is available for comment until 6/30 but a House bill that would block the proposal is gaining support from Republican and Democratic leaders. (Accounting board defends plan to count stock options as expense, Mercury News, 4/20/04) In our opinion, enactment would be a tragedy.

In testimony to Congress’s Joint Economic Committee, Federal Reserve Board chairman Alan Greenspan said that not expensing stock options gives a distorted view of profitability. The Fed chief acknowledged that the House of Representatives is considering a bill that would defer enforcement of FASB’s rule until the SEC studies its economic impact. Noted Greenspan, “I think it would be a bad mistake for Congress to impede FASB.”

Compliance Week reports that DaimlerChrysler bowed to concerns by voluntarily scrapping its stock option plan for its managers in favor of an incentive pay plan. Board members will earn a variable component that depends on the stock price and the company’s return on sales compared with a peer group, including BMW, General Motors and Toyota, according to published accounts. This means the board members will receive their first bonus in 2009.

“We’re looking at a major overhaul of executive pay programs,” said Steven E. Hall, President of Pearl Meyer & Partners, in a statement. “Companies are acting on investor demands that pay programs be less dependent on short-term stock price movement and more directly related to long-term financial performance as well as real growth in shareholder value.” (Executive Compensation Is 2004’s Lightning Rod, 4/13/04)

Director Independence

The Delaware Supreme Court has affirmed a lower court ruling dismissing a shareholder derivative action challenging the independence of the board of directors of Martha Stewart Living Omnimedia. The court found that four of the six directors were independent, despite holding a friendly relationship with Martha Stewart and conducting a modicum of business interactions with her or her company.

In measuring independence, the court presumed directors were “faithful to their fiduciary duties,” and required the plaintiff “to overcome that presumption” by creating “a reasonable doubt.'” “Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s independence,” ruled the court. (see, 4/15/04, Martha Stewart Shareholders Lose In Court)

All the more reason to keep pushing to allow shareholders to place their director nominees in the corporate proxy. That will give us truly independent directors.

A Supplement, Not a Replacement

Joseph Grundfest, Stanford Law School professor and a former SEC commissioner, proposed majority elections of directors as an explicit alternative to the SEC’s proposal to place director nominees on corporate proxies, under very limited circumstances. (see letter of April 12th)

The American Society of Corporate Secretaries (ASCS) and Barclays Global Investors NA (BGI) also signed the letter, which made it “the only perspective that has material support in both the corporate and shareholder communities,” according to the signatories.

“Such a majority requirement would create a strong incentive for corporate nominating committees to confer and consult with shareholders about the identity of nominees,” Grundfest pointed out. “The result will, we believe, be a less confrontational mechanism that constructively engages shareholders in the process of nominating and electing directors.” (ISS Friday Report of April 16, 2004)

James E. Heard, Vice Chairman, Institutional Shareholder Services, wrote to the SEC that ISS continues to believe that the Commission’s proposed Rule 14a-11 should be adopted.

“While we have urged changes in the proposed rule (see our earlier comment letter and our comments at the recent March 10, 2004, Roundtable discussion) we believe that proposed Rule 14a-11, which would provide significant longterm shareholders with a realistic opportunity to have their own nominees for director included in a company’s proxy materials, is a sound proposal.

We also believe that the Grundfest proposal has considerable merit. While it does not offer a means for shareholders to have their own nominees included in a company’s proxy materials, it does provide strong incentives for companies to seek majority-vote election of all directors. Companies that chose to permit directors who failed to receive a majority of votes to serve on their boards would face disclosure requirements that few companies, and few directors, would find attractive. The likely result would be to encourage companies to elect directors by majority, rather than plurality, votes.”

He suggests the Grundfest proposal be considered “as a supplement to, and not a replacement for, the right of shareholders to have their director nominees included in company proxy materials.” We heartily agree.

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Lax Tax

In 1940, corporations and individuals roughly split the federal income tax bill equally. Last year, corporate taxes accounted for 13.7%, while individuals paid 86.3%. The majority of companies operating in the United States in 2000 didn’t pay any taxes, according to a recent GAO study. According to the study, 73.3% of foreign-based companies paid no taxes in 2000, and 88.5% paid less than five percent of their U.S. earnings. Among U.S.-based corporations, 63% paid nothing. And a remarkable 93.9% owed less than five percent of their income. Small companies (less than $250 million in assets or gross receipts of less than $50 million) were more likely than large companies to pay nothing.

Although Enron has heightened concerns about corporate fraud, only 0.75% of business tax returns were audited by the IRS in the past year, down from 2.62% in 1997, according to Syracuse University’sTransactional Records Access Clearinghouse (TRAC). In 2003 there were only12 civil negligence penalties aimed at corporations. Back in 1999, there were 62. During the same period, civil fraud penalties dropped from 247 to 170.

The major corporate scandals of recent years haven’t involved tax abuses, but, as Ackman writes “the legal and political atmosphere would seem to counsel an increase in revenue agency diligence, not a decrease.” (“Free Riders” by Lee Drutman for and “Firms Often Avoided Taxes,” by Warren Vieth of the Los Angeles Times, and “IRS: Paper Tiger,” by Dan Ackman of

CalPERS to Nominate

With or without the SEC’s proposed rule that would make it easier for investors to elect directors, CalPERS is “strongly considering” offering up its own board nominations, said William McGrew, an investment officer in Calpers’ corporate governance unit, according to a Wall Street Journal article by Phyllis Plith. (Calpers ‘Strongly Considering’ Running Board Candidates, 4/8/04)

Such talk at CalPERS has gone back at least to the days of Dale Hansen and Richard Koppes but now they appear to be getting serious. One probable candidate would be Ralph V. Whitworth, a principal at Relational Investors LLC, who presses for change at investment targets, in part, by elbowing his way onto their boards. CalPERS already has about $1 billion tagged for Whitworth’s $2.4 billion investment fund.

The prospect is welcomed by veteran activits, such as Herbert Denton, president of New York investment bank Providence Capital Inc. Over the years Denton has helped place 34 individuals on 19 boards as part of a strategy to enhance shareholder value. “I think CalPERS has always been in the vanguard in thinking about corporate governance,” he said. “For goodness sake, they are huge shareholders, they are permanent investors, why shouldn’t they have representation?” “The institutional community owns nearly 60% of the top 1000 companies and they have virtually no direct representation at these companies. It’s insane.”

SEC’s Director Nomination Rule Still Moving

The SEC is now expected to post its revised recommendations for proxy access sometime in May, according to Compliance Week. One possible revision is to increase the threshold for withhold votes from 35% to 40-45%. The other modification many believe is under consideration is the “Advice and Consent” compromise proposal advanced by Joseph Grundfest and Ira Millstein. Under their plan, if a majority of shareholders withhold votes from a candidate for director, the company’s nomination committee must identify a new candidate.

“With this approach nomination committees would have the opportunity to find a candidate that meets both management and shareholder interests,” Grundfest said during the SEC’s recent roundtable. “And dissident shareholders that could be confrontational would not find their way on the board.” Although interesting, it is hard to see how that proposal can be reconciled with the thrust of the SEC’s proposal, which would give a small token of power directly to shareholders. (SEC Poised To Unveil Revised Proxy Access Rule In May, 3/31/04)

CNNfn Interviews Robert Monks

Christine Romans, CNNfn‘s anchor for Street Sweep, led with a question concerning a new trend that outside directors are actually showing up at annual shareholder meetings. Monks indicated that he will be much more impressed when directors are willing to meet with shareholders and discuss the issues. It took many hours and thousands of dollars for Monks to get to the Exxon’s annual meeting to present a shareholder resolution. “I asked if I could ask a question of a director and I was told no.” All he got was his four minutes under the red light.

Jim Hedges appeared to question recent reforms, saying that outside directors “rely solely on management” for information, at the same time they are being asked to sign off on the viability of those statements. “Why on earth would I want to be an external director in a public company?” Monks said that shows the problem with the American model. The board is dependent for information on the very person they are supposed to be evaluating. “What does that tell you? Does it tell that you there is a serious commitment to having a board to carry out the duties that we are told that directors are supposed to do, or does it tell you that a board of directors is largely cosmetic?” (3/31/04 March 31, 2004, Transcript # 033104cb.l06)

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February 2004

Volume 12, Number 1

Corporate Governance: An International Review remains the world’s premiere academic journal on the subject under Christine Mallin’s capable editorial hands. The January 2004 edition includes a review of corporate governance rating services by Howard Sherman of GovernanceMetrics International and Nick Bradley of Standard & Poor’s Governance Services group, as well as reviews of tools and rating ideas in Germany and Greece.

An empirical study, “The Stock Market Reaction to the Introduction of Best Practices Codes by Spanish Firms,” finds the market reacts positively to announcements of compliance with the code of best practice that imply a major restructuring of the board of directors, whereas no wealth effects are observed for announcements that relate to isolated reforms recommended by the code. Another empirical study, “The Link Between Earnings Timeliness, Earnings Conservatism and Board Composition: evidence from the UK,” finds firs with a higher proportion of outside board members are more likely to recognize bad news in earnings on a timely basis, yet they don’t display greater reporting conservatism with respect to good news.

Along with several other feature articles, the Review also includes book reviews, including one by Marc Goergen on Mark J. Roe’s excellent Political Determinants of Corporate Governance, as well as a section entitled “Corporate Governance Update,” which attempts to highlight news around the world. No quarterly publication can keep readers up-to-date on world news. However, I always see items that I have failed to notice and it is always interesting to see what the editor includes.

Buy from Political Determinants of Corporate Governance

California May Trump SEC’s Move Toward Democracy

California’s Secretary of State Kevin Shelley sponsored legislation in California, introduced by Assemblymember Judy Chu that appears to go a step further than the SEC’s rulemaking, Security Holder Director Nominations, S7-19-03AB 2752 would require publicly traded corporations doing business in California to have election procedures meeting specified requirements, such as:

  • Shareholder eligibility: Corporate election procedures would allow shareholders or groups with more than 2% of the company’s stock held for 2 years to nominate directors. This compares with the SEC’s proposed requirement of a 5% threshold and without the “triggering” event to stall action.
  • Soliciting support: Companies would be required to make information available to shareholders no less than once per year regarding all individuals or groups interested in soliciting support to nominate candidates for the board. The notifications required by the corporation will better enable shareholder coalitions to form.
  • Deadlines and candidate information: Proxy statements shall include 250 word statements provided by director candidates. The proposed SEC rules require far fewer words and contemplates use of shareholder internet sites to convey information.
  • Candidate limits: Not less than 40% of the total number of directors on the board must be eligible for nomination by shareholders. The SEC proposal limits most companies to 1 or 2 shareholder nominated directors.
  • Nomination process: In order to have a nominee included in a company’s proxy statement and proxy card, the nominating shareholder or group must provide specified notice to the company, no later than 80 days before the company mails its proxy material.
  • Allowable restrictions: The procedures may include restrictions to restrict nominees who are not independent or are convicted criminals. “Independent” may need to be further defined but the law would not appear to preclude shareholder from nominating professional “relational investors” or turnaround specialists, unlike the SEC proposal.
  • A company’s proxy card shall identify shareholder nominees, and shall present the nominees in an impartial manner. Each candidate must be voted on separately. This provision helps to level the playing field.
  • If a company includes statements in its proxy statement supporting company nominees or opposing shareholder nominee(s), the nominating shareholder or nominating group shall be given the opportunity to include a statement not to exceed 500 words per nominee.
  • Companies would be required to make information regarding the process and deadlines to nominate and elect an individual to the board available on their website and in their annual report.
  • The Secretary of State shall, not later than December 31, 2005, provide access to the corporate election procedures by means of an online database. This provision would seem to require a substantial amount of work the Secretary of State. How would the possible need for an appropriation during California’s budget crisis impact the bill’s chances of passage?

Further, the bill would require that corporations doing business in California shall implement any shareholder proposal that passes by a majority vote, unless the proposal clearly states it is advisory. If a corporation establishes a means to place an advisory shareholder proposal on the ballot, it shall also establish a means to place shareholder proposals on the ballot that are required be implemented. The bill provides for fines of up to $100,000 dollars a day for every day a proposal is not implemented. Contact Information: Julio Martinez is staffing the bill for Assemblymember Chu. His office number is (916) 319-2049. Willie Guerrero, Assistant Secretary of State, is the contact within Kevin Shelley’s office. Please cc James McRitchie, Publisher of CorpGov.Net.

Letters should be directed to: Assemblywoman Judy Chu, State Capitol Room 2114, Sacramento, CA 95814 and Secretary of State Kevin Shelley, 1500 – 11th Street, Executive Office, Sacramento, CA 95814. The SEC got over 12,000 comments on their rulemaking. I hope Shelley and Chu can handle the mail this bill will generate.

Fiduciary College – Save the Date

Fiduciary College at Stanford Law School explores “best practices” for fiduciaries interested in discharging their responsibilities prudently and effectively. Learn from and work with experts from academia, government, and investment management, as well as seasoned pension, endowment, and foundation function practitioners.

Comcast and Disney

Communications Workers of America President Morton Bahr issued thefollowing statement recemtly:

We’re pleased that the Securities and Exchange Commission will allow Comcast shareholders to address the issue of disproportionate voting power and to call for reforms, as outlined in the shareholder proposal submitted by the CWA Members’ Relief Fund.

Comcast’s capital structure defies the most fundamental aspect of shareholder democracy – the principal of one vote per share. It gives CEO Brian Roberts and his family a 33-1/3 percent undilutable voting control even though they own less than one percent of the market value of the company.

This archaic structure, in which the family’s Class B stock holdings are given undue weight over Class A holdings, is more commonly seen at small companies – not Fortune 100 giants like Comcast. It gives CEO Roberts an effective veto power over shareholder initiatives and stifles accountability.

This issue is especially important in light of Comcast’s ongoing effort to take over the Walt Disney Co. Under terms of Comcast’s proposal to Disney, Roberts would continue to control one-third of the voting power of what would be one of the world’s most powerful media conglomerates.

Until this issue is settled, I can see no reason to vote in favor of the proposal to take over Disney. I also urge readers to withhold votes from Michael Eisner. From the ISS recomendation, “If there were ever a case for separating the roles of chairman and CEO, this company is the poster child. Were there a shareholder proposal on the ballot to separate those roles, we would support it.”

Kitchen-Table Vigilance

John Wasik, Author of The Kitchen-Table Investor and Retire Early and Live the Life You Want Now, argues that vigilant investors might have detected the troubles that besieged Parmalat, Enron and other companies whose accounting practices turned them into corporate pariahs if there had been greater transparency. “The momentum for enhanced corporate democracy is stronger than ever.”

Parmalat, for example, scored 2.5 out of 10 (6.5 was the median score) on a measure of board accountability. Only three of 13 Parmalat directors were classified as independent by GMI. A traditional response to the “unchecked power” of shuttered boardrooms has been increased government regulation.

Wasik notes that “unfortunately, that approach has limits and has never been totally effective against fraudulent activities. Corporate malfeasance, though, can be more effectively policed by more than 100 million global investors than by a handful of government agencies. Such vigilance often starts with a simple question: Is management operating in the best interests of shareholders?” (Could Investors Have Detected Parmalat, Enron Woes?: John WasikBloomberg, 2/16/04)

Editor: We couldn’t agree more. In the U.S. what’s needed is not more regulations requiring that companies tick off boxes. Instead, shareholders should be empowered to actively monitor. What better way for that to happen than to allow shareholders to play a much more significant role in nominating and electing directors?

Women Add Value

A study of 353 of the 500 largest US companies from 1996 to 2000, by BMO Financial Group and Catalyst, shows that companies in the top quartile in terms of having the most women executives showed a return on equity of 17.7% and a total return to shareholders of 127.7% compared to 13.1% and 95.3% for the bottom quartile, those with the lowest percentage of women among their top officers. (BusinessWeek 1/26,  Corporate Governance Alliance Digest, 02/17/04)

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Avoiding Shareholder Battles

Rob Norton’s “The SEC Opens the Boardroom to Unhappy Investors,” in the March/April edition of Corporate Board Member magazine, offers sound advice on what directors should do now to prepare for possible changes in nominating procedures that will give shareholders a little more power.

  • Move quickly to restructure the nominating process along the lines of the SEC requirements. Many boards have already instituted some of the required reorganization and disclosures, but many have done too little. In a survey of 150 members of the Business Roundtable conducted last June, for instance, a third of the companies said their nominating or governance committees had no process for communicating or responding to shareholder nominations of board candidates.
  • If your company has not already done so, take steps to demonstrate a readiness and willingness to add truly independent, tough-minded outside directors—the kind whose nominations assure shareholders that the company is genuinely interested in having a board that represents their interests as well as management’s. And make sure to communicate the company’s seriousness to the public and to institutional investors. Says Kerry Moynihan, a managing partner at the executive search firm Christian & Timbers: “Companies can inoculate themselves against unwanted nominations if they are seen as having a rigorous process in place to nominate directors who aren’t just the CEO’s golf buddies.”
  • Consider taking steps to avoid the triggering events that would enable shareholders to make the board open the proxy to outside nominees.
  • Reach out to shareholders. A less combative and ultimately more effective way to avoid having institutional shareholders propose their own candidates would be to make sure that lines of communication are open and effective. “Board members should make an effort to know who their shareholders are—which can be difficult,” says John Wilcox, vice chairman of Georgeson Shareholder Communications in New York. “Directors should then analyze what kinds of issues might be of concern to them, either through surveys or other kinds of research.” Says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, “My advice to board members is: Communicate with your institutional holders, listen to them, and be sensitive to their needs. It’s as simple as that.”

Norton concludes with the following admonition, “if companies dig in their heels and fight the trend—and especially if corporate scandals continue—what the SEC has done so far with proxy access may turn out to be merely the beginning of a longer march toward making the nomination and election of directors less like the discreet boardroom protocols of the past and more like the rough-and-tumble battles of political contests.”

Real Reform of Nominations

Phillip Goldstein, President of Kimball & Winthrop, Inc., wrote one of the more interesting supplementary comment letters to the SEC regardingSecurity Holder Director Nominations, S7-19-03(comments. Through his usual wit, Goldstein asks the Commission to scrap its “proxy access” proposal and restart with a new objective. “All shareholders have a fair opportunity to vote for the nominees of their choice. The only way they can do that is if they are provided with a proxy card that includes all bona fide nominees.”

Goldstein recommends that new rules be modeled after Section 481 of theLabor-Management Reporting and Disclosure Act of 1959. Granting shareholders of publicly traded corporations the same level of voting rights as union members would “ensure the free exercise of the voting rights of stockholders and almost certainly would be upheld by a court as a valid exercise of the Commission’s rulemaking authority.”

Victory for Shareholder Democracy

Judge Richard J. Holwell denied a preliminary injunction sought by the MONY Group claiming that Highfields Capital Management’s inclusion of a duplicate proxy card in a campaign to defeat a corporate merger violated rules passed pursuant to section 14(a) of the Securities Exchange Act of 1934.

Holwell said that a bar could be seen as “frustrating the animating spirit that lies at the core” of the rule in question, which is intended to make it easier for shareholders to communicate without having to mount expensive battles. (Dissident’s Use of Proxy Card Exempt From Rules,, 2/14/04. Judge Rules in Favor of Opponents of MONY Takeover, NYTimes, 2/12/04)

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Lawsuit Threatens Speech at Shareholder Meetings

Cintas Corporation brought a defamation lawsuit against Timothy Smith and Walden Asset Management for alleged statements he made at their annual shareholders meeting accusing Cintas of supporting sweatshops.

Not only does such a move threaten to silence critics who will now fear expensive lawsuits, it also could put a serious damper on fun. Shareowners have one opportunity each year to confront managers with tough questions. Will frequent filers, such as Evelyn Y. Davis and John Chevedden, be forced into silence. Walden, which advocates “socially responsible” investing sponsored a resolution at the October 14, 2003 Cintas meeting asking the company to evaluate its vendor code of conduct and the compliance of off-shore factories and suppliers. The lawsuit seeks damages of at least $75,000, plus unspecified punitive damages and an injunction preventing Walden from making statements linking Cintas to Haitian sweatshops.

Shareowners who believe such a lawsuit is counterproductive might want to contact William C. Gale, Senior Vice President-Finance and Chief Financial Officer of Cintas Corporation at 513-573-4211. (Citizens Advisers Urges Cintas Corp. to Withdraw Defamation Lawsuit Against Shareholder Advocate, Shareholder Action Network, 2/12/04. Cintas sues for defamation, The Cincinnati Enquirer, 2/6/04) You might also want to post to the Yahoo! message boardeRaider, or elsewhere.

SEC RoundTable March 10th

The Securities and Exchange Commission will host a roundtable on March 10, 2004, from 9 a.m. – 5:15 p.m., to discuss the rules proposed by the Commission on Oct. 14, 2003, relating to Security Holder Director Nominations, S7-19-03. The proposals would, under very limited certain circumstances, require companies to include shareholder nominees for directors on their proxy ballot.

The roundtable will take place in the William O. Douglas Room of the Commission’s headquarters at 450 Fifth Street, N.W., Washington, D.C. on March 10, 2004. The public is invited to observe the discussion, and seating will be available on a first-come, first-served basis. It appears there will be many small panels with about a 10 minute time allocation to each person on the panel. The roundtable discussion also will be available via webcast on the Commission’s Web site. A final agenda and list of participants will be published in a press release prior to the roundtable discussion.

The Commission will accept comments regarding issues addressed in the roundtable discussion and otherwise regarding the proposed rule amendments from March 10, 2004 until March 31, 2004. Submit your comments to [email protected]. Be sure to refer to File No. S7-19-03 in the subject line. Comment letters will be posted on the Commission’sWeb site. Only include information that you wish to make available publicly.

For additional information, contact Lillian C. Brown or Andrew Brady, Division of Corporation Finance, at (202) 824-5250, or, with regard to investment companies, John M. Faust, Division of Investment Management, at (202) 942-0721, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549.

Compliance Webcast

Companies that focus on complying ONLY with the letter of the law may find themselves with bloated controls, burgeoning expenses, and enduring headaches. But corporate leaders who embrace the spirit of the law should see a re-energized company, reassured investors, and maybe even reduced costs. Research conducted by McKinsey Co. found that 57% of institutional investors said that good governance determined whether they increased their holdings in a company. Sign-up now for 2/5/04 2 PM ET broadcast. (Bridge to Excellence: Comply, Sustain and Improve)

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Investing in Firms With Good Corporate Governance Pays

Mutual funds that invest in companies with superior governance practices, such as the Sequoia Fund and Northern Large Cap Value Fund, tend to have better long-term returns, according to a study by Lipper Inc.

The 10 large-company value, core and growth funds with the best records of investing in good-governance companies had better one-, three- and five-year returns than their average competitor, said fund research company Lipper and GovernanceMetrics International, which rate corporate governance practices. However, funds with worse corporate-governance investments actually did better over one year, probably due to the technology stock rally in 2003. (Mutual funds benefit from strict governance, Contra Cost Times, 2/2/04)’s Gadfly Gets It

After reading comments submitted on the SEC’s Security Holder Director Nominations, S7-19-03 rulemaking, self-described “gadfly” Michael Collins writes that “free elections are more likely in Iraq than at U.S. corporations.” See Fair Elections? Not for U.S. Companies (1/31/04, you’ll have to search for it). Collins sees through the Business Roundtable’s argument that CEOs should continue to play a larger role in choosing directors than “special interest groups,” such as pension funds and shareholders. Let’s hope others read his commentary and become enlightened. The movement seems to be growing. California Secretary of State Kevin Shelley, who oversees elections for public office, recently indicated that he wants a law forcing companies doing business in California to allow shareholders to nominate candidates for corporate boards of directors. (Fundamental change in corporate governance proposed, San Jose Business Journal, 1/19/04) See also Should Corporations Try Democracy?

GE, Striving for Average

General Electric was named the “world’s most respected company” for the six straight year in a survey of 903 CEOs conducted by PriceWaterhouseCoopers for the “Financial Times.” However, shareholder activist John Chevedden is battling for them to just reach average with regard to director independence. He beat back GE’s challenge to the SEC, so his proxy proposal will be in the 2004 GE proxy with minor changes.

RESOLVED: Shareholders request that our Board initially strive for and then at least maintain an average independence level for our Board. This proposal includes that, once adopted, if our company reverts back to the current practice, this will be subject to a shareholder vote.

Chevedden uses the standard from the Council of Institutional Investorsthat “A director is deemed independent if his or her only non-trivial professional, familial or financial connection to the corporation or its CEO is his or her directorship.”

By the Council’s definition, Chevedden believes the average Board at major U.S. companies is 70% to 80% independent. “This proposal requests that our board at first strive to be average and then maintain or exceed average. In 2003 our board was 59% independent” – considerably below average.

Continue Reading ·

January 2004

Corporate Monitoring Project

The Corporate Monitoring Project has moved its headquarters from San Francisco to Vancouver, Canada. While broadening its focus to include Canadian companies, promises to continue their primary emphasis on improving corporate governance in the USA. Their latest newsletter outlines the following developments:

  • Three innovative shareowner proposals that have so far been submitted to six companies
  • Stock voting leverage website development underway
  • voting discussion website launched
  • New movie “The Corporation”

If you’re not on the Corporate Monitoring Project’s mailing list, you’re missing some of the most world’s most innovative thinking about developments to better enable shareowners to hold management accountable. The Project hasn’t been on the cover of BusinessWeek but its influences are everywhere. To subscribe, send an e-mail request toMark Latham. Launched‘s open forum for shareholders is billed as being a “first-of-its-kind Web site” allowing individual investors to voice opinions and research proxy votes related to publicly-traded equities. Yet, how is it significanly different than the bulletin board I posted in 1995 and later removed, the typical Yahoo! board, or eRaider? Yes, many of us have tried to set up resources for investors to exchange views and discuss proxy voting matters ranging from the election of boards of directors to issues such as the approval of executive compensation. They say the site “will help transition today’s passive investor into an active stakeholder.” We hope so. Take a look. Tell us what you think. Is there finally a forum for intelligent discourse.

Evelyn Y. Davis Establishes Scholarship

PRNewswire via COMTEX carried an item indicating that shareholder activist Evelyn Y. Davis and the Evelyn Y. Davis Foundation have contributed $100,000 to the University of Pennsylvania to endow a scholarship for students pursuing careers in business or political journalism. It appears identical to an earlier scholarship she established at the University of Miami School of Communication.

Davis publishes the influential corporate newsletter “Highlights and Lowlights” and has made a career of defending the interests of shareholders. She attended her first shareholder meeting years ago at IBM and today travels to more than 40 meetings annually, often commanding attention through her probing and challenging questions.

As editor of “Highlights and Lowlights,” Davis has been attending White House press conferences since 1978 and has been recognized by presidents. Her publication offers political analysis and timely business coverage in corporate governance matters for corporate chief executives. Let’s hope these scholarships help push some students to look critically at democracy as practiced in corporate governance.

Democratic Reforms Sought at SK in Korea

Sovereign Asset Management (Sovereign) announced its support of five new independent, non-executive board nominees to the board of SK Corporation (SK) at the forthcoming Annual General Meeting, to be held in March 2004. The candidates have been officially submitted to SK and are as follows:

  1. Dr. Dong-sung Cho, Professor of Business Administration, Seoul National University, President-Elect of the Korean Academic Society of Business Administration.
  2. Dr. Seung-soo Han, former Cabinet Minister, diplomat and President of the 56th Session of the United Nations General Assembly.
  3. Mr. Jin-man Kim, former CEO of KorAm Bank and Hanvit Bank.
  4. Dr. Joon-gi Kim, Associate Professor of Law and Executive Director, Hills Governance Center, Yonsei University.
  5. Mr. Dae-woo Nam, former outside director of Korea Gas Corporation.

Sovereign also proposed a number of amendments to SK’s current Articles of Incorporation, designed to further enhance corporate governance at the company. James Fitter, CEO of Sovereign, said: “SK Corp is a potentially great company that deserves a fresh start. It is time to break from the past and revitalise the board of directors to ensure sound stewardship for a healthy future.” He added: “These candidates are independent Koreans who demonstrate the highest standards of integrity, transparency, and accountability. Their successful election will be dependent upon receiving the votes of Korean and foreign minority investors alike. We are confident that they will work constructively with the other members of the board to collectively make informed, independent decisions that are in the best interests of the company and are of benefit to all shareholders equally.”

Proposed Amendments to the Articles of Incorporation include:

  1. Approval of Related Party Transactions
    Unanimous approval by a newly created Related Party Transactions Committee should be required for all major related party transactions.
  2. Term of Office of Directors
    Directors’ terms should be reduced from 3 years to 1 year. There should be provisions for automatic termination of office in the event of criminal conviction carrying a prison sentence.
  3. Method of Electing Directors
    The current prohibition of cumulative voting should be removed.
  4. Election of Directors
    The total number of directors should be at least five, but no more than 10, with at least half being outside directors. The authority of the board to determine the number of outside directors is removed.
  5. Compensation of Directors
    The compensation of directors should be determined by a newly created Director Compensation Committee and approved at the General Shareholders Meeting.
  6. Written Voting and Electronic Voting
    Shareholders should be permitted to exercise their voting rights by submitting votes either in writing or electronically.
  7. Notice of Meetings
    The notice period for convening a General Shareholders Meeting should be increased to at least three weeks from the current two-week period.

A toll-free telephone information helpline, with Korean and English language services, has been set up so SK shareholders can call for assistance with the voting process. For those calling within Korea, the number is: 00798-612-1093. For those calling outside Korea, the number is: +61-2-9240-7469.

Director Trends

We have added Corporate Board Member magazine to our growing list of “stakeholders,” leading authorities in explaining movements and motives in the field of corporate governance. The most recent issue, “What Directors Think,” discusses the fact that reforms are increasing pressures and workload in the boardroom, with noticeable changes in directors’ opinions during 2003.

Greater scrutiny and reporting requirements have significantly increased board members’ workloads. Three-quarters of survey respondents are devoting more time to their director duties in 2003 than in 2002 – an average of 19.2 hours a month, up from 14%. The percentage of directors who reported board meetings lasting more than five hours increased sevenfold from 7% in 2002 to 50% in 2003.

With increased pressures, workload and time commitment, most directors believe an increase in pay should follow, especially for committee chairs. Of survey respondents, 81% said audit committee chairs deserve better pay, compared to 54% in 2002. Fully 80% of respondents said they are not paid enough for their board duties.

However, reforms have had a positive impact – 73% of directors now think they are less likely to be sued in a securities case thanks to better governance compared to 66% in 2002. In addition, more than 60% of survey respondents said good governance practices mean lower premiums and better coverage by directors’ and officers’ insurance, compared to 51% in 2002. Moreover, 86% of the 2003 survey participants believe good governance practices improve a company’s image, and 46.7% believe it benefits a company’s stock price. Clearly, the message is getting through.

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UCLA Corporate Governance Conference

The Seventh Annual Corporate Governance and Equity Offerings Conference will be presented by the UCLA Anderson School of Management in cooperation with the Nasdaq and the National Venture Capital Association. This event opens with the Directors Networking Dinner on February 26th and continues on February 27th with a one-day conference and the Sixth Annual NVCA Los Angeles Networking Luncheon. The conferenced will feature top-level speakers addressing various board-level issues focusing on the best practices and emerging trends in corporate governance and the issuance of equity. They include Ralph V. Whitworth, Jamie Heard, Jay W. Lorsch and others. This conference will be held at the UCLA Anderson School at 110 Westwood Plaza, Los Angeles, CA. For questions about the conference, e-mail Simone B. Heald at [email protected] or call (310) 825-1795.

Davos Leaders and OECD Contrast on Tougher Regulation

According to a 1/25/04 report by Reuters, business leaders at the World Economic Forum in Davos Switzerland “shunned calls for tougher regulation in the wake of a raft of corporate scandals, saying more rules would prove ineffective and cumbersome.” Despite the billions of dollars gone missing from the accounts of Italian food group Parmalat in Europe, from U.S. energy trader Enron, and numerous others, the Davos attendees said a higher sense of moral responsibility at the boardroom level would be more effective than a rules clampdown.

The US introduced stiffer corporate governance rules under the Sarbanes-Oxley Act and in Europe, the Parmalat scandal has intensified calls for regulators to follow suit. “Checking boxes and signing things won’t solve integrity problems,” said Daniel Vasella, Chief Executive Officer of Swiss drugs firm Novartis. James Schiro, chief executive officer of insurer Zurich Financial Services, said “ethical behaviour cannot be regulated, it cannot be imposed by legislation.”

“There have been huge failures in corporate governance,” said, Nina Mitz, chief executive of public relations firm Financial Dynamics. “Companies have to be managed better and then the level of transparency has to be improved, and then afterward, this message has to be taken out to the public,” she said.

In contrast, the Organization for Economic Cooperation and Development (OECD), made up of 30 member countries, including the US, UK and working relationships with more than 70 other countries, unveiled a draft revision of its “Principles of Corporate Governance” that was adopted by member governments in 1999. Although they are non-binding, the principles provide guidance for national legislation and regulation, as well as guidance for stock exchanges. Among the proposals:

  • Granting investors the right to nominate company directors, as well as a more forceful role in electing them.
  • Providing shareholders with a voice in the compensation policy for board members and executives, and giving them the ability to submit questions to auditors.
  • Mandating that institutional investors disclose their overall voting policies and how they manage material conflicts of interest that may affect the way they exercise key ownership functions, such as voting.
  • Identifying the need for effective protection of creditor rights and an efficient system for dealing with corporate insolvency.
  • Directing rating agencies, brokers and other providers of information that could influence investor decisions to disclose conflicts of interest, and how the conflicts are being managed.
  • Mandating board members to be more rigorous in disclosing related party transactions and protecting so-called “whistle blowers” by providing employees with confidential access to a board level contact.

Officials expect to submit a final revised version of the “Principles” to OECD governments for approval at the annual meeting of the group’s Council at Ministerial Level on 5/13-14/2004. OECD Invites Comment on Draft Revision of its Corporate Governance Principles.

Share Lending Practices Surveyed

The ISS Friday Report of 1/23/04 included an article on the International Corporate Governance Network’s survey to learn more about the practice of institutional share lending and its impact on proxy voting. Theconfidential survey is intended for pension funds, mutual funds, investment trusts, insurance companies, and other asset managers. If your institution is involved in lending shares or has ever been frustrated in its attempt to recall shares to vote them, I highly recommend that you fill out the survey so that ICGN can aggregate data and recommend action. They are seeking responses by the end of February. The article said, “those interested in completing the form are advised first to read the accompanying cover letter,” but I didn’t see a letter. I’ll ask them to post it.

Shareholder Nominated Directors

First, Hanover Compressor settled a shareholder lawsuit, agreeing to allow shareholders to nominate two independent directors. More recently,Pensions&Investments (1/12/04) reported that HealthSouth agreed to a settlement with the Louisiana Teachers’ Retirement System. The fund will name eight nominees to the HealthSouth board including the following luminaries:

  • Richard H. Koppes, formerly with CalPERS, currently Jones Day Reavis & Pogue, with projects too numerous to list;
  • Charles M. Elson, law professor at the University of Delaware, Newark, and director of its Weinberg Center for Corporate Governance;
  • John C. Coffee Jr., professor and director of Center on Corporate Governance at Columbia University Law School, New York; and
  • Margaret M. Foran, vice president-corporate governance and secretary at Pfizer Inc., New York.

In addition, the Louisiana fund created a mechanism to gather more nominees from other institutional investors.

The SEC is currently in the process of developing a relatively toothless plan that would give shareholders the right to nominate board candidates under extremely limited circumstances. If the regulations are enacted as proposed, we may see more changes through shareholder lawsuits than through the new rules.

Now HealthSouth is back in the news after identifying $2.5 billion in fraudulent accounting entries and millions more in aggressive maneuvers, adding up to between $3.8 billion and $4.6 billion in bookkeeping irregularities. They hope to hire a new management team by June 2004 and to release restated financial statements by the first quarter of 2005. The company’s former chief executive, Richard M. Scrushy, is scheduled to go to trial on 85 counts of fraud and money laundering this summer. How much shareholder value has been lost that could have been avoided if any significant shareholder could have placed director nominees on the corporate proxy? (1/21/04) reports the SEC is planning a forum on the proposal for late February or early March. It’s unclear when the commission will formally consider the proposal. Staff is reportedly still going through more than 12,000 comments, the vast majority of which called for shareholder access to the corporate proxy for their director nominees. Let’s keep the pressure on.

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SEC Proposes Mutual Fund Governance Requirements

The Commission proposed amendments to its rules to enhance fund boards’ independence and effectiveness and to improve their ability to protect the interests of the funds and fund shareholders they serve. The amendments are designed to strengthen the hand of independent directors when dealing with fund management.

  • Independent Composition of the Board. Independent directors would be required to constitute at least 75% of each fund’s board. This requirement is designed to strengthen the presence of independent directors and improve their ability to negotiate lower advisory fees and other important matters on behalf of the fund.
  • Independent Chairman. The board would be required to appoint a chairman who is an independent director. The board’s chairman typically controls the board’s agenda and can have a strong influence on the board’s deliberations.
  • Annual Self-Assessment. The board would be required to assess its own effectiveness at least once a year. Its assessment would have to include consideration of the board’s committee structure and the number of funds on whose boards the directors serve.
  • Separate Meetings of Independent Directors. The independent directors would be required to meet in separate sessions at least once a quarter. This requirement could provide independent directors the opportunity for candid discussions about management’s performance, and could help improve collegiality.
  • Independent Director Staff. The fund would be required to authorize the independent directors to hire their own staff. This requirement is designed to help independent directors deal with matters on which they need outside assistance.

Comments on the proposed rule amendments should be received by the Commission within 45 days of publication in the Federal Register. New York Comptroller Alan Hevesi, California Treasurer Phil Angelides and North Carolina Treasurer Richard Moore outlined additional measures they want funds to adopt:

  • Provide shareholders with an at least annual, customized statement of the charges, expressed in dollars, for management and other expenses they’ve paid to a fund. The industry has opposed personalized breakdowns as too difficult to develop, and the SEC has not pursued them.
  • Reveal the rationale behind a fund’s fee structure, and they want to make sure that if funds disclose their portfolio holdings to a third-party, that the same information be made public.

The nation’s two largest mutual fund groups, Fidelity Investments and Vanguard Group, have already come out in opposition to the requirement that chairmen of mutual fund boards be independent.

Ending the Recurrent Crisis

The Recurrent Crisis in Corporate Governance pushes the edge of mainstream thought in this growing discipline. Authors Paul W. MacAvoy and Ira M. Millstein, giants in the field, have well deserved reputations as practitioners and scholars. This thin volume will quickly guide the course for progressive board members concerned with building solid companies, rather than future Enrons.

Although MacAvoy and Millstein stop short of urging direct nomination of directors by shareholders, the author’s do recognize the real benefit of boards being truly independent from the CEO. “The independent and professional board is the ‘grain in the balance’ of survival in the long run.”

Directors who are unwilling to grow should look elsewhere. “Directors on the verge of quitting because of increasing responsibility and liability are not the ‘productive’ directors and, by leaving, imply an average increase in the quality of boards.” This book is for those who choose to stay and focus on what the author’s consider the real target, maximizing the generation of wealth and the return of profit to investors.

The recurrent crisis referenced in the title is primarily the “incapacity to deliver in practice on heightened expectations for governance. There is a void of capability (on corporate boards) which, if not filled will culminate again in misleading and inadequate reported financial results and large managerial extractions of wealth from failing companies.”

In a few brief chapters, the authors review recurrent themes during the last thirty years, from failure of the Penn Central Railroad to the decision by the General Motors board to publish governance guidelines after discharging its CEO, an act once widely acclaimed as a virtual Magna Carta for directors. They also discuss significant initiatives by public pension funds and court decisions that have affirmed the responsibility of directors to review and approve long-term goals and strategies. Yet, even with significant reforms, systemic flaws remain that will result in a continuing cycle of crisis and reform. However, the frequency and severity of such cycles can be significantly reduced through recommendation actions.

Their central theme is the need for independent directors, not just as defined by recent exchange reforms, but real independence, citing for example, studies like that of Shivdasani and Yermack who found that CEO involvement in the selection of directors negatively affected the quality and independence of nominees. P.33 Of course, one of the most significant studies in this area is one which MacAvoy and Millstein published in 1997. Examining data from 154 US companies, they found a positive correlation between active/independent boards and Economic Value Added.

Consistent with those findings, we cannot expect a CEO who is also chairman of the board to prepare the board to adequately evaluate their own lapses or those of senior staff. Therefore, the first and most important reform recommended by the authors is to end that dual role. “Ideally, the board’s chairman should be an independent director.”

The least painful time to make this transition is upon succession, which now often occurs every few years. Because a “lead” director is “still just another director subject to the influence if not dominance of the singular CEO/chairman, we have no confidence in that role as more than a temporary step on the road to separation.”

Other recommendations for boards from the book include the need to:

  • Determine that management has appropriate processes in place to meet certification required by Sarbanes-Oxley
  • Take responsibility for the company’s strategy, risk management and financial reporting
  • Reward extraordinary, not market, performance
  • Assure themselves of the integrity of management.

“The board cannot function without leadership separate from the management it is supposed to monitor.” It has the legal responsibility to do so. “Now it must be empowered with the opportunity to fulfill this responsibility.”

MacAvoy and Millstein end with the following: “Perhaps with these reforms, the recurring crises in governance will take place with less frequency and intensity.” Without these actions, shareholders, and maybe even the great unwashed masses, will be storming the corporate gates demanding much more in the way of a shift in power. The SEC’s latest proposal to allow up to three shareholder nominees could be just the beginning.

Directors should be shaking in their boots. From the January 19, 2004 BusinessWeek – “Lucent Technologies is asking shareholders to scrap its staggered board elections, a takeover defense despised by governance gurus. Allstate ditched its poison-pill takeover defense, citing ‘shareholder sentiment.’ And Alcoa is putting ‘golden parachute’ payments to a shareholder vote. In each case, the action followed a majority shareholder vote at the last annual meeting. Says Patrick McGurn, special counsel at proxy adviser Institutional Shareholder Services: ‘The only way you can explain the difference in behavior is the threat that proxy access may be available.’”

The board that MacAvoy and Millstein envision may be independent from the CEO, but it still is not directly accountable to shareholders. Although not my ideal, it would be a significant step in the right direction for most corporations and might just head off further reforms radical democrats like me have been calling for.

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Mutual Fund Summit

The nation’s leading experts from industry, government and academia will meet on January 24, 2003 in Oxford, Mississippi to discuss the fallout from the recent mutual fund scandals regarding fees and improper trading, as well as the future of the fund industry. The “mutual fund summit,” hosted by Fund Democracy and the University of Mississippi School of Law, is open to the news media. The summit is being sponsored by the Zero Alpha Group (ZAG), the National Association of Personal Financial Advisors and the Financial Planning Association.

Separately, ZAG will hold on Wednesday, January 21, 2004 a phone-based telenews conference to release a major new study from Wake Forest University and the University of Florida on mutual fund industry brokerage commissions. For more information about the upcoming phone-based news conference, contact Stephanie Kendall, for the Zero Alpha Group, at (703) 276-3254.

Participants at the mutual fund summit will include: Mercer Bullard (moderator), founder and president of Fund Democracy and assistant professor of law, University of Mississippi School of Law; Barry Barbash, Shearman & Sterling; John Bogle, founder of The Vanguard Group; Harvey Goldschmidt, commissioner of the U.S. Securities and Exchange Commission; Paul Haaga, chairman of the Investment Company Institute and executive vice president and director of Capital Research and Management Company; Don Phillips, managing director of Morningstar; Linda Dallas Rich, senior counsel of the Financial Services Committee of the U.S. House of Representatives; John Rogers, chairman and chief executive officer of Ariel Capital Management; Barbara Roper, director of investor protection of the Consumer Federation of America; Paul Roye, director of the Division of Investment Management of the U.S. Securities and Exchange Commission; Erik Sirri, Walter H. Carpenter professor of finance at Babson College; and Craig Tyle, general counsel of the Investment Company Institute.

The Mutual Fund Summit will be held from 10am to noon on Saturday, January 24, 2004 in the Moot Court Room at the University of Mississippi Law School in Oxford, MS. Register. There will be a live Webcast of the Summit available at for those who are unable to attend. Zero Alpha Group (ZAG) will host a streaming audio replay starting Tuesday, January 27, 2004.

Mutual Funds and CalPERS

SEC chief William Donaldson didn’t hold back in his recent speech to the Mutual Fund Directors Forum. “We (the SEC) cannot be in the boardroom when investors’ interests may be compromised,” Donaldson said. “Investors are depending on you to stand up for them.” Investigators are “carefully looking at the role that independent directors played” in abuses. “We are asking whether the directors were aware of these abuses, and whether there were red flags that were ignored.”

Donaldson said directors should serve as “independent watchdogs” for investors because almost all such funds are operated by money-management firms that want to maximize profits through fees but those fees also reduce investors’ returns. That relationship creates inherent conflicts of interests and potential for abuse. He admonished directors to ask themselves whether “directors are too passive, sit on too many boards, lack the knowledge to keep apprised of a fund’s activities, and are paid too much.”

The SEC is reportedly considering the following:

  • Requiring an independent chairman on all boards.
  • Increasing the percentage of independent directors under SEC rules from 51% to 75%.
  • Allowing independent directors to hire staff so they don’t have to use fund advisers.
  • Requiring directors to submit annual self-evaluations, including whether they sit on too many fund boards.
  • Requiring directors to keep a paper trail of the information they used to determine that the fund managers were charging reasonable fees for management, advertising and administrative costs.

Most readers have seen the widespread reports of investigations by New York Attorney General Eliot Spitzer, the Securities and Exchange Commission and others.

Less reported have been investigations by CalPERS, which has already fired Putnam and placed Alliance Capital Management on its watch list. Now staff are investigating Franklin, parent of Franklin Templeton Investments, which has received subpoenas from New York Attorney General Eliot Spitzer, Massachusetts Secretary of State William Galvin and California Attorney General Bill Lockyer. Investigators are looking into the propriety of payments made to Morgan Stanley to promote its funds and the possibility that a Franklin salesman helped Prudential Securities evade market-timing restrictions.

CalPERS plans to discuss whether to terminate its contract with Franklin at its investment meeting next month. “Franklin will be subjected to the same scrutiny as Putnam and Alliance, ” said Christy Wood, a senior investment officer for CalPERS. (see SEC Wants Mutual Fund Fees Explained, Washington Post, 1/8/04 and CalPERS money firms queried: Regulators have contacted 15 of 60 companies, SFGate, 1/7/04)

Given this turn of events, isn’t it about time that Robert F. Carlson either resigned his seat on the CalPERS Board or his seats on 12 Investment trusts of the Franklin Fund? I’m certainly not alleging any impropriety on Mr. Carlson’s part, but I am concerned about more than just appearances. How can a man, even one as brilliant as Carlson, serve adequately on so many boards? Additionally, CalPERS corporate governance principlesdefine independent directors as “not affiliated with a significant customer or supplier of the Company.” Can Mr. Carlson be considered an independent director at CalPERS when Franklin manages $780 million in U.S. stocks for the pension fund?

TIAA-CREF to Establish SRI Fund?

A coalition of groups and individuals have worked together for several years to help promote social responsibility and corporate governance reform within TIAA-CREF. They certainly got the attention of the press at the last annual meeting. Stories appeared in Barons, Dow Jones NS, Wall Street Journal, Corporate Social Responsibility New Service, Bloomberg NS, New York Daily News, NY Post, Investor Relations web, NY Times, Newsday, WFUV in NYC, Voice of America, and Investor Relations.

Representatives of TIAA-CREF have now agreed to meet with Social Choice for Social Change: Campaign for a New TIAA-CREF to discuss their proposal for a new socially responsible fund. To maintain our momentum and insure that the meeting is productive, the Campaign asks supporters to “make one call to TC in the next two weeks endorsing such a meeting, and requesting that at this meeting our ideas are fully explored.” Call CEO Herbert Allison at 1-800- 842-2733; 212-490-9000.

Public Funds File More Suits

A new study by PricewaterhouseCoopers reveals that public pension funds are increasingly joining class action lawsuits – a trend the study tracks back to a record $2.8 billion settlement won by the California Public Employees’ Retirement System and the New York State Retirement Fund in 1999. That year 18 cases had public pension funds as lead plaintiffs, while in 2000 there were 19 such cases. However, that jumped to 31 and 56 in 2001 and 2002, respectively, according to Dow Jones. In fact, two-thirds of all cases with public pension funds as lead plaintiffs have been filed in the past three years. (Suits With Pensions as Lead Plaintiff Rake In Bucks,, 1/7/04)

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December 2003

Suing is Not the Answer

In October, the SEC proposed a rule that would give shareholders access to company proxy ballots if a majority vote to approve a shareholder-access plan proposed by 1% or more of the company’s shareholders or if 35% of holders withhold votes for one or more board candidates. If either of these triggering events occur, then in the following year shareholders who own 5% or more of the company’s stock for at least two years can place one or two nominees on the corporate proxy. Comments on the rulemaking were due December 22nd. SEC staff are now reviewing more than 12,000 comments and are expected to soon make recommendations concerning any possible amendments.

About half of the initial 12,000 or so commentators used a form letter that says the proposal has the potential to put an end to the “Imperial CEO,” but contains unnecessary barriers, “including high ownership thresholds and a cumbersome two-year process, which would make them difficult for investors to actually use.” Another group of almost 4,000 says the rule should “go much further in providing investors with strengthened rights regarding the nominations and voting process.” This group flatly opposes the triggers and expresses their hope that the SEC will stand by investors, “including individual ones,” which presumably means significantly lower thresholds, since individual investors are highly unlikely to own 5% or even 1% of any company’s shares.

Unfortunately, such letters have received little attention. Instead, the press has focused on Wall Street Journal, for example, singles out a 76-page letter from the Business Roundtable, which represents not the owners of corporations but instead the often entrenched management. The BRT’s comment letter said the proposed rules “will not enhance corporate governance, are rife with unintended consequences,” such as encouraging “involvement by special-interest groups in the director election process.” Increased proxy contests will result in “divisive boards that have difficulty functioning as a team and jeopardizing effective board oversight,” it predicts.

However, those “special interests” would have to be owners and it is doubtful they would convince more than half of all shares to be voted with them unless their interests were shared by most shareholders. The divisive argument is similar to arguments that used to be made against diversity, but now most recognize that differing skills and perspectives strengthen boards, rather than weakening them.

According to Business Roundtable President John J. Castellani, companies should not be governed democratically. “I think the concept that (companies) are somehow a democracy run like a New England town meeting has gotten out there – that’s not really what they are,” he said. While the BRT makes legal arguments and hopes the SEC will table the proposed regulations, relying instead on recent box-ticking reforms, SEC Commissioner Harvey Goldschmid said the agency is confident that it is on firm legal ground. “There should no serious challenge to our power here,” Goldschmid said. “The general counsel’s office has opined that we have full legal authority to move ahead and I completely agree.”

“Suing is not going to help them,” said Paul Lapides, head of the corporate governance center at Kennesaw State University in Georgia. “This is more of the same attitude of ‘I’m in charge and I don’t want anybody else to have power over me.’ ” (Proxy Rule Pits CEOs Vs SEC, Phyllis Plitch, Dow Jones Newswires, 12/26/03; Proxy plan draws more criticism, Bloomberg News, 12/24/03)

Phil Angelides, First Corporate Governance Governor?

Dale Kasler’s recent article, CalPERS again embraces activist agenda, in the Sacramento Bee puts forth the notion that California State Treasurer Phil Angelides is using activism at CalPERS and CalSTRS to further his political ambition.

“Angelides needs to raise his profile,” said political analyst Jack Pitney of Claremont McKenna College. “This is the kind of issue that can gain greater traction than 20 years ago. … Nearly everybody pays some attention to the stock market.”

After a period of keeping a lower profile, California’s giant funds are addressing issues from inner-city development to global warming to human rights; divesting tobacco to nudging a pharmaceutical giant to cut the price of AIDS drugs in poor countries. Last week both funds joined in suing the New York Stock Exchange and seven “specialist” trading firms of defrauding investors out of at least $150 million.

Fortune magazine labeled Angelides “a Left Coast version of Eliot Spitzer, ready to save capitalism from its worst excesses, and in so doing propel himself to higher office.” Yet, Angelides says his gubernatorial aspirations are irrelevant to these developments, “these have been deeply held beliefs that I’ve had for decades.”

As Kasler points out, the suit against the NYSE made a big splash in the national media. Angelides popped up on CNBC and got his picture in the Wall Street Journal. I doubt many Californian’s will remember such publicity if Angelides challenges Arnold Schwarzenegger in 2006. However, if Angelides can build a political career by drawing attention to corporate governance … all the more power to him. If he educates enough Californians, his chances of winning the governor’s office are bound to improve. Angelides has a lot of good ideas on how to address California fiscal crisis. Schwarzenegger’s best chance of staying in office may be to co-opt him.

UK Funds Join Call for Investor Nominated Directors

According to Reuters, Britain’s biggest financial institutions will comment on the SEC rulemaking, Security Holder Director Nominations, S7-19-03, recommending that shareholders have a greater say in the boardroom. “The letter reflects the non-U.S. experience in removing and appointing directors and that it is a lot easier in the UK than it is in the US,” Daniel Summerfield, who is leading the lobbying campaign for the University Superannuation Scheme (USS), was quoted as saying.

The USS, the UK’s third-largest pension fund, along with other large institutional investors, want UK-style voting rights, including the right to call extraordinary general meetings to oust directors in order to protect a growing proportion of their assets held in U.S. shares. (UK investors call for more rights in US-paper, 12/11/03)

Governance Books for Christmas

A few of the books we recommend are the following: Corporate Goverance by Monks and Minow, Corporate Governance and Risk by Shaw; The Recurrent Crisis in Corporate Governance by MacAvoy and Millstein; Back to the Drawing Board: Designing Corporate Boards for a Complex World by Colin B. Carter; Jay W. Lorsch, Corporate Governance: The McGraw-Hill Executive MBA Series by John L. Colley; Blueprint for Corporate Governance: A Strategy, Accountability, and the Preservation of Shareholder Value by Fred R. Kaen; Corporate Governance and Capital Flows in a Global Economy by Peter Cornelius, Bruce Mitchel Kogut; Corporate Governance at the Crossroads: A Book of Readings by Stuart L. Gillan; Convergence and Persistence in Corporate Governanceby Jeffrey N. Gordon and Mark J. Roe; Institutional Investors and Corporate Governance by Theodor Baums; The Divine Right of Capital: Dethroning the Corporate Aristocracy by Marjorie Kelly; Saving the Corporate Board: Why Boards Fail and How to Fix Them by Ralph D. Ward.

Companies Find More Fraud

According to a new KPMG survey, 75% of executives said they have uncovered fraud in their organizations in the last year, compared with 62% of executives responding to a similar survey in 1998. Employee fraud was the most prevalent, reported the executives, but financial reporting and medical/insurance fraud were much more costly. Reporting of financial fraud more than doubled, to 7% percent in 2003, up from 3% in 1998. The average cost was more than $250 million per episode. 36% of companies reported $1 million or more in costs due to fraud in 2003, compared with 21% in 1998. Internal controls are being used by 77% of companies, up from 51% in 1998. Companies are also taking more-decisive action when they detect fraud. For example, 64% brought civil or criminal charges, compared with just 37% five years ago, and 64% percent notified a regulatory or law enforcement agency, compared with 34% previously. (Companies Look Harder, Find More Fraud,, 12/2/03)

Tunrbull Offers Innovative Course

Macquarie University Graduate School of Business in Sydney Australia. Shann Turnbull’s “meta” level 40 hour course covers theories of governance; corporate director practices; comparative legal and organizational structures; role of shareholders/members; maximizing sustainable performance; ethics, corporatization, privatization, public/private/partnerships; regulatory frameworks and bench-marking governance. The next course will be over the five days of February 13, 14, 15, 21 & 22 in 2004. External students visiting Sydney for 10 days are welcome. Offered again on July 30, 31, August 1, 21 & 22. Dr. Turnbullwould welcome exporting the program to any institution that might be interested in co-presenting the course.

Last Few Days for Comment Letters

Comments on the SEC rulemaking, Security Holder Director Nominations, S7-19-03, are due 12/22/03. Roughly 225 individual comments have been sent via e-mail, with about 200 favorable and 25 against. Almost 7,000 form letters have been sent, with the vast majority in support. We encourage you to support the SEC’s rulemaking. However, we stronglyencourage readers to suggest amendments to make the proposal more usable for shareholders. See our suggested sample e-mail.

Shareholder Influence Poised to Grow

A recent survey by Lieberman Research Worldwide found that most investors believe the influence of institutional investors on board decisions will increase over the next few years. A clear majority of shareholders believe the law should allow all shareholders to “nominate an agreed minimum number of independent directors” (62%) and “vote directly on company decisions that could affect shareholder value” (59%). (Shareholders Want Boards of Directors to Wake up, Shake up and Shape up,, 12/10/03)

First Use of Shareholder Access Rules?

Public pension funds have told Marsh & McLennan they plan to nominate their own candidates for the board of its mutual fund group Putnam Investments when the SEC proposal granting proxy access takes effect. Marsh could become the first firm in history to face a “binding proxy access proposal” that would trigger shareholder nominations. Marsh criticized the funds for giving their opinions in a press release, rather than working directly with the company.

Filing the action are AFSCME Employees Pension Plan, New York State Common Retirement Fund, California Public Employees’ Retirement System and the California State Teachers’ Retirement System. Together they hold 6.85 million shares, worth $306,000,000 or about 1.3% of the company.

“Investors have pulled more than $32 billion dollars in assets out of Marsh’s Putnam subsidiary due to its involvement in this terrible mutual fund scandal, and Marsh’s stock price is down about 10 percent,” said Alan G. Hevesi, New York State Comptroller and sole trustee of the New York State Common Retirement Fund. “I can’t think of a stronger case worthy of shareholder involvement, and I have no doubt, that given the chance, shareholders will respond favorably to our initiative.”

“We haven’t identified particular people,” according to Richard Ferlauto, director of pension-investment strategy for AFSCME. “If this resolution received a majority vote, then we would work on identifying candidates and the slots they should fill.” (Marsh & McLennan Faces Criticism, WSJ, 12/9/03)

Pay Higher for Top Brass

The Conference Board’s annual study reports manufacturing, median total compensation for outside directors is now $69,620, up from $55,700 in 2002. The financial sector increased from $41,450 to $55,000. Service was $60,000 this year, up from $48,400 last year. Total compensation includes all fees and retainers, annual, one-time or periodic grants of stock, restricted stock grants, and the value of option grants. The mix of fees, retainers and committee pay is also up in all three industry sectors. Manufacturing increased from $39,000 to $45,000, financial services from $31,600 to $43,000, and service from $35,700 to $40,000.

CEO pay was also up. Total CEO compensation was highest in financial services at $2,512,000. It was lowest in wholesale trade at $893,000. Total current compensation (salary plus bonus) was also highest in financial services at $1,524,000 and lowest in computer services at $656,000. Communications paid the highest median salary – $625,000. Lowest was computer services, which paid $400,000. (CEO Pay Rises In Most Industries, Outside Director Pay Also Up in All Industries, NewsAlert, 12/10/03)

GTCR Being Watched

SEIU set up an internet site called “GTCR Golder Rauner manages billions in private equity investments for public employee retirement systems. But GTCR doesn’t uphold the type of corporate governance standards most fiscally responsible institutional investors rightly demand from their managers.” “GTCR’s corporate governance record should raise concerns for public pension funds that are considering an investment in a GTCR limited partnership, and for the investing public at large.”

Bush Bubble

George Soros, the prominent financier, argues the Bush Administration’s supremacist ideology is built on two pillars: the United States will do everything in its power to maintain unquestioned military supremacy and we won’t hesitate to take pre-emptive action. The war on terrorism has been used to curtail civil liberties at home and to exert our might abroad. Yet, attempting to impose our values on others endangers our security by engendering a vicious circle of escalating violence. This is the opposite of the “open society” approach that Soros has long advocated and that is central to democratic governance (at corporate, national and international levels).

We could have treated 911 as a crime against humanity, responding with police action supported by the international community. We certainly had that support after 911. Instead, we went to war against states harboring terrorists. Soros argues that terrorism will never disappear but will continue to provide a pretext for America’s need to maintain supremacy. We have become the pigs of George Orwell’s Animal Farm: “all animals are equal, but some are more equal than others.” Terrorists set exactly that agenda and we have played directly into their hands. The war against terrorism is bound to generate a continuous flow of innocent victims whose resentment feeds the growth of terrorist perpetrators.

Like the high-tech bubble, Bush has deceived the American public and “the gap between the Administration’s expectations and the actual state or affairs could not be wider.” A recent Council on Foreign Relations publication sketches three strategies:

  • Bush doctrine of pre-emptive military action advocated by neoconservatives.
  • Deterrence and containment advocated by Colin Powell.
  • Preventive action in cooperation with other nations.

Of course all three strategies may be necessary, but let’s hope it isn’t too late to place our greatest emphasis on the third option. “We cannot just do anything we want, as the Iraqi situation demonstrates, but nothing much can be done in the way of international cooperation without the leadership – or at least the participation – of the United States.” Increased foreign aid through international channels and fairer trade rules would provide a good start. International cooperation, of the kind the Bush Administration has largely rejected, is the key. (see “The Bubble of American Supremacy,” in December’s The Atlantic Monthly) Just as participation by shareholders in nominating and electing directors will result in a more profitable long-term strategy for corporate governance, the best way to combat terrorism over the long run is for the United States to work cooperatively with other nations to meet common goals.

Women Gaining Board Positions….Slooooowly

Women now hold 13.6% of all board seats in the Fortune 500, according to Catalyst, a nonprofit research and advisory organization. That’s up from 12.4% in 2001 and 9.6% in 1995 when Catalyst began tracking women on boards. At that pace, 20 years from now women still won’t make up 25% of board members.

Golden West Financial Corp., Avon Products Inc., WellPoint Health Networks and TIAA-CREF are again among those with the highest percentage of female board members. Golden West placed first with five out of nine directors. (Getting on Board: Women Take Charge,, 12/7/03)

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November 2003

Shorting and News Searches Get Easier

The SEC announced a rule to make it easier for investors to short a stock by eliminating the “uptick” rule, which bans short selling on a stock when the price is falling. The initial rule would apply to 300 companies over a two year period. In an unrelated item, Yahoo! Inc’s finance module has added a news tracking services, allowing users to search 3,000 news sources. (Investor Business Relations, 11/10/03)

Gangs of America

I haven’t gotten a copy yet, but this book by Ted Nace looks fascinating from the short descriptions I’ve seen. It tells the history of how corporations developed, from the Virginia Company’s Jamestown Colony to Thomas Scott, who invented the holding company, and beyond. How the United States of America became a country is familiar to all of us, even if in somewhat mythological terms. In contrast, how the corporate form developed, just isn’t part of our culture. Perhaps Gangs of America will change that, if only just a bit.

SRI Outperforms

The Fall 2003 edition of Business Ethics (one of a very few publications I always read cover to cover) carries an article by Hewson Baltzell, president of Innovest Strategic Value Advisors entitled “Refuting Media Bias Against SRI.” In it, he refutes a July 20 New York Times article by Mark Hulbert, which cited a Wharton School study concluding that social factors could cost investors as much a 30 basis points per month. Baltzell points out the “cost” comes from comparing SRI funds to highly specialized funds (apples to oranges). “In one non-SRI portfolio of 28 funds, for example, 15 are real estate funds and two are electric utility funds. Real estate and electric utilities are similar to bonds, which did very well over the last few years.”

In contrast, as previously reported at CorpGov.Net, Innovest’s October 2002 study found that companies with high environmental ratings (on factors such as energy efficiency) out-performed low-rated companies by 3,400 basis points (34%). More recently, a June 2003 study of four-year stock performance for the paper and forestry sectors, environmentally above-average firms out-performed below-average firms by 43% cumulatively. In food products, the difference was 33%; for computers and peripherals, 19%; and for autos the difference was 50%. Mainstream institutional investors, such as pension funds, are “increasingly aware of the edge environmental overlays provide.” In a final dig at the NYTimes, Baltzell closes, “While the Rip Van Winkle business press remains asleep, sophisticated financial folks are waking up to the potential of SRI.”

Federal Encroachment and S7-19-03

Those concerned with arguments made by the Business Roundtable and others that the SEC would be over-stepping its jurisdiction if it granted shareholder nominees access to the corporate ballot under Security Holder Director Nominations, S7-19-03 should read Mark Roe‘s excellent paper “Delaware’s Competition.” There may be a race to the bottom or to the top with other state’s, but Delaware’s real competition, Roe argues, comes from Congress and the SEC. “State corporate law that federal authorities dislike, they reverse…state power is to jigger the rules in the middle.”

“Arguably the core of corporate law is the shareholders’ vote.” However, in that area SEC regulations virtually dictate the process to be used. According to Roe, Federal authorities stepped in when state’s failed to do anything to cope with abusive practices favoring the solicitation for management. In the 1950s, when state decisions favored insurgents, the Federal authorities responded to management pressure and interevened again.

Here are just a few of the items Roe cites where state laws have been superseded:

  • Insider trading, made illegal in 1933 and 1934 and expanded in the 1960s.
  • Insurgents’ access to shareholder lists (The SEC promulgated rule 14a-7, indicating its intention to end the “expense and delay requestors typically encounter [under state proceedings] in obtaining a securityholder list.”)
  • Unbundling proposals. State law allowed managers to bundle proposals, putting shareholder-friendly proposals, such as a special dividend, with something like management entrenchment. The SEC’s 1992 proxy amendments now require “a separate vote on each matter presented.
  • Mix and match. SEC made it easier to elect minority boards under rule 14a-4(b)
  • SEC rules defining the materiality standard, controlling accountants’ interactions and duties, and a raft of other controls.

Roe points out, Federal authorities don’t just regulate the company, they also regulate shareholders. For example, under ERISA pensions must consider voting an asset. More recently, mutual funds must now disclose their voting policies and, soon, how they vote. Even the tax code comes into play, with regard to golden parachutes, executive compensation and options. Even rule 14a-8 has seen subtle shifts. In the 1990s the SEC required Waste Management to accept a proposal on increasing independent directors. Since then, it has allowed anti-poision pill measures and anti-staggered board precatory votes.

If I read Roe correctly, Security Holder Director Nominations, S7-19-03, can simply be viewed as one more foray into territory otherwise delineated by Delaware’s General Corporation Law, section 141, which says that the business of the corporation is to be managed by the board. It really isn’t all that different than the SEC’s 1992 amendments that eased shareholder communication rules, in part to counter-balance state anti-takeover legislation. In his conclusion, Roe notes that “Deleware may say the words, but they only get to do so when the federal authorities do not take away the microphone.”

Fortune on Phil Angelides

Marc Gunther’s article, “Calpers Rides Again,” in the 12/8/03 edition ofFortune magazine focuses on the growing influence of California Treasurer Phil Angelides and his “controversial new agenda.” He sits on the boards of CalPERS and CalSTRS, the 1st and 3rd largest public pension funds in the US. “That concentrates a quarter of a trillion dollars of investing power in a state not known as business-friendly. How that power will be used by the trustees who run Calpers and Calstrs–all Democrats, many with close ties to unions–is an important question.”

Traditionally, CalPERS focused on board independence, executive pay, and other corporate governance issues. Recently, though, “Calpers and Calstrs have gone beyond governance into social engineering.” Examples of what Gunther terms “social engineering” are:

  • Divestment of tobacco stocks, which subsequently rebounded.
  • Lobbying US firms that reincorporated overseas to “come home to America,” even if that means paying more taxes.
  • Steering investments to inner-city businesses.
  • Green investing.

Gunther acknowledges that CalPERS’ inner-city investments might generate not only direct returns but also indirect benefits because “they curb inequality, reduce the costs of poverty, and create new customers for other companies owned by the fund. Angelides calls this a “double bottom line”–financial returns and social good.” As a long-term investor in, essentially, the entire market, CalPERS has an incentive to look at the entire economy. “I don’t think many companies can be successful in an unsuccessful economy,” Angelides says. Nor can companies thrive, he says, in an economy plagued by environmental woes, health-care costs, or “great divisions between rich and poor that erupt into social tension.”

One of the risks of this strategy, according to Gunther, is that such investments “could be turned into payback for campaign contributors.” “Who is to decide which company’s practices are social or antisocial, good or bad for the overall economy?”

Of course, in this editor’s opinion, that role ultimately falls to members of the system and to taxpayers. Members of the system, who work to protect the environment and public health, don’t want CalPERS to disregard the environmental record of the companies they invest in and they don’t want to encourage California’s youth to take up smoking. Taxpayers are probably more concerned with not having to pick up the tab if the “social engineering” investment strategy doesn’t pay off. However, many also share the values of public empolyees and the financial risks appear to be minimal.

Gunther says Angelides is “brainy and engaging…a Left Coast version of Eliot Spitzer, ready to save capitalism from its worst excesses, and in so doing propel himself to higher office.” “The Greeks gave us democracy, and Angelides wants to deliver nothing less to corporate America,” Gunther writes, noting the current effort by Angelides and other institutional investors to change SEC rules to give shareholders easier access to nominating and electing directors.

What could be more socially responsible than democratic corporate governance? All the evidence we’ve seen indicates is should be a winning strategy. Arnold Schwarzenegger would do well to cooperate with Angelides, a man of visionary ideas.

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Pension Funds at UN to Address Global Warming

Several state treasurers have been raising the issue of global warming, supporting shareholder resolutions demanding companies disclose more environmental information. Companies that are slow to act may get caught flat-footed when emission caps finally are tightened. The nation’s largest industrial companies could face big costs, such as switching their power plants from coal to cleaner-burning natural gas.

California Treasurer Phil Angelides, who as a trustee of the $155 billion CalPERS and the $103 billion CalSTRS, has been meeting recently with investors, environmental-technology entrepreneurs and environmental activists to flesh out how an environmental investment screen in California might work. In New York, whose $109 billion public pension fund is the nation’s second-largest, after CalPERS, Alan Hevesi, the state comptroller, reportedly isn’t considering withholding investments from companies whose environmental performance isn’t adequate. Mr. Hevesi has argued that environmental performance is linked to corporate profits, but divestment is an extraordinary step.

The meeting is being organized by the Coalition for Environmentally Responsible Economies. (State Aides Mull Pension Funds And Environment, WSJ, 11/21/03)

Call for Social Justice Fellowship Applications

Two-year grants offer support for salary, fringe benefits, financial assistance, mentoring, and a professional development account for a promising new leader. The host nonprofit organizations receives a computer to support the work of the Fellow. A defining feature of the program is that the applying nonprofit and its prospective Fellow prepare the application together as a team.

We, at CorpGov.Net, believe at the heart of social justice is the need for democratic corporate governance and we would love to see one of the fellowships go to promoting such work. Let’s get to the core of the issue, instead of concentrating on the symptoms. Applications and eligibility criteria are now available from New Voices. The deadline is January 12, 2004. For additional information or to join the program mailing list, please contact [email protected], or by phone at 202-884-8051.

Watchdog Fund to Fight for Corporate Democracy

The Watchdog Fund, a new open-end mutual fund that intends to drive corporate governance improvements in American companies, has been launched. The fund seeks to play a role in strengthening the corporate governance of companies in which it invests. The Watchdog Fund says it will proactively exercise its shareholder rights, including objecting to management and the Board when necessary.

“The need for effective oversight by shareholders has never been clearer,” said Nell Minow, one of the founders of the corporate governance movement, a leading shareholder activist, and Editor of The Corporate Library, an independent investment research firm specializing in corporate governance and board effectiveness. “The tools for effective oversight have never been stronger. The Watchdog Fund’s arrival is well timed and I look forward to seeing them constructively engaged in protecting and enhancing management accountability and shareholder value.” Ms. Minow is not associated with The Watchdog Fund.

The Watchdog Fund will pursue capital appreciation — its primary investment objective –by identifying and investing primarily in U.S.-based small- and mid-cap companies, with market capitalizations ranging from $75 million to $5 billion. The fund may also take positions in the largest U.S. companies. Such companies will be selected on the basis of misalignment between management and shareholder interests. The Watchdog Fund may work with other shareholders or pursue legal action to improve corporate governance, or sell short the shares of companies it believes are poorly governed. In addition, the fund may also invest in companies it believes are examples of good corporate governance.

The investment strategy and process of The Watchdog Fund will be managed by its creator, portfolio manager Howard Horowitz, Chairman and CEO of H Team Capital, LLC, an investment management firm headquartered in New York City. The Fund will treat all shareholders equally and enforce prohibitions on market timing and after-hours trading. The fund imposes a 1.00% fee (short-term trading fee) on fund shares redeemed 30 days or less from the date of purchase and 0.50% for shares that are redeemed after 30 days but less than one year from the date of the purchase. The minimum investment in the fund is $2,500.

“The fund will serve as a watchdog for its shareholders, guarding their interests, defending their rights, and fighting for corporate democracy,” said Mr. Horowitz. “It’s an opportunity for concerned citizens to advocate for corporate accountability in a way that matters — with their dollars — while simultaneously seeking to profit from improvements in the stocks.”

Mr. Horowitz noted that The Watchdog Fund’s mission goes beyond investment management. “It’s a way for people disgusted by self-dealing management and boards to rebuild a capital market where owners’ interests come first.” For more complete information on The Watchdog Fund, including fees, expenses and prospectuses, call 1-866-8-WATCHDOG (1-866-892-8243).

SEC Adopts Nomination Disclosure Rules

On 11/19/03 the SEC adopted rules to improve disclosures regarding the nominating committee processes at public companies and the ways shareholders have to communicate with directors. This rule does not provide shareholders with any additional right to access but may provide valuable information for shareholders attempting to influence the nomination process. The new standards require companies to disclose the following regarding a company’s process of nominating directors:

  • whether a company has a separate nominating committee and, if not, the reasons why it does not and who determines nominees for director;
  • whether members of the nominating committee satisfy independence requirements;
  • a company’s process for identifying and evaluating candidates to be nominated as directors;
  • whether a company pays any third party a fee to assist in the process or identifying and evaluating candidates;
  • minimum qualifications and standards that a company seeks for director nominees;
  • whether a company considers candidates for director nominees put forward by shareholders and, if so, its process for considering such candidates; and
  • whether a company has rejected candidates put forward by large, long-term security holders or groups of security holders.

The new disclosure standards also require companies to disclose information regarding shareholder communications with directors, including:

  • whether a company has a process for communications by shareholders to directors and, if not, the reasons why it does not;
  • the procedures for communications by shareholders with directors;
  • whether such communications are screened and, if so, by what process; and
  • the company’s policy regarding director attendance at annual meetings and the number of directors that attended the prior year’s annual meeting..

Chairman William Donaldson said, “The Commission today continued its efforts to improve the proxy process as it relates to the nomination and election of directors. The disclosure required by these new rules will improve the transparency of the director nomination process and means by which shareholders can work with directors at their companies.” The are expected to be available on the Commission’s website within the next few days and will apply to proxy and information statements first sent or given to security holders on or after the date that is 30 days after their publication in the Federal Register.

Q&A Re Security Holder Director Nominations, S7-19-03

John K. S. Wilson, Assistant Director – Socially Responsible Investing atChristian Brothers Investment Services, shares some of the questions he asked SEC staff about the shareholder nomination rulemaking and their responses:

How will disputes over the eligibility of specific nominations be resolved? Will the process be handled in the same manner as under Rule 14 a 8?

Currently, the proposed rule does not outline any manner of resolving such disputes. The Commission has solicited comment on who should be responsible for determining whether nominees should be allowed on or ommitted from ballots.

(Wilson: I consider this important because if the matter is left to companies, it could result in routine and boilerplate ommission of nominees. In my view, nominees should be evaluted by the SEC as of 14a8, but the Commission representative did not indicate whether this was a likely outcome.)

Will the content of communications regarding nominee qualifications, including websites, be regulated?

The content of websites related to shareholder nominees will be regulated under existing restrictions against false and misleading statements. The Commission will enforce this rule as it does currently for shareholder resolutions.

By what procedure will companies determine the outcome of board elections? I.e. how do we know who wins?

Under state law, plurality determines the outcome in most cases. The candidates receiving the highest number of votes for the available seats will be elected. Some companies in some states may choose another process at their discretion, but it is anticipated that this will be the commonly accepted practice.

This raised the question of whether it was possible that shareholder nominees could bring companies out of compliance with Sarbanes-Oxley, for example if a financial expert is defeated by a non-financial expert. 

For instance, say there are six nominees, including one incumbant that is a “financial expert” as defined by S-O and one other that is a shareholder nominee but who is not a financial expert. There are five board seats. If the financial expert receives the least number of “For” votes, that individual will be removed from the board in favor of the shareholder nominee. The board will lack a financial expert as required by the law.The person I spoke to was not exactly clear on how this problem would be avoided. She suggested first that it could be a campaign issue for the company, and later suggested that the company would have to expand the size of the board and appoint a financial expert.

In the case of multiple nominees, how will it be determined which nominee will appear on the ballot?

The shareholder or shareholder group with the largest number of company shares in aggregate (counting only those shares held for over one year) will have first priority for their nominees.

What is the maximum number of shareholders that can form a group to nominate a director?

There is no absolute limit on the number of shareholders that can form a group. However, if the group chooses to solicit publicly for shareholders to join the group, there will be a maximum of 30 shareholders. So for example, ICCR could aggregate the shares of all members to acheive the minimum ownership threshold to nominate a director. However, if ICCR chooses to seek outside support by posting an invitation on the website, it would have to limit involvement to 30 shareholders. There is no requirement that a group must solicit.

For Further Information Contact: Lillian C. Brown or Grace K. Lee, Division of Corporation Finance, at (202) 824-5250, or, with regard to investment companies, John M. Faust, Division of Investment Management, at (202) 942-0721, U.S. SEC, 450 Fifth Street, NW, Washington DC 20549-0402.John K. S. Wilson notes that he found staff to be friendly and responsive, “although it took her about a week to get back to me.” So, don’t leave your questions to the last minute.

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Business Roundtable Urges SEC To Extend Comment Period On Director Election Rules

Contact: Tita Freeman at (202) 496-3269
Release Date: 11/18/2003
In a letter to the Securities and Exchange Commission, the Business Roundtable this week urged the SEC to extend by 60 days the public comment period on the proposed rules that would permit shareholders to use a company’s proxy statement to nominate directors. The Business Roundtable notes that the short 60-day comment period currently provided for in the SEC’s proposed shareholder access release is insufficient for interested parties to comprehensively review, comment and provide requested information on the proposed rules. In addition, the Roundtable states that the current comment period does not provide adequate opportunity for thorough, well-informed rulemaking as provided for under the Administrative Procedure Act, 5 U.S.C. § 553(c).

“Director nomination is an issue the SEC has been studying for more than 60 years, and the limited 60-day comment period precludes meaningful examination of the current proposal,” said John J. Castellani, President of the Business Roundtable. “The Roundtable is concerned that the current timetable will result in a rule based on limited public participation and insufficient facts.”

The complexity of the proposed director nomination process is apparent in the SEC’s proposed rules. Moreover, the SEC’s proposing release does not include important data or detailed analyses of the potential implications of the proposed rules. Instead, it includes hundreds of questions that effectively shift the burden of data collection, fact-finding and cost estimation to the public.

“Members of the Commission have acknowledged the complexity and significance of these proposed rules. Indeed, they raise questions relating to Commission authority, federalism and the role of state and federal governments in establishing shareholder rights,” said Castellani. “The proposed rules have the potential to alter dramatically the standards and practices of corporate governance,” Castellani continued. “The members of the Business Roundtable believe it is imperative that the SEC extend the current comment period by an additional 60 days to allow the interested public the time it needs to answer the questions the Commission has posed and to ensure the sort of meaningful public participation that is the bedrock of sound rulemaking.”

The Business Roundtable is an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. “The chief executives are committed to advocating public policies that foster vigorous economic growth, a dynamic global economy, and a well-trained andproductive U.S. workforce essential for future competitiveness.” Editor’s Note: Actually, the proposed rules are not much different than what staff proposed in the beginning of May, with changes to limit its applicability. We’ve waited 60 years; now the BRT wants a 60 day extension that could push the start of the proposed regulations out another year.

Dear Mr. Spitzer: (an open letter from Mauren Duffy)

CGFReport commends your outspoken criticism of the SEC’s quick deal with Putnam mutual funds. As you know, CGFR’s position is that monetary settlements in lieu of admissions of blame, and sometimes prison terms, are little more than sanctioned payoffs. Admissions of guilt, shareholder restitution and, where appropriate, imprisonment for those who have violated the public trust and the law are vital as deterrents against future conduct and to the recovery of investor trust.

Maureen Nevin Duffy
Corporate Governance Fund Report
3 Deal Lake Ct
Asbury Park, NJ 07712

62 Majority Votes on Poison Pills

Shareholder activist John Chevedden says the Council of Institutional Investors (CII) tracked 62 majority votes on poison pill proposals submitted in 2003. Only seven have adopted policies terminating their pills or amending their policies.

Arden Realty, CSX and Northrop Grumman amended their pills to expire on or before Dec. 31, 2003. Energy East, which doesn’t have a poison pill, adopted a policy that it won’t adopt a pill unless approved by shareholders. 3M, Hewlett-Packard and JP Morgan Chase, which also don’t have poison pills, re-sponded to the majority votes by approving policies to get shareholder approval before adopting any poison pills. But their policies include a huge loophole giving their boards the right to adopt pills without prior shareholder approval if, as fiduciaries, they decide a pill would be in the best interests of shareholders.

JP Morgan’s policy appears to goes a step beyond the others by requiring any non-pre-approved pills to be submitted to a non-binding vote at the next special or annual meeting.

These clauses effectively render the policies meaningless. And the proponents of the winning shareholder proposals aren’t happy. John Chevedden, sponsor of pill at Hewlett-Packard, called the fiduciary-out policy “as good as a fig leaf.” Nick Rossi, proponent of the proposals at 3M and JP Morgan Chase, said that shareholder pre-approval should always be required.

Investors Link Corporate Responsibility with Reduced Risk, Better Returns

Calvert, the nation’s largest family of socially responsible mutual funds, today announced the results of a Harris Interactive® investor survey, which dramatically highlights investors’ growing concerns about ethical standards at corporations and mutual fund companies. “The survey clearly shows that investors understand that corporate responsibility matters,” said Barbara J. Krumsiek, Calvert’s President & CEO. “It is increasingly clear that investors believe that well-governed, socially responsible companies are better positioned to deliver long-term, sustainable value to their shareholders,” she added.

Conducted by Harris Interactive® for Calvert, the survey found that investors see a definite link between good corporate governance and shareholder value:

  • 84% of investors are more likely to invest in a mutual fund if it engages in ethical business practices in its operations and reporting.
  • 71% of those surveyed said that they either strongly agreed (35%) or somewhat agreed (36%) that companies operating with higher levels of integrity carry lower investment risk.
  • 68% of those surveyed said that they either strongly agreed (31%) or somewhat agreed (37%) that companies operating with higher levels of integrity deliver higher investment returns.

Against the backdrop of two years of corporate scandals, the Calvert survey clearly found that investors are more interested in knowing how the companies they invest in conduct their business. According to the survey, compared to two years ago, investors said they now:

  • want their financial advisors to investigate the ethical as well as financial performance of investments before making recommendations—92%.
  • are more interested in how corporations are governed—79%
  • are seeking more financial and accounting information about their investments—68%
  • are less confident about the trustworthiness of corporate management—77%
  • are less confident about the safety of financial markets—59%
  • are less confident about mutual fund integrity—45%

Finally, the survey showed that investors were generally in favor of a wide range of corporate reforms that might encourage ethical behavior. Here are the percentages of survey respondents who felt that the following reforms are either essential or very important:

  • Open and honest reporting – 90%
  • Having a Board of Directors that is independent from management – 71%
  • Setting reasonable executive compensation – 67%
  • Encouraging greater shareholder voting on key issues – 61%
  • Diversity in the Board of Directors – 56%

The Calvert survey was based on telephone interviews with 600 respondents with primary or shared decision making about financial investments, who have not worked in the investment or securities industry, and who currently own at least one mutual fund outside of their 401(k) investments.

NASD Dissidents Launch Contested Election for Board of Governors

The NASD Dissidents’ Grassroots Movement (NDGM) announced an historic challenge of recent Board of Governors nominees. Read theirpetition and the press release. NDGM has nominated Dan Roberts for the Industry Governor seat. For the three Public Governor seats, NDGM has nominated Raymond Gambel and Les Greenberg, Esq.; they also cross-endorsed one of the NASD’s nominees: Joel Seligman, Esq.

The NDGM and nominees “seek reform on Wall Street that prevents investor fraud and promulgates effective regulations. We seek ways to put America back to work. We seek ways to once again raise capital for local businesses and jump-start our economic recovery. But most importantly, we believe that it’s time for investor advocates and the small and mid-sized brokerage firms of the United States to unite and regain what has been stripped from them by years of ineffective regulation and wasteful bureaucracy.”

Let’s Fix the Corporate Election Process

Imagine going to the polls to vote, but the ballot only gives you two options. Vote for the candidates of one party, or withhold your vote. No matter how many vote against the slate, it still wins. Theoretically you can nominate other candidates, but to do so requires millions of dollars in legal, mailing and other expenses for a separate ballot, while the one-party slate is also authorized to spend your money in any contest; so why bother? Does this sound like an election or a dictatorship?

Yet, this is the current situation that shareholders of public companies face. Whether you personally vote your proxies or delegate that task to a mutual or pension fund, it is vitally important that we change this system, not only to avoid future Enrons and restore investor confidence, but also so that corporations better reflect one or our most fundamental values, democracy. Corporations, far more than government, determine how we spend our most productive hours, what we eat and even the quality of air we breathe. If they aren’t governed democratically, can we really be said to be living in a democracy?

Last year, Les Greenberg and I petitioned the SEC to provide equal access on the corporate ballot for directors nominated by shareholders. Last spring, a report by the $3 trillion Council of Institutional Investorsindicated that petition had “re-energized” the “debate over shareholder access.” Last month the SEC proposed a rule to address the issue. Dozens of people have congratulated me and I’m getting lots of press calls. However, like many good ideas from the grassroots, something got lost in translation.

Instead of equal access, the SEC is proposing to allow shareholders to nominate a token board member or two at an estimated 0.3% of companies – and the nominating process may take two years. That’s like getting permission to install an alarm in your house after it has been burgled.

Three-years of corporate scandals and continuing excesses in CEO pay highlight the major flaw in current corporate governance – allowing CEOs and incumbent boards to not only hand-pick director candidates, but to also exclude all other candidates from the ballot that gets mailed to all shareholders. But “governance by embarrassment” is not enough and “just-in-time-governance” is likely to be too late. Shareholders want their directors to be proactive; this proposal throws up too many barriers for that to happen.

Generally speaking, the purpose of the Securities Act of 1933 and the Securities Exchange Act of 1934 is to protect the investing public from the improper acts of boards of directors and corporate managers. Their purpose is not to protect directors and CEOs from shareholders. The Commission needs to be reminded they work on behalf of shareholders, not the Business Roundtable, which represents CEOs. You can do this simply by sending a comment e-mail to the SEC using our suggested language. Please join us in asking for important amendments to this significant proposal.

Below is a summary of the SEC’s proposal and how it can be fixed.


As proposed, the SEC would allow shareholders to place their own nominees for director seats in corporate proxies during the subsequent two years if one of the following two “trigger” events occurs after 1/1/2004:

  • A demand for proxy access is made by a shareholder, or group of shareholders, owning at least 1% of voting shares outstanding for at least a year, and shareholders or 50% of the votes cast favor such access.
  • When 35% or more of votes cast on one or more director nominees are “withhold” votes.

CorpGov.Net Recommends:

Triggering requirements should be eliminated. Requiring such events simply adds a one-year delay to needed action by shareholders. The corporation may bleed to death before shareholders can place their nominees on the board.

If the SEC is compelled to require triggering events, they should be broadly expanded to include a demand for proxy access by any shareholder owning at least $2,000 of company stock for at least a year or if any of the following events occur:

  • Bankruptcy
  • Restatement of earnings
  • Share value declines by 25% over any one year period
  • Fines or penalties by government agencies total $250,000 in any one year period.

Limit on Shareholder Nominees

As proposed by the SEC, the number of shareholder nominees a company would have to place in the corporate proxy would be limited to 1 for a board with 8 or fewer directors (<50% of existing boards); 2 for a board with 9-19 directors (>50% of existing boards); and 3 for a board with 20 or more directors (a very few existing boards).

CorpGov.Net Recommends:

The number of shareholder nominees should only be limited to 1 less than half the board seats in any given election cycle. In close to half of all companies listed, the SEC would limit shareholder nominees to one single candidate. I’ve served on boards and believe that one member would likely be a voice in the wilderness, easily ignored. Even in the majority of firms, where two shareholder nominees would be allowed, those directors could easily be isolated. Allowing shareholders to replace one less than half of the board protects against short-term speculators, but it would also ensures that shareholders will see light at the end of the tunnel.

Nominating Shareholders

As proposed by the SEC, if a trigger is tripped, the company would have to open its proxy to a shareholder nominee only if the nominating shareholder or group of shareholders has owned more than 5% of the outstanding shares for two or more years and intends to hold its stake through the next annual meeting. Nominating security holder groups would be limited to 30 members.

CorpGov.Net Recommends:

No trigger should be required. A two tier structure should apply to nominating shareholders.

  • Any shareholder owning at least $2,000 of company stock for at least two years who intends to continue to hold for at least a year after the next annual meeting should be able to nominate. If more than one slate is nominated, the slate of the nominator with the largest number of shares should be included on the corporate proxy. Filers under this option would have to agree to severely limit their campaign costs. They would not be allowed to hire a proxy solicitor, place ads or even conduct mass mailings (other than via e-mail). Their candidates would rise or fall largely on the basis of their 500-word statement in the proxy and their websites. If the company does not include a statement either opposing the shareholder nominee or supporting their own nominee, than even the 500 word statement would be omitted from the proxy materials and the shareholder campaign would largely depend on websites and e-mail.
  • Any shareholder or group of shareholders (no limit on numbers) owning at least 3% of company stock for at least two years, who intends to continue to hold such stock for at least a year after the next annual meeting, should be able to nominate candidates without restriction as to campaign expenditures. If more than one slate is nominated, the slate of the nominator with the largest percentage of shares would be included on the corporate proxy.

Out of 14,484 public companies filing periodic reports with the SEC, the SEC release estimates the proposed access rule would be triggered at 73 companies and in 45 of these companies a security holder would make a nomination. The SEC is considering further limiting even this small dose of democracy to “accelerated filers,” an estimated 3,159 companies. Yet, I believe that far more than 0.3% of companies could benefit from having shareholder nominees and smaller companies would be more likely to benefit, given that they have a lower proportion of independent directors.

It took ten huge funds, including CalPERS and CalSTRS, to come up with 1.6% of the shares at Unocal to sign a letter asking them to divest risky investments in Myanmar. Clearly it will be extremely difficult for shareholders to put together and maintain investor groups for something as complex as nominating directors or even creating a triggering event.

Under the two-tier approach I recommend, many more companies would face some sort of contest. However, in the vast majority of cases the costs, in terms of time and money, would be minimal. Only if shareholders were truly dissatisfied with the current board or if the shareholder campaign rang true would there be any contest. However, in those cases shareholders would be able to invigorate the process by forcing debate on the issues and providing real choices.

Independence of Nominees

As proposed by the SEC, the shareholder nominee would have to be independent from those making the nomination and from the company. Candidates can’t be employed by the nominating shareholders or affiliated with them in any way.

CorpGov.Net Recommends:

Shareholder nominees must be independent of the company but no such prohibition should apply to the nominating shareholder. The prohibition against candidates employed by or affiliated with nominating shareholders is far too restrictive. Shareholders should be able to nominate activist shareholders such a Ralph Whitworth of Relational Investors or Andrew Shapiro of Lawndale Capital Management. When they spot trouble on the horizon, shareholders will want experienced turnaround experts on the board to communicate with them and to generate the pressure needed to make necessary changes. A major issue would be trust and such individuals have often gained the trust of major institutional investors and shareholder activists through their affiliations with them. For excellent coverage of such funds, see the Corporate Governance Fund Report.


Will the SEC continue to try to police corporations through expensive box ticking procedures, such as many of those set up by Sarbanes-Oxley, or will it give investors the tools we need to look after our own interests?

A shift toward more democratic elections seems to be working for Apria Healthcare. In June, they announced their proxy would include information concerning up to two director nominees submitted by a stockholder or group of stockholders that have owned beneficially at least 5% of the company’s common stock for two years or more. According to Board Chairman Ralph V. Whitworth, the change was “based on the proposition that shareholders have both a meaningful role to play in corporate governance and a legal right to participate in such governance.”

During the last six months, this small change has helped propel Apria’s share price about 30%, compared to less than 15% for the S&P 500. A legal right to participate in governance should bring shareholders both more power and higher returns.

While the SEC’s proposed rulemaking would set in place a groundbreaking mechanism for shareholder access to the corporate ballot for the purpose of nominating directors, it falls far short of providing shareholders with the power to hold directors accountable. The interests of directors would still be far more aligned with those of management than with shareholders.

Shareholders want their directors to be proactive. My recommendations would allow that to happen by giving us the tools we need to monitor and democratically govern the corporations we own. The result would be more efficient, effective and responsive corporations. Join us! Comments are due 12/12/03.

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CalPERS to Express Concerns With SEC Access Rule

CalPERS apparently intends to express somewhat similar concers to those I expressed above. Their draft letter outlines four specific areas they feel can be enhanced. The four areas are as follows:


CalPERS believes strongly that the rule should include a trigger based on non-implementation of a shareholder proposal that passes by majority vote. We believe there is no more direct link than the one between the non-implementation of a shareowner proposal and the Commission’s rationale for the proposed rule – providing a mechanism for long-term shareowners to influence companies where there are indications that the proxy process has been ineffective or when there is dissatisfaction with the proxy process. If a shareowner proposal passes but is not implemented – often times year after year – obviously the proxy process is ineffective.

We also support additional triggers based on material restatements, SEC enforcement actions and significant under-performance. Each of these criteria is consistent with cases where shareowners have reason to be dissatisfied with the existing board or management. While shareowners will certainly not choose to take action under the nominating procedure in many of the cases that these triggers would permit, this is the proper universe to which this rule should apply.

In regards to the two triggers in the proposed rule, we are supportive of these mechanisms, and we feel that they are appropriate triggers. However, we believe that the withhold threshold in the first trigger should be lowered from the proposed 35% to 20%. This still represents a significant hurdle for a withhold campaign, and certainly demonstrates dissatisfaction of the owners. On the other hand, it is also a high enough hurdle that there will not likely be a large number of companies that will have the nominating procedure triggered due to this event. We also seek to remove the proposed criteria that any shareowner proposal to implement the access procedure would need to be sponsored by a 1% holder or group. We feel that it is irrelevant who sponsors the proposal. Rather, the important issue to focus on is that the proposal will need to be passed by a majority vote. We feel that the 1% requirement is unnecessary.

Number of Nominees

CalPERS is advocating that the number of permitted nominees should never be less than two. We suggest that the rule permit two nominees or up to 35% of the seats on the board, whichever is larger. In our experience, it is very difficult for a single director to effect change or have an effective voice. Limiting the number of nominees to one in any circumstance would impair the proposed rule form achieving its stated goal of providing a mechanism for dissatisfied owners to seek greater representation. While we agree that this rule should not permit security holders to seek control, we view the proposed limitations on the number of nominees as too constrictive. Clearly, any number of seats that remain less than a majority will avoid such concerns. Again, given the fact that any nominees would still be required to obtain a majority vote to be elected, owners will have the ultimate control and would not elect a slate if they thought it was too large relative to the particular board.

Time Period for Application of the Rule

CalPERS is advocating that the rule, once triggered, should remain operative for a period of five years. The proposed time period it would remain in effect of two years is simply too short to permit owners the ability to monitor performance and responsiveness and react accordingly. In one sense, the shorter time period might force investors to nominate candidates in situations when they might otherwise be willing to give incumbent boards some time to address concerns without nominating new or additional directors.

Nominee Independence Standards

CalPERS is supportive of the concept of requiring that nominees under this rule be independent of the company. We are also generally supportive of independence standards that would be applied to the relationship between the nominee and the nominating holder or group. However, we have serious concerns that the broad application of the proposed independence standards will inhibit significant holders from seeking seats on boards as part of actively managed governance strategies. For example, CalPERS has significant resources dedicated to actively managed strategies in the governance arena. Under these strategies, external managers such as Relational Investors may seek board representation in an effort to build long-term equity value in a company. As such, these individuals conduct rigorous fundamental research and take significant equity positions. These individuals are perhaps the most desired type of director because they are independent, extremely well aligned with the owners, and very well prepared with an in-depth understanding of the company that other directors typically do not posses.

CalPERS is advocating for a narrow exception to the proposed independence standards that would permit holders of at least 2% to nominate principles of the fund. We believe that this threshold would ensure that the nominating holder is a very significant investor. We also have ultimate confidence in the election process and once again point out that the nominee still must be elected by a majority. We are fully supportive of disclosure requirements that would require the nominee to disclose their holdings, qualifications and affiliation with the nominating holder. With this information, it is appropriate to let the owners decide if a significant equity owner should be elected to the board to represent shareowners.

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Message of Impotence

The headlines read “Institutions Tightening the Screws of Their Own Proxy Voting Guidelines.” Yet, Les Greenberg of the Committee of Concerned Shareholders says that institutional investors provide a false sense of security to the investing public when they only “withhold” their votes. The real message is a message of impotence.

One recent example should suffice. “An influential adviser to institutions (Institutional Shareholder Services) is urging its clients to oppose the re-election of the directors of Texas Instruments, including Thomas J. Engibous, the company’s chairman and chief executive. The adviser … is angered by the disclosure that the Texas Instruments board adopted a costly stock option plan without obtaining shareholders’ approval. It is recommending that stockholders withhold their votes for the eight directors who can stand for re-election. … Institutional shareholders own 68.7 percent of Texas Instruments’ shares outstanding, while officers and directors own 0.83 percent.” (NY Times, 3/29/03, “Texas Instruments Directors Come Under Fire”) “Campaigns to withhold votes from directors cannot oust the directors….” (NY Times, 4/4/03, “Will S.E.C. Allow Shareholder Democracy?”)

Greenberg points out that even if the entire 68.7% of the stock owned by institutional investors were voted to “withhold,” when the 0.83% vote to re-elect themselves, the BOD of Texas Instruments will continue “business as usual.”

The only effective means of assuring accountability of Directors is to field opposition candidates and/or to support candidates nominated by others. Accountability through embarrassment is a myth.

Labor Sharpens Its Pension Sword

That’s the title of an article in the 11/24/03 edition of BusinessWeek. “Spearheaded by the AFL-CIO Office of Investments, labor has become one of the country’s strongest voices for corporate reform, demanding independent boards of directors, mutual-fund accountability, and curbs on runaway CEO pay. But now a number of unions are upping the ante, using their pension holdings to pressure companies on bread-and-butter labor issues as well. Combining old-fashioned tactics such as picketing with their clout in the boardroom, unions are attacking employers on everything from health-care benefits to job outsourcing.”

While some worry that shareholder activism will hurt the AFL-CIO many, if not most, would agree with William B. Patterson, the head of the AFL-CIO Office of Investment. “Other shareholders will vote no [on labor-sponsored proxy resolutions] if they think our demands are not in their interest.” Vanderbilt University law professor Randall S. Thomas says the danger is that they can be accused of exceeding their duties as pension fund fiduciaries. But should the concept of fiduciary interest be limited to maximizing short-run returns? If a short-term investment strategy puts union members out of their jobs, that doesn’t make sense. Of course labor funds should take the long view, but so should all pension funds, since they hold stocks for about 7 years on average.

SEC Reforms Starting to Work

2003 may go down in history as the year the SEC created the three most important reforms since its creation. In January the SEC announced two related rule changes. One directed mutual funds to make the policies and procedures related to proxy votes public this year and requires that in 2004 they must disclosed how they voted. The other rule applied a similar standard to investment advisors. Of course the third rule is the currentSecurity Holder Director Nominations, S7-19-03, which would open the corporate proxy to shareholder nominees for directors. From a recent report in BusinessWeek entitled “Tossing Out The Rubber Stamp,” it appears the first of the rules are starting to work. According to the article:

Vanguard Group Inc. typically used to rubber-stamp 9 out of every 10 slates of directors put up for election by companies in which it held stakes. But this year it decided there was no sense in supporting directors it disagreed with. So it ratified only 29% of the slates, withholding votes from at least one nominee in an eye-popping 71% of the cases…Money managers using their voting power more aggressively would add clout to a corporate-accountability movement that has been led by labor-union and state-employee pension funds.

Vanguard apparently now routinely votes against directors on audit, nominating or compensation committees, if they aren’t independent of management. If the third rule is adopted later this year opening up proxy access, even just a bit, such votes of no confidence may take on even more significance. Additionally, WSJ (11/10/03) reports that “Vanguard Gives Corporate Chiefs a Report Card.” “Vanguard approved 79% of its companies’ auditors, down from 100% last year. And the firm voted in favor of just 36% of employee-option plans, the same number as last year.” 164 shareholder resolutions on everything from staggered boards to takeover defenses to executive compensation earned majorities this year.

Family Companies Earn More

In “Family, Inc.” BusinessWeek (11/10/03) reports “Suprise! One-third of the S&P 500 companies have founding families involved in management. An those are usually the best performers.” Family firms that maintain a presence in senior management returned an average of 15.6% to shareholders per year, compared to 11.2% for nonfamily companies. Return on assets averaged 5.4% vs 4.1% for nonfamily companies; revenue growth was 23.4% vs 10.8%; income growth 21.1% vs 12.6%. No suprise to us. The companies tend to be younger, the families have invested patient capital, the large investment provides a powerful incentive to monitor. Independence isn’t the issue either in management or among directors, what matters is that someone or some group has the incentive to monitor and the ability to hold management accountable. That could be a family or it could be other involved shareholders. The SEC proposal,Security Holder Director Nominations, S7-19-03, could be a start, especially if modified to eliminate the triggers and lower the thresholds.

Ohio May Increase In-State Investments

According to, having come under fierce attacks for their performance and spending habits, Ohio’s public pension funds may have yet another obstacle to overcome if HB 227 is enacted. That legislation attempts to increase oversight of Ohio’s five pension systems and would also require that:

  • 50% of the money invested externally must be placed with a firm that has its headquarters in Ohio or has at least three offices employing 15 or more people in the state.
  • 70% of stock or bond trades would need to be made with firms that are either based in Ohio or have officers in the state.
  • Another 10% above the above designations must be placed with minority firms that also meet the foregoing Ohio-centric criteria.

Neil Toth, Director of Investments for the $56 billion Ohio Public Employees Retirement System noted that just four of the top 100 US money managers are headquartered in Ohio, while only fifteen or so of the top 100 money management firms would meet the criteria of having three separate offices in Ohio employing a total of fifteen persons.  Toth noted that “…preliminary estimates of the cost to OPERS of complying with the investment provisions of HB 227 range from $40 million to $100 million annually.”  The Ohio State Teachers Retirement System, with assets of $50.5 billion, said its costs would rise up to $40 million more a year, while the Ohio School Employees Retirement System said that fund’s costs “conservatively” would be at least $11 million.   

Weighing in against the proposal were both the Council of Institutional Investors, which characterized the constraints on investment activity as “a hidden tax,” and the National Association of State Retirement Administrators (NASRA), which in a letter to Ohio Governor Bob Taft obtained by, said that “…HB 227 would actually hinder the ability of public retirement plan trustees in Ohio to carry out their fiduciary responsibilities, which require them to operate solely in the best interests of the plans’ participants—working and retired public employees.”

NASRA President David Bergstrom went on to note that, “Although this measure may be intended as a way to increase the profits of locally based firms, the advantage given to a few businesses would likely come at a very expensive price tag to millions of state taxpayers, public employees, and retirees, who must make up shortfalls in the funds’ performance.”  Editor’s response: Maybe this approach won’t work well in Ohio, but would it work in New York or California?

Should We Trust TIAA-CREF?

A statement by Curtis C. Verschoor and Stephen Viederman: Although the mutual fund scandals have not yet reached TIAA-CREF, there are disturbing signs of lack of transparency and accountability, the hallmarks of good governance, for which TIAA-CREF says it stands. TIAA-CREF Chairman, President, and CEO Herb Allison asserts that trust is its competitive advantage, yet his actions seem contradictory and at variance with his commitment to strong governance. Our participants&Mac226; proposal and several others calling for CREF to improve its governance were all opposed by management and the Board (almost all either finance professors or finance professionals).

Our proposal recommends the Board be responsible for “overseeing ethics in the organization to assure the appropriate culture is established and maintained.” CREF says they oppose it, although NYSE and NASDAQ both now require disclosure of a code of business conduct. Does this mean that CREF officers and employees have no ethical guidelines to follow when considering issues of market timing and late trading? Why is Chairman, President, and CEO Herb Allison silent on these and other matters of critical importance to participants, the mutual fund industry, and the public? TIAA-CREF seems to disclose only the bare minimum legally required.

TIAA-CREF Spin #1: In a Business Week interview, Allison promised to reveal management salaries in the 2003 proxy and “adopt the same standards of the public companies we invest in” and “issue a press release.”

FACT: 2003 proxy contains no management salary information. No press release was issued. CREF has no compensation committee, hence no compensation committee report on how compensation is determined. Readers cannot judge accountability.

TIAA-CREF Spin #2: An October 2002 press release states Herbert Allison, Jr. had been appointed the new Chairman, President and CEO of TIAA-CREF. Allison has been referred to as Chairman, President, and CEO in numerous publications by TIAA-CREF and others during the year.

FACT: 2003 proxy states that Vice Chair Martin Leibowitz had been promoted to the Chairmanship without previous notice and Allison is not even a Trustee of CREF let alone the chair. Is this transparency?

TIAA-CREF Spin #3: 2003 proxy states that CREF board decided “to appoint an independent trustee as “presiding trustee.”

FACT: 2003 proxy does not state the identity of this individual, if actually named, or his/her duties. This is another lack of transparency.

TIAA-CREF Spin #4: 2002 proxy promised to “continue to provide participants with meaningful information about CREF&Mac226;s proxy voting policies and processes.”

FACT: CREF has not held itself accountable on this issue, as well as many other dealing with its own governance.


  1. Not clear how total compensation from TIAA-CREF group can be less than amount paid by CREF alone.
  2. Not clear how several directors can be responsible for oversight of the management of 53 other funds, yet have not have any other stated directorship responsibilities (presumably beyond CREF).
  3. Selection of independent auditor not put to a vote at annual meeting.
  4. An audit committee written charter is mentioned, but its text is omitted from the proxy statement. It may be requested, but no indication is made from whom.
  5. No report of the audit committee is included, so readers have little idea what its responsibilities are and cannot judge accountability.

Curtis C. Verschoor: I have just received a personal telephone call from Laverne Jones, Corporate Secretary of TIAA-CREF, who informed me that they have postponed their annual meeting and will be sending revised proxy materials. She said the reasoning was because too few people had received the materials in time to vote, but I wonder if it is because of the defects in the proxy statement and voting card that we pointed out, since they are revising the proxy statement and “increasing the amount of disclosure” as well as correcting the errors they had found. So hopefully we will see improved governance. (Editor’s note: see also formalstatement by Curtis C. Verschoor and Stephen Viederman. See the proxy statement. More coverage at

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October 2003

Christian Science Monitor Says Proposed SEC Hurdles Too Steep

In a 10/31 commentary entitled Shareholder Power, the CSM recounts the proposed triggers that would allow shareholders to nominate a token member or two to most boards. “One trigger would be if more than 35 percent of shareholders vote to ‘withhold’ approval of a board-approved candidate. Another would occur if at least 1 percent of investors ask for their nominees to be on the ballot the following year and that proposal is then approved by half the shareholders.”

“These are still steep hurdles that don’t give investors enough clout,” says CSM. “In the 2,227 director elections held over the past two years, only about 1.1 percent of the companies had withhold votes that were more than 35 percent. Surely more than 1 percent of companies need a boardroom shake-up. And for companies in immediate need of reform, waiting a year to vote on investor-nominated candidates could lead to no reform at all.”

While alarmed at the minimal impact the rule is likely to have, the editorial doesn’t even contemplate the fact that once the “triggering event” has occurred, shareholders would still be required to gather a 5% group, agree upon a candidate, and hold a modified, though less expensive, proxy campaign. That’s likely to happen only at a small proportion of the 1% where a trigger has been pulled.

The editorial calls on the SEC to ensure that corporate America has “better safety valves for quick internal reform.” While most shareholders support their boards and management, they “would welcome having a bigger stick in the closet to bring a stronger spirit of accountability into corporations. More people would invest in companies if they had faith that their representatives actually represented them.”

CorpGov.Net’s Commentary: One major criticism of the SEC proposal from the business community has been cost. If every corporate election becomes an election contest, management won’t be able to concentrate on earning the profits shareholders seek and companies will needlessly be spending those profits to ensure board nominated candidates win. However, what if we simplified the SEC’s proposal to make it much less expensive?

Instead of the triggers proposed by the SEC, let’s allow any shareholder currently qualified to file a resolution to nominate directors. If more than one shareholder nominates, the company would include only the nominee(s) from the largest shareholder or shareholder group. That would simplify the process for shareholders. In order to keep the expenses of businesses down, filers would have to agree to severely limit their campaign costs; they would not be allowed to hire a proxy solicitor, place ads or even conduct mass mailings (other than via e-mail). Their candidates would rise or fall largely on the basis of their 500 word statement in the proxy and their websites. If the company does not include a statement either opposing the shareholder nominee or supporting their own nominee, than even the 500 word statement could be omitted and their shareholder campaign would largely depend on their website and e-mail.

Many more companies would face some sort of contest, but in the vast majority of cases the costs, in terms of time and money, would be minimal. Only if shareholders were truly dissatisfied with the current board or if the shareholder campaign rang true would there be any contest. In those cases shareholders would be able to invigorate the process and provide real choices.

Democratic Structures, Key to Public Trust

In a national survey of 2,031 adults sponsored by the National Cooperative Business Association (NCBA) and the Consumer Federation of America (CFA), 71% of consumers said they are more likely to buy products or services from a business if they know it to be a cooperative. Respondents believe that companies that allow members to democratically elect the board of directors, and are locally owned and controlled are more trustworthy than profit oriented businesses. Co-ops also rated higher by wide margins on questions of value, quality, price, and commitment to their communities.

“Public trust is the first casualty of corporate accountability scandals,” said CFA Executive Director Stephen Brobeck. “Fortunately, this survey shows there’s a solution to consumer concern about their lack of control. Consumers believe the nation’s more that 40,000 co-ops offer more democratic, accountable options and trustworthy options. And those are options they clearly prefer.”

Perhaps companies that are not cooperatives can also learn something from the survey. If they act a little more like cooperatives, perhaps they can gain back some of that trust and all stakeholders will benefit. It seems to be working for Apria Healthcare. Back in June, they announced they would include in their annual meeting proxy statement information concerning up to two director nominees submitted a stockholder or group of stockholders that have owned beneficially at least 5% of the company’s common stock for two years or more. According to Board Chairman Ralph V. Whitworth, the change was “based on the proposition that shareholders have both a meaningful role to play in corporate governance and a legal right to participate in such governance.”

During the last six months, Apria’s share price has risen about 25%, compared to about 15% for the S&P 500. A legal right to participate in governance might bring shareholders both more power and higher returns. (Disclosure: the editor’s portfolio includes Apria Healthcare and shares in the Sacramento Natural Foods Cooperative.)

More Directors Turning Down Positions

According to Korn/Ferry International’s 30th Annual Board of Directors Study, 23% of Fortune 1000 directors turned down additional board roles in 2002, compared to only 13% the previous year due to the increased liability of serving on corporate boards. Other key findings:

  • American Fortune 1000 boards lead the way in holding executive sessions (87%) without their CEO present. Only 4% of Japanese boards hold such sessions;
  • In the Asian Pacific region, 41% of boards formally evaluate their directors, whereas 29% percent of American boards conducted such reviews (up from 21% last year);
  • 98% of the American boards are in compliance with Sarbanes-Oxley; 63% of French boards report compliance with the Bouton Report; and 66% of UK boards satisfy the Higgs and Smith Reports on the issues of director independence.
  • 92% of Australia/New Zealand directors, 80% of U.S. directors and 71% of French directors say the former CEO should not sit on the board.

To Harvard With Love

Robert A.G. Monks shares his recent letter to Lawrence H. Summers, President of Harvard College, on the 50th anniversary of his graduation from Harvard College. I always learn something whenever I read anything from Bob Monks and this letter was no exception. There are the ever present facts and figures:

  • History will look back on the 1990s as a time when the principal officers of public American corporations transferred from shareholders to themselves approximately $1 trillion — or 10 percent of the market value of public exchanges.
  • At the beginning of the decade roughly 2 percent of the market value of listed companies was represented by options, at the end the figure was up to 12 percent.  
  • Business support for research is Harvard’s second largest revenue line at $518.8 million.

At heart, however, Monks’ letter is an elegant plea; Summers should drop his “ivory tower” approach to investing. “By a simple standard of decency, these representatives of Harvard’s interests should respect the spirit of the law of trusts by becoming more active as investors.” He cites Harvard’s role in founding the Investors’ Responsibility Research Center (IRRC) and later activism at Waste Management and Templeton Mutual Funds. He then address how Harvard should attempt to involve itself as a socially responsible investor not through the traditional SRI mode of divestiture or blacklisting but “by changing companies from within.”

In the UK institutional investors are now required, after the Myners Report, to adopt explicit, written social and environmental policies with respect to their investments. ‘Institutions are now in effect legally required to become activist with respect to investee companies if this is necessary to enhance value.” Monks goes on to note that “no such high-level discussion has yet taken place in the United States, either in the public or private sector.”

Will Harvard take the lead? Let’s hope it doesn’t take another 25 years of corporate governance activism by Bob Monks to get them to do so.

Everything You Wanted to Know About Corporate Governance . . .

That’s the lead title in series of 10/27/03 Wall Street Journal articles. Unfortunately, while shareholders are mentioned, they aren’t central. “Who are the major players in corporate governance?” asks writer Judith Burns. Her answer? “Board members, senior management, outside auditors, states, federal regulatory agencies such as the Securities and Exchange Commission, criminal prosecutors, legislators and the courts all play a role.” But apparently not shareholders. Of course Ms. Burns discusses the SEC’s equal access proposal and shareholders soon gain more than a foothold in her introduction to the subject. However, by leaving them out of the defined “major players in corporate governance,” she consigns shareholders to a role which lacks the appearance of legitimacy.

Comments Start Pouring in to SEC on Equal Access Proposal

The first comment letter was from Stephen F. Gates, Senior Vice President and General Counsel of ConocoPhillips. “In the context of a newly adopted regulatory framework that is already designed to address the issues of board composition and director performance, the adoption of proposals to facilitate election contests is an unwarranted step that offers little apparent benefit while threatening significant harm. We encourage the SEC to weigh these costs against the absence of any clear benefit and reject these proposals.”

The second comment letter was from shareholder, Les Greenberg, Chairman of the Committee of Concerned Shareholders. “The proposed rule, allegedly intended to promote BOD and Management accountability, would limit ‘equal access” to the corporate ballot to only those Shareholders with substantial means. There are 9,000+ corporations with publicly traded securities where the legitimate corporate governance needs of all investors should be protected. Institutional Investors, alone, will not have the interest or the resources to nominate Director-candidates at many of those corporations. Director accountability should be promoted at more than a few corporations. Individual Shareholders should be able to act as their own watchdogs in protecting their investments…The choice is clear: true corporate democracy or continued paternalism by the corporate aristocracy.”

Comments are due by December 22, 2003. Send them electronically to[email protected]. Include File No.: S7-19-03 in the subject line of your e-mail. If you attach a document, indicate which software you used (for example, Word Perfect 5.2, MS Word 2000 or ASCII text) at the start of your message. They are now asking not to submit documents in HTML format or PDF, even though several of the posted comments are in HTML.

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Who Should Pay for Contests?

In “Why shareholders must have more power,” which appears in the 10/21/03 Financial Times, Harvard professor Lucian Bebchuk argues the current SEC proposal to grant limited shareholder access doesn’t go far enough. Two additional reforms are needed.

“Under existing corporate law, incumbents’ ‘campaign’ costs are fully covered by the company, which provides a great advantage over outside candidates, who must pay their own way. To enable challengers to make their case to the shareholders, companies should be required to reimburse reasonable costs incurred by such nominees, at least when they draw sufficient support in the ultimate vote.” Personally, I believe there is a much less expensive option that will go a long way to solving this problem.

The SEC needs to either amend or delete section 240.14a-8(i)(8) in order to allow shareholders to hire a proxy monitor to provide independent advice to shareholders, not only on shareholder resolutions but also on elections for directors. I want my pension and mutual funds to be activists, nominating directors wherever warranted, but I don’t want them spending my savings or diluting the value of my shares through expensive proxy battles. If shareholder nominees get 500 words in the proxy materials and if an assessment by an independent proxy monitor, such as ISS, is also included in the proxy materials that endorses those independent nominees, that should be enough. Institutional investors would risk breaching their fiduciary duty by voting against such a recommendation. Money devoted to a proxy campaign would simply be wasted.

Bebchuk’s second recommendation, however, is one I embrace. He points out that, “Incumbent directors are now protected from removal not only by impediments to running outside candidates but also by staggered boards, on which only a third of the members come up for election each year. Most public companies now have such an arrangement. As a result, no matter how dissatisfied shareholders are they must prevail in two annual elections to replace a majority of the incumbents. Requiring or encouraging companies to have all directors stand for election together could contribute significantly to shareholder wealth.”

Yes, we need to do away with staggered boards, but we also need to increase the number of nominations shareholders can make through the SEC’s proposed process. Limiting nominations to one or two is absurd. It would take years and years for shareholders to shape a more responsive board under such conditions. Shareholders should be able to replace one less than half of the board by placing their nominees on the corporate ballot. That protects against short-term speculators and gives time for the current CEO and board to show they are responsive, but it would also ensure that shareholders will see light at the end of the tunnel.

Cluster Bomb or Smart Bomb?

When the SEC announced its rulemaking to provide very limited ballot access to shareholders, all commissioners were unified in support. Is the support waivering? At the recent NACD 2003 Annual Corporate Governance Conference, Commissioner Cynthia A. Glassman said “I agree with this proposal in theory, but to paraphrase no lesser an authority than Homer Simpson, Communism works . . . in theory.” “While I agree that the rule could have a positive effect on some poorly governed companies, I am concerned that the rule’s reach will not be so limited. To use a military analogy, we may be dropping a cluster bomb when a surgical strike is more appropriate. I am also very concerned about the potential competitive effects the proposal could have, especially for companies that compete in global markets.” (ISS Friday Report, Proxy Access Proposal Reveals Cracks in Governance Juggernaut by Michael P. Bruno, 10/24/03)

Continuing the military analogy, the Commander in Chief reports to a full-time Congress with a full-time staff. As Gary Moreau points out (see “Radical Voices at the Conference Board” below), “The military superior has far less power than the corporate boss.” Sure the Business Roundtable opposes the proposal; they don’t want to lose power. Ms. Glassman, democracy also works in theory, but it will be much more effective if the actual procedures for elections are democratic, as well as the label. And, not to take anything away from Michael Bruno at ISS, but where’s the “governance juggernaut.” If there is a corporate governance force out there aimed at being lord of the world, crushing all in its path, it is the Business Roundtable, not corporate governance advocates who are trying to bring the semblance of democracy to the way corporations are governed.

Lower Expectations

Americans are facing retirement with diminished expectations and an emphasis on protecting their assets, according to two recent studies.

Strong Retirement Plan Services found nearly half of adults currently employed full- or part-time expect to work after retirement, most out of financial necessity. Only one-third of respondents planned to retire early, by age 60. Those who expected to continue to work were evenly split between working in the same career or another. Of those who would switch, almost 20% wanted less stress, while 10% wanted something more in line with their real interests.

A survey by John Hancock Financial Services found that 76% described themselves as more conservative and risk averse than they were a couple of years ago, a finding that was even more pronounced among Baby Boomers nearing retirement age. (Money Management Executive, 10/22/03)

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Computershare to Acquire Georgeson

Australia’s Computershare, a global transfer agent and technology provider for the financial services industry, announced an agreement to acquire New York-based shareholder services firm Georgeson Shareholder Communications for roughly $115 million in cash. Georgeson provides shareholder communications and strategic advisory services to mutual funds and corporations around the world, including corporate proxy solicitation, in which it has an estimated 55% market share. Computershare said it plans to keep the Georgeson name in the U.S. and in its other markets. The deal is expected to close by the end of 2003.

Bits from

A Towers Perrin survey of the 300 Fortune 1000 CFOs with defined benefit plans found that 3/4 are underfunded…14% were concerned the financial condition of their pension plans might impair the company’s ability to pursue business transactions.

Almost 66,000 white collar workers joined the AFL-CIO last year. Educators, health workers and public sector employees are swelling the ranks of unions across the country.

Radical Voices at the Conference Board

Across the Board, the Conference Board’s magazine of ideas and opinions, includes two rather radical voices in its 9-10/03 edition. Gary Moreau, author of the upcoming book Thinking Outside the Boss, and William Greider, author of The Soul of Capitalism: Opening Paths to a Moral Economy, are featured.

In “What the military can teach corporate-governence reformers,” Mr. Moreau compares the board of directors with Congress and points out that being a senator or representative is a full-time job with their own staff. In describing military commanders, he notes they are constrained by specific rules of engagement. “The military superior has far less power than the corporate boss.” Promotions are determined by an independent board of fellow officers, not by the superior officer. “The differences in compensation between ranks are also much smaller in the military,” implying that much of the money paid to CEOs is wasted.

Moreau says corporate-governance reform must include “a greater delineation and compartmentalization of power within the corporation.” He recommends separation of governance and daily operations. “The governance organization should include the traditional service departments of legal, human resources and administration. In most cases, it should also include finance, accounting, customer service, and quality. Ideally, these governance functions should report directly to the board via the chairman, where that position is separate from the CEO, or the lead director, if the CEO and chairman positions are combined.” “If the military seems an unlikely place for corporate-governance leaders to turn for organizational ideas remember that business borrowed its organizational model from the military can change, certainly our armies of commerce can, too.”

Mr. Greider’s focus is, in some ways, even more far-reaching. He is concerned that average Americans have already worked longer hours and have borrowed against their homes. Eventually, they’ll go broke. It isn’t just those on the shop-floor who are alienated, but also middle-managers, chemists, engineers and even doctors. Who controls corporations? Shareholders aren’t really the ultimate-owners; “the owners of property are the people who control its use, who make the fundamental decisions about how it should be used.” “A very small group of insiders: top executives, a handful of large-block investors, maybe some financiers and creditors who plan in intimate role in the management. They have agreed to share their returns with the shareholders – absolutely – but they don’t share power with them, and that is not the proper alignment.”

According to Greider, insiders should include everyone inside the firm, suppliers and their community. We need many perspectives contributing to decision-making. That will yield better decisions. “The history of human progress is people discovering the capacity to alter the system around them, whether it’s political or economic, to realize more of their human capacities.” In the end, “a lot of companies might discover that greater employee ownership – not 60 percent, not even 50 percent, maybe 20 percent for starters – encourages greater workplace participation and cooperation” and we might find that participation leads to greater wealth enhancement for the vast majority.

All of a sudden this editor feels like a real moderate; the biggest change I’m pushing for at the moment is simply to allow shareholders to place their nominees on the corporate ballot, without all that trigger nonsense of the current SEC proposal. We don’t need a trigger to activate our right to nominate members of Congress; why should we have to wait the companies we own have been robbed before we can exercise a little corporate democracy?

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Emphasis on Corporate Governance Permanent

Public relations firm Hill & Knowlton commissioned the survey of 257 chief executives at 199 public and 54 private companies in North America, Europe and Asia by ORC International. CEOs overwhelmingly expect the emphasis on increased disclosure, independent directors, increased scrutiny of CEOs and more activist shareholders to be permanent fixtures in the business landscape. Only one in five strongly believe that new corporate governance rules enacted under Sarbanes Oxley will improve ethical behavior. Yet, half the CEOs thought the greatest threat to a company’s reputation, ignoring financial performance, was unethical behavior. (CEOs Split On Corporate Governance Rules,

Editorials in Pensions & Investements

Two important editorials appear in the 10/13/03 edition of Pensions & Investments. One is entitled “Recall this holy grail as too timid.” While the editorial praises the SEC for its historic proposal that would grant shareholder nominees access to the corporate ballot under specified conditions, the proposal “doesn’t go far enough.” “Problems include the protracted process, over two annual meetings, for the shareholders’ nominee to be placed in the corporate proxy. Among other problems is that the SEC provides only two events to trigger shareholder access. Neither makes for timely nominations for a company in an operational crisis or, worse, under investigation for fraud.” They checked with Patrick McGurn, of ISS, who noted that if the rule had been in place this past proxy season, shareholders probably would not have triggered the nomination process at any company.

A second editorial, by Barry Burr, predicts the growth of a new money management style, “active” management, involving corporate activism. “Fund sponsors will have to join the movement in some form, willingly or not, as developing events push them to activism.” Mr. Burr indicates that “only three corporate activist money market managers have a track record.” He names Relational Investors, Hermes and Lens, but cites the recent formation of H Team Capital as promising. I’m happy to report there are several more such funds, including Andrew E. Shapiro’s Lawndale Capital (where I have some of my investments). The best way to learn about these funds is to subscribe to Maureen Nevin Duffy’s excellent publication, the Corporate Governance Fund Report.

Mr. Burr points to the promise of the SEC’s recently proposed proxy rules. He’s correct that disclosure of mutual fund votes will help researchers design corporate governance investment strategies but such activist investors will have a much better chance of beating the market if they can run for board of director positions under the most recently proposed rule. Most of these corporate governance funds have financial ties to likely nominating funds, such as CalPERS. Unfortunately, the current release prohits such strategies by prohibiting nominees to have financial relationships with nominators. That provision would be a tragic mistake, if included in the final rule. The proposed rules should be amended to encourage such relationships. Shareholdres should be able to call in professionals to help turn boards around; that will put corporate governance on the right path.

Analysis of SEC’s Proposed Rule on Shareholder Nomimations Begins

During the question period of 10/15/03 teleconference sponsored by RR Donnelley and Glasser LegalWorks, David Lynn, who is Chief Counsel for the SEC’s Division of Corporate Finance, indicated the SEC may allow shareholder resolutions of the type AFSCME filed last spring (to allow shareholders to place director nominees on the corporate ballot), even though they don’t come from 1% shareholders.  He indicated they might but referred me to footnote 74 in the current release. As I read that footnote in context, the rule would only allow such resolutions from 1% shareholders. Other interpretations?

I’d like readers to join with me in commenting and supporting the notion that election of directors, as a topic, should no longer be off limits for shareholder resolutions. Even if the SEC requires a 1% shareholder or group to set off a triggering event (I don’t believe we should have to wait for triggering events at all), anyone who can introduce a resolution should be able to introduce nontriggering resolutions on elections. We could ask, for example, that companies adopt policies similar to Apria Healthcare (see, 6/24/03). By the votes, at least we could get a feel if it is worth putting together a 1% group the following year.

A second relative obscure point I hope members will join me in opposing is language in the proposal that excludes from nomination by shareholders anyone who has “accepted directly or indirectly any consulting , advisory, or other compensatory fee” from any member of the nominating group. This would exclude people like Ralph Whitworth and Andrew Shapiro who have built solid reputations for turning companies around with minority positions on boards, since it is likely that at least one fund in most nominating groups will have some sort of business relationship with such individuals. This provision should be amended so as not to preclude such nominees.

SEC Posts Ballot Access Rulemaking

The rulemaking the SEC calls Security Holder Director Nominations, File No. S7-19-03, has been posted to the SEC’s Internet site. For those who want to comment first, and perhaps influence the comments of others, the race is on. The rest of us have 60 days from the first date of publication in the Federal Register.

Comments in hardcopy should be submitted in triplicate to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Alternatively, comments may be submitted electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. S7-19-03. This number should be included in the subject line if sent via electronic mail. Electronically submitted comment letters will be posted on the Commission’s Internet website. The SEC does not edit personal information, such as names or electronic mail addresses, from electronic submissions. You should submit only information that you wish to make available publicly. We encourage all who wish to submit comments on this historic rulemaking to do so via e-mail so that your comments can be easily available to others.

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Corporate Recall

Jeff Brown, of the Philadelphia Inquirer and Kathleen Pender of the San Francisco Chronicle made comparisons between the California recall and proposed SEC election reforms and both got it right.

Brown says, “Were the SEC to take the California recall object lesson to heart, it might move more boldly to introduce democracy to America’s corporate boardrooms, where it is badly needed. Unfortunately, the SEC’s latest stab at reforming corporate governance is all but meaningless.”

He points out the SEC triggers and other hurdles “are meant to prevent election of candidates beholden to ‘special interests,’ which presumably refers to folks like environmentalists or union activists. Imagine if there were 20 candidates for each seat – any nut could be elected with a tiny plurality.” But, Brown points out that a better way to assure candidates have broad backing to win would be to use an instant runoff system (IRV), where voters rank each candidate. That’s the same mechanism that Les Greenberg and I have called on the SEC to use in amendments to our proposal. Don’t limit nomination to gigantic shareholders (who can well afford a full proxy battle) and use IRV to ensure majority support.

Pender wrote, “an actor who had never held office was elected governor of California after getting his name on the ballot by paying $3,500 and submitting 65 signatures of registered voters.” California is the world’s 5th largest economy in the world. Approximately 36 million Californians are dependent on Mr. Schwarzenegger decision-making abilities. “Yet it’s almost impossible,” writes Pender, “for shareholders of public companies to run for a seat on the board of directors.”

Although Sean Harrigan, president of CalPERS, called it a good first step, Pender writes, “That’s like saying a moldy crust of bread is a good first meal when you haven’t eaten in a month.”

“What really concerns the SEC is the heavy pressure it is receiving from corporate executives and powerful business groups that oppose true boardroom democracy,” writes Brown, the same insiders who have been “rewarding themselves extraordinary pay and perks.”

Why should the SEC be trying to balance the advice of the Business Roundtable with those of the Council of Institutional Investors, CalPERS, or small shareholders? But then why did Congress listen to the BRT, instead of the Financial Accounting Standards Bureau when it came to the question of wether or not to expense options? Shouldn’t the owners of corporations have more say in the rules governing corporate elections than the hired help? I thought the primary mission of the SEC was to protect investors.

Unfortunately, money talks and BRT members spend a lot more of it buying influence with government decision-makers than do shareholders or their fiduciaries. The recent California elections may have been a circus, but corporate elections are much more sinister and will remain essentially self-perpetuating oligarchic dictatorships, even if the proposed SEC reforms are enacted. (Corporate democracy has to happen,, 10/12/03; Recall didn’t change bad state credit, SFChronicle,10/9/03)

Early Retirement Trend Reversing?

The trend toward earlier and earlier retirement has slowed and, perhaps, even reversed. A host of explanations are possible: the elimination of mandatory retirement, the cessation of the expansion of Social Security, the reduction of retirement incentives within Social Security, and the changing nature of the private pension system. One explaination is the shift in coverage from defined benefit to defined contribution plans. According to a new brief from the Center for Retirement Research at Boston College, workers covered by 401(k) plans stay in the labor force longer than if they had traditional pension plans. The authors find that a typical worker with a 401(k) plan would be expected to retire fifteen months later than a worker with traditional pension coverage.

TIAA-CREF Faces Resolution

TIAA-CREF, the world’s largest retirement fund has long professed to be a “concerned” investor and a leader in corporate governance. Yet, TIAA-CREF does not appear to practice itself many of the same good corporate governance practices it advocates publicly, such as transparency and accountability.

For years, member-participants have requested CREF to disclose how it has advanced its claim of promoting good governance in portfolio companies. Yet, CREF has consistently kept them and the public in the dark. Their stated response to requests for more open and accountable communications has been “it’s not required.”

Read the rest of this formal statement by Curtis C. Verschoor and Stephen Viederman, as well as the full text of their important resolution. The fund faces several resolutions seeking to bring its governance practices in alignment with the corporate governance practices it advocates. See the proxy statement. More coverage

Financial Disclosure: Best Practices in Financial Accounting & Reporting for Canadian and U.S. Companies

November 13 & 14, 2003 – Calgary — November 17 & 18, 2003 – Montreal
Highly publicized accounting failures highlighted the need for accounting transparency in the minds of investors, regulators and preparers. Regulations issued by the SEC, Canadian securities regulators and the stock exchanges and ongoing legislation continue to impact the role of corporate governance in today’s business world. Attend this conferenceand find out what Canadian and U.S. companies need to be doing to meet the unprecedented demands being placed on them.

To register or for further information, call Mary at 1-888-864-5658 or register online.

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SEC Announces Historic Rulemaking on Access

The SEC released an historic rulemaking on 10/8/03 that would allow shareholders to place their own nominees for director seats in corporate proxies during the subsequent two years if one of the following two “trigger” events occurs after 1/1/2004:

  • When a demand for proxy access is made by a shareholder, or group of shareholders, owning at least 1% of voting shares outstanding for at least a year, and a subsequent favorable vote on the demand by more than 50% of the votes cast.
  • When 35% or more of votes cast on one or more director nominees were “withhold” votes.

The number of shareholder nominees a company would have to place in the corporate proxy would be limited to 1 for a board with 8 or fewer directors (<50% of existing boards); 2 for a board with 9-19 directors (>50% of existing boards); and 3 for a board with 20 or more directors (a very few existing boards).

If a trigger is tripped, the company would have to open its proxy to a shareholder nominee only if the nominating shareholder or group of shareholders has owned more than 5% of the outstanding shares for two or more years and intends to hold its stake through the next annual meeting. Nominating shareholders also would have to show through SEC 13G filings that they don’t intend to take over the company. In addition, the shareholder nominee would have to be independent from those making the nomination and from the company. Candidates can’t be employed by the nominating shareholders or affiliated with them in any way.

If more than one slate of candidates in nominated by more than one nominator or nominating group, the slate of the nominator with the largest percentage of shares would be included on the corporate proxy.

The commissioners voted 5-0 to open the proposed rules to public comment for 60 days. The proposal was crafted to avoid the election of “special-interest” directors beholden to the shareholder groups that nominated them and by requiring evidence of significant investor dissatisfaction with the company. (Listen to 10/8/03 webcast)

“This is a proud and historic day at the commission. We’re in the process of shifting the balance of power between corporate managements and shareholders. No longer will managements be able to ignore dissatisfied majorities of shareholders,” said SEC Commissioner Harvey Goldschmid.

Corporate lobbyists are resisting the SEC proposal as potentially divisive and costly. The Business Roundtable, representing CEOs at the largest corporations, says the move would bring chaos in the boardroom, give special interests undue influence over company policy and force companies that govern themselves stringently into board takeover contests. Henry McKinnell, chairman and CEO of Pfizer Inc. and Business Roundtable co-chairman, said Wednesday the SEC plan “will not enhance corporate governance. Instead, the proposals present the possibility of special-interest groups hijacking the director election process.” “”The unintended consequences of the SEC’s shareholder access amendments coupled with the SEC’s failure to perform necessary preliminary research concerning the amendments’ impact may stifle business innovation, decrease productivity and stall economic growth.” (See press release) Earlier they said such a rule “would undercut the role of the board and its nominating committee.” “Certain shareholders may nominate directors for self-serving reasons, such as personal gain or to further a political agenda …”

Investor activists want it to go even further, arguing shareholders need more clout to wrest control from managers of rubber-stamp boards. Managers of the largest U.S. pension funds, which control more than $640 billion in eight states, say the proposal as written heavily favors company management. “We are troubled that this opportunity for meaningful and lasting reform may be squandered,” officials of the funds recently told Donaldson in a letter. “Our understanding of the current proposal is that it is excessively restrictive, going well beyond deterring frivolous nominations and preventing abuse by corporate raiders.”

The Council of Institutional Investors (representing $3 trillion in investments) commended the SEC for releasing the proposal saying it is “an important step toward reforming the fundamental weakness in the current U.S. corporate governance model — the fact that investors have few, if any, meaningful and cost-effective ways to influence who actually sits on corporate boards and represents shareholders.” However, the Council expressed concern with the proposed triggers. “Not only do the triggers create at least a year delay before shareholders can place a candidate for director on management’s proxy card, but they also reflect a continued misperception that shareholders should have to overcome various barriers before they can exercise their rights to elect directors at annual meetings.” (See press release)

“The rules proposed today adopt the basic principle of giving long-term investors a say in the election of directors. However, the proposed rules also contain triggering requirements that would make it difficult for even the largest investors to use them, and impossible to do so in a timely manner,” AFL-CIO president John Sweeney said. American Federation of State, County and Municipal Employees (AFSCME) President Gerald McEntee recommended the SEC add other “triggers” to the list such as bankruptcy, a series of financial restatements or formal investigation by the SEC.

For sources and additional coverage see (SEC Proposal Weighs Giving Shareholders More Power To Nominate, Elect Directors, WSJ, 10/8/03), (SEC Rules To Ease Appointment of Shareholder Directors,, 10/8/03), (SEC Pries Open Boardroom to Shareholders, msnMoney, 10/8/03),, 10/9/03.

Editor’s Initial Comments (without the benefit of having read the text of the proposed rules):

  • The two year trigging event will often mean the corporation has done a lot of bleeding before shareholders can place their nominees on the board. According to Phil Angelides, “It’s like telling a homeowner that they can’t install a home alarm until after their home has been burgled.” Shareholders should be able to use the nomination process to point to nascent problems, not just obvious plundering. 
  • The 1% and 5% thresholds are too high. I like an example used by Les Greenberg of the Committee of Concerned Shareholders. It took ten huge funds, including CalPERS and CalSTRS, to come up with 1.6% of the shares at Unocal to raise a simple issue. Clearly it will be extremely difficult, if not impossible, for shareholders to put together and maintain investor groups for something as complex as nominating directors or even creating a triggering event. If we are going to require triggering events, something I oppose, one of them should allow shareholders with $2,000 in stock (same as for resolutions) to place a triggering proposal on the ballot. Keep in mind, it would still take a majority vote to activate the trigger. 
  • The limit on the number of nominees is too low. In close to half of all companies listed, the SEC would limit shareholder nominees to one single candidate. I’ve served on boards and believe that one member would likely be a voice in the wilderness, easily ignored. Even in the majority of firms, where two shareholder nominees would be allowed, directors could easily be largely isolated. If we’re going to limit the number of shareholder nominated directors in any given year, it should be simply a minority of the board. 
  • The prohibition against candidates employed by or affiliated with nominating shareholders is far too restrictive. Shareholders should be able to nominate activist shareholders such a Ralph Whitworth of Relational Investors or Andrew Shapiro of Lawndale Capital Management. When they spot trouble on the horizon, shareholders will want experienced turnaround experts on the board to communicate with them and to generate the pressure needed to make necessary changes. A major issue would be trust and such individuals have often gained the trust of major institutional investors and shareholder activists through their affiliations with them. For excellent coverage of such funds, see the Corporate Governance Fund Report.

In summary, while the rulemaking would set in place a groundbreaking mechanism for shareholder access to the corporate ballot for the purpose of nominating directors, it falls far short of providing shareholders with the power to hold directors accountable. There would be no real shift in the balance of power. The interests of directors would still be far more aligned with those of management than with shareholders.

In their report, “Equal Access – What is It?,” (see bottom of page 1) the Council of Institutional Investors said, “the debate over shareholder access to management proxy cards to nominate directors and raise other issues has been re-energized with a rulemaking petition filed by the Committee of Concerned Shareholders and James McRitchie.” (see also my subsequent comments 1 and 2) The current SEC rulemaking falls far short of the ideal we initially expressed.

True, the rulemaking would provide a small deterrent effect. Directors would know that two years down the line, one or two of them just might be thrown out of office if they fail to serve the long-term interests of shareholders. But “governance by embarrassment” is not enough and “just-in-time-governance” is likely to be too late. Shareholders want their directors to be proactive; this proposal throws up too many barriers.

Yes, CEOs and their organizations will object to any real shift in power. However, the primary mission of the SEC is to “protect investors,” not incumbent CEOs and directors. Will the SEC continue to try to police corporations through expensive box ticking procedures, such as many of those set up by Sarbanes-Oxley, or will it give investors the tools we need to look after our own interests? If enough shareholders take an interest in the rulemaking, we’ll get those tools and maybe the SEC will be able to reduce their enforcement budget.

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Putting Investors First

Putting Investors First: Real Solutions for Better Corporate Governance, by Scott C. Newquist and Max B. Russell offers a great guide to CEOs, directors, shareholders and their fiduciaries. From pay for performance, based primarily on options, to the accounting games and how they are played, Newquist and Russell step their readers through a lack of checks, balances and accountability, that have had serious consequences.

Central to their argument is that CEOs have “circumvented governance mechanisms by supplying the board with information that is incomplete, inaccurate, or incomprehensible.” For many shareholders, their most effective action would be to sell but to properly evaluate their options they need complete and accurate information. “The ultimate fix is up to boards of directors. They must reassert their power and accept fully their responsibilities and obligations to protect shareholders’ interests.”

Newquist and Russell see through the limited promise of box ticking guidelines, including most of those recently enacted in Sarbanes-Oxley. Enron would have all but loans to officers. They seek to move us away from “just-in-time-governance” and “governance by embarrassment” to principles, “supported by mechanisms that stress accountability, disclosure, performance measurement, and checks and balances. “Principles-based governance benefits from scrutiny, debate, and most of all, transparency.”

Among the recommended mechanisms are:

  • Requiring directors to also sign off on financial statements, with a “to the best of my knowledge” qualifier.
  • An annual meeting between independent directors and institutional investors webcast to all.
  • Disclosure of dissenting opinions on important issues and board votes as soon as practical.
  • Split CEO and chair or a strong independent director with an out “if the CEO is the only insider on the board and is totally committed to transparency and accountability.” (An out I would likely question)
  • Independent information sources and analytical capability for board members.

There are many more excellent suggestions. However, I did express one serious reservation. Read what became an exchange with Scott Newquist.


Scott McNealy, CEO of Sun Microsystems, apologized in a letter to SEC chairman William Donaldson for a speech in which he criticized actions by the commission and others as “absolutely wacko.” In the speech, McNealy also described the Sarbanes-Oxley Act as a “disaster” and compared Alan Greenspan, chairman of the Federal Reserve Board, to Chauncey Gardner, the slow-witted character in the movie “Being There,” starring Peter Sellers, who is mistaken by Washington politicians for an expert in economics and foreign policy. (Is SEC ‘wacko’? Sun chief apologizes, International Herald Tribune, 10/7/03, Tuesday, October 7, 2003

Get Ready for the Next Proxy Season

“For well over half a century, the Securities and Exchange Commission (SEC) has had a rule, now Rule 14a-8, that has provided shareholders with the right to include proposals in a company’s proxy materials. The shareholder proposal rule provides shareholders with a vehicle for expressing their views to management and other shareholders on matters that are important to them. This process is a relatively inexpensive alternative for shareholders when compared to the means available to raise shareholder concerns, such as tender offers and proxy contests.”

That’s from the introduction to Romanek and Young’s, the most comprehensive site I’ve seen on shareholder resolutions. Use it in combination with “What Is A Shareholder Resolution? Step-by-Step” and Bart Naylor’s Self-help guide to Shareholder Activism.

Pension Funds Want More Than Token Authority Over Directors

The rules to be announced by the SEC next week would set up a two-year process for selecting new board members. In the first year, a triggering event must occur, like a vote by a majority of shareholders to open an election, or a sizable percentage of shareholders withholding votes for the board’s own nominees. In the second year, large shareholders would then be able to nominate 1-3 directors, depending on the size of the board. Those nominees would need to certify that they have no conflicts of interest and, here’s the kicker, no financial relationship with or special ties to the investors who nominate them.

In a New York Times article, Phil Angelides, the state treasurer of California is quoted saying, “Under these rules, you can only run a new slate at WorldCom after the meltdown occurred. It’s like telling a homeowner that they can’t install a home alarm until after their home has been burgled.”

At a Congressional hearing earlier this week, William H. Donaldson, the chairman of the commission, said “There is a trade-off between the efficiency and effectiveness of the board, working in the best interests of the corporation, as opposed to members with separate agendas, constituency interests if you will, which can be divisive to the board.”

I like the home alarm analogy. The process should require no triggering event. Shareholders should be able to nominate up to half the board at any company. Then, future “trigger events,” defined by shareholders themselves, could lead to a change in control. As for Donaldson’s argument regarding constituent interests with separate agendas, if they can convince a majority of shareholders to vote for their candidate, then by definition the issues they raise do not simply reflect narrow interests, but rather the will of the majority. There is no conflict of interest in such cases. Let’s hope that by the time the proposal is adopted, it is simplified to be much closer to the simple language which Les Greenberg, of theCommittee of Concerned Shareholders, and I proposed in our August 1, 2002 petition to the SEC. (NYTimes, Big Pension Funds Object to Proposal on Proxy Rules, 10/3/03)

October 8th, Mark Your Calendar!

An understated announcement on October 1st indicates the SEC will hold an open meeting on Wednesday, October 8. One of the subjects will be the following:

  • The Commission will consider whether to propose amendments to certain Rules, Schedules and Forms under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 that would require companies, under certain circumstances, to include in their proxy materials security holder nominees for election as director. For further information, please contact Lillian Cummins Brown at (202) 942-2900.

Sixty-three years after the Commission originally proposed giving shareholders access to the proxy to nominate directors, it appears they are ready to try again, essentially taking up the petition Les Greenberg and I submitted in the summer of 2002. Let’s hope nothing as distracting as World War II gets in the way this time.

The Business Roundtable is certainly giving distraction and further postponement a try. Their letter of October 1st suggests “the SEC undertake additional research into the impact of various triggers and thresholds before proceeding with proposed rules concerning shareholder access.” (my emphasis) The BRT is “concerned that some of the triggering events in the Report will result in the application of shareholder access to most, if not all, companies rather than only companies where there has not been an effective proxy process.”

The SEC has indicated their rule may propose a 3% threshold for shareholders. However, the BRT said a stock ownership threshold of 25% should be required to justify “the costs and disruption” of board elections. Additionally, they point out that “proxy voting guidelines of many institutional investors and the voting recommendations of proxy advisory services are likely to be revised to support shareholder access proposals at all companies, if for no other reason than to make shareholder access available in case a company is not responsive to shareholders in the future.” Instead, the BRT wants at least a two year window, and that’s for a rule that would only allow shareholders to nominate a few, certainly less than half, of the board members.

Will the SEC listen to the BRT, an association representing the CEOs of corporations with a combined workforce of 10 million employees and $3.7 trillion in annual revenues, or will they listen to CII, an organization that represents the owners of over $2 trillion in such companies, the AFL-CIO, which represents more than 13 million working men and women, as well as the vast majority of investors who sent in comments in response to the SEC’s Solicitation of Public Views Regarding Possible Changes to the Proxy Rules? Watch for coverage in the Dow Jones newsletter Corporate Governance, (see complimentary subscription offer for readers of CorpGov.Net), ISS Friday Report and other timely publications.

Symposium on Corporate Elections

The Program on Corporate Governance at the John M. Olin Center for Law, Economics, and Business, Harvard Law School will symposium on corporate elections. The symposium, which will take place on October 3 at Harvard Law School, will focus on the proposals for shareholder nomination of directors currently under SEC consideration. The symposium will bring together SEC officials, CEOs, directors, institutional shareholders, investors, large shareholder activists, lawyers, judges, and academics to examine this important issue. A video and a transcript of all the conference sessions will be available shortly after the conference on the program’s web site:

The symposium will include many important players, including Martin Lipton, Lucian Bebchuk, Mark Roe, John Castellani, Ralph Whitworth, Jay Lorsch, Sarah Teslik, Jamie Heard, Robert Monks, Damon Silvers, John Wilcox, John Coffee, Joseph Grundfest, Harvey Goldschmid, and many others. We only wish they had included advocates for smaller shareholders and for “socially responsible” mutual funds, who are often denied participation in such discussions.

Should CEOs Allow Shareholders to Nominate Board Candidates?

Chief Executive, which bills itself as “the only magazine written strictly for CEOs and their peers,” includes an article entitled “Shareholder Democracy” in its October issue. “As the leading source of intelligence for and about CEOs,” Chief Executive “provides ideas, strategies and tactics for top executive leaders seeking to build more effective organizations.”

Should CEOs take democracy seriously? Readers of Chief Executive are likely to conclude they should. Author Gregory J. Millman states, “When staunch members of the financial establishment start speaking the same language as labor unions and reform groups, it suggests that CEOs face a Hobson’s choice: share power voluntarily or see it taken away.”

The article begins with “traitor to his class,” Robert A.G. Monks, “pinching himself, almost afraid to believe that the cause he’s championed for so long is now gaining steam.” Millman then describes MCI, where former SEC Chairman Richard Breeden as court monitor published 78 recommendations, including that “CEOs consider…allowing shareholders to nominate board candidates.” That seems to this editor to be a telling quote. If the SEC goes forward with its rulemaking, will it be because CEOs allowed it?

Near the end of the article Bob Monks predicts that CEOs will do all they can to defend the status quo. “One would think that the first place opponents would turn would be the White House,” he says, adding that, based on recent history, they would likely find a sympathetic ear. He also believes the Business Roundtable might bring a suit, claiming the SEC has exceeded its authority.

Normally, I love a story that gives me the last word, but in this case it simply reflects realism and the relatively minor impact the groundbreaking SEC rule is likely to have initially. “As shareholder advocate Jim McRitchie, editor of, notes, that (the rule) would effectively require shareholders to form broad, unwieldy coalitions just to muster a nominating quorum, because even the largest institutional investor rarely owns 3 percent. He and others also believe that allowing shareholders to nominate candidates only after such a ‘triggering event’ would mean closing the barn door after the horse had already run away.”

If we’re lucky, adoption of an SEC rule will trigger enough additional future reforms to make boards responsible to shareholders, instead of CEOs. CEOs shouldn’t be in a position of allowing or prohibiting shareholder access to the ballot; that’s a decision that should be left to shareholders themselves.

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Continue Reading ·

September 2003

Investment in Asia and Emerging Markets Up

Global investors have begun to move back into Asian markets, with $14 billion (US) dollars pumped into China, Hong Kong, Taiwan and Singapore in the first 8 months of 2003, compared with less than $10 billion raised during all of 2002. Cross-border capital flows into developing countries plunged from almost $300 billion in 1997 to just $110 billion in 2002. Now, mutual funds, insurance companies, and other big institutional investors from Europe and the U.S. are channeling fresh money into emerging-market equities and bonds. The Institute of International Finance, the Washington (D.C.)-based association of leading international commercial and investment banks, now predicts that capital flows will rise to around $160 billion this year.

Do the Opposite

A September 26, 2003 editorial from the St. Petersburg Times tells of taking contrary investing to an absurd conclusion. The state of Florida’s $92-billion employee pension fund is investing in Edison Schools Inc., the private education management company whose stock plummeted from $36.75 a share in 2001 to 15 cents last year. What were they thinking? The editorial asks, “Was there no Enron stock left to buy?”

The Edison buyout not only carries considerable risk but it puts members of the fund (half of whom are teachers) in a very uncomfortable position.

House Democratic Leader Doug Wiles said, “This transaction will risk the hard-earned savings of Florida’s public employees on a private company that has lost millions of dollars, is deeply in debt, has been subject to SEC scrutiny, and is being sued by its shareholders for misleading accounting and disclosure practices. . . Our public employees have dedicated their lives to public service and I’m certain that the majority would not approve of a significant investment in a business that seeks to eliminate their own jobs.”

Amen. (Investing in irony, 9/26/03)

Shareholders More Active Around the World

The Economist Intelligence Unit (EIU) reports that 74% of 310 senior asset managers polled around the world said shareholders were becoming more active in influencing how companies they own are operated. Once rubberstamp boards have become more assertive. Top management is also now spending more time on corporate governance issues than it did a year ago. Asset management companies have also beefed up their corporate governance teams, launching funds to specifically press companies on governance issues. The report noted that the appearance of greed by executives was very damaging to company reputations and that shareholders were likely to demand pay that properly reflected performance. (More Investors Worldwide Becoming Governance Activists,, 9/25/03)

Public Funds Get Serious

CalPERS, CalSTRS, AFSCME, the New York State Comptroller and the Connecticut State Treasurer’s Office took a full page ad in the Wall Street Journal, urging the SEC to give American investors greater access to corporate election ballots, calling it “the next critical step of corporate reform.”

“When boards control their own membership, directors can be unaccountable and inattentive — opening the door to abusive executive compensation, fraud and other misconduct,” the ad says. “If properly drafted, the SEC’s new rules will give shareholders the ability to use proxy materials to elect truly responsive directors, leveling the playing field with board-nominated candidates.”

The ad points to a Harris Poll of 1,030 adult investors funded by AFSCME showing that 84% want access to the company proxy to nominate and elect directors.

According to the ad, the rules should “protect against frivolous challenges by requiring significant shareholder involvement, protect against corporate raiders by limiting involvement to long-time shareholders, protect against hostile takeovers by limiting the number of investor-nominated candidates to less than a majority, and protect against unresponsive boards by giving investors timely access to the ballot.”

Speaking of board members who failed to fulfill their responsibilities, Connecticut State Treasurer Denise Nappier says, “shareholders need a process that allows them to replace those board members and install qualified replacements.” New York State Comptroller Alan G. Hevesi, sole trustee of the $106 billion New York State Common Retirement Fund said, “The ability of major investors to select board nominees has to be established in a clear and direct way without damaging barriers and impediments.” AFSCME President Gerald W. McEntee says, “Now is the time to get corporate elections out of the back room and onto the proxy ballots where they belong.”

Contacts: CalPERS, Brad Pacheco, 916-326-3991. CalSTRS, Sherry Reser, 916-229-3258. AFSCME, Cheryl Kelly, 202-429-1145. New York State Comptroller, 518-474-4015. Connecticut State Treasurer’s Office, Bernard Kavaler, 860-702-3277.

Investors Deserve a True Voice in Board Elections

American Federation of State, County and Municipal Employees (AFSCME), AFL-CIO, released two polls providing new insight into corporate board elections on the eve of an SEC rule making to enhance proxy access for director nominations. The key findings of the Harris Interactive survey of more than 1,000 individual investors, show:

  • Eighty percent think there should be a process to allow shareholders to nominate candidates for boards of directors;
  • Ninety percent agree that corporate misconduct has weakened investor confidence in the stock market;
  • More than half of the shareholders agree that corporate management is not in the best position to decide who should be nominated to the board of directors.

A large majority of these investors also believe shareholders should have access to corporate proxy materials to nominate board member candidates rather than leaving the decision solely in the hands of corporate management. Currently, any shareholders who want to challenge an incumbent board member has to pay hundreds of thousands, even millions, of dollars to run their own candidates.

AFSCME says new rules being considered by the SEC should adhere to the following principles:

  • Access to the proxy should be granted when an investor group with substantial ownership in the company seeks to nominate a director.
  • Investors should be long-term shareholders with the long-term interests of the company in mind, not short-term market manipulators.
  • This right should be available to elect less than a majority of investors-the new rules should not assist hostile takeovers but rather should be a tool to reform corporate boards to make them more accountable to shareholders.
  • Investors must be able to use these rules in a timely manner so that they will impact corporate conduct in the shortest period of time possible.

Later the same day, Sean Harrigan, president of the Board of Administration of CalPERS, testified before the Senate Committee on Banking, Housing and Urban Affairs. Harrigan suggested strengthening, auditor independence, financial reporting, federal securities laws, and the resources of the SEC, including: enforcing an outright ban on audit firms performing non-audit services; developing internal controls over financial reporting; giving the SEC a greater degree of independence from the federal budget process; and studying whether the SEC should have additional authority to ban individuals from serving as an officer or director at public companies convicted of misconduct.

Harrigan told the committee that the single most important reform that everyone should support is the ability of shareholders to have access to the proxy to nominate directors.

“At the heart of many problems that face investors is a lack of accountability of board members to the owners of the corporation,” Harrigan said. “The root causes of problems like abusive executive compensation, lack of oversight that helps permit fraud and plain old poor performance is the lack of accountability of board members to their owners. A reasonable and balanced approach to providing investors with greater access to management’s proxy statement will directly address this problem.”

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Davis Signs Governance Reforms

Governor Gray Davis signed legislation to increase corporate accountability and rebuild public trust by cracking down on corporate fraud and establishing a whistle-blower protections.

  • AB 1031 (Correa) aligns state law with the federal Sarbanes-Oxley Act of 2002 by increasing criminal penalties for securities fraud to $25 million, making it illegal to destroy documents during a securities fraud investigation, and strengthening the Department of Corporations’ authority over stockbrokers and investment advisers.
  • SB 523 (Escutia) requires major corporations and publicly traded companies to quickly report important false or misleading statements made by corporate officers to shareholders and authorities or face $1 million fines.
  • SB 777 (Escutia) protects whistle-blowing workers alerting authorities about illegal practices from retaliation, establishing a $10,000 fine for each violation. (Davis signs reform package,SacBee, 9/23/03)

“Crown Jewel” of Corporate Reform

In an Op-Ed piece available through Institutional Investors’ CalPERSWatch, Sean Harrigan says access to the proxy is the “crown jewel of fundamental reform in America.” CalPERS objects to the trigger event requirement the SEC has indicated they may include in their proposed rules to allow shareholders to nominated directors. However, if the SEC feels compelled to include a trigger event, Harrigan appears to recommend the following:

  • Companies with a proven record of anti-shareowner behavior, such as not implementing shareowner proposals which pass by a majority vote.
  • Companies that either make any material restatements, are subject to any SEC enforcement action or are subject to a meaningful withhold vote for any incumbent director.
  • Chronically underperforming companies.

Reed to Help Sort Out NYSE

John S. Reed, former chairman and co-chief executive officer of Citigroup, will take over leadership at the NYSE and will they try to sort out how the exchange will be governed. He’ll be paid $1. “At the New York Stock Exchange, we are talking about a board with a combined chairman and C.E.O., with a conflicted board that was mainly handpicked by the chairman and we are talking about excessive secrecy,” said Stephen Davis, president of Davis Global Advisors. “For all the hue and cry about poor governance at the exchange, these kinds of sleepy boards are commonplace all across the nation.”

While the conflicts at most companies are largely between the interests of management and those of shareholders, at the NYSE it is between the commercial interests of its members and the investing community at large. The exchange proclaims that its “ultimate constituency” is the investing public but investors are given no role in selecting directors. Actually, that doesn’t sound all that different from most corporations. There is at least some hope that may change. (In String of Corporate Troubles, Critics Focus on Boards’ FailingsNYTimes, 9/21/030

The Corporate Governance Alliance Digest

We’ve added The Corporate Governance Alliance Digest to our list of “Stakeholders.” The Digest is published by Eleanor Bloxham, pioneer of economic value management & author of Economic Value Management,and John M. Nash, founder and President Emeritus of the National Association of Corporate Directors. Following are a couple of tidbits from the latest edition:

The Digest surveyed its readers, “What % of Boards do you think are effective and what are your criteria for effectiveness?” Readers said 10% of public companies; 30% of private companies; and 60% of non-profit boards are effective.

Criteria for effectiveness included: Separate CEO and Chair and only 1 executive on the Board. Objective director selection process. Up-to-date and expanded charters for the Board and its Committees. Formal Board/Committee/Individual evaluation process conducted annually. Standing Governance and Strategic Review Committees. Formal CEO evaluation process by the full Board. Committees staffed entirely by independent directors, with a very strict definition of independence, i.e., beyond regulatory requirements. Regular retention of outside advisors. Adequate D&O insurance. Budget for director education, development, and skill set upgrading. Diversity of experience and expertise of the directors, combined with the quality of their boardroom interactions such as openness and direct but respectful challenging of management.

Here’s another item from the Digest which reported on a survey by the Institute of Internal Auditors, which attempted to determine what, if anything, companies were doing related to training of the board of directors. Based on 125 responses (over 80% from US based companies) to the question “Do your Directors receive periodic training related to their performance as a member of the Board?” 22% said yes, it is required by the board, 24% said yes, it is something they do on their own, and 53% said no, they did not receive periodic training.

Ohio Pension Reforms

Ohio legislators are working on a bill that would subject the state’s $107 billion public employee pension funds to more ethical, legal, and financial scrutiny. Possible provisions include:

  • authorizing the Ohio Retirement Study Council – a legislative oversight committee – to hire a criminal investigator to examine spending at the five funds
  • require the filing of financial disclosure statements with the Ohio Ethics Commission for all pension board members and certain staff members
  • require regular performance audits of each retirement system
  • ethics and travel policies for all five public employee funds
  • provisions to remove pension board members who misspend money
  • give retirees more representation through a change in the composition of several fund boards.

The move came after questions were raised earlier in the year about the spending practices at the State Teachers Retirement System (STRS).  Among the alleged excessive expenses were:

  • a $94.2-million office building adorned with $869,000 in artwork
  • generous fringe benefits for STRS employees
  • frequent out-of-state travel for pension board members
  • $14 million in employee bonuses. (Ohio Lawmakers Drafting Pension Reform Bill,, 9/18/03)

Ohio Pension Chair Steps Down

The chairman of the Ohio Police and Fire Pension board resigned yesterday after the state’s largest police organization called on him and two other trustees to step down over travel expenses. Dayton firefighter David Harker resigned because he had difficulty dealing with the pressure generated by news stories about the travel expenses, according to the Cleveland Plain Dealer. The Dayton Daily News reports that, trustees spent about $612,000 on travel and expenses at seminars and meetings in places including Las Vegas, Lake Tahoe, Palm Springs and Key West since 1998 on travel and expenses at seminars and meetings in various places. Cleveland police Detective Robert Beck, who was also criticized for the expenses, will take over as the fund’s new chairman.

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More Pressure on Grasso

Four of America’s largest public pension funds — two in California, one in New York and one in North Carolina, with combined assets of $401 billion — asked Grasso to step down. They asserted his $139.5 million deferred-pay package is too much, particularly amid efforts by U.S. companies to shore up their governance standards as the nation’s stock markets recover from an unprecedented period of corporate fraud.

“This pay package is out of line and it’s part of a sickness of culture in this country where too many at the very top have forgotten what’s right and fair in the American economy and what average workers make in this country,” argued California state treasurer Phil Angelides, who along with the heads of the California Public Employees’ Retirement System (or CalPERS) and the head of the California State Teachers’ Retirement System expressed their dismay to Mr. Grasso in a letter Tuesday. They asserted that it would take an average American 5,200 years working a 40-hour workweek to receive the money Mr. Grasso has received.

The NYSE is supposed to represent the interests of investors. In their letter to Mr. Grasso, the California pension funds and Mr. Angelides said: “The pay package sends the wrong signal at this critical time when public and private sector leaders must be steadfast in their commitment to restoring the credibility of our financial markets.” They added: “It is particularly troubling that the most substantial amounts paid under the agreement were for a time period when the NYSE fell short of its central regulatory mission, as Americans endured the greatest wave of corporate scandals since the market manipulations of the 1920s.”

In addition to his retirement package, Mr. Grasso received a $30.5 million pay package in 2001, nearly equal to the Big Board’s net income that year. Mr. Grasso’s 2001 pay included a one-time $5 million bonus for the leadership role he played in re-opening the exchange after the Sept. 11 terror attacks. Now, his decision to accept that money is under attack. Mr. Angelides said he wasn’t aware of one firefighter or one police officer or even the mayor of New York “or anyone else having gotten a $5 million bonus for doing the right thing by America.” (Large Investors Issue Call
For Grasso to Leave NYSE, 9/17/02, WSJ

Epilogue: Grasso resigned as chairman and chief executive of the NYSE on 9/17/03 after the board voted 13 to 7 during a conference call to ask him to resign in order to restore investor confidence in the world’s largest stock market.

Five years ago Grasso was a member of the board of Computer Associates International and witnessed investor fury when the company tried to pay its senior executives more than $1 billion in stock. You’d think he might have learned from that experience. Grasso fought for more than two weeks to preserve his job and a lump-sum payment of nearly $140 million, even agreeing to forgo an additional $48 million he was “entitled to receive” over the next four years.

Oh the sacrifices some people are willing to make; but it was too little, to late. By handpicking members of his own the compensation committee that set his pay, Grasso set a poor example for companies the NYSE “regulates.” Grasso’s resignation marks an end to an embarrassing episode for the exchange but I hope it doesn’t end the controversy over how the exchange should be run. Conflicts of interest at the NYSE should be minimized. Critics have argued the SEC should divide the NYSE into two institutions, one to manage the exchange and one to regulate it, following the model of the Nasdaq and NASD. Will that be part of the plan the NYSE submits this fall? I’d like to see something more creative, with actual investor advocates sitting on the board. Let’s get rid of NYSE’s constitutional provision that requires that securities industry representatives take up 12 of the 27 seats on the board.

Role Reversal in Warning at CalPERS

If you want CalPERS investments, don’t take our members’ jobs. That’s the message from CalPERS as the board considers restricting investments in companies that take over government services, putting at risk the jobs of its 1.4 million members. Charles Valdes, a trustee with the $145 billion pension fund who has often blasted “socially responsible investing” is quoted in the Sacramento Bee saying “We shouldn’t have any part of that.”

On the other hand, State Treasurer Phil Angelides, who touts triple bottom line investment strategies cautioned his CalPERS colleagues about hamstringing the fund. “This policy could be fraught with peril. It’s very important … that we retain access to the top-tier investors in this country,” Angelides said. “We have to be very careful about how we fight this. There may be instances where jobs can be best provided by the private sector.”

If they move forward they will be following the lead of similar restrictions at New York City and Ohio based funds. This would be a tough policy for boar members to oppose because it is an issue so crucial to CalPERS members. Outside money managers oversee more than 300 private equity funds with about $21 billion in investments or commitments from CalPERS.

“Privatization efforts by companies seeking profit from public services represents a significant threat to CalPERS participants,” says Dennak Murphy, a director with the Service Employees International Union (SEIU) which represents 225,000 public and almost 500,000 workers in total in California.

An SEIU report to CalPERS says the pension fund has invested $880 million in seven limited partnerships that have stakes in companies specializing in privatization. One of those companies provides services for six California prisons. An additional $2.1 billion is invested in 21 funds that have a record of investing in these businesses.

“It’s happening all over the place,” Murphy said Monday. He said companies like New York-based Edison Schools Inc., which operates charter schools in California, were originally funded with private equity investments. Edison Schools, a publicly traded company, plans to become a private venture this fall.

“I could not be more opposed to contracting out (government services),” said state Controller Steve Westly, a CalPERS board member. “This is a red herring issue — people who promise to save millions of dollars. It comes on the backs of people who have their health care taken away.” (Pension Trustees May Get Tough, Gilbert Chan, Sacramento Bee, 9/16/03) (see also editorial, CalPERS oversteps, Sacramento Bee, 9/17/03)

The move comes at the same time that the board of directors of the California State Employees Association (CSEA) has scheduled a vote on disaffiliation from SEIU. The current president of CSEA is expected to be ousted in November; getting the board to disaffiliate from SEIU may be his last major act of desperation to stay in power. Valdes, who has historically been on the side of the old-line leadership at CSEA, may be trying to reposition himself, fearing that without SEIU support he will not be reelected in 2005.

There are good reasons for limiting CalPERS investments in companies that take jobs away from public employees. The CalPERS board will have to balance its duties to the public and to its members. When they do, they’ll find a way to serve both.

Ralph Ward Predicts Professional Directors

“Director education programs are booming, but I predict that this is just the beginning of a movement toward professionalizing the job of director,” says board guru Ralph Ward and author of Saving the Corporate Board. “Within a few years, investors, courts and regulators will be looking closely at how many hours of training your board members have accumulated. Getting serious on sending your board back to school now will keep you ahead of the curve.”

The September edition of Ralph Ward’s Boardroom INSIDER offers advice on establishing a chief governance officer, how to get the most our of boar training, outsourcing the boards busy work, getting regular updates on ethics issues, and how technology is changing the information going to corporate directors

DJSI Adjusts

Dow Jones Sustainability Indexes (DJSI) added more than 50 new constituents in its yearly adjustment, including Toyota (ticker: TM), which jumped into the leader position for the automobile sector, and Hewlett-Packard (HPQ). More than 40 companies, including DaimlerChrysler (DCX) and Bank of America (BAC), were deleted. The DJSI World Index covers the top 10 percent of largest 2,500 companies in the Dow Jones World Index.

Toyota earned the leading position on the DJSI World Index in the automobile industry due to strong eco-efficiency performance, a proactive greenhouse gas (GHG) mitigation strategy, and high corporate average fuel economy. The Japanese car manufacturer also exhibited best practice in managing lower-carbon technologies, such as hybrid and fuel-cell technology, and maintains a strong life-cycle management of its products. DaimlerChrysler was dropped because of poorer fuel economy, the lack of a systematic CO2 strategy, and comparatively lower improvement in the eco-efficiency of operations.

Over this past year, the DJSI World increased by 23.1% while the DJ World Index went up by 22.7% and the MSCI World rose by 21.2%. (, William Baue, 9/12/03)

Redefining Directorship

“For the first time, governance is as much about compliance as it is about board and corporate performance. Now is the time for action, yet there are still more questions than answers as directors begin to implement boardroom reforms.” Answer these questions and more at the NACD 2003 Annual Corporate Governance Conference, which bills itself as the premier gathering of both public and private company board members for more than two decades. Agenda.

IRRC Teams with Glass, Lewis & Co

Investor Responsibility Research Center and San Francisco’s Glass, Lewis & Co. are billing their new proxy voting service as a conflict-free option, in contrast to that offered by Institutional Shareholder Services.Dow Jones Newswires, September 4, 2003. The introduction of competing services in the marketplace may benefit institutional investors by giving them access to a diversity of opinion. Ms. Soulé, of Glass & Lewis, thinks that many institutional investors, particularly the larger ones, will buy both sets of recommendations before deciding on how to vote their proxies. The Voting Agency Service can decouple the recommendations from the voting mechanism, allowing clients to vote against Glass Lewis’ recommendation while still retaining IRRC’s voting services.

Sixth Director Training and Certification Program on October 8-10, UCLA

More than a dozen world-class subject matter experts will cover every aspect of being a successful corporate director. This two-day intensive director-level educational event is designed for executives, directors, and officers of private and public companies. For more information, seeDIRECTORS.ORG.

Five Indian Cos Rank High

Five Indian companies rank high in a recent Corporate Governance Poll published in the latest issue of Asiamoney magazine.

  • Bharat Petroleum
  • Reliance Industries
  • Hindustan Petroleum
  • Castrol
  • Hindalco

Nonpublic CFOs see value in adopting new accounting standards

Should privately held companies apply corporate governance standards that are mandated for publicly traded companies to their own businesses? Many financial executives from nonpublic companies say yes. In a new survey commissioned by Robert Half International, 1,356 CFOs from privately held companies to address the issue of governance. Thirty-eight percent of CFOs said private firms would benefit from implementing the same practices as are required of public companies under the Sarbanes-Oxley Act of 2002; 38 percent of respondents were undecided. (White Paper Examines Corporate Governance Trends Impacting Private Businesses,, 9/12/03)

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NYSE Overhaul Needed

A former chairman of the New York Stock Exchange, James Needham, joined criticsin calling for a clean sweep of the boardroom as the best way of quelling the growing storm over the $139.5 million Grasso received in accrued benefits and savings. Needham was chairman from 1972 to 1976. Needham likened the appearance of the board’s handling of Grasso’s pay to the problems at Enron, where directors’ conflicts of interest and a lack of awareness of company operations became evident when that company collapsed in scandal in 2001.

In a July report, the Council of Institutional Investors outlined a number of troubling connections among NYSE management and board members, and found few rules to prevent conflicts.

“The more research we did, the more connections we found,” Austin Brentley, manager of corporate governance affairs at the Council said.

Whether the chairman influenced decisions over his compensation – and Grasso has insisted he didn’t – the arrangement smells rotten, said Nell Minow, editor of The Corporate Library.

“If you asked me what’s the best guarantee we’ll have some kind of pay abuse, I’d say first you let the CEO pick all of his directors, and then you make it so they don’t have to disclose his pay,” Minow said. “It’s a recipe for disaster.” Minow said the most urgent reform needed at the NYSE was a complete overhaul of how board members are selected for their two-year terms, to ensure that the process employs the same level of disclosure required for public companies, possibly with SEC oversight. (The Star Online, 9/16/03)

Floor traders were putting together a petition calling for Grasso’s ouster. We’re looking for the final NYSE report on corporate governance reform in early October” as part of a broad review, said an SEC spokesman.

Access Denied?

In “Access denied!” Hoffer Kaback (Directors & Boards) argues that once having elected a board, how can shareholders then seek to challenge a board’s “considered decision” of nominating a slate through a company proxy that is, itself, in large part the formal product and document of those same board members in their capacity as representatives of those shareholders. Kaback sees this as an “analytical pretzel,” where “self-referential, circular, and renvoi problems “ are “troubling.”

I don’t think you’ll find many Americans who agree that voters shouldn’t be able to challenge the considered decisions of their elected officials. Grousing about politicians, threatening impeachment and even recall are time honored traditions. Why should it be any different for boards of directors?

The more fundamental flaw in Kaback’s argument is that board members were never elected by shareholders in the first place, so they aren’t really challenging their elected representatives. Instead, they are challenging board members who are likely to have been either chosen or blessed by the CEO, a former CEO, or an “independent” committee whose members may or may not be the CEO or former CEO’s college roommates, dentists or other close friends. In any case, shareholders will have had as little input into determining the actual directors as voter in North Korea have over selecting their “elected” officials.

In a prior article, “The Albanian Candidate” (Winter, 2001), Kaback lamented the dearth of information about candidates and the lack of opportunities for shareholders to question and evaluate them. Now he’s having doubts about the SEC’s possible move to allow “common shareholders” to make nominations and have those nominees included on the company proxy, “notwithstanding that such candidates would be running against the director-nominees endorsed by the company (acting through its nominating committee and full board).” Yet, how better to end the “Albanian” syndrome? If board nominated candidates face actual contests, we can be sure there will be a wealth of information on all candidates and plenty of services available to help shareholders evaluate them.

Additionally, I don’t think Mr. Kaback need worry about “common shareholders” placing nominees on company proxies. According to anISS Friday Report (9/12), SEC Commissioner Roel Campos told theCouncil of Institutional Investors that the SEC proposal slated for release in October will be open to shareholders holding at least 3 percent, and maybe 5 percent. They’ll be able to nominate up to two or three director candidates, but not more 20 percent of a company’s board after a trigger event, such as a 20% withhold vote against a director or a board refusing to act upon a majority vote on a shareholder proposal.

Mr. Kaback notes that if the SEC acts to “recreate the proxy world,” “corporate elections as we know them will forever be transformed.” Yes, they’ll include an ounce of democracy.

Average is Best?

According to a recent study of 1,600 firms by GovernanceMetrics International Inc., companies with the worst corporate governance ratings returned 5.4% for the 12 months ended Aug. 12, compared with 11% for all stocks rated. The Dow Jones Industrial Average gained 9.7% in the 12 months ended Aug. 12. Over three years, the worst corporations lost an average of 13% a year compared with a loss of 1.8% for all companies. The Dow Jones industrials lost an average of 3.7% annually during that period. Highly rated firms beat those currently rated near the bottom over five and 10 years as well.

“But good governance doesn’t automatically make you rich,” according to the report in the Wall Street Journal. “While bad governance makes for bad returns, buying companies with top-notch governance won’t necessarily mean higher returns. While the companies that get top governance scores did best during the past three years, corporations with average ratings won the five- and 10-year contests.” (Weak Boardrooms And Weak Stocks Go Hand in Hand, WSJ, 9/9/03)

That seeming anomaly is easily explained. Many companies with the best corporate governance are the recent beneficiaries of intervention by activist shareholders like Ralph Whitworth, Burt Denton, and Andrew Shapiro who have been, in Maureen Nevin Duffy’s terms, “pushing back.” They’ve taken poorly performing companies and turned them around by instituting corporate governance reforms. Ms. Duffy’sCorporate Governance Fund Report is the only publication systematically following these crusaders.

Duffy provides coverage of the recent Council of Institutional Investors meeting. She reports that Ralph Whitworth said everyone knows “you have to dance with the one that brought you to the dance.” When push comes to shove corporate board members are more likely to vote with the one who put them on the board. Shareholders “have to get a ticket to the dance.” Open access to the corporate ballot would provide that ticket. Whitworth contends that none of the now notorious companies like Tyco and Enron would’ve set off a trigger event under upcoming SEC rules. “The issue is to be proactive not reactive. If board members felt truly vulnerable under challenge,” most companies would respond.

Other factors being equal, over the long run, companies with excellent corporate governance will provide excellent returns. That’s what I’m betting on.

National Coalition of Corporate Reform

In a keynote speech at the fall meeting of the Council of Institutional Investors, New York State Comptroller Alan Hevesi, who oversees $90 billion in pension funds, called for investors to form an activist group that will police poorly behaving companies.

The group would pursue its efforts through lobbying, litigation, proxy voting, and intervention in the regulatory process. Hevesi’s proposal to form the NCCR has been endorsed by a number of officials including California Treasurer Philip Angelides, Pennsylvania Treasurer Barbara Hafer, AFSCME International President Gerald McEntee, North Carolina Treasurer Richard Moore, AFL-CIO President John Sweeney, and California Controller Steve Westly. There are also expressions of support from New York State Attorney General Eliot Spitzer, CALPERS Board President Sean Harrigan and New York City Comptroller William C. Thompson, Jr. An organizing meeting for the group is planned for early October.

“The goal of the coalition is to reform corporate governance and restore confidence in the financial markets. NCCR will unite institutional and individual investors, labor leaders, corporate CEOs, elected officials and community leaders in support of a program of corporate governance reforms, regulation and legislation,” Hevesi said. (press release, 9/3/03)

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CREF Faces Shareholder Resolution on Divestment of Gold Mining Companies

On August 11, the College Retirement Equities Fund (pension fund for college/university faculty and staff), which offers the largest singly managed stock account in the word, notified the Securities and Exchange Commission that it was withdrawing its No-action request and would include an amended shareholder proposal requesting a vote at its November 2003 Annual Meeting on divestment of gold mining companies from CREF stock accounts.

CREF had notifed the SEC that it intended to omit the original resolution which also called for a divestment vote on gold mining companies. CREF objected to the focus of the supporting statement on Freeport McMoran Copper and Gold’s environmental and social concerns regarding its gold mining activities in West Papua, Indonesia. In fact, it its letter to the Securities and Exchange Commision, CREF claimed, “The Company is not aware of any debate, media attention, or legislative or regulatory initiatives regarding gold mining.”

In order to rebut CREF’s claim, the amended shareholder proposal contains a new supporting statement documenting environmental and social concerns with a host of other gold mining companies in CREF’s portfolio including Newmont Mining, Placer Dome, Rio Tinto and NewCrest Mining.

In addition, in 2003 CREF shareholders will again have an opportunity to vote on separation of the CEO and Chairman of the Board positions. The separation resolution received over 23% of the CREF vote in 2002. However, the content of the supporting statement that appeared in the 2002 proxy has been challenged by CREF. An amended resolution has also been submitted to CREF and the SEC, but the SEC staff has yet to make a decision.


For both ethical and financial reasons, participants request CREF: 1) To announce that CREF will make no additional gold mining-related investments, and 2) To begin an orderly divestment of all gold mining investments.

Participant’s Supporting Statement

Central banks and international financial institutions hold more than 34,000 tons of gold. This is more than 13 times the annual production of the world’s mines; if sold, these reserves could satisfy gold demand for more than 8 years (current demand is approximately 4,000 tons per year). Of this demand, 85% is typically used for jewelry.

Gold mining companies cause environmental and social impacts.

  • Newmont Mining: The Indonesia government is sending a team to take tailing samples from gold mining firm Newmont in North Sulawesi following a report that cyanide levels in the tailings exceeded the government limit. (Jakarta Post, Moch N. Kurniawan, June 21, 2003). Newmont has admitted spilling mercury at its mining operations in Peru in 2000. “Newmont CEO Parries Environmental Attacks At Shareholder Meeting”, Tom Locke, Dow Jones Newswires, May, 7, 2003)
  • Placer Dome: Indigenous Dayak Meratus of Indonesia, submitted a statement at the Placer Dome Annual Shareholder meeting April 30, 2003, stating that Placer Dome’s proposed gold mine on their lands threaten their environment and their very existence as indigenous peoples. The Dayak Meratus live in the last remaining native forest in Kalimantan, Indonesia, which has enjoyed protected status since 1928. Placer Dome proposes to build a gold mine in the Meratus Mountain Range Protected Forest, violating Forestry Law 41. The Dayaks have already made unequivocal statements opposing this mine. (“Three Communities Protest at Placer Dome AGM,” Report
    from Miningwatch, Canada, April 30, 2003.)
  • Rio Tinto: Rio Tinto operates over 60 mines and processing plants in 40 countries. Rio Tinto owns 90% of the Kelian gold mine in Kalimantan, Borneo, Indonesia. Prior to Rio Tinto’s arrival to Kalimantan, small-scale gold mining was performed by the local population. Around 1989, paramilitary police forced the local miners out of the mines. In 1990, Rio Tinto acquired more land, evicting more people who had to live in shanties. A total of 440 families were displaced from their homes. Some compensation was paid, but it was not adequate to cover losses. (Asia-Pacific Human Rights Network, Corporate Watch, Human Rights Features, July 16, 2001.)
  • NewCrest Mining: The conflict between forest protection laws and mining leases issued in protected areas has created a political storm in Indonesia. Indonesian Ministers and officials fear international legal action if mining is excluded from protected areas. Media reports have linked Indonesian government fears of costly international arbitration to Australian owned projects such as Newcrest’s PT. (“Protected areas international arbitration threat to Indonesia”, Koran Tempo, 3 April 2002 [translation].)

It is unclear how much environmental liability, cleanup responsibility, and remediation costs may exist, and no existing audit contains information on any environmental liability.

Should CREF financially co-sponsor the manufacture and promotion of such
mining activities? If not, vote for orderly divestment.

Submitted by Ann E. Marchand, 7043 22nd Ave. N.W., Seattle, WA 98117

SEC Comment Deadline Draws Near

September 15, 2003 is the deadline for public comments on SEC rulemaking release 34-48301: Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors. One of the more interesting comment letters was submitted by Mr. David A. Smith. His generously footnoted comments reference source materials and specific regulations in support of points influenced by his ongoing attempts to influence State Street Corporation (NYSE: STT). His efforts and those of others are documented atShareholders Online, a site operated by Patrick Jorstad. I asked Mr. Smith to summarize his thought provoking recommendations for readers of CorpGov.Net. He graciously provided us with the following points:

  1. Require directors to disclose their home addresses in filings with the SEC. Directors of publicly traded corporations should be required to disclose their home addresses in the inside ownership filings they routinely file with the SEC. Directors often substitute the corporate address in these filings for their home addresses, making shareholder communication (and service of process, should a shareholder lawsuit become necessary) more difficult. Implementation of this change would be simple and cost nothing.

  2. Repeal Rule 14a-8(i)(8). Currently, shareholders are barred from using Rule 14a-8 (“Shareholder Proposals”) to propose director nominees. Rule 14a-8(i)(8) permits a corporation to exclude from its proxy materials any shareholder proposal that pertains to “an election for membership on the company’s board of directors.” This means that insurgents must engage in an expensive proxy fight, while incumbents receive a free ride on the corporation’s proxy materials (at shareholder expense). This creates an “artificial, SEC-sanctioned monopoly on the nominating process that is more befitting of Communism than of representative democracy.”

  3. Create a tough, uniform definition of director “independence,” such as that offered by the Council of Institutional Investors, applicable to all directors of all publicly traded companies, without regard to their listing status on a particular stock exchange. When directors with self-dealing transactions and other conflicts of interest populate the nominating committee, shareholders are unlikely to have faith in the nominating process. Just because a committee is populated with “non-employee directors” does not mean they’re “independent.”

  4. Require companies to disclose the names and addresses of rejected nominees and their sponsors. The SEC’s proposed rules would only require a company to disclose the names of a rejected nominee’s sponsors. Requiring a company to disclose the names and addresses of the sponsors and of the rejected nominee would facilitate direct shareholder communication with the insurgents, and would empower shareholders to learn more about the facts and circumstances surrounding the rejected nominee’s candidacy. The SEC currently requires companies to disclose the names and addresses of the sponsors of shareholder proposals under Rule 14a-8, so such disclosure isn’t unprecedented.

  5. Mandate disclosure of the fees paid to third party nominee evaluators. Failure to disclose the fees paid to third-party nominee consultants could lead to at least two kinds of abuses. First, companies might pay exorbitant fees (for reasons largely unrelated to genuinely evaluating the nominees). Second, companies might also pay token fees, to provide a false patina of respectability for their choice of nominees. Mandating disclosure of the fees paid would cut down on the opportunity for mischief.

  6. Base the 3% ownership threshold in the new rules on the number of shares actually voted at the last shareholders’ meeting, not the total shares outstanding. The proposed rules would require a company to disclose that it has rejected a nomination from shareholders owning, in the aggregate, 3% of its outstanding shares. However, the total number of shares outstanding is usually substantially less than the total number of shares that a company reports as actually voted at its last shareholders’ meeting. Basing the 3% ownership threshold on the number of shares reported as actually voted at the last shareholders’ meeting will give corporations added incentive to ensure that proxy materials are received by all shareholders, that proxies are voted, and that all votes are properly “accounted for.” This would also make it easier for smaller shareholder groups to meet the 3% threshold.

  7. Require corporations to disclose all changes to their nominating processes or to their governing documents on Form 8-K. Shareholders have a right to know when such procedures or governing documents (e.g., articles of organization, by-laws, etc.) are changed. Mandating that such changes be disclosed on Form 8-K (“Current Report”) would ensure that shareholders learn of them in a timely fashion.

  8. End the SEC’s Special Treatment of the Corporate Bar, such as the provisions of 17 CFR §229.404(b)(4) and §205.7 which provide a special exemption to attorneys with regard to reporting business relationships. Corporate attorneys, who may represent companies before the Commission, should be under the same requirements as anyone else.

Mutual Fund Fraud

Eliot Spitzer, the New York attorney general, found major mutual fund companies engaging in fraudulent after-market trading practices with privileged institutional investors. Canary Capital Partners, has agreed to settle with Mr. Spitzer’s office, returning $30 million in profits and paying a $10 million penalty. While Bank of America’s mutual fund family, Nations Funds, is named most prominently in Spitzer’s complaint, prosecutors also mentioned the names of other major fund companies that had provided similar trading benefits to institutional clients, including Janus, Security Trust Company and the mutual fund division at Bank One.

Academic research has estimated that mutual fund shareholders lose billions of dollars annually due to the trading abuses that are the subject of Attorney General Spitzer’s ongoing investigation. (see Spitzer’s press release, 9/3/03; NYTimes, Mutual Funds Allowed Fraudulent Trading, Spitzer Says, 9/3/03)

Only a few years ago Matthew P. Fink, President of the Investment Company Institute boasted that “over 80 million individual shareholders own mutual funds, nearly one in two households. Our industry opened the capital markets to all investors, and we have done so without scandal, without government bailouts, without betraying the trust and confidence of our shareholders.” (2000 Mutual Funds and Investment Management Conference: Keynote Address) As recently as June 2003 Paul Roye, director of the SEC Division of Investment Management, credited the lack of scandal in the investment company industry to the fact that many funds have compliance officers and effective compliance procedures already in place. Yet, his division found no compliance controls in place as all at some investment company complexes. (Roye Outlines Investment Management Division’s Agenda)

Let’s see if they get religion.

Handy’s Democratic Vision

The Fall 2003 edition of “Strategy + Business,” carries an informative article on one of the gods of modern business literature, Charles Handy. A good summary of Handy’s influence is found in a quote from Warren Bennis, “If Peter Drucker is responsible for legitimizing the field of management and Tom Peters for popularizing it, then Charles Handy should be known as the person who gave it a philosophical elegance and eloquence that was missing from the field.”

Lawrence M. Fisher begins with a stroll in one of England’s small villages where Charles Handy and his wife Elizabeth make their home. He explains that one of Handy’s early insights was that organizations aren’t inanimate objects but vibrant microcosms of human societies. Those who seek to manage companies need to understand the motivations of individuals and how collective behavior determines organizational behavior.

In his second book, Gods of Management, Handy saw us moving from corporate cultures built around the founder (Zeus) and bureaucracy (Apollo) to collaborative teams (Athena) and independent specialists (Dionysus).

Fisher goes on to portray an intellectual journey to the point that now Handy has come to believe that “a company ought to be a community, a community that you belong to, like a village.” “Nobody owns a village. You are a member and you have rights. Shareholders will become financiers, and they will get rewarded according to the risk they assume, but they’re not to be called owners. And workers won’t be workers, they’ll be citizens and they will have rights. And those rights will include a share in the profits they have created.”

And just what would such a company look like? Building on Handy’s work, Brook Manville and Josiah Ober begin to give us the outline in A Company of Citizens: What the World’s First democracy Teaches Leaders About Creating Great Organizations (2003). The authors provide readers with a wealth of information concerning the rise of Athenian democracy and the importance of harnessing the knowledge of people who have an innate desire to have a part in controlling their own destiny.

From citizens paying dramatists with public funds to expose the foibles of institutions and leaders to intricate systems designed to ensure artificial social networks stimulate the exchange of ideas, Manville and Ober present many interesting details. There is much here worth borrowing, from team-based rotating leadership to transparency of information to ensure group decisions had a solid foundation.

They appear to accept Handy’s suggestion, from The Hungry Spirit(1998), that companies should issue two classes of shares – voting shares for members of the company and some major stakeholders – nonvoting shares for more casual or short-term investors. People need to take center stage in terms of rewards and honors at most companies where human knowledge is the prime creator wealth. Handy sees the rights of citizenship being extended in some limited way to part-timers, freelancers, as well as suppliers and investors.

Elsewhere I have written of the need to reassess the role of antitakeover defenses, suggesting that instead of using poison pills, firm specific human capital could be better protected through bylaw amendments that require employee approval of changes in ownership. (see “ATDs Issues Not Simple” in August 2003 News)

Where are we likely to see such democratic companies arise? Based on Handy’s writings, as extended by Manville and Ober, we’ll find them where

  • Companies have a clear sense of their own mission and goals — where the company of citizens believes the goals can best be achieved through collective action.
  • The nature of the work and the performance challenges demand large-scale cooperation and collaboration. Traditional hierarchies may work well enough for routine activities but as work relies increasingly on knowledge, democracy is a better fit.
  • The need for fresh ideas and management approaches require regular changes in leadership.

Perhaps two of the most important factors are relatively high employee ownership and unionization. One indicates commitment to the firm, the other is a crucible of democracy in the workplace.

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August 2003

Asian Business Dialogue on Corporate Governance 2003

The Asian Corporate Governance Association will hold its Third Annual Conference–the “Asian Business Dialogue on Corporate Governance 2003”–on Thursday, October 16, 2003 at the Ritz Carlton in Hong Kong. For a list of featured speakers and registraiton information, see the ACGA site.

WorldCom Reforms

WorldCom court settlement of fraud complaint brings major reforms, including:

  • Separation of CEO and Chair functions, with CEO only insider
  • Term limit of 10 years for board members, one of whom must retire every year
  • Voice for large shareholders in nominating directors
  • Increased pay for directors but requirement for them to spend 25% purchasing shared on open market
  • Outside auditor to be rotated every 10 years
  • Internet site to facilitate communication with board and voting on resolutions

See 8/26 NYTimes, WorldCom Report Recommends Sweeping Changes for its Board.

Corporate Reforms: A Look from the Inside

Maureen Nevin Duffy, founder, editor and publisher of the Corporate Governance Fund Report, will moderate a presentation by Bill George sponsored by the NYSSA’s Corporate Governance and Socially Responsible Investing Committees on September 25th, at The Harvard Club, 27 West 44th Street, NYC. The recent shareholder revolution has led to the downfall of many companies. Bill George, former Medtronic chair and CEO, and the author of the widely acclaimed new book,Authentic Leadership, will analyze the root causes of corporate ethical dilemmas and the required reforms in corporate governance. Bill George serves on the boards of Goldman Sachs, Target, and Novartis, and is Professor of Leadership and Governance at IMD in Switzerland. He will be Executive-in-Residence at the Yale School of Management this fall.Registration and information.

Davis Recall to Impact CalPERS?

The August issue of CalPERS Watch included an article speculating on the impact of a recall of governor Gray Davis. Marty Morgenstern, director of the Department of Personnel Administration, would probably be ternminated under a new administration. Also vulnerable is Sidney L. Abrams, appointed to the board in September 2001 by Governor Gray Davis to serve as the insurance industry representative. His term expires in January 2005. Willie Brown, Jr. was appointed by Governor Gray Davis in January 2003 to serve a second term as the elected official of a Local government. His term runs through January 15, 2007.  Since Brown’s term as Mayor ends in January, there’s been speculation concerning when his term will end.

Perry Kenny, head of the California State Employees Association, which opposes the recall is quoted saying, “What is the advantage of having so many political nominees if there is a chance that they lose perspective of what their main responsibilities are, which is to the members.” Referring to the recall, Kenny said, “This might help our cause.” Many expect Kenny himself to be voted out of office later this year. J.J. Jelincic, a money manager with CalPERS, is expected to be voted the next president of CSEA. (Kenny is thought to have lost considerable ground since the 2000 election, see the Union Spark)

Elsewhere CalPERS Watch reports that CalPERS is still looking to invest $600 million with third-party corporate governance money managers by the first half of 2004. Staff is drafting a policy to guide international real estate investment and Jones Day, CalPERS’s outside fiduciary counsel has decided to drop CalPERS as a client.

Shareholder Resolutions Top 1,000

Shareholders of U.S. companies proposed a record number of proxy resolutions this year in response to corporate scandals, according to data from Institutional Shareholder Services.

More than 1,000 initiatives were filed at about 800 companies, surpassing last year’s 830 proposals, according to ISS. A record 139 shareholder proposals received majority votes, up from 106 in 2002. Organized labor filed more than 40 percent of the shareholder initiatives, according to ISS data.

At 25 companies shareholder proposals have passed between two and five years in a row and not been adopted. These would likely be prime targets where shareholders can be expected to nominate directors under the upcoming open ballot provisions expected soon from the SEC. According to activist John Chevedden, FirstEnergy (FE), identified as a likely origin of the worst blackout in North American history, repeatedly ignores shareholder votes for improved corporate governance. Mr. Chevedden informs us that FirstEnergy ignored 4 majority shareholder votes since 1999.

The most popular subject this year was removing “poison pills” or prevent their adoption without shareholder approval (53 resolutions). (See Star Tribune)

Who do you believe? Apparently, Investor Responsibility Research Center (IRRC) data says shareholder proposals were 775 this year, compared with 529 in 2002. IRRC says executive pay emerged as the primary issue; 41% dealt with that topic, while 23% dealt with poison pills. (Investment Management Weekly, 8/18/03)

Certainly, executive pay will be a big issue next year, especially with CalPERS adopting a policy in June for evaluating executive stock option plans for the 1000 largest companies it invests in. One of the key requirements was a limitation that no more than 5% of stock options go to the top five executives, and that executives have to wait at least four years to cash options in. The fund will vote against repricing of options and will oppose compensation plans that go against their policy.

UC Berkeley Corporate Governance Conference, September 14-16

The University of California at Berkeley’s Haas School of Business will present a conference on corporate governance at Sonoma Mission Inn north of San Francisco. This is the latest in their Berkeley Program in Finance semiannual series for institutional investment managers, fund sponsors and financial advisors. Mark Latham, of the Corporate Monitoring Project will co-chair the conference with Haas School Professor Terrance Odean. The excellent line-up of speakers includesCharles ElsonFlorencio Lopez-de-SilanesPatrick McGurnKenneth BertschBernard Black and Andrew Shapiro. Cost: $2,950.

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Editor Recommends SEC Put Proposed Disclosure Rules on Hold

I recommend that the SEC delay further action on its S7-14-03 rulemaking until the Commission has adopted rules allowing shareholders to place their board nominees on corporate proxy cards. That rulemaking is far more important than the rule currently under consideration.

In response to the Commission’s “Solicitation of Public Views Regarding Possible Changes to the Proxy Rules,” a few managers and those representing them, argued that time is needed to see the impact of recently enacted laws, regulations and listing standards. If the Commission adopts the rules described in File S7-14-03, I am concerned those arguments will again be used in an attempt to delay much more substantive changes.

While the rules proposed in S7-14-03 are positive, they would not result in any fundamental shift in power. With a little creative spin from attorneys and investor relations specialists, many firms could easily comply, while conducting business as usual.

For example, the proposal attempts to prompt healthy debate by requiring a nominating committee to explain the specific reasons for not including a candidate recommended by shareholders with 3% of a company’s voting stock.

First, that threshold is so high that even the largest shareholders, such as CalPERS, won’t be able to meet it unless they form groups with other large institutional investors. They aren’t likely to be motivated to undertake such action unless a company has already experienced precipitous losses. Restoration of value will be difficult, at best, and the proposal cuts out any likely prospective contribution from smaller shareholders.

Second, and more important, the proposed rule is more likely to result in the production of sanitized junk. Does anyone really expect to see a disclosure that says: “we chose Jones’ old college roommate because they’re a better fit with the current board, or we picked former Senator X because he can help us lobby for tax breaks?”

Do members of the Commission believe incumbent directors will look at the requirement to explain their actions and conclude, in good faith, their challengers will be better stewards of the company? I sincerely doubt such rules will result in any director stepping down. I think it is also highly unlikely that directors will drop a nonincumbent nominee they have selected, in favor of one recommended by shareholders.

The disclosures set forth in the rulemaking for nominating committees might be informative, if the rule were amended to require committees to disclose meeting transcripts. Of course, if the rule were expanded to include such a requirement, most meetings would become carefully choreographed plays, with any real debate held elsewhere.

If shareholders can easily place their own nominees on the corporate proxy card, there will be no need for elaborately regulated nomination and communication schemes. If directors face real contests, nominating committees will be forced by competition to explain why their candidates are superior and directors will rush to communicate with shareholders in order to ensure reelection.

For my views the important topic of opening access to the ballot, see: and

Homestore Settlement Includes Governance Reforms

Homestore agreed to pay $13 million in cash and 20 million shares of common stock, resulting in a second-quarter charge of $63.6 million, to settle a class-action lawsuit led by CalSTRS. Homestore agreed to adopt, within 30 days of final approval of the settlement, corporate governance provisions including requirements for independent directors and special committees, a non-classified board of directors with two-year terms, appointment of a new shareholder-nominated director, prohibition on the future use of stock options for director compensation and minimum stock retention by officers after exercise of future stock option grants.

CalSTRS, the nation’s third-largest pension fund with 715,000 members, suffered a $9 million loss because of an accounting scheme at Homestore that used bogus transactions to inflate revenues by more than $90 million in 2001. That prompted three former executives to plead guilty to federal fraud charges last year. (see CalSTRS press release, 8/13/03) Shareholders shouldn’t have to sue in order to get truly independent directors on corporate boards. Homestore provides yet another example of why an open ballot is needed.

Excess Payments to CalPERS Board Members

I had a chance to discuss Westly v Board of Administration with Judge Robie this week. He indicated that even though reimbursements paid to CalPERS Board members since September 2000 exceeded the limits of Government Code sections 20091 ($100 per meeting) and 19820(a) (travel limits), they do not constitute “illegal” payments, since there was some room for interpretation until the California Supreme Court upheld his decision. I owe CalPERS Board members and apology for questioning the legality of those payments.

That said, I still believe the Board should pass a motion suggesting that members voluntarily pay back the excess per meeting payments. Doing so would eliminate any question about the Board’s motives. Such questions are not unreasonable, given prior advice from outside counsel, general counsel, and due to the previous court decision in the case of Kathleen Connell for Controller v CalPERS. Each presaged the court’s final decision.

Senior Researcher Wanted at Center for Corporate Citizenship

One of my alma maters, Boston College, is seeking a researcher with four or more years experience in one or more of the following: corporate social responsibility/community relations; community and economic development; business/public administration; public/social policy, who can assist with securing resources for projects from external organizations , as well as design and manage research, analysis and study design of research projects.

Candidates should have strong communication skills including written (particularly in producing research reports) and in presentationfindings, and we are particularly interest in candidates with experience in multicultural and international contexts. Contact Cheryl Schaffer, Associate Director. at 617.552.0723. Center for Corporate Citizenship at Boston College

Donaldson Criticized

On August 7th the Wall Street Journal ran an op-ed, “Citizen Donaldson,” by a misinformed professor, Henry G. Manne, arguing against the SEC’s move to allow shareholders to place their nominees on the corporate ballot.

Manne asserts the SEC is planning to open such nominations to “small shareholders” that hold as little as 3% of a company’s shares. CalPERS, the country’s largest pension fund, is hardly a “small shareholder.” Yet, they hold far less than 3% of the stock in the vast majority of their portfolio firms. Contrary to Manne’s assertion, the SEC proposal would only be practicable for the largest investors – even then, most will have to form coalitions in order to utilize the soon to be proposed mechanism.

Manne argues, “Getting rid of bad corporate managers is nothing like the cumbersome and expensive political device of a political election either. It starts (and ends) with the assembling of a controlling number of voting shares, or, when there are large institutional holdings, often with just a quiet suggestion for change. The system works because unhappy shareholders sell or threaten to sell their shares and thus eventually make the change of control a profitable exercise. The essence of individual shareholder participation is ‘exit,’ not ‘voice.’”

However, in many cases there is no need for a wholesale buyout in order to change control or refocus efforts. Replacing a few board members often results in a smoother, less costly transition. Manne’s assertion that shareholders can exit “for the cost of a stock broker’s sales commission” is often far from reality since pension funds and other institutional investors hold an increasing amount of stocks using indexing strategies. There often is no reasonable possibility of exit and frequently there is no desire. Additionally, target companies are sometimes the focus of value investors who want to unlock potential. The market won’t recognize that value because it is held back by directors who lack creativity or are too close to management to do their job.

Manne says “the shareholder proposal rule has mainly been the playground of activists seeking publicity but generally uninterested in the hard job of serious corporate management.” I think here, he has a point. But the reason shareholder proposals seem like play is because they are only advisory. Without the proper tools, without the ability to hold management accountable through cost efficient mechanisms, shareholders are powerless to take a real role in corporate governance.

Manne believes “it is revealing that no corporations have ever opted into such a scheme on their own, even though they would be free to do so under the laws of many states.” Here again, Manne is out of touch. Has he not heard of Apria Healthcare? However, the fact that those in control do not want to risk the possibility of losing power is not surprising. Very few individuals voluntarily yield power.

Corporate democracy has not only been “a joke among sophisticated finance economists,” as Mr. Manne contends, it has been a cruel hoax on investors. While the corporation laws of every state provide that shareholders elect the board, those elections are a sham. Both management and directors are unaccountable.

The SEC can improve their proposal, not by weakening or scrapping their proposal as Manne advocates, but by strengthening it. Lower the ownership threshold even further and get rid of the requirement for a triggering event that in many cases will occur only after a company is already in trouble. It was an innovative idea, but a bad one. With a 3% threshold and a required triggering event, shareholders will probably only be able to use the director nomination provision at a dozen companies a year and those firms will already be bleeding. Who will safeguard the other 9,000? Shareholders involvement in the nomination process can provide an ounce of prevention.

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Excess Payments to CalPERS Board

I received a series of questions from a CalPERS fiduciary concerning my call for board members to return all per diem and travel expenses which exceeded legal limits per Westly v Board of Administration (2003) 105 Cal.App.4th 1095, 130 Cal.Rptr.2d 149.

Basically, although this individual recognized that CalPERS must stop excess payments once the courts made their final determination, they questioned requiring board members to return what they have already been paid.

The following is an abbreviated list of their questions and concerns:

Would Kurato Shimada (and others) have to give back $300 for each day he participated in Board meetings? I know it’s the principle, but Shimada attended Board meetings under what could certainly be interpreted as a contract that paid him $400/day. Shimada accepted that contract, and put in the time…

What about the release time allowed for state employees on the Board? How could that be recovered? These members’ agencies received upwards of 60% of the members’ total compensation to replace them for the time away from their jobs for CalPERS responsibilities…. These members put in the time for CalPERS and did not put in that time for their agency. They didn’t receive any additional compensation.

My Response: The court did not make new law in handing down its decision; it simply affirmed the existing law. In its lawsuit against AOL Time Warner, CalPERS is not simply asking the company to cease its illegal activities, CalPERS is rightfully seeking disgorgement of insider-trading proceeds; restitution of defrauded monies; damages sustained as a result of wrongdoing, etc. Similarly, allowing board members to keep payments, which the courts have determined are excessive would be wrong. Yes, they should pay the excess amounts back, regardless of the “contract” they made with themselves.

With regard to the release time: I’m not asking CalPERS to recover those monies now. But if someone takes CalPERS to court, they very well might. They would also seek reasonable costs and expenses, including fees for legal counsel, which might be as much as the money actually recovered. However, you are right “it’s the principle.” Board members should not personally benefit/profit from activities of questionalble legality. That principle is much more important than the relatively small amount of money involved. If CalPERS fiduciaries disagree with that principle, members and beneficiaries are in trouble.

At least in the case of release time the “benefit” accrued to public agencies, not to individuals. Those public agencies had no say in creating the policy that resulted in higher reimbursements to them. They granted additional release time in good faith and had no reason to believe the board policy wasn’t proper. On the other hand, the payments were in excess of legally allowable amounts and should be recovered in order to make system participants and their beneficiaries whole.

The case against board members who directly received increased compensation is clear. They made the decision to raise their own reimbursement from the legally set $100 per diem to $400 and they also raised their own travel reimbursement to amounts above legal limits.

I certainly do not know all the history behind the issue but I can sketch a few facts relevant to me that preceded the lawsuit.

Soon after Proposition 162 passed, the board asked a series of questions of outside counsel, Joe Wyatt Jr., concerning their legal authority. As I recall, Wyatt expressed his expert opinion that the board was not exempt from civil service laws, the Administrative Procedure Act (APA) and other statutes. California Constitution article 16, section 17 provides some latitude to the board where a statute conflicts with the board’s ability to fulfill its fiduciary duties. According to BPAC agenda item 4, page 4 (May 18, 1999) “Counsel has also advised that the Board will have the burden of proving necessity, should the action be challenged in court.”

In BPAC agenda item 5A (April 14, 1998) staff (Kayla Gillan, General Counsel) presented four alternatives with regard to raising board compensation. She recommended that the Committee “focus on possiblelegislative alternatives.” (her emphasis)

As you may or may not know, after substantial adverse press, testimony before the board and legislature by myself and others concerning the acceptance by board members of campaign contributions and gifts, the board enacted several “policies” (resolutions BD-98-01, BD-98-02 and BD-98-03) on 2/19/98 requiring disclosure of solicitations, gifts and banned certain campaign contributions. On 2/21/98 I petitioned CalPERS pursuant to Government Code section 11340.6, requesting promulgation of the policies as regulations pursuant to the APA. CalPERS declined to do so. I then sought a determination regarding the legality of the regulations from the Office of Administrative Law (OAL) on 5/1/98.

I had primarily two concerns. First, CalPERS should not violate the APA, which requires public notice, opportunity for comment and other protections when adopting regulations. Additionally, I was concerned the board would simply repeal the policies after press coverage of excesses ended. That would be much more difficult if they had to follow the APA to repeal the regulations.

Separately, the political committee “Kathleen Connell for Controller” challenged the validity of two of the resolutions resulting in a judgment by Sacramento Superior Court on 9/28/98, which found both resolutions invalid, since they “constitute regulations which were promulgated without compliance with the Administrative Procedure Act.” In Determination No. 18, dated 8/11/99, OAL found all three policies invalid for the same reasons. The board had claimed the California Constitution exempts it from the APA, arguing that Constitutional provisions giving the board “plenary authority and fiduciary responsibility for investment of moneys and administration of the system…” exempt it from oversight or control by any other executive branch agency or statute. That argument was thoroughly rejected by the Superior Court.

When the board acted to raise their own salaries and travel reimbursement rates they did so knowing full well that they were very likely to be exceeding their authority based on the opinion of outside counsel, OAL’s determination and the prior court decision.

I also find the board’s logic for violating the Government Code limitations on their own reimbursements hypocritical. Board members advocating the pay increase claimed they would be violating their fiduciary duty spelled out in the Constitution because if they didn’t the board wouldn’t be able to attract competent candidates. However, at the same time they were attempting to enact regulations governing those elections which a Sacramento Bee editorial said “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (CalPERS muzzles critics: Ballot rules protect board, keep others in the dark, May 25, 1999) You don’t attract more competent candidates by prohibiting them from discussing why they are running in the ballot statement.

Regardless of the board’s motivation, now that the courts have determined that the payments exceed what the law allows, board members should voluntarily turn the excessive amounts back to the system.

SEC Reform Must Allow More Than Token Nominations by Shareholders

The corporate director who asks tough questions soon faces “social distancing,” according to a new study by University of Texas management professors. “Subtle social interactions can have a major impact on the success of board reforms at large companies,” said James Westphal, one of the authors.

“Social Distancing as a Control Mechanism in the Corporate Elite” by Westphal and Poonam Khanna, confirms what critics have long argued — country-club cronyism bogs down efforts to rein in CEO power and advance shareholder rights. The doubters of a CEO’s become “deviant group members” of the board and ostracized for going against group normative. Their will be shunned and their contact with fellow directors will wane.

“The results also show that directors who experience this are less likely subsequently to participate in board reforms,” Westphal added. “Unless boards are actually required to do changes, you should be relatively pessimistic about the chances for voluntary board reform, unless there is significant turnover in board membership,” he said.

The professors examined director participation in four “elite-threatening” actions that shareholder activists and institutional investors have been advocating for years: separating the chairman and CEO positions, creation of an independent nominating committee, firing the CEO, and the repeal of a “poison pill” takeover defense.

The study of Fortune 500 directors found that directors who participated in one of the four actions were invited to nearly 50 percent fewer informal meetings and their input was solicited on 53 percent fewer occasions in formal board meetings. (Reformist directors get the big chill, study finds,Forbes, 8/3/03) The “SEC Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors” called on shareholders to be able to nominate a small number of directors to be placed on the corporate proxy. Let’s hope there are enough of them so they can be both independent and supported by their fellow directors, instead of being as outcast as the research has found. Allowing shareholders to nominate almost half the directors in any given year would make all the difference.

Dr Julie Gorte, Director of Social Research, Calvert Group, points out, “The logic of board independence is very similar to that of the Supreme Court majority in the University of Michigan case. The court noted that true diversity in student populations had to include sufficient numbers of minority students to enable them to act as individuals. The same goes for board independence. One or two “true” independent members of the board may be ostracized or subjected to various forms of ingratiation or persuasion until they no longer exercise independent judgment in corporate governance. But a true critical mass of truly independent directors will make this far more difficult–which is why the new proposed listing guidelines AND the SEC proposed rule on allowing shareholders meaningful access to companies’ ballots for directors are so important.”

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ATDs Issues Not Simple

In “Corporate Officers Shouldn’t Get ‘Tenure,'” (WSJ, 7/25/03), Neil A. O’Hara argues that although a team production model of the corporation may be “gaining traction among both academics and corporate people,” according to Lynn A. Stout, one of its leading proponents, shareholders have rejected it. “Shareholders who risk their capital by investing in a company expect the best possible return. If they don’t get it, they shift their money elsewhere. That is how markets allocate capital to the most efficient users.”

But the theoretical basis of O’Hara’s assertions is a dated view of the principal-agent approach articulated by Michael Jensen and William Mekling in 1976. O’Hara’s article summarizes it as follows:

In theory, the board of directors acts as an agent elected by the principals (shareholders) to oversee the corporation in their best interests. The board appoints senior management as sub-agent to run the company’s day-to-day operations. A contract between agent and principal normally requires that both parties agree to any change in the terms and the principal reserves the right to terminate the agent. Current corporate governance in the U.S. undermines this arrangement. The charter and bylaws of a corporation determine how it is governed, yet the board can alter bylaws without shareholders’ consent. Boards adopt bylaws shareholders cannot amend except by supermajority vote. The agents change the relationship and effectively prevent the principals from reversing the change by setting an impossibly high threshold.

O’Hara concludes, “the threat of takeover protects shareholders’ interests by penalizing bloated management. Employees and executives work hard because failure invites the unwanted attention of more efficient users of capital, both financial and human. A corporation protected from this threat becomes bureaucratic and inefficient. That may explain why “corporate people who know how companies really work” might support a model that offers them protection equivalent to academic tenure. The ‘team production’ concept looks like discredited European state capitalism in drag.”

I wrote to Professor Stout and asked for her reaction to the O’Hara article. Here response is as follows:

Mr. O’Hara suggests that protecting target firms from hostile bidders is not in shareholders’ interests. Not in shareholders’ immediate interests, perhaps– who wouldn’t want to sell at a premium? But this may be short-term thinking. The main point of my op-ed was that if PeopleSoft’s founders and top managers had not thought they had some protection against takeovers, it is not clear that there is any formal contract that could have induced them to build this company from scratch the way they did. Or at least, no formal contract that wouldn’t have cost so much that early investors would never have agreed to it. Instead of focusing on making PeopleSoft a thriving firm, PeopleSoft’s employees would have focused instead on burnishing their resumes, in the expectation that at any moment they might be booted out the door.

This is not to say that antitakeover provisions don’t contribute to downstream “agency costs”– they do. But those costs may be the price investors must pay to encourage the kind of entrepreneurial effort that created Peoplesoft in the first place. If you want evidence, just look to the numerous empirical studies that demonstrate that companies nowadays put in antitakeover provisions at the IPO stage–as PeopleSoft did. This suggests that investors don’t think antitakover protections are a bad thing when companies are first created, and investors need to spur employees to work 24/7. If they did, investors would be free to punish corporate promoters who use them by discounting the price they are willing to pay for shares, or even reusing to buy at all.

Finally, Mr. O’Hara suggests that antitakover protections are somehow responsible for the 1990’s excesses in executive pay. Informed observers think the cause lies elsewhere– in the attempt to use options as a means of “bonding” executives’ interests to shareholders, and as an alternative to trusting boards of directors. As we know now, this strategy–intended to further shareholders’ interests–instead exploded in their collective faces, as options compensation turned out to be little more than an expensive lottery ticket that induced many firms (e.g. Enron) to take on far more risk than was good for the shareholders’ health. Once again, crude shareholder primacy thinking ended up working against shareholders themselves.

Yes, the knee jerk reaction of many shareholders to antitakeover defences (ATDs) is negative and I have probably been guilty of too frequently classifying all ATDs as management entrenchment devices. I have frequently cited the Gompers, Ishii, Metrick article and others to support removing ATDs. At CorpGov.Net we’ve set forth many views, which align with shareholder primacy, such as our petition to the SEC to allow shareholders to place their director nominees on the company proxy. Additionally, I’ve long been of the opinion that most “stakeholder” laws, which allow corporate boards to consider the impact of takeovers on employees and the community are subjective, simply providing management with additional rational to remain entrenched, rather than truly empowering workers.

However, I’ve long been fascinated with Margaret Blair’s arguments concerning the growing importance of human capital, relative to financial capital and to Marjorie Kelly’s argument that shareholder primacy is built around a myth of the divine right of capital. For me, the answer has long involved greater democracy both at the top and bottom of corporate governance. At the bottom, we need much more extensive worker ownership and participation in decision-making. At the top, we need the right of shareholders (including employee owners) to include their director nominees on the corporate ballot.

Contrary to Mr. O’Hara, many shareholders, especially pension funds are searching for a way account for “team production” by trying to obtain double or triple bottom line returns. Since 1988 the Pension Welfare Benefits Administration, which oversees ERISA, has made it clear that collateral benefits may be considered if the investment is otherwise “equal or superior to alternative investments available to the plan.”

ATDs probably do have a place, especially in young firms composed mostly of knowledge workers, such as Peoplesoft. Since firm specific human capital can lock workers into a particular enterprise, perhaps in addition to seeking a shareholder vote on buy-outs, employees should also be required to approve such changes in ownership. Additionally, we need to continue to push for broad changes such as legislation to require worker representation on all pension funds, not just those of Taft-Hartley plans, as well as in the administration and governance of 401(k) plans. Long-term shareholders and those concerned with good public policy can’t dismiss Stout’s concerns but should develop corporate governance mechanisms to ensure employees have every incentive to be productive. If you do, we’ll all be winners.

For more information see the Team Production site.

Donaldson Says Proxy Access “Long Overdue”

ISS Friday Report (8/1/03) includes an article quoting Donaldson saying shareholder access is “long overdue.” At a speech before the National Press Club, SEC Chairman William Donaldson voiced support for a pair of upcoming rule proposals that would revise the agency’s proxy rules if given final approval by the commission.

Donaldson announced that on Wednesday, the SEC will consider the first rule proposal, which would enhance disclosure around nominating committees and shareholder communications. The second proposal, granting shareholder access to the proxy in limited circumstances will be taken up in September. During a question-and-answer session he said, “I believe it’s long overdue.” Objections from trade groups such as the Business Roundtable were addressed by the SEC staff, going through a review process, which would keep a “Johnny One-Note” or “someone with an axe to grind” from being elected to a board, he said.

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July 2003

SRI Tilted Indexes Gain 1%

A simulation by Innovest for a major US pension fund found that a slight “tilt” toward certain SRI criteria resulted in gains averaging 1% for five of six portfolios, with the one fund only underperforming by 0.04%.

The Innovest results directly contradicted the findings of a recently publicized study from the Wharton School at the University of Pennsylvania. That study concluded that including socially responsible investment factors could cost active investors as much 3.6% per annum in lost performance.

Bijan Foroodian, Innovest’s Director of Quantitative Analysis says “The Wharton study appears to be fundamentally flawed” since it compares the performance of broadly – based SRI funds with a group of 28 mainstream equity funds, of which fully 17 are real estate funds. “Given the enormous differentials in the risk/return characteristics of these two different types of investments, this comparison is, at best, disingenuous.”

Additionally, Innovest points to the Wharton study’s primary focus on social funds practicing exclusionary, negative screening as falling short of more advanced techniques used in the construction of social conscience criteria. Instead, SRI portfolios designed to maximize performance should be stressing positive screens and must discriminate among the various social performance metrics; clearly they do not all have equal financial impact.

Going forward, there is every reason to believe that this “SRI premium” will become even larger in future. The Innovest simulation identifies six powerful global “mega-trends” which can be expected to further increase the importance of SRI factors:

  1. Changing demographics for both consumers and investors, substantially increasing the saliency and financial stakes of companies’ environmental and social performance.
  2. Tightening national, regional, and global regulatory requirements for stronger performance and disclosure on SRI issues.
  3. Growing pressures from the international non-governmental organizations (NGO’s), armed with unprecedented resources, credibility, and global communication platforms.
  4. A substantial broadening of the purview of what is considered to be the legitimate fiduciary responsibility of investors to include addressing companies’ social and environmental performance. (In the U.K. and a number of other European countries, this enlarged view of fiduciary responsibility has been enshrined in law).
  5. The globalization and intensification of industrial competition, particularly into emerging markets, exponentially increasing the level of environmental and social risk for major corporations and investors.
  6. A growing inclination – and capability – among major institutional investors for shareholder activism on environmental and social issues.

See executive summary of the report “New Alpha Source for Asset Managers: Environmentally-Enhanced Investment Portfolios” or contactPeter Wilkes.

Morgan Stanley to Shareholders: It Depends on Your Definition of Win

Among Morgan Stanley’s problems is an investigation announced by Spitzer and Massachusetts Secretary of State William Galvin of their mutual fund sales practices, with an eye towards whether the firm improperly pressured brokers to sell their house funds to investors.

Now a shareholder, Walter Baer, is alleging that the brokerage firm squelched the outcome of a vote on one of its funds — Latin American Discovery Fund. Baer’s proposal was to convert this closed-end fund into an “interval” fund — such funds make tender offers to buy back shares on a regular basis but do not trade, as do closed-end funds — in the belief that this would help eliminate a persistent discount to its net-asset value.

Barron’s Online points out that Baer is a senior analyst at Rand Corp. He was among the first to call for the federal government to establish the now-famous “do-not-call” list, banishing unwanted telemarketers, and to write research on e-mail. In the 1980s, he was chief technology officer for Times Mirror…maybe more than Morgan Stanley had bargained on.

According to Baer’s tally, his proposal won 61% of the votes cast (47% of all shares outstanding) — but the press release issued by Morgan Stanley on June 13th states: “The Fund noted the results of the voting on a stockholder proposal to recommend that the Board of Directors act to adopt interval-fund status for the Fund. Less than a majority of the Fund’s outstanding shares, and less than a majority of the shares represented at the annual meeting, voted in favor of this proposal.” (see Yahoo!)

According to Baer, “Morgan Stanley resorted to an irrelevant apples-to-oranges comparison with the shares ‘represented at the meeting,’ in an attempt to use smoke and mirrors and avoid properly conveying the voting outcome in their press release.” “They lost, but chose to ignore it.” For shareholder proposals the outcome is decided based on the number of people who actually cast a vote — not the number of votes present, which often includes broker non-votes, a much larger denominator.

Baer concedes: “They’ve done nothing illegal. I just believe it’s misrepresenting what the shareholders voted for. And Morgan Stanley would be well advised to take a vote of 61% of shares cast seriously, particularly at a time when people want improved corporate governance .”

In a reply to Baer, fund president Ronald Robison wrote a letter: “In general, it is unlikely that the Board of Directors of a Fund will accord a proposal any significant weight unless it is approved by the holders of a substantial majority of the Fund’s outstanding shares.”

Other shareholders were stunned. “Will Morgan Stanley CEO Phil Purcell, on the board of these funds, choose to ignore this matter, coming so soon after he and Morgan Stanley ran into hot water for their cavalier attitude about the monumental $1.4 billion Wall Street settlement?” asks another longtime closed-end fund investor and shareholder in the fund, Adam Shapiro of Advantage Capital Management.

Their action, or inaction, certainly lends support to the SEC’s suggested changes to regulations that address how corporate boards are nominated. Morgan Stanley seems intent on being among the first to pull the SEC’s trigger. (Greener Pastures: Votes Cast Aside, Barron’s Online, 7/21/03)

Praise from the Capitalist Tool

Forbes praises CorpGov.Net for its “unbridled linkfest and no annoying product promotions.” We won “Best of Web, while The Corporate Librarywon 1st place as category favorite. We can’t think of a better site to trail. In fact, we’re please to ever be mentioned in the same breath with The Coporate Library. We’ll never have their resources but continue to belive there is room for many in this field. See reviews.

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Canadian Companies Win Highest Overall Governance Rating

GovernanceMetrics International (GMI), an independent governance ratings agency, rated 1600 global companies from 15 countries. Seventeen companies – fifteen US and two Canadian, received scores of 10.0, GMI’s highest rating (see below).

Canadian companies had the highest overall average rating of 7.2 followed closely by the UK, US and Australia. Companies with overall global ratings of 7.5 or more, which GMI considers above average, are almost exclusively from these four countries. In continental Europe, French companies scored the lowest with an average of 4.1, but the lowest governance performance of all was Japan, where the average rating was 3.5.

Even though US and Canadian firms scored well overall, there are still five companies from these two countries that received a global rating of 3.0 or less, which GMI considers well below average. This indicates that despite a strong legal and regulatory framework, companies can still satisfy basic requirements but represent a governance risk to shareholders. Sixteen companies received GMI’s lowest rating of 1.0; of these, ten were Japanese, two were French, two were Dutch, and one Swiss and one American.

The highest scoring industries globally were Utilities (average rating of 7.0), Energy (6.9) and Insurance (6.8). The poorer performers were Construction (4.9), Autos (5.6) and Media (5.8). Not surprisingly, more regulated industries tended to have better governance practices overall, although GMI would have expected Financial Services as a regulated industry to have had better ratings overall than the 6.1 the industry achieved.

Noticeable differences were found in how companies performed in particular categories. In the area of potential dilution, Japanese companies scored well since stock options are generally not a feature of compensation practices in that country. On the other hand, of the 483 companies in the ratings universe with potential options dilution of 15% or more, all but seven were American. In financial disclosure, Japanese and European companies tended to score lower than US, Canadian, UK and Australian companies because of fewer disclosure requirements. In addition, 21% of the companies in the ratings do not report their accounts under US GAAP or International Accounting Standards practices, but under purely local standards. These companies are predominately Japanese and Continental European.

European corporations outperform in the area of broader stakeholder relations. In environmental, labor and social matters, European companies have far better practices and disclosure policies than US companies and consistently score better in this category.

GMI’s Chief Executive Officer, Gavin Anderson said, “among the myriad of questionable practices we found are a chairman and president who were forced to resign because of bid rigging, but have now been re-hired as advisors; directors who sit on as many as fourteen public company boards as well as several committees; one director who collects a $600,000 annual consulting fee on top of his director fees, and one firm that does not designate either executive directors or a CEO and thus regulations relating to directors remuneration do not apply to them. What our ratings help determine is the culture of accountability and integrity at companies. We know from a number of studies that shareholders will pay a premium for companies with good corporate governance.”

GMI’s rating system incorporates more than 600 data points across seven broad categories of analysis, including board accountability, disclosure, executive compensation, shareholder rights, ownership base, takeover provisions and corporate behavior and social responsibility. Subscribers to GMI are able to view a company’s overall rating, section ratings and several pages of written analysis. The firm also utilizes a “red flag” alert to identify areas that it believes investors should pay particular attention to.

Companies with a global score of 10 (highest rating) were:
Alcan Inc. (Canada)
McDonald’s Corporation (US)
BCE Inc. (Canada)
Petroleum Corporation (US)
ChevronTexaco Corporation (US)
PepsiCo, Inc. (US)
Chubb Corporation (US)
Pfizer Inc. (US)
Colgate-Palmolive Company (US)
Pinnacle west Capital (US)
E.I. DuPont de Nemours & Co. (US)
Praxair Inc. (US)
Eastman Kodak Company (US)
SLM Corporation (US)
Exxon Mobil Corporation (US)
The Allstate Corporation (US)
Gillette Company (US)

Editor Calls on CalPERS Board Members to Pay Back Excess Payments

California’s Assembly Appropriations Committee should pass AB 1428 (Levine), which deletes the current limit on reimbursements paid to employers of CalPERS’ elected Board members for an employee to replace the board member while that member attends to board duties. However, before voting the bill out of Appropriations, CalPERS should submit a plan to recover excess reimbursements paid to CalPERS Board members since September 2000.

At that time, contrary to Government Code, section 20091, which limits the compensation of Board members for attendance at Board meetings to $100, the Board increased the compensation to $400 per meeting. According to an article at the time in the Sacramento Bee, “with an average of 75 meetings a month, certain board members’ compensation will increase to a yearly average of $30,000 from around $7,500 a year for service on the CalPERS board.” The Bee reported at that time that “five board members are eligible for the $400 per meeting rate. They are: Robert Carlson, William Rosenberg, Mike Quevedo, Joseph Thomas and Willie Brown.” (See CalPERS board votes itself big pay increase, 9/21/00)

Additionally, contrary to section 19820, subdivision (a) of the Government Code, which limits travel reimbursements for Board members and employees, as determined by the Department of Personnel Administration (DPA), the Board adopted an expense reimbursement policy that exceeded those authorized amounts.

On January 30, 2003 the Court of Appeal, Third District, upon action by the State Controller, ruled the Board had exceeded its authority with respect to these and other expenditures. The California Supreme Court then upheld that ruling. (Westly v CalPERS)

Raising the reimbursements paid to employers of CalPERS’ elected board members, as AB 1428 would authorize, is reasonable. Board duties should consume more than 25% of the time of Board members. Neither would I be concerned if the Board sought legal authority to raise their per meeting reimbursement.

However, no member of the Board should receive a financial benefit from violating existing laws. CalPERS should recover excess amounts paid to Board members.

UK Corpgov Redraft

The independent Financial Reporting Council has given the go-ahead to a redraft of the code to take into account the boardroom reforms recommended by the Higgs Review. The main reforms include:

  • At least half a board should be comprised of independent directors.
  • Roles of CEOs and chair should be split except in exceptional circumtances (they must first consult with shareholders. Higgs wanted to end this.)
  • A senior independent director should be available to shareholders if they have concerns which contact through the chairman or executives has failed to resolve.
  • Boards should undertake a formal and rigorous annual evaluation of its own performance of its committees and individual directors.
  • Insitutional shareholders should avoid a box-ticking approach to assessing a company’s corporate governance.
  • Companies should adopt rigourous, formal and transparent proceedures for the recruitment new directors to the board.
  • No individual should be appointed to a second chairmanship of a FTSE 100 company.
  • After a non-executive director serves six years – two three-year terms – on a board, their continued appointment should be subject to a “particularly rigorous review”. After nine years on a board, non-executive directors should be subject to annual re-elections and they may no longer be considered independent.
  • Boards should not agree to a full-time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company.
  • Chairmen can continue to chair committees set up to approve who should join their company’s board. Higgs wanted to ban this practice.
  • Meetings of independent directors without the chair present was limited to once a year, curbing Higgs’ recommendations. (Corporate governance redraft gets go-ahead,, 7/23/03)

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Quotes from the Pundits

When asked about the number of targets expected under possible SEC rules on CNBC (Shareholders may get bigger say at companies, 7/15/03) the following exchange took place:

“Murray: I know you haven’t worked out the details of this yet and you’ll be doing that through the rest of the year, but if you just intuitively … if you look at the Fortune 500 right now, are we talking about 100 of those companies that might be eligible for this kind of action, are we talking about 10 of those companies? I mean, what’s the magnitude of number of companies that you think might be subject to this new rule?

Donaldson: It’s not 10, but it’s probably well over 100.”

Therefore, Donaldson appears to believe that more than 1 in 5 companies in the Fortune 500 will face election contests under the SEC’s proposal to allow shareholders to place director nominees on the corporate ballot. That to me is an astonishing estimate. According to the Investor Responsibility Research Center, of more than 800 shareholder proposals filed last year, just under 100 received majority votes. That’s a ratio of 1 to 8 companies.

Carol Bowie, IRRC’s director of governance research, said “This is something that has vexed investors of late,” she said. “They are, after all, the owners of the company.” (Voters might nominate boards,, 7/16/03)

Contrast the above with Ann Yerger, deputy director of the Council of Institutional Investors, who called the move “a very positive step for investors.” She suggested that pension funds and other large investors likely would only have to press through the corporate board changes in a few, unusual cases of unresponsive corporations. (AP, SEC Considers Investor ‘Democracy’ Plan)

”This proposal is about real independence,” says Nell Minow of the Corporate Library. It ”goes to the heart of corporate governance because it interrupts the current ‘closed-loop’ system of director selection and communication. If this proposal survives the many stages necessary to become law, its greatest significance will be in its value as a deterrent.”

Says Jerry Davis of the University of Michigan Business School, ”This will make corporate director elections look less like elections in North Korea.” (

“The fact that this would be progress says a lot about the extent to which the term “shareholder democracy” is an oxymoron, said Floyd Norris in the New York Times, A Small Move to Shareholder Democracy. “The S.E.C. is still unwilling to take democracy to the limit, which would mean letting shareholders vote the incumbents out even if no one was willing to finance a full-scale proxy fight.”

“It is clear the commission is serious about doing well by investors.” said Sarah Ball Teslik, executive director of the Council of Institutional Investors, a trade group representing pension funds and other large shareholder groups. “There is nothing in the last 20 years the SEC has done that will be as important.”

“We can expect the corporate community to pull out all the stops to slow this down, including a challenge in the courts about whether the SEC even has authority to do this instead of leaving it up to the states,” Nell Minow, editor of the Corporate Library, said.

Evelyn Y. Davis, a shareholder activist for 40 years, fears the proposal could backfire, eventually leading the SEC to mandate a similar percentage of votes be obtained before putting any shareholder proposal on the proxy ballot. She said she thinks a better way to make current directors more responsive to shareholders would be for the SEC to limit director terms to six years and to require firms to adopt any proposal that wins a wide majority vote.

“This is a positive step towards making boards of directors more accountable to long-term investors,” AFL-CIO President John Sweeney said in a prepared statement. “The retirement savings of America’s working families have been harmed by the failure of boards of directors to prevent wrongdoing at Enron, Worldcom and other scandal-plagued companies. We call on the SEC Commissioners to quickly adopt new proxy rules and end the self-perpetuating system that permits incumbent boards to hand-pick director candidates.” (SEC Chief Supports Plan to Aid Investors,, 7/16)

Phillip Goldstein of Opportunity Partners LP says he is opposed to additional disclosure about the nominating process “unless the company makes public actual transcripts of the nominating committee meetings. Otherwise, it will just be sanitized junk disclosure that is of no value to anyone except the overpaid lawyers that prepare it (and maybe regulators). Or, does anyone expect to see disclosure that says: ‘I chose my old college roommate or my golf partner or a washed up
politician than can help us lobby for tax breaks?'” Additionally, “Just curious what the possibility is that incumbents might actually conclude in good faith that the challengers would be better stewards of the company and consequently determine not spend lots of shareholder money to keep their seats? If that has ever happened, I would like to know which board made that determination. Perhaps you could pose that question to the Business Roundtable.”

Andrew Shapiro, President of Lawndale Capital Management, LLC reminds us that his “substantial experience in board situations in need of change” led him to call for open access for nomination of a majority of the board less one director. “Having a small % of the board, especially only one director is more symbolic than practical in application. For any director’s motion in the board room to even be considered, it needs a second and for real change to be taken seriously, there has to be a meaningful chance of such board motions to pass. This is exactly what hamstrung Guy Adams during his short stay on Lonestar’s board. We further commented on the use of triggering events, but the starting point was always a shareowner slate of a majority of the board less one director with the triggering event opening up the entire board slate for shareowner access for nominations. If shareowners have been abused so much that a proposal that garnered a majority vote is ignored, then shareowners (or at least that proponent) should have the fundamental right, a whole year later, to propose on the company’s proxy a slate for the majority of the board that will be responsive to the will of the company’s owners. It is through this ultimate power to elect a majority that a likely compromise and real reform is achieved.”

More from the Wall Street Journal (UPDATE: Shareholder Advocates Applaud Proxy-Access Plan, 7/16/03) “We’re supportive of efforts to expand shareholder access to proxies,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “If they can give shareholders more say in the companies they own, more power to them.”

“I think it’s like a nuclear bomb, to be used only as a last resort,” said Nell Minnow. Minnow figures companies will bend over backwards to avoid setting off any of the proposed “triggers.” “Corporations are so horrified by this prospect that they’re trying to come up with alternatives to make shareholders happy,” Minnow said.

Use of “triggers” will limit shareholder proxy access to troubled companies whose directors aren’t doing their job, Teslik predicts. Minow agrees, saying “The impact will not be felt in Ralph Nader being nominated for 10 boards,” but in how companies handle their own nominations.

AFL-CIO deputy general counsel Damon Silvers praised the SEC for tackling the controversial proxy access issue. “They’re taking it seriously,” said Silvers.

The WSJ reports that business groups are unhappy with the proposal. If the SEC approves it, Minnow expects they will immediately challenge it in court. However, Teslik noted that “State law governs corporations but securities laws govern proxies.” She said the SEC proposal shouldn’t be viewed as a matter of state law because “it’s not about nomination, it’s about who has access to the proxy.”

In the 7/18/03 ISS Friday Report, Robert Todd Lang, a partner at Weil, Gotshal & Manges questions “What happens if three different shareholders who are qualified come up with short-slate proposals for nominees?” “The math on that is horrendous. . . . I’m sure [the SEC is] working on it, and I’m sure that everybody’s going to be watching to see what they propose.”

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said dialogue between shareholders and companies will fail less often once the rule is passed. Elson cited new independence requirements on boards and nominating committees mandated by the SEC and the stock exchanges. “If someone comes to you with a large enough holding, to an independent nominating committee, you’re going to listen,” he said.

Likewise, Peter Clapman, senior vice president and chief counsel for corporate governance at TIAA-CREF, said shareholders would bring their gripes to the independent directors instead of mounting a laborious nomination effort. “Apart from the nomination process, you’re going to see shareholders enlarging the communication process with the board.” Nevertheless, if shareholders move to nominate their own candidates, look out, Clapman said. “For TIAA-CREF to do this, for us to undertake it, we would do it to win.” Because only the most serious shareholders would attempt it, they would nominate stellar candidates, such as people with top industry credentials, and back the effort with a coalition of shareholders, he added.

Writing for Forbes magazine, Dan Ackman (Proxy Reform Should Be Across The Board, 7/16/03) advises the Commission to “do more by cutting away the weasel aspect of the staff report that says that perhaps the new process should only kick in if there have been ‘triggering events’ indicating that shareholder ideas haven’t been taken seriously. Suggestions that outside shareholders should also be allowed to nominate a limited number of board members should also be abandoned. If democracy is good, it should apply across the board.”

Thomas W. Joo, of the University of California at Davis, says that “unlike the rank and file and grassroots activists, those big players (who can meet the proposed SEC thresholds) already have informal pull with boards–and they failed to exercise that pull to rein in the risky and/or illegal conduct of Enron, WorldCom and others. Furthermore, because failure to respond to shareholder proposals will be one factor in granting access to the proxy, the proposal may trigger greater management resistance to proposals–both by exclusion from the corporate proxy under 14a-8 and by opposition to proposals on the proxy or independently submitted.” However, he also notes that “in light of the political pressure the SEC faces from the business community, and in comparison to the unimpressive Sarbanes-Oxley Act, the proposals are encouraging. The political reality is that incremental reform is the best we can hope for.”

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On SEC Staff Recommendations for Board Election Reforms: Statement of the Social Investment Forum

“The Social Investment Forum supports the release of the July 15, 2003 U.S. Securities and Exchange Commission (SEC) staff recommendations regarding shareholder selection and nomination of representatives to corporate Boards of directors, and the possibilities it opens for increased shareholder access to corporate proxies and increased shareholder rights.

We appreciate the SEC for taking steps that underscore what an increasing number of investors have come to recognize — that the current rules for Board elections do not work, and do not result in Boards that are accountable to and represent the interests of shareholders. The Social Investment Forum believes that the significant lack of shareholder access to the corporate proxy — when combined with the self-perpetuating boards that are often insulated from investor accountability — is a significant obstacle to preventing future corporate abuses and restoring investor confidence.

The Social Investment Forum supports:

  • The report’s recommendation for increased disclosure and transparency of nominating committees and their processes, as well as improving communications between shareholders and the Boards that serve them.

  • The call for greater shareholder access to the company proxy, providing shareholders with the ability to more easily nominate diverse candidates, as opposed to a separate proxy for the election of directors, which would be too burdensome to shareholders. The Forum recommends that all Board nominees, including shareholder nominees, should be afforded the same resources and opportunities to reach shareholders and discuss the merits of their candidacies. In addition, all Board nominees should disclose material, familial, professional, and financial relationships.

  • The opportunity for shareholders to vote “yes” or “no” for a director and not just “yes” or “abstaining.”

  • Greater opportunities for shareholders to communicate with their Board of Directors.

The Social Investment Forum supports the overall direction of the SEC report. The steps taken this week will help corporate Boards better represent shareholders, not just corporate management, and improve corporate governance as well as corporate performance over time. The SEC has clearly heard the concerns of diverse individual and institutional shareholders across the country.

The Social Investment Forum will be watching this process closely. We hope the SEC will take the next important step: issuing rules that promote broad shareholder access to the Board nomination process and to corporate Boards as a whole.”

The Social Investment Forum is the national trade association for the social investment industry. It is dedicated to the concept, practice, and growth of socially responsible investing. The Forum’s more than 500 members include financial planners, banks, mutual fund companies, research companies, foundations, and community investing institutions.

SEC Rules: New Opinion Polling Device or Democratic Corporate Governance?

The “SEC Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors” provided background, summarized public recommendations (see also Appendix A to the Review – Summary of Comments), outlined alternatives and made recommendations to the Securities and Exchange Commission for a rulemaking.

Five alternatives for increasing shareholder involvement in the nomination and election of corporate directors were presented by staff and can be summarized as the following:

  1. Require companies to include shareholder nominees in company proxy materials.
  2. Require companies to deliver nominating shareholders’ proxy cards with company proxy materials.
  3. Require greater disclosure by nominating committees.
  4. Require further disclosures regarding shareholder communications with the Board.
  5. Revise Exchange Act Rule 14a-8 to allow shareholder proposals related to the company’s nomination process.

After a lengthy discussion of each of the above alternatives, staff recommended the Commission proceed with a rulemaking based on three major components and cleanup amendments as necessary.

  1. Enhanced disclosure of the nomination process. Require documentation of the criteria committees use to nominate directors and the disposition of nominations from shareholders who have owned a specified amount of stock for a minimum specified period. One of the more interesting provisions would be disclosure of “whether each member of the nominating committee believes that it was in the company’s best interest not to nominate the candidate.

  2. Enhanced disclosure of shareholder communications with board members. Corporations would be required to specify how shareholders can communicate with specific board members or intermediaries. Most helpful would be a recommended requirement that companies disclose the number of times each board member met with shareholders and “any action taken by the board as a result of the communications.”

  3. Staff recommends the rule include provisions for shareholder access to company proxy materials. Shareholders or groups of shareholders would have to meet applicable state, federal laws and listing standards. Nominees would have to meet standards for independence. Shareholders or shareholder groups would have to meet minimum standards with regard to holdings and time held. Limitations would be set on the total number or percentage of shareholder nominees. Additionally, the shareholder nomination process would only be available if one or more “triggering events” occur that objectively “demonstrate deficiencies in the proxy process,” especially thwarting the will of the majority of shareholders.

  4. Cleanup regulations might be necessary regarding solicitation activities by nominating shareholders and groups, ownership and transaction reporting and concerning the definition of an “affiliate.”

Mr. Donaldson and others at the SEC indicated they hope to issue proposed rules regarding disclosures (1 and 2 above) in August. The proposal for nomination of directors by shareholders would talk a little longer, probably until September. The proposed change is not one of “democracy,” Donaldson said but “to give some real power to people who have the right to express their view through a vote.” That sounds a little too much like opinion polling to me.

Taken as a whole, the set of regulations would be at least a step in the right direction. Certainly, enhanced disclosure of the nomination and communications processes could go a long way to ensure shareholder views are heard and considered. However, enforcement appears to be largely though bad publicity and public shaming. Again, we are to depend on the court of public opinion.

Disclosure and transparency are important but power is fundamental. Allowing shareholder access to the corporate proxy would move in the direction of shifting actual power from managers to shareholders. Of course, the devil is in the details. Staff did not recommend specific thresholds or timeframes for holdings. If the Commission moves forward with a rulemaking, we don’t know if the threshold will be $2,000 or 10% of outstanding shares. We don’t know if shareholders will need to hold for one year or two, prior to have a right to nominate. We don’t know if they will be able to elect one member or half of the board.

Most troublesome to this editor is the idea that the shareholder nomination process would only be available after a triggering event like a board ignoring a shareholder vote or shareholders massively withholding votes from management nominees. Imagine telling Blacks or women that you have a right to vote or to run for office but only after we make a finding that you’ve been badly treated. No! Voting and running for office should be viewed as fundamental, triggered by mutual respect for democracy and the rights of others, not by paternalistic nonsense. Shareholders own the company; we shouldn’t have to prove we have been abused prior to exercising power.

If a trigger is going to be mandatory, it should be one that tackles the issue head on, such as a shareholder resolution on whether or not shareholders should be able to place nominees on the corporate ballot. Such a resolution should be put forward, like any other resolution, by any shareholder who has held $2,000 of stock for over one year. Those resolutions can set forth the details on who can nominate, how long nominators have held shares and what proportion of the board is subject to such nomination by shareholders. If the proposals win majority support, they should go into effect.

As Floyd Norris pointed out in a New York Times opinion piece, “Hong Kong’s experience shows, letting people vote for only a minority of the governing council can create frustration when the elected minority turns out to be unable to bring change.” (A Small Move to Shareholder Democracy, 7/16/03) Mr. Donaldson, you’ve taken a courageous step but it isn’t about people being able to express their opinion through a vote; it’s about power and whether or not those who exercise corporate governance will be held accountable.

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SEC to Unveil Shareholder Proxy-Access Plan

Expectations appear low as the SEC is about to unveil staff’s recommendation. “I’m expecting them to take one baby step forward to open discussion on the issue, but even that is an extraordinary step,” Nell Minnow told the Wall Street Journal.

The SEC is mulling “triggers” that would force a company to open access to its proxy, said Sarah Teslik, executive director of the Council of Institutional Investors. One possibility would give proxy access to stockholders at companies that repeatedly fail to implement shareholder-approved proposals, or otherwise ignore majority votes. Another possibility is to limit shareholders to nominating a single candidate. Concerning thresholds, Minnow said a 5% threshold is about right, but figures if the SEC eases rules on shareholder communication, “you could go up to 10%.”

Teslik thinks a 10% threshold is likely and says, even then the SEC would need to enact additional reforms to discourage lawsuits. If shareholders seeking to nominate candidates are at risk of being sued by like any other corporate raiders, “they won’t do it,” said Teslik. (SEC Expected To Unveil Shareholder Proxy-Access Plan Tues, Dow Jones Newswires, 7/15/03)

Mergers on Rise: Good Sign or Bad?

“When mergers heat up, it tells you that people have confidence in the future,” said Charles Elson, a professor of corporate governance at the University of Delaware. “When merger activity slows down, it tells you that companies are slowing down.” Shareholders should be delighted, right? Maybe not.

A report from the Boston Consulting Group says mergers generally show negative returns. Studying 277 big deals in the United States between 1985 and 2000. Their study confirms the findings of many others. “We found that a full 64 percent of the deals in our sample destroyed value at the time they were announced, and 56 percent continued to do so two years after the deal.”

Maybe rising confidence also leads to complacency. (Big mergers fueling economic optimism: Analysts say deals show confidence in market, San Francisco Chronicle, 7/15/03)


The International Corporate Governance Network opened its ninth annual meeting in Amsterdam with the theme of “Making Corporate Governance Work.” Nearly 400 participants from around the world are expected to attend. Sessions discussed increasing regulation, corporate governance rating tools and securities class actions suits.

Fritz Bolkestein, the European Union Commissioner for the Internal Market, described the EU Action Plan to modernize European company law by increasing transparency and equipping shareholders with better control mechanisms. One urgent priority is to overcome obstacles to cross-border voting, another is to ensure the independence of remuneration and audit committees. But he insisted that the nominating committee should consist mainly of executive directors. Only company managers have the day-in, day-out experience to judge their peers.

That position places him at odds with this editor and probably most of those in attendance at ICGN. (for more information, see the ISS Friday Report, 7/11/03)

SEC Staff to Recommend Shareholders Be Given More Power

The Wall Street Journal reports that Securities and Exchange Commission staff plan to recommend that the agency “move to give shareholders more power in nominating and electing corporate directors.”

In next Tuesday’s report staff plans to recommend that, in limited circumstances, companies should have to place a shareholder-selected board nominee on a company’s official proxy material. Options under consideration include allowing shareholder nominees on the company ballot when a certain percentage of shareholders support a candidate or when a “majority of shareholders” express serious concern about the board’s makeup. (SEC May Give Investors More Nominating Power, 7/10/03)

Women Directors Ensure Better Governance

Research comes from the Conference Board of Canada in a report entitled, “Women on Boards: Not just the Right Thing…But the Bright Thing, co-authored by David Brown, Debra L. Brown and Vanessa Anastasopoulos. Boards with women review five or more non-financial performance measures regularly and explicitly assume 94% of governance responsibilities recommended by the Toronto Stock Exchange (TSE).  All-male boards review and average of 2.5 non-financial performance measures and assume only 72% of the responsibilities recommended by the TSE. The study also shows that 94% of boards with three or more women ensure adherence to conflict of interest guidelines, compared with 68% of all-male boards. Boards with women also scored higher in ensuring adherence to an organizational code of conduct.

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Proxy Access: Presidential Issue?

Writing for Dow Jones, Neal Lipschutz raises the issue of where candidates stand on shareholders’ right to nominate corporate directors. (see Point of View: Proxy Access And The Presidential Race, 7/8/03) “Hard to believe, for sure. But there are early indications that corporate governance may become an issue in next year’s U.S. presidential election and the Democratic primaries that precede it.”

“We’ve come a long way baby,” is my response. Senator John Edwardsrecently announced, “I’ve proposed making sure that shareholders’ nominees for corporate boards can compete with CEOs’ picks on a level playing field.” Edwards would:

  • Allow Shareholders to Nominate Directors. Edwards supports a proposal, now before the SEC, to allow large shareholders and groups of shareholders to nominate board members without waging a costly proxy fight. The SEC staff is expected to make a recommendation by July 15th.
  • Require Institutional Investors to Stand Up for Their Investors. Managers of mutual funds and pension funds have a fiduciary responsibility to represent their investors. Edwards would require fund managers with a substantial investment at stake to exercise the rights of ownership, unless they can demonstrate that doing so is not in the best interest of their investors. He would also require pension plans to disclose their votes on shareowner initiatives, like the SEC recently required mutual funds to do.
  • Fully Enforce the Edwards Amendment to Require Lawyer Accountability. Over the objection of the American Bar Association, Senator Edwards added a provision to the Sarbanes-Oxley Act to require that lawyers representing corporations put the interests of shareholders first. If the lawyers observe wrongdoing by insiders, they are now required by law to report that wrongdoing up the corporate ladder, to the board of directors if necessary. The SEC’s implementing regulations muddled the law’s requirements; Edwards would issue clearer regulations and fully enforce them.
  • Put the “Public” Back into Initial Public Offerings. Some Wall Street bankers have been able to game the system, selling underpriced shares to friends and potential clients that can be rapidly resold for large profits. Edwards would limit sales to insiders and their families and remove regulatory barriers to auctioning IPO shares.

Lipshutz concludes, “With war, homeland security and job losses in a sluggish economy front and center as the big issues for many Americans, it is hard to see the nascent political debate on corporate governance gaining resonance with too many voters. But, then again, there are many individual investors among the electorate, and a lot can happen before full-throttled campaigning even gets under way.”

Microsoft Moves From Options 

Microsoft intends to replace its employee stock option program with one awarding restricted stocks, which vest over a 5 year period. Timing is good since options issued in the last several years are mostly underwater and nearly worthless.  Employees will apparently be cash out their options as well. President Steve Ballmer said, “We want to be a magnet for the best people by paying smarter. We want to attract and retain employees by offering real ownership and great long-term financial incentives.  And we want to ensure that our senior employees’ total compensation is even more closely linked to growth in the number and satisfaction of our customers.”

The firm will record an expense for the restricted stock in future financial statements, and will restate past earnings to reflect the cost of the options. That step may reduce net income estimates for last year by about 32% or $2.74 billion. Although it may cost shareholders in the short run, I expect it will be seen by most as a smart move and should increase the sense of ownership among Microsoft employees who will now face at least some downside risk, as well as upside reward.

At least some other high tech companies can be expected to follow Microsoft’s lead. It should also reduce pressure on Congress to meddle in accounting standards setting. A positive move all around. The Financial Accounting Standards Board has stated its intent to require companies to list the cost of stock options in their financial statements. In 1994, Congress blocked a similar effort. Microsoft’s action might prompt Congress to sit on their hands and allow FASB to do its job.

Governance Editorial Joins Push for Democracy

The June edition of Governance includes an editorial by Michelle Edkins, Director of Institutional Relations, Hermes Focus Asset Management, calling in the SEC to allow separate voting for each director (with for, against and withhold options for each), disclosures should provide information about their “suitability” for the job and the “nomination process should be as professional and robust as that for recruiting a senior executive and should be led by independent directors.” Additionally, “shareholders representing a sizeable ownership stake should be able, easily and cost effectively, to put binding resolutions on the agenda for a general meeting.”

The reason for recommending such weak reforms? “It is most likely that those at the most senior levels of the company will have the best idea of the skills and background needed to take the company successfully into the future.”

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Public Pension/Mutual Fund Differences

“Public pension funds are much more likely than mutual funds or investment banks to support the heavy lifting that drives long-term progress not just for an individual company but for the greater society,” according to Professor Laszlo Tihanyi, a University of Oklahoma colleague who co-authored a study published in the April-May 2003 Academy of Management Journal (AMJ). There were two other co-authors, University of Oklahoma Professor Richard A. Johnson and Arizona State University Professor Michael A.Hitt. Another study, published in the August-September 2002 issue of AMJ, found that pension funds favor internal innovation through R&D, while mutual funds prefer external innovation through business acquisitions. (see Pension Funds and Mutual Funds Influence Their Holdings Differently,, 7/1/03)

Corporate ‘Democracy’ on Trial

A Reuters article by Kevin Drawbaugh entitled Corporate ‘Democracy’ on Trial Before SEC is generating some buzz on an accompanyingmessage board (although it has more error messages than real ones). It they keep it up, perhaps it can become a forum for debate on what tactics activists can take to ensure this opportunity doesn’t just blow by like the last time the SEC proposed a regulation to allow shareholders to place the names of director nominees on the corporate ballot. That was 1942. The next time they even seriously looked at the issue was 1977. Opportunities don’t come around every day.

SEC staff will issue their report and recommendations to staff on July 15th. I hope pension funds, mutual funds, unions, environmental groups and others are enlarging their mailing lists and preparing a lobbying campaign.

Prior to the June 13th deadline the California State Teachers’ Retirement System (CalSTRS) devoted a section of its Web site for nine days to instructing visitors on how to send an e-mail to the SEC, along with suggested language. According to a Dow Jones report, the link received 368 hits. Personally, I saw the link and think it could have been far more effective if the message and links had been clearer.

Yet, it was certainly a good first start, especially for CalSTRS, which has long played a poor relation in corporate governance activism to its sister fund CalPERS. Outreach to individual investors could have reached far more if large funds maintained e-mail addresses of all their shareholders, members and other interested parties.

CalPERS, for example, recently began offering e-news services. The SEC would have received a lot more e-mail if CalPERS and others had mechanisms like this in place and had made use of them.

I urge readers to create e-mail news and activist lists and services. Instead of the 600 comments the SEC got on this issue prior to June 13th, let’s ensure any proposed rule on democracy in corporate elections, gets at least 6,000 comments.

Lavelle Favors Open Ballot

Louis Lavelle, who covers corporate governance for BusinessWeek, wrote a commentary for the July 2 edition entitled “Shareholder Democracy Is No Demon.” Lavelle takes on several of the objections of opponents, such as the Business Roundtable and the American Society of Corporate Secretaries:

  • The “divisive” proxy contests predicted by opponents would be rare, given the fact that the typical recommended threshold of 3% “means anywhere from several to several dozen institutional shareholders would have to agree on a candidate slate.”
  • Shareholder democracy would result in “balkanized” boards made up of special-interest directors say critics. Lavelle answers that the ideal board candidate is someone with forceful opinions who isn’t afraid to share them. “What opponents fear probably isn’t a divided board. It’s that groups that have been largely banished from the boardroom — namely labor and environmentalists — might gain a foothold. But given the 3% ownership threshold, candidates advocating a radical labor or environmental agenda wouldn’t be nominated, much less elected.”
  • Unqualified nominees. “Any shareholder nominee would have to be thoroughly vetted to win the support of enough institutional investors to get on the proxy — these are legitimate campaign issues that board-nominated director candidates could raise in the proxy.”
  • Cost of allowing shareholder nominees on the proxy. Even assuming the exaggerated estimates of the American Society of Corporate Secretaries are correct, Lavelle says it would be “money well spent,” about 4% of the average CEO’s pay.
  • “Having more than one candidate for each open seat on the board, investors are told, could create “confusion” among shareholders, who are apparently quite capable of dissecting complex income statements but incapable of choosing between opposing slates.” We’ve had two centuries of democracy in the political, its about time we tried it in business. “The sky isn’t going to fall — despite what Corporate America would have you believe.”Back to the top

Corporate Boards; How Bad Are They?

Ralph Ward, editor and publisher of the influential newsletterBoardroom INSIDER and author of a fantastic new book, Saving the Corporate Board, talks to Editor-in-Chief of Financial Executives International’s Jeffrey Marshall about the evolving shape of boards and board practices in Assessing the State of Corporate Boards.

“A board of directors is simply a lousy tool for everything we’re demanding of it nowadays. You elect people who are part-timers, who are amateurs at the corporation, who can give a few hours a month of attention to it – now you essentially want them to act as a new level of auditor, as a cop on the beat for a corporation… You would want them to take a strong personal interest in it, but at the same time they’re supposed to be extremely independent of the corporation.”

“There is an increasing drive toward shareholder democracy – an open ballot for electing board members. Currently, the board itself generally puts forward the slate for election at the next meeting. There is a move afoot to get some SEC and stock exchange regulations to allow investors who own a certain percentage of the company to nominate their own members. I think that is going to be the wave of the future, but how well it will address the underlying problems, I’m not sure.”

Regardless of how they become directors, boards will benefit from the thoughtful recommendations of Ralph Ward, a master of the incremental fix.

News on Open Ballot Measure From Dow Jones

Dow Jones reporters summarize efforts on open access issue in “From Leaflets To Web Sites, Investors Rally On Proxy Issue.” They give well deserved credit to Les Greenberg for posting a couple of hundred messages on chat boards, encouraging readers to send comments to the SEC.

However, they also point out that the Council of Institutional Investors “handed out fliers on the streets of Washington near Metro stations telling passersby about the SEC’s comment period. Shareholder activist Web site eRaider spread the word on its message boards. The California State Teachers’ Retirement System became involved for the first time in corporate-governance outreach, devoting a section of its Web site for nine days to instructing visitors on how to send an e-mail to the SEC, along with suggested language for the missive; the link received 368 hits.” It would be nice to know which of these efforts paid off.

I saw a short note on the CalSTRS site but missed the suggested language for e-mails to the SEC. Outreach to individual investors could have reached far more if large funds maintained e-mail addresses of their shareholders or members. CalPERS, for example, recently began offering an e-news services. The SEC would have received a lot more e-mail if CalPERS and others had mechanisms like this in place and had made use of them.

A couple of probable errors in the Dow Jones article:

  • “The only way for dissidents to reach shareholders with an alternative slate of directors is to launch a proxy contest, which can cost upwards of $25,000.” While I suppose it is possible to run such a low budget campaign, the most frequently cited low figure is $250,000. I think they misplaced a zero.
  • They cite a quote from Bill Patterson and note he is from the “AFL-CIO, which sent a rule-making petition to the SEC earlier this year urging reform of the process.” I don’t think so. The SEC makes it a practice to post petitions for rulemakings submitted to the SEC on their internet site; there is nothing from the AFL-CIO this year on that subject. This is not to take anything away from their efforts, which have been essential in the current reform effort.

One quote was telling: “(SEC Chairman) Donaldson proposed it on his own initiative. The fact that he asked for this review suggests he thinks the idea has merit, and other members of the commission appear sympathetic,” said James Heard, chief executive of proxy adviser Institutional Shareholder Services, which wrote to the SEC supporting more shareholder access to proxies.

Investment Industry Democracy “Feeble”

UK. A committee of MPs is to investigate the way corporate ballots are conducted after the Investment Management Association (IMA) revealed that many fund managers’ votes are “lost” and that investment managers have no way of checking whether their votes on directors’ pay are cast in line with their views. MPs dubbed the investment industry’s attempts at democracy as “pretty feeble.”

The National Association of Pension Funds (NAPF) disclosed that the level of voting by institutional shareholders dipped last year, despite a perceived renewal of investor activism as “rewards for failure” and “fat cat” pay came under the media spotlight. (MPs to investigate ‘lost’ votes on directors’ pay, Times Online, 7/2/03)

Companies Fail to Post Insider Trading

Under the SEC requirements mandated by the Sarbanes-Oxley Act companies must post details of transactions by insiders on their corporate websites or link to individual filings or a list of them on a third-party site like the SEC’s EDGAR database by June 30th. A survey of 300 small- and mid-cap companies by Blunn & Company found that 11% had failed to meet the deadline. (see Best Practices for Insider Trading Information on Your Website and Companies Fail to Heed SEC’s Deadline for Insider Trading Disclosure)

Broker Votes Curbed; Option Plans Must Be Voted

The SEC approved listing requirements requiring listed companies in the United States to gain shareholder approval for new stock option plans, or significant changes to existing plans.

The new rules also prevents NYSE-member brokerage firms from voting on behalf of shareholders in equity-compensation matters unless the shareholders have given voting instructions. Does this signal the beginning of the end of broker voting for most issues? We hope so.  

Loopholes will still exempt some plans from shareholder votes, including:

  • signing bonuses, or “inducement awards,” for new executive hires
  • some plans related to mergers and acquisitions
  • some employee pension plans
  • the exchanges’ non-US. companies.

Prior to the new rules, the NYSE and Nasdaq required shareholder approval for stock-compensation plans for executive officers and directors but allowed corporations to institute broad-based equity compensation plans without such approval. Companies have used that loophole to keep expensive management and director packages under the shareholder radar.

Continue Reading ·

June 2003


The spring edition of Strategy + Business, a quarterly sponsored by consulting firm Booz Allen Hamilton, carries an article titled “Corporate Governance: Hard Facts about Soft Behaviors. The authors argue against mandatory rules, such as having independent directors, since data supporting the value of independent directors has been inconclusive. Instead, companies should focus on soft behaviors that will lead to success:

  • select the right directors
  • train them continuously
  • give them the right information
  • balance the power of the CEO and directors
  • nurture a culture of collegial questioning
  • gain from directors an adequate commitment of time
  • measure and improve.

No one can reasonably argue against most of the recommendations. My problem is with the typical definition of “independence.” The authors cite a survey by Korn/Ferry that 9 out of 10 directors say that “willingness to challenge management” is either the most important criterion or among the most important in selecting new directors.

The authors say we’re moving in the right direction because 70% of Korn/Ferry searches are initiated by nominating committees (vs 10% eight years ago). However, “because CEO-board chemistry is vitally important to corporate governance and operations, the chief should be able to vet and veto nominees with whom she or he is not comfortable.” Who is more likely to challenge management, a director chosen by the nominating committee, and vetted by the CEO, or one nominated and elected by shareholders?

They cite research by the New York Times, which found that at 20% of the 2,000 largest U.S. companies, members of the board compensation committee had business ties with the CEO. Ask yourself, is that more likely or less likely if directors are nominated by shareholders? It is clear that shareholders are far less likely to nominated directors with business ties to the CEO. Selecting the right directors ought to start by allowing shareholders themselves to place director nominees on the corporate ballot.

Inequality Growing

Income inequality in the US has grown sharpy, according to a recent study by Katharine Bradbury and Jane Katz of the Federal Reserve Bank of Boston. Upward mobility of families moving from one quintile in the income distribution to a higher quintile decreased in the 1980 and slipped even further in the 1980s. Almost 10% of families who started in the bottom 3/5 of national income rankings wound up in the top 1/5 by the end of the decade. By the 1990, only 7.2% made that jump. In 2001, the top 1% of families held 34% of America’s total household net worth and the top 10% held 70%, while the bottom 50% held only 2.8%.

In “Land of Less Opportunity” (6/30/03), BusinessWeek questions how long the public will maintain their faith that anyone in America can achieve affluence. “Unless the decline in income mobility is reversed, that faith may waiver.” Will elimination of the estate tax actually end the American dream, instead of encourage it? How will corporate governance be impacted, if the hopes of American workers evaporate?

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P&I Endorses Shareholder Democracy

The influential publication Pensions & Investments ran an editorial favoring shareholder democracy, complete with a cartoon of a shareholder activist tin man seeking a heart from a Wizard of Oz-like SEC. Indeed, shareholders won’t be truly whole until they have proxy ballot access for the purpose of nominating directors. Patrick McGurn of Institutional Shareholders Services calls it the “Holy Grail” of corporate governance. I think a better metaphor is the shareholder’s Magna Carta. However labeled, such voice is critical and P&I’s clear statement that the “SEC should grant that access” adds to the 405 comment letters that were almost unanimous in support.

The P&I editorial points out that Exxon Mobil and Intel submitted comments opposing shareholder access and gave little concession to shareholders. Exxon Mobil, for instance, did not offer to “provide information on directors to allow shareholders to evaluate their performance.” “Opening the process would be a worthwhile exercise. It would force management and the incumbent board to explain why their candidates should prevail over alternative candidates.”

P&I recommends caution. “Before opening the proxy process, the SEC needs to develop a reasonable mechanism for carrying it out, including who can nominate, how many nominees to allow on the corporate ballot, and how to ensure compliance and other due diligence for alternative nominees.” If the reforms don’t work out, “institutional investors will be the first to cry out to reverse or modify the changes. But true shareholder democracy deserves to be tried in the world’s greatest democracy.” We couldn’t agree more wholeheartedly.

Forbes Covers Corporate Governance Web Sites

If you or your company can afford $5,550 tuition, Wharton, University of Chicago and Stanford Law School offer a three-day program called the The Directors’ Consortium. If you are at all fuzzy about the new rules of operating in this post-Enron environment, then you owe it to yourself and your shareholders to hit the Web. If the subject is Sarbanes-Oxley, a quick Google search will yield over 70,000 hits. Many of the sites listed merely post a PDF of the 130-page document; others are selling compliance software for IT departments or accounting offices. We found PricewaterhouseCooper’ssub-site devoted to the topic particularly useful.

Other essential bookmarks in the area of corporate governance are The Corporate Library, a Web site from a Portland, Me-based governance research firm led by shareholder activists Robert Monks and Nell Minow, and Corporate Governance, a treasure trove of links on the subject. Corporate Governance is one of the oldest sites on the Web devoted to the topic. It is a chore to scroll through, but its links are comprehensive. They range from research reports like a recent study by Harvard and Wharton on corporate governance and equity prices to news and listings of upcoming conferences devoted to governance.

That’s just a small sample of what can be found at Forbes’ Best of The Web: CEO’s Web-Guide To Corporate Governance.

CEO Pay Up

The average increase in total compensation for S&P 500 CEOs was 63%, compared to 51% percent for CEOs of non S&P 500 companies. “We look to the largest companies to lead the way in reform, but only a very few have made any attempt to rein in compensation,” said Paul Hodgson, senior research associate at The Corporate Library and author of the report, What Really Happened to CEO Pay in 2002.  Over the same period, the S&P 500 Index was down 23.3% and the S&P 1500 Index was down 22.5%.

Whose Money?

Herb Dyer, executive director of the Ohio State Teachers Retirement System (STRS) made an almost unbelievable blunder in a letter to one retiree, writing that the teachers’ pension fund belongs to STRS board members “to distribute as they see fit,” according to the Cleveland Plain Dealer. She also said the board is concerned about condescending, insensitive, and reckless comments that Dyer has made in public. 

Additionally, STRS suspended all employee bonuses and has begun a full review of policies on out-of-state travel and fringe benefits. Discretionary bonuses that were scheduled to be handed out next month would have come on top of “performance-based” bonuses, which totaled $1.75 million in 2000, $2.2 million in 2001, and $1.46 million in 2002.  Critics of STRS policies note that payment of $14 million in bonuses came during a period where the fund lost 21% of its assets, $12.3 billion. STRS oversees pensions for 424,171 teachers and retirees. (see Ohio Fund Wants A Closer Look at Bonuses,, 6/23/03)

CNN’s Market Call with Rhonda Schaffler 6/20/03

Tough Call: whether it’s a good idea to give shareholders more power in the director nomination process. CorpGov.Net’s editor, James McRitchie, participated in this point counter-point with David C. John of the Heritage Foundation. Mr. John’s position is that recent rules have mandated independent directors and other important reforms…problem solved. In a few minutes, there wasn’t time to say everything I would have liked. Following are the major points I tried to make:

The so-called elections of corporate boards are a sham. They’re more like elections in a communist dictatorship than anything resembling democracy. The ruling party selects it successors. It’s a self-perpetuating closed loop. Unless shareholders spend millions of dollars to conduct a proxy solicitation, our only option is to vote for management’s slate or withhold our votes. That problem will remain until we get access to the company proxy.

While there has been a lot of focus on “independent” directors in Sarbanes-Oxley and proposed listing standards; having “no material relationship” with the company doesn’t make a director independent. They can still be the CEO’s personal dentist or their best friend.

To see how truly independent directors improve corporate governance and corporate performance take a look at some of the companies I’ve invested in and the people who are the driving force behind reforms. There’s Andrew Shapiro’s impact at Arlington Hospitality (HOST) and Quality Systems Inc. (QSII); Ralph Whitworth at and Richard Koppes at Apria Health Care Group Inc. (AHG) and Richard Koppes again at ICN Pharmaceuticals Inc. (ICN).

The petition that Les Greenberg and I submitted last year was cited by the $3 trillion Council of Institutional Investors as having “re-energized” the “debate over shareholder access.” In truth, it was the abuse of power at Enron and other companies that energized us all.

In 1977 the Business Roundtable, which represents CEOs, supported access. Yet, after Enron, Global Crossing, WorldCom and too many others to name, they now oppose access.

Virtually all of the 300 recent comments to the SEC on proxy rules and the election of directors from shareholders favored access. CalPERS and the Council of Institutional Investors suggest a five percent threshold. The AFL-CIO favors a three percent threshold. Others, including foundations, socially responsible mutual funds and individual investors propose one percent or less.

One route to try to restore market confidence is to put an SEC cop or an Elliot
Spitzer on every block to police “corporate wrong doers.” That’s an expensive notion and bound for failure. The other option is to empower the owners of corporations to monitor management. Let those who own the companies nominate and elect directors who will be accountable to us.

It’s high time the SEC quit restricting the rights of shareholders to manage our own affairs. Either set a low threshold, allowing shareholders to nominate directors and place them on the corporate ballot or empower the shareholders of each company to come up with our own framework to ensure democratic corporate governance. It’s time to move forward.

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SEC Comment Period Ends: Time to Assess Comments

Last June, Fortune magazine featured an article featuring Robert A.G. Monks where he was quoted saying, “The so-called elections of corporate boards are mostly a sham, and will remain so until dissidents can get access to the company proxy statement to challenge the management slates.” Enron was in the air, unions and socially responsible investment (SRI) funds were frustrated that companies were ignoring successful shareholder resolutions, and I was disappointed with the rules proposed by the NYSE and Nasdaq concerning “independent directors.”

Having “no material relationship” with the company doesn’t make a director independent. I wanted directors who are accountable to shareholders and who can be removed through the election process if they are not doing their job. In the case of The Business Roundtable v. SEC (905 F.2d 406, D.C.Cir. 1990), the court indicated the “goal of federal proxy regulation was to improve those communications (with shareholders) and thereby enable proxy voters to control the corporation as effectively as they might have by attending a shareholder meeting.”

We were far from that ideal and I could think of no better way to achieve that goal than to allow shareholders access to the corporate proxy. Reading about Les Greenberg’s experience at Lubys, I thought it was a good time to raise the issue once more . . . this time using a formal petition. So, last August 1st, Les Greenberg, representing the Committee of Concerned Shareholders, and I filed a petition with the SEC.

We called for open/equal access to the corporate ballot for shareholder nominees. We specified the same time honored requirements that currently apply to resolutions, $2,000 held for at least a year and we also called for the elimination of broker voting. eRaider submitted a similar petition, but with less specifics. AFSCME filed shareholder resolutions at several firms calling for shareholders to be able to place nominees on the corporate ballot.

The SEC actually adopted regulations requiring mutual funds and money managers to disclose their voting policies and their votes. Unions, public pension funds, SRI funds and corporate governance activists launched their biggest season of resolutions ever. They also began to endorsing what Patrick McGurn of Institutional Shareholder Services (ISS) called the “Holy Grail” of corporate governance. Our petition was cited by the $3 trillion Council of Institutional Investors (CII) as having “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” In truth, Enron had energized us all.

AOL Time Warner, Citigroup, ExxonMobil and others successfully lobbied the SEC to issue “no action” letters on proposals by AFSCME that called for shareowners to nominate candidates. Yet, the Commission also decided to solicit comments from the public on how to “improve corporate democracy.” Comments were due June 13th. The SEC staff now has until July 15th to come up with its recommendations. Where do we stand? summarized 300 comments to the SEC on the issue of increasing democracy in corporate elections with the following statement: “The question is not whether shareowners should have access to the proxy to nominate directors, but what percentage of stock ownership qualifies shareowners to make nominations.”

However, it almost goes without saying that those who benefit financially from the current system oppose any substantial change. AutoZone and ExxonMobil both of flatly opposed the idea of shareholder access. Cary Klafter, of Intel, expressed the more common theme of management. “Sarbanes-Oxley and the revised stock exchange listing requirements are barely in place and ought to be given time to work before considering a revamp of the proxy rules to ‘fix’ perceived problems when the solutions may already be in place and in the process of implementation.”

Similarly, Patrick Mulva, ExxonMobil’s corporate secretary, wrote that allowing certain shareholders access to the proxy statement “would be detrimental to good corporate governance” and urged the agency to “stay on course with the significant corporate governance reforms already enacted.” “Most advocates of the ‘open ballot’ recognize that the process must be limited to shareholders holding a significant position — anywhere from 1% to 5% or more of the company’s outstanding shares. However, a shareholder or group owning such a significant stake can easily afford the cost of a proxy solicitation. By way of example, a 1% interest in ExxonMobil would represent almost 6.7 million shares with a market value at current prices of approximately $2.5 billion.”

In 1977 Business Roundtable (BRT) recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” The memo noted such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” Yet, after Enron, Global Crossing, WorldCom and too many others to count, the BRT now argues such amendments “may result in the nomination and election of directors that will cause the company to violate federal law or fail to comply with SEC, NYSE or NASDAQ requirements.”

John C. Wilcox, of Georgeson Shareholder Communications Inc. advised, “We do not believe that shareholders should have the power to unilaterally use a company’s proxy statement for director nominations.” Instead, he propose that boards open the nominating process to a nominations advisor chosen by a “qualified shareholder or group representing 10% or more of a company’s outstanding shares owned for no less than three years. If more than one shareholder or group qualified, the one representing the most outstanding shares would prevail. The ‘qualified shareholder representative’ would work directly with the nominating committee of the board in proposing nominees, negotiating for the selection of favored candidates and commenting on the qualifications and suitability of incumbents.”

Robert A.G. Monks advocates a Shareholder Advisory Committee, authorized by a by-law amendment, that “would consist of three paid representatives elected by the company’s largest institutional shareholders; it would be funded with a penny a share by the company itself, and have a right to meet with the company, propose candidates for director and publish its views annually in the proxy statement.”

Proxy advisor Institutional Shareholders Services noted “Any democracy is only as robust as its electoral process. Elections at U.S. corporations lack several attributes of any good democratic system. Most nominees run unopposed. Challengers to the incumbent directors lack any meaningful opportunity to place their names on the ballot.” “Qualifying significant shareholdings should vary with the size of the issuer. At the very largest public companies, holdings of as little as 3 percent to 5 percent of the outstanding shares should suffice. At smaller companies, however, qualifying holdings of 10 percent or more may be prudent.”

Not surprisingly, investors and those who act as pension fund and mutual fund fiduciaries almost universally support shareholder access to the corporate ballot. The California Public Employee Retirement System (CalPERS) and the Council of Institutional Investors (CII) suggest a five percent threshold. The AFL-CIO favors a three percent threshold, as does the Nathan Cummings Foundation, Domini Social Investments, Walden Asset Management and the American Federation of State, County and Municipal Employees’ Pension Plan (AFSCME), which filed the Citigroup resolution and has published a white paper on the equal access issue. The Social Investment Forum (SIF) and Responsible Wealth, which represents “a network of hundreds of affluent Americans,” advocate a one percent threshold. Jerome L. Dodson of Parnassus Investments seeks a lower threshold of $100,000 and advocates elections incorporate instant runoff voting.

Nell Minow, Editor of The Corporate Library stated that “While there has been a lot of focus on “independent” directors in the Sarbanes-Oxley legislation and the proposed listing standards, there really can be no meaningful independence as long as the nomination process is a self-perpetuating closed loop. The Commission should develop a procedure along the lines of that announced by Apria Healthcare this week to permit shareholders to submit candidates to be included on the proxy circulated to all of the shareholders by management.”

Stephen Davis, President of Davis Global Advisors, Inc. pointed out that “in virtually every other market in the world, with the exception of Canada, shareowners have the ability to cast their vote against directors. If a majority votes No, the director fails to be elected. At the core of any system of accountability is the right of stakeholders to hire and fire their agents. DGA endorses the position taken by the Council of Institutional Investors and the AFL-CIO advocating prudent measures to enable investors with significant stakes to nominate directors. Contested elections, under controlled circumstances, could spur boards further in advancing shareowner interests.”

Gabriel P. Caprio, Chief Executive Officer, Amalgamated Bank suggested a three percent threshold for three reasons. “First, that is the current level of support that is required for resubmission of a shareholder proposal in a subsequent year. Second, it is the figure that the Commission itself proposed five years ago in the rulemaking proposal that resulted in the current version of Rule 14a-8, when the Commission proposed (but did not adopt) a proposal to give shareholders the right to override the exclusions in Rule 14a-8(i) if at least three percent of the shareholders supported a particular resolution. We note in this regard that a one-year holding period is in line with current requirements and makes it more likely that any shareholder proponents are long-term holders. Third, and to be practical about it, a three percent threshold will be a significant barrier at many publicly-traded companies. As a result, it is likely that nominees put forth by a group of shareholders holding that large a percentage of outstanding shares will reflect a level of dissatisfaction that warrants inclusion of the candidates in the company-prepared proxy materials.

Mark Latham of the Corporate Monitoring Project suggests amending rule 14a-8(i)(8) to explicitly allow binding shareowner resolutions on director elections. Defining several standardized levels of access for nominees in the proxy, without actually imposing them as a regulation, could facilitate experimentation and learning. It would enable the investment community to try opening access to the proxy at, for example, $2,000, 1% or 5% thresholds (my numbers) and allow us to learn the pros and cons of a variety of scenarios, rather than requiring that one standard apply to all.

Bartlett Naylor of Capital Strategies said “By opening the proxy to shareholder-nominated directors, this Commission would sign an emancipation proclamation, ending the enslavement of shareholders to management-controlled directors.”

Holy Grail, Emancipation Proclamation or Magna Carta, clearly allowing shareholders to place their nominees on the corporate ballot would be a huge leap forward for the rights of shareholders. Robert Monks was right last year when he said “The so-called elections of corporate boards are mostly a sham, and will remain so until dissidents can get access to the company proxy statement to challenge the management slates.”

His partner in several ventures, Nell Minow, is correct in her assessment that “independent” directors, as defined in the Sarbanes-Oxley legislation and the proposed listing standards, is not really meaningful. One route to try to restore market confidence is to put an SEC cop on every block to police corporate wrong. That’s an expensive notion and bound for failure. Yes, we might catch managers self-dealing but my guess is that far more agency costs are due to mismanagement.

The other option is to empower the owners of corporations to monitor management. Let those who own the companies elect directors who will be accountable to them. Instead of sham elections, allow shareholders to turn directors who are not doing their jobs out of office though fair elections. Then we will ensure our corporations and our financial markets are the most efficient and productive in the world. It is high time the SEC quit meddling in the free enterprise system by restricting the rights of shareholders to manage their own affairs.

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Executive MSc in Corporate Governance Offered at NIMBAS

Given the recent high profile failures in corporate governance in a wide range of different businesses, NIMBAS Graduate School of Managementin the Netherlands, in association with Bradford University School of Management (UK) have developed an MSc in Corporate Governance that builds on an existing MBA degree in a one-year, part-time Executive program.

The aim of this program is to enable international participants from various functional backgrounds to identify and understand the ways in which corporate governance processes impact on their organizations. Understanding these processes and ensuring principles of corporate fairness, transparency and accountability are becoming essential for today’s business leaders.

Those already holding an MBA degree will have a substantial advantage in that many of the areas under study will have formed part of their MBA curriculum. However, this programme will provide a structure and a focus for the main themes involved:

  • The theory and practice of corporate governance itself.
  • Corporate reporting and its regulation
  • Business ethics
  • Internal management control
  • Corporate tax management
  • Best practice management
  • The legal framework surrounding corporate governance

For further information, please contact Joy Kearney, International Relations Manager, NIMBAS Graduate School of Management.

CalPERS Attacks Fat-Cat Pay

CalPERS will go after 10 to 15 companies with the worst pay practices in the next proxy season, as it currently does by listing underperforming companies.

The giant pension fund will oppose repricing “underwater” stock options, “evergreen” stock-option plans that are replenished without shareholder approval, executive pay plans that don’t tie pay to performance, or that don’t require executives to vest their stock compensation over at least four years. CalPERS will also oppose any option plan where the top five executives pocket more than 5 percent of the stock or options granted in a single year.

According to the San Jose Mercury News (CalPERS assails exorbitant executive pay, 6/18/03) “CalPERS standards could be tough hurdles for Silicon Valley companies. For example, at least 120 of the valley’s 150 largest companies dole out more than 5 percent of their options to the top five executives. Topping that list is Media Arts Group, which reserved 94 percent of its options for top bosses in 2002. Intel, Hewlett-Packard, Siebel Systems, Intuit and Cisco Systems were among the few local companies that hand out at least 95 percent of their options to the remaining workers.”

These may be tough reforms for Silicon Valley firms but this editor is convinced that those who comply with the new standards will be rewarded by greater productivity from employees. Certainly, the top five executives are important but in too many firms their pay is wildly out of proportion to their actual contribution. Additionally, the CalPERS policy will be much more effective for all concerned than the one originally threatened by California State Treasurer Phil Angelides who, last month said, “Maybe it would be a good idea to dump stock in companies with excessive CEO packages-it would send a strong message.” Using its voting power will send a stronger and certainly a longer lasting message. Let’s hope companies are responsive. (see Agenda Item 7c)

Outside Directors, Are They Independent?

The New York Times ran an article by Mark Hulbert asserting that researchers have found little evidence that companies improve their performance by raising the number of independent directors on their boards. (Outside Directors Don’t Mean Outsize Returns, 6/15/03) The problem is in what constitutes “independent.” Just because directors are neither employees nor officers of the company, and they have no business or personal relationships with it, that doesn’t make them independent.

To be truly independent, directors must have their own constituency. They need to be elected and accountable to shareholders who can remove them from office through the election process if they are not doing their job. In the case of The Business Roundtable v. SEC (905 F.2d 406, D.C.Cir. 1990), the court indicated the “goal of federal proxy regulation was to improve those communications (with shareholders) and thereby enable proxy voters to control the corporation as effectively as they might have by attending a shareholder meeting.” Nominating and electing directors will give them just that kind of power.

See “Inside Track with Broc: Jim McRitchie and Les Greenberg on Shareholder Access for Retail Investors,” an interview posted at (6/10/03)

Corporate Governance Challenges for Emerging Economies

“More than ever before, the economies of the world, and the jobs and business that depend upon economic activity, are being shaped by the force and speed of globalization by such an environment that the need for timely, true and fair financial reporting, underpinned by the highest standards of corporate governance is increasingly critical.

“This year’s World Council for Corporate Governance’s International Conference is particularly important because market and public confidence is still so fragile after a series of high profile corporate failures in which the absence of effective governance was a major factor,” said Patricia Hewitt, MP, Secretary of State for Trade & Industry (UK) in her message to the 4th International Conference on Corporate Governance in London.

Earlier Derek Higgs the UK banker who headed the review of the role of non-executive directors stated, “Corporate Governance has become a key issue for driving today’s business. Our greatest challenge is to ensure that not only the wealth created is sustainable but also that the benefits accrue to everyone.”

Dr. William Halal, Professor of Management at George Washington University in his opening address asserted, “the issues of Corporate Governance in emerging economies are even more challenging. Ethics has to be the key issue to restore public confidence in the market economy.”

In his keynote address Prof. Avinash Persaud, Managing Director, State Street Bank asserted that “Contrary to common belief, the biggest owners of capital are public employees pension funds and ordinary insurance policy holders. If pensioners in developed markets had a greater exposure to the risks of emerging economies, it would be good for emerging economies, it would be good for the long-run returns of those pension funds and it would create a powerful lobby for the global economy, something that is sorely lacking today. “

In his theme address Dr. Madhav Mehra, the President of World Council for Corporate Governance, which organised the Conference asserted, “the box ticking model of Corporate Governance was inappropriate for the emerging economies.” He added, “unbridled greed poses the biggest threat to capitalism. The storm that has been raised even by a mild report on corporate governance reform by Derek Higgs is indicative of how the system defends itself against any change. For corporate governance to succeed we have to change our metaphors of success from ‘winner takes all’ and ‘success at all costs’ and develop an inner value system which prides on ethics, morality, equity, transparency and above all the courage to own failures.”

While chairing the session on “Improving the Effectiveness of Corporate Boards”, Mr. Michael Foot, Managing Director of FSA stated “the Boards of 21st Century have enormous challenges and their success will depend on their ability to tackle the stakeholders’ issues effectively.”

Representatives from eighteen countries participated in the Conference which was highly rated by participants.

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Creative Solutions Offered SEC by Mark Latham

Mark Latham’s suggestions to the SEC regarding possible rule changes to encourage democracy should win an award for creativity, as well as serious consideration. Here is a summary of a few of the suggestions he included in his comment letter.

  1. Branding. Comparing the quality of one director candidate to another is a complex task. The majority of individuals lack the time and expertise to make detailed decisions on their proxies. Even ISS (Institutional Shareholder Services) probably spends only about four hours of analysis per proxy. The solution, according to Latham is brand reputation, allowing individuals to, for example, vote the same way as CalPERS, Domini Social Investments or any other institutional investor that announces their intended votes in advance. The Commission could promote this possibility by:
    • Developing an internet brand voting system as a pilot program.
    • Encouraging others to develop an internet brand voting system.
    • Clarifying regulations that may affect such a system, such as proxy solicitation rules.
    • Funding system development.
  2. Company Specific Rules Established by Shareowner Resolutions. Amend rule 14a-8(i)(8) to explicitly allow binding shareowner resolutions on director elections. Defining several standardized levels of access for nominees in the proxy, without actually imposing them as a regulation, could facilitate experimentation and learning. It would enable the investment community to try opening access to the proxy at, for example, $2,000, 1% or 5% thresholds (my numbers) and allow us to learn the pros and cons of a variety of scenerios, rather than requiring that one standard apply to all.
  3. Instant run-off voting. Since candidates with the most votes may actually not be preferred by a majority of voters if there are more than two candidates, require or at least encourage instant run-off voting.

While I would prefer the SEC adopt my own recommendations, Latham’s are far preferable to instituting a 5% threshold across the board or limiting the number of shareowner director nominees to one or two per board. Latham would basically empower the shareowners of each company to come up with their own framework to ensure democratic corporate governance, a reasonable approach.

More Press as Comment Period Nears End

The Washington Post carried an article on 6/12, SEC Ponders Broadening Proxy Access; Agency Seeks Input On Board Election Idea. It reported that the Business Roundtable, an organization that represents chief executives at the largest companies, is polling its members and won’t comment until the survey is complete. However, comments are due 6/13. Following are highlights from the Post article:

  • The fear among chief executives, securities lawyer Howard Schiffman said, is that the proposal would make it harder for them to run their companies. “The problem is that there could be so much democracy on the board that the board becomes another alternative management,” he said. “There can’t be two CEOs. At some point you have to have a CEO who can make decisions.
  • Corporations also try to have a mix on boards, including individuals with different expertise and a balance of women and minorities, executives said. Challenges by shareholder groups could disrupt such a mix and also lead to the election of directors with limited agendas, executives said.
  • The threat of a challenge could make directors more likely to challenge chief executives on such matters as pay and complex deals, Schiffman said. SEC actions should foster “something between a board that is totally passive and one that is an alternative government,” he said.
  • One idea the SEC staff is considering would require companies to pay to include in proxy material the names of candidates nominated by shareholders holding a significant amount of stock — say, 2 or 3 percent of outstanding shares. Discussions so far would limit shareholders to one nominee.
  • Shareholders want board seats for different reasons than they did during the hostile corporate-takeover days of the 1980s. “This is not for control, this is for a spot at the table,” an SEC official said.

I have no reason to believe shareholders won’t seek directors that are any less diverse than those proposed by current nominating committees. Considering the small numbers of women, minorities and the lack of diversity of opinions held by current board members, shareholders could hardly do worse. I hope the SEC does not limit shareholder nominees to one per board. That would virtually guarantee failure, since one board member can easily be ignored and isolated. We need more than a spot at the table. We need boards who reflect the values of shareholders and can be held accountable by shareholders. Tokenism is not democracy.

Contrast the Wahington Post’s coverage to that of, which starts “The question is not whether shareowners should have access to the proxy to nominate directors, but what percentage of stock ownership qualifies shareowners to make nominations.”

Apria Healthcare Sets New Governance Standard

Apria Healthcare Group Inc. filed proxy materials (see especially exhibit A) which included allowing stockholders to nominate candidates for election to the Board of Directors at future annual meetings and to have those nominees listed in the company’s proxy materials.

Ralph Whitworth, Apria’s Chairman stated, “It has become painfully obvious over the past few years that corporate America must improve board room dynamics. This has to start with a robust and inclusive process for determining board composition. Apria’s new policy will allow our shareholders to participate in that process without the cumbersome and expensive undertaking of filing and distributing a separate proxy statement.”

The policy allows one or more stockholders who own beneficially at least 5% of Apria’s common stock as of the record date of the applicable annual meeting, and who have maintained that ownership level for at least two years, to submit nominations for the Board of Directors and to require the inclusion of information concerning their nominees in Apria’s proxy materials. A maximum of two stockholder nominations are permitted for each individual Board seat.

One condition they didn’t mention in the press release I saw was that any Nominating Stockholder nominee who does not receive at least 25% of the votes cast in the related election of directors will be prohibited from serving as a Nominating Stockholder nominee for four years from the date of the annual meeting in question. So, it is unlikely that such a candidate will be able to gradually build a reputation with shareholders. They would need to win at least be a real contestant from the start.

Additionally, Directors of Apria will now have stock ownership requirements for Directors similar to the requirements established for senior management earlier this year. Under the new requirements, each of the company’s eight non-employee Directors must own $150,000 worth of Apria stock within the next five years. Target ownership levels for senior management are expressed as multiples of salary, ranging from one and one-half to three times.

In 2001 and 2002, BusinessWeek magazine named Apria’s Board of Directors among the best boards in corporate America and, in 2000, Institutional Shareholders Services (ISS) named Apria as the best governed company in North America.

Apria provides home respiratory therapy, home infusion and home medical equipment through more than 410 branches serving patients in 50 states. In 2002, Apria received HME News’ HME Excellence Award as Best Respiratory Provider in the United States. With over $1.25 billion in annual revenues, it is the nation’s leading homecare company. (Disclosure: the Editor of CorpGov.Net is an investor in Apria)

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Canadian Coalition for Good Governance

The Canadian Coalition for Good Governance represents Canadian institutional shareholders by promoting the best corporate governance practices and working to align the interests of boards and management with those of the shareholder.

Objectives Include:

  • Ensuring that all public corporations have highly qualified boards of directors who understand that they are accountable only to the shareholders in the carrying out of their fiduciary duties.
  • Ensuring that boards of directors insist on excellent and ethical management.
  • Ensuring that that the board of directors supervise management proactively.
  • Ensuring that all committees of the board of directors are independent from management and highly qualified.
  • Ensuring that external auditors follow policies of transparent accounting, reporting directly to the audit committee thereby ensuring independence from the management of the company.
  • Supporting compensation schemes that reward employees for superior performance.
  • Developing a common position on acceptable accounting standards and financial disclosure through input with the various regulators and standard setting organizations.

The 19 founding members of the coalition manage about 350 billion Canadian dollars, or about $260 billion; an additional 35 institutions, managing 250 billion Canadian dollars, have signed on as observers. The chairman is Michael Wilson, a former finance minister of Canada who heads the Canadian arm of UBS Global Asset Management.

Coalition members plan to monitor the composition and performance of corporate boards and to swap information on board candidates to recommend to nominating committees. They also aim to develop common positions on accounting standards and financial disclosure. (see Conscience of Canada Inc., NYTimes, 6/8/03.

According to Corporate Governance Review (Fairvest Securities Corp.) The CCGG will start with a budget of about $1 million. the board will be chaired by former finance minister Michael wilson and operations will be managed by David Beatty (director of Bank of Montreal). The coalition will actively lobby for legislative changes.

Another Attempt at a Corporate Governance Mutual Fund

The ABC fund will invest in companies it sees as undervalued and will try to make money by pushing for improvements in corporate governance, according to the fund’s manager, H Team Capital. It will talk to management, agitate for new leadership or board members, mounting proxy fights, or encouraging takeovers.

The fund’s manager, Howard Horowitz, a lawyer and former merger-arbitrage analyst for the now defunct Lipper & Co. investment firm, has no public record as a solo mutual fund manager. He co-managed the Lipper Merger Fund, which folded after company head Kenneth Lipper shut down his hedge funds amid heavy losses and a discovery that securities in the portfolios had been mispriced.

Dan Culloton of says “investors should stay wary of the fund until it proves it’s a serious corporate avenger and not a clever attempt to exploit the public’s preoccupation with corporate malfeasance.” He also warns the fund will have to gather sizable assets if it’s to have meaningful pull with companies or it will need to win over such funds to vote with them. (New Fund Seeks Gains Via Corporate Change, 6/6/03)

eRaider attempted such a fund with an elaborate internet affiliate designed to enhance value as a brand name and to work with other shareholders in an attempt to move companies. I proposed such a fund in 1996. I definitely think it can work, although I’d build it around a modified index fund that holds hundreds of companies and focuses corporate governance initiatives only at a few at a time. It will be interesting to see how they do.

Linda E. Scott to Head TIAA-CREF Corporate Governance Post

TIAA-CREF named Linda E. Scott to be Director, Corporate Governance. Scott leaves the Office of the New York State Comptroller, where she served as Director of Investor Affairs for the New York State Common Retirement Fund. Previously, she was Deputy Director of Communications for the New York State Comptroller and Special Assistant to the President of the Board of Education of New York City. She received her BA from Trinity College in Hartford and an MA from Yale University.

When interviewed about New York State Retirement Fund target companies in 1996, she implied that making the list has little to do with governance. “It’s all bottom line,” she said. “It’s ‘How much money did you make for us this past year?’ We’re not here to make sure that boards are composed of good directors. We’re here to make sure boards make money for us.” I assume she recognized the correlation then and hope she’ll bring TIAA-CREF to join those asking the SEC to allow shareholder access to the corporate ballot for the purpose of nominating directors. (see BusinessWeek, 11/25/1996).

Burden of Proof Shifting to Incumbent Boards

In a recent interview with a New York Times reporter, Patrick McGurn, a senior vice president with Institutional Shareholder Services said the burden of proof used to be on the dissidents to prove their case for change when waging a proxy fight, but his company and many others in the investment community have become increasingly skeptical of the ability of existing managements and boards to make significant changes. “You saw time and time again that incumbent boards weren’t taking care of shareholder interests.”

The subject of the report was the endorsement by ISS of a new slate of directors for the El Paso Corporation. “A ‘clean slate’ with a fresh start, unencumbered by the legacy of past mistakes, can help move the company forward,” Institutional Shareholder Services, which advises more than 700 large investors, concluded in its report on El Paso.

While ISS acknowledges the current board deserves credit for recent actions, it also believes they deserve much of the blame for El Paso’s troubles. “This board, and all members of this board, by their own acknowledgments, drank the Kool-Aid,” said McGurn. Strong words from an influential shareholder advisor. (see An Investment Adviser Urges That El Paso Board Be Ousted, by Reed Abelson, 6/4/03)

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Webcast on Open Access

Last month held a groundbreaking webcast onShareholder Access to the Ballot. Participants included:

  • Andrew Brownstein, Partner, Wachtell Lipton Rosen & Katz
  • Richard Ferlauto, Director of Pension and Benefit Policy, AFSCME
  • Lawrence Hamermesh, Professor, Widener University
  • Richard Koppes, Of Counsel, Jones Day
  • Ted White, Director of Corporate Governance, CalPERS
  • Beth Young, Senior Research Analyst, and Corporate Governance Consultant

Broad topics of discussion included: Why Investors are upset, Availability of Shareholder Nominees and Who Selects Such Nominees, More Disclosure as a Possible Solution, the Importance of Board Collegiality, Use of “Short Slates,” Number of Candidates and Disclosure Framework, and Ideal Frameworks for SEC’s Consideration.

While the webcast was innovative and very informative, it might have benefited by having someone there to represent individual shareholders and/or socially responsible mutual funds. However, if you want to know what the key thinking on this issue is among those representing large businesses and large public pension funds, you probably won’t find a better read.

Hanover Compressor Settlement Adds Fuel to Open Ballot Fire

Thanks to the team of William Lerach and Robert Monks, a recent Milberg Weiss shareholder settlement allows shareholders holding more than 1% of Hanover’s outstanding shares to nominate directors. Hanover’s Nominating and Governance committee will then select two of those individuals to be placed on the ballot. After these shareholder-nominated directors have served a one-year term, the board then is only obligated to nominate one shareholder-nominated director in the future. The settlement also includes a number of other governance restrictions, such as shareholder approval for new executive option plans and repricing of stock options and rotation of the independent auditor every five years. (see This Settlement Raises the Governance Bar, BusinessWeek, 5/14/03; see also Will Boye’s article on the ISS siteHanover Settlement Seen as “Breakthrough” for Equal Access)

BusinessWeek Endorses Open Ballot Concept

“Democracy in the boardroom could lead to more effective corporate governance by forcing directors to be more accountable — something recent reforms have done with only limited success. Allowing shareholder nominees on proxies could ensure that those who shirk their duties would face real consequences…In one bold stroke, his agency can give greater voice to America’s frustrated investors and improve accountability in the boardroom.” (Louis Lavelle, with Mike McNamee and Amy Borrus,Commentary: A Fighting Chance for Boardroom Democracy, 6/9/03)

Plea From TIAA-CREF Activists

In the 1980s, TIAA-CREF participants lobbied for five years to set up a socially responsible fund. Now they’re pushing for that fund to invest in particularly responsible companies and in low-income area housing and business, as well as engaging in shareholder advocacy. These are becoming more standard in socially responsible investing and are quite viable financially. Endorsements include the National Women’s Studies Association and United for a Fair Economy, Benjamin Barber, Dennis Brutus, Noam Chomsky, Sandi Cooper, Ursula Goodenough, and Howard Zinn.

Last year, TIAA-CREF’s then-CEO John Biggs told the New York Times he would support setting up a new fund that moves in this direction if there was sufficient financial interest. Proponents have now gathered over $16 million in pledges from over 600 individuals who have committed to transfer retirement assets should the fund materialize! At TIAA-CREF’s annual meeting officials said they would consider the proposal. You can help through the following actions:

  1. Contact TIAA-CREF to voice support for the proposed fund, even if you have called before. Let them know about your TIAA-CREF membership, money pledge (if you did), and affiliation,. Call CEO Herbert Allison at 800-842-2733; 212-490-9000 (ask for him and leave a message with his assistant).
  2. Visit TIAA-CREF: Out of the Bad and Into the Good to learn more about the proposed fund and to make a pledge.
  3. Forward this message with a short personal endorsement to listservs, organizations, and your colleagues nationally.
  4. Contact Neil Wollman and Abby Fuller to receive campaign updates about every two weeks. And let them know of any actions you take.

Directors and General Counsel See Ethics As Key to Reform

A recent survey of more that 600 corporate directors and general counsel at public corporations co-sponsored by the American Corporate Counsel Association and the National Association of Corporate Directors found that 90% believe CEOs and senior management bear a great deal of responsibility for recent scandals at companies like Enron and WorldCom.

Their solution? Corporate directors, by 70%, and general counsel, by 82%, both agree that senior management’s commitment to creating and sustaining an ethical business culture is the single most important measure in improving corporate governance. About a third of both groups believe corporate governance reforms will create a more adversarial relationship between senior management and boards; 40% see recent scandals restricting risk-taking and entrepreneurship.

Editor: It’s hard to argue against promoting ethics but isn’t their recommendation a little like saying that we’d have less theft if those with the opportunity to steal would demonstrate a greater commitment to ethical conduct? A more systemic solution would be to allow shareholders to place director nominees on the corporate ballot. Shareholder directors could then monitor and changes in actual behavior would be more likely to occur.

The NACD was recently running an informal survey on their site that mentions the SEC’s possible proposal to allowing shareholder nominees on corporate ballots. 38% of respondants think there is room for shareholder input in the existing process, 19% believe only directors should nominate directors but 40% of survey respondants think shareholders should be able to nominate directors and place those names on the corporate ballot. That’s a high number, considering that most visiting the NACD site are probably members. Maybe some directors are tired of not having the “independence” of their own direct constituency.

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May 2003

BRT Leads Opposition

The Financial Times reports “the most powerful business lobby group in the US plans to ask the Securities Exchange Commission to delay sweeping reforms that investors say will improve shareholder democracy. Public and union pension funds, as well as individual investors, hope the SEC will change rules on proxy filings to make it easier for investors to add their own candidates to the slate of official board nominees at companies’ annual meetings.”

In August 1977 the influential Business Roundtable (BRT) recommended “amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” Their memo said such amendments “would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.”

Now the Fincial Times reports the BRT is likely to ask the SEC to defer any changes until after implementation of new principles governing corporate governance proposed by the NYSE and Nasdaq. Why has the BRT changes its position?

The SEC first proposed a rule to allow access back in 1942. Investors have been waiting more than 60 years for that basic right. So far, no letters from opponents to democracy have been posted on the SEC’s website. Investors have united in their support for measures that would grant “equal access” to the official company ballot.

Editor Files Comments on S7-10-03 Possible Changes to Proxy Rules

Corpgov.Net editor, James McRitchie, filed comments on the SEC release for possible changes to regulations to bring about greater shareholder democracy. See the full letter (without the footnotes) herein our Commentary section. Based on feedback from readers and additional input, I would propose a few amendments to SEC Rulemaking Petition File No. 4-461, filed jointly in August 2002 with Les Greenberg of the Committee of Concerned Shareholders.Provisions should now include the following:

  • Minimum Ownership Threshold (included in 4-461): The threshold should be kept low, the same as for resolutions…a minimum holding of $2,000.

A higher threshold is likely to lock out most individual shareholders and even small institutional investors. Shareholder scrutiny would almost entirely focus on large companies, where the majority of stock is held by large institutional investors. Shareholders in the other 8,500+ companies would be left with the current system, which denies them any significant access to representation. 

Additionally, we do not want to move from management domination to domination by majority shareholders, as exists in much of Continental Europe. Such markets are not as robust because minority shareholders and prospective shareholders fear that dominant shareholders will divert value from the firm to themselves. Although strong fiduciary duties, laws against unfair interested party transactions, and other enforcement mechanisms can reduce these kinds of private benefits of control, the least costly mechanism is to allow all shareholders to have a voice in corporate governance. Active monitoring by investors of all sizes will ensure diverse ownership, proper valuation of stocks and robust markets.

  • Minimum Holding Period (included in 4-461): Shares held by the nominating shareholder must have been held for a minimum holding period in excess of one year. This helps to prevent use by short-term speculators. 
  • Good Faith Deposit: Nominations should be accompanied by a deposit of $3,000 per candidate nominated, which is to be refunded if each nominee meets the same threshold currently required for resubmission of proposals: minimum 3% vote in year one, 6% in year two and 10% in year three. This would discourage frivolous filings.
  • Competing Shareholders: In the even that multiple shareholders compete for access to the proxy for their director nominees, the SEC should employee a process similar to the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995. Only candidates from the largest two shareholder blocks should be required to be placed on the corporation’s proxy ballot. This is the fairest way to reduce the number of potential candidates to a manageable size. Any rulemaking should allow for at least two shareholders or groups of shareholders to have their director nominees included in order to ensure against domination by a single shareholder, as discussed above. 
  • Instant Run-off Voting (IRV): Since there may be up to three candidates for a given board seat and we want to ensure board members receive majority support, while minimizing the expense of elections, IRV should be required whenever there are three candidates. Under this procedure, voters rank the three candidates by preference. If no candidate wins a majority of first choices, then the last-place candidate is eliminated. Ballots of that candidate’s supporters are then reallocated to their next-choice candidate and the winner is determined. For more information on IRV, see “Voting System Reform” at
  • Exemption from Regulation 13-D: Communication among shareholders together holding more than 5% should be exempted from burdensome requirements under Regulation 13-D so long as that communication is limited to efforts to nominate director candidates. Shareholders should be able to openly discuss the merits of candidates without the need to file burdensome paperwork. 
  • Maximum Permissible Slate: Qualifying shareholders should have the right to nominate a maximum of half the board minus one at each shareholder meeting. This will discourage short-term speculators from using the process. Existing methodologies for shareholders to run an entire slate would remain in tact and provide an alternative, if more expensive one, for shareholders to seek a change in control.
  • Director Statement: Each shareholder-nominated director candidate should have the opportunity to include a backgroun