Author Archive | James McRitchie

Archives: November 2000

LENS Files Complaint at Metromedia
Shareholder activist, Lens Investment Management, LLC, filed a formal complaint, under Section 220 of Delaware General Corporation Law, against Metromedia International Group, Inc. (Amex: MMG), a diversified global media company. Lens is seeking to inspect corporate records to determine whether top execs have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting from Metromedia International at the expense of its public shareholders. For more, see Yahoo! and Lens’ campaign.

Disclosure for Fund Fees

The Securities and Exchange Commission will soon release a study on mutual fund fees recommending that funds disclose the amount of expenses paid on a hypothetical $10,000 account, according to Mercer Bullard, CEO of Fund Democracy. In SEC Preparing to Shine a Brighter Light on Fund Fees (TheStreet.com, 11/17), Bullard indicates SEC Chairman Arthur Levitt pointed out that fund fees can take a huge bite out of returns. “He used the example of a $1,000 investment in an S&P 500 index tracking fund made in 1950, which should be worth about $500,000 today. But after fees, this total drops to $230,000, and if the fund is not tax efficient it shrivels to $65,000.”

International Shareholder Advocacy

Lauren Compere, of Walden Asset Management, provides guidance to shareholders seeking to advocate abroad in their November issues of Values. Access to company proxies varies, ranging from an ownership threshold of 1% in Germany and Japan to 5% of outstanding shares in France. How can U.S investors influence companies in their international portfolios?

  • Learn the rules of country specific markets.
  • Develop global proxy voting guidelines.
  • Pursue alternatives to shareholder resolutions, such as letter writing and meetings.
  • Develop a network of local partners to gain legal representation at annual general meetings.

Exec Pay Too High

An editorial in the 12/13 edition of Business Week makes the case for CEO churning (Why CEO Churn is Healthy). “They’re flying out of the corner office like quail being flushed out of cover.” Lucent, Xerox, Gillette, Procter & Gamble, Coca-Cola and Aetna have thrown their CEOs out within the last 12 months. According to Challenger, Gray & Christmas Inc., 103 CEOs left their jobs in September, more than twice last year’s rate. “Many CEOs are barely in control of their companies’ fate, much less their own.” “In the transition to the New Economy, it may be that CEOs can be expected to manage only a portion of the change before they fall victim to an unexpected trend or are overwhelmed by inadequate execution.”

While CEO churn may be logical in an era of rapid transitions, should temporary help be paid 500 times their average employee? A recent Hay Group survey found that 85% of institutional investors believe that executive pay at UK firms is insufficiently related to performance and that 100% thought pay incentives covering three or more years should make up a much larger proportion of total reimbursement. Yet, that same survey showed that 91% oppose the introduction of a procedure whereby shareholders could move resolutions on pay issues at the annual meeting and 97% oppose shareholders having to sanction reimbursement packages. (Governance, 9/2000)

Executive pay is much more extreme in the US than in the UK. Voting on exec pay doesn’t appear to translate to shareholder empowerment but too few institutional investors on either side of the Atlantic have really pushed for the long term incentives tied to performance they say they want. Until they do, the paradox will remain.

Back to the topConvergence

Gerald F. Davis and Michael Useem make a convincing case for convergence, not among nations but among firms with higher stock market valuations. To survive global industry consolidations, many such firms will seek a listing on American stock exchanges, and will thereby become subject to US legal standards. In their paper, “Top Management, Company Directors, and Corporate Control,” the authors point to the need for further research in five key areas “if we are to know what works and what does not, and which theories are useful and which are not”:

  1. Boards and directors: What does the decision process inside the boardroom look like? What are the sources of power and influence of inside and outside directors? How are the decision process and director influence contingent on the ‘institutional matrix’ in which a board is embedded? (Example: Pettigrew and McNulty, 1998.)
  2. Comparative governance: What really accounts for the astonishing and remarkably persistent diversity in the national systems of corporate governance? How do national institutions, cultures, and social structures shape and constrain the evolution of corporate governance systems? (Examples: Kogut and Walker, 1999; Bebchuk and Roe, 1999.)
  3. Financial globalization: If the surge of cross-border investing is a major driver of corporate change, what can we expect of financial flows and their regulation in the years ahead? How is the evolving organization of investors and companies likely to affect the internationalization of capital flows? What aspects of corporate governance will affect the attractiveness of a national economy for international investors? How are actions by the International Monetary Fund and World Bank likely to affect national systems of corporate governance? (Example: Evans, 1995; Mizruchi, 2000).
  4. Inequality in a “globalized” world: How do systems of corporate governance affect distributions of wealth within and among nations? What is the likelihood that social movements for change may mobilize in the face of – or to resist – globalization? Does the globalization of finance lead to a leveling up or a leveling down of national standards for labor relations, environmental protection, and income inequality? (Example: Firebaugh, 1999).
  5. Business and Political Leadership: To what extent is a shared leadership style emerging among top company managers and government officials around the world? Are such institutions as the World Economic Forum creating a global network among those who govern the major commercial and political institutions in the leading economies? As worldwide relations among business and political elites do emerge, are they undermining traditional relations among elites within economies? (Examples: Davis and Mizruchi, 1999; Khanna and Palepu, 2000).

eLOT Adopts Model Bylaws 

eLot, a leading web-based retailer of governmental lottery tickets, implemented bylaw amendments requiring two-thirds of the members of the board to be independent. The bylaws establish a strict definition of independence and mandate audit, compensation, nominating and transaction committees, all members of which must be independent. The bylaws also require that independent directors elect a “lead director” at any time when the chairman of the board is also an executive officer. The lead director and the other independent directors must meet in executive session following every meeting of the full Board. (Disclosure: the Editor owns stock in eLot)

CEO Options Under Water

Graef Crystal reports 45% stock option grants out of 1,036 studied were below there strike price. William Schrader at PSINet Inc. is down the most with a decline of 85% but WorldCom’s Bernard Ebbers lost the most money, $51.3 million with a drop of 61%. See U.S. CEOs With the Most Underwater ’99 Options.

LENS Investment Still Active

Founded in 1991 by Robert A.G. Monks as an investment management firm, Lens was among the first to take an active role in corporate governance. Some activists were worried when it ceased operation as an investment manager and took on the role of a specialist in investor activism. Recent action at Metromedia ensures us that Lens continues to be active. SeeShareholder Activist, Lens, Supports Announcement From Metromedia International Group — Global Communications and Media Company Considers Selling Assets, 11/9/00, andMetromedia International Group Response to Lens Investment Management, 11/14/00.

Spread it Around

Stock-based incentive programs pay double dividends, according to a survey of 173 firms by Hewitt Associates, since they also deliver higher returns to shareholders. (WSJ, 11/21/00)

New Era of Shareholder Activism

The Christian Science Monitor notes “the Internet allows individuals like Stoller to air their opinions, marshal support, and put pressure on heretofore unapproachable boards of directors.” The experience of Martin Stoller and Aaron Brown of eRaider and Nell Minow of The Corporate Library are highlighted, as well as Les Greenberg’s current campaign at Luby’s. See “A place at the table,” 11/20/00 and monitortalk.

New Proposal to Ensure Audit Independence

The Corporate Monitoring Project has expanded the field of battle for shareholder activism with a different spin from therecent SEC action on auditor independence. While the new SEC rules require companies that use their accounting firms for both auditing and consulting to jump through new regulatory hoops, the Corporate Monitoring Project proposes to let shareholders decide. Its too bad the SEC didn’t adopt the proposal as an option but the idea is also compatible with the new rules. Under the proposal, shareowners would vote to choose the company’s auditor, instead of just rubber-stamping or rejecting management’s choice. As under its corporate monitoring proposal, auditing firms would self-nominate and shareholders would select from among them. This would encourage auditors to build their reputations in the eyes of investors rather than in the eyes of management, creating new pressure for higher standards. The first resolution to seekauditor independence by shareholder vote will be submitted atSONICblue.

Back to the topShareholders Score

Progress is being made by shareholders. One small measure of success is the recent favorable votes on shareholder sponsored resolutions.  During the 1999-2000 season they garnered an average 22.6% vote, compared to an historical average of 5%.  Governance related proposals won an average of 36.5%. (Strategic Compensation Research Associates, as reported in the November edition of Directorship)

“Vote No” Gets Teeth?

The Court of Chancery of the State of Delaware issued an opinion on 11/8 confirming that directors of Dime Bancorp, Inc. nominated by Dime for re-election at its annual meeting held in July were not re-elected to a new three-year term. The directors must stand for re-election at Dime’s annual meeting of stockholders to be held next year.

Apparently, shareholders rejected Dime’s nominees by more that a two to one margin. North Fork Bancorporation, Inc. intends to nominate several directors to the Dime board of directors at the Dime 2001 annual meeting. See North Fork Announces Victory Over Dime in Delaware Court.

Unfortunately, although this appears to be a groundbreaking case which could lend teeth to “vote no campaigns,” I have not been able to locate a copy of the decision on the Internet or any real analysis. Any additional information readers have on this case would be appreciated. Please send it along to[email protected] or post to http://eraider.com/message.cfm?topicID=31&catID=64&messagenumber=183

CalPERS Sets International Investing Standards

California Public Employees’ Retirement System, the nation’s largest public pension, approved a standards for human rights, labor and the environment for overseas investments. State Treasurer Phil Angelides appears to have spearheaded the move, while State Controller Kathleen Connell opposed the move. (Calpers sets new standards for emerging markets, Reuters, 11/14, Yahoo!)

Microsoft Political Contributions Under Fire

A resolution calling for Microsoft to report its political contributions was filed by Trillium Asset Management Corporation and three members of Responsible Wealth last year and received a 7.6% yes vote. The resolution may be introduced again at the 2001 meeting. Common Cause reports that Microsoft’s soft money contributions went from $77,000 in the 1996-1997 election year cycle to approximately $1.8 million in the first eighteen months of the 1999-2000 election year cycle. (SocialFunds.com, 11/13)

Standard and Poor’s Rates Russian Firms

Companies wanting to attract investments can use their benchmarks to improve corporate governance practices in four key areas: ownership structure, financial shareholder relations, financial transparency and information disclosure, and board structure and process. Performance is against codes and Organization for Economic Cooperation and Development, World Bank and European Bank for Reconstruction and Development guidelines and principles. Ten firms have reported signed up so far. (see World standards to rate Russia business practice, ITAR/TASS News Agency, 11/14 via Northernlight and Russian firms choose transparency or taxman-S&P, Yahoo! 11/14)

IMF Calls for Competition in Hong Kong

The International Monetary Fund urged creation of a legal framework to crack down on anti-competitive behavior but Stephen Ip Shu-kwan, Secretary for Financial Services, indicated that, “all-embracing competition legislation could have profound implications for our market efficiency and flexibility, particularly given that Hong Kong is a small and open economy.” (see IMF pushes for competition law, South China Morning Post, 11/15)

China to Tighten Disclosure

China is tightening disclosure rules for financial companies. Public banking, insurance and securities will be required to disclose information on asset quality as well as non-performing assets. Financial statements would be audited by foreign accountants under international accounting rules. (seeDisclosure rules tighten up for financial listings, South China Morning Post, 11/15)

UK Pension Funds Respond to New Disclosure Law

UK pension fund trustees are now required to disclose how they account for social responsibility issues in their investment strategies, if at all. A survey by the UK Social Investment Forum reveals that 59 percent of the UK pension funds surveyed, representing 78 percent of total assets, incorporate socially responsible investment into their investment strategies. Only 14 percent of funds, representing 4 percent of total assets, state specifically that social concerns will not be taken into account. (see UK Pension Funds Embrace Social Responsibility, SocialFunds.com, 10/11)

Back to the topRiot Police at Smirnov Boardroom

As further evidence that Russia is still in need of corporate governance reform, black-masked riot police, wearing body armor and brandishing nightsticks, broke down the doors of a Russian vodka distiller involved in a shareholder dispute. (seeIn Russia, Riot Police Hold the Golden Share, International Herald Tribune, 11/8)

India’s the Place

Gary Wendt, CEO of Conseco, an Indiana based financial holding company, argues there is an oversupply of money chasing Asian investment opportunities. Taiwan, Singapore and Australia are overpriced. Indonesia, the Philippines, Malaysia, Burma and Thailand remain high risk countries, as does China. Japan is facing debt overload; the average firm’s debt-to-equity ratio is 90%.

Wendt’s “dark horse” candidate is India, which has the largest quantity of today’s most important resource: people. While wage rates for educated workers are high in other English speaking countries, India’s still have a long way to catch up. What was previously done in Indianapolis can now be done in India with the same efficiency. As reported earlier, CLSAranked emerging market companies in terms of corporate governance. Three of the top ten are based in India: Infosys,Hindustan Lever, and Wipro.

An edited version of Gary Wendt’s speech at the Conference Board’s Global Leadership Forum appears in Across the Board’s 11-12/00 edition. In the interest of disclosure, it should be noted that the editor of CorpGov.Net, James McRitchie, recently purchased Wipro ADRs.

$259 million PSLRA Settlement at 3Com

3Com Corporation has agreed to pay $259 million to settle a securities class action filed by the Louisiana School Employees’ Retirement System and the Louisiana Municipal Police Employees’ Retirement System on behalf of 3Com shareholders. The Funds were appointed to the role of principal lead plaintiffs by the United States District Court for the Northern District of California pursuant to the Private Securities Litigation Reform Act in March 1998 and were represented by Bernstein Litowitz Berger & Grossmann LLP.

The settlement is the second largest ever obtained from a corporate defendant in a securities class action, next to that obtained against Cendant Corporation. The settlement also requires the 3Com Audit Committee to include at least three directors, all of whom must be independent and at least one of whom has accounting or financial management expertise. Newsalert, 11/8, Louisiana Pension Funds Announce $259 Million Class Action Settlement With 3Com

Southeast Asian Markets Endangered

The Wall Street Journal warns that “Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come.” Poor corporate governance has led some funds, such as activist Julian Robertson’s Tiger Management, to close up shop. CLSA Emerging Markets found that during the 1997-1998 financial crisis, a basket of 108 emerging-market stocks fell 10.5%, whereas the 10 companies that scored best on corporate governance criteria gained 133%. The top five rated firms included: TSMC, Infosys, HSBC Holdings, Hindustan Lever, and Wipro. CLSA also ranked 25 emerging market countries based on environments that are good for corporate-governance practices. The survey placed Singapore and Hong Kong number one and two, but most Southeast Asian markets didn’t fare well. Thailand, Indonesia, Philippines, and Malaysia all placed in the bottom ten. (WSJ, 11/8, Corporate-Governance Issues Hamper Emerging Markets)

Proxy Contest Central

Anticipation mounts for the upcoming debut of Investors’ Bullhorn. If it works as planned, iBullhorn.com will empower investors by dramatically reducing the cost and complexity of proxy solicitations. Creative software, knowledgeable monitors and the Internet will allow shareholders to communicate and take collective action, all within the boundaries of SEC rules. Some of the site’s features, as described by Kristy Kaepplein, iBullhorn.com’s founder and president, are as follows:

  • share with others, either anonymously or publicly, how they plan to vote, and view others’ planned votes
  • read research from independent proxy research services on proxy voting items
  • suggest nominees for the Board of Directors, and even “nominate” them if they choose to solicit proxies from other shareowners
  • communicate with each other, management and the board, anonymously if they wish
  • feel more confident that others posting to the site actually own shares in the company, because iBullhorn validates their positions
  • initiate shareholder proposals by selecting from iBullhorn’s library or craft their own; iBullhorn transmits electronically
  • solicit and grant proxies from/to other shareowners (as permitted by state and federal law)

The site may give every investor the opportunity to become a “relational investor,” even those who’s shares are held by mutual or pensions funds. Fiduciaries are likely to learn that providing fundholders and beneficiaries with the tools to communicate and act collaboratively may be one of the most important ways to build customer loyalty. A fund’s corporate governance rating could become increasingly important and may be dependent on attracting and keeping those who are knowledgeable and active.

If Kaepplein and associate David Sensenich have their way it will be underperforming managers who do the “Wall Street Walk,” not shareholders. To get the whole story, read “Democracy for capitalists” in Governance, October 2000.

Back to the topMalaysian Audit Committees

The 2000 National Conference on Internal Auditing in Kuala Lumpur brought reflections by star.com.my on the Malaysian Code which is expected to be adopted by the KLSE as part of its listing rules. Last year’s US Blue Ribbon committee on improving audit committee effectiveness and the Malaysian Code on Corporate Governance issued last March have created more focus on auditing. Boards should be aware of the risks the organization faces, the systems of internal control and should ensure they are adequate. The KLSE is likely to require boards to include a statement in company annual reports on internal controls. (Life gets difficult for audit committees, 11/6) (see also, Update on Malaysian Code on Corporate Governance)

Demonstration at TIAA-CREF November 14th

Social Choice for Social Change, a campaign to have the largest nongovernmental pension fund in the world invest 5-10% of its assets ($200-400 million) in community development institutions and companies that are models of social and environmental responsibility, will be protesting outside their annual shareholder meeting and establishing a presence inside. Where: 730 Third Avenue in Manhattan, between 45th and 46th Streets. When: 11/14, 9-12 noon. Contact: Paul Sheridan, Brooklyn College (718) 951-5359 (office) (718) 783-4196 (home).

Social Choice will supply fliers and signs, as well as graduation caps and gowns for those who choose to wear them (for a visual effect–a number of prominent national media plan to attend or will otherwise be covering the story). You can also bring a gap/gown or sign of your own. TIAA-CREFprotesters will be joined by people associated with a number of community organizing groups in NYC who are working for increased low-income housing. Also joining them will be other protesters calling for TIAA-CREF to divest from Philip Morris tobacco and from Unocal Oil, which has operations tied to the brutal dictatorship in Burma. Together, they are telling TIAA-CREF to “Get out of the bad and into the good.”

Norms and Corporate Law Symposium

A symposium on the choice between law and non-legally enforceable norms in the governance of business organizations will be held at the University of Pennsylvania on December 8th and 9th. Here’s a real bargain. Advance registration is required but the fee is only $100 and that includes continental breakfasts, lunches, and dinners on both days. Contact Bonnie T. Clause. Presentations include:

Bernard S. Black, Stanford Law School
“Do Corporate Governance Norms Matter? A Crude Test Using Russian Data”
Commentator: John C. Coffee, Jr., Columbia Law School

Margaret Blair and Lynn Stout, Georgetown University Law School
“Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law”
Commentator: John C. Coates, Harvard Law School

Robert D. Cooter and Melvin A. Eisenberg, Boalt Hall
“Norms and Organizations”
Commentator: Lisa Bernstein, University of Chicago Law School

Oliver Hart, Dept. Economics, Harvard University
“Norms, Corporate Law and the Theory of the Firm”

Marcel Kahan, New York University School of Law
“Economics and Law, Networks and Norms: An Analysis of the Incentive Structure of the Corporation”
Commentator: Henry B. Hansmann, Yale Law School

Saul Levmore, University of Chicago Law School
“Compensation Norms”
Commentator: David M. Schizer, Columbia Law School

Paul G. Mahoney and Chris Sanchirico, Univ. Virginia School of Law
“The Self-Contradictory Nature of Norms and the Belief-Stabilizing Role of Law”
Commentator: Jack Knight, Dept. Political Science, Washington Univ.

Curtis Milhaupt, Columbia Law School
“On the Evolution of Japanese Corporate Norms”
Commentator: Reinier H. Kraakman, Harvard Law School

Edward B. Rock and Michael L. Wachter, Univ. Pennsylvania Law School
“Islands of Conscious Power: Laws, Norms and the Self-Governing Corporation”
Commentator: Jeffrey Gordon, Columbia Law School

Mark Roe, Columbia Law School
“The Shareholder Wealth Maximization Norm and Industrial Organization”
Commentator: Ian Ayres, Yale Law School

David Skeel, University of Pennsylvania Law School
“On the Role of Shame in Corporate Law”
Commentator: William T. Allen, New York University School of Law

Eric L. Talley, University of Southern California
“Disclosure Norms”
Commentator: Eric Posner, University of Chicago Law

Institute For International Corporate Governance and Accountability

Capital markets, dominated by multinational institutional investors, and product markets, rather than governments, are defining corporate behavior. The Institute, with the help of a grant from the Ford Foundation, will attempt to create an international umbrella organization bringing together scholars, practitioners and policymakers who are willing to question the American influence on the corporate governance systems and consider structural approaches to corporate accountability.

The Institute will open up a dialog that crosses disciplinary boundaries including law, economics, sociology, psychology, philosophy, political science, history, anthropology, ethics, and business, among others. They start from the premise that “responsible corporate behavior — rather than stockholder-centered corporate behavior — ought to be the norm.” The Institute aims to reconcile the compatibility of wealth creation with economic and environmental justice. To learn more, viewECGN posting.or contact Tanya McCain.

Unsavory Backgrounds Disproportionate Among Internet Execs
Kroll Associates reports that Internet executives are four times more likely to have “unsavory backgrounds” than those of other industries. Of the 70 background investigations, 39% were found to have problems such as insurance fraud, undisclosed bankruptcies, securities violations and even links to organized crime. Apparently, moving at Internet speed doesn’t allow for careful checks on employees, internal auditing or security. Financial Times, 10/25

Economic Professors Rate Gore Above Bush

According to a survey by The Economist of economics professors, less than 60% rated Gore’s proposed economic policies a B or better, while less than 40% gave a B or better to Bush’s policies. Clinton’s record scored a B with 90%. Most of the economists agree with Greenspan that projected surpluses are best used to pay down the debt. Gore’s plans call for going further in that direction than Bush’s and so, should be better for the economy. (Poor Grades for Al and George, 9/30)

Back to the topExec Pay

America leads that pack by miles. While our bosses take home 475 times more than workers, our closest rivals are Venezuela, Brazil and Mexico where they earn almost 50 times more than their underlings. In Europe, the ratio runs 11 to 24 times. In Canada its about 20 times and in Japan around 11, according to a study by Towers Perrin.

Levitt’s Legacy

His boat, named Full Disclosure, may soon get more use. Arthur Levitt is likely to step down as chairman of the Securities and Exchange Commission (SEC) near the end of the Clinton administration. The Economist review his legacy in Shining light on the markets, 10/26. One of his greatest accomplishments was the October 23rd Regulation FD (for fair disclosure), which requires companies to provide the public with information at the same time as security analysts and portfolio managers. He is still working on prohibiting accounting firms that audit a company’s books from selling the same company other services. Sunlight and integrity, not a bad record.

Buy Means Sell

The Economist recommends shareholders take a closer look at share buybacks. When pioneered by Henry Singleton of Teledyne, repurchases cut the number of outstanding shares by 85% while increasing profitability and stockmarket value by buying shares when they were cheap. Today, many are overpaying. “Worse, companies may be buying only because their managers are selling.” Those who have made repurchases above current prices to provide shares for options exercised by staff include Dell Computer, Adobe, Chiron, Autodesk, and KLA-Tencor. (Buy Means Sell, 10/7)

Pension Funds Ignore Voting Responsibilities

Years ago the Department of Labor (DOL) set ruled that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets (see “Avon” letter). According to a recent article in Institutional Investor Magazine (10/1) pension funds are Passing the Buck on their responsibilities.

“More than one third say they believe that voting doesn’t make a difference.” “Only 4.2 percent of funds polled say that they have ever tried to place an issue on a proxy ballot, and just 1.6 percent indicate that they have ever voted in favor of a social issue.” According to Institutional Investor Magazine, pension funds could “find themselves liable if a socially motivated action proved costly. Respondents unanimously say that social issues are not a shareholder’s responsibility.”

Directors Should Go Back to School

The State of Wisconsin Investment Board will advocates that directors of corporate boards take continuing education classes, much as attorneys are required to do. SWIB will contact 140 companies where the $65 billion fund holds at least a 5% stake and will gauge future actions on their response, according to aDow Jones report.

Our opinion? It is a great idea that we hope most directors will embrace. Much has changed in the last few years. Directors would benefit from learning from others knowledgeable in such areas as the changing role of the audit committee, best practices in corporate governance, recent legal developments such as the SEC’s “Fair Disclosure” rules, and the growing role of shareholder activists, such as SWIB.

Investigate Directors

The Corporate Library’s new beta Director Screening Toolhelps you analyze individual directors of the 1,500 companies in the S&P supercomposite (essentially the 1,500 largest public companies). Fields include number of shares held, attendance record, inside or outside director, and the text of the director’s proxy profile.

For example, I queried the database to identify all directors with poor attendance and got 150 names. How many female directors? (912) How many males? (11972) How many males had a poor attendance record? (137) How many females had a poor attendance record? (13) How many directors served on 13 boards? (two, Robert E. Foss and Mark D. Groban, M.D.) How many board members are age 30 or under? (seven) How many own 100 shares or less in the company whose board they serve on? (589)

You get the picture…another useful tool from the great folks at The Corporate Library. Be careful though. Remember this is a test model. The data may need confirmation. It is hard for me to believe, for example, that three members of the Adobe Systems Board hold no stock in the firm.

Update 1: After this item was posted, Ric Marshall, Chief Executive Officer of The Corporate Library did a little more digging on Adobe. It appears that two out of the three Adobe Directors they listed as having 0 shares hold exercisable options (5,000 and 7,500 shares each), but “as of the most recent proxy filing neither is a shareholder of the company!!! On the third, Mr. Geschke, we were way off, though the 886,077 shares over which he has voting and investment power (and which are now shown in our database) are held in a family trust.”

Marshall points out the “correlation between lagging company performance and outside director shareholdings represents one of the very few demonstrable links between corporate governance and performance. That’s somewhat the case here, as Adobe is currently underperforming their peer group, though it is still outperforming the S&P500. But if the Directors of the firm don’t believe in the company enough to risk their own money why should anyone else?”

I’ve written to the investor relations department at Adobe (e-mail: [email protected]) to seek confirmation that directors Delbert W. Yocam and Carol Mills Baldwin hold exercisable options but no stock in the company. I also asked for an explanation. I’ll let you know how they respond.

The Corporate Library is to be congratulated for offering the most powerful tool to date on the Internet for holding corporate directors accountable. Keep up the great work!

Update 2: I received the following response from Mike Saviage, Sr. Director of Adobe Investor Relations concerning the fact that two of their directors lacked sufficient confidence in Adobe to invest any money in it:

In regard to your question about director ownership of our stock, individuals make investment decisions based on their own personal circumstances (tax and otherwise). Section 16 reporting persons in particular have significant limitations on their ability to trade in the stock of companies for which they are directors or officers. Adobe does not monitor the individual circumstances or the investment choices of its directors and officers.

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Archives: October 2000

LENS Files Complaint at Metromedia

Shareholder activist, Lens Investment Management, LLC, filed a formal complaint, under Section 220 of Delaware General Corporation Law, against Metromedia International Group, Inc. (Amex: MMG), a diversified global media company. Lens is seeking to inspect corporate records to determine whether top execs have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting from Metromedia International at the expense of its public shareholders. For more, see Yahoo! and Lens’ campaign.

Disclosure for Fund Fees

The Securities and Exchange Commission will soon release a study on mutual fund fees recommending that funds disclose the amount of expenses paid on a hypothetical $10,000 account, according to Mercer Bullard, CEO of Fund Democracy. In SEC Preparing to Shine a Brighter Light on Fund Fees (TheStreet.com, 11/17), Bullard indicates SEC Chairman Arthur Levitt pointed out that fund fees can take a huge bite out of returns. “He used the example of a $1,000 investment in an S&P 500 index tracking fund made in 1950, which should be worth about $500,000 today. But after fees, this total drops to $230,000, and if the fund is not tax efficient it shrivels to $65,000.”

International Shareholder Advocacy

Lauren Compere, of Walden Asset Management, provides guidance to shareholders seeking to advocate abroad in their November issues of Values. Access to company proxies varies, ranging from an ownership threshold of 1% in Germany and Japan to 5% of outstanding shares in France. How can U.S investors influence companies in their international portfolios?

  • Learn the rules of country specific markets.
  • Develop global proxy voting guidelines.
  • Pursue alternatives to shareholder resolutions, such as letter writing and meetings.
  • Develop a network of local partners to gain legal representation at annual general meetings.

Exec Pay Too High

An editorial in the 12/13 edition of Business Week makes the case for CEO churning (Why CEO Churn is Healthy). “They’re flying out of the corner office like quail being flushed out of cover.” Lucent, Xerox, Gillette, Procter & Gamble, Coca-Cola and Aetna have thrown their CEOs out within the last 12 months. According to Challenger, Gray & Christmas Inc., 103 CEOs left their jobs in September, more than twice last year’s rate. “Many CEOs are barely in control of their companies’ fate, much less their own.” “In the transition to the New Economy, it may be that CEOs can be expected to manage only a portion of the change before they fall victim to an unexpected trend or are overwhelmed by inadequate execution.”

While CEO churn may be logical in an era of rapid transitions, should temporary help be paid 500 times their average employee? A recent Hay Group survey found that 85% of institutional investors believe that executive pay at UK firms is insufficiently related to performance and that 100% thought pay incentives covering three or more years should make up a much larger proportion of total reimbursement. Yet, that same survey showed that 91% oppose the introduction of a procedure whereby shareholders could move resolutions on pay issues at the annual meeting and 97% oppose shareholders having to sanction reimbursement packages. (Governance, 9/2000)

Executive pay is much more extreme in the US than in the UK. Voting on exec pay doesn’t appear to translate to shareholder empowerment but too few institutional investors on either side of the Atlantic have really pushed for the long term incentives tied to performance they say they want. Until they do, the paradox will remain.

Back to the topConvergence

Gerald F. Davis and Michael Useem make a convincing case for convergence, not among nations but among firms with higher stock market valuations. To survive global industry consolidations, many such firms will seek a listing on American stock exchanges, and will thereby become subject to US legal standards. In their paper, “Top Management, Company Directors, and Corporate Control,” the authors point to the need for further research in five key areas “if we are to know what works and what does not, and which theories are useful and which are not”:

  1. Boards and directors: What does the decision process inside the boardroom look like? What are the sources of power and influence of inside and outside directors? How are the decision process and director influence contingent on the ‘institutional matrix’ in which a board is embedded? (Example: Pettigrew and McNulty, 1998.)
  2. Comparative governance: What really accounts for the astonishing and remarkably persistent diversity in the national systems of corporate governance? How do national institutions, cultures, and social structures shape and constrain the evolution of corporate governance systems? (Examples: Kogut and Walker, 1999; Bebchuk and Roe, 1999.)
  3. Financial globalization: If the surge of cross-border investing is a major driver of corporate change, what can we expect of financial flows and their regulation in the years ahead? How is the evolving organization of investors and companies likely to affect the internationalization of capital flows? What aspects of corporate governance will affect the attractiveness of a national economy for international investors? How are actions by the International Monetary Fund and World Bank likely to affect national systems of corporate governance? (Example: Evans, 1995; Mizruchi, 2000).
  4. Inequality in a “globalized” world: How do systems of corporate governance affect distributions of wealth within and among nations? What is the likelihood that social movements for change may mobilize in the face of – or to resist – globalization? Does the globalization of finance lead to a leveling up or a leveling down of national standards for labor relations, environmental protection, and income inequality? (Example: Firebaugh, 1999).
  5. Business and Political Leadership: To what extent is a shared leadership style emerging among top company managers and government officials around the world? Are such institutions as the World Economic Forum creating a global network among those who govern the major commercial and political institutions in the leading economies? As worldwide relations among business and political elites do emerge, are they undermining traditional relations among elites within economies? (Examples: Davis and Mizruchi, 1999; Khanna and Palepu, 2000).

eLOT Adopts Model Bylaws 

eLot, a leading web-based retailer of governmental lottery tickets, implemented bylaw amendments requiring two-thirds of the members of the board to be independent. The bylaws establish a strict definition of independence and mandate audit, compensation, nominating and transaction committees, all members of which must be independent. The bylaws also require that independent directors elect a “lead director” at any time when the chairman of the board is also an executive officer. The lead director and the other independent directors must meet in executive session following every meeting of the full Board. (Disclosure: the Editor owns stock in eLot)

CEO Options Under Water

Graef Crystal reports 45% stock option grants out of 1,036 studied were below there strike price. William Schrader at PSINet Inc. is down the most with a decline of 85% but WorldCom’s Bernard Ebbers lost the most money, $51.3 million with a drop of 61%. See U.S. CEOs With the Most Underwater ’99 Options.

LENS Investment Still Active

Founded in 1991 by Robert A.G. Monks as an investment management firm, Lens was among the first to take an active role in corporate governance. Some activists were worried when it ceased operation as an investment manager and took on the role of a specialist in investor activism. Recent action at Metromedia ensures us that Lens continues to be active. SeeShareholder Activist, Lens, Supports Announcement From Metromedia International Group — Global Communications and Media Company Considers Selling Assets, 11/9/00, andMetromedia International Group Response to Lens Investment Management, 11/14/00.

Spread it Around

Stock-based incentive programs pay double dividends, according to a survey of 173 firms by Hewitt Associates, since they also deliver higher returns to shareholders. (WSJ, 11/21/00)

New Era of Shareholder Activism

The Christian Science Monitor notes “the Internet allows individuals like Stoller to air their opinions, marshal support, and put pressure on heretofore unapproachable boards of directors.” The experience of Martin Stoller and Aaron Brown of eRaider and Nell Minow of The Corporate Library are highlighted, as well as Les Greenberg’s current campaign at Luby’s. See “A place at the table,” 11/20/00 and monitortalk.

New Proposal to Ensure Audit Independence

The Corporate Monitoring Project has expanded the field of battle for shareholder activism with a different spin from therecent SEC action on auditor independence. While the new SEC rules require companies that use their accounting firms for both auditing and consulting to jump through new regulatory hoops, the Corporate Monitoring Project proposes to let shareholders decide. Its too bad the SEC didn’t adopt the proposal as an option but the idea is also compatible with the new rules. Under the proposal, shareowners would vote to choose the company’s auditor, instead of just rubber-stamping or rejecting management’s choice. As under its corporate monitoring proposal, auditing firms would self-nominate and shareholders would select from among them. This would encourage auditors to build their reputations in the eyes of investors rather than in the eyes of management, creating new pressure for higher standards. The first resolution to seekauditor independence by shareholder vote will be submitted atSONICblue.

Back to the topShareholders Score

Progress is being made by shareholders. One small measure of success is the recent favorable votes on shareholder sponsored resolutions.  During the 1999-2000 season they garnered an average 22.6% vote, compared to an historical average of 5%.  Governance related proposals won an average of 36.5%. (Strategic Compensation Research Associates, as reported in the November edition of Directorship)

“Vote No” Gets Teeth?

The Court of Chancery of the State of Delaware issued an opinion on 11/8 confirming that directors of Dime Bancorp, Inc. nominated by Dime for re-election at its annual meeting held in July were not re-elected to a new three-year term. The directors must stand for re-election at Dime’s annual meeting of stockholders to be held next year.

Apparently, shareholders rejected Dime’s nominees by more that a two to one margin. North Fork Bancorporation, Inc. intends to nominate several directors to the Dime board of directors at the Dime 2001 annual meeting. See North Fork Announces Victory Over Dime in Delaware Court.

Unfortunately, although this appears to be a groundbreaking case which could lend teeth to “vote no campaigns,” I have not been able to locate a copy of the decision on the Internet or any real analysis. Any additional information readers have on this case would be appreciated. Please send it along to[email protected] or post to http://eraider.com/message.cfm?topicID=31&catID=64&messagenumber=183

CalPERS Sets International Investing Standards

California Public Employees’ Retirement System, the nation’s largest public pension, approved a standards for human rights, labor and the environment for overseas investments. State Treasurer Phil Angelides appears to have spearheaded the move, while State Controller Kathleen Connell opposed the move. (Calpers sets new standards for emerging markets, Reuters, 11/14, Yahoo!)

Microsoft Political Contributions Under Fire

A resolution calling for Microsoft to report its political contributions was filed by Trillium Asset Management Corporation and three members of Responsible Wealth last year and received a 7.6% yes vote. The resolution may be introduced again at the 2001 meeting. Common Cause reports that Microsoft’s soft money contributions went from $77,000 in the 1996-1997 election year cycle to approximately $1.8 million in the first eighteen months of the 1999-2000 election year cycle. (SocialFunds.com, 11/13)

Standard and Poor’s Rates Russian Firms

Companies wanting to attract investments can use their benchmarks to improve corporate governance practices in four key areas: ownership structure, financial shareholder relations, financial transparency and information disclosure, and board structure and process. Performance is against codes and Organization for Economic Cooperation and Development, World Bank and European Bank for Reconstruction and Development guidelines and principles. Ten firms have reported signed up so far. (see World standards to rate Russia business practice, ITAR/TASS News Agency, 11/14 via Northernlight and Russian firms choose transparency or taxman-S&P, Yahoo! 11/14)

IMF Calls for Competition in Hong Kong

The International Monetary Fund urged creation of a legal framework to crack down on anti-competitive behavior but Stephen Ip Shu-kwan, Secretary for Financial Services, indicated that, “all-embracing competition legislation could have profound implications for our market efficiency and flexibility, particularly given that Hong Kong is a small and open economy.” (see IMF pushes for competition law, South China Morning Post, 11/15)

China to Tighten Disclosure

China is tightening disclosure rules for financial companies. Public banking, insurance and securities will be required to disclose information on asset quality as well as non-performing assets. Financial statements would be audited by foreign accountants under international accounting rules. (seeDisclosure rules tighten up for financial listings, South China Morning Post, 11/15)

UK Pension Funds Respond to New Disclosure Law

UK pension fund trustees are now required to disclose how they account for social responsibility issues in their investment strategies, if at all. A survey by the UK Social Investment Forum reveals that 59 percent of the UK pension funds surveyed, representing 78 percent of total assets, incorporate socially responsible investment into their investment strategies. Only 14 percent of funds, representing 4 percent of total assets, state specifically that social concerns will not be taken into account. (see UK Pension Funds Embrace Social Responsibility, SocialFunds.com, 10/11)

Back to the topRiot Police at Smirnov Boardroom

As further evidence that Russia is still in need of corporate governance reform, black-masked riot police, wearing body armor and brandishing nightsticks, broke down the doors of a Russian vodka distiller involved in a shareholder dispute. (seeIn Russia, Riot Police Hold the Golden Share, International Herald Tribune, 11/8)

India’s the Place

Gary Wendt, CEO of Conseco, an Indiana based financial holding company, argues there is an oversupply of money chasing Asian investment opportunities. Taiwan, Singapore and Australia are overpriced. Indonesia, the Philippines, Malaysia, Burma and Thailand remain high risk countries, as does China. Japan is facing debt overload; the average firm’s debt-to-equity ratio is 90%.

Wendt’s “dark horse” candidate is India, which has the largest quantity of today’s most important resource: people. While wage rates for educated workers are high in other English speaking countries, India’s still have a long way to catch up. What was previously done in Indianapolis can now be done in India with the same efficiency. As reported earlier, CLSAranked emerging market companies in terms of corporate governance. Three of the top ten are based in India: Infosys,Hindustan Lever, and Wipro.

An edited version of Gary Wendt’s speech at the Conference Board’s Global Leadership Forum appears in Across the Board’s 11-12/00 edition. In the interest of disclosure, it should be noted that the editor of CorpGov.Net, James McRitchie, recently purchased Wipro ADRs.

$259 million PSLRA Settlement at 3Com

3Com Corporation has agreed to pay $259 million to settle a securities class action filed by the Louisiana School Employees’ Retirement System and the Louisiana Municipal Police Employees’ Retirement System on behalf of 3Com shareholders. The Funds were appointed to the role of principal lead plaintiffs by the United States District Court for the Northern District of California pursuant to the Private Securities Litigation Reform Act in March 1998 and were represented by Bernstein Litowitz Berger & Grossmann LLP.

The settlement is the second largest ever obtained from a corporate defendant in a securities class action, next to that obtained against Cendant Corporation. The settlement also requires the 3Com Audit Committee to include at least three directors, all of whom must be independent and at least one of whom has accounting or financial management expertise. Newsalert, 11/8, Louisiana Pension Funds Announce $259 Million Class Action Settlement With 3Com

Southeast Asian Markets Endangered

The Wall Street Journal warns that “Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come.” Poor corporate governance has led some funds, such as activist Julian Robertson’s Tiger Management, to close up shop. CLSA Emerging Markets found that during the 1997-1998 financial crisis, a basket of 108 emerging-market stocks fell 10.5%, whereas the 10 companies that scored best on corporate governance criteria gained 133%. The top five rated firms included: TSMC, Infosys, HSBC Holdings, Hindustan Lever, and Wipro. CLSA also ranked 25 emerging market countries based on environments that are good for corporate-governance practices. The survey placed Singapore and Hong Kong number one and two, but most Southeast Asian markets didn’t fare well. Thailand, Indonesia, Philippines, and Malaysia all placed in the bottom ten. (WSJ, 11/8, Corporate-Governance Issues Hamper Emerging Markets)

Proxy Contest Central

Anticipation mounts for the upcoming debut of Investors’ Bullhorn. If it works as planned, iBullhorn.com will empower investors by dramatically reducing the cost and complexity of proxy solicitations. Creative software, knowledgeable monitors and the Internet will allow shareholders to communicate and take collective action, all within the boundaries of SEC rules. Some of the site’s features, as described by Kristy Kaepplein, iBullhorn.com’s founder and president, are as follows:

  • share with others, either anonymously or publicly, how they plan to vote, and view others’ planned votes
  • read research from independent proxy research services on proxy voting items
  • suggest nominees for the Board of Directors, and even “nominate” them if they choose to solicit proxies from other shareowners
  • communicate with each other, management and the board, anonymously if they wish
  • feel more confident that others posting to the site actually own shares in the company, because iBullhorn validates their positions
  • initiate shareholder proposals by selecting from iBullhorn’s library or craft their own; iBullhorn transmits electronically
  • solicit and grant proxies from/to other shareowners (as permitted by state and federal law)

The site may give every investor the opportunity to become a “relational investor,” even those who’s shares are held by mutual or pensions funds. Fiduciaries are likely to learn that providing fundholders and beneficiaries with the tools to communicate and act collaboratively may be one of the most important ways to build customer loyalty. A fund’s corporate governance rating could become increasingly important and may be dependent on attracting and keeping those who are knowledgeable and active.

If Kaepplein and associate David Sensenich have their way it will be underperforming managers who do the “Wall Street Walk,” not shareholders. To get the whole story, read “Democracy for capitalists” in Governance, October 2000.

Back to the topMalaysian Audit Committees

The 2000 National Conference on Internal Auditing in Kuala Lumpur brought reflections by star.com.my on the Malaysian Code which is expected to be adopted by the KLSE as part of its listing rules. Last year’s US Blue Ribbon committee on improving audit committee effectiveness and the Malaysian Code on Corporate Governance issued last March have created more focus on auditing. Boards should be aware of the risks the organization faces, the systems of internal control and should ensure they are adequate. The KLSE is likely to require boards to include a statement in company annual reports on internal controls. (Life gets difficult for audit committees, 11/6) (see also, Update on Malaysian Code on Corporate Governance)

Demonstration at TIAA-CREF November 14th

Social Choice for Social Change, a campaign to have the largest nongovernmental pension fund in the world invest 5-10% of its assets ($200-400 million) in community development institutions and companies that are models of social and environmental responsibility, will be protesting outside their annual shareholder meeting and establishing a presence inside. Where: 730 Third Avenue in Manhattan, between 45th and 46th Streets. When: 11/14, 9-12 noon. Contact: Paul Sheridan, Brooklyn College (718) 951-5359 (office) (718) 783-4196 (home).

Social Choice will supply fliers and signs, as well as graduation caps and gowns for those who choose to wear them (for a visual effect–a number of prominent national media plan to attend or will otherwise be covering the story). You can also bring a gap/gown or sign of your own. TIAA-CREFprotesters will be joined by people associated with a number of community organizing groups in NYC who are working for increased low-income housing. Also joining them will be other protesters calling for TIAA-CREF to divest from Philip Morris tobacco and from Unocal Oil, which has operations tied to the brutal dictatorship in Burma. Together, they are telling TIAA-CREF to “Get out of the bad and into the good.”

Norms and Corporate Law Symposium

A symposium on the choice between law and non-legally enforceable norms in the governance of business organizations will be held at the University of Pennsylvania on December 8th and 9th. Here’s a real bargain. Advance registration is required but the fee is only $100 and that includes continental breakfasts, lunches, and dinners on both days. Contact Bonnie T. Clause. Presentations include:

Bernard S. Black, Stanford Law School
“Do Corporate Governance Norms Matter? A Crude Test Using Russian Data”
Commentator: John C. Coffee, Jr., Columbia Law School

Margaret Blair and Lynn Stout, Georgetown University Law School
“Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law”
Commentator: John C. Coates, Harvard Law School

Robert D. Cooter and Melvin A. Eisenberg, Boalt Hall
“Norms and Organizations”
Commentator: Lisa Bernstein, University of Chicago Law School

Oliver Hart, Dept. Economics, Harvard University
“Norms, Corporate Law and the Theory of the Firm”

Marcel Kahan, New York University School of Law
“Economics and Law, Networks and Norms: An Analysis of the Incentive Structure of the Corporation”
Commentator: Henry B. Hansmann, Yale Law School

Saul Levmore, University of Chicago Law School
“Compensation Norms”
Commentator: David M. Schizer, Columbia Law School

Paul G. Mahoney and Chris Sanchirico, Univ. Virginia School of Law
“The Self-Contradictory Nature of Norms and the Belief-Stabilizing Role of Law”
Commentator: Jack Knight, Dept. Political Science, Washington Univ.

Curtis Milhaupt, Columbia Law School
“On the Evolution of Japanese Corporate Norms”
Commentator: Reinier H. Kraakman, Harvard Law School

Edward B. Rock and Michael L. Wachter, Univ. Pennsylvania Law School
“Islands of Conscious Power: Laws, Norms and the Self-Governing Corporation”
Commentator: Jeffrey Gordon, Columbia Law School

Mark Roe, Columbia Law School
“The Shareholder Wealth Maximization Norm and Industrial Organization”
Commentator: Ian Ayres, Yale Law School

David Skeel, University of Pennsylvania Law School
“On the Role of Shame in Corporate Law”
Commentator: William T. Allen, New York University School of Law

Eric L. Talley, University of Southern California
“Disclosure Norms”
Commentator: Eric Posner, University of Chicago Law

Institute For International Corporate Governance and Accountability

Capital markets, dominated by multinational institutional investors, and product markets, rather than governments, are defining corporate behavior. The Institute, with the help of a grant from the Ford Foundation, will attempt to create an international umbrella organization bringing together scholars, practitioners and policymakers who are willing to question the American influence on the corporate governance systems and consider structural approaches to corporate accountability.

The Institute will open up a dialog that crosses disciplinary boundaries including law, economics, sociology, psychology, philosophy, political science, history, anthropology, ethics, and business, among others. They start from the premise that “responsible corporate behavior — rather than stockholder-centered corporate behavior — ought to be the norm.” The Institute aims to reconcile the compatibility of wealth creation with economic and environmental justice. To learn more, viewECGN posting.or contact <

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Archives: September 2000

Proxy Monitor Acquires Investors Research Bureau

Proxy Monitor, a leading proxy voting advisor to institutional investors, announced its acquisition of Investors Research Bureau, Inc., publisher of Securities Class Action Alert, the authoritative publication on federal securities class action lawsuits.

“Tracking securities litigation, and making sure that they participate in settlements and judgments, is an increasingly important compliance responsibility for our clients,” said James E. Heard, Proxy Monitor’s CEO. “This acquisition will enable us to provide Proxy Monitor’s clients with timely, accurate and comprehensive information about class action suits nationwide.”

“Decisions by institutional investors to become lead plaintiffs and record-setting settlements such as last year’s $3.42 billion Cendant Corporation’s settlement underscore why institutional investors need to carefully track securities litigation,” says Newman. “I am very excited at the opportunity to be a part of Proxy Monitor and to have a chance to work with Proxy Monitor and its clients while also continuing to serve existing Securities Class Action Alert clients.”

Pension Board Sets Own Course

The California Public Employees’ Retirement System’s board voted to invest $125 million in CIM California Urban Real Estate Fund, despite objections from investment staff who recommended only $50 million because of the firm’s inexperience managing money for institutions, according to the ISS Friday Report, 9/22. California Treasurer Philip Angelides (who often favors the “double dividend” of investing in California), State Controller Kathleen Connell and CalPERS President William Crist objected to the investment. The Sacramento Bee reported that former board members Villalobos and Shimada, as well as retired state state Senator William Campbell, will split a $2.5 million “placement agent” fee from CIM.

Name and Shame

Regulations which took effect in July required UK pension funds to disclose the extent, if any, to which “social, environmental or ethical concerns are taken into account in the selection, retention and realization of investments.” They don’t need to create such policies but, if they have them, they must be disclosed. Expectations are that fund managers and analysts will be under pressure to become familiar with socially responsible investment practices if they want to attract pension fund business. Friends of the Earth and others have promised to name and shame those funds that state they apply no social, environmental or ethical considerations but others warn that fund trustees aren’t the nation’s moral arbiters; that’s government’s job. To learn more see, U.K. Pension Funds Forced to Reveal Ethical Policies, Kit Bingham, ISS Issue Alert, 7-8/00.

Back to the top

AFSCME Sides with Tenet

The American Federation of State, County and Municipal Employees, owner of 6.5 million Tenet Healthcare Corp shares valued around $235 million, urges Tenet shareholders to reject a slate of dissident directors headed by Dr. M. Lee Pearce and to support Tenet’s nominees. Their letter, cites Pearce’s conflicts of interest with Tenet and its shareholders and his lack of qualifications as a corporate governance reformer. Once again working capital is leading with full disclosure and smart tactics. See AFSCME Lobbies Shareholders to Vote Against Dissident Slate at Tenet Citing Group’s Conflicts of Interest, Checkered Governance Record.

However, California’s public employee pension system CalPERS has announced its 1.8 million Tenet shares will support the Pearce slate, citing Tenet’s failure to honor shareholder votes for annual director election and proposed “excessive” stock option grants to board members. Institutional Shareholder Services (ISS), the nation’s leading institutional shareholder advisory firm and provider of corporate
governance services, has also sided with the dissident nominees. ISS wrote in its report, “the incumbent board has shown a brazen indifference toward shareholder demands over the last few years. We also harbor concerns about senior management’s equity participation in Tenet’s Broadlane joint venture.”

ISS was particularly biting in its commentary on Tenet’s corporate governance philosophy: “Management … believes that varying industry and regulatory forces demand that directors take a longer-term view of company strategy and that a staggered board provides the continuity to achieve that end. This paternalistic argument — that shareholders somehow must be saved from themselves — does not hold water in today’s investment and corporate governance landscape. Effective corporate governance depends upon the board being accountable to shareholders … and we believe the Tenet board has failed on this account.”

Investor Relations Advice

Investor Relations on the Web by Stephen J. Dolmatch & Amy L. Goodman offers excellent advice in a reprint from American Corporate Counsel Association Docket Magazine. Find it free on FindLaw.com. Companies are responsible for the accuracy of their Internet postings if they “reasonably can be expected to reach investors or the securities markets.” The article focuses on reviewing your firm’s entire website from the standpoint of securities law disclosure. Major points: avoid the duty to update through the use of archives, use disclaimers, hyperlink with caution, take special precautions before and during securities offerings, avoid a general solicitation of company securities, beware of chat rooms and message boards, recognize the limitations the SEC has placed on the Internet for fair disclosure, but take advantage of the tremendous opportunities the Internet offers for investor communications.

Corporate Rule or Shareholder Loss?

Russell Mokhiber and Robert Weissman’s latest article,Withering Democracy, calls attention to political contributions by corporations. Every major industrial sector except for communications/electronics now favors the Republican Party but most hedge their bets by contributing to both. Already, corporate contributions are 50 percent higher than in the 1992, and there’s plenty of time to go. “The system formally remains one of one person, one vote, but is it the people or the corporations who rule?” I would further question if such contributions are a wise investment of shareholder resources. The trouble is that one company can’t easily stop unless their competitors do as well. Campaign reform would pay double; more democracy for citizens, more money left for shareholder dividends or reinvestment.

Improving Survival of Family Firms

Privately-held companies have the advantage of being able to make long-term strategic decisions based, on “patient capital” but only if family members trust each and share a common vision for the company. Research by Wharton’s Family-Controlled Corporation Program (FCCP) focuses on relationship dynamics that include trust levels, goal agreement, a participatory culture and views on the long-term health and competitiveness of the business. Family leaders should invest time in building unity among shareholders and professionalizing the strategies and structures through which they interact, according to FCCP director Timothy G. Habbershon. Why they don’t and how they can are the subjects of a research paper, Improving the Long-run Survival of Family Firms.

Corporate Governance Responsibilities Outlined

Simeon Chanduru, partner in charge of Business Risk Consulting, Ernst & Young Zimbabwe, highlights the duties and responsibilities that directors assume when they accept appointment to the board in Zimbabwe’s The Financial Gazette, 9/21. For a Malaysian perspective, see Corporate governance way to renew vigour, by Cheah Foo Song, thestar.com.my, 9/5.

Corporate Governance in the New Economy – Singapore

The New York Institute of Finance is offering a course in Singapore (30 October – 1 November 2000) which will cover topics such as: the legal environment for directors, what makes an effective board, how to assess board performance, minimizing risk, financial statements and audits, strategic planning, employee issues and future trends. For more information contact Calyn Siew, Director – Marketing (Asia Pacific), New York Institute of Finance, Tel : +65 236 9690.

Size Does Matter

As we reported last month, Dan Dalton and Catherine Daily, both of Indiana University, have found a positive correlation between large boards and performance. They reviewed 27 studies published over the last 40 years covering more than 20,000 firms. (Number of Directors on the Board and Financial Performance: A Meta-Analysis. Academy of Management Journal) In August’s Director’s Monthly, the authors explain that larger boards are better able to secure critical resources through the networks their directors create. In addition, larger boards allow coalitions to form that are more likely to challenge CEOs and moderate their dominating influence, they promote diversity and they provide an indispensable training ground for succession planning.

Back to the top

Board Investments Make Difference

Donald Hambrick and Eric Jackson tracked the level of stock ownership at companies over a 10 year period and found that board members held an average $470,000 for top perfomers in each sector, in comparison with $80,000 for poorly performing companies. They suggest a matching purchase program so that each board member would have at least 5% of their net worth invested in the companies they serve. (CFO, September 2000, page 27)

Bits

Webcasting of conference call is now up to 61%, compared with 48% six months ago, according to a survey by the National Investor relations Institute. Hybrid pensions, including cash balance plans, now make up 32% of the Fortune 100’s plans, according to Watson Wyatt Worldwide. Pearl Myers survey finds that 17.5% of largest 200 firms offer stock options to all employees. Corporate giving as a percent of pretax income declined between 1986 and 1996 from 2% to 1%. Pensionsnet.com aims to create greater transparency within Europe’s pension fund industry by providing news and information, analysis, statistics, company details and jobs in an interactive format. International Federation of Accountantsinvites comment on their code of ethics regarding independence.

CalPERS Shouldn’t Ignore the Law

The California Public Employees Retirement System Board recently voted themselves pay increases and higher reimbursements to their employers so they can put in more time on Board activities. See CalPERS board votes itself big pay increase, Sacramento Bee, 9/20/00. On the surface their action sounds fine, but the Board is ignoring the law and risks permanent alienation from its members.

Government Code, section 20092 limits the reimbursement CalPERS can provide to a Board member’s employer to an amount “not to exceed 25 percent of the member’s total annual compensation.” The wise men and women who created CalPERS wanted to ensure those elected by the System’s members remain well connected to the membership. Yet, a majority of the Board voted reimbursements well beyond the legal limit of 25%, voting increases ranging from 60% to 90%.

Article XVI, section 17 of the California Constitution, enacted by Proposition 162, gives the Board sole and exclusive fiduciary responsibility over the Fund. The Board now argues, that it is “impossible” for them to fulfill their fiduciary duty if they are “limited to the 25 percent cap specified in Government code 20092.”

Several of the same Board members previously invoked this same Constitutional authority in an attempt to ignore public participation and other requirements of the rulemaking process. Thankfully, both the Office of Administrative Law and the court thoroughly rejected their argument. (see OAL Determination 18, requested by James McRitchie, and Kathleen Connell for Controller et al v. CalPERS Board of Administration, Sacramento County Superior Court Case No. 98CSO1749.)

The purpose of Prop 162 was to prevent raids, limit political interference and firmly establish the System’s primary obligation to its members. It was never meant to allow the Board to avoid public scrutiny or to place itself above the law.

A majority of the Board now argues they need more time to do their jobs. President Crist, for example submitted a claim that he is working up to 105 hours a week on CalPERS activities. However, previous testimony by Dr. Crist revealed that he counted time for sleeping because he dreams of CalPERS. Questioned about counting more hours of work than there are in a week, Dr. Crist joked that he had passed over the international dateline.

Do Board members really need more time for trips to Frankfurt, Paris and Sardinia? Conference providers are eager to pay their expenses because they attract attendance from firms that want to sell investments and services to the world’s largest pension fund. However, the benefits to members are questionable.

Board members who spend little time with their fellow workers, who are wined and dined all over the world and who can look forward to $800,000 “placement fees” for selling investments to CalPERS once they leave the Board are unlikely to relate to member needs for health care or disability claims. (see also CalPERS may boost board pay, Sacramento Bee, 9/20/00) When we worked and voted to enact Proposition 162, we did so to keep greedy politicians from diverting our money. We never dreamed it would be used by the Board to place themselves above the law.

CalPERS Board members should get a pay raise and there should be some adjustment in the 25% ceiling. However, they should do so by seeking a change in the law, not by ignoring it. In the words of a previous Sacramento Bee editorial on the Board’s election process, let’s not “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (see CalPERS muzzles critics, Sacramento Bee, 5/25/99)

The Board should take a direct approach and seek the necessary changes in statute. However, if a majority on the Board wants to maintain the legal fiction that Prop 162 places them above the law, they could “save face” by calling for “cleanup” legislation. They could argue, for example, that although the Constitution gives them the authority to raise the ceiling, they are seeking Legislative concurrence in order to remove any inconsistency in statute. Either way, members should demand that CalPERS not ignore the law and the need to change it.

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Reg FD Criticised By Trade Associations

Fair disclosure rules which take effect October 23rd are still coming under fire from trade associations like the Financial Executives Institute which says two business days would have been more reasonable than 24 hours for reporting accidental releases. Their members may only recognize the significance of information provided once analysts use it. Stuart Kaswell, of the National Investor Relations Institute, says “many companies will probably clam up. Reg. FD creates an uneven playing field and stymies competition – it will do the exact opposite of what it’s intended to do.”

However, an analysis by Investor Relations Business says “those companies that make it a point not to practice selective disclosure say that the rule will not change much of what they did before.” If those who have been selectively disclosing “clam up,” the regulation will have served its purpose. FD mandates an even playing field for information users. Those who are not adept at providing it fairly are likely to stumble. Its up to trade associations like FEI and NIRI to build their membership and provide training so that companies have an even playing field when it comes to knowing what information is likely to be deemed materially significant. The competition for providing good information on how to live within the rules may be just beginning.

Backers of FD, such as the Council of Institutional Investors are right, analysts who owe a company for selective disclosure aren’t producing objective reports. FD isn’t a perfect solution but it certainly is a step in the right direction. I doubt if it creates the precipice that critics imagine but only time and future SEC enforcement actions will tell. (see Criticism of Reg. FD Continues, Investor Relations Business, 9/11)

Paid Exposure

Wallstreetbeat.com offers monitoring and reporting exposure. Companies can send in a brief summary, and $11,250 for the first 90 days. The company also collects a fee from companies for arranging introductions to outside analysts and distributing research to brokers and investors. According to Investor Relations Business (9/11), wallstreetbeat.com’s 18 own analysts write reports “at their own discretion.” Companies covered “have no control over the content of reports.” Of course if their reports are unfavorable, companies aren’t too likely to renew, are they? They are reportedly “in negotiation with six or seven companies” for their services.

I’ll be stopping by their site now and then to see how business is going. I’ve got a feeling the SEC might also be popping by for a visit.

Group Under PSLRA Defined

Group created by Milberg Weiss Bershad Hynes & Lerach isn’t a “group” within the meaning of the 1995 Private Securities Litigation Reform Act, according to U.S. District Court Judge Jeremy Fogel who held it “beyond dispute that one of the Reform Act’s primary purposes was to eradicate lawyer-driven securities fraud class actions.” The Policemen and Firemen retirement System of the City of Detroit was awarded lead plaintiff status instead, even though the reportedly alleged half the damages of the solicited group. (Corporate Governance Highlights, 8/25)

Exec Pay Levels Inconsistent With Healthy Democracy

CEO compensation rose 535% in the 1990s, while the S&P 500 rose 297%, according to a report by the Institute for Policy Studies and United for a Fair Economy. If the minimum wage had risen as quickly, it would now be $24.13/hr. instead of $5.15. The trend toward greater inequity “is inconsistent with a healthy democracy, according to the Institute. Top execs as 50 top Internet firms held an average $235 million in unrealized options. The report also expresses concern that an increasing gap between top level public and private sector execs will lead to a government brain drain, especially since 65% of government’s senior execs will be eligible for retirement by 2004. (ISS Friday Report, 9/8)

In a related item, a PricewaterhouseCoopers survey found Internet firms are transitioning to exec compensation packages similar to traditional firms, large base salary and bonuses for meeting revenue and profit goals. Fewer managers are now willing to accept lower cash compensation. (ISS Friday Report, 8/25)

Labor Coalition Blocks Insider Takeover

The AFL-CIO and the Paper Allied-Industrial, Chemical and Energy Workers Union won a vote against the Crown Central Petroleum insider Takeover by Rosemore Acquisition, run by the Rosenberg family which also owns a controlling interest in Crown. The Rosenbergs controlled nearly 46% of Crown’s voting power but the offer required a two-thirds majority of all shareholders. Labor’s clout in corporate governance continues to grow. (ISS Friday Report, 8/31)

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Europeans to Disclose Executive Pay

Disclosure of executive pay is taboo no longer in Europe, according to a 9/11 report in the Wall Street Journal. In France the Socialist-led coalition government wants to require it through federal regulations. The Irish Stock Exchange has mandated salary disclosure a condition for listing. “The writing is on the wall: Secrecy is on the way out for executive pay,” says Stephen Davis of Davis Global Advisors.

Dick Cheney: Corporate Governance Hero Or Political Greedhead?

The usually obscure world of “golden parachute” payments to departing chief executives has burst into the headlines with media fretting over the rich package Haliburton Corp. is paying departing CEO (and US Republican VP nominee) Richard Cheney. The Haliburton board’s fond farewell drew fire for its richness (originally $20 million by some estimates) and for its unvested stock options (currently worth over $13 million) that Cheney announced on September 1 he’d abandon.

But the fuss is based far more on political perception than on corporate governance reality, says Ralph D. Ward, publisher of online newsletter Boardroom INSIDER and a speaker on governance issues. “Corporate boards should – and do – get slammed for giving fat parachutes to failed CEOs” he says, citing the recent controversial cases of Mattel chief Jill Barard and Times Mirror’s Mark Willes.

At Haliburton, however, Ward notes that Cheney spent the past five years building shareholder value, boosting company sales to $14.9 billion in a tough industry (up 14% in just the last year). Cheney even shaped a solid succession plan that leaves the respected David Lesar in charge. “This is just the sort of performance by a corporate leader the Haliburton board should reward.”

Ward adds that CEO pay and severance packages are not designed solely to keep chief executives at the company, but to drive them toward — and reward — excellence during their tenures. “Do shareholders want CEO pay incentives to incent, or don’t they? The Cheney controversy suggests that the difference between the worlds of corporate governance and politics seems to be that the former rewards achievement, while the latter punishes it.” (Editor’s comment: The stock option award set up a potential conflict of interest that had to be addressed. Both corporate governance and politics should reward achievement and demand independence, neither of which were likely with the conflict of interest Cheney faced before abandoning the stock options.)

Click Locally, Vote Globally

That’s the reported unofficial motto of proxymaster.com, a new service of Institutional Shareholder Services, which will enable institutional investors to customize their proxy voting policies and vote online for 9,000 US and 8,400 nonUS firms. (see Proxymaster website to offer proxy voting, Pensions and Investments, 9/4 or contact )

Analysts Need to Retool

An editorial in Pensions and Investments (Everyone an Analyst, 9/4) praises the SEC’s rule requiring broader disclosure and calls on analysts to take a new role in providing “value-added interpretation of data.” “Analysts have spent far too much time trying to estimate, with the help of nods and winks form corporate managments’, next quarter’s earnings per share. But research suggests analysts’ earnings estimates, despite the information from corporate managements, are unreliable.”

Severance Pay Reaches Obscene Levels for Failure

Louis Lavelle editorializes in Business Week the with regard to CEO pay, “Nothing Succeeds Like Failure.” Looking at the severance packages of failed CEOs, Lavelle finds them “insulting not just to us workers, but to shareholders as well.” The latest evidence is the $9.5 million bonus given to ousted Durk I. Jager by P&G, even though during his short 17 months the stock is down 50%. “Directors should take the lead of Sunbeam Corp. (SOC), which after firing Albert J. Dunlap in the face of a disastrous restructuring and allegations of accounting improprieties, resisted his demands that he be allowed to accelerate all of his outstanding options.”

Business Week Calls for New Social Contract

Noting the American people are upset with corporations who invade their privacy, overwork and underpay them, threaten their safety and buy off their government, a Business Week editorial (9/11) (subscription required for link) calls on corporations to take the following steps:

  • Embrace the McCain/Feingold campaign-finance-reform legislation
  • Take responsibility for overseas factories
  • Spread option grants to more employees
  • Curb CEO pay

Cultural Exchange Promoted by Japanese Businesses

Japanese firms have gotten the message…more independent board members are needed to ensure better alignment of management and shareholder interests. However, in “High-profile foreigners take seats in Japan’s boardrooms” the Financial Times rightfully questions the value of substituting senior executives with little experience in other industries with foreign dignitaries.

FT notes that Corazon Aquino, recently appointed to the board of Sanyo Electric, is “more famous for her yellow dresses than her knowledge of semiconductors.” Former US vice president, Dan Quayle, has joined the board of Aozora Bank, the former Nippon Credit Bank. “Analysts warn the external director system may end up being little more than a cultural exchange between Japanese and foreign businessmen.”

Brazilian Reforms Stall

Corporate governance reform has been postponed again and a vote will not come until after the October elections. Under the stalled legislation, ordinary shareholders would be guaranteed the same selling price when a company is taken over as those with a controlling interest. Minorities with a stake of 15 percent or more would be entitled to a seat on the board. The powers of Brazil’s securities regulator would be strengthened and insider trading would be outlawed.

An editorial in the Financial Times says the reforms should go further, claiming that preferred shareholders should also receive “tag along” rights to the same selling price. In addition, they should consider an “alternative stock market on which only those companies meeting best practice of corporate governance and transparency could be listed.” Editorial comment: Brazil’s market, 9/6

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Ten Step Plan for Better Boards

The Board Book: Making Your Corporate Board a Strategic Force in Your Company’s Success bycover Susan F. Shultz is one of the most readable guides for directors available. The majority of the book is devoted to individual chapters on each of ten critical mistakes which boards commonly make:

  1. Failure to recruit strategically
  2. Too many insiders (more than two)
  3. Too many paid consultants (should have no paid; no more than two venture capitalists)
  4. Too much family (should have 3 independents to each family member)
  5. Too many cronies, interlocks and conflicted directors
  6. Getting the money wrong (CEO and board pay should be performance based in line with company pay scales)
  7. Fear of diversity
  8. Information block (should be open, unrestricted and effective communication)
  9. Passive boards (should be proactive, independent and strategic)
  10. Failed leadership (should have strategic leadership, positive culture, effective meetings, member rotation and transparency)

Shultz also includes a discussion of director liability and future board trends. Appendices contain additional resources:

  1. Comparing statutory and advisory boards
  2. List of actions requiring board approval
  3. Sample corporate governance guidelines
  4. Fortune 500 firms without women directors
  5. Sample director’s evaluation of a CEO
  6. Sample board evaluation
  7. Sample board self-assessment
  8. Governance resource list

Shultz interviewed an impressive list of academics, attorneys, CEOs, consultants, directors, institutional investors, and others for background material. This allows her to pepper her book with real life examples and compelling stories. The Board Book can help boards avoid common pitfalls and investors act like owners, instead of speculators.

Ethical Laws and Investments Go Hand In Hand

In “Look Who Demands Profits Above All” (Los Angeles Times, 9/1) former Secretary of Labor, Robert Reich, argues that CalPERS and TIAA-CREF are only doing their job, maximizing the value of their investors’ portfolios, when they refuse to consider ethics in their investments. “If we want companies to be more socially responsible, we’ll have to pass laws requiring them to be so, and those laws will have to be enforced. And not just national laws…ultimately, many such laws will have to be international.”

Reich appeared to take a much different position while at the Department of Labor when he released a booklet, “Road to High-Performance Workplaces: A Guide to Better Jobs and Better Business Results” which argues:

  1. High performance companies view their workers as valuable assets and make investments accordingly. Training is viewed as continuous, with a commitment to life-long learning.
  2. High performance workplaces encourage workers to accept multiple new roles as problem-solvers, self-managers, and entrepreneurs. Management also invites workers to participate in the day-to-day activities of the company.
  3. High performance companies gain long-term worker commitment by creating compensation systems tying pay to individual, team, and corporate performance. Such companies also seek to make executives more responsive to shareholder concerns by linking executive compensation to longer-term corporate goals.

While his more recent statement is true, international laws are needed and must be enforced, it is also true that pension and mutual funds have an important role in finding the correlation between responsible investments and positive returns. SRI funds have been out-performing the market, not just because they identify good management and reduce liability, but because SRI funds recognize social trends and consider them an essential part of their investment strategy.

Tobacco is one example. It can only be profitable if we give little value to life and society agrees to pay for the health care needs which tobacco use creates. The Council for Responsible Public Investment estimates that California looses more than $10 billion a year from tobacco use due to health costs and time lost at work. As these “hidden” costs are revealed tobacco profits erode. Outraged citizens demand litigation, increased taxes, reduced subsidies, etc. SRI pension and mutual funds will outperform where they can identify the convergence of investment opportunities and social concerns.

Continue Reading ·

Archives: August 2000

Minow Writes to SEC

Nell Minow of the Corporate Library recently wrote to the SEC to express her concerns a growing number of no action letters that make no sense. Her main focus is on a challenge made by Comshare based on the worthiness of the proponent. Nell Minow on Comshare Shareholder Proposal.

Shareholder Efforts Recognized

“The last time someone voluntarily gave up power was in 1800, when George Washington did it,” said Les Greenberg. Greenberg wants shareholders of cafeteria operator Luby’s to vote in favor of removing anti-takeover devices, electing directors annually and canceling bonuses for management if sales, profits or the share price decline. Oh, and he’s also running for the board. Small investors are fighting back and dailies all over the country are picking up on the corporate governance revolution.

San Antonio Express-News writer Bill Day observes that “a decade after democracy finally sprouted in Russia, Eastern Europe and South Africa, it makes sense that a pro-democracy movement would be pushed in corporations, where leaders still choose their own successors and where shareholders often allow the company to vote for them.” (Democratic Shift: Shareholders demanding a larger role in the running of corporations, 8/26)

Seven Veterans Profiled

The Washington Post’s Kathleen Day quickly moves from the origins of Martin Stoller and Aaron Brown’s eRaider.com to profile corporate governance giants in Soldiers for the Shareholder, 8/27. What are they doing now?

Robert A.G. Monks, who created Institutional Shareholder Services and then went on to start activist fund Lens which returned 160.2 percent in the three years ended June 30, compared with a return of 71 percent for the 500. He’s leaving Lens to concentrate on moving nonprofits endowments to become active shareholders. Nell Minow, who joined Institutional Shareholder Services as general counsel and has been partners in corporate-governance ventures with Monks, left Lens to focus on the Corporate Library, the best internet resource corporate governance.

T. Boone Pickens Jr., thought of as a villainous corporate raider in the 1980s, is now remembered for his push to replace passive directors with shareholder advocates. Carl Icahn is still at it recently netting $600 million by forcing the sale of Nabisco. “I don’t think the corporate governance movement has done much of anything, and our economy eventually will pay a major price because of it.”

Sarah Teslik, head of the Council of Institutional Investors, recently railed against her own members’ inaction. Unless she can persuade them to nominate alternate slates, she’ll quit. “The balance of power is still 96 percent with management and 4 percent with shareholders.” James Heard, of Proxy Monitor, says companies that ignore nonbinding shareholder proposals are “shortsighted and stupid…many still view shareholders as a nuisance.”

Executive compensation expert Graef Crystal continues to hammer on excessive compensation. His most recent study finds that corporate performance explains 2 to 4 percent: “the rest largely depends on the size of the company.” Day ends her review with a warning from Crystal.

By 2015 the ratio of the average executive’s pay to that of the average worker will approach that which existed in 1789, when Louis XVI was king of France. “And you know what happened to Louis XVI,” he says. “And by the way, they got his wife, too.”

Securities Litigation Year 2000

The Corporate Directors Forum will present a debate between William Lerach, attorney with Milberg Weiss Bershad Hynes & Lerach LLP in San Diego, and Michael Torpey, partner with Brobeck, Phleger & Harrison LLP at the La Jolla Marriott from 5:30-7:30 p.m. on September 21st . The cost is $35. Contact Sally Gault at (858) 455-7930 or at [email protected].

Institutional Investors Differ

An American Enterprise Institute study prompted by the sea change in share ownership of U.S. Corporations offers the following:

First, while there is broad agreement among institutional investors about the importance of shareholder rights, effective boards, and efficient CEO compensation and succession for corporate performance, the true economic value of “good governance” and effectiveness of shareholder activism are still matters of debate. Mutual fund investors tend to believe there is no “one size fits all” approach to corporate governance and are therefore disinclined to impose any form of “best practices” model.

Second, while investors may refer to “corporate governance” in their monitoring and intervention, actions relate far more frequently to poor performance. Except in highly publicized cases involving allegations of excessive executive compensation, dysfunctional boards, or fraud, it is generally only after firms are identified as troubled or long-term underperformers that governance practices are given more than routine scrutiny.

Third, institutional investors view good governance as most valuable when a firm or its industry is in trouble. Despite somewhat differing views on the overall value of good governance practices, all investors in the survey sample agreed that having an independent board, solid succession plans, and shareholder rights unfettered by restrictive antitakeover measures helps to assure the fastest possible recovery for the firm and share values. (Institutional Investors and Corporate Behavior, R. Glenn Hubbard, Ehud Houminer and Gile R. Downes, Jr.)

Attorney’s Get $262 Million

Record-breaking awards in the Cendant securities fraud case were approved by a federal judge Monday in New Jersey: a $3.1 billion settlement and $262 million in fees to attorneys for the plaintiffs’ class. The most controversial component of the ruling by U.S.District Judge William H. Walls was his rejection of New York City’s contention that the fees of the injured investors’ lawyers should be cut to $186 million. (law.com, 8/22)

Bigger is Better

A report by Dan Dalton and Catherine Daily, both of Indiana University, concluded there is a positive correlation between large boards and performance. They reviewed 27 studies published over the last 40 years coverning more than 20,000 firms. (Number of Directors on the Board and Financial Performance: A Meta-Analysis. Academy of Management Journal) (WSJ, 8/24)

Internet Resources for Board Members

Independent Director Initiative, run jointly by the UK Institute of Directors and Ernst & Young, to provide independent directors with online assistance. Their recent survey showed only 14% of companies provide training or support; the site aims to fill that gap. (Governance, 7/00)

Rice University to hold four hour broadcast on “The Basics and Beyond” for boardroom advice. Participants will interact in the moderator led discussion via phone, fax and e-mail. Mark 9/7 on your calendar and reserve your spot by calling 972-620-4015 or write to [email protected]. (Director’s Monthly, NACD, 7/00)

Not just for directors is the upcoming iBullhorn.com which bills itself as “a collaborative community built to enhance relationships between corporations and their investors.” We will hear more from this somewhat mysterious group later but for now they say their mission will be accomplished by:

  • Amplifying investors’ voices in corporate governance
  • Promoting increased direct communications between Investors, Corporate Management, and the Board of Directors.

Wealth Through the Workplace Act (H.R. 3462)

In June, the House Education and the Workforce Committee approved Rep. John Boehner’s Wealth Through the Workplace Act (H.R. 3462) that would create a new “super stock option” for rank-and-file workers. The original bill would have required a company to offer the super stock option to 50 percent of its workers in order to qualify; the markup sets the requirement at 70 percent. Workers would get tax deferral until underlying shares are sold (as capital gains if held for a year after exercise). Employers would get a tax deduction for the increased value of the option upon employee exercise.

According to an analysis by Institutional Shareholder Services, which appeared in The Corporate Governance Advisor, taxpayers would pick up a small portion of the tab in the form of slower and lower tax receipts but existing shareholders would foot the “lion’s share” in the form of lower future earnings per share and lower risk-adjusted rates of return. “Perhaps foreseeing such objections, the Bill’s sponsors give shareholders little say in the matter. Under the legislation, boards could unilaterally approve Super Option plans unless corporate bylaws require them to put the plans to shareholder votes.”

Korea at Critical Juncture

“The next six months to one year is a crucial period for the nation’s economy,” said Finance Minister Jin Nyum at the Seoul Foreign Correspondents Club. Hyundai’s makeover and the sale of Daewoo Motor are key milestones to regaining investor confidence. Also of major importance are banking reforms which may come soon after October, when troubled banks must submit their own plans for rescue. The government continues to emphasize the need for transparency in corporate governance and accounting standards. (news.excite.com/8/23)

The Korea Exchange Bank, Hyundai main creditor, threatened to call its loans if Hyundai fails “make good on its pledge to improve its corporate governance structure by separating management from ownership and ensuring a system under which top managers should be responsible for their failures.” (The Corporate Library, 8/9-15)

Guylaine Saucier to Chair Canadian Governance Committee

In July, the Toronto Stock Exchange (TSE) announced they have joined with the Canadian Venture Exchange and the Canadian Institute of Chartered Accountants (CICA) in appointing Guylaine Saucier to head a committee to “review the current state of corporate governance in Canada, compare Canadian and international best practices, and make recommendations for hanges that will ensure Canadian corporate governance is among the best in the world.” TSE released a set of 14 guidelines five years ago based on recommendations of a corporate governance committee chaired by Peter Dey. A recent review concluded that although many have embraced the voluntary guidelines, others have not. Can Saucier move the pack? (Corporate Governance Review, 6-7/00) (Profile in caMagazine, 6-7/99)

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Anonymous Humor

And, lo, it came to pass that the trader by the name of Abraham Com did take unto himself a young wife by the name of Dot. And Dot Com was a comely woman, broad of shoulder and long of leg. Indeed, she had been called Amazon Dot Com. And she said unto Abraham, her husband, “Why doth thou travel far from town to town with thy goods, when thou can trade without ever leaving thy tent?”

And Abraham did look at her as though she were several saddle bags short of a camel load, but simply said, “How, dear?” And Dot replied, “I will place drums in all the towns and drums in between to send messages saying what you have for sale and they will reply telling you which hath the best price. And the sale can be made on the drums and delivery by Uriah’s Pony Stable (UPS).”

Abraham thought long and decided he would let Dot have her way with the drums. And Dot said, “There will be a lot of banging in the land.”

And Abraham replied, “It is my most fervent wish that this be so.” And the drums rang out and were an immediate success. Abraham sold all the goods he had, at the top price, without ever moving from his tent.

But his success did arouse envy. A man named Maccabia did secret himself inside Abraham’s drum and was accused of insider trading.

And the young did take to Dot Com’s trading as doth the greedy horsefly to camel dung. They were called Nomadic Ecclesiastical Rich Dominican Siderites, or NERDS for short.

And, lo, the land was so feverish with joy at the new riches and the deafening sound of drums, that no one noticed that the real riches were going to the drum maker, one Brother William of Gates, who bought up every drum company in the land. And indeed did insist on making drums that would only work if you bought Brother William’s drumsticks.

And Dot did say, “Oh, Abraham, what we have started is being taken over by others.” And as Abraham looked out over the Bay of Ezekiel, or as it came to be known, “eBay,” he said, “We need a name of a service that reflects what we are.” And Dot replied, “Young Ambitious Helpful Owner Operators.”

“Whoopee!” said Abraham.

“No, YAHOO!” said Dot Com.

ICGN Push End to Broker Voting

The sixth annual International Corporate Governance Network held in New York included almost 350 delegates from over 22 countries. The group set a target date of July 1, 2001 for implementation of the ICGN Share Voting Principles aimed at knocking down hurdles to shareholder proxy voting in markets around the world. The four focus markets include France, Japan, Australia and the United States.

In France ICGN will try to overturn a law that requires signatures of beneficial owners on the proxy cards. In Japan and Australia, ICGN issues revolve around the length of time shareholders have to vote. In the US, ICGN members will fight to reverse rules which currently permit proxy vote practices that allow brokers to vote on certain corporate resolutions without first obtaining instructions from shareowners. The practice is a breach of ICGN Share Voting Principle #1, “The same voting rights should attach to shares regardless of how much equity a shareholder holds, or how geographically distant a shareholder may be from the company. Votes should be cast only according to instructions by the owner or the owner’s agent.”

ICGN elected 12 members to its board. Returning directors include: Andre Bladi (Baladi & Associates), Peter Clapman (TIAA-CREF), Sandy Easterbrook (Corporate Governance International), Claude Lamoureux (Ontario Teachers’ Pension Board), Pierre-Henri Leroy (Proxinvest), and Lars Millberg (Aktiesparana shareholder association). New members include: Peter Butler (Hermes), Stephen Davis Davis Global Advisors), Jon Lukomink, Ariyoshi Okumura (Lotus Advisory), Linda Selbach (Barclays Global Investors) and Dario Trevisan (Studio Legale Trevisan & Associates). (Corporate Governance Review, 6-7/00)

TIAA-CREF to Target Executive Compensation

Director’s Alert reports that TIAA-CREF is targeting excessive executive compensation in the upcoming 2001 proxy season. In 1980, average CEO pay was 40 times the average employee’s earnings. By 1998 it was over 400 times and by now it is higher still. Chief Counsel, Peter Clapman, says TIAA-CREF will meet with companies to build independent, educated compensation committees. “Many compensation committees don’t fully understand their role–or they don’t know how options really work,” said Clapman. If a company refuses to address the problem, TIAA-CREF may be prompted to withhold support for directors. (Director’s Alert, August)

Internet Voting Up Dramatically

That’s the usual headline, and its true. Between 1998 and 1999 there was a tripling of the number of accounts voting via the Internet, according to some estimates. However, that doesn’t mean anything like a majority. In fact, according to ADP, which processed about 88% of the total votes, only 3% of votes were returned online, whereas over 5% voted via telephone. (8/14, Investor Business Relations)

Institutional Investors Want Boards With Internet Savvy

Successful Internet executives may have their pick of blue-chip boards to join, according to John T.W. Hawikings, leader of the board service practice of Russell Reynolds, global executive and director recruiting firm. A survey based on more than 400 institutional investors by Russell Reynolds found that 2/3 believe all boards should have at least one director drawn from Internet or technology areas. About an equal proportion of respondents favor pricing options so that recipients are rewarded for company performance only if it does better than the market. About 58% believed corporate governance guidelines should be voluntary, rather than required by regulatory authorities. (Pensions & Investments, 8/7)

Need for Good Governance, a No Brainer

An editorial in the July edition of Dr Matthew Gaved’s excellent publication “Governance” argues:

Good governance may or may not feed into the share price. What matters is that shareholders believe that it does. They are prepared to pay more for the stock of well governed companies. What more incentive to managers need? …Academics and others may continue to search for the Holy Grail of statistical linkage, but shareholders should be content with dropping out of the quest. For them, the McKinsey study is all the proof they need.

It certainly is a no brainer for me. However, the McKinsey study focused on turnarounds and it was clear from the international differentials that existing disclosure and shareholder protections also play a key role in setting the floor which is higher in the UK and US than in Latin America and much of Asia. I’m afraid the naysayers will go unconvinced.

Folks at McKinsey are saying that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” Whether or not good corporate governance will yield much that can be measured at the average company may still be a matter for the statisticians but international companies that meet US listing requirements are often revalued at higher prices. As for making over companies in trouble, the more funds such as Lens, Lawndale, Relational Investors and Hermes keep beating the indexes, the more likely it is that others will jump on the bandwagon. By shifting to independent directors, evaluating their CEOs and their own performance, by separating CEO and chair and by investing more of their own money in their companies, the work of the likes of Robert Monks and Peter Butler will get harder. (for more on the McKinsey study see our June news and the McKinsey site)

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SEC Bans Selective Disclosure
Thanks to many of our readers and others who submitted 6,000 public comments, the SEC passed a slightly watered down version of their originally proposed rule which prohibits company officers from sharing market-sensitive information with analysts and institutions without providing the same information to the general public. See CBSMarketWatch.com, 8/10, Statement by SEC Chairman Arthur LevittFact Sheet.

The new regulation requires that when an issuer intentionally discloses material information, it must do so publicly, not selectively. The company may make the required disclosure by filing with the SEC, or by a press release. When selective disclosure of material information is made unintentionally, the company must publicly disclose the information through a method of wide distribution promptly.

Pax World Discloses Votes on the Internet
For nearly 30 years Pax World has used stockholder voting as a way to make shareholder voices heard. Since 1971, this socially responsible mutual fund has made their voting results available to shareholders upon request. Now, with the help of Proxy Monitor, Pax World has taken the next step, joining Domini Social Investments in posting their proxy voting decisions. (Thanks to Mark Latham for bringing this development to our attention.)

Virtual Meetings
A June ISSue Alert editorial points out that Delaware’s new law allowing annual meetings to be held entirely in cyberspace came with “some strings attached,” strings which I must admit, I didn’t notice. According to ISS, before directors switch to e-meetings, they must implement 1) voter verification procedures, 2) measures to ensure shareholders can participate at the meetings through two-way communication and 3) the means to record shareholder votes in real time.

ISS argues shareholder meetings have become a “giant soapbox” with shareholders paying for the microphone. ISS uses their editorial as an opportunity to slam stock exchange rules which allow broker voting but suggests that “real time” voting at cyber meetings should boost turnout. Again, I don’t know of any shareholder activists who oppose allowing cyber broadcasting and participation…as long as the physical meetings continue.

The real problem, according to the ISS editorial, is the lack of shareholder participation and the quality of discourse, especially among small shareholders. ISS suggests that shareholders “look for new avenues for communication with their elected representatives– the directors” by requesting one on one meetings, attendance at investor road shows and quarterly analyst calls.

While I agree with ISS that shareholders should demand that directors show up and be responsive at these venues, the fundamental issue is still information and the ability to hold the board accountable. One step in that direction is the corporate monitoring proposal devised by Mark Latham, which I first introduced at Whole Foods. The proposal would allow shareholders to collectively hire a firm, such as ISS, to inform and advise them of proxy issues.

ISS did shareholder’s no service by recommending against the proposal, which could have been a major step in improving the level of participation and quality of discourse. ISS indicates this is the major problem, especially with regard to small investors. If they really believe this is the case, let’s hope they change their stance on Mr. Latham’s proposal during the next proxy season.

Seven Deadly Sins
The June ISSue Alert also carried an article on “Equity-Based Compensation: the Seven Deadly Sins,” with biting humor by Patrick S. McGurn and Jill Lyons. CEO pay at 362 of the largest US firms is up six times since 1990 to an average $12.4 million, so the first deadly sin is gluttony.

Sloth is listed next, with the rise in unrestricted stock which rewards recipients for their ability to remain “living and breathing” until the awards vest, according to Matt Ward ofWestWard Pay Strategies.

Envy is coupled with “net envy” and the use of maga grants of options.

Lust is popularized through the TV show “Who Wants to be a Millionaire?” and broad based options now available at 30% of US firms.

Anger is how some companies have reacted to the difficulty of winning shareholder approval. The author’s note that New York was the last major corporate domicile to drop its mandate that shareholders approve stock plans but I’m sure companies will find other reasons to be mad at their shareholders.

Greed; Berkshire Hathaway’s Charlie Munger says director stewardship is like “putting a rat colony in a granary.”

Pride; few directors on compensation committees are willing to admit they need help.

Who says corporate governance devotees are a sour lot? I say you’ve got to have a sense of humor to remain in a field where all too many speak the language of democracy while acting to continue oligarchic practices.

Shapiro Strikes Again
San Francisco based Lawndale Capital filed a 13-D increasing its position to 7% of Earl Scheib Inc. (A-ESH), a nationwide operator of 169 auto paint and body shops. Attached to the 13D filing is a letter expressing concern over the reduced activity of ESH’s Board and ESH’s compensation arrangement with its Chairman.

Lawndale seeks to have the Company publicly disclose the agreement with its Chairman, Mr. Colburn and an explanation of how the board monitors Mr. Colburn’s performance. Lawndale plans to vote “withhold” on his reelection as Director, may vote to withhold on other directors, and is initiating a search for one or more new directors to replace Board members who are unable to be active or to supplement the Board.

Ford Family Wins: Shareholders Lose
Shareholders approved a plan to help the Ford family to retain 40% of the voting power, even as they reduce common stock holdings. Short term greed won over long term interests, with the plan for a special dividend that will give shareholders new Ford shares plus some $6 billion in cash. TIAA-CREF and CalPERS, which together own 2% of Ford’s stock, voted against the plan. Excluding the impact of the Ford family’s Class B shares, about 26% of the common shares were voted against the proposal even though the plan won with “86% approval.”

High Plains Bylaw
High Plains, an ethanol producer, announced the adoption of a bylaw that requires at two-thirds of their Board to be independent of management, consultants, and significant customers or suppliers. It also requires key committees to be comprised solely of independent directors, and assigns new responsibilities to Board committees. The real news is that several companies are adopting such bylaws in order to demonstrate their commitment to shareholders. This one came at the initiative of Lawndale Capital. (PRNewswire, 7/31)

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Swiss Join Movement to Disclose
The Swiss Exchange is to build disclosure of director pay into the listing requirements. (see http://www.newsdirections.com/r/0008nzz.html, use the German to English translator at bottom of our front page.)

e-Board Strategy to Help Bush?
“The secret weapon behind the most promising E-commerce start-ups is a board of directors, especially a non-executive chairman, that serves as mentor to young, inexperienced and ambitious CEOs,” says Roger Kenny, co-author with Ram Charan of the recently published E-Board Strategies: How to Survive and Win. “Mentors with years of experience in the rough and tumble business world can guide the way, helping the less experienced through the challenges. The Bush-Cheney combination is a textbook example.” (PR Newswire, 8/03)

The Patterson Report
The Corporate Library now presents The Patterson Report by Dr. Jeanne Patterson, former professor at Indiana University, and author of a 1996 study on social investing and 1998 and 2000 reports for The Conference Board on this topic. Her report categorizes and summarizes the major empirical studies in corporate governance. A fantastic addition to valuable information on the Internet!

“The reviews in The Patterson Report will be continually updated. With the Internet, studies are coming at us at a great pace. We will be providing Internet links to the actual study whenever possible. We will also have an opportunity to add articles, correct mistakes, and respond to suggestions. We encourage our readers to help us to make the site useful by sending us studies that they develop or find useful.”

Shareholder Activists Compared
eRaider cofounder Aaron Brown compares 5 types of shareholder activists along a matrix of goals, tactics, typical shareholding, targets and corporate defenses. Then he indicates how he intends to blend the best characteristics of each. see http://eraider.com/commentary2.cfm?commID=209

Centre for Corporate Governance Research
Professor Christine Mallin of the University of Birmingham has established a new program for studies of company governance in the United Kingdom and other national settings. Housed at the Birmingham Business School, the “Centre for Corporate Governance Research” is focused on the relationship among directors, investors, and other stakeholders, and the impact of these relations on company strategy and performance.

The Centre has the following aims:

  • Conduct and encourage high quality research in corporate governance;
  • Engage in interdisciplinary and cross-border research through collaboration with contacts in the UK and overseas;
  • Consult with professional bodies, corporations and other groups, on corporate governance issues;
  • Disseminate the research of the Centre as widely as possible through published research, presentations at conferences and seminars.

Among the Centre’s research are studies of voting by institutional investors, the disclosure of directors’ compensation, and company compliance with the Cadbury and Greenbury recommendations for effective governance. It has also undertaken projects on the development of corporate governance in China, Malaysia, and Central and Eastern Europe. The Centre’s Administrator is Lesley Bodenham.

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Archives: July 2000

SRI Outperforms
Are you a pension fund trustee who’s counsel keeps saying you can’t do that when you suggest socially responsible investing strategies? Yes you can. Read “What Trustees Can Do Under ERISA” (the Employee Retirement Income Security Act) – A study of permissible trustee activism. Let Kirsten Snow Spalding and Matthew Kramer guide you.Fiefdoms to Continue
Earlier this month I reported that the founder of Hyundai had announced that neither he nor his sons would continue to serve on the board. “The three of us will watch over the company management only as shareholders,” said Chairman Chung at the end of June. Later in the month, I suggested the Ford family could take a lesson from Chung. More recently, the Wall Street Journal (Hyundai Resists South Korea’s New Economic Ways, 7/25) reports that one of the sons, Mong-ku, reversed himself and is now determined to defend his control of Hyundai Motor. In addition, Hyundai Heavy Industries continues to be controlled by another son, Mong-joon. Fiefdoms aren’t easily converted to democracy, either in the US or Korea.

Shanghai Conference On Sweatshops
Domini Social Investments, Ethical Funds, Calvert, and Walden Asset Management are sponsoring Verite’s Third Annual Supplier’s Conference in China. The conference will develop the capacity of factory managers to establish workplace conditions that meet internationally agreed upon human and labor rights standards. “Independent monitoring and verification are crucially important for addressing the problem of workplace standards that violate internationally agreed upon human and labor rights,” said Heather White, Verite’s founder and executive director. “Without credible independent monitoring, vendor standards and corporate codes of conduct are justifiably regarded as nothing more than public relations fluff.” (see Business Wire press release, 7/20)

Corporate Governance Issues Impact Cross-Border Mergers
Corporate governance issues can have a significant influence on cross-border mergers, according to a report, “Corporate Governance and Cross-Border Mergers,” released by The Conference Board. Europe alone has had more than $400 billion worth of hostile deals since the beginning of 1999. “Key corporate governance decisions in M&A transactions are not necessarily about corporate governance,” says author Lucy Alexander. “They are consequences of other decisions, such as where the company will be headquartered, and are influenced by other issues such as tax, politics and the relative strength of organizations. However… corporate governance issues may have a direct impact on whether deals happen or not and certainly on the price at which they occur.” (for press release go to the Conference Board site, click on “Our Expertise,” then on “global corporate governance,” then scroll down to press releases.

Virtual Meeting Law
The 7/21 ISS Friday Report carried additional reactions to newly adopted Delaware law which allows corporations to hold shareholder meetings solely in cyberspace. Dwight Mater of Bell & Howell says “it’s easier for shareholders.” Karen Hampton of Ford says webcasting of meetings will increase. Charles Elson, of the Center for Corporate Governance at the University of Delaware, indicates he likes to “see people eye-to-eye. Yet the world is changing.” Larry Hamermesh, a law professor at Widener University says meetings could get out of control “if you have 5,000 people online who all want to be heard.” (ISS Friday Report, 7/21)

Many seem to miss the point. I don’t know of anyone who opposes Internet broadcasting of the meetings or voting online. Of course it’s easier for shareholders to attend online and all companies should facilitate access. Professor Hamermesh comes close to the point. However, the problem isn’t that meetings will get “out of control.” By meeting solely in cyberspace it will be much easier for management to ensure there are no unexpected or embarrassing questions, no surprises. When 5,000 shareholders online want to be heard someone will need to select which questions will be addressed. Prescreening and prescripting become much more likely. The problem is that management will be more in control of the process than ever before.

Back to the topCheney Nomination May Help EDS Shareholders
The nomination of Dick Cheney to be George Bush’s running mate may help put the spotlight on poor corporate governance practices at Electronic Data Systems where Cheney serves as a member of the board. On May 23rd, 61% of shareholders voted in favor of allowing shareholders to vote on the adoption of poison pills. According to shareholder activistJohn Chevedden, EDS governance suffers a number of shortfalls:

  • No annual election of all directors.
  • Director James Baker’s law firm bills EDS substantial fees, which go undisclosed by EDS.
  • The American Bar Association discourages directors from sitting on boards of companies from which they take additional legal fees.
  • Directors with financial links to the company sit on Audit and Nominating Committees.
  • Directors Brown and Gray own only a nominal number of shares.
  • Directors Gray and Groves are overextended with 7 outside board seats each.
  • EDS has no provisions for confidential or cumulative voting.
  • An 80% shareholder vote is required on certain key items (equals a 100% requirement when only 80% of shares are voted).

Who Does ICI Represent?
The Investment Company Institute is paid by companies in the industry, but half of the dues come out of shareholders’ pockets, according to a lawsuit filed by Linda Rohrbaugh and Richard Krantz. Their suit seeks a return of money paid for representation because, according to the plaintiffs, ICI represents fund companies, not shareholders. A commentary by Lewis Braham, Staff Editor for BusinessWeek, says “ICI should either increase representation for shareholders or give them back their money.” Currently, 39 of the 45 members of ICI’s governing board work for fund-management companies. The other six are “independent directors” of member funds. Yet, ICI’s code of best practices says 2/3 of a mutual funds directors should be independent.

Braham reports that after shareholders scored a victory in 1997 with a ruling that the independence of directors could be questioned because they served on several boards in the same fund family, ICI successfully lobbied the Maryland legislature to nullify the judge’s ruling. ICI also tried to make it more difficult to get shareholder proposals on proxy statements and sought to prohibit proposals to fire advisers or buy back shares of closed-end funds. Clearly, Braham is right in his assessment. (see A Raw Deal for Fund Shareholders, BusinessWeek, 7/31, requires subscription) See also Conflict Of Interest?

Indian Families Remain In Charge
Manjeet Kripalani, Bombay bureau chief for BusinessWeek wrote a commentary with a familiar complaint; too few Indian executives are ready to walk the corporate governance talk. Ratan Tata, of the $8 billion Tata Group gave notice that in two years he will step aside and let the board appoint his replacement but few are following his lead. The new corporate governance code requires ownership disclosures, global accounting norms, independent directors, audit and shareholder grievance committees. The Securities & Exchange Board threatens fines and delisting for errant companies but “few believe it.” “Families continue to control 90% of publicly listed companies. And they have plenty to hide–not least intragroup loans and investments set up to minimize taxes, misappropriate funds, and cover up losses.” (see Commentary: India: Paying Lip Service to Corporate Disclosure, international edition of BusinessWeek, 7/24)

Shareholders Protest Ma Bell’s Porn
Twenty-seven religious and socially concerned institutional investors controlling over 2.8 million shares of stock are calling upon AT&T to reconsider its recent decision to partner with The Hot Network, which distributes sexually explicit material for broadcast on cable television systems. (see letter to AT&T) Jerome Dodson, of the Parnassus Fund, plans to enlist other AT&T investors in drafting a shareholder resolution voicing opposition to the Hot Network. If enough shareholders support the resolution, the measure will be voted on at AT&T’s next shareholder meeting. (Shareholders Fight AT&T Porn Channel, AP, 7/19)

Ford Protects Family Voting Power
Institutional Shareholder Services joined New York State Comptroller Carl McCall, TIAA-CREF and the California Public Employees’ Retirement System in opposing Ford’s plan which allows Ford family members to take cash out of the company by selling their new common shares without diluting their voting strength. When set up in 1956, class B shares allowed the Ford family, with 5.9 percent of the economic interest in the company, to control 40 percent of the voting power. Under the new plan, to be voted on at a special shareholder meeting on August 2, the family will have 7.1 percent of the economic interest and 41.8 percent of the voting power. (Reuters, 7/19) However, the Investor Responsibility Research Center reported the Ford family might retain 40% of voting power, although their class B holdings would decline from 5% to 3.6%, according to CalPERS. IRRC also reported the Council of Institutional Investors opposes the proposal as well. (Corporate Governance Highlights, 7/21)

Ford could soon be learning a lesson from the recent turmoil at Hyundai. (see below)

Good Governance Still Needed in Southeast Asia
John J. Brandon, assistant director of The Asia Foundation, says foreign investment will return to Southeast Asia as memory of the crisis of three years ago fades, but “countries that can make the most rapid progress on reforms in a transparent and accountable manner stand to benefit the most.” “Good governance and corporate reform are critical in order to achieve sustainable economic development. The pay-off, over time, should be better jobs, higher economic growth, and a brighter future for Southeast Asia. Weak legal systems, corruption, unaccountable government, and poor corporate oversight cannot factor into the equation. (for full opinion see “The wobbles in Southeast Asia’s rebound,” Christian Science Monitor, 7/19)

Back to the topAustralian Rules Regarding Extraordinary Meetings May Change 
A report to the Federal Government has outlined changes to the Corporations Law so that only shareholders who collectively hold at least 5 per cent of voting capital would have the power to request a general or extraordinary meeting, instead of the current threshold of 100 shareholders. (Sydney Morning Herald, 7/17/00)

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Archives: June 2000

Shareholders Virtually Screwed
Reliable sources tell me that Senate Bill No. 363, “An Act to Amend Title 8 of The Delaware Code Relating to the General Corporation Law” has been signed into law by Governor Thomas Carper and goes into effect July 1. Section 7 allows companies to hold stockholder meetings entirely by remote communication without a venue for physical attendance, at the sole discretion of the board of directors and without shareholder approval.

While I have always been a strong advocate of using electronic technology to inform shareholders and I support the Internet broadcasting of annual meetings, this measure appears to go too far and can easily lead to the further disenfranchising of shareholders as well as the loss of an important forum.

The Council of Institutional Investors expressed their concern about Section 7 in its newsletter dated June 15, 2000. “The proposed law could also mean that shareholders would no longer have an opportunity to question directors in person…virtual meetings could be abused by management, since shareholders can’t keep an eye on the proceedings of all-electronic meetings.”

Clearly, the result of repealing the requirement that companies convene physical shareholder meetings will be a reduction in management accountability by insulating executives and directors from shareholders.

While I’m complaining about Delaware, they could also do a better job of enabling the public to search bills, read their text and any committee analysis. Their Legislative Information System is totally inadequate. After too long, I finally found the text of SB 363 and a summary.

Stakes by Outside Directors Matter
Donald Hambrick and Eric Jackson examined companies with winning 10 year shareholder returns vs laggards and found that outside directors of winners held 4-5 times more equity in their firms than did outside directors of laggards. “Our results strongly suggest that directors with a meaningful stake are a pivotal factor in improved governance.”  Outside Directors With a Stake: The Linchpin In Improving Governance, forthcoming in California Management Review

SEC in Rewrite on Selective Disclosure
The US Securities and Exchange Commission has decided to revise its proposal regarding selective disclosure in response to complaints from news organizations. The amended proposal will reportedly allow corporate insiders to disclose material information to “legitimate” members of the press. Sources expect the final proposal to be released by the end of July. (The Corporate Library, News Briefs, June 14-20)

Women on Board in Georgia
Board of Directors Network (“BDN”) bills itself as “the only organization in the United States devoted to improving corporate governance in America through advocating gender diversity in the boardroom.”

A recent article in the Atlanta Journal Constitution (June 18th, 2000) discusses the findings of BDN’s 1999 survey. Women hold only 5 percent of the 1,808 board of director seats in public companies headquartered in Georgia. Only 13 of the 228 public corporations surveyed for a 1999 report have more than one woman director, and none has more than two.

Their survey mailing gets mixed responses, from handwritten notes telling the group “mind your own business” to wanting to learn more about their database of 500 potential board candidates.

BDN’s 1999 study also showed 162 of the 228 publicly held companies surveyed had no women executive officers listed in their 1998 SEC filings. A 1999 survey by the Society for Human Resource Management found that the number one barrier to corporate advancement for women is the lack of women on boards of directors. Therefore, BDN is not only helping women become directors but is also helping all women in corporations get ahead.

Broker Voting
We’re finally getting some attention on this issue. The Council of Institutional Investors is once again prodding the New York Stock Exchange to drop this practice. I urge readers to write to the NYSE and ask for a copy of their response to CII. Let them know this isn’t just an issue for CII.

Catherine Kinney, group executive vice president for the Office of the Chief Executive sent a letter to CII on 6/82000 that indicated they had studied the issue of broker voting and had decided to “maintain the exchanges’ discretionary voting structure with no changes.” That’s an outrage!

The Investor Responsibility Research Center carried an article in their June 23 newsletter Corporate Governance Highlights that discusses the recent exchange between CII and NYSE. In addition, it notes a study, “Does Managerial Control of the Proxy Process Disenfranchise Shareholders?” (now titledCorporate Voting and the Proxy Process: Managerial Control versus Shareholder Oversight), by Jennifer Bethel of Babson College and Stuart Gillan of the TIAA-CREF Institute.

Their research found that broker votes were associated with increasing management votes by more than 15 percent, depending on the type of proposal. As many as 4.7 percent of routine proposals might not have passed without broker votes.

I urge everyone to write to the NYSE, using the contact box athttp://www.nyse.com/about/about.html. Ask them to fax you a copy of Catherine Kenney’s letter June 8th letter to the Council of Institutional Investors.

Tell them you’d like to understand what rationale could possibly explain this continued anti-democratic practice, which dilutes the value of shareholders votes.

Board Study
Annual Study of Small-to-Midsize and Large Public Company Boards: 2000 found most directors are between 60-69. Only 13% of large company directors are women and 4% of small-to-midsize directors are women. Median pay of large firms is $35,000 vs $10,000 at small-to-midsize firms. Large firms address more issues using board committees; 33% of them have a committee dealing with corporate governance vs only 2% of small-to-midsize firms. The sample in the 2000 study includes 182 large public companies with median annual sales of $15.3 billion and median net earnings of $728 million as of December 31, 1998. It also includes 192 small-to-midsize companies with median annual sales of $149 million and median earnings of $13 million as of December 31, 1998.

Companies Reap Returns on Human Capital Investments
Shareholders of companies that already have superior human capital practices reaped huge returns in 1999, while shareholders who invested in companies with poor human capital practices lost money, according to new research by Watson Wyatt Worldwide. Companies that had received a high human capital index (above 75) in the original study provided a subsequent average 70 percent total return to shareholders for 1999. Companies with a human capital index between 25 and 75 returned just 12 percent to shareholders, while shareholders lost an average 6 percent by investing in low human capital index (below 25) companies. Want to determine where your organization falls? To complete a 36-item questionnaire and receive customized results, call 1-800-388-9868.

Option Use Grows
The “war for talent” is leading to a growing use of stock options to attract and retain employees. Almost 19% of employees were eligible in 1999, up from 12% in 1998, according to the latest survey from compensation consultants Watson Wyatt Worldwide. Average lowest qualifying salary level last year was $58,100. (reported in Directorship, June, 2000)

Mutual Fund Survey Results
Each year the Management Practice Inc. conducts a survey of mutual fund directors’ compensation. This year they found overall compensation grew by 9.1% while assets managed per director grew 7.8%. Mandatory retirement policies were in place at 64% of funds surveyed with 72 as the median retirement age. The median age of current trustees is 62 with 10 years of service. Most boards have 6-8 members, with a majority being independent. Independent directors chaired 25% of the boards and another 45% have designated one member as a “lead director or trustee.” For more survey results go tohttp://mfgovern.com and click on “Surveys & Publishing.”

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Hell Freezes Over and Bargain Hunting Ends
coverThe May/June edition of Business Ethics carried an article by Allan A. Kennedy based on his recently published book, The End of Shareholder Value. Kennedy claims “the end of the shareholder value era is drawing near.” “Managers everywhere took up the mantle of shareholder value, if for no other reason than to defend themselves from predators” during the late 1980s. In pursuit of shareholder value, managers sold off underperforming assets, downsized, cut R&D and launched buybacks.

His evidence that shareholder value has lost its mantra status? A Conference Board survey says 67% of corporations surveyed said the employment compact had changed; job security was no longer a part of it. He writes that in ten years, “virtually any employee making over $100,000 a year” will be using third-party agents to negotiate their contracts. (Maybe in 10 years my third party agent, part of the AFL-CIO, will get me a $100,000 contract…depending on the rate of inflation. What does that have to do with ending shareholder value?) Further evidence of the demise of shareholder value: suppliers have banded together, even government bureaucrats are withdrawing subsidies for plan relocation. “Companies must ensure they never again take their eye off the ball in pursuit of a false idol like shareholder value.”

Kennedy has a point; companies which concentrate on pumping up the price of their stock at the expense of employees, suppliers, government, and communities will get burned eventually. Wasn’t that lesson widely learned when thousands cheered at the firing of Al Dunlap? (see John A. Byrne’sChainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price)

Pick up any financial periodical and the evidence runs against the focus on shareholder value ending any time soon. The June 12th edition of Pensions&Investments carries an editorial on a “value rebound.” One mutual fund saw 20% of his portfolio bought by merger and acquisition activity with acquirers paying an average 60% premium. Didn’t the Dot.com sell off have something to do with investors seeking value? Open any financial publication and you’ll find plenty of money managers offering advice on where values can be found. Europe seems popular with many because they haven’t gone though the “consolidation” that US firms have experienced and “careful shoppers” can find bargains in East Asia, according the June 25th edition of BusinessWeek. The latest McKinsey study (seehttp://www.mckinsey.com/features/investor_opinion/index.html) concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.”

Kennedy has a catchy title that is bound to help him sell his book but the end of shareholder value will come at about the time shoppers stop looking for a sale. Maybe that’s happening in Kennedy’s neighborhood but I don’t see it in mine. In fact, what I see is everyone wanting to find a bargain and their willingness to band together on the Internet at places like http://eraider.comto engage in aggressive shareholder oversight to ensure that shareholders get a premium for improving corporate governance.

CalPERS Tobacco Sell Off Closer
The board of California’s giant public pension fund instructed the investment staff to draw up policy guidelines on divestiture that would apply to tobacco or any other industryCalSTRS, the State Teachers’ Retirement System recently took a similar route to divestment. See CalPERS inches closer to selling tobacco stock, Sacramento Bee, 6/20.

Good Governance Critical to Attracting Capital
McKinsey & Company completed an update and expansion of their previous “investor premium” work with a new Investor Opinion Survey, June 2000. Undertaken in co-operation with the World Bank, the surveys gathered responses from over 200 institutional investors, who together manage approximately US$3.25 trillion. Forty percent of the respondents were based in the U.S. Key findings include:

  • Three-quarters of investors say board practices are at least as important as financial performance when evaluating companies for investment.
  • Over 80 percent of investors say they would pay more for a well-governed company than for a poorly governed company with comparable financials. (A well-governed company was defined as having a majority of outside directors with no management ties; holding formal evaluations of directors; and being responsive to investor requests for information on governance issues. In addition, directors held significant stockholdings in the company, and a large proportion of directors’ pay came in the form of stock options.)
  • The actual premium investors say they would be willing to pay differs by country. Investors say they would pay 18 percent more for the shares of a well-governed UK company, 22 percent for an Italian company, and 27 percent for one in Venezuela or Indonesia.

The premium appears correlated with the perception of predominant governance standards, with investors willing to pay a higher premium where disclosure or shareholder rights are main concerns. McKinsey concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” “High governance standards will prove essential to attracting and retaining investors in globalized capital markets, while failure to reform is likely to hinder those companies with global ambitions.” See also Investors will pay for governance.

PSLRA Advances Corporate Governance Agenda
The recent Cendant settlement is seen by many as a vindication of PSLRA but its impact on furthering corporate governance is likely to have more lasting importance than achieving the original objectives of Congress.

Andrew Osterland reviews the recent settlement of a class-action suit against Cendant in the current issue of CFO magazine and concludes it may actually be good news for companies facing securities litigation. “Reason: Shareholders, unlike plaintiffs’ attorneys, have less interest in bringing a company to its knees.”

The Private Securities Litigation Reform Act (PSLRA) of 1995 was intended by Congress to: 1) reduce the number of “frivolous” lawsuits, by requiring more detail in complaints before being awarded discovery privileges, and 2) improve the recovery rates of shareholders, by increasing the role of institutional investors. Since passage the PSLRA, the percentage of dismissals has risen from 12% to about 25%. At Cendant shareholders recovered 34% of damages vs the usual 8-9%.

The PSLRA has been successful at reducing attorney fees when an institutional investor has sought lead plaintiff status but few have. Why? According to Osterland, the courts lack a clear definition of which claimant most adequately represents class members, most institutional investors lack legal staff or resources and many don’t want to upset business relationships with defendants and their Wall Street underwriters.

“CFOs now have more reason to hope that powerful institutional investors will help quash frivolous lawsuits that companies might otherwise settle rather than fight.” But if few are willing to step up to the plate, it seems PSLRA hasn’t really gone very far in achieving its goals. Perhaps the most significant outcome has been to provide activist institutional, such as CalPERS andSWIB with another tool for advancing their corporate governance agendas.

What do institutional investors want? The Cendant outcome is instructive: A majority of board members must be independent.

  • All members of the audit, nominating, and compensation committees must be independent.
  • The full board of directors must be elected annually.
  • Shareholders must vote their approval before options are repriced.

How about adding the need to split the CEO and board chair next time around? I don’t see how any board can be truly independent when the CEO sets the board’s agenda.

See CFO Magazine, June 2000, BETTER BALANCE: The huge settlement against Cendant may actually be good news for companies facing securities litigation.

OECD Activities
The May edition of NACD’s Director’s Monthly includes an excellent article by the US ambassador to the Organization for Economic Cooperation and DevelopmentAmbassador Amy Bondurant walks readers through how and why the OECD got involved in corporate Governance and her role in developing theOECD Principles of Corporate Governance. Bondurant argues that good corporate governance is essential to attracting and retaining investment, as well as an important contributor to performance. “Corporations with active and independent boards appear to have performed much better in the 1990s that those with passable, non-independent boards.” She cites a recent McKinsey study in Asia which found that “over three-quarters of respondents believe the quality of corporate governance is at least as important, if not more, than financial issues.” Her summary of the Principles is among the best I’ve seen in such a short write-up.

She also explains some of the other relevant OECD work, such as that of the Anti-Bribery Working Group. The Group monitors ratification and implementation of the Anti-Bribery Convention which entered into force in February 1999 with 34 signatory countries (20 ratified) representing 75% of world trade. See also Bribery and Codes of Corporate Conduct: An Analysis (March 2000) in their section on working papers. An additional initiative, the Good Governance Outreach, will project the Principles of Corporate Governance beyond OECD member countries, along with the Anti-Bribery Convention. The OECD is also updating its Guidelines for Multinational Enterprises to promote responsible business conduct by multinational enterprises. Its nonbinding standards cover employment, industrial relations, environment, competition, taxation, science and technology. A chapter on disclosure will be revised to ensure conformity with the Principles of Corporate Governance. Revisions are expected to be the most extensive since 1976 and will include input from labor unions and NGOs. Their internet site provide instructions on how to get involved.

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Declaration of Independence
Lew Lederman, Chairman and CEO of Knowledge E*Volutions proposes that boards declare their independence in writing. Some “bedrocks” of such documents include: separate chair, separate board secretary and secretariat, and a separate budget. (A Declaration of Independence for Boards in the Information Age,NACD’s Director’s Monthly, May)

First All Day Broadcast
Infonet Services will Web cast seven hours of interactive investment content. “Infonet is taking advantage of technological advances to level the playing field for all investors,” said Morgan Molthrop, Infonet’s Vice President of Investor Relations. “The same strategic information will be available to mom-and-pop investors in Peoria that has, in the past, been available only to investors that run billion dollar portfolios.” The Web cast is scheduled for Monday, June 26, at 8 AM Pacific Time.

BusinessWeek’s Criticism of CalPERS off Target
BusinessWeek’s Christopher Palmeri warns, “CalPERS May Not Do as Well by Doing Good.” While CalPERS has plenty of problems, attempting to do well by doing good is not one of them.

Rather than mandating divestitures and forcing a percentage of the fund into home state projects, Angelides should leave politics out of CalPERS’ investment policy. CalPERS has a 100-person investment staff. Let them decide where the best place to make money is.

While Palmeri is right that “muddying the waters with a social agenda can mean poor results in both areas,” Angelides’ proposed policies might be closer to extending the principles of good corporate governance than shifting CalPERS to a philanthropic fund.

For example, CalPERS governance policies call for disclosure and transparency because without information shareholders cannot make informed decisions. Angelides believes it may be better to invest in our own “emerging markets” in California than in countries where political freedom, basic workers’ rights and a free press conducive to secure investments are denied. Angelides is right to take risk into account.

Certainly, it would be wrong for the State Treasurer to use his position to advance his own political ambitions at the expense of fund members and beneficiaries, just as it was wrong for other members of the CalPERS board to vote in favor of policies to “muzzle critics” in order to stay in office. However, Angelides’ plan for investing in the “double bottom line” builds on partnerships not subsidies.

Angelides has called on CalPERS to join with CalSTRS in divesting the fund of tobacco companies based on their poor performance but it is clear that health concerns and social issues have played a part as well. The board’s President, William D. Crist indicates he is “against making investment decisions based on someone’s idea of what is good or bad for society, because I don’t know where that train stops,” ”Do we one day ban investments in alcohol, handguns, and rap music?” It could, indeed, be a slippery slope. However, unlike alcohol, handguns and rap music, tobacco products cause harm even when used as directed and, more important from an investors standpoint, tobacco companies are losing lawsuits at a growing pace.

Limiting investments to where transparency, disclosure and the guarantee of basic rights such as freedom of the press exist may be reasonable proxies for minimizing risk. Similar arguments can be made for divesting tobacco. It is doubtful CalPERS will take up the mantle of a “socially responsible investment.” State Controller Kathleen Connell was only convinced to vote for tobacco divestment at CalSTRS after a broader policy of assessing economic risks was adopted. (see Why Connell did about-face on tobacco stock) It clearly pointed to the unique vulnerability of the tobacco industry to bankruptcy. Those elected by the membership are also unlikely too go too far down the SRI path off. Most enjoy an occasional beer, hunting on the weekends and/or gambling at Lake Tahoe, Reno or Los Vegas.

Palmeri decries taking social forces into account and but applauds CalPERS’ corporate governance policies, indicating they “helped the fund post solid average annual returns of 17% over the past five years.” However, the vast majority of CalPERS funds are invested passively, as an indexed fund. Whereas activist funds such as LENS and the recently createdAllied Owners Action Fund take substantial positions in companies and then announce them as targets, each year CalPERS announces its corporate governance focus list without making further investments in them from its largely passive portfolio.

Where Reforms Are Really Needed

If Palmeri is really concerned about CalPERS’ returns, he should be advocating that CalPERS put its money where its mouth is. They should take advantage of the “CalPERS Effect” by increasing their investments in focus companies prior to announcing them.

If Palmeri is really concerned about CalPERS members he should be pointing to the need for governance reforms at CalPERS itself. Although it uses the resolution process extensively in corporate governance, CalPERS has no similar mechanism to let its own members place action items on the ballot when its own board refuses to act. It also has a “Shareowner’s Forum” on the Internet but only Board members and staff can meaningfully post to it. Should CalPERS divest its tobacco holdings? Why not put the question to the membership?

Elections at CalPERS have been won with less than 6% of the vote because the board refuses to authorize runoffs. It is practically impossible to defeat an incumbent. Those in office can campaign at member expense. Campaign rules can be freely violated unless they can be proved to have changed the results. Appeals are heard by staff whose bonuses are determined by incumbents. In addition, there are no term limits and conflict of interest rules are weak. One recently reelected board member will serve out 32 years by the end of his term, while simultaneously sitting on the board of nine mutual funds.

Palmeri’s advice to leave investment policies to professional staff misses a major point of the corporate governance revolution: informed shareholders participating in governance can add value. CalPERS members are some of the best-educated retirees and employees in the nation; why not involve them in the decision-making process?

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Ditching Directors
Nell Minow and John Robson argue for term limits. Why not let shareholders decide?

With sitting CEO’s stretched thin on boards, retired executives have become a popular source of directors. A recent survey of major corporations reported 86% had at least one retired CEO. Most recognize that board members grow stale and lack independence after too many years of service. In “Ditching Directors,” Nell Minow and John Robson argue that we need an impartial mechanism to weed out those whose contributions have worn thin. One common solution, mandatory retirement at age 70, effectively creates a “virtual drop-by.” They suggest, instead, term limits of 10 or 12 years of service for all directors.

Minow and Robson rightly argue that age limits are “blindly discriminatory” and a “clumsy substitute” for evaluating and replacing sitting directors. Most who have studied the issue agree the real solution is that all boards should have an effective means of evaluating individual director performance. Each board should establish performance criteria, not only for itself (acting as a collective body) but also individual behavioral expectations for its directors.

The elements of such criteria differ but those recommended by CalPERS are illustrative. Their US Corporate Governance Principles state that “minimally, these criteria should address the level of director: attendance, preparedness, participation, and candor.”

Minow and Robson argue one reason director evaluation and replacement hasn’t worked is because many don’t ask directors to sign a performance agreement going into the job. “There’s no reason why the conditions of continued director service cannot be established in a formal director’s ‘employment contract,’ just as a chief executive would enter.”

Unfortunately, the more fundamental problem is that even with an annual evaluation process in place, many boards will let mediocre directors continue. Forcing out a colleague is just too tough. As Minow and Robson note, “selective pruning of dead wood is, it seems, just too painful and disruptive.” “At Stone & Webster, a Boston-based engineering firm, J. Peter Grace sat on the board for 50 years.”

While I embrace their notion of term limits and the importance of a director-evaluation system embodied in corporate bylaws, a more ideal solution would be opening up the nomination process to shareholders.

Shareholder participation and free discussion, such as what occurs on the eRaider bulletin boards, can add value to the firm. Directors faced with the real possibility of being replaced by shareholders would rationally choose to be more responsive to shareholder issues and avoid self-interested actions, such as the golden parachutes and dead hand pill we see at Comshare. Directors who can easily be held accountable by shareholders will have a greater tendency to direct in a manner beneficial to shareholders than do directors where shareholders can only note their displeasure by withholding their vote without a practical alternative.

When eRaider or other serious minded shareholders discuss the issues facing a corporation, such as Employee Solutions orComshare where are the directors? Certainly, liability issues come into play but perhaps more important is the fact that currently it is extremely difficult for shareholders to hold directors accountable, so why bother?

Mandatory term limits are a good fall back but what is really needed are directors who face real contests, where shareholders decide who will stay and who will go.

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China Shifts
Bank of China (BOC) President Liu Mingkang told the 2nd Asia Development Forum that China was involved in a three step approach. Initial reform from 1978 to 1993 focused on enterprise autonomy. From 1993 to 1998 the Chinese government focused its efforts on sound corporate management. Beginning in September 1999, the Chinese government began to focus on six key elements of corporate governance:

  • a set of clearly defined strategies with a broad vision,
  • a transparent and sound decision-making process,
  • information disclosure arrangement based on prudent accounting norm and practices,
  • the establishment of well-defined accountability, responsibility with strict & explicit targets as well as relevant effective motivation schemes and checking mechanism,
  • a system ensuring independent, full and good play by all board members and fairly protecting interests of all shareholders, and
  • education and cultivation of the staff at all levels. corporate governance. (Xinhua News Agency, China Tries to Plant Good Corporate Governance Into SOEs, 6/7)

CalSTRS Swears Off Tobacco
The State Teachers’ Retirement System became America’s biggest pension fund to dump most of its tobacco industry holdings; is CalPERS next? The motion was made by state Treasurer Phil Angelides who will take his battle to CalPERS at its June 19 meeting. Through last week the tobacco sector was up just over 15% for the year, making it a leading performer. However, Angelides blamed a “free fall” in tobacco stock prices for costing the two pension funds a combined $600 million in lost stock value in 1999. Although their was much talk about health issues and the need for consistency with educational policies, board members based their decision on various reports that legal and financial pressures facing the tobacco industry threaten to throw it into bankruptcy and jeopardize CalSTRS’ tobacco holdings. see Sacramento Bee, 6/8, CalSTRS letting go of tobacco: Fund’s $238 million in shares to be shed.

Angelides is also calling on CalPERS to strengthen its standards for investing in foreign emerging-market stocks and bonds by analyzing financial criteria such as market liquidity, shareholder legal protections, and currency risk — along with screens to ensure political freedom, basic workers’ rights and free press conducive to sustained growth before funds are invested. His proposal is based on the premise that free markets, democracy and prudent financial standards offer the most optimum soil for cultivating growing returns. Are social goals compatible with high return on investments? Limiting Investments To Free Markets Will Offer Solid Returns writes California Treasurer Phil Angelides in the 6/5 San Francisco Chronicle.

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Womenconnect.com Offers Advice
The latest issue of <a href="http://www.boardroominsider.com”>Ralph Ward’s Boardroom INSIDER, as always, carries many interesting tips for boardroom occupants. In one item Ward brings our attention to Womenconnect.comwhich offers a rich selection of advice and articles for women in business. Their Boardroom Bound offers advice on how to establish yourself in your first board seat no matter your gender.

Exposure Draft Released by Panel on Audit Effectiveness
The Panel on Audit Effectiveness released an Exposure Draft of its Report and Recommendations. The Panel’s recommendations are addressed to many constituencies: the Securities and Exchange Commission (SEC), standards-setters, firms, the American Institute of CPAs, corporate audit committees and others. The Panel will hold public hearings on July 10 and 11, 2000 to obtain the views of interested individuals and organizations about the recommendations of the Panel in the Exposure Draft. Written comments are invited by July 21, 2000. For details on how to participate in the public hearings and/or to submit written comments, please see “Public Hearings/Written Comments.”

Trouble at Mattel Meeting
Shareholder activist John Chevedden reports that at its 6/7 meeting newly appointed Mattel Chairman Robert Eckert “refused to release voting data by percentage or by numbers for any of the 6 items for vote. He merely said that the shareholder resolution to redeem the poison pill passed, the directors were reelected and accountants ratified.” Later Mattel issued a press release noting a 65% yes vote for Mattel to redeem its poison pill.

TIAA-CREF Proposals Supported
TIAA-CREF announced it won considerable support for shareholder resolutions it submitted to two companies with dual class common stock – and insider-dominated boards. The resolutions, at Cablevision Systems and Telephone and Data Systems, advocate independent boards. Each company is currently controlled by a particular group that has 10 votes per share, whereas public shareholders such as TIAA-CREF have only one vote per share. This stock structure violates the principle of one-share, one-vote, which TIAA-CREF regards as a bedrock principle of shareholder democracy.

At Cablevision the resolution reportedly won the support of an estimated 43% percent of shares voted that TIAA-CREF regards as independent of management. Similarly, at TDS’ annual meeting, holders of its common shares, excluding Series A common shares which are controlled by a family voting trust, cast 45 percent of their shares in favor of the TIAA-CREF resolution. (PRNewswire, 6/7)

Bug Biggs Campaign
Campaign for a New TIAA-CREF got some major publicity recently with a major article in the Los Angeles Times on 5/28. TIAA-CREF acknowledges that Neil Wollman was a player in the 1980s effort to get the company to launch Social Choice, which now boasts $4 billion in assets, but says he was not the catalyst. Neil Wollman and Abigail Fuller now want the company’s socially screened fund to set aside a portion of its assets–5% to 10%–to invest in community development projects and in venture funding for young firms that meet positive screens (by using environmentally friendly technology, for example, or exemplary hiring practices). TIAA-CREF wants to rely solely on negative screening. Want Your Retirement Fund to Put Your Money Where Your Heart Is? If so, mark your calendar for the next two Mondays and call CREF’s Chief Executive John Biggs at 1-800-TIA-CREF (842-2733), ext. 4280.; or 212-490-9000).

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Canadian Retail Investors Double 
In 1989 only 23% of Canadians held equities directly or indirectly; now 49% do according to a study conducted a Toronto Stock Exchange/World Investor Link study reported inInvestor Relations Business on 5/29. Only 4% trade on a daily basis; 40% hold stock for at least a year. The internet is a key factor in the growth of retail investing. Client rules, which changed in February, no longer require brokers to check with investors when they make a trade not in line with their typical investment objectives.

Dotcom Investors Flip
Shareholders keep their GE stock for an average 3.5 years, Microsoft for 3.5 months and Yahoo! for 3.5 days, according toGlenn Pascall, senior fellow at the Institute for Public Policy and Management. Pascall estimates that as many as 75% of new dotcoms will be swallowed by more established firms with better shareholder retention. A convincing long-term business plan can encourage investors to hold, as was the case with Amazon.com which remained relatively stable when the dotcom sector plummeted. Investors believed Jeff Bezos had an effective long-term strategy. Another strategy to retain at least some shareholders might be offering a direct stock purchase plan. Yahoo! recently became the first Internet company to do so. (Investor Relations Business, 5/29)

Labor & Corporate Governance
Proxy Voter Services (PVS), a division of Institutional Shareholder Services (ISS), has launched a no-cost newsletter designed to review proxy issues of current interest to multiemployer plans and to serve as an informational resource for trustees and investment professionals. Labor & Corporate Governance will provide readers with an up-to-date review of corporate governance issues and how they affect multiemployer and labor funds.

Green Power
Prompted by government pressure on institutional investors to act socially responsible, another U. advisor is marrying corporate governance to social issues analysis. Manifest, the Essex-based voting agency and governance specialist began its “Green Card” service. In partnership with London advisor Environmental Governance Ltd. (EnG), Manifest is rating top UK companies on environmental risk. The firm offers scores based on individual investor guidelines. Or clients can choose a set of default weightings.

CalSTRS Adopts Divestment Policy
The California Teachers’ Retirement System adopted a broad policy which may set the stage for tobacco divestment at its June 7 meeting. As reported by Pensions & Investments, 5/29, the new policy would allow divestment when three of four indicators have been met.

  • industry faces potential combined product liability judgments greater than net worth;
  • significant threat of industry-wide bankruptcy filings;
  • regulations/legislation which may substantially impair earnings; and
  • collective action by institutional investors has potential to drive down share prices.

Disclosure Theme at Asian OECD Roundtable
Organization for Economic Cooperation and Development’s 2nd Asian Roundtable on Corporate Governance opened in Hong Kong with disclosure as the theme. The role of the board of directors in overseeing disclosure, accounting and audit and non-financial disclosure such as related parties, ownership structures and government policies will also be examined. The First Asian Roundtable organized by the OECD was held in Seoul in March 1999.

Family-based business structures and poor enforcement of corporate laws will hinder adoption of international governance standards for another generation, according to Olivier Fremond of the World Bank’s corporate governance unit. The 53% rebound in the stockmarket during 1999 rewarded managements without requiring adoption of international norms. With China needing capital and about to enter the WTO, it is likely to drive corporate governance reform. “You can talk about different cultures and traditions and they do play an important role, but ultimately efficiency, fairness and accountability are principles that need to be employed in Asia,” Fremond said. “The force behind this is going to be the institutional investor.” (Reuters, 5/31, Good governance a generation away in Asia-W.Bank)

Australian Institutional Investors Apathetic Voters
A study by the Centre For Corporate Law and Securities Regulation found that, in companies with a wide shareholder base, proxy instructions for resolutions about the election of directors accounted for only 35% of possible votes in 1999. Similar figures applied for controversial and major resolutions. This compares with 80% in the US, 73% in Germany and 50% in the UK. (Sydney Morning Herald, 5/30, Institutions urged to use voting rights)

Reliance on Global Equity Grows
Companies in France, Germany and Japan are becoming increasingly dependent on open market equity for financing their expansion-they are becoming more like companies in the US and UK, according to the latest issue of The Conference Board’s Institutional Investment Report. The largest 25 US pension fund holders of international equity, held $265.6 billion in international stocks as of September 30, 1999. These 25 pension funds accounted for roughly 66% of the $403.7 billion foreign equity held by all US investors in the third quarter of 1999. This represents a phenomenal 24% increase from the third quarter of 1998 when the largest 25 pension funds held $181.1 billion, roughly 42% of $432 billion of all US foreign equity. In 1996, the largest 25 pension funds’ share of all US foreign equity was only at 28%, or $110.8 billion out of a total $397.7 billion. This small group of investors hold tremendous leverage. (see press release)

SEC Rulemakings
The SEC is soliciting input on concepts and proposed rules. Two which deserve attention are File No. S7-04-00: Concept Release on International Accounting Standards and File No. S7-04-00: Electronic Filing by Investment Advisers. I’ve posted my comments on both on our Commentary page or go directly toaccounting or advisors.

Continue Reading ·

Archives: June 2000

Shareholders Virtually Screwed
Reliable sources tell me that Senate Bill No. 363, “An Act to Amend Title 8 of The Delaware Code Relating to the General Corporation Law” has been signed into law by Governor Thomas Carper and goes into effect July 1. Section 7 allows companies to hold stockholder meetings entirely by remote communication without a venue for physical attendance, at the sole discretion of the board of directors and without shareholder approval.

While I have always been a strong advocate of using electronic technology to inform shareholders and I support the Internet broadcasting of annual meetings, this measure appears to go too far and can easily lead to the further disenfranchising of shareholders as well as the loss of an important forum.

The Council of Institutional Investors expressed their concern about Section 7 in its newsletter dated June 15, 2000. “The proposed law could also mean that shareholders would no longer have an opportunity to question directors in person…virtual meetings could be abused by management, since shareholders can’t keep an eye on the proceedings of all-electronic meetings.”

Clearly, the result of repealing the requirement that companies convene physical shareholder meetings will be a reduction in management accountability by insulating executives and directors from shareholders.

While I’m complaining about Delaware, they could also do a better job of enabling the public to search bills, read their text and any committee analysis. Their Legislative Information System is totally inadequate. After too long, I finally found the text of SB 363 and a summary.

Stakes by Outside Directors Matter
Donald Hambrick and Eric Jackson examined companies with winning 10 year shareholder returns vs laggards and found that outside directors of winners held 4-5 times more equity in their firms than did outside directors of laggards. “Our results strongly suggest that directors with a meaningful stake are a pivotal factor in improved governance.”  Outside Directors With a Stake: The Linchpin In Improving Governance, forthcoming in California Management Review

SEC in Rewrite on Selective Disclosure
The US Securities and Exchange Commission has decided to revise its proposal regarding selective disclosure in response to complaints from news organizations. The amended proposal will reportedly allow corporate insiders to disclose material information to “legitimate” members of the press. Sources expect the final proposal to be released by the end of July. (The Corporate Library, News Briefs, June 14-20)

Women on Board in Georgia
Board of Directors Network (“BDN”) bills itself as “the only organization in the United States devoted to improving corporate governance in America through advocating gender diversity in the boardroom.”

A recent article in the Atlanta Journal Constitution (June 18th, 2000) discusses the findings of BDN’s 1999 survey. Women hold only 5 percent of the 1,808 board of director seats in public companies headquartered in Georgia. Only 13 of the 228 public corporations surveyed for a 1999 report have more than one woman director, and none has more than two.

Their survey mailing gets mixed responses, from handwritten notes telling the group “mind your own business” to wanting to learn more about their database of 500 potential board candidates.

BDN’s 1999 study also showed 162 of the 228 publicly held companies surveyed had no women executive officers listed in their 1998 SEC filings. A 1999 survey by the Society for Human Resource Management found that the number one barrier to corporate advancement for women is the lack of women on boards of directors. Therefore, BDN is not only helping women become directors but is also helping all women in corporations get ahead.

Broker Voting
We’re finally getting some attention on this issue. The Council of Institutional Investors is once again prodding the New York Stock Exchange to drop this practice. I urge readers to write to the NYSE and ask for a copy of their response to CII. Let them know this isn’t just an issue for CII.

Catherine Kinney, group executive vice president for the Office of the Chief Executive sent a letter to CII on 6/82000 that indicated they had studied the issue of broker voting and had decided to “maintain the exchanges’ discretionary voting structure with no changes.” That’s an outrage!

The Investor Responsibility Research Center carried an article in their June 23 newsletter Corporate Governance Highlights that discusses the recent exchange between CII and NYSE. In addition, it notes a study, “Does Managerial Control of the Proxy Process Disenfranchise Shareholders?” (now titledCorporate Voting and the Proxy Process: Managerial Control versus Shareholder Oversight), by Jennifer Bethel of Babson College and Stuart Gillan of the TIAA-CREF Institute.

Their research found that broker votes were associated with increasing management votes by more than 15 percent, depending on the type of proposal. As many as 4.7 percent of routine proposals might not have passed without broker votes.

I urge everyone to write to the NYSE, using the contact box athttp://www.nyse.com/about/about.html. Ask them to fax you a copy of Catherine Kenney’s letter June 8th letter to the Council of Institutional Investors.

Tell them you’d like to understand what rationale could possibly explain this continued anti-democratic practice, which dilutes the value of shareholders votes.

Board Study
Annual Study of Small-to-Midsize and Large Public Company Boards: 2000 found most directors are between 60-69. Only 13% of large company directors are women and 4% of small-to-midsize directors are women. Median pay of large firms is $35,000 vs $10,000 at small-to-midsize firms. Large firms address more issues using board committees; 33% of them have a committee dealing with corporate governance vs only 2% of small-to-midsize firms. The sample in the 2000 study includes 182 large public companies with median annual sales of $15.3 billion and median net earnings of $728 million as of December 31, 1998. It also includes 192 small-to-midsize companies with median annual sales of $149 million and median earnings of $13 million as of December 31, 1998.

Companies Reap Returns on Human Capital Investments
Shareholders of companies that already have superior human capital practices reaped huge returns in 1999, while shareholders who invested in companies with poor human capital practices lost money, according to new research by Watson Wyatt Worldwide. Companies that had received a high human capital index (above 75) in the original study provided a subsequent average 70 percent total return to shareholders for 1999. Companies with a human capital index between 25 and 75 returned just 12 percent to shareholders, while shareholders lost an average 6 percent by investing in low human capital index (below 25) companies. Want to determine where your organization falls? To complete a 36-item questionnaire and receive customized results, call 1-800-388-9868.

Option Use Grows
The “war for talent” is leading to a growing use of stock options to attract and retain employees. Almost 19% of employees were eligible in 1999, up from 12% in 1998, according to the latest survey from compensation consultants Watson Wyatt Worldwide. Average lowest qualifying salary level last year was $58,100. (reported in Directorship, June, 2000)

Mutual Fund Survey Results
Each year the Management Practice Inc. conducts a survey of mutual fund directors’ compensation. This year they found overall compensation grew by 9.1% while assets managed per director grew 7.8%. Mandatory retirement policies were in place at 64% of funds surveyed with 72 as the median retirement age. The median age of current trustees is 62 with 10 years of service. Most boards have 6-8 members, with a majority being independent. Independent directors chaired 25% of the boards and another 45% have designated one member as a “lead director or trustee.” For more survey results go tohttp://mfgovern.com and click on “Surveys & Publishing.”

Back to the topHell Freezes Over and Bargain Hunting Ends
The May/June edition of Business Ethics carried an article by Allan A. Kennedy based on his recently published book, The End of Shareholder Value. Kennedy claims “the end of the shareholder value era is drawing near.” “Managers everywhere took up the mantle of shareholder value, if for no other reason than to defend themselves from predators” during the late 1980s. In pursuit of shareholder value, managers sold off underperforming assets, downsized, cut R&D and launched buybacks.

His evidence that shareholder value has lost its mantra status? A Conference Board survey says 67% of corporations surveyed said the employment compact had changed; job security was no longer a part of it. He writes that in ten years, “virtually any employee making over $100,000 a year” will be using third-party agents to negotiate their contracts. (Maybe in 10 years my third party agent, part of the AFL-CIO, will get me a $100,000 contract…depending on the rate of inflation. What does that have to do with ending shareholder value?) Further evidence of the demise of shareholder value: suppliers have banded together, even government bureaucrats are withdrawing subsidies for plan relocation. “Companies must ensure they never again take their eye off the ball in pursuit of a false idol like shareholder value.”

Kennedy has a point; companies which concentrate on pumping up the price of their stock at the expense of employees, suppliers, government, and communities will get burned eventually. Wasn’t that lesson widely learned when thousands cheered at the firing of Al Dunlap? (see John A. Byrne’sChainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price)

Pick up any financial periodical and the evidence runs against the focus on shareholder value ending any time soon. The June 12th edition of Pensions&Investments carries an editorial on a “value rebound.” One mutual fund saw 20% of his portfolio bought by merger and acquisition activity with acquirers paying an average 60% premium. Didn’t the Dot.com sell off have something to do with investors seeking value? Open any financial publication and you’ll find plenty of money managers offering advice on where values can be found. Europe seems popular with many because they haven’t gone though the “consolidation” that US firms have experienced and “careful shoppers” can find bargains in East Asia, according the June 25th edition of BusinessWeek. The latest McKinsey study (seehttp://www.mckinsey.com/features/investor_opinion/index.html) concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.”

Kennedy has a catchy title that is bound to help him sell his book but the end of shareholder value will come at about the time shoppers stop looking for a sale. Maybe that’s happening in Kennedy’s neighborhood but I don’t see it in mine. In fact, what I see is everyone wanting to find a bargain and their willingness to band together on the Internet at places like http://eraider.comto engage in aggressive shareholder oversight to ensure that shareholders get a premium for improving corporate governance.

CalPERS Tobacco Sell Off Closer
The board of California’s giant public pension fund instructed the investment staff to draw up policy guidelines on divestiture that would apply to tobacco or any other industryCalSTRS, the State Teachers’ Retirement System recently took a similar route to divestment. See CalPERS inches closer to selling tobacco stock, Sacramento Bee, 6/20.

Good Governance Critical to Attracting Capital
McKinsey & Company completed an update and expansion of their previous “investor premium” work with a new Investor Opinion Survey, June 2000. Undertaken in co-operation with the World Bank, the surveys gathered responses from over 200 institutional investors, who together manage approximately US$3.25 trillion. Forty percent of the respondents were based in the U.S. Key findings include:

  • Three-quarters of investors say board practices are at least as important as financial performance when evaluating companies for investment.
  • Over 80 percent of investors say they would pay more for a well-governed company than for a poorly governed company with comparable financials. (A well-governed company was defined as having a majority of outside directors with no management ties; holding formal evaluations of directors; and being responsive to investor requests for information on governance issues. In addition, directors held significant stockholdings in the company, and a large proportion of directors’ pay came in the form of stock options.)
  • The actual premium investors say they would be willing to pay differs by country. Investors say they would pay 18 percent more for the shares of a well-governed UK company, 22 percent for an Italian company, and 27 percent for one in Venezuela or Indonesia.

The premium appears correlated with the perception of predominant governance standards, with investors willing to pay a higher premium where disclosure or shareholder rights are main concerns. McKinsey concludes that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” “High governance standards will prove essential to attracting and retaining investors in globalized capital markets, while failure to reform is likely to hinder those companies with global ambitions.” See also Investors will pay for governance.

PSLRA Advances Corporate Governance Agenda
The recent Cendant settlement is seen by many as a vindication of PSLRA but its impact on furthering corporate governance is likely to have more lasting importance than achieving the original objectives of Congress.

Andrew Osterland reviews the recent settlement of a class-action suit against Cendant in the current issue of CFO magazine and concludes it may actually be good news for companies facing securities litigation. “Reason: Shareholders, unlike plaintiffs’ attorneys, have less interest in bringing a company to its knees.”

The Private Securities Litigation Reform Act (PSLRA) of 1995 was intended by Congress to: 1) reduce the number of “frivolous” lawsuits, by requiring more detail in complaints before being awarded discovery privileges, and 2) improve the recovery rates of shareholders, by increasing the role of institutional investors. Since passage the PSLRA, the percentage of dismissals has risen from 12% to about 25%. At Cendant shareholders recovered 34% of damages vs the usual 8-9%.

The PSLRA has been successful at reducing attorney fees when an institutional investor has sought lead plaintiff status but few have. Why? According to Osterland, the courts lack a clear definition of which claimant most adequately represents class members, most institutional investors lack legal staff or resources and many don’t want to upset business relationships with defendants and their Wall Street underwriters.

“CFOs now have more reason to hope that powerful institutional investors will help quash frivolous lawsuits that companies might otherwise settle rather than fight.” But if few are willing to step up to the plate, it seems PSLRA hasn’t really gone very far in achieving its goals. Perhaps the most significant outcome has been to provide activist institutional, such as CalPERS andSWIB with another tool for advancing their corporate governance agendas.

What do institutional investors want? The Cendant outcome is instructive: A majority of board members must be independent.

  • All members of the audit, nominating, and compensation committees must be independent.
  • The full board of directors must be elected annually.
  • Shareholders must vote their approval before options are repriced.

How about adding the need to split the CEO and board chair next time around? I don’t see how any board can be truly independent when the CEO sets the board’s agenda.

See CFO Magazine, June 2000, BETTER BALANCE: The huge settlement against Cendant may actually be good news for companies facing securities litigation.

OECD Activities
The May edition of NACD’s Director’s Monthly includes an excellent article by the US ambassador to the Organization for Economic Cooperation and DevelopmentAmbassador Amy Bondurant walks readers through how and why the OECD got involved in corporate Governance and her role in developing theOECD Principles of Corporate Governance. Bondurant argues that good corporate governance is essential to attracting and retaining investment, as well as an important contributor to performance. “Corporations with active and independent boards appear to have performed much better in the 1990s that those with passable, non-independent boards.” She cites a recent McKinsey study in Asia which found that “over three-quarters of respondents believe the quality of corporate governance is at least as important, if not more, than financial issues.” Her summary of the Principles is among the best I’ve seen in such a short write-up.

She also explains some of the other relevant OECD work, such as that of the Anti-Bribery Working Group. The Group monitors ratification and implementation of the Anti-Bribery Convention which entered into force in February 1999 with 34 signatory countries (20 ratified) representing 75% of world trade. See also Bribery and Codes of Corporate Conduct: An Analysis (March 2000) in their section on working papers. An additional initiative, the Good Governance Outreach, will project the Principles of Corporate Governance beyond OECD member countries, along with the Anti-Bribery Convention. The OECD is also updating its Guidelines for Multinational Enterprises to promote responsible business conduct by multinational enterprises. Its nonbinding standards cover employment, industrial relations, environment, competition, taxation, science and technology. A chapter on disclosure will be revised to ensure conformity with the Principles of Corporate Governance. Revisions are expected to be the most extensive since 1976 and will include input from labor unions and NGOs. Their internet site provide instructions on how to get involved.

Back to the topDeclaration of Independence
Lew Lederman, Chairman and CEO of Knowledge E*Volutions proposes that boards declare their independence in writing. Some “bedrocks” of such documents include: separate chair, separate board secretary and secretariat, and a separate budget. (A Declaration of Independence for Boards in the Information Age,NACD’s Director’s Monthly, May)

First All Day Broadcast
Infonet Services will Web cast seven hours of interactive investment content. “Infonet is taking advantage of technological advances to level the playing field for all investors,” said Morgan Molthrop, Infonet’s Vice President of Investor Relations. “The same strategic information will be available to mom-and-pop investors in Peoria that has, in the past, been available only to investors that run billion dollar portfolios.” The Web cast is scheduled for Monday, June 26, at 8 AM Pacific Time.

BusinessWeek’s Criticism of CalPERS off Target
BusinessWeek’s Christopher Palmeri warns, “CalPERS May Not Do as Well by Doing Good.” While CalPERS has plenty of problems, attempting to do well by doing good is not one of them.

Rather than mandating divestitures and forcing a percentage of the fund into home state projects, Angelides should leave politics out of CalPERS’ investment policy. CalPERS has a 100-person investment staff. Let them decide where the best place to make money is.

While Palmeri is right that “muddying the waters with a social agenda can mean poor results in both areas,” Angelides’ proposed policies might be closer to extending the principles of good corporate governance than shifting CalPERS to a philanthropic fund.

For example, CalPERS governance policies call for disclosure and transparency because without information shareholders cannot make informed decisions. Angelides believes it may be better to invest in our own “emerging markets” in California than in countries where political freedom, basic workers’ rights and a free press conducive to secure investments are denied. Angelides is right to take risk into account.

Certainly, it would be wrong for the State Treasurer to use his position to advance his own political ambitions at the expense of fund members and beneficiaries, just as it was wrong for other members of the CalPERS board to vote in favor of policies to “muzzle critics” in order to stay in office. However, Angelides’ plan for investing in the “double bottom line” builds on partnerships not subsidies.

Angelides has called on CalPERS to join with CalSTRS in divesting the fund of tobacco companies based on their poor performance but it is clear that health concerns and social issues have played a part as well. The board’s President, William D. Crist indicates he is “against making investment decisions based on someone’s idea of what is good or bad for society, because I don’t know where that train stops,” ”Do we one day ban investments in alcohol, handguns, and rap music?” It could, indeed, be a slippery slope. However, unlike alcohol, handguns and rap music, tobacco products cause harm even when used as directed and, more important from an investors standpoint, tobacco companies are losing lawsuits at a growing pace.

Limiting investments to where transparency, disclosure and the guarantee of basic rights such as freedom of the press exist may be reasonable proxies for minimizing risk. Similar arguments can be made for divesting tobacco. It is doubtful CalPERS will take up the mantle of a “socially responsible investment.” State Controller Kathleen Connell was only convinced to vote for tobacco divestment at CalSTRS after a broader policy of assessing economic risks was adopted. (see Why Connell did about-face on tobacco stock) It clearly pointed to the unique vulnerability of the tobacco industry to bankruptcy. Those elected by the membership are also unlikely too go too far down the SRI path off. Most enjoy an occasional beer, hunting on the weekends and/or gambling at Lake Tahoe, Reno or Los Vegas.

Palmeri decries taking social forces into account and but applauds CalPERS’ corporate governance policies, indicating they “helped the fund post solid average annual returns of 17% over the past five years.” However, the vast majority of CalPERS funds are invested passively, as an indexed fund. Whereas activist funds such as LENS and the recently createdAllied Owners Action Fund take substantial positions in companies and then announce them as targets, each year CalPERS announces its corporate governance focus list without making further investments in them from its largely passive portfolio.

Where Reforms Are Really Needed

If Palmeri is really concerned about CalPERS’ returns, he should be advocating that CalPERS put its money where its mouth is. They should take advantage of the “CalPERS Effect” by increasing their investments in focus companies prior to announcing them.

If Palmeri is really concerned about CalPERS members he should be pointing to the need for governance reforms at CalPERS itself. Although it uses the resolution process extensively in corporate governance, CalPERS has no similar mechanism to let its own members place action items on the ballot when its own board refuses to act. It also has a “Shareowner’s Forum” on the Internet but only Board members and staff can meaningfully post to it. Should CalPERS divest its tobacco holdings? Why not put the question to the membership?

Elections at CalPERS have been won with less than 6% of the vote because the board refuses to authorize runoffs. It is practically impossible to defeat an incumbent. Those in office can campaign at member expense. Campaign rules can be freely violated unless they can be proved to have changed the results. Appeals are heard by staff whose bonuses are determined by incumbents. In addition, there are no term limits and conflict of interest rules are weak. One recently reelected board member will serve out 32 years by the end of his term, while simultaneously sitting on the board of nine mutual funds.

Palmeri’s advice to leave investment policies to professional staff misses a major point of the corporate governance revolution: informed shareholders participating in governance can add value. CalPERS members are some of the best-educated retirees and employees in the nation; why not involve them in the decision-making process?

Back to the topDitching Directors
Nell Minow and John Robson argue for term limits. Why not let shareholders decide?

With sitting CEO’s stretched thin on boards, retired executives have become a popular source of directors. A recent survey of major corporations reported 86% had at least one retired CEO. Most recognize that board members grow stale and lack independence after too many years of service. In “Ditching Directors,” Nell Minow and John Robson argue that we need an impartial mechanism to weed out those whose contributions have worn thin. One common solution, mandatory retirement at age 70, effectively creates a “virtual drop-by.” They suggest, instead, term limits of 10 or 12 years of service for all directors.

Minow and Robson rightly argue that age limits are “blindly discriminatory” and a “clumsy substitute” for evaluating and replacing sitting directors. Most who have studied the issue agree the real solution is that all boards should have an effective means of evaluating individual director performance. Each board should establish performance criteria, not only for itself (acting as a collective body) but also individual behavioral expectations for its directors.

The elements of such criteria differ but those recommended by CalPERS are illustrative. Their US Corporate Governance Principles state that “minimally, these criteria should address the level of director: attendance, preparedness, participation, and candor.”

Minow and Robson argue one reason director evaluation and replacement hasn’t worked is because many don’t ask directors to sign a performance agreement going into the job. “There’s no reason why the conditions of continued director service cannot be established in a formal director’s ‘employment contract,’ just as a chief executive would enter.”

Unfortunately, the more fundamental problem is that even with an annual evaluation process in place, many boards will let mediocre directors continue. Forcing out a colleague is just too tough. As Minow and Robson note, “selective pruning of dead wood is, it seems, just too painful and disruptive.” “At Stone & Webster, a Boston-based engineering firm, J. Peter Grace sat on the board for 50 years.”

While I embrace their notion of term limits and the importance of a director-evaluation system embodied in corporate bylaws, a more ideal solution would be opening up the nomination process to shareholders.

Shareholder participation and free discussion, such as what occurs on the eRaider bulletin boards, can add value to the firm. Directors faced with the real possibility of being replaced by shareholders would rationally choose to be more responsive to shareholder issues and avoid self-interested actions, such as the golden parachutes and dead hand pill we see at Comshare. Directors who can easily be held accountable by shareholders will have a greater tendency to direct in a manner beneficial to shareholders than do directors where shareholders can only note their displeasure by withholding their vote without a practical alternative.

When eRaider or other serious minded shareholders discuss the issues facing a corporation, such as Employee Solutions orComshare where are the directors? Certainly, liability issues come into play but perhaps more important is the fact that currently it is extremely difficult for shareholders to hold directors accountable, so why bother?

Mandatory term limits are a good fall back but what is really needed are directors who face real contests, where shareholders decide who will stay and who will go.

Back to the topChina Shifts
Bank of China (BOC) President Liu Mingkang told the 2nd Asia Development Forum that China was involved in a three step approach. Initial reform from 1978 to 1993 focused on enterprise autonomy. From 1993 to 1998 the Chinese government focused its efforts on sound corporate management. Beginning in September 1999, the Chinese government began to focus on six key elements of corporate governance:

  • a set of clearly defined strategies with a broad vision,
  • a transparent and sound decision-making process,
  • information disclosure arrangement based on prudent accounting norm and practices,
  • the establishment of well-defined accountability, responsibility with strict & explicit targets as well as relevant effective motivation schemes and checking mechanism,
  • a system ensuring independent, full and good play by all board members and fairly protecting interests of all shareholders, and
  • education and cultivation of the staff at all levels. corporate governance. (Xinhua News Agency, China Tries to Plant Good Corporate Governance Into SOEs, 6/7)

CalSTRS Swears Off Tobacco
The State Teachers’ Retirement System became America’s biggest pension fund to dump most of its tobacco industry holdings; is CalPERS next? The motion was made by state Treasurer Phil Angelides who will take his battle to CalPERS at its June 19 meeting. Through last week the tobacco sector was up just over 15% for the year, making it a leading performer. However, Angelides blamed a “free fall” in tobacco stock prices for costing the two pension funds a combined $600 million in lost stock value in 1999. Although their was much talk about health issues and the need for consistency with educational policies, board members based their decision on various reports that legal and financial pressures facing the tobacco industry threaten to throw it into bankruptcy and jeopardize CalSTRS’ tobacco holdings. see Sacramento Bee, 6/8, CalSTRS letting go of tobacco: Fund’s $238 million in shares to be shed.

Angelides is also calling on CalPERS to strengthen its standards for investing in foreign emerging-market stocks and bonds by analyzing financial criteria such as market liquidity, shareholder legal protections, and currency risk — along with screens to ensure political freedom, basic workers’ rights and free press conducive to sustained growth before funds are invested. His proposal is based on the premise that free markets, democracy and prudent financial standards offer the most optimum soil for cultivating growing returns. Are social goals compatible with high return on investments? Limiting Investments To Free Markets Will Offer Solid Returns writes California Treasurer Phil Angelides in the 6/5 San Francisco Chronicle.

Back to the topWomenconnect.com Offers Advice
The latest issue of <a href=”http://www.boardroominsider.com”>Ralph Ward’s Boardroom INSIDER, as always, carries many interesting tips for boardroom occupants. In one item Ward brings our attention to Womenconnect.com<a href=”http://www.boardroominsider.com”>which offers a rich selection of advice and articles for women in business. Their Boardroom Bound<a href=”http://www.boardroominsider.com”> offers advice on how to establish yourself in your first board seat no matter your gender.

Exposure Draft Released by Panel on Audit Effectiveness
The Panel on Audit Effectiveness released an Exposure Draft of its Report and Recommendations. The Panel’s recommendations are addressed to many constituencies: the Securities and Exchange Commission (SEC), standards-setters, firms, the American Institute of CPAs, corporate audit committees and others. The Panel will hold public hearings on July 10 and 11, 2000 to obtain the views of interested individuals and organizations about the recommendations of the Panel in the Exposure Draft. Written comments are invited by July 21, 2000. For details on how to participate in the public hearings and/or to submit written comments, please see “Public Hearings/Written Comments.”

Trouble at Mattel Meeting
Shareholder activist John Chevedden reports that at its 6/7 meeting newly appointed Mattel Chairman Robert Eckert “refused to release voting data by percentage or by numbers for any of the 6 items for vote. He merely said that the shareholder resolution to redeem the poison pill passed, the directors were reelected and accountants ratified.” Later Mattel issued a press release noting a 65% yes vote for Mattel to redeem its poison pill.

TIAA-CREF Proposals Supported
TIAA-CREF announced it won considerable support for shareholder resolutions it submitted to two companies with dual class common stock – and insider-dominated boards. The resolutions, at Cablevision Systems and Telephone and Data Systems, advocate independent boards. Each company is currently controlled by a particular group that has 10 votes per share, whereas public shareholders such as TIAA-CREF have only one vote per share. This stock structure violates the principle of one-share, one-vote, which TIAA-CREF regards as a bedrock principle of shareholder democracy.

At Cablevision the resolution reportedly won the support of an estimated 43% percent of shares voted that TIAA-CREF regards as independent of management. Similarly, at TDS’ annual meeting, holders of its common shares, excluding Series A common shares which are controlled by a family voting trust, cast 45 percent of their shares in favor of the TIAA-CREF resolution. (PRNewswire, 6/7)

Bug Biggs Campaign
Campaign for a New TIAA-CREF got some major publicity recently with a major article in the Los Angeles Times on 5/28. TIAA-CREF acknowledges that Neil Wollman was a player in the 1980s effort to get the company to launch Social Choice, which now boasts $4 billion in assets, but says he was not the catalyst. Neil Wollman and Abigail Fuller now want the company’s socially screened fund to set aside a portion of its assets–5% to 10%–to invest in community development projects and in venture funding for young firms that meet positive screens (by using environmentally friendly technology, for example, or exemplary hiring practices). TIAA-CREF wants to rely solely on negative screening. Want Your Retirement Fund to Put Your Money Where Your Heart Is? If so, mark your calendar for the next two Mondays and call CREF’s Chief Executive John Biggs at 1-800-TIA-CREF (842-2733), ext. 4280.; or 212-490-9000).

Back to the topCanadian Retail Investors Double 
In 1989 only 23% of Canadians held equities directly or indirectly; now 49% do according to a study conducted a Toronto Stock Exchange/World Investor Link study reported inInvestor Relations Business on 5/29. Only 4% trade on a daily basis; 40% hold stock for at least a year. The internet is a key factor in the growth of retail investing. Client rules, which changed in February, no longer require brokers to check with investors when they make a trade not in line with their typical investment objectives.

Dotcom Investors Flip
Shareholders keep their GE stock for an average 3.5 years, Microsoft for 3.5 months and Yahoo! for 3.5 days, according toGlenn Pascall, senior fellow at the Institute for Public Policy and Management. Pascall estimates that as many as 75% of new dotcoms will be swallowed by more established firms with better shareholder retention. A convincing long-term business plan can encourage investors to hold, as was the case with Amazon.com which remained relatively stable when the dotcom sector plummeted. Investors believed Jeff Bezos had an effective long-term strategy. Another strategy to retain at least some shareholders might be offering a direct stock purchase plan. Yahoo! recently became the first Internet company to do so. (Investor Relations Business, 5/29)

Labor & Corporate Governance
Proxy Voter Services (PVS), a division of Institutional Shareholder Services (ISS), has launched a no-cost newsletter designed to review proxy issues of current interest to multiemployer plans and to serve as an informational resource for trustees and investment professionals. Labor & Corporate Governance will provide readers with an up-to-date review of corporate governance issues and how they affect multiemployer and labor funds.

Green Power
Prompted by government pressure on institutional investors to act socially responsible, another U. advisor is marrying corporate governance to social issues analysis. Manifest, the Essex-based voting agency and governance specialist began its “Green Card” service. In partnership with London advisor Environmental Governance Ltd. (EnG), Manifest is rating top UK companies on environmental risk. The firm offers scores based on individual investor guidelines. Or clients can choose a set of default weightings.

CalSTRS Adopts Divestment Policy
The California Teachers’ Retirement System adopted a broad policy which may set the stage for tobacco divestment at its June 7 meeting. As reported by Pensions & Investments, 5/29, the new policy would allow divestment when three of four indicators have been met.

  • industry faces potential combined product liability judgments greater than net worth;
  • significant threat of industry-wide bankruptcy filings;
  • regulations/legislation which may substantially impair earnings; and
  • collective action by institutional investors has potential to drive down share prices.

Disclosure Theme at Asian OECD Roundtable
Organization for Economic Cooperation and Development’s 2nd Asian Roundtable on Corporate Governance opened in Hong Kong with disclosure as the theme. The role of the board of directors in overseeing disclosure, accounting and audit and non-financial disclosure such as related parties, ownership structures and government policies will also be examined. The First Asian Roundtable organized by the OECD was held in Seoul in March 1999.

Family-based business structures and poor enforcement of corporate laws will hinder adoption of international governance standards for another generation, according to Olivier Fremond of the World Bank’s corporate governance unit. The 53% rebound in the stockmarket during 1999 rewarded managements without requiring adoption of international norms. With China needing capital and about to enter the WTO, it is likely to drive corporate governance reform. “You can talk about different cultures and traditions and they do play an important role, but ultimately efficiency, fairness and accountability are principles that need to be employed in Asia,” Fremond said. “The force behind this is going to be the institutional investor.” (Reuters, 5/31, Good governance a generation away in Asia-W.Bank)

Australian Institutional Investors Apathetic Voters
A study by the Centre For Corporate Law and Securities Regulation found that, in companies with a wide shareholder base, proxy instructions for resolutions about the election of directors accounted for only 35% of possible votes in 1999. Similar figures applied for controversial and major resolutions. This compares with 80% in the US, 73% in Germany and 50% in the UK. (Sydney Morning Herald, 5/30, Institutions urged to use voting rights)

Reliance on Global Equity Grows
Companies in France, Germany and Japan are becoming increasingly dependent on open market equity for financing their expansion-they are becoming more like companies in the US and UK, according to the latest issue of The Conference Board’s Institutional Investment Report. The largest 25 US pension fund holders of international equity, held $265.6 billion in international stocks as of September 30, 1999. These 25 pension funds accounted for roughly 66% of the $403.7 billion foreign equity held by all US investors in the third quarter of 1999. This represents a phenomenal 24% increase from the third quarter of 1998 when the largest 25 pension funds held $181.1 billion, roughly 42% of $432 billion of all US foreign equity. In 1996, the largest 25 pension funds’ share of all US foreign equity was only at 28%, or $110.8 billion out of a total $397.7 billion. This small group of investors hold tremendous leverage. (see press release)

SEC Rulemakings
The SEC is soliciting input on concepts and proposed rules. Two which deserve attention are File No. S7-04-00: Concept Release on International Accounting Standards and File No. S7-04-00: Electronic Filing by Investment Advisers. I’ve posted my comments on both on our Commentary page or go directly toaccounting or advisors.

Continue Reading ·

Archives: May 2000

GE Workers Demand More Control of Pension
General Electric’s pension fund now has $2 for every $1 it expects to pay out. Who should benefit?

BusinessWeek (6/5) carries an article entitled, “GE’s Pension Fund Runneth Over. So Do Tempers: Refusing to share more of the riches with workers sparks revolt.” GE’s pension fund has grown to the point that it now has $2 for every $1 it expects to pay out. Workers want a share of the growing profits. They’re demanding regular cost of living increases and a seat on the pension board.

GE tried to neutralize the issue with its workers and unions by increasing some retiree benefits just nine days before its annual meeting but workers weren’t satisfied. Excess pension income adds directly to GE’s bottom line and allows it to buy other companies whose own pensions are underfunded, but GE can’t invest the surplus or the income generated in other businesses.

Who should benefit from excess pension income? Under ERISA, the primary responsibility of fiduciaries is to run pension plans “solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.” Keeping profits up or to making it easier to buyout companies with underfunded pensions isn’t a legally acceptable purpose of the fund by law.

I agree with the Coalition for Retirement Security, current and future retirees need pensions that are portable, insured, adjusted for inflation whenever possible. They also deserve plans that give them a say in how their pension money is invested. Giving workers representation on corporate boards could substantially increase corporate monitoring and efficiency.

Pension funds own about 25% of the market. Since 1988 the Department of Labor has held that corporate governance and, specifically proxy voting can add value. Therefore, voting rights are subject to the same fiduciary standards as other plan assets and must be voted solely in the interests of participants and beneficiaries. However, although DOL has done three studies demonstrating that many funds cannot document how they voted in corporate elections, DOL has never taken disciplinary action against a fund for failing to act in the interest of beneficiaries.

If more workers were represented on pension fund boards it seems likely that pensions would be more active players in corporate governance…maybe not to the extent of eRaider or CalPERS but at least there would be more open debate about how votes in corporate elections may impact plan participants. That would be a great start.

Daniel Szente Named CalPERS CIO
Daniel M. Szente, 52, will manage the nation’s largest public pension fund. He comes from Pennsylvania-based McGlinn Capital Management, where he was Executive Vice President and Director of Research. He has more than 16 years’ investment policy and management experience in the public sector, serving as Assistant Director of Investments of the State Teachers Retirement System of Ohio. Szente holds a Bachelors of Science degree, a Masters in Business Administration from Ohio State University. see press release

Gary Cooper of Governance?
That’s what BusinessWeek calls governance activist investor Andrew Shapiro in their 5/29 edition. I didn’t quite get the connection. Maybe its that Shapiro charisma or that frontier mystique with a worldly polish. Regardless of his relation to the film star, the article pointed out Shapiro’sbylaws, which he put in place at Quality Systems, are “fast becoming a template for other investors looking to create change. Early this year, Palo Alto Investors, a $200 million hedge fund, used a proposal modeled on Shapiro’s to get the board to make changes at Embrex Inc., a Durham (N.C.) biotech company.” (see The Gary Cooper of Governance, requires subscription)

Japanese Court Sides With Shareholder
Nara district court nullified a routine vote to award retirement bonuses to directors because Nanto Bank failed to adequately answer a question posed from the floor of the annual meeting seeking disclosure of the amounts. Nanto Bank is appealing the court’s decision. If upheld, Japanese shareholders would win a dramatic victory. IRRC’s Corporate Governance Highlights, 5/12

Results in for First International Proxy Campaign
A union led contest to change the board composition and labor practices at Rio Tinto PLC won about 20% of the vote as reported by Businesswire.Results of Voting At 2000 Annual General Meetings of Rio Tinto plc and Rio Tinto Limited

Takeover Defenses Up
IRRC reports that almost 59% of 1,900 firms studied have classified boards (directors elected on a staggered basis, usually for three-year terms). Poison pills (which increase the cost of takeover typically via redemption rights or new issues) are maintained by 56% of the companies, compared with 52% in 1997. To order a copy of Corporate Takeover Defenses contact Heidi Salkeld at IRRC at 202-833-3555 or email [email protected].

Labor’s Money
A Newsletter for the Taft-Hartley proxy Voter produced by IRRC is now available for free online. The May-June issue discusses the AFL-CIO’s Key Votes Survey, AFSCME’S New Activism, Building Trades Initiatives, Mueller/USWIA Lawsuit, and more. Jointly-trusteed funds won more shareholder proposals in 1999 (15) than any other group of investors. IRRC’s newsletter is a welcome addition to news sources on the cutting edge of corporate governance. Register for Labor’s Money.

Korn/Ferry Finds e-businesses at Stage 1 of Corporate Governance
Korn/Ferry International researched the proxies of the Fortune e-50 found smaller boards with fewer women and minority directors, dominated by insiders. More than half are paid solely with stock or stock options. see Businesswire, It’s a Look Back to the Early 1980’s for New Economy Boards, According to Korn/Ferry International Study

Proportion of Investing Public Drops
A May 5-7 Gallup poll found that about half of all households (54%) have money invested in the stock market right now, a drop of seven percent from a similar survey conducted at the beginning of March. Among these investors, 28% have heard of “socially responsible” investing. Only 11% of all investors have consciously made such social investments. see One in Nine Investor Households Have “Socially Responsible” Investments

eRaider Invents Unproxy
eRAider, the activist fund for the rest of us, invented the “unproxy” to get its point across in its current battle against a poison pill at Employee Solutions. see Send In Your UnProxies

Back to the top

CalPERS: Heritage Foundation v Freedom House
Will largely public union-based CalPERS take its international investment advice from the anti-union conservative Heritage House over liberal think tank Freedom House? CalPERS staff cited several studies showing “linkages between political and electoral freedom and future growth are weak or do not exist at all.” Therefore, CalPERS should favor dictatorships over democracies? I don’t think so. Maybe a long term investor such as CalPERS ought to be looking toward something like the Global Reporting Initiative when they take up this issue again in August. See San Francisco Chronicle, 5/16, CalPERS Postpones Decision on Investments in Developing Nations: Board wants staff to revise plan to add human rights criteria.

coverImproving Corporate Boards : The Boardroom Insider Guidebook
One of the most frequent requests from readers of CorpGov.Net is for a book on how to improve their board. Finally I can recommend a book that doesn’t read like a dry academic text and is built on real life examples. Ward presents a clear guide to solving the most common problems facing boards. Each chapter provides a concise overview of a problem or focus area, several real life examples, internet resources, advice from various experts and a checklist summary. CalPERS should consider sending Mr. Ward’s book to each board member of the companies on its focus list.

The Internet Will Drive Corporate Monitoring
Mark Latham’s paper on the clickable voting revolution will appear in the June edition of Corporate Governance International. When online brokers or others offer individual investors an automated voting function on the same websites where they now trade or track their stocks, the corporate governance revolution will get another large boost. Latham has also put forward a draft paper entitled Internet-based Stock Voting Advice Systemswhich goes into greater detail about the mechanics of such a system. The system makes so much sense and could probably be made so profitable that I can’t understand why you’re still reading this instead of building it. I hope someone keeps me posted of their progress; I want to be one of the first users.

Asian Shareholder Revolution Held Back By US Practice
The Asian Wall Street Journal argues companies aren’t living up to the shareholder value mantra. A contributing factor is US Broker voting.

A May 19th Asian Wall Street Journal commentary, “A Corporate Governance Revolution,” argues Asian companies had to bend to the demands of new investors in order to get the fresh capital needed to survive. “Now they repeat the shareholder value mantra, even if they don’t quite live up to it.”

I was recently on a speaking tour of Korea and Japan, sponsored by the State Department, to discuss foreign direct investment. My focus was on the impact of the Internet on shareholder activism. I found many businesses hoping to follow the example of Indian software company Infosys in raising funds on the Nasdaq. However, the shareholder activists I met with, particularly Hasung Jang with the People’s Solidarity for Participatory Democracy (PSPD), are increasingly frustrated with the poor voting record of individual investors from the United States.

Broker voting rules in the US make it extremely difficult for US investors whose shares are held in “street name” to vote with shareholder activists. If they haven’t voted within ten days of the meeting, their broker exercises “discretionary” voting rights in support of management’s proposals. This practice unfairly stacks the deck against shareholders everywhere, but is particularly egregious in Korea and Japan where proxies are typically sent out only 14 days prior to the annual meeting.

It’s ironic that a significant barrier to good corporate governance in Asia is an undemocratic practice that originates in the US.

AutoZone Dispute Goes Public
Board member Edward Lampert has taken his criticism of the company’s shareholder rights plan public. Lampert, who represents the automotive parts retailer’s largest investor, threatened to solicit support of shareholders to have the board removed. (Investor Relations Business, 5/15/2000)

EDGAR Opens to HTML
New rules, effective 5/30/2000, will allow corporate filings, such 10-Ks and 10-Qs, to be made in HTML (PDF is so far unacceptable). The SEC expects HTML filings, which will allow limited graphics (no animation) and hyperlinks within documents and to filings already in the database, to constitute the vast majority of filings within a short time. (Investor Relations Business, 5/15/2000)

Hermes Lens to Launch in Europe
Hermes Lens is set to launch a continental European version of its $683M Hermes Lens UK Focus Fund which attempts to make money by investing in and turning around poorly performing firms through corporate governance activism. The 5/15 edition of Pensions & Investments indicates the 18 month old fund is so successful it may soon close to new investment to “pause for breath.” Hermes Chief Executive Peter Butler expects their first investments to be in Germany and France. Butler described their strategy as taking 18 months to 2 years to turn a company around.

Back to the top

Global Governance Partners and Napalm
Forbes Magazine picked right up on Guy Wyser-Pratte’s message to sleepy managers in Europe who resist change: “Wake up and smell the napalm.” Wyser-Pratte’s recent successes in Europe have led him to launch a $200 million fund, Global Governance Partners. With a staff of just 12 in New York, the new fund will limit itself to ten positions in underperforming companies around the world. “Helping out will be a network of analysts, versed in the arts of arbitrage and shareholder activism, that Wyser-Pratte has built in 22 cities around the world, including Tokyo, Milan and Johannesburg.” (see also, Business Week, The Raiders are Coming! The Raiders and Coming!, 4/24, p. 138.)

Convergence
A survey of institutional investors by Russell Reynolds Associates found them moving away from small, venture capital dominated boards. In the other direction, 2/3 said every board should have a formal internet committee and almost as many believe every board should have at least 1 technology expert. A majority steered away from companies with unsatisfactory corporate governance. (The Economy Is New, but Not the Standards, NYTimes, 5/14/2000)

Jumping in With Both Feet
New York Times article notes that “most mutual funds keep their distance from companies on matters of corporate governance, but the $3 million Allied Owners Action fund, introduced on March 10, jumps in with both feet.” They are already having an impact on their first investment, Employee Solutions. For example, Employee Solutions recently announced that Quentin Smith, its president, chief executive and chairman, would relinquish the chairman’s position. (A 2-Month-Old Fund, Carrying a Big Stick, NYTimes, 5/14/2000)

Pay Disclosures Spreading
Johannesburg Stock Exchange (JSE) has proposed that listed companies be compelled to disclose each individual director’s salary, bonuses and other forms of remuneration each year. The King code currently requires disclosure of overall remuneration for executive and nonexecutive directors, rather than individuals’ packages. See Controversy Is Likely Over Fat Packages For Directors, Africa News Online, 5/15/200.

CalPERS Changing Directions?
Recently the Los Angeles Times ran an article about State Treasurer Phil Angelides’ proposal to direct more CalPERS money to “narrow California’s wealth gap.” Will he succeed?

California Treasurer Phil Angelides unveiled a plan to narrow California’s wealth gap by investing more than $8 billion in low-income communities. The plan calls for 2% of the state’s pension fund portfolios to be directed toward impoverished communities in California rather than risky overseas markets. CalPERS already has $150-million invested in “Magic” Johnson’s theater developments much more in affordable housing. The system suffered steep losses in Indonesia and Malaysia.

Will Angelides succeed? Chances may be good investments that can pass fiduciary standards. The recent board appointments of San Francisco’s mayor Willie Brown Jr. and Sean Harrigan, a United Food & Commercial Workers official have strengthened CalPERS’ pro-labor voice. Like politicians on the Board, many of the labor based members will be looking for the double benefit of good returns for future beneficiaries and economic benefits to California’s economy today.

The recent replacement of Charles Valdes with Michael Flaherman, as chairman of the powerful investment committee may further this shift, even though Mr. Valdes’ roots are in labor, whereas Mr. Flaherman’s are not. Flaherman appears more open to considering social issues, such as divesting tobacco stocks. Valdes has been a strong voice against social screens.

While I expect a shift, CalPERS won’t suddenly switch to a strategy of selecting investments based on politics, which then searches for investment theories to justify them. The six Board members elected by CalPERS members are unlikely to favor any Angelides plan that narrows California’s wealth gap at the expense of those who elect them. However, there is no reason why CalPERS can’t move further in serving its members, not just when they retire, but on a day-to-day basis while they live and work in California.

After three hours of debate, the Board approved a motion that would allow the CalPERS investment staff and the treasurer’s office to work together to try to come up with a compromise agreement by August. (see also Rough reception given Angelides’ CalPERS vision, Sacramento Bee, 5/16/2000)

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eRaider Becomes Gathering Place
The Allied Owners Action Fund is still working out what action to take to increase the value of its first target investment, Employee Solutions. Discussions on its affiliated internet site, e-Raider, are now getting more sophisticated as discussants move to specialist eRaider boards such asAccounting to delve more deeply into the issues being raised. In addition, although suggestions by posters to go after Homebase (HBI) next has apparently been rejected, shareholders have been encouraged to gather on the site to organize and plan action.

NACD Viewpoints
Jon Masters notes that while the McKinsey study indicates institutional investors say they would pay a premium for stock of companies with good corporate governance, a recent Columbia Business School study based in detailed interviews concluded: “Except in highly publicized cases involving allegations of excessive executive compensation, dysfunctional boards, or fraud, it is generally only after firms are identified as troubled or long-term underperformers that governance practices are given more than routine scrutiny.” Masters argues that if we truly believe good governance enhances value, it needs to be factored into the investment process. To do so, we’ll need more meaningful public information.

In the same Viewpoints section of April Director’s Monthly, attorney Lewis Black Jr. discusses the escalating tug of war between directors and shareholders. Binding bylaw resolutions have upped the ante. Directors view them as an effort to micromanage. Black appears to sees a backlash building against vote no campaigns. “An increasing number of corporations are issuing shares to the public with reduced voting rights.”

Infosys CEO Interviewed on Corporate Governance
The Hindu carried an interview with Naryana Murthy who heads software firm, Infosys. Murthy speaks of values: “public good ahead of private good; of not using the corporation’s resources for personal benefit.” He voices the need to align the Indian Generally Accepted Accounting Principles (GAAP) much more with international standards and improve disclosure standards for financial statements. “Critical shareholder resolutions need to be debated by as many shareholders as possible…we have to create trust among our shareholders, especially the minority shareholders. That comes from disclosure, transparency and fairness.”

Murthy speaks favorably of ESOPs but warns, “first of all there has to be a mechanism to reward those who are wholly meritorious. ESOPs cannot become a mechanism of patronage. Second, they cannot be used to reward the cronies of promoters and enhance the shareholding of promoters.” SeeCorporate governance a question of value systems.

How Important is Your Internet Site?
First Federal Savings & Loan Association of East Hartford didn’t make its corporate filings available online. In a recent Wall Street Journal article, Richard Lashley says it’s a “little thing,” but it’s indicative of how First Federal views shareholder relations. It also appears to be at least one important reason why he supported a dissident slate headed by Josiah Austin of Pearce, Arizona. Austin will push for First Federal to hire a new investment banker to review how the S&L might achieve higher profits under more-aggressive management. Mr. Austin may have won control two of 10 board seats — not a majority, but enough to begin exerting pressure. (WSJ, Heard in New England: Dissident Says He Won Fight For S&L Seats, 5/10/00)

ECGN Update
The European Corporate Governance Network, which does about the best job of keeping corporate governance codes online updated, reports the following have been added to their codes page:

  • the EASD Corporate Governance Principles and Recommendations released last week;
  • a local download option for the Preda code from Italy;
  • the “Urgent Recommendations Concerning Corporate Governance” from Japan (in draft form since 1997);
  • Guidelines of the Swedish Shareholders’ Association;
  • Guidelines of the European Shareholders’ Association;
  • the Turnbull Report from the U.K.;

Shapiro Touts QSI Template
The Corporate Board (5-6/00) carries a conversation with Andrew Shapiro, “Making Governance a Proxy Issue,” where Shapiro discusses mandating corporate governance reform at target companies. “The Lawndale proxy sought to impose one of the toughest definitions for outside director independence ever seen, including strict director tests for company employment or consulting income, and board interlocks. Wholly independent audit nominating and compensation committees were also demanded.”

Shapiro’s tactic seems to be working. He launched his campaign at Quality Systems (QSI) in the spring of 1999 when Quality Systems was around $4/share. By March of 2000 it was $15/share. Although with the recent sell-off in dot.coms, the price has slipped to around $10/share. Recently, Shapiro won a similar agreement at ELot which has been selling at about $3/share. “We plan on using this proposition and more advanced versions at other companies to force positive changes.” (see disclaimer)

CalPERS Honors Contributions
CalPERS will honor Apple Computer for improved corporate governance, the Texas Instruments’ board for its dedication to shareowner interests, and Time Warner CEO Gerald M. Levin for his commitment to the principle that CEOs are responsible to shareowners and accountable to the Board of Directors. Award recipients will be honored at a dinner on May 15, 2000 at CalPERS headquarters in Sacramento, California. (see press release)

Corporate Governance Week
I’d never heard of it, but then I’d never heard of the Leading Corporate Governance IndicatorsTM until I started getting e-mail from Stephen Davis, editor of Global Proxy Watch. Davis is certainly prolific and on target. The April 29th edition of The Economist features his rankings in a comparison of 1996 and 1999. Britannia still rules the Indicators but Germany is picking up while the US and France stand idle. However, Michelle Edkins of Hermes recently noted the information contained in many UK reports appears to come from one template…actual disclosure may lacking. Perhaps further refinements in the Indicators is warranted. Back to “corporate governance week.” Here are two main events.

On 10-11 July the World Bank, Commonwealth Association for Corporate Governance, Asian Corporate Governance Association, Davis Global Advisors and others are sponsoring “The Shareholders Role in Corporate Governance in Emerging Markets and Transition Economies.” The conference is being held in New Haven, Connecticut USA. For an e-program, please contact[email protected].

Later that same week is the sixth annual conference of theInternational Corporate Governance Network, scheduled for 12-14 July in New York City. The event is the largest global corporate governance event of the year. Sponsors for the 2000 conference include the New York Stock Exchange, Nasdaq, and host TIAA-CREF, the world’s largest pension fund system. Program information and registration materials may be found on their conference page.

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Delaware Premium
Research by Robert Daines, an associate professor of law at the New York University, finds that Delaware law appears to improve firm value. “On average and over time, investors pay more for the assets of publicly held firms governance by Delaware corporate law.” He offers two explanations. First, Delaware takeover law is relatively less entrenching, reducing the cost of acquiring (selling) the company. Second, because companies typically lack operations in Delaware, managers and employees are prevented from gaining political influence and cannot defeat takeover efforts through political influence. In addition, Daines argues that Delaware’s specialized judicial system “may effectively deter managerial or control shareholder opportunism.” He speculates the premium for incorporation “might be even bigger if Delaware law were less protective of incumbent managers intent on resisting an uninvited bid.” (The Corporate Board, 5-6/200, pp. 22-25)

Whitworth Urges Investors to Step Up to the Plate
Speaking at the spring meeting of the Council of Institutional Investors, Ralph Whitworth said his first order of business as a new member of Matell’s board would be to have the company come out with a new bald “Ken” doll. After telling the story of how he got asked to serve on the board, he pointed out that 1 member on a 10 member board can make a difference, particularly if they have the focused interest of a large shareholder. “As issues come up, the heads turn down to look at the major shareholder,” he indicated. Whitworth urged council members to step up to the next level of activism and present names of board candidates to nominating committees. (IRRC, CG Highlights, 3/31/00)

Strengthening Shareholder Relations in the Privately Held Company
Recognizing that private companies need to address many of the same fundamental issues of governance, ownership and control as public companies, consultant Thomas Bakewell offers advice to family businesses and others. Bakewell sets out various considerations for developing private company boards, pointing out that empirical evidence has shown a significant positive correlation between the boards contribution to strategic planning and growth of the firm, with outside members being more critical to growth. Another focus of the article is shareholder agreements and the need to address ownership and control issues upfront. The article also provide a useful case study of a closely held businesses which was able to maintain its goals by addressing such issues before it was acquired by a larger firm. see NACD’s Director’s Monthly where you can download the article (4/2000)

The issue also contained a helpful analysis of the new SEC audit committee regulations which was compiled by KPMG’s Audit Committee Institute. The Institute site has a wealth of information and links to serve and educate committee members. We’ve added a permanent link to their site from our Links page under Audit Committees.

Coalition for Retirement Security Pushing COLAs
Faced with demonstrations, publicity campaigns, the backing of institutional investors, and use of the Internet to rally employees with the possibility increasing the purchasing power of their pensions by pressuring pension funds with huge surpluses. (More activist retirees put squeeze on companies, The Christian Science Monitor, 5/1/00)

CalSTRS Board Hopes to Up Benefits
California teachers scored a victory when their pension fund endorsed a record $15.3 billion in new retirement benefits for K-12 and community college educators in California. Now, it’s on to the Legislature. (seeSacramento Bee, 5/5/00)

India to Curb Fraud
Dr. P.L. Sanjeev Reddy, Secretary, Department of Company Affairs, announced that his Department is working out a caution list of defaulting companies, with the idea of putting it on their website. He also announced that his Department and the Reserve Bank of India are working out measures to deal with Non-Banking Financial Companies which have siphoned off money from stock exchanges and individual investors. (Northerlight)

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Rio Tinto Resolutions Gain Support
Institutional investors with more than $44 billion in assets are supporting two union-backed resolutions demanding changes at Rio Tinto Plc. The resolutions demand that Rio Tinto adopt International Labour Organisation conventions on human rights at work and appoint a single, independent non-executive deputy chairman to make the board more accountable to shareholders. (Investors back union call for changes at Rio Tinto, Reuters, 5/4/00)

Internet Boards Lacking
Internet company board are under-experienced, underpaid, and understaffed, according to a survey of 100 leading Internet companies just released by Manhattan-based Spencer Stuart. Nearly 1/3 of members are insiders, compared to 1/5 of the Standard & Poors (S&P) 500 companies and many outside members are probably venture capitalists with a financial stake in the company who may have a short-term perspective. The boards are younger too and may not have the experience necessary to “successfully guide companies through difficult times.” They are also 97% male, about 1/2 the size of S&P 500 counterparts and rely heavily on options. Spencer Stuart believes survivors will begin to look more like their S&P 500 counterparts. (Internet Boards Of Directors Not Top-Notch, Newsbytes, 5/5/00)

Calvert Social Index to Post Votes
Following the lead of Domini Social InvestmentsCalvert’s new fund has announced it will post its proxy votes starting in 2001. We applaud this most important step in keeping investors informed. How can we ever hold our fiduciaries accountable if we don’t know how they vote? When will we see Fidelity posting their votes? They say, “we help you invest responsibly” but how do we know they’re voting responsibly? I’d like to report Fidelity will be next but I’d place bets on Citizens Funds to start posting long before Fidelity. Is voting only a concern for “socially responsible investors?” I’ve never liked that label but I do believe that socially responsible investing begins with good governance. If your fund hasn’t announced they will report their votes, I suggest you request that they do so.

Boardroom INSIDER Features Adaptive Broadband
Ralph Ward’s Boardroom Insider caused us to take another look at Adaptive Broadband’s corporate governance guidelines which appear to be a good baseline any high tech firm. With 21 key points. I particularly like the pledge not to reprice stock options even if they are significantly “under water” and the requirement that all execs (42 persons) must buy and hold outright stock of the Company valued at one-half to two times base salary, depending on their positions. One minor criticism, put the full text up on the Internet in a more readable format. I also see Ward’s new book,Improving Corporate Boards: The Boardroom INSIDER Guide, is now available. I’ve only got an unbound preprint but highly recommend it! It contains the kind of practical advice most boardmembers only accumulate from years of experience…by the time you get that, it may be too late.

Shareholders Vote for Choice
Preliminary results reported by IRRC (4/21) indicate that 12.7% of First Union shareholders voted to require the nominating committee to nominate two candidates for each board position. The resolution also called for statements by candidates on why they believe they should be elected were also to be included with future proxies. We understand opposition to the resolution which would certainly put the board in an awkward position. How do you tell a candidate you’ve requested to run that the board has listed them as their second choice. However, the vote shows a growing uneasiness with the current system which locks shareholders out of the nominating process unless they are prepared to do an expensive proxy solicitation. Although I personally don’t see Richard Dee’s proposal as a realistic solution to the problem, I certainly voted my First Union shares in favor. At least it’s a start in nibbling away at SEC rule 14a-8(c)(8) which prohibits proposals relating to “an election to office.”

Canadian Business Corporations Act to be Amended
Changes may allow shareholders to communicate more easily with regard to voting intentions but also proposed is that corporations can refuse resolutions which are for the “primary purpose” of promoting general economic, political, racial, religious, social or similar causes. Relaxation of residency requirements is called for as is a prohibition against loans to directors which are likely to put the firm on the road to insolvency. Also reported in the 2-3/00 edition of Corporate Governance Review, several Canadian firms are seeking to lower their quorum requirements. Two firms have proposed reducing to levels at or near those held by a single shareholder. Author, Bess Joffe argues corporations should seek levels that balance “the conflicting interests of maintaining sufficient shareholder representation while not putting the company in a position where it is unable to carry on business.”

Virtual Recruitment for Boards
Another landmark for corporate governance via the internet was achieved in March when UK’S Net Resource Services Ltd. launched a site designed to help companies find suitable candidates for non-executive directorships. According to Managing Director, Peter Coppard, the site is ideal for those with management experience embarking on a second career and will open up opportunities for companies to easily sort through candidates and qualifications at minimum cost. See Non-Executive Director.

Non-Financial Issues to Play Larger Role
An editorial in the 2/00 edition of Governance predicts that with institutional holdings peaking (see Institutional Investor Stakes in Largest 1,000 Corporations have Peaked), social activism will be on the rise because individual investors have “shown a tendency to use their power as consumers to support their social or ethical concerns,” such as human rights, employee relations, community responsibility and pay inequity. “A second stage of governance development is underway that will see corporations becoming more sensitive to the concerns of society as a whole, and make institutions more accountable to their beneficiaries. We heartily agree and believe the Internet will be the main venue for coordinating shareholder issues. Included in the same issue is an interview with South Africa’s Mervyn King (link to older interview), who reiterates that the key role of non-exec directors is to help the board make correct business judgment decisions, and a discussion of TIAA-CREF’s global governance standards.

Contradictions at TIAA-CREF?
Governance also acknowledges the Social Choice for Social Changecampaign to get TIAA-CREF to use 5-10% of the Social Choice Account’s assets for “positive investments” in companies that are models of responsibility. I understand from Neil Wollman and Abby Fuller they have started an every Monday call-in to CEO John Biggs. So far, no change from media-relations director, Tom Pinto’s position that we “can’t just introduce a fund at the whim” of some of its two million investors. We applaud TIAA-CREF for its effective work executive pay disclosure, its campaign against dead hand poisson pills and its new global guidelines. However, we do think they should also pay attention to the wishes of their own shareholders.

Railroads & Clearcuts Campaign Wins Resolutions
According to the April 28th ISS Friday Report, the group scored majority votes in calling for annual director elections at Weyerhaeuser and Boise Cascade. On the Railroads & Clearcuts Campaign site Rachael Paschal, president of the Western Land Exchange Project, is quoted saying “Improving accountability of corporate management to investors will improve the ‘double bottom line’: profits and environmental quality.” Social activists are getting the message that their long term social goals can best be achieved by first winning good corporate governance. Also published on the site is Bart Naylor’s excellent guide, Change Corporate America For 33 Cents: A Self-Help Guide to Shareholder Activism.

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Archives: April 2000

Advisors to Disclose Vote Policies
See my “Comments on SEC Proposed Rule: File No. S7-10-00.
In 1988 the Department of Labor (DOL) set forth the opinion that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets. I have argued for many years that the same standards of trust law should also hold for mutual funds and other institutional investors. The SEC is now proposing rules which would take an important step in that direction by requiring that registered investment advisers disclose proxy voting practices on Form ADV. The form would keep clients and the public informed about who is responsible for voting proxies and how their interests are protected. Advisers that vote client proxies would be required to disclose their voting policies, practices and procedures.

The proposal is contained in Item 16 of “Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV.” Comments must be received on or before June 13, 2000. The proposal was released on April 5, 2000. [Release No. IA-1862; 34-42620; File No. S7-10-00] (File name: 34-42620.htm) See SEC Proposed Rules for comment instructions. The filling changes are part of an effort to create an internet based system for advisers similar to the EDGAR database for companies. I urge all readers to review this most significant proposal and to submit comments. In addition, I would welcome comments to [email protected] so that we can discuss the proposal further. (IRRC CG Highlights, 4/14/00)

Equity Shifts to Individual Investors
Individual investor ownership in the largest 1,000 U.S. corporations is increasing, according to a report released by the Conference Board. Institutions have substantially increased their holdings of the largest 1,000 U.S. corporations — from 46.6% of total stock in 1987 to an average of 59.9% by year-end 1997. But for the first time since 1987, the upward trend of average institutional holdings for the Top 1000 turned downward to 57.6% at the end of the third quarter of 1999.

“Online trading, direct stockholding, employee stock ownership, and the general proliferation in information availability and individual awareness are all contributing to the increasing importance of the individual shareholder,” says Dr. Carolyn Kay Brancato, Director of the Conference Board’s Global Corporate Governance Research Center. “Historically, companies have focused their investor relations efforts on institutional investors, money managers, and sell-side analysts working for big brokerage houses. But the growing significance of the individual investor has induced some leading U.S. corporations to explicitly devise approaches to attract the long-term and stable individual shareholder.”

NYSE turnover in 1998 climbed to 76% — beating the 1997 record level of 69%. The number of block trades, most of which are done by investors, increased during the last year as well. Institutional investors experienced average annual turnover of 44.3% in 1998, up from 42.5% in 1997. See press release “Institutional Investor Stakes in Largest 1,000 Corporations have Peaked

CalPERS May Be Changing Course
The Sacramento Bee said the rulemaking would “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” However, this week we saw a new willingness of the Board to listen to members and take a more even handed attitude toward their own elections. A Board policy committee modified proposed rules which would have encouraged candidates for the Board to use deceptive tactics. Instead, committee members voted for a policy which comes closer to safeguarding full disclosure. More importantly, the committee also agreed to hold a workshop on the election process which currently leans heavily in favor of incumbents. Reforms are desperately needed if CalPERS is to live up to the high governance standards it sets for others.

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CalPERS Continues Fight at Maxxam
CalPERS continues supporting a coalition of environmentalists and unions in the push for independent directors, former U.S. Sen. Paul Simon of Illinois and Abner Mikva, a former Congressman from Illinois. Maxxam announced in March that it has nominated Michael J. Rosenthal and J. Kent Friedman, Maxxam’s general counsel, to serve on the board. Josh Reiss, a Maxxam spokesman, said that the company never agreed that two independent directors are needed. However, my sources indicate CalPERS had delayed continued work with the coalition, given statements from Maxxam that they would nominate two independent directors on their own. See California Pension System Backs Dissident Directors for Holding Company

Proxy Monitor Backs Resolution at Advanced Micro Devices
Proxy Monitor, a leading proxy voting advisor, announced recommended to clients that they vote in favor of a shareholder resolution to name an independent director as chairman of Advanced Micro Devices (ADM-NYSE). The proposal, sponsored by CalPERS, is scheduled to come to a vote at ADM’s April 27, 2000 annual meeting.

“It’s time to loosen the grip that ADM’s Chairman and CEO W.J. Sanders has on the board,” said James E. Heard, Proxy Monitor’s CEO, in announcing support for the proposal. “Naming an independent director to chair the board is a necessary first step.”

“We also think Mr. Sanders should resign from the nominating committee, which he chairs.” Heard added. “It’s a poor reflection on the board’s independence to permit the CEO to be a member of the nominating committee, much less serve as its chairman. This is a key board committee, and it should be composed only of independent directors.”

CalPERS to Withhold at Bank of America
CalPERS will withhold its proxy votes from four Bank of America directors to protest a $76 million compensation package awarded to CEO Hugh McColl last year when the bank suffered a 16% earnings shortfall and laid off 19,000 employees. see philly.com, 4/13

CalPERS Election Rules to be Heard
CalPERS directors last year proposed that future candidates for the Board be barred from mentioning their opponents in material sent out with the ballots in member elections. The rules also would have banned any statements on issues of general concern to the membership but would have lifted a prohibition against misleading statements. A Sacramento Bee editorial, “CalPERS muzzles critics,” said the measure would “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.”

Although the Board has now shelved that plan, current proposed election rules would allow each candidate to review the statements of their opponent and would then have a minimum of 10 days to rewrite their statements. This would obviously encourage candidates to submit poorly crafted and/or deceptive arguments to throw off their opponents.

In addition, the proposed rules fail to address obvious conflicts of interest, such as having election appeals decided by staff whose reimbursement is determined by incumbent board members. Currently, election rules can be violated with impunity unless challengers can prove the violations would have changed the outcome of the elections. In the last contested election, the incumbent was allowed to review his opponent’s statement and change his own in an apparent violation of the rules but the challenger could not substantiate the number of votes that were changed as a result.

Unfortunately, CalPERS is better at giving governance advice than in accepting it. Many other agencies in California hold workshops with their constituents before proceeding with controversial regulations but CalPERS has argued their Constitutional authority exempts them from normal rulemaking procedures. The court has disagreed. This time CalPERS is going through proper procedures but the rules would still lead to voter obvious deception. The proposal will be heard on 4/18 at 1:30.

Pfizer’s Gallagher to Retire
Pfizer’s corporate governance executive, Terence Gallagher, to retire in June. Peggy Foran, who is already sharing Pfizer’s top governance title, joined the office three years ago, after spending most of her career at J.P. Morgan as a corporate lawyer. Although Pfizer’s governance practices could be improved, most active shareholders agree that at Pfizer they’ll at least get a hearing. (WSJ, 4/12)

Elson to Head New Corporate Governance Center
We’ve mentioned Charles Elson’s move before but it is worth repeating in greater detail. The center, at the University of Delaware, will be a clearinghouse for information on corporate organization. It is expected to offer symposiums, workshops, research opportunities and publications for scholars, students, business leaders, economists, judges and lawyers. Two symposium topics under consideration for the first year: Delaware corporate law in the aftermath of Smith v. Van Gorkom (directors must be informed when they make decisions), differences between dot.com and Fortune 500 board views on corporate governance. (Deleware Law Weekly, 4/12)

Comments Due to OECD
The Organization for Economic Co-operation and Development is undertaking a major review of its Guidelines for Multinational Enterprises. Second round comments are due 4/12.

Billionaire Boys Club Grows
Compensation packages for Yahoo! CEO Timothy Koogle and America Online’s Steve Case both wnet over the billion dollar mark in 1999 due to soaring stock prices. “Koogle’s compensation works out to a staggering $4.7 million a day, compared with median annual household income of about $40,000, or $110 a day.” Seven of 1999’s 10 most highly compensated CEOs run technology companies, according to USA Today,New economy rockets CEO pay, 4/5/00. Median compensation for 200 CEOs jumped to $17.6 million last year, up 111% from1998. Among the growing trends, retention packages to get CEOs to stay put for a few years. Part of the problem, outside compensation consultants. ”No compensation consultant is going to recommend a CEO take a pay cut. They’ll lose their job,” says compensation expert Graef Crystal. ”It’s part of the reason that CEO pay is a never-ending spiral that always goes up.”

Innovative Corporate Governance Votes Set for AT&T, Chase and Ford
Carl Olson, Chairman of Fund for Stockowners Rights, a research and education group headquartered in Washington, D. C. recently announced three novel proposals:

  • Resident Analysts, AT&T: Individual directors face the problems of part-time duties and reliance on information provided by management. These constraints inhibit the ability of directors to represent the interests of the stockowners fully. The resolution would allow each director to retain an analyst who would have access to all the corporation’s records and would report only to the director. Directors would receive an additional $100,000 per year to retain and pay expenses of the analysts.
  • Permanent Secret Ballots, Chase Manhattan Bank: Only confidential voting policies that can only be changed by stockowners offer real protection. Despite an overwhelmingly favorable advisory vote at the1986 annual meeting on a resolution sponsored by John and Lewis Gilbert to establish full confidential voting, the board never adopted the policy. The proxy statement has only a vague mention of a limited confidential voting policy, and the board can amend or repeal it without a vote of the stockowners. The resolution at Chase calls for a detailed confidential voting policy that only the stockowners can change.
  • Abolish “Tissue Paper” By-Laws, Ford Motor Company: If the board can amend or repeal by-laws that the stockowners adopted, then the by-laws are made of “tissue paper” that can easily be torn up. Ford, like other companies incorporated in Delaware, has “tissue paper” by-laws. Stockowners are prevented from directly changing this policy because it requires an amendment to the certificate of incorporation. The resolution requests the board to initiate an amendment to the certificate of incorporation that will ensure the stockowners the ability to adopt by-laws that only they can amend.

Contact: Carl Olson, at 818-223-8080. Fund for Stockowners Rights,West Coast Office, P.O. Box 6102,Woodland Hills, CA 91365

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Shann Turnbull Speaks out on AMP Limited
On 4/3 the chairman and four other directors resigned from Australia’s largest financial institution the AMP Limited. Shareholder activist Shann Turnbull met with the newly appointed company secretary, Christine McLoughlin and called on AMP and other Australian companies to establish Corporate Governance Boards (CGBs) as proposed in Parliament by Democrat Senator Andrew Murray. The following are excerpts from Turnbull’s op ed piece which appeared in the Australian Financial Review, 4/6/00 on page 21.

The constitution of AMP Limited, like most publicly traded companies in Australia gives the Chair power to determine the conduct and procedures of General Meetings, including the processes of electing directors. This can makes the position, influence and perks of Directors subject to the Chairman’s favour.

The solution is a division of power such as introducing a CGB, which would take over some of the roles delegated to Board Audit, Remuneration and Nomination sub-committees. This would also provide a process to ethically manage any related party transactions with their dominant shareholder as occurs with Coles-Myer, Qantas, Axa and many other companies.

Without a CGB directors are placed in the unethical situation of setting and marking their own exam papers…Without a member of the CGB chairing shareholder meetings it can become impossible for shareholders to make directors accountable…As the largest shareholder in many other companies the AMP Limited should be both a role model and agent for raising standards.

However, last year the AMP Chairman not only entered into the debate on motions before the Chair but those in which he had a financial interest to double the level of director’s fees!…its time Parliament ensured that our public corporations cannot register constitutions, which allow unethical and uncompetitive practices. This would also remove the nervous energy and deliberating turmoil required at present to change a company Chair.

AFL-CIO Announces Key Votes
The list of 34 resolutions are intended to “represent a worker-owner view of value that emphasizes creating value for the long term through management accountability, partnerships with workers, and the protection of brand integrity.” See Key Votes.

Dot-Com Directors Involved
Karen Jacobs, of the Wall Street Journal, argues that dot-com directors must be “active participants in creating and shaping strategy, defining markets and building senior-management teams. They have to hit the ground running, and sometimes help build a business from the roots up. And they have months, not years, to make an impact.” How do cash poor startups attract the talent? New York-based Skyauction.com, which auctions travel packages, landed seasoned experts in compensation, auditing, cable TV, and a former head of state by offering them options worth $1M each. Jacobs says companies are also looking passed CEOs to division directors and others. (see Running Boards, WSJ, 4/6)

Japanese Trusts to Exercise Voting Rights
A survey conducted by Jiji Press found 83% would consider abstaining or voting against items presented at annual meetings.  Only 5 said they would rubber-stamp all decisions.  The firms cited illegal practices, poor earnings results, and poor information disclosure as reasons for voting against management. The Corporate Library News Briefs, 3/28

Preparing for the Annual Meeting
Brian Machburn and Robert Obray offer an excellent checklist in the March issue of Directorship. The checklist, based on “Questions at Stockholders’ Meetings 2000” published by Deloitttee & Touche LLP, is broken into 4 broad categories: board composition and activities, board practices, audit committee, and executive compensation and benefits. For example, be prepared for “what perquisites–such as club memberships, professional services, apartments, automobiles or use of company airplanes –does the company provide for executives and their families?” ….elsewhere in the same issue, Directorship reports the percent of women on Fortune 1000 firms grew from 6% in 1993 to 8.3% in 1996 to 9.3% in 1999.

Wendt Speaks in La Jolla on Issues Facing Corporate Boards
The Corporate Directors Forum will present a session on “Contemporary Issues Facing Boards Today,” during its April 27th meeting at the Radisson Hotel La Jolla from 5:30-7:30 p.m. Henry Wendt, the former CEO pharmaceutical giant SmithKline Beecham, will offer his perspective on issues facing emerging companies to Fortune 500 companies. Wendt has been an active board member for companies such as Allergan, Atlantic Richfield Company, Computerized Medical Systems, and West Marine Products. Recently he was selected as a Harvard Business Review article panelist on board issues surrounding CEO succession. Contact: Larry Stambaugh, Chairman of the Board of Corporate Directors Forum, 858-455-7930. (Excite News, 4/4)

Governance Changes at Cendant
Cendant, the franchiser of Century 21 real estate offices, Howard Johnson hotels and Avis car rentals, is restructuring its board of directors from 15 to 13 to comply with terms of a class action settlement that arose out of accounting irregularities. Robert Kunisch and John Snodgrass, former employee directors, resigned effective March 31. Myra Biblowit, vice dean for cultural affairs at New York University, and Sheli Rosenberg, vice chairman of Equity Group Investments, were elected to replace Kunisch and Snodgrass, effective 4/3. This brings the number of employee directors to 3 from 4. Additionally, Michael Monaco, a former employee director, and Carole Hankin resigned effective with the annual meeting on 5/25. Cendant agreed to pay shareholders about $3 billion and make significant changes in corporate governance to settle a massive class-action lawsuit brought on by several large pension funds.

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SEC Proposes Major Update of EDGAR
Programming for the next stage of modernization is expected to be implemented in late May 2000. EDGAR will include the following new features according to the current proposal:

  • the ability to include graphic and image files in HTML filings;
  • the ability to use hyperlinks in HTML filings, including links between documents within a submission and to previously filed documents on our public web site EDGAR database at www.sec.gov; and
  • the addition of the Internet, and removal of diskettes, as an available means of transmitting filings to the EDGAR system.

Comment Period Extended on Selective Disclosure Regulation
The SEC extended the comment period for its controversial selective disclosure proposal until April 28th due to pressure from several industry groups on the fair disclosure (FD) provisions, according to a report in the 4/3 issue of Investor Relations Business. The SEC has received about 1,000 comments with retail investors in overwhelming support. However, the Securities Industry Association wants more time to rally opposition to the proposal which it sees as having potential to damage the communication process. The American Bar Association is also concerned the rule will have a chilling effect on communications. Others concerned are reported to include the National Investor Relations Institute.

Shareholders Listen In
83% of companies conduct conference calls and 82% of those allow individual investors to listen in, up from 29% two years ago and 48% webcast the calls, according to a study by the Rivel Research Group for the National Investor Relations Institute. see Executive Alerts

No Action on Dividend Request
SEC held that a shareholder proposal to provide dividends in stock, rather than cash because of more favorable tax treatment, may be excluded from AT&T’s proxy because rule 14a8(I)(13) allows companies to omit proposals related to specific amounts of cash or stock dividends. (reported in 3/20 issue of Investor Relations Business.

Aquisition of Fairvest to Further Level Playing Field
VERSUS Technologies Inc., a leading Canadian provider of electronic, securities trading services to the institutional and retail marketplace, signed a letter of intent to acquire Fairvest Securities Corporation, the leading provider of Canadian corporate governance research. VERSUS intends to continue leveling the playing field for retail investors by distributing Fairvest products and services to its E*TRADE Canada clients in the future.

Fairvest analyzes proxies and provides voting recommendations on corporate governance issues of approximately 1000 corporate issuers and provides institutional investors with a proxy voting department capable of voting all proxies according to specific guidelines while maintaining complete proxy voting records. Fairvest also publishes the Corporate Governance Review six times per year, which has a paid subscription base of over 180 organizations, including law firms, consulting firms, investment dealers and corporate issuers. We’ve enjoyed reading it for years and appreciate its insights into Canadian trends.

Domini Publishes Voting Guidelines for 5th Year
Last year, the firm became the first mutual fund manager to publish their actual votes cast for each company in its portfolio. This year, Domini Social Investments entered its second year as a fully transparent voter, and reissued its challenge to the mutual fund industry to follow suit. During the past 5 years assets in mutual funds have grown from $2.81 to $6.77 trillion. Each has a fiduciary duty to their shareholders to examine each resolution and votes proxies in their shareholders interests.

While few will agree with every one of the Fund’s policies or votes, Domini has undeniably taken the lead in this area of disclosure. I sincerely hope they are soon joined by others. Visitors to Domini Social Investments’ website can choose any of the 400 companies in the Domini Social Equity Fund’s portfolio, see a brief description of the issue being voted on, andview Domini’s vote.

The site also provides another valuable resource which allows users to search for shareholder resolutions by company or social issue and to send email concerning the resolutions directly to the company. The database was created by the Interfaith Center on Corporate Responsibility (ICCR), andSocialFunds.com.

Next, someone needs to create a portfolio tracker which contains all corporate proxy resolutions, links these to the applicable policies of TIAA-CREF, CalPERS, Domini and others and then allows shareholders to vote their own shares.

Family Struggle at Hyundai
Corporate governance reforms appear to have taken a back seat to traditional family control of Korea’s most conservative chaebol. According to a report in the Sydney Morning Herald, the Government is incensed that a top executive in the firm was sacked and then reinstated without reference to the company’s board or shareholders. See Coup at Hyundai takes a family to war, 04/01/00.

Online Voting Up
15% of investors who vote on measures that affect companies in which they own stock will do so via the internet this year, up from 6% in 1999, according to Automatic Data Processing, Inc. ADP processes 90 percent of proxy statements. See Shareholders’ proxy voting online expected to grow,The Arizona Republic, 4/2/00.

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Archives: March 2000

Exec Pay Tied to Luck
Study for the National Bureau of Economic Research by economists Marianne Bertrand of Princeton University and Sendhil Mullainathan of the MIT found three “luck” factors correlated with higher pay: The price of oil, the foreign-exchange rate, and the average performance in specific industries. Representation of large shareholders on a company board reduces the extent of CEO pay arising from luck by as much as a third. (The CEO makes what? The Christian Science Monitor, 3/27/00)

India to Set Up Corporate Governance Center
Dr. P.L. Sanjeev Reddy, Secretary, Department of Company Affairs, sought the cooperation of corporate tyccon Shri Birla in setting up the center. Dr. Reddy also sought cooperation in assisting the Government to work out a provision for adequate representation of women on the Board of Directors of Companies as a measure to remove gender bias and better corporate governance. (M2 PressWIRE via Northern Light)

Peter Brown on Board Trends
Julia Bright interviewed Peter Brown, of Top Pay Research Group, in the 3/2000 edition of Governance. Top Pay advises on all aspects of board nominations and conducts and annual survey of directors. Based on the survey, Brown opines that the volume of regulations governing boards has become burdensome in the UK, especially for small companies. In small firms directors have an important role to play to ensure options are considered, whereas large firms have staff to generate strategic options and the board takes on more of a monitoring role. However, Brown appears to believe the monitoring role of directors has been overemphasized because of failures by auditors. He cites the use of directors as ambassadors as a positive approach and favors moving to a system, like that in many US firms, where directors are paid, in part, with shares or options. Options make it much easier for small firms to attract directors with specified qualifications. With execs retiring earlier, it should be easier to attract those interested in “semi-retirement” on boards; the key is to make sure they don’t expect to serve more than a few years while their ideas and enthusiasm are still fresh.

Raiders Are Back
Kirk Kerkorian, Carl Icahn, leveraged buyouts, and hostile takeovers are back. WSJ’s “Raiders of the Lost Decade: 1980s-Style Mergers Return,” documents the sharp rise in words and graphs. “Jumped” deals (challenged by another company) and hostile takeovers have never been higher. LBOs are climbing back to rates unseen since the late 1980s. “Old economy” companies are cheap. With antitakeover measures in place and the junk-bond market nearly shut, buyers have to be more creative. Steven Lipin [email protected], Nikhil Deogun[email protected] and Kara Scannell kara.scannell @wsj.com discuss the current phenomenon and where it is most likely to hit next.

Investor Activist Sees Hope in Japan
Yoshiaki Murakami lost his bid to gain a board seat and raise dividend payments at Shoei Co. but believes he was supported by holders of about 3 million of 14 million Shoei shares. “Corporate governance has begun to flower in this country,” he said. (WSJ, 3/29/00, [email protected])

Deutsche Bank Merging to Growth
Michael Useem and John Ross, president and CEO of Deutsche Bank’s American operations, discuss the challenges organizations face in making mega-mergers work across cultural boundaries in [email protected] Newsletter, 3/29-4/11/00.

Worldwide Internet Use to Climb
The number of active users worldwide is predicted to climb to 361.9 million by 2003, a 178% increase from the 130.6 million people who were actively using the net at year-end 1999. By year-end 2000, only 42% of active users will come from the U.S. Content and language will become more diverse but there is likely to be a convergence of styles, tastes, and products with a more homogenous global marketplace. e-commerce revenues will increase from $233 billion at year-end 2000 to $1.4 trillion in 2003. (eGlobal March 2000 Report)

Stock Options for Hourly Workers
Labor Secretary Alexis Herman joined in advocating legislation to encourage companies to grant stock options to hourly workers. A recent study by the Employment Policy Foundation estimated that as many as 26 million hourly workers are now covered. The move could increase that number and the amount of grants. (WSJ, 3/29/00, p. A4)

Funds Resist Urge to Divest Tobacco
Six states, 10 major municipalities and 15 universities have set policies to restrict or divest tobacco stocks but most funds and endowments are still holding tobacco stocks, despite their mounting legal problems and poor showing on Wall Street, according to a new study by IRRC. Institutions are reluctant because tobacco stocks were very profitable before the 1990s, they’re still found in all of the major indexes, funds wan to avoid the ‘slippery slope’ where social concerns come before their duty to maximize returns for beneficiaries. For a copy of Tobacco Divestment and Fiduciary Responsibility contact Heidi Salkeld at 202-833-0700 (phone) or email[email protected].

Missing Link Down Under
Research in the U.S. has found that executive pay is higher and corporate performance is better where boards are independent. However, Geof Stapledon reports his own study, with Jeffrey Lawrence, in Australia found no evidence in support of the CEO influence hypothesis. One possible explanation is the common practice in Australia of using external consultants to provide advice on pay. (Governance, 3/2000)

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NYTimes Profiles Charles Elson
The leader who built his reputation on director compensation and engineering Al Dunlap’s ouster from Sunbeam explains how he got interested in corporate governance. “If every director was like Charles, I could go into another line of work,” says Nell Minow. Elson will soon be heading a new center in Deleware which will provide a forum for debate on exactly what the laws on corporate governance should be. (A Scholarly Shareholder Activist, NYTimes, 3/28/00)

IBM Employees Win CalPERS Support
CalPERs will vote its 9.2 million IBM shares in favor of a resolution which allows employees to stay with IBM’s defined benefit plan. “Withdrawing promised benefits for any employee is not only morally reprehensible, but bad business,” said board president William Crist. (Calpers To Vote 9.2M IBM Shares For Employee Resolution, WSJ, 3/28/00)

Audit of Corporate Governance Practices
Sempra Energy has quietly reached agreement with John Chevedden of Redondo Beach. Sempra has agreed to an outside audit of its corporate governance practices by Batchelder & Partners, in exchange for withdrawal of Mr. Chevedden’s proposal that would have allowed shareholders to vote for all directors each year, instead of 1/3. Another Chevedden proposal remains to be taken up. It would allow approval of key changes by a simple majority vote by shareholders, instead of the currently required two-thirds, which Chevedden says puts excessive control in the hands of the board. The company is expected to face stiff questioning and criticism at its annual meeting because of a stagnant stock price and recently cut dividend. (Shareholder proposals for Sempra on hold for now, San Diego Union-Tribune, 3/24/00)

New Disclosure Rules
Ontario Securities Commission is proposing new disclosure rules. “Clearly defined and effective corporate governance principles can make Canadian companies more accountable and more competitive,” OSC chairman David Brown said. “In fact, the quality of corporate governance is becoming a valuable asset in global competition for capital.” The new rules would require companies to:

  • include in interim financial statements an income statement and a cash flow statement for the quarter and the year to date;
  • Provide an interim balance sheet and explanatory notes to quarterly statements;
  • Provide a quarterly discussion and analysis.
  • Board review of interim financial statements before they are released.

According to David Brown, “Continuous trading demands continuous disclosure.” “The next big step is a national system of integrated disclosure…Essentially, integrated disclosure will permit issuers to do public offerings of securities merely by issuing a term sheet to prospective investors. To qualify, an issuer will have to commit to maintaining a continuous flow of prospectus-quality disclosure to the marketplace.” SeeCredibility and Confidence of the Investment Community: A topical update on new reporting and financial market requirements.

Director Pay Inches Up to $1,000/Hour
InvestmentNews survey of the 50 largest fund firms found average pay rose about 2.5% over 1999 to $234,420. Since most directors log about 200 hours a year of work, according to Management Practice Inc., that equates to about $1,000/hour. Dreyfus Funds director Joseph DiMartino led with a rise of 7.5% to $642,177. Investor returns were in single digits at all but one of the companies on the list. Dreyfus domestic equity funds, for example, were up an average of 2.62% in the three years ended Feb. 29, while Franklin Templeton’s gained 8.84%, far below the 21.76% average annual gain of Standard & Poor’s 500 stock index. The article points out that “the nifty 50 aren’t just overpaid compared to the average Joe. It seems that they’re are raking it in compared to corporate directors. Microsoft Corp., for example, paid its typical director $134,094 in 1998 while Intel Corp. paid out $168,333. Philip Morris Cos. Inc. paid an average of $118,928.” see Fund pay: $1,000 an hour

Friends-and-Family Stock
IPO prospectus must disclosure the total number of shares set aside, but not who get them. CEOs are free to quietly hand out directed shares to whomever they choose, including companies they have business dealings with who will then sing their praises. Fortune writer Melanie Warner tells how Sycamore Networks had one of those astounding Internet IPOs. The optical networking firm, with just $11 million in annual revenue and one customer, was worth $15 billion due to the hype generated. See Misadventures in the Me-first Economy, Part 2, Fortune, 3/20/00.

In the same issue see The New Role of Directors. Small insider boards help dot-coms move fast but don’t provide much oversight. “These companies are breaking the rules, remember–such as how to handle emerging revenue-recognition issues like barter transacti ons, and whether a fast-growing Internet company is diluting shareholders excessively by issuing too many options. A dot-com that makes a misstep on one of these fronts–and subsequently stumbles in the market–will soon be facing both SEC questions and a very old-fashioned slew of shareholder lawsuits.”

Trustees Responsible for Making Boards Accountable
The message is just as strong “down under” where Joe Hockey, Australia’s Minister for Financial Services, said mutual fund managers were “lazy” because they did not agitate enough for boardroom accountability. “If a board or directors are not acting in the best interests of the company or making decisions that they should be held accountable for, it is not good enough for funds managers to run away and not face up to the tough task of holding those directors accountable for their decisions.” Funds trustees hold more than 50% of shares in publicly-listed companies in Australia yet only 30% of votes were exercised at annual meetings – a lower ratio than in the United States and the United Kingdom. The Sydney Morning Herald, Hockey swipes at ‘lazy’ funds bosses, 3/24/00.

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Survey Results
We surveyed readers for a week on the question of including an option to “vote with management’s recommendations” on the internet proxy. Does this discourage independent analysis and voting by shareholders? We used a cheap survey vehicle (free) and it showed. 27 readers said yes, the option discouraged; 31 said no it didn’t; and 5 said it makes no difference. However, 30 of the 31 votes came in within a few minutes of each other. I guess someone thought is was important enough to vote 30 times.

Broker Votes
While we’re on the topic of stuffing the ballot box, Patrick McGurn’s editorial in the February ISSue Alert is worthy of note. McGurn traces the practice of letting member brokers vote proxies on certain uncontroversial matters for their clients if they fail to vote (the “ten-day rule”). It originated because many investors “considered the corporate franchise to be a joke.” So many, in fact, threw away their ballots that companies couldn’t get a quorum.

McGurn writes that CII called repeatedly for the elimination of broker voting for all purposes other than making a quorum but the SEC, NYSE and AMEX didn’t budge. Now the NASDR, the self-regulatory arm of NASDAQ, has asked the SEC to extend discretionary voting to its members who aren’t already covered by the NYSE or AMEX. According to the editorial, “by allowing brokers to legally stuff the ballot box, management can inflate their margin of victory or even swing the outcome of close elections.”

“Just vote no” campaigns to protest poor performance by boards and/or individual directors or to voice displeasure for failure adopt shareholder proposals with majority votes are distorted by broker votes. Under stock exchange definitions “dissidents must foot the bill for delivering their proxy materials to all shareholders if they want to remove broker votes from the process” in contested elections. Yet, election of directors “pales in comparison to the widespread use of broker votes to fix votes on stock option plans.” Broker votes can be used on proposals that seek to add 5% or less of outstanding shares to existing or new stock option plans. It isn’t a coincidence that most plans come under that limit.

McGurn calls on exchanges to repair the broker vote process. “Adding more issues to the list of matters on which brokers can’t vote isn’t enough.” He points out that even selection of the audit firm can cross the line, given recent revelations of independence violations. Broker voting “threatens to undermine investor’s confidence in the entire voting system.” It appears it may be too late to have an impact on this rulemaking since comments on Release No. 34-42238; File No. SR-NASD-99-63 were due to the SEC Secretary Jonathan G. Katz by January 12, 2000. (see Federal Register: December 22, 1999 (Volume 64, Number 245) [Page 71836-71839]).

I obtained a copy of CII’s comments, dated 1/3/2000, urging rejection of NASD’s proposal. CII represents funds with more than $1 trillion invested. Yet the battle they have waged in this area makes them look like a powerless worm. The issue was brought up in 1989 by one of their members, CalPERS. In 1994, CII reiterated the request and on 5/20/99 they again advised against allowing brokers to vote shareholder proxies without instructions.

Amazingly, the 5/20/99 letter from CII indicates that they have been told, but could not verify that “the service provider that transmits over 99% of NYSE company proxies routinely votes uninstructed proxies, even without broker direction. More staggeringly, we are told these votes are, in all cases, cast for management.”

The comment period for the NASD rulemaking may be officially closed but that shouldn’t stop readers from protesting to SEC Chairman Arthur Levitt. If enough of us raise a hell, maybe the SEC will finally put a stop to a system which is riddled with conflicts of interest and which results in ballot stuffing in favor of management at the expense of shareholders.

Bottom Line
ASCS plans annual conference for San Francisco on “Taking Corporate Governance to the Bottom Line.” Mayor Willie Brown, Jr., who recently joined the CalPERS board, will open the conference to be held 6/28-7/2. Other featured speakers include Frank McCourtPaul CareyJoseph Grundfest andRichard Koppes.

AFSCME Steps Up Governance Efforts
AFSCME has begun a new, multifaceted program to increase public employee influence in the shareholder arena. Funds maintained for the retirement benefits of AFSCME members total over $1 trillion in assets. Activities will be coordinated by the union’s newly formed Office of Corporate Affairs. Shareholder resolutions at the Bank of New York (redeem or vote poison pill), Baxter International (declassify board), Conseco (declassify board), Great Lakes Chemical (declassify board) and Mattel (redeem or vote poison pill) are the first-ever from AFSCME’s $500 million staff retirement fund. The Office also plans to intensify efforts to gain trustee seats for employees at key funds where currently there is no employee representation. Currently 48 of the top 100 public employee pensions have no worker-elected trustees. (see February 14, 2000 press release)

Stock Swaps Up
In 1988 less than 2% of M&A deals were paid for entirely in stock; by 1998 the figure was 50% and it has continued to grow. While a cash offer places risks and rewards with the acquirer, the acquirer shares more risk in a stock swaps. The authors offer advice on how to choose a payment method. (Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions, by Alfred Rappaport and Mark L. Sirower, Harvard Business Review, 11-12/99)

Clueless? I Disagree
Pensions & Investments (3/20/00), which usually runs insightful editorials, ran one entitled “Clueless in California” railing against legislation which calls on CalPERS and CalSTRS to divest of tobacco stocks. They even included a clever cartoon with 3 investment rating services: Moody’s alphabetical system, Monrningstar’s stars and the California Legislature’s weather vane (a chicken) to determine which way the political winds are blowing.

The editorial makes good points: investment decisions should be left to investment professionals; the funds are largely indexed and divesting tobacco stocks would reduce the benefits of indexing; the market has already discounted tobacco stocks (“selling the stocks now could simply lock in all of the losses”); it would set a bad precedent.

The news this morning on National Public Radio noted that tobacco companies are now starting to retain bankruptcy attorneys. That should make both the fund fiduciaries and the Legislature take notice. However, more important is the fact that with over a million members, the CalPERS health benefits program is the second largest purchaser of health care in the nation. While other health care providers a fraction the size of CalPERS are suing tobacco companies to recover the cost of damages, I doubt this is much of an option for CalPERS, as long as they own so much tobacco stock.

Yes, legislation requiring divestment would set a bad precedent. Unfortunately the CalPERS Board has had years to take action on its own but has failed to do so. Common sense dictates that a fund which is spending millions on tobacco related illnesses and smoking prevention programs shouldn’t also be investing in the same companies they might want to sue.

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Online Class Offered
ICMA Retirement offers “Making Sense of Investment Choices,” as the 1st of an 8 part course for public sector employees. Users register their e-mail address and take a test on investments. Then, based on their incorrect answers, they are led to the portion of a digitized instructional video. The program remembers where the user left off if they log off. (Pensions & Investments, 3/6/00, p. 8)

Securities and Exchange Board of India
IRRC CG Highlights (3/10/00) reports the SEBI announced it will tie governance measures to exchange listing rules. Measures, to be drawn from Report of the Kumar Mangalam Birla Committee on Corporate Governance, mandate all elements of a director’s renumeration, including salary, benefits, bonuses, stock options, pension contributions, severance pay and the price of stock options. Companies seeking a new listing must comply right away. For those already listed, adoption will be spread out over 3 years.

NACD Director Compensation Survey
1999-2000 Director Compensation Survey released. NACDsurveyed 1,200 companies and found the vast majority use annual retainers but separate attendance fees are also common with about 80%. There is also a strong shift toward NACD’s own recommendation that companies pay at least 50% in equity. The survey offers a comprehensive picture of compensation practices in public companies ranging in revenues from $200 million to $6.6 billion.

Rio Tinto, Broadest International Proxy Contest to Date
According to ISS Friday Report, this is the first joint shareholder initiative sponsored by unions in several countries. The coalition has a web site with the complete text of resolutions and supporting statements at http://www.rio-tinto-shareholders.com. (3/10/00)

Big Changes at CalPERS
Michael Flaherman, a pricing economist for the Bay Area Rapid Transit and graduate of Harvard and MIT, was elected to replace Charles Valdes, a CalTrans attorney, as chairman of the powerful investment committee at CalPERS. Sean Harrigan, a member of the State Personnel Board and International Vice President of the Food and Commercial Workers International Union, replaces board president William Crist as vice chair of the committee. Rob Feckner, elected by school members and who is also a board member of the California School Employees Association, was elected to chair the board’s policy making Benefits and Program Administration Committee, replacing Michael Flaherman.

In a further effort to disperse power among more board members, Flaherman announced he would resign as board vice president, a position he was elected to just last month. San Francisco Mayor Willie Brown took part in the power shift during his first meetings as part of the governing board of the $170 billion pension fund which has been a leader in corporate governance since 1984. (Sacramento Bee, 3/14/2000)

TIAA-CREF‘s Corporate Governance Policy Goes Global
New policy states that every company should: provide a clear explanation of its compensation program in its proxy statement; provide compensation that is linked to performance, and is reasonable based on prevailing industry standards; seek shareholder approval for all stock-based compensation; clearly disclose “soft” elements of executive compensation, such as pension plans; and place its program under the direction and oversight of a board committee completely independent of management and knowledgeable about executive compensation. Global standards are “are important to encourage investments in countries and companies in a global economy where gaining access to capital markets is increasingly seen as very much in each nation’s self-interest.” (full text)

AFL-CIO Weighs in Against Petro China IPO
Letter sent to 100 investment managers arguing that risk factors include lack of transparency and inability to exit through liquid market, engage in shareholder activism or litigate. Of course, there is also the issue of alleged human rights abuses in Sudan and tibet by PetroChina‘s parent company and the expected layoffs of 1 million workers in China. (see also, ISS Friday Report, 3/3/00; IRRC CG Highlights, 3/10/00)

Indexed Options
Despite support Alan Greenspan and a few institutional investors, only one major company, Level 3 Communications currently uses them. Since indexed options only pay off when the company outperforms its peers, they will always be unpopular with CEOs. BusinessWeek notes “the Financial Accounting Standards Board (FASB) allows traditional options to avoid any charge to earnings–a free ride that has contributed mightily to the popularity of options over cash. Why the difference? Because the exercise price of indexed options fluctuates depending on the value of the index it’s tied to. The FASB has ruled that indexed options must be charged to earnings every quarter so that investors can see the current option- related liabilities.” However, as I recall, this accounting problem arose out of pressure placed on the FASB to give options a free ride — not because it made sense. Some, such as Ira Millstein, argue that a downturn is likely to bring indexed options because if the stock heads south CEOs will still get a payoff if they can beat their peers. (Commentary: An Options Plan Your CEO Hates, BusinessWeek, 2/28/00) The article speculates on how much various CEOs would earn under indexing.

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Executive Pay Trends
SCA Consulting says executive pay will break records this year; less linkage with operating performance but more with stock; greater use of stock options. Trends in part driven by dot-com economy. (ISS Friday Report, 2/25/2000)

MEDEF Slams Governance Legislation
Ernest-Antoine Seilliere, chairman of the French business leaders’ group spoke at a press conference opposing legislation aimed at improving corporate governance by separating the functions of chairman and CEO, and requiring further disclosures on issues such as shareholder pacts and takeover bids. (WSJ, 3/14/2000)

Barbariams at the Gate, Again
Carl Icahn is locked in his 4th proxy battle in 5 years to take control of Nabisco Group Holdings. SEC filing says his group aims to elect a slate of directors who will “better enhance stockholders value.” Nabisco responded with a poison pill. Icahn built his reputation, in part, as a corporate raider in the 1980s by proposing to divide RJR Nabisco’s food and tobacco operations. (WSJ, 3/14/2000)

Coming in April
Ralph D. Ward’s Improving Corporate Boards: The Boardroom Insider Guidebook will be published by John Wiley & Sons. Finally, a clear guide to solving the most common problems facing boards. Each chapter provides a concise overview of a problem or focus area, several real life examples, internet resources, advice from various experts and a checklist summary. Perhaps CalPERS should be sending Mr. Ward’s book to each board member of the companies on its focus list.

Allied Owners Action Fund
Years ago, I wrote of a mutual fund that would derive value from encouraging good corporate governance. Unlike theLENS fund, it wouldn’t cost $10 million to join. It’s finally here, a corporate governance fund for the rest of us! The Fund will buy up to 5% in companies with lax management, under-used assets, passive boards or other problems. Then it will attempt to “open deaf mangement’s ear.” The basic idea is that active, knowledgeable shareholders can add value. The Fund will have its own investment staff and analysts but will also look to a separate company, eRaider, for ideas. eRaider operates as an internet confederation where paid moderators help to keep bulletin board discussions concerning potential investments and ownership strategies on track. Take a look. Join the discussions. I moderate a board on corporate governance; I’m also an investor.

Internet Voting, A Revolution?
Not. I’ve had several reporters calling to get my opinion on internet voting. Far from being a democratizing revolution, internet and telephone voting appear likely to increase the hold management has over shareholders. Go to proxyvote.com to vote your shares and the first choice you have is to “vote my shares per directors’ recommendations.” It’s even worse by telephone where the “vote with management’s recommendations” option has long been the first choice offered to telephonic voters. Industry insiders tell me that about 9 out of 10 take this first option and hang up. Who can blame them? We’ve all been stuck in menu-driven voice mail Hell. The internet option is more benign but why should either electronic proxy offer an option that is not on the paper proxy? Tell me what you think about the issue through the survey above or by e-mailing [email protected].

It’s not internet voting that will make a difference, it’s internet information, conversation, and communities that will dramatically increase shareholder democracy over time. Some important landmarks: SEC filings through EDGAR beginning around 1994; Corporate Governance puts up the proxy voting guidelines of TIAA-CREF, CalPERS and others in 1995; Bell & Howell broadcast its 1996 annual meeting; CalPERS solicits support for shareholder proposals at Archer Daniels Midland Company in 1996; LENS and others explain their strategies and seek support for their positions; CII and CalPERS start forums; various proxy fights arise out of chatrooms and bulletin boards; AFL-CIO’s Executive Paywatch; disclosure of votes by Domini and CalPERS; World Bank and OECD forums; FOE’s online “Confronting Companies Using Shareholder Power: A Handbook on Socially-Oriented Shareholder Activism”; Mark Latham’s corporate monitoring project, Nell Minow’s effort at the Corporate Library re CEO contracts; eRaider and Allied Owners Action Fund.

For many stock speculators, the internet simply represents “TV with a buy button” for low fee transactions. However, for those of us who view our shares as ownership investments the internet will make a huge difference. In recent decades corporations learned that employee ownership and involvement adds value. Tomorrow, they will learn that active participation by shareholders can add value as well.

Those who seek to extend their control through “shareholder mix” campaigns will find that it is like trying to control a conversation; it can’t be done and still be genuine. The corporations that are successful in the internet age will engage with and learn from their employees, customers, competition and especially their shareholders.

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CalPERS Pressures Maxxam
Pension system prods company to add two independent directors to its five-member board now dominated by chairman and CEO Charles Hurwitz. Maxxam has been widely criticized for its poorly performing, redwood harvesting and labor disputes. (WSJ, 3/8/2000)

Harmonizing Global Standards
Top-level corporate executives, the Big Five, and institutional investors met in London to harmonize global accounting and financial standards. Among topics of discussion: warnings on audited financial statements, ethical standards and independence among auditors. (Executives, Investors Address Global Rift In Reporting Rules, WSJ, 3/8/2000)

Poison-Pill Duels In New Jersey and Deleware 
The battle is over who has the power to prescribe a pill, the board or shareholders. In New Jersey it’s between the Chubb Corp. and its shareholders. In Delaware, the SEC issued a “no action” letter to Novell Inc., allowing the company to deny a call for shareholder input into its pill. The Chubb move could end up as an important test case in court. In the Novell case, the proponent may be appealing to the chat rooms. Commentary: are chat rooms the new people’s court? (see Cases in Two States Illustrate Debate Over Poison Pill Laws,WSJ, 3/2/2000)

Bye Bye Bylaw
A landmark decision, in the case of Chesapeake v Shorewood Packaging, found Shorewood’s supermajority bylaw to be an “unjustified impairment of the Shorewood stockholders’ right to influence their company’s policies through the ballot box.” The opinion also argued against Shorewood’s claim that its stockholders are prohibited from voting to eliminate the company’s classified board structure and subsequently seating a new board, invoking the “plain language” of Delaware law and policy that “stockholders have the authority to determine the governance structure of their corporations in the bylaws.” The decision marks only the 3rd time since 1989 that the Delaware Court of Chancery has found that directors of a Delaware corporation breached their fiduciary duties in responding to a takeover threat. (see “Chesapeake Corp. v. Shore: An Example Of Meaningful Proportionality Review” by J. Travis Laster)

California to Divest Tobacco Stocks?
State Senator Tom Hayden and Assemblyman Wally Knox amended AB 107 to require CalPERS and CalSTRS to divest $900 million in tobacco stocks over an 18-month period. Similar measures have failed in the past but tobacco stock lost 51.5% last year bolstering arguments that investing in such stocks is imprudent. As of Dec. 31, CalPERS had $589 million in tobacco stocks, while CalSTRS had $319 million.

Boardroom Diversity 
May depend on organized pressure, according toBusinessWeek (3/6/00), which reports the number of black directors has increased 57% in six years, in part due to groups like Jesse Jackson’s Operation Rainbow Push. Without such organized pressure, Hispanics have only gained 10%. The number of Fortune 500 companies with at least one woman on their board is up 21% since 1993 when Catalyst Inc. initiated their 1st survey on the subject. The 1999 Catalyst Census of Women Board Directors of the Fortune 1000 found that women hold 11.2% of board seats at the 500 largest publicly traded U.S. companies, compared with 11.1% last year. 96 of the Fortune 100 have at least one woman director, whereas only 54 of the Fortune 1000’s smallest companies do. (Corporate boards still male, CNN, 12/15/99)

Goldman Sachs Advises Japan, Copy Germany
Japan should consider scrapping capital gains tax on the sale of cross-holding shares, says Kathy Matsui, of Goldman Sachs. Although cross-held shares have declined to 39% vs 52% in 1991, adoption of the tax exemption would further encourage liquidation of low-yielding investments and the reinvestment of proceeds in higher-yielding areas. She also noted that Japanese firms with independent external directors had outperformed the market by about 40% during the last year and called for making the appointment of independent directors a stock exchange listing requirement. (Reuters, 3/1/2000)

Barbie’s Software Into Hard Drive?
Ralph Whitworth, of Relational Investors, which holds 4.2 million Mattel shares, has been elected a member of the board of directors of Mattel. (Dow Jones Newswires, 3/1/200)

Canadian Best-of-Sector Fund
Jantzi Social Index becomes Canada’s first index of “socially responsible” firms. Unlike most US SRI funds, they will accept firms with gaming and alcohol interests. (Do Canadian SRI types have more fun or what?) The fund uses a “best-of-sector” approach in order to reach a fairly broad base of 60 firms, given the need to include natural resource companies, which are often “environmental challenged.” The Economist notes that socially responsible indexes have “outperformed their ethically neutral counterparts…Virtue, in other words, can bring more than its own reward.” (The Economist, 2/5/2000)

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Archives: February 2000

Nell Minow, “CEO slayer,” is at it again. The Corporate Library began publishing the employment contracts of top corporate CEOs. “In theory, these documents have always been public, because they are filed with the SEC. But in reality, they are hard to track down. We wanted to make them easily accessible so that anyone who is interested can evaluate them.” “It does not surprise us that General Electric’s CEO, Jack Welch, has one of the best. It is not about perks or parachutes, but about securing his assistance as he leaves the company.” The worst contract reviewed to date belongs to another CEO with outstanding performance: Robert Annunziata of Global Crossing. Minow said, “Clearly, the company’s performance has been spectacular, and Mr. Annunziata has created tremendous shareholder value. But the contract’s pay/performance link is weak.”

Mr. Annunziata gets a $10 million signing bonus and two million stock options at $10 a share below market. The make and model of the Mercedes the company will buy for him and his wife is also spelled. To keep him from getting homesick, his mother gets first class airfare to come see him once a month. “The amount involved may be small in relation to the value he has created,” said Minow. “But it seems to us that anyone who gets the equivalent of $30 million just for showing up can pay for his own airfare and Mercedes. More important, the fact that these were the details he and the board were thinking about during that busy weekend is an indication that the new CEO is not as willing to bet on himself — and put his money where his mouth is — as shareholders might wish.”

Minow says the “CEO employment contract can provide some useful insight into the board’s performance and some insight into the board’s relationship with the CEO.” CEO pay is one of those “swimsuit issues” – so popular and so revealing.  Minow’s preliminary report is highly entertaining and very informative…an A+.  The Corporate Library has quickly become the most important source for information on corporate governance on the internet, outside of the SEC. We look forward to more.

Limits of shareholder activism, a perspective from London. (US shareholder activists bid for a bigger say, London Evening Standard, 2/24/2000).

Governance, 2/2000, reports on “Germany’s quiet revolution.” In late 1999 the German government proposed to abolish the 50% capital gains tax. Sales may lead to a drastic reduction in cross-holdings which have been a fundamental feature of German corporate governance. While providing stability and protection against takeover, cross-holdings have also reduced flexibility and liquidity. Once the reform is enacted, many expect a merger mania. The Portuguese Securities Markets Commission has endorsed 17 corporate governance principles. As Governance points out, few global institutions are likely to embrace recommendation 15 which calls for inclusion of 1 or more independent directors, but it does represent a step toward wider acceptance of international standards.

Sarah Teslik, executive director of CII, argues that directors should just say no to large payouts to poorly performing executives. (Governance, 2/2000) We agree, but we also embrace an editorial criticizing both CII and the SEC which appears on Pensions & Investments, 2/21/2000. Both organizations will hold a closed-door, members-only meeting in late March. SEC chairman, Arthur Levitt, has repeatedly called on corporations to open up their conference calls so as to not disadvantage those not allowed to participate. CII should just say no to a setting which P&I says serves to create the impression of “special deals, or at least the suspicion of favoritism.”

Boardroom, 1-2/2000, reports on a ground-breaking study in South Africa under the sponsorship of the Institute of Directors that surveyed directors on what type of person made the best chairman. About 38% favored statesman, 29% entrepreneur profile, an 18% the driver style. A smaller study in the UK had found the top pick to be facilitator, then thinker and driver. Boardroom points out the least favored type of chairman, the pioneer, appears to possess the qualities to fulfill the most significant roles recommended by the King and Cadbury reports. For more on the study, contact theWoodburn Mann Graduate School of Business Administration at the University of Witwatersrand.

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eLOT takes advice from Andrew Shapiro, president of Lawndale Capital Management and agrees to proactive reforms which may attract institutional and socially responsible investors. The news was presaged by an article in the 1/24/2000 edition of Barron’s where Stanley Kabala, eLot’s chairman and CEO, said the company’s board was in “unanimous agreement” about adopting Shapiro’s proposal if the details are worked out. On 2/122/2000, eLOT announced adoption of the following principles:

  • The Board of Directors shall at all times be composed of a majority of independent Directors, using the NASDAQ definition of independence. The Board will appoint the following committees:
    – Audit Committee
    – Corporate Governance and Succession Committee
    – Nominating Committee
    – Compensation Committee
  • Before each annual meeting the Nominating Committee shall solicit recommendations for candidates to fill Board vacancies from each holder of more than 5% of the Company’s fully diluted shares.
  • The majority of the Board members’ compensation should be equity-based.

The Company also announced that the Board of Directors has established a goal that not less than 10% of the Company’s purchases be from Minority and Women’s Business Enterprises (MWBE) qualified under the applicable federal and state definitions, and instructed eLOT management to develop a plan to further that goal. eLOT invites qualified MWBE companies to submit proposals and qualifications via e-mail to [email protected]Business Wire, 2/22/2000

CalPERS released “focus list” of Advanced Micro Devices; Bob Evans Farms; Crown Cork and Seal; A.G. Edwards; First Union Corporation; Intergraph Corporation; Lone Star Steakhouse & Saloon; J.C. Penney Company; Phycor; and Rite Aid. Many have agreed to a number of corporate governance changes. (Reuters, 2/23/2000)

Barron’s, 2/21/2000, carried an article titled, “NEUTRAL GROUND? A Boardroom Battle May Land In the Conference Room,” which discussed Mark Latham’s upcoming presentation at a Pfizer sponsored conference on International Corporate Governance. Mr. Latham will be presenting our proposal which seeks to have shareholders select a firm to advise them on future proxy issues. Patrick McGurn, of ISS, is quoted as saying that although Latham “diagnosed the problem correctly, he hasn’t necessarily come up with the solution.” Understandable, since ISS might possibly lose business if the proposal catches fire at Pfizer and elsewhere.

However, the Barron’s editor then writes, “McGurn notes that there are plenty of chat rooms where investors can talk to each other on these issues.” Surely, Mr. McGurn does not believe ISS and chat rooms offer investors equivalent advice. I’ve been reading McGurn’s analysis for years and it’s much better than anything I’ve found in chat rooms. In fact, his article in January’s ISSue Alert, “The 2000 Proxy Season: From A to Z,” is a great example of the good humor and thorough analysis that is typical of Mr. McGurn. Yes, he’s even got X covered. “X is for Xenophobia” and he goes on to discuss recent concerns of the Corporate Governance Network, OECD and the World Band in two brief paragraphs.

Management Practice Inc. bulletin for 2/2000 assesses trends in the compensation of mutual fund trustees. Compensation is growing a little slower than at comparable sized corporations (9% v 11%). Trustees appear to devote a comparable amount of time to their duties (200 hours a year). The greatest difference appears to be in the form of compensation. Both are moving toward payment in real or deferred shares but funds are lagging. The MPI Compensation survey concludes by noting that both corporations and funds tend to draw from the same pool of candidates. “By this measure independent trustees of mutual funds are comparatively inexpensive.” However, my personal impression is that most trustees aren’t acting as independently as they should, so maybe their lower compensation is warranted.

Whole Foods Market did not ask for an SEC no-action letter and has agreed to include our slightly revised “Shareholder Power Proposal” resolution in their proxy package. Despite the SEC’s puzzling 6/15/98 no-action letter in the case of theTempleton Dragon Fund, Whole Foods did not object to inclusion of internet site addresses in the resolution. We applaud their progressive attitude and trust that forward looking shareholders of the company will vote in favor of hiring a proxy advisor to analyze future proxy issues.

Brazilian corporate governance reforms expected to address lack of corporate transparency and the diminishing rights of minority shareholders, if a bill authored by lower house deputy Emerson Kapaz passes. Kapaz, who belonged to President Fernando Henrique Cardoso’s Social Democrat Party (PSDB) when he started drafting the bill in mid-1999, but shifted to the Progressive Socialist Party (PPS), which isn’t a part of the government alliance. (Mara Lemos; Dow Jones Newswires; 5511-813-1988; [email protected])

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Willie Brown Jr., the current mayor of San Francisco and former Speaker of the California Assembly, was apparently sent a letter in error notifying him that he was Governor Gray Davis’ choice for a seat on the CalPERS board, as was earlier reported by the Sacramento Bee, 1/22/2000. Apparently, someone in the Governor’s office goofed. However, the day after that announcement comes news that he is to be appointed after all. (see Willie Brown gets seat yanked from under him, Sacramento Bee, 2/16/2000; A state post for Brown –really: Davis confirms CalPERS offer, Sacramento Bee, 2/17/2000;Dan Walters: Davis’ gaffe — how bad is it?Brown appointed to CalPERS – againGray Grants Willie a Job — One He Already HasGray Comes Out of Brown Funk Appointment mix-up a comedy of errors, San Francisco Examiner, 2/17-24/2000; Davis Flipflops on Willie Brown Appointment , Los Angeles Times, 2/17/2000, The times they are a-changin’ at CalPERS, Sacramento Bee, 2/19/2000). As I’ve indicated previously, Brown’s appointment will raise press coverage of CalPERS.

Crist stays CalPERS president; Flaherman new VP, reportsSacramento Bee, 2/17/2000. Valdes will continue to serve as investment committee chairman until at least next month, when the board will elect committee chairs.

CalPERS Board comes to its senses and refuses to commit political suicide. President William Crist presented a “compromise” option for regulations on board candidate statements. Instead of prohibiting future candidates from criticizing opponents or telling voters why they are running and also removing the current prohibition against misleading remarks, the Board voted to put a new version of the rules out for public notice.

James Morgan, testified that he circulated a petition against the earlier proposal at his workplace, Cal/EPA. “Every single person that I talked to signed it. I have circulated assorted petitions over the years and I have never ever had every single person I talked to sign.” Stephen Brackett, of the Santa Monica Police Officer Association, testified that he also found that “100% of the people I spoke to were opposed to the concepts that are before you today.”

The newly proposed rules would expand candidate statements to 200 words but would also allow candidates to revise their statements after reading those of the other candidates. It was just such an action by Dr. Crist in 1998 which precipitated a protest by this editor. Although the protest panel appointed by the same General Counsel who allowed the action found it was arguably a technical violation of the rules, the election could not be overturned because CalPERS rules require the protester to prove the outcome would have been different. In other words, CalPERS staff is free to assist incumbents as long as their actions cannot be directly tied to the outcome.

The Sacramento Bee said the proposed rules previously approved by a majority of the Board, including Dr. Crist, would risk creation of a permanent board: “unaccountable, untouchable and isolated from its members.” Dr. Crist’s new proposal is certainly better. It would allow candidates to review all the statements and revise their own within 10 days. I question the value of letting candidates take ideas from their opponents without voters knowing where the ideas originated. The rule would encourage candidates to initially file poorly crafted and perhaps deceptive arguments. On refiling they would then reap the benefit of anything of value submitted by their opponents, while letting their opponents appear to address phantom arguments which no longer appear with the ballot. Far better, would be to require submitted statements to remain unedited, but to allow a second round of perhaps 100 words which could be used to rebut opponents or add new information.

On an even more positive note, the Benefits and Program Administration Committee agreed to examine other election issues in the near future. (see McRitchie’s testimony)

CalSTRS scored an 18.3% return last year on its cash, stock, bond, real estate and private equity investments. CalPERS, America’s largest pension fund, logged a return of just under 16%. (Sacramento Bee, 2/12/2000)

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Stephen Viederman (president, Jessie Smith Noyes Foundation) and Peter Camejo (trustee, Contra Cost County Employees Retirement Association) argue that fiduciary duty requires looking at the potential risks and rewards related to tobacco, the environment, treatment of employees, or any other of a range of social concerns in view of the fact that social funds perform as well as if not better than comparable funds. Morningstar has found socially screened mutual funds have, on average, performed better over the last one and three year period, a finding confirmed by other researchers. Isn’t it time, they ask, for “more open discussion of these issues by pension fund executives, following the lead of Contra Costa County.” On the other hand, Pensions & Investments editorial director, Mike Clowes, decries the vanity behind the ‘social’ mantle. He argues that investing in arms-makers, for example, is not socially irresponsible. “Invest as your conscience directs you, but don’t proclaim moral superiority by claiming to be socially responsible.” In our opinion, both are right. Fiduciary duty requires an examination of risk, including legal liability, but socially responsible investing needs a new name. The same issue of Pensions & Investments carries an article about a new startup fund, Eco-Enhanced Index Management, which is betting that corporate environmental are positively correlated with financial performance. (P&I, 2/7/2000)

Leonard Chazen, a partner at Covington & Buling, offers excellent advice to the SEC. He notes 1999 no-action letters have consistently refused to include a position on shareholder proposals raising unsettled questions of state law, such as many issues surrounding poison pills. The “agnostic” position of staff is “not easily reconciled” with Rule 14a-8(g), which gives the company the burden of proving it is entitled to exclude the proposal. The SEC’s failure to apply that burden means companies can exclude a proposal with little risk if they believe the proponent lacks the resources or resolve to litigate. The SEC should return to its earlier position that the improper subject exclusion does not apply to a proposal that raises an unsettled question of state law since, in such instances, companies cannot meet the burden of proving the proposal is improper, as is required under Rule 14a-8(g). (the Corporate Governance advisor, 11-12/99)

Congressman Bernard Sanders authored a letter signed by 46 Members of Congress urging the SEC to allow a stockholder resolution sponsored by 300 employees which seeks to reverse pension and retiree health benefit cuts. A recent release praised IBM workers for their determination and the SEC for their ruling.

Tomorrow the World. Anne Simpson describes the work the World Bank is now doing with the Confederation of Indian Industry to improve corporate governance and the ability of 17 Indian firms to tap international capital markets. As those firms reap anticipated rewards, other firms and necessary government reforms will follow. Sounds like an excellent strategy for the Global Corporate Governance Forum. (Director’s Monthly, 1/2000)

Sheet Metal Workers International Association to run an independent candidate at Paul Mueller and cumulative voting will increase the prospects of their board pick, Joseph ‘Nick’ Bacino. (IRRC Corporate Governance Highlights, 2/11/99)

Patrick McGurn highlights the debate between “do-it-yourself” slates stacked with large investor members of insurgent groups and new school players who prefer “independent” candidates. “Each school’s greatest strength is also its biggest weakness.” The investors have better alignment with shareholders but they also fuel charges of self-interest. McGurn’s excellent analysis goes over several of the recent cases, including Pfizer, and concludes experience will tell which side has growing influence. However, I’d bet there is no one size fits all. The value of either strategy is tied to factors, such stage of development. A recent IPO will usually go the investor route, while established firms will opt for independent directors. (ISS Friday Report, 2/11/2000)

Fairvest annual survey finds general decline in shareholder opposition to management proposals among Canadian firms. Their analysis indicates this may have more to do with the voluntary reporting methodology of their survey than actual practice. However, it appears poison pills were more shareholder friendly. M. Yves Michaud appears to be among the most innovative and successful crusaders. A proposal at the Canadian Imperial Band of Commerce requiring directors to hold shares equal to 6 times fixed remuneration got 88% of the vote. His proposal that BCE nominees be voted individually got 94% of the vote and another proposal at 2 banks to require minutes of the annual meeting to be sent to all shareholders got 58% and 65% of the vote. (for more seeCorporate Governance Review, 12/99-1/2000)

Germany’s first corporate governance code of best practices has been released and attempts to balance a strong commitment to stakeholders and a mandate to maximize shareholder value. The Fairvest analysis notes the cod neglects to require disclosure of executive pay and tolerates directors who can miss half the meetings before their lack of attendance is made public. (for more see Corporate Governance Review, 12/99-1/2000)

Phillip R. Lochner, Jr., writes that lists of the best and worst boards are generally a “trivial pursuit.” Too often companies are ranked by those with little board experience based on stock price, reputation, short-term prospective and luck. He levels a similar criticism at ratings of individual board members. He notes that directors have ample opportunity to “tell shareholders what they are doing and why.” “Just such a dialogue between shareholders on the one hand and boards and management’s on the other is the best way to begin to discover which directors and boards are rally performing well, rather than relying on outsiders whose judgments may be based on nothing but thin air.” I’m in total agreement, but until boards are willing to enter the chat rooms or post to the boards, at least the top 10 lists provide the something to attack or defend. Shareholders aren’t in the meetings; its up to directors to come out of the boardrooms or invite shareholders in. (Directorship, 2/2000)

Executive pay up 24% in 1999 over 1998, according to Pearl Meyer & Partners survey of 55 service and industrial companies with revenues averaging $18.5 billion. Average CEO compensation at such firms stands at $9.4 million. (Directorship, 2/2000)

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Transparency International ranked the US 9th out of 19 countries whose companies are perceived to dole out bribes. China had the highest level of perceived bribery and Sweden the lowest, with Australia and Canada close behind. The index is based on perception, not fact.

Public retirement funds manage about five times as much equity as their private counterparts but also index at about five times the rate of privates. One surprise in the analysis performed by Thomson Financial Investor Relations was that public funds invest more aggressively. Those with active allocation patterns invest 83% of their equity in growth stocks vs only 51% for privates. For more information, contact Richard Wines at 212-510-9350.

SEC’s selective disclosure may mean investor relations officers have to release information they know only a small portion of the investment community will understand, according to Sara Brody of Brobeck, Phleger & Harrison LLP. “If selective disclosure means saying the same thing to everyone, the real question is whether the level of information needs to be degraded,” said Brody at a National Investor Relations Institute Rock Mountain chapter lunch. (Investor Business Relations, 2/7/2000)

TIAA-CREF established a policy “a number of years ago” to absolutely do no soft dollar business, according to Peter Clapman, senior vice president and chief counsel. That means no payments, for what normally takes the form of research services from brokers to investment managers. Sounds like a good policy. Such commissions, often in the form of rebates, take on the appearance of bribes and kickbacks. Joyce Mader, who served on DOL’s ERISA advisory panel on soft dollars is quoted as saying, “abuse of soft dollars can cost a plan tens of hundreds of thousands of dollars, which is bad enough. But if investment professionals steer a plan to inappropriate investments because they’re getting a cut of commission, that can cost a plan millions.”

Union money is beginning to go into direct investments with collateral benefits. Bob Eason discusses the MFS Union Standard Equity Fund, not only its positive labor screens, but also public relations aspects and the enhanced ownership in fewer companies which facilitates active ownership and involvement. Another union focused fund has been set up by the Machinists. IAM Share invests mostly in companies with Machinist contracts, with about a third in a mix of large-cap companies in other industries. According to State Street, a similarly modeled portfolio would have outperformed the S&P 500 over the last ten years.

Proxy professionals often key to winning key proxy campaigns. “When management faces numerous dispersed shareholders, it almost always wins, but if those shareholders can speak with one voice, the playing field is leveled,” according to Rich Ferlauto of ISS’ Proxy Voting Service. At Marriot, “all the proxy voting services did the right thing and supported us,” said Matt Walker who worked on the campaign against management’s dual-class stock proposal for the Hotel Employees & Restaurant Employees. (for more on the above 3 items, contact the Center for Working Capital, 202-637-5179)

Friends of the Earth US, released an online Confronting Companies Using Shareholder Power: A Handbook on Socially-Oriented Shareholder Activism “written for socially-conscious or mission-based investors who recognize their obligation to exercise ownership responsibility in the companies they hold. It is intended to assist investors who have long-term commitment to social issues and who are committed to using shareholder activism tools in a prudent and responsible manner.” This single posting to the internet will generate more and better crafted shareholder resolutions than any prior publication. I know, sounds like hype, but I think it’s true. Shareholder activists will be bringing issues to a boil with this recipe book.

OECD is undertaking a major Review of its Guidelines for Multinational Enterprises and is seeking public comment. The Guidelines haven’t been altered significantly since their adoption in 1976. Also of interest at the OECD site is a recent report, Deciphering Codes of Corporate Conduct: A Review of their Contents (updated version as of December 1999).

CERES 2000 Conference in San Francisco April 13-14th, “Navigating the Networks of Change,” is based on the premise that environmental improvement in the 21st century will require new forms of cooperation and mutual accountability among key sectors of society. The conference will focus on the issues that arise at the crossroads of corporate accountability, environmental protection and stakeholder engagement in an era of globalization and information revolution. I’m going to be there. Contact me at[email protected] prior to the conference if you’d like to get together for a few minutes, lunch or whatever.

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IRRC conference goers discussed the need for independent boards, the use of stock options and other governance concerns at dot-com companies without reaching consensus. TIAA-CREF announced continued focus on eliminating dead hand poison pills. Use of internet voting up but still only represents about 6% of balloting. SEC encouraged use of internet. If shareholders agreed to view documents online, companies could save as much as $700 million industrywide. SEC granted no-action relief from Bart Naylor’s proposal to allow shareholders to place nominees on company ballots. Naylor is now hoping to get firms to nominate two persons for each slot. (IRRC Corporate Governance Highlights, 1/28/2000)

I generally limit my commentary to trends and don’t focus on specific companies. However, its worth noting that Proxy Monitor’s recommendation to Medco Research shareholders was to reject the proposed merger with King Pharmaceuticals, while ISS favors the merger. Perhaps if there is a “trend” here, it is the continuing importance of independent analysis by proxy monitoring firms. The Medco case provides another example of healthy competition and independent insights.

The Cluetrain Manifesto may not live up to the forward by Thomas Petzinger, Jr. of the Wall Street Journal. “Recall what The Jungle did to meat packing, what Silent Spring did to chemicals, what Unsafe at Any Speed did to Detroit. That’s the spirit with which The Cluetrain Manifesto takes on the arrogance of corporate e-commerce.” E-commerce is a baby that’s just begun to babble, as far as I’m concerned. It isn’t mature enough to get knocked down from a position of arrogance… But then I’m no web expert and the authors of this book seem to have those credentials.

While the book focuses on the internet’s ability to facilitate dialogue and talking story, contrary to their great expectations, I think the web will represent “TV with a buy button,” for millions of sorry souls. However, I can see that in the world of corporate governance, the internet is making a huge difference by empowering shareholders. Maybe the Cluetrain authors aren’t exaggerating in the long run. The book is great for one liners. “Word of mouth has gone global.” “The community of discourse is the market.” “Markets…want to participate in the conversations going on behind the corporate firewalls,” and corporations that let them are likely to benefit.

There’s also the Cluetrain Corollary to Metcalfe’s Law. “The level of knowledge on a network increases as the square of the number of users times the volume of conversation.” So asNETwork grows, on this and other channels, it becomes easier to learn the truth about corporate governance around the world and at individual firms. Like Linux, nobody is managing or controlling it, but many voices are contributing. All those “best practices” are helping firms discover, rather than invent, their own identity when used properly.

Here’s another line from Cluetrain, “controlling information is like trying to control a conversation: it can’t be done and still be genuine.” “The questions we ask aren’t going to predict the future. They will create the future.” So far, what we hear most on the internet is positioning by those who want to be our saviors. “The questions themselves are intended to confuse the issue, and the answers are nothing but the smirk on the face of someone who just proved himself right.”

See The Cluetrain Manifesto site; then buy the book though our link and support this news site. (In the last quarter of 1999 we helped Amazon.com sell $2,048.02 on books, earning the huge referral fee of $110.12. No, we’re not getting rich but if readers will buy their books using our direct links, we’ll get 15%. If you just pop over to Amazon.com from our site and buy after browsing, we only get 5%. If everyone had bought those books in the last quarter using direct links, we’d have made another $200. Okay, I’m off the rant.)

Mannesmann to accept Vodafone’s $182 billion merger offer, ending a protracted battle for the German telecom firm, according to WSJ. The deal will create not just a European behemoth, but the world’s largest wireless provider.

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Archives: January 2000

Web posts blamed for firing, according to court documents filed on behalf of Dimitri Papadakos, formerly CEO of Gyrodyne Co. of America. Papadakos seeks $20 million in damages from Gyrodyne and various online posters, including his half brother, Peter Papadakos, a Gyrodyne director at the time. Also named were Peter Pitsiokos, Gyrodyne’s vice, president, corporate secretary and general counsel, who allegedly fed Peter Papadakos defamatory information for postings accusing Dimitri Papadakos of receiving illegal payoffs and diverting company assets for personal use. (WSJ, 1/27/00) No, this is not the kind of brave board activism we have been seeking.

Internet used to empower investors at Coho. See The Gadfly “Latest from the message board revolt: Coho investors swimming upstream,” by Michael Collins. Mr. Collins is one of the few in the mainstream press (if CBS MarketWatch can be called that) who routinely writes on shareholder activism.

Lens reported a preliminary vote tally showing 34% of shareholders supported their non-binding proposal which urged Ashland’s board to hire a nationally recognized investment banker to explore value enhancing alternatives for the company, including possible sale, spin-off, merger, or other transaction for any or all assets of the company. ISS had also recommended a favorable vote. (PR Newswire via Northern Light)

Deloitte & Touche guide says to expect shareholder questions on e-business, globalization, and M&A. “Questions at Stockholders’ Meetings 2000” is available for free: contact Andrea O’Neil at (203) 761-3059.

The Corporate Library sent letters to the Corporate Secretaries of more than 500 leading companies last July, requesting a copy of each CEO’s compensation agreement and the name of a corporate governance contact person. Nell Minow says responses have ranged from “rude and evasive to genuinely concerned and helpful.” The cooperative response rate appears to be approximately 16%. The report is scheduled for release on February 25, 2000. For more information, contact Nell Minow.

Hostile takeovers come to Japan. The country’s first such all-domestic battle may signal a changes in corporate culture. (Business warfare rubs off on Japan, The Detroit News, 1/25/00)

Back in 1940, John C. Bogle’s Princeton thesis noted the SEC call at that time for mutual funds to serve “the useful role of representatives of the great number of inarticulate and ineffective individual investors in corporations in which investment companies are also interested.” With mutual funds now controlling 35% of stock and churning them at rate of 112%/year, Bogle still hasn’t given up on that 60 year old goal. He says mutual funds have become a marketing business, reluctant to offend potential clients. But an industrywide effort of 1/1000 of a basis point could raise $60 million for active corporate governance (6 times what TIAA-CREF spends).

Of course funds are unlikely to raise corporate governance issues, Bogle notes, because they “live-in-glass-houses” and are controlled by small outside firms whose principle business is providing the funds with “all the services required to conduct its affairs.” The yield is rising expenses, managed corporate earnings, the stock market as casino, and growing stock dilution from free riding management options. His hope on the horizon is index funds whose only way to add value is through shareholder activism. He offers prescriptions but more need to listen. (Governance: The Silence of the Funds, in The Corporate Board, 1-2/2000)

Do You Need a Dissident Director?, asks Steven A. Seiden, in the same issue of The Corporate Board. Seiden notes TIAA 1998 purge of Furr/Bishop’s board and the growth of limited partnerships who seek to turnaround underperforming companies. Prime among Seiden’s recommendations is that dissident directors need to be “unfettered by any financial, family or close personal ties to the activist” investor.

Sean Harrigan, Member of the California State Personnel Board, has been named as its representative to CalPERS. Harrigan serves as the Regional Director and International Vice President of the Food and Commercial Workers International Union (UFCW) Region 8 – Western United States. Harrigan was appointed to the State Personnel Board by Governor Gray Davis in June 1999 and replaces Ronald Alvarado as the Board’s representative to CalPERS. See alsoCalPERS bio.

CalPERS took a 10 interest in San Francisco-based Thomas Weisel Partners which invests in the growing internet, technology and communication industries centered in California. CalPERS will commit $500 million to act as lead investor in new alternative investment funds and may make another $500 million available.

Willie Brown Jr., the current mayor of San Francisco and former Speaker of the California Assembly, is rumored to be Governor Gray Davis’ choice for a seat on the CalPERS board reserved for a representative of local government. (Sacramento Bee, 1/22/2000) The profile of California’s $168 billion retirement fund is about to rise dramatically.

Back to the topDirectorship’s, 1/2000 issue, carried an interesting interview with Woody Small, co-portfolio manager of Undiscovered Managers All Cap Value Fund which picks portfolio companies, in part, based on the quality of directors. The fund has outperformed the Russell 1000 Value Index since 1997. We applaud Mr. Small for his action but wish he would take the next logical step. He indicates he has never taken an affirmative action to recommend that a board member resign or not stand for reelect ion. In addition he has never recommended director candidates to management.

Governance Institute expanded its biennial hospital survey of health system boards to include a ranking of the nation’s 20 top hospital systems based on governance practices. (Modern Healthcare, 1/17/2000)

Ira Millstein is reportedly resigning from his post as chair of the World Bank’s Private Sector Advisory Group. (see IRRC Corporate Governance Highlights, 1/20/2000)

Corporate Governance of State-Owned Enterprises in China was the subject of two-day meeting, which was co-sponsored by the Development Research Center (DRC) of the State Council, the Economic Cooperation and Development, and the Asian Development Bank. (see China Holds Corporate Governance Seminar)

Accoss the Board, the Conference Board Magazine, reports that “while the business pages are full of newly minted millionaires and billionaires, half of all Americans have less than $1,000 in financial assets.” (1/2000, p. 9)

Koppes, Richard H., Lyle G. Ganske, and Charles T. Haag, “Corporate Governance Out of Focus: The Debate Over Classified Boards,” The Business Lawyer, May 1999, Vol. 54, No. 3, pp. 1023-1055. The author’s argue that shareholder activists should reexamine their call for annual elections. Classifying a board greatly improves the ability of a corporation to defend against unsolicited takeovers bids and proxy fights. Classified boards can protect poison pills from being removed and promote continuity, stability and independence. Takeover premiums have been shown to be higher for companies with takeover defenses. Independence is best secured by serving multi-year terms. The danger of one-year terms is that truly independent board members may not be invited to run again after their first term and it often takes more than a year to make major changes.

The authors argue that focus should, instead, be on increasing board independence and activism, citing theMillstein/MacAvoy study which found a “significant correlation between an active, independent board and superior corporate performance.” However, the Millstein/MacAvoy study measured not only board independence, but responsiveness to shareholders. Any firm that didn’t return the CalPERS survey was graded F, whereas those who took the action CalPERS desired got an A+. Board independence is important but responsiveness and accountability to shareholders may also be key.

Early in the article, Koppes et al. quote from a recent statement by CalPERS in support of one of its proposals to eliminate a classified board. “We believe that the ability to elect directors is the single most important use of the shareholder franchise. Accordingly, directors should be accountable to shareholders on an annual basis.” The authors point to the fact that CalPERS itself has a classified board, where board members are elected or appointed for multi-year terms.

CalPERS is right in its first statement but their second statement does not follow. In fact the arguments of Koppes et al. would be convincing if certain steps were taken to reduce the likelihood of entrenchment by strengthening accountability to shareholders. First among these reforms would be the ability of shareholders to place nominees on the company proxy. One can argue about where the threshold should be set, but Bart Naylor’s recent proposal allowing those with 3% of shares to do so appears reasonable.

Secondly, to ensure those elected reflect the consensus of shareholders, any such proposal should be combined with the ability to use instant run-off voting (IRV). In 1993, for example, 96 candidates ran for two CalPERS Board positions. One of the winning candidates received less 5.5% of the vote. We certainly can’t say this was the candidate most voters wanted.

IRV facilitates expansion of voter choice by eliminating the “spoiler” impact of long-shot candidacies and avoids the expense of runoff elections. IRV works by allowing voters to rank candidates in order of preference, 1, 2, 3, and so on. The candidate who receives the fewest number of first choices from the voters would be eliminated in the first count and all his or her ballots would be redistributed to the voters’ second choice. Each successive count eliminates the next lowest polling candidate, transferring his or her ballots, until one candidate achieves a majority.

Other facilitating reforms would include confidential voting and a recognition that trust law requires that voting rights be subject to the same fiduciary standards as other plan assets. Although this rule has held since 1988 for pension funds, it has not yet been applied to other institutional investors, such as mutual funds and insurance companies.

Koppes et al. are right, but without mechanisms in place to allow shareholders better access to the nomination process, shareholders must continue to support annual elections as an important mechanism to avoid entrenchment.

Back to the topIRRC Corporate Governance Highlights discusses proposals for a one-time doubling of voting rights for shareholders who have continuously held shares for 5 years, establishing a right for shareholders with 2% of outstanding shares access to company’s proxy statement to nominate board members, electing the entire slate of board every 3 years, requiring an annual strategic report to shareholders, and implement exec compensation program that focuses management on the need to “maximize the company’s long-term wealth-generating capacity.” IRRC also summarizes some of the no-action relief letters from companies. (1/7/2000) IRRC indicates that CalPERS, NYCERS, and CII weighed in on the American Home Products sale. (1/14/2000) Still time to register for IRRC’s governance2000.com conference, to be held in New York City on Jan. 20-21.

Tidbits from Investor Relations, 1/2000. Less than 1/4 of ASX companies have internet sites with dedicated investor relations sections, according to a study by Computershare Analytics. Like the US SEC, the Australian Securities & Investments Commission is urging listed companies to dump briefings which are exclusive to analysts and institutions.International Accounting Standards Committee calls for the adoption of an international code of conduct to raise internet business reporting standards. Street-name investors of 5,000 publicly-traded US companies are enabled for internet proxy voting through ADP. Use of internet proxies is permitted in 20 states, up from 14 in 1998. States that do allow such voting are by far the leading states for registration. In 3rd quarter of 1999, over 1,500 publicly-traded companies webcaste their quarterly conference calls, according toStreetFusion. Investor Relations also profiles Yve Newbold who recently worked on raising voting levels in the UK. Her next project is chairing the Ethical Trading Initiative, to prod retail companies into applying proper labor standards in overseas factories.

Jason Zweig, mutual fund expert at Money Magazine, indicates that closed-end funds used to be a great corner of the market where you could find terrific stock pickers. “But I’m sad to say they have become a cesspool of lousy corporate governance, where the fund managers not only charge exorbitant fees but reject every single attempt at shareholder democracy.” He advises that he would not buy a closed-end fund without reading about “the latest attempts by shareholders to express their legitimate rights, and what the fund managers did to stomp on them.” (MoneyLive, 1/10/2000)

Sheryl Pressler, CalPERS investment manager, to step down on Feb. 28. A national search for her replacement has begun. Pressler is moving to Atlanta-based Lend Lease Real Estate Investments Inc. She earned just over $300,000 in fiscal year 1999 at CalPERS. William Crist, president of the CalPERS board, said “there’s no way, politically, we could have matched the (Lend Lease) pay.” (Sacramento Bee, 1/15/2000) Pressler dramatically raised the fund’s return, largely by increasing the proportion of investments in stocks.

BusinessWeek names General Electric as having best board, unseating Campbell Soup. For the third time in four years, Business Week surveyed Wall Street’s biggest investors and most prominent governance experts for their views of the best and worst boards in America. Boards of Campbell, IBM, Home Depot, Intel, Compaq, and Cisco Systems are near the top. Walt Disney Co. was named the worst in America. CEO Michael D. Eisner is coming under increasing fire for Disney’s recent lackluster performance. Institutional shareholders want Eisner to put more independent directors on a board that, despite improvement, remains packed with Eisner chums. Since May, 1998, Disney has lost nearly 18% of its market value, more than $15 billion. (BusinessWeek, 1/24/2000)

In an accompanying article entitled “Now, a Gadfly Can Bite 24 Hours a Day,” BusinessWeek calls eRaider “the most ambitious effort to use the Web as a tool to champion change.”  [eRaider, which will be starting up shortly, will operate as a mutual fund which tries to influence the companies they buy. However, eRaider will be the first fund that actively organizes on the Internet for this purpose.] BusinessWeek ended the article with the sentence,  “It’s enough to make a CEO sentimental about the good old days when gadflies were little more than an annual annoyance.”

For old fashion boards, that may be.  However, boards that have been through something of a corporate governance revolution meet more frequently, savor their independence, and recognize that well informed owners can add value. Gone are the days when the voices of  owners are an annual annoyance; chat rooms run 24 hours a day.

Gladflies have helped bring about important changes in corporate governance over the years.  It was largely the Gilberts who persuaded the SEC to enact the rules governing shareholder proposals in 1942. Before them, companies weren’t required to put proposals to a shareholder vote or to let shareholders speak at annual meetings.  Gadflies made the  system of activist shareholders possible.

However, provocative criticism from individuals only goes so far.  By bringing individual investors together with an institutional investor committed to activism, eRaider forges a new constructive model orchestrating change by influencing the direction of underperforming portfolio companies.

Back to the topCalPERS is debating if it should use its influence to impact labor and human rights practices in emerging markets. Staff has been asked to make a recommendation in April. The board appears to be split between those who want to impose screens and those who seek “constructive engagement.” Treasurer Phil Angelides would like to screen out countries with excessive risk factors and look at democratization efforts, shareholder, human and workers rights. Chuck Valdes, who heads the investment committe, wants the fund to be “proactive” and believes divestment would be a “violation of fiduciary duty.” (Pensions&Investments, 1/10/2000)

I doubt divestment, in the face of excessive risk, would be a violation of fiduciary duty but in order for “constructive engagement” to work, there must be a viable movement for human/labor rights. I’d like to hear from readers regarding this issue and what action you think CalPERS should take. Please write [email protected].

Ralph D. Ward, publisher of the Boardroom INSIDER online newsletter says the $142-billion buyout by America Online of Time-Warner announced is more than a triumph of New Media Over Old Media — it heralds “the triumph of the New Boardroom over the Old Boardroom.” “The AOL board of directors shows the strengths of the newer, high-tech model board with, with smaller membership (10 versus 13 at Time Warner), and a focused core of current leaders in the tech and venture industries,” including Nextel Chair Daniel Akerson, former Netscape CEO James Barksdale, and Frank Caulfield of Kleiner, Perkins Caulfield.

The Time-Warner board “is as blue-chip as the company itself, but older (average age 62), and less focused on up-to-the-minute media experience” with such directors as Beverly Sills, former Senator John Danforth, and retired Bank of New York Chair J. Carter Bacot. “Though the Time-Warner board has enormous talent, even a member like Ted Turner couldn’t turn them into a lean, nimble growth machine.”

Ward also predicts that it will be interesting to see how the final AOLTimeWarner board membership will shake out. “With names like those above, plus Colin Powell, Gerald Greenwald and [Fannie Mae Chair] Franklin Raines, how do you separate the sheep from the goats?”

Internet company board’s average 7 directors, much smaller than S&P 500 companies, which average 12 directors. While boards at most U.S. companies meet 8 times per year, Internet companies’ boards meet an average of 10 times per year. 53% of dot-com directors surveyed are considered independent, compared to 67.6% for the boards of S&P 500 companies. Only one in four of Internet companies surveyed has a nominating committee, compared with 90% at S&P 500 companies. Learn more about the findings of this recent IRRCstudy by attending their governance2000.com conference, to be held in New York City on Jan. 20-21.

Corporate Directors Forum, based in San Diego announced the six winners of its prestigious “Director of the Year,” award, which recognizes the leaders in the business community that represent superior corporate governance.

Those receiving awards include: Peter P. Savage, former president, CEO and chairman of the board of Applied Digital Access as Director of the Year for Corporate Citizenship; Gene Ray, chairman of the board of The Titan Corporation as Director of the Year for Companies in Transition; Irwin Jacobs, chairman and CEO of QUALCOMM, Inc., as Director of the Year for Enhancement of Economic Value; David R. Flowers, former chairman and CEO of Pulse Engineering, Inc., as Director of the Year for Corporate Governance; John C. Raymond, chairman and CEO of the Greystone Group, L.P, as Director of the Year for Not-for-Profit Organizations; and Jack Goodall, chairman of the board of Jack in the Box Inc., who will receive the Lifetime Achievement in Corporate Governance Award.

The winners will be recognized during the Corporate Directors Forum Annual Director of the Year Awards dinner on February 23, 2000 at the Hyatt Regency LaJolla. Thickets are still available by contacting Larry Stambaugh, Chairman of the Board of Corporate Directors Forum, 858-455-7930.

English version of “Corporate Governance Principles: A Japanese View” has been added to the ECGN codes page.

Back to the topShareholder activist John Chevedden raised an important issue in a recent letter to the SEC’s Jonathan G. Katz. Rule 14a-8(j)(1) requires that companies “simultaneously” provide proponents and the SEC with a copy of their no action requests. “Companies are evading the spirit of this rule by sending the Commission’s copy by courier or overnight delivery. Meanwhile, the proponent’s copy arrives by ordinary mail – 5 days later. Companies can further exacerbate this by using certified mail for more delay.” Chevedden notes further that while the company often has 40 days to respond to a short 500-word resolution, the proponent must often prepare a rebuttal of a 20 page company document – “with 5 days lost in transit.” Clearly, Chevedden is right. The SEC should clarify that Rule 14a-8(j)(1) requires companies to make a diligent effort to ensure letters delivered to the proponent and the SEC arrive on the same day. I urge readers to join Mr. Chevedden’s effort to seek clarity on this issue.

SEC released proposed rules on Fair Disclosure (File No. S7-31-99) moving to take advantage of the communication revolution. The rule would help to level the playing field when an issuer chooses to disclose material nonpublic information. A new item 10 would be added to Form 8-K but the rule would alternatively allow disclosure through qualified press releases or any other method reasonably designed to provide broad public access.

Although the rule does not consider an internet posting on the issuer’s site to be sufficient for public disclosure, I expect this will be one of the most popular mechanisms when used in conjunction with press releases and publicly accessible conference calls, especially with regard to playback. The internet is now the leading source for retail investment information. 75% of individual investors use corporate sites as important research tools and 90% choose companies without the help of an advisor.

As mentioned last month, Individual Investor Group Inc.(INDI) broke new ground by discussing corporate earnings on the company’s message board. The FD rule should facilitate such innovation. By removing some of the speculative advantage which a few investors enjoyed, the Fair Disclosure rule and other recent developments may convince stockholders to act as owners, taking a more active role in corporate governance rather than doing the Wall Street walk.

SEC also released final audit committee disclosure rules. Independent auditors must now review the companies’ financial information prior to the companies filing their Quarterly Reports on Form 10-Q or Form 10-QSB with the Commission. Company proxy statements must include additional disclosures and reports about and from their audit committees. The rules are designed to improve disclosure related to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements of public companies.

Boardroom INSIDER’s Ralph Ward reviews the new regs, noting that “Audit committees now have to put it on the line with a proxy report that they’ve reviewed financial issues with management, and that they stand behind the numbers. The committee also has to have a written charter, independent members with specific financial savvy, and be in charge of hiring and fire the outside audit firm.”

Ward notes that “most people are probably surprised to learn that these standards aren’t already required. If it raises a stir to say audit directors must be financially literate, independent, and responsible, what does that say about our current boardroom standards?” How should corporate boards cope with the new audit crackdown? Ward’s publication gives several tips

Wharton professors John E. Core and David F. Larcker studied 195 firms that adopted target ownership plans involving senior-level managers between the years 1992 and 1996. While target ownership plans aren’t a magic bullet, when CEOs with below-average stock ownership in their companies increase their holdings, company performance definitely improves. (CEOs and Their Companies Profit from Executive Stock Ownership, [email protected] Newsletter)

NASD restructuring to streamline corporate governance. (seeNASDAQ/AMEX Newsroom)

Class action law suit alleges CalSTRS held retirement workshops and distributed information to members early in 1998 but never mentioned pending legislation which would boost their monthly retirement checks by $240 a month if they retired after 1/1/99. The suit alleges that employers contemplating changes in their pension program have a legal obligation to inform employees if that information might affect employees’ retirement decisions. (2 retired teachers sue pension fund, Sacramento Bee, 1/5/00.

Magellan trustees recommending shareholders approve allowing up to 25% of assets to be invested in a single company and to allow the fund to make investments that represent more than 10% ownership in a single company. This will allow Magellan to stop bumping up against its current 5% limit when investing in large companies and will facilitate investment in small firms. Although not mentioned in a recentWSJ article (“Fidelity Seeks More Freedom for Magellan,” C28, 1/1/00), it could also facilitate a move toward greater involvement in corporate governance activities.

Mark N. Clemente and David S. Greenspan have released their 1999 list of M&A “bloopers.” “This year, we are particularly amazed by the number of transactions that…are revealing serious accounting and financial irregularities.” Those making the list include America Online-Netscape, @Home-Excite, Disney-Infoseek, BNP-Bank Paribas, Tyco International Ltd-Binge/Purge, Deutsche Telekom, American Home Products-Warner Lambert, Aetna U.S. Healthcare, AutoNation, and Bank One. The Corporate Library LLC News Briefs, 12/15-28/1999.

CalPERS launches all-out campaign to rid Tyson Foods of dual-class structure. IRRC reports they have engaged Garland Associates (212) 866-0095 to assist in soliciting shareholder votes. (Corporate Governance Highlights, 12/30/99).

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Archives: December 1999

Stock options granted in 1998 in public companies to nonexecs was $1,737, up from $1,269 in 1997, according to a survey by Sanford Berstein. Inc. magazine (10/99) says 39% of the Inc. 500 give stock options to all full-time employees, up from 26% last year. Data compiled by New York University economist Edward Wolff shows that top 10% of population held 73% of country’s net worth in 1997, up from 68% in 1983. Congressional Budget Office data shows top 1% has as many after tax dollars to spend as the bottom 100 million. Top 20% is gaining ground, while all other quintiles are dropping their share over last two years. Rutgers researcher May Kroumova found that where 401(k) plans are invested in employer stock, participants have 20-30% higher assets/employee. (Employee Ownership Report, 1-2/2000) Issue also contains feature articles on IPOs, negotiating an ESOP loan, case studies, surveys, etc. Sign up for their free bulletin for news about upcoming events.

AFL-CIO released their Investment Product Review which came out of its Capital Stewardship program, an effort to ensure workers have a voice in the institutions that manage their retirement funds. The products reviewed offer a broad range of collateral benefits, from job creation, promotion of workers rights to community economic development, both here and abroad. For a copy, call the Office of Investment at 202-637-3900.

Nell Minow may have left full time work at LENS but her move to The Corporate Library promises to continue to endear her to the corporate governance community; her 1st project is to publicly disclose the CEO contracts of the S&P 500. (ISS Friday Report, 12/17/99)

Patrick McGurn reports that more than 30 firms in 1999 ceded board seats to dissident nominees to end insurgent investors’ threats to incumbent directors. He spotlights recent action at GRC International and Cone Mills as well as the co-opting tactics of Dun & Bradstreet which is spinning off Moody’s Investors Service in an attempt to head off Harris Investments LP. (ISS Friday Report, 12/17/99)

Directors & Boards has revamped its web site and seeks to become the most powerful and sought-after tool for counsel in referencing the role, duties, structure and composition of corporate boards by incorporating an online archive of 23 years of articles. See James Kristie’s Board Trends 1970s to the 1990s: “The More Things Change…”

Institutional investor holdings have jumped from $770 billion in 1980 to $15.4 trillion at the end of 1998 with pension funds controlling 48%. The share held by open-end mutual funds has gone from 6% to 21% according to the Conference Board.

Ontario Teachers Pension Plan Board included a talk entitled “A Random Walk through Corporate Governance” which outlined many of the fund’s proxy voting decisions for 1998.Corporate Governance Review (a publication of Fairvest) reports that OTTPB opposed 76% of resolutions involving stock options in 1999 and 41 of 42 resolutions to adopt shareholder rights plans. (10-11/99

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Century’s top stories included Michael Milken changing the rules of corporate governance in the early 1980s, backing greenmail artists and corporate builders alike with his junk bonds. (Boston Globe 12/28/99)

SEC rulemaking on Role of Independent Directors of Investment Companies (Comments due January 28, 2000) October 15, 1999 [Release 34-42007; File No. S7-23-99; IC-24082] encourages further independence of directors but fails to require disclosure of investments in specific funds within a fund complex.

California Treasurer Phil Angelides slapped a moratorium on state investments in tobacco securities, saying “the extraordinary and unprecedented barrage of litigation” surrounding tobacco companies made them imprudent investments.” Angelides said he would use his position as chair of the Corporate Governance Subcommittee of the California State Teachers Retirement System (CalSTRS) to ask that fund’s board to consider a similar moratorium, as well as divestiture.

Individual Investor Group Inc. (INDI) broke new ground by discussing corporate earnings on the company’s message board. After third quarter results were announced, (see Press Release, Nov 4), they invited INDI stakeholders (including investors) to ask management questions. Questions and answers were then posted on the site. Hats off to an innovative approach. (reported in Investor Relations Business, 12/13/99)

Corporate Governance International’s 2/99 issue carries a detailed critique of UK corporate governance measures byJohnathan Charkham; excellent reading, especially for anyone involved in putting together a corporate governance code at corporate, national or transnational levels. The issue also includes a survey of recent developments in Germany and an empirical study of the perception of Korean executives toward corporate governance issues.

Focused funds were the subject of a recent article in WSJ(12/20/99, C25). It seems the average diversified mutual fund with 132 holdings does no better than funds holding 35 or less. The article goes on to mention several focused funds, such as Janus Twenty (up 78% in 12 months) and Turner Top 20 (up 95% since inception) which have done well. These funds have greater potential not only because managers know their companies better, as WSJ writer Mara Der Hovanesian, points out. They also have greater incentives to be active shareholders and add value.

Corporate governance reforms have been pushed by giant pension funds like CalPERS and TIAA-CREF, as well as limited partnerships like LENS, Relational Investors and Lawndale Capital. Recently, mutual funds have begun to realize there is money to be made in good corporate governance. Witness Heartland Advisors recent pressure on Commercial Federal, Gehl and ICN Pharmaceuticals, Oakmark’s action at Dun & Bradstreet and T. Rowe Price’s pressure on Cort Business Services.

SEC Commissioner, Paul Carey’s address this month to the Investment Company Institute Procedures Conference (see bleow) emphasized that mutual fund advisers have a fiduciary duty to vote portfolio securities “in the best interest of the fund,” a duty which many are not fulfilling because they are spread too thin to know the issues and because of potential conflicts of interest. Prudent monitoring requires focus. When more funds take up this banner we will all be better off.

CalPERS grew by $20.5 billion last year. At the end of September 1999, CalPERS had earned an 18.2% return on its investments. The Fund’s investments in U.S. stocks, which account for more than $72 billion of the System’s portfolio, returned more than 27%. CalPERS’ $31 billion invested in the international markets gained 31%.

Ernst & Young, the former auditor of CUC International, Inc., agreed to a $335 million settlement in the securities class action lawsuit on behalf of shareholders of Cendant Corporation (NYSE: CD). The $335 million settlement is the largest amount ever paid by an accounting firm in a securities class action case. Hopefully, the action will act as a stimulus for accounting firms to take their watchdog roles seriously. PR Newswire,12/17/1999

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SEC Commissioner Paul Carey delivered an important address to the Investment Company Institute Procedures Conferenceon 12/9/99. Although his remarks may not reflect the SEC’s official opinion, it is heartening to hear Mr. Carey affirm that mutual fund advisers, as fiduciaries, “must act in the best interest of their beneficiaries. Thus, when voting portfolio securities, a fund adviser must act in the best interest of the fund, and not in its own interest.”

The Department of Labor (DOL) affirmed this opinion with regard to pension funds in 1988. Since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets (see “Avon” letter). As indicated on the “home” page of this publication, we have long advocated that the same standards of trust law should also hold for mutual funds and other institutional investors.

Mr. Carey goes on to recommend that mutual fund board members “can and should play a role in the voting process,” ensuring “the funds’ voting power is being exercised to benefit fund shareholders” by

  • Finding out if their advisers are voting and what methodology they are using.
  • Providing guidance on the need for cost benefit analysis in determining how to vote, and setting policies with regard to strategy and when voting is to be used to influence company policy to maximize shareholder value.

Carey believes board should consider how their votes should be exercised in conflict of interest situations and advises they may want to disclose voting policies to fund shareholders, pointing to the efforts of CalPERS, Domini Social Equity Fund, and TIAA-CREF. In closing, he notes “the Division of Investment Management is exploring possible recommendations concerning investment advisers’ obligations to disclose how they vote proxies.” In our opinion, such measures could go a long way toward ensuring accountability to shareholders.

Chainsaw, just in time for Christmas. Read John Byrne’s thrilling nonfiction version of Mean Business and think of Scrooge without the ghosts. There’s no salvation for Al Dunlap here but shareholders might find redemption. Though hundreds of interviews, Byrne has done an excellent job of documenting what really happened and how intelligent investors and directors got snookered.

Another great gift is The Millionaire Next Door: Special Edition by Thomas J. Stanley and William D. Danko.

Strategic Corporate Research has been added to our list of Stakeholders. Please pay them a visit and get to know their services.

CalPERS accidentally released a list of 15 companies being considered as possible targets. Among them is First Union. CalPERS has introduced a shareholder resolution to divide roles of CEO and chairman. First Union’s shares have tumbled 40.8 percent so far this year. The “accidental release” brings to mind that each year the System’s release is premature because each year CalPERS fails to up their holdings prior to naming targeted firms. Would Michael Price or Robert Monks announce they have targeted certain firms for changes without first increasing their investment? Of course not.

CalPERS claims they have gained $150 million per year through targeting activities. The System should take better advantage of its own activism by increasing its investment in a few of these firms before releasing the list and pursuing needed corporate governance changes. See CalPERS jumps the gun on targeting 15 firms, Sacramento Bee, 12/15/99 and CalPERS List Reveals Tentative Target Firms, LA Times, 12/15/99. More links and commentary on Yahoo!

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Telecom Italia had to scrap plans to split off its wireless unit because of protests from minority shareholders. Telecom Italia apparently had the majority to vote in favor, but backed off because of the debate in the media. See Hark! The Shareholders Are Restless in Europe in 12/12/99 New York Times for a roundup of recent actions in Europe.

SEC’s comment period on “pay to play” has ended with 55 letters received. As proposed, the new rule would prohibit investment advisers from managing money for government clients for two years if the adviser, partner, officer or solicitor contributes to certain elected officials or candidates. The proposal also would require registered advisers with government clients to keep records of political contributions made by the firm or its officials. (dowjones.com, 12/7/99)

Corporate Governance NETwork registration can now be paid using a credit card. After 5 years on the net, we’ve finally decided to join take the e-commerce plunge.

Bart Naylor’s open ballot shareholder’s resolution to allow 3% holders to nominate candidates for the board of directors is now available. Naylor is attempting to address the major problem facing shareholders; how to make the board accountable. If shareholders have no say in the nominating process and have no alternative candidates, why should directors listen to them?

Largest shareholder settlement in history at Cedant, $2.83 billion, arising from fake reporting of $500 million in 1998. The lawsuits, filed in the U.S. District Courts of New Jersey, Connecticut and Pennsylvania, alleged that Cendant issued false and misleading financial statements to the investing public about the company’s income and earnings. The lawsuits further alleged that certain former officers and directors of the company sold or filed intentions to sell over 4 million shares of Cendant common stock preceding the announcement. Cendant Corp. will make major changes in corporate governance:

  • limiting all board of directors’ terms of tenure to just one year,
  • bar on repricing stock options without shareholder vote,
  • majority of board to be independent,
  • audit, compensation and nominating committees to be entirely independent directors.

According to New York State Comptroller H. Carl McCall, the settlement should also allow shareholders at the nation’s 3 largest public pension funds to recover from 40-60% of the $89 million they lost when Cendant’s shares dropped by over 50% after the accounting fraud was made public last year. “This is a landmark victory for CalPERS and all Cendant shareowners,” said Charles P. Valdes, Chairman of CalPERS Investment Committee. “This settlement demonstrates the important role that pension funds play as lead plaintiffs in securities actions. Not only have we recovered a substantial portion of the losses incurred by all class members, but the company is emerging stronger and worthy of greater confidence by the financial markets.” (WSJ, A4, 12/8/99)

New York Post reports that “after years of excesses marked by manic mergers and astronomically high compensation that regularly landed him on the list of highest-paid CEOs, (Henry) Silverman will effectively be operating with his hands tied behind his back.” Silverman collected $199.3 million in total compensation last year, even as the company restated 1997 earnings from a profit of $115 million to a $216 million loss.

In a related story, the SEC is to boost its attack on accounting fraud with more criminal prosecutors. The SEC is irritated by the cavalier attitude of some executives toward bookkeeping and weak-kneed auditors. (WSJ, A6, 12/8/99)

IRRC will host governance2000.com, a conference which will explore how high tech and dot-com businesses will influence, and be shaped by, the corporate governance movement.  President of AmTech Dr. Gilbert Amelio, NASDAQ chief operating officer J. Patrick Campbell, Razorfish Inc. President & CEO Jeffrey Dachis and Portal Software Inc. CEO and founder John Little will headline the conference. For more information on the issues, see Dot.Com Boards are Flouting the RulesBusiness Week, 12/20/99, p. 130-134.

UK’s Trade Union Congress notes that UK has widest gap between pay of top execs and workforces. See top directors’ pay packets fatter than ever. TUC calls for dramatic changes such as trade union represention on remuneration committees while performance criteria should be long-term and should include non-financial performance indicators. TUC also calls for additional disclosures such as positions on other boards held by members of the remuneration committee and share options should be charged against profit.

Ralph Ward’s Boardroom Report warns boards to focus less on Y2K and more on corporate governance. Board recruitment is moving from CEOs to auditors and e-commerce experts. Ward provides tips on the boardroom talent pinch, family succession planning, an emeritus program for retirement-age directors, and how to cope as an inside director.

PlanSponsorExchange.com has increased their news coverage through an agreement with NewsEdge Corporation. “Institutional Investors Grow Bolder about Demanding Change,” for example highlights changes in the Carolinas reported by the Charlotte Observer and discusses the strategies of activist funds such as CalPERS and LENS, as well as many institutional investors in the Carolinas. State Treasurer Harlan Boyles investment style is quoted as, “Our philosophy toward risk is analogous to the way Woody Hayes coached football: three yards and a cloud of dust.”

Claude Smadja, managing director of World Economic Forum, calls for an international code of corporate governance to ensure global accounting standards and protect the interests of the shareholders. (The Hindu, 12/8/99)

Seattle reports streaming in from everywhere. A coalition of teamsters, consumers, sea turtle protection activists, religious people, women’s groups, environmentalists, students and others certainly had an impact. Will a coalition build? See Robert Weissman’s A Whiff of Democracy in Seattle.

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Hong Kong Society of Accountants (HKSA) has urged listed companies to improve the transparency and accountability of directors’ pay. The society called for the establishment of remuneration committees composed of independent directors to act as a check and balance on corporate policy. (South China Morning Post, 12/3/99)

Arthur Andersen introduces web-based SEC financial reporting courses. An introductory discount of 20% is being offered until December 31, 1999. UK Has Largest Pay Gap Between Directors and Workers in all Europe. Japanese Government to Rescind Law Banning Educators from Serving on Corporate Boards. More on these an other stories at The Corporate Library.

Internet leading source for retail investment information. 3/4 now use corporate websites as important research tools and 90% choose companies without the help of an advisor. Among features wanted on corporate sites: timely news releases (96%), income/balance sheets (93%), ownership profile (92%), e-mail connection to IR department (92%) and many want the option to get data automatically e-mailed to them or at least an indication that information has been updated. (Investor Relations Business, 11/29/99)

An article in the New Zealand Herald (11/27) opines that “absence of a strong shareholder activism group – together with a weak and ineffective Securities Commission and stock exchange – have been contributing factors to the poor performance of companies and the sharemarket.” Australia has the Australian Shareholders Association (ASA) with 450,000 subscribers at $A60 a member (with some additional income, $A186,000 a year). A similar organization in New Zealand would be lucky to raise much more than $A30,000 a year…not enough to effectively monitor non-performing companies. Several examples of problem firms are addressed and the article concludes with a statement that “the free market model is less effective in a small economy.” NEW ZEALAND HERALD: INVESTORS CRY FOR GUIDANCE (http://www.globalarchive.ft.com, 12/2) I know when you’ve got a hammer in your hand, everything looks like a nail but this is another perfect example of the need for shareholders to cooperatively hire a proxy monitoring firm.

Mauro F. Guillen, of Wharton, reports a trend toward distinctiveness rather than convergence in a recent paper, “Corporate Governance and Globalization: Arguments and Evidence Against Convergence.” Factors working against convergence include complex webs of banking, labor, tax, and competition laws and political dynamics unique to each country. Along with adoption of best practices comes adaptation to the unique culture. “Countries develop corporate governance models that fit their legal traditions, social institutions, and development path.” (see Leveraging Differences in an Increasingly Borderless World) Courtesy ofEDGEvantage, a monthly electronic briefing on developments in corporate strategy, governance and responsibility, available free to registered members.

Irish Stock Exchange to introduce a new listing rule forcing publicly quoted companies to reveal individual directors’ remuneration in their annual reports for 2000. The Irish Times, 11/27

Our Bulletin Board seeks your assistance. Maybe you can answer some of the many questions that arrive…or post a few of your own.

Holidays bring our greatest revenue stream (generally a trickle). Remember, you can support the site by giving books and other items purchased through our affiliates during the holiday season. See our shameless promotions area.

I can’t think of a better present for these times than Kevin Keasey, Steve Thompson and Mike Wright’s four volumeCorporate Governance. This set, published in 1999, by Edward Elgar is a ready reference to classic writings in the field and is sure to be accessed frequently by owners, like this editor, who wake up in the middle of the night with corporate governance concerns. The authors place the movement in context, address accountability and performance, consider the efficacy of various stakeholders and institutional structures and integrate writings from numerous disciplines. It sure beats running to the library when someone calls and mentions that seminal work from an Academy of Management Journal in 1991. I can’t say that I’ve read the set thoroughly but I have ambitions. Alhough I would have liked to have seen additional chapters by M. Blair, Monks, Minow, Tricker and others, the authors have done a great job and still have plenty of new material for the next edition.

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Archives: November 1999

Hermes announced a halt to its planned merger with Lens but also indicated it has addedCalPERSOMERS, and SPP from Sweden as investors in its shareholder activism funds which now total $560 million. “HLAM is growing so quickly that we have decided the London based management team must focus on opportunities in [the] UK, and thereafter extend to Europe as a whole,” said Alastair Ross Goobey, chief executive of Hermes. The Corporate Library News Briefs, 11/29.

Detroit News Corporate Report Card evaluated 111 publicly-traded firms with headquarters in Michigan.

   Top Performers
Ford Motor Co.
Herman Miller Inc.
La-Z-Boy Inc.
Old Kent Financial Corp.
SPX Corp.

Poorest Performers
Aastrom Biosciences Inc.
Code-Alarm Inc.
Mechanical Dynamics Inc.
Secom General Corp.
Somanetics Corp.

Charles O. Holliday, chairman and CEO of DuPont, was elected chairman of the World Business Council for Sustainable Development (WBCSD). Key focus areas for the future will include climate and energy, making markets work for sustainability, embedding social responsibility in corporate governance, and the importance of innovation and technology in moving toward sustainable development. The WBCSD is a coalition of 120 companies, from 30 countries and more than 20 major industrial sectors, committed to sustainable development. PRNewswire, 11/29/99

Dr. Y. V. Reddy calls for reform of Indian government owned enterprises. See The Hindu, 11/29/99.

Innovators. Laborers International Union of North America(LIUNA) resolution asks Flour, PPG Industries and Texaco to provide for an increase in the voting rights of shareholders who hold stock for an extended period of time. Similar proposals have been submitted by International Brotherhood of Electrical Workers‘ (IBEW) to MGIC Investment and by United Brotherhood of Carpenters’ (UBC’s) to Mead. Another innovative proposal from these unions seeks access to the nominating process for shareholders through the proxy statement. Bart Naylor, formerly with the Teamsters, is submitting proposals to include shareholder nominees on the proxy card (access to be open to groups holding 3% of shares). Responsible Wealth plans to ask Disney to establish and ESOP and to fund it with stock contributions at least equal to stock given to corporate officers. IRRC Corporate Governance Highlights, 11/19

The company-pay proposal for shareowner proxy voting advice has now been submitted to Equus II (EQS) for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the news releases, text of other proposals, reasons for selecting these companies, and answers to other frequently asked questions.

Shareholder activist, John Chevedden continues his campaigns at Northrop & Airborne. After receiving substantial majorities last year, and being ignored by the companies, he’s back. Will Northrop submit its poison pill to a vote by shareholders? 64% voted in favor last year. Will Airborne hold annual election of all directors? Last year 70% voted in favor.

Korn/Ferry reports that more retired execs are sitting on boards. Current CEOs have now dropped to 3rd place, behind retirees and major shareholders. Average compensation at the Fortune 1000 is also up, rising from $40,651 to $41,949, not including stock grants.

Italy’s Milan stock exchange is expected to introduce a rule next month to encourage quoted companies to adopt its new voluntary corporate governance code. “If they do not use it, companies will have to explain why and outline their own model of governance,” said Stefano Preda, chairman of the stock exchange. The voluntary code of conduct was introduced last month as a means to protect minority shareholders and create value. Financial Times, 11/10/99

AFL-CIO’s Office of Investment has contacted investment managers for collectively-bargained benefit funds asking them to oppose Vodafone Airtouch Plc’s hostile bid for Mannesmann. Contact: AFL-CIO Bill Patterson, 202/637-5372. For additional information see WSJ, 11/29, pp. A4, A23,& 28.

Investor relations sites visited frequently by buy and sell side analysts, according to Investor Relations Business (11/15/99) However, they commonly complain that information is not updated. Article advises IROs to use internet tracking information to develop a list of possible institutional investors.

Steven Kaplan of the University of Chicago and Bernadette Minton of Ohio State University find that if a Japanese company’s stock returns declined by 50% in a given year, the firm was almost twice as likely as normal to bring a new outside director onto the board and the chief executive was significantly more likely to be forced out or fail to become chairman (normally some 70 percent of retiring CEOs move up to the chairmanship). Wharton Leadership Digest, 10/99

November issue of Governance contained several excellent articles on large trends and developments in the field of corporate governance. First was an announcement about theGlobal Corporate Governance Forum. Governance reports their first practical project is to work with the Confederation of Indian Industry to bring 50 Indian companies into compliance with NY Stock Exchange standards for disclosure and accountability.

Final guidance had been issued in the UK on how companies should manage internal controls. Boards are now expected to practice continuous assessment of risk issues. The Institute of Chartered Accountants in England & Wales has already issued guidance. Doloitee & Touche survey of FTSE 250 found less than 25% compliant on ongoing monitoring. Article provides additional numbers.

Stephen Davis argues that remuneration issues in the UK are only “the tip of the governance iceberg.” Davis favors legislation which would mandate annual elections for the board as a whole. In addition, each committee should be required to submit an annual report to investors discussing their membership, director attendance and work product.

Julia Bright interviews Julian Treger of UK Active Value Investors. Treger discusses their recent move to take over Hogg Robinson, their call for a corporate governance report on corporate Britain’s response to the internet and the strategies their firm uses to target under-valued companies.

Governance also contains an opinion piece by Shann Turnbullwho recommends the use of advisory boards of stakeholders with a combination of interest and “intimate business specific knowledge.” Turnbull sees the members elected by stakeholders. He also calls for proportional (cumulative) voting and a “watchdog” senate elected by one vote per investor. “A fundamental flaw in the Anglo practice of a unitary board is that directors have absolute power in managing their own conflicts of self-interest.” “The watchdog board provides external directors with the power and capability to stop problems of insider dealing before they occur.”

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William Crist, chairman of CalPERS, responded to a recent editorial in the Sacramento Bee entitled Low road at PERS: Ethnic remarks are another sign of arrogance. His remarks, “CalPERS’s record since Proposition 162” (11/19) included misleading statements. An “independent panel of attorneys” did not find the election protest to be “without merit.” Instead, the panel found they could not overturn the election because CalPERS rules also require a finding that election results “would have been different.” Allowing Mr. Crist to dramatically change his statement to address gave him an advantage but no one can say with certainty that he would have lost. The standard set by the regulations regarding protests was impossible to meet.

In addition, the protest panel was anything but “independent.” Mr. Crist sits on the Performance and Compensation Committee which recommends how much to pay the General Counsel. The panel that ruled on the protest was hand picked by the same General Counsel who had been accused of conspiring with Mr. Crist to violate the rules.

In 1997 candidates were denied the right to make even minor changes in punctuation to their statements. Yet, 1998 General Counsel allowed Mr. Crist’s changes because “the First Amendment applies to political speech, and that the purpose of the candidate statements is to permit the voters to make an informed choice.”

In a report to the Board, which CalPERS failed to disclose in its current rulemaking, the Legal Office now contends that prohibiting candidates from disclosing their opponent’s record or expressing their opinions on issues of general concern is not a violation First Amendment rights. Clearly, CalPERS regulations are being used to favor incumbents over challengers.

Governance experts weigh in on battle for American Home Products. Richard Koppes questions whether Warner-Lambert “is fulfilling its fiduciary duty to shareholders” because of its use of an options package explicitly designed to kill any chance other suitors, such as Pfizer. Jeffrey Gordon said the option grant is likely to be upheld in court, especially since the attractive accounting method is being phased out by accounting bodies. As long as shareholders can vote up or down, Warner-Lambert’s moves aren’t violating good governance. Others appear to disagree, including Joseph Grundfest and Nell Minow. (see WSJ, p. C1, 11/17/99)

CalPERS investment committee chair, Charles Valdes, publicly apologized for remarks interpreted as disparaging to state Treasurer Phil Angelides and others of Greek descent. The apology came after critical letters from members of the Legislature and Governor Gray Davis. Assemblyman Louis Papan, said he will urge fellow legislators to discuss setting minimum eligibility requirements for board members. (Valdes reportedly filed for bankruptcy in 2/91 and 1/97.)

“If you can’t manage your own finances, what the hell are you doing as the head of the CalPERS investment committee?” Papan was quoted as saying. Board members may pick a new investment committee chair in March. (CalPERS official says he’s sorry: Remarks were called offensive to Greeks, Sacramento Bee, 11/16/99) The board unanimously approved a “resolution of reprimand” which states that Valdes’ remarks “raised an implication of ethnic prejudice that is unacceptable and hurtful to the mission of CalPERS.” The censure results in further public humiliation for Valdes. (CalPERS officially censures Valdes for insensitive remarks, Sacramento Bee, 11/18/99)

Mutual funds are putting more pressure on underperforming companies. Mentioned in this growing trend is pressure from Heartland Advisers on Commercial Federal, Gehl, and ICN Pharmaceuticals, as well as similar moves by Oakmark on Dun & Bradstreet, and T. Rowe Price on Cort Business Services. Commercial Federal, which was also being hit by Mutual Series, Acadia Fund and John Hancock Funds, apparently has accepted two board nominees from Mutual Series. (WSJ, 11/15/99, C1)

Patrick McGurn’s “The Internet and the Rise of Corporate Governance Activism” in the October 1999 edition of ISSue Alert offers good advice. He outlines some of the recent developments, including: CalPERS “push-back” function which will alow visitors to automatically receive e-mails with the content of new material posted to its site (I have advised CalPERS to create a portfolio function which would not only track in individual’s stock but would directly link to proxy positions taken by CalPERS), permanent sites maintained byGreenway Partners LP and LENS, campaign specific sites such as richmondsavingsbank.com, sites by other players such as AFL-CIO’s Paywatch and Responsible Wealth site as well as chat rooms at Yahoo!, Silicon Investor and Motley Fool. McGurn warns that corporations aren’t keeping up.

In the next century, battles for shareholders’ hearts and proxies will be fought in cyberspace. To defend themselves, companies must adopt governance guidelines and make them a central focus of their web strategies. Boards also must review and update these guidelines on a regular basis.

The same issue also offers some excellent advice on how to design shareholder-friendly poison pills of the type recently proposed by Adaptive Broadband.

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Across the Board, the Conference Board’s magazine, carries an informative article arguing against paying directors in stock. The percentage of firms with stock-base compensation has risen from 17% in 1990 to nearly 80% in 1996. The authors note that while base compensation has remained essentially stable, stock and options awards have skyrocketed. Stock dilution, selling the company short through reloads, market timing, and the increased likelihood of accepting an above-market premium are but a few of the problems raised. Another is the appearance of conflict of interest. “Perhaps it would be wise to restrict such programs to stock awards, but not options, and certainly not resets, reloads, and similar transactions. In this way, some independence of th board – or at least the perception of its independence – might be reasonably maintained. (Daily, Certo and Dalton, Pay Directors in Stock? No., issue 11-12/99, pp. 46-50)

A bad example in this area could turn out to be Tyco’s recent decision to pay its board of directors 90% of their current year cash compensation in the form of Tyco shares or options, or a combination of the two. The move may be designed to show confidence in the company’s price but what will happen if the options are repriced? (WSJ, 11/4/99)

the Corporate Governance Advisor (9-10/99, pp. 10-12) carried on article based on empirical research on the same subject by Bhagat, Carey and Elson, entitled “Director Ownership, Corporate Performance, and Management Turnover.” Their study found a significant correlation between the amount of stock owned by individual outside directors and firm performance. “Second, the greater the dollar value of the individual outside director’s equity holdings in the enterprise, the more likely a disciplinary-type CEO turnover in a poorly performing company would exist.”

The same issue notes a court settlement with Occidential Petroleum in February is what led their board to adopt progressive board corporate governance guidelines. “Such court-sanctioned governance changes are becoming commonplace,” noting such court mandated changes at Computer Sciences, Fleming, and KeySpan Energy.

The company-pay proposal for shareowner proxy voting advice has now been submitted to CitigroupGeneral Electric,GillettePfizerWhole Foods Market and Warner-Lambert, for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the full news release, text of proposals, reasons for selecting these companies, and answers to other frequently asked questions. A balanced article byLynn Cowan appeared over the Dow Jones newswire on 11/12/99. Ms. Cowan indicates that corporate governance experts and a proxy advisory firm had mixed reactions to the proposal. Among the issues raised were concern about the level of independence an adviser could maintain if it was being paid by the company it was supposed to evaluate; the cost of such services eating into shareholder returns; and the likelihood that a company would not adopt such a proposal, since proxy questions are suggestions that management can ignore.

My guess is these issues will begin to resolve themselves as people become more familiar with the proposal. Advisors will maintain their independence because they will be selected directly by the shareholders, not the company’s management. The cost of such services “eating into shareholder returns” is minimal because those costs are capped at $5,000 to $10,000, depending on the size of the firm.

John Wilcox, vice chairman of Georgeson Shareholder Communications, indicated that institutional fund managers own stock in thousands of companies and don’t have the time to sort through every proxy question; small investors, on the other hand, generally don’t own as many stocks and don’t have a fiduciary duty to other investors to research their votes. Yet, the fact that individual investors do not have fiduciary duties doesn’t mean they have no need for proxy advice. The proposal would provide them with an alternative to voting with management or doing the Wall Street Walk. To say that institutional fund managers don’t have time to sort through every proxy question simply reinforces the need for the resolution. Since proxy voting can add value, voting rights should be subject to the same fiduciary standards as other plan assets. If institutional investors can’t find the time to meet their fiduciary duty to review proxy issues they’d better vote for this proposal because it will provide the advice they need.

Jamie Heard, chief executive of Proxy Monitor, felt management may not go along with the proposal, given the voting support that generally comes from individuals. However, those which have shown leadership in the area of corporate governance may wish to stay at the front of the pack. I believe we will find several firms who recognize that informed shareholders can add value. The two which I submitted, Whole Foods and Pfizer, are currently seen as progressive. Wouldn’t they want to maintain that reputation?

Let’s hope there will be a few brave firms ready to move the herd. A few years ago not many had adopted corporate governance principles or established corporate governance committees but times are changing. I’m betting that several firms will be willing to raise the bar. For the laggards, there is always the threat of bylaw amendments or other action.

Fund managers from TIAA-CREF, Franklin/Templeton, Fidelity, Vanguard and others request publishers of global-market indexes factor the quality of corporate governance into rankings. WSJ, 11/5, p. C14.

John Smale, who in 1992 helped lead the corporate governance revolution, has announced he will retire from GM’s board in May, before GM’s annual meeting. seePhiladelphia Inquirer, 11/3.

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AFL-CIO President John Sweeney called on pension fund administrators to manage worker assets in ways that help, not hurt, working families and communities. At a convention of the International Foundation of Employee Benefits, Sweeney spoke in favor of “greater diversity in the boardroom and more equality between the executive suite and the shop floor.” Worker-owners at Taft-Hartley benefit plans won 15 shareholder proposals in 1999, more than any other group. “We want our money to create jobs, not destroy them. We want our money making real investments in communities, not sent chasing after the latest fad. We want to see our money supporting good corporate governance, not lining the pockets of overpaid executives, and we want our money supporting partnerships with workers, not encouraging confrontation and destructive downsizing.” (PR Newswire via Northern Light, 11/1/99)

Korn/Ferry’s 26th Annual Board of Directors Study finds 84% of directors receive some of their compensation in stock, up from 62% 4 years ago. 56% report committees overseeing corporate governance and making committee appointments is shifting from the CEO to the board. Over 60% of respondents are deeply involved in the strategy setting process. Minority directors now have a presence in 60% of America’s boardrooms and women are represented at 73% (ed. but the proportion of representation is still dismal). More than 1,000 directors participated in the 1999 Korn/Ferry International Annual Board of Directors Study, including 215 CEOs, 187 inside directors and 614 outside directors. The study also analyzes proxy information from over 900 of the largest U.S. corporations. (Disclosure: Corpgov.net editor owns stock in Korn/Ferry)

Pensions&Investments reports that “a citizens’ group advising the Labor Department is recommending expanding current law to let companies dip into their pension fund surpluses to pay for anticipated retiree health care liabilities.” Michael Fulotta of ASA Inc is quoted as noting, “there has been a consistent decline in pension assets since 1990, which has resulted in the decline of …funding ratios across all industries.” See DOL panel to suggest wider use of surpluses, 11/1/99.

He survived double bankruptcies, conflicts of interest and ischanging the rules to silence challengers, but now CaliforniaAssemblyman Lou Papan is calling on the chairman of the powerful CalPERS Investment Committee to resign. seeStatement on Turkish Past Fuels Feud at Pension Fund,10/25, LA Times and Resignation of CalPERS Official Urged, Sacramento Bee, 10/27. Papan has now been joined by 22 additional members of the Legislature, including the Speakerand the Minority Leader, in his call for the resignation of Mr. Valdes. Their letter to Mr. Valdes includes the following:

Your attempt to dismiss protests that you were violating California’s open meeting laws by implying that these protests were based on ethnic hatred is beyond acceptability. This is unacceptable not because it is offensive to Greek-Americans, but because it is offensive to all Californians.
In today’s society we cannot stand for any level of racial or ethnic intolerance. Your display of racial insensitivity combined with your blatant disregard of the Open Meeting Act leads us, as elected officials, to insist upon your immediate resignation.

The arrogance of the CalPERS Board has even led some to question the independence which was given to it under a constitutional amendment in 1992. The Sacramento Bee (Low road at PERS: Ethnic remarks are another sign of arrogance, 11/2/99) has editorialized

The CalPERS attempt to hire this consultant without proper notice and then respond with ethnic insults are sadly consistent with other actions, including the board’s move last year to tip its election in favor of an incumbent and its adoption of new election rules this year that deny challengers an opportunity to criticize board policy. Such arrogance can’t be smoothed over with apologies. Ever since voters in 1992 freed PERS from any oversight by the people’s elected representatives, it has grown more haughty and insular. Lawmakers need to give voters an opportunity to reverse that mistake.

When CalPERS broke its own election rules to favor an incumbent, it did so to the thwart a challenge from this editor. When the board voted to change election rules to ban debate, again the editor of this publication was named as the cause of that action. However, the answer is not to amend California’s constitution, which grants a degree of autonomy to CalPERS; the answer is to be found in an active and informed membership. The Sacramento Bee has provided the only press coverage of the issues at CalPERS but only a small minority of CalPERS members live in Sacramento. The membership of CalPERS is likely to be aroused only when the Los Angeles Times, San Francisco Chronicle, Wall Street Journal and others begin covering governance issues at this $160 billion fund.

On the other side of the Atlantic the Chairman of CalPERS, Dr. William Crist, is labeled ‘Darth Vader’ and gets a chilly reception in Paris. see International Herald Tribune, 10/18/99.

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Retirees are uniting online to protect their pension funds, highlight key issues impacting retiree pensions and benefits, and to publicize positive steps some employers are taking to protect and enhance retiree pensions and benefits. The site has a special interest in the right of employees to share in their pension surplus. The site is concerned with ensuring that promised financial benefits are maintained once the employee completes his part of the employment contract. The site includes links to several organizations fighting for retiree rights and trying to get some control over their pensions. SeeRetiree News.

Shareholder resolution presented to CREF (College Retirement Equities Fund) for its November 9th annual meeting in New York City to divest the CREF Stock Account/CREF Global Equities Account of Freeport McMoRan Copper and Gold stock. Freeport runs the world’s largest copper mine in Irian Jaya, Indonesia. Major concerns regarding human rights and environmental impacts continue to
plague this project. CREF’s response is that they don’t want to screen funds no matter what a corporation like Freeport is doing in Indonesia. see http://www.tiaa.org/voting/cref/

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Archives: January 1999

January 1999

Mark Latham, author of the “The Corporate Monitoring Firm” in Corporate Governance An International Review (UK, January 1999), and founder of the Corporate Monitoring Project; has developed a newsletter and is working toward shareholder resolutions to be introduced in the year 2000. His articles on this innovative system were published in five countries and four languages last year. Robert Monks has written that Latham’s system proposes a “solution to two core problems – free riding and genuinely independent nomination of directors – that are rarely addressed effectively.” Planning a conference of institutional investors? Inviting Mr. Latham to speak would be a sure way to create a little excitement. To subscribe to the Project’s free newsletter MailTo:[email protected]

The Supreme Court rejected a bid from Hughes Aircraft employees who contributed to the plan to share in the firm’s $1.2-billion pension fund surplus. The employees argued that money diverted to the underfunded pension plan of General Motors was protected because the pension represented an “exclusive benefit” to workers and couldn’t be diverted for other uses. Hughes was joined in their appeal by the Clinton administration and the U.S. Chamber of Commerce. Hughes “never deprived [the retirees] of their accrued benefits,” wrote Justice Clarence Thomas. No surplus funds were available for distribution to the former employees, he said. John Chevedden, a Hughes retiree and shareholder activist (this year at Raytheon), said the decision emphasizes the need workers to have greater control over their pension funds. The ruling “gives companies carte blanche to siphon money from one pension plan to another” he said. “I think it shows a need for a change in the law.” (LATimes, 1/26/99)

Pensions & Investments has unveiled a redesigned web site today with daily news and more than 200,000 pages of databased information for institutional investors. Wow!

Canadian Imperial Bank of Commerce shareholders overwhelmingly approved shareholder activist Yves Michaud’s proposal that directors must hold shares in the bank equal to six times the annual fee they’re paid for their services (approximately $180,000). Michaud reportedly became a shareholder-rights activist after losing part of his retirement savings. In 1996, he won a landmark court ruling that forced a number of banks to put his proposals to a vote at their 1997 annual meetings. (Montreal Gazette, 1/22/99)

United for a Fair Economy, a network of wealthy investors, has filed shareholder resolutions asking eight companies to research, report and, in most cases, reduce pay gaps. The companies are AlliedSignal Aerospace Co., AT&T Corp., BankAmerica Corp., BankBoston Corp., Citigroup Inc., General Electric Co., Huffy Corp. and R.R. Donnelley & Sons Inc.

ATraitor To His Class: Robert A.G. Monks and the Battle to Change Corporate America, a new biography by Hilary Rosenberg, show Monks to be a specimen of a vanishing species: the Yankee Republican gadfly, according to David Warsh of the Boston Globe. Monks took shareholder activism to a new level of behind-the-scenes respectability, says Warsh. (Boston Globe, 1/19/99)

John Bogle, founder of The Vanguard Group, asks why mutual funds haven’t been more involved in corporate governance initiatives. One reason is that most mutual funds are short-term investors but that is changing with the growth of market indexing which he expects will take 15% of the market within the next decade. More central to Bogle’s analysis is that “we would prefer not to advise the companies in our portfolios about governance when our own houses are so fragile.” The fund’s manager typically sets its own fee which is duly rubber stamped by the fund’s “independent directors” who were appointed by the manager.

“Measured over the past 50 years, the average equity mutual fund has carried a volatility risk quite similar to that of the market, but has lagged the market return by about 1.5 percent annually over the long term, and about 2.25 percent over the past 15 years…professional managers, despite their expertise, have failed to outperform the market before the deduction of costs. Their costs doom them to below-market returns.” seeThe Corporate Board, 1-2/99

In the same issue, William Dimma asks “Why Not Director Accreditation?” and Susan Mosoff reviews “Global Stock Ownership Plans.” Mosoff’s article points to ShareNet , an Arthur Andersen product designed to help companies answer questions about operating stock ownership plans in different countries. The site notes that 54% of the world’s largest companies operating in the North America and Europe operate global share plans.

Back to the topAfter years as a corporate governance “bad boy” because of its poison pill polices, Fleming (FLM: NYSE) seems to have turned over a new leaf, announcing proposals to eliminate classification of directors and to require all new stock option plans to be submitted to shareholders for their approval. (Excite News)

Federal Reserve Chairman Alan Greenspan assailed President Clinton’s proposal to invest Social Security funds on Wall Street. “I do not believe that it is politically feasible to insulate such huge funds from government direction,” he told the House Ways and Means Committee. The $133 billion CalPERS experience demonstrates it would not be an easy task. That system finally gained its independence when California voters approved Prop. 162, making raids or interference illegal. However, now there are questions as to the accountability of its Board. For example, the Board continues to insist CalPERS is exempt from the California Administrative Procedure Act, which requires public notice and publication of rules. How can its members hold the CalPERS Board accountable if its rules aren’t easily accessible? Clearly independence must be combined with systems of accountability if either Clinton’s proposal or CalPERS have any hope of measuring up to the high standards Americans have come to expect.

Anthony Neoh, who I had the pleasure to meet last fall at the International Company Secretaries Conference in Hong Kong last November, reports on important developments in China in the January 14th edition of the Far Eastern Economic Review. A new Chinese Securities Law promises to further the transformation of the Chinese economy by requiring regulation of the markets by the China Securities Regulatory Commission which is about to quadruple in size. Public securities must now comply with specified disclosure standards, and be traded in approved exchanges. Company officers and all professionals will have specified duties, such as disclosure, and prohibitions, such as insider trading and market-manipulation.

Neoh points out that the savings rate in China is about 40% of income but the public owns stock valued at just 7% of the country’s GDP. “Clearly, the stockmarkets have immense growth potential? The new Securities Law will not provide a cure for all the markets’ ills, but it will provide a firmer foundation. It compares well with the securities laws of emerging markets.” By this April, CPAs engaged in securities work must be members of independent partnerships with unlimited personal civil liability. “Already, in a Shanghai court, an investor is suing a listed company’s directors and its public accountants for deficient disclosure of company accounts.”

As Mr Neoh points out, “the test for this law, however, lies in its implementation.” Anthony Neoh is a visiting professor of law at Peking University and the former chairman of theSecurities and Futures Commission in Hong Kong.

CalPERS vs. Felzen, 97-1732, went before the Supreme Court to block an Archer-Daniels-Midland $8-million settlement that went entirely for legal fees. (see LA Times, 1/11/99)

Not everyone agrees with the shareholder value mantra…but maybe their arguments aren’t too strong. (see Earth Times News Service)

Annual meetings are getting “shorter, more boring and less well-attended, say those who follow annual meeting trends” but Sarah Teslik says “the annual meeting ought to be the single most important thing for shareholders.” Corporate internet sites, electronic chat rooms, and teleconferences with analysts and the media seem to be displacing much of the role of annual meetings. (read more in the 1/10/99 Philadelphia Inquirer)

Back to the topGovernance: The International Corporate Governance Newsletter has joined our growing list of Stakeholders. From their November issue. European share plans are quickly catching up with North America. Global Share Plan Survey 1998 revealed that 75% of UK companies have set up global executive share plans, compared with 66% in North America. In Continental Europe 80% had employee stock purchase plans covering all national employees compared with 65% in US and 24% in UK. UK firms favored option plans with 82% of firms, vs 56% in the US and 36% Continental Europe. The issue also included a useful matrix comparing the membership, duties and other features of audit, remuneration and nomination committees.

The December issue discusses the new Hermes/LENS alliance and promises an interview with Bob Monks in the next issue. An analysis of board structures and practices in six countries reveals some real differences in the professions of outside directors but typical size hovered around 12. The authors could not find any correlation between board size, structure and profitability. An interview with Sir Adrian Cadbury reveals that in the UK institutional investors own 75% of big companies. Although they’ve increased their voting, 40% compared with 20% in 1990, that still leaves 60% “who just collect their money and do nothing.” Cadbury believes we need to focus on the responsibilities of institutional shareholders for the standards of companies in which they have put their funds. However, a second major issue is the accountability of institutions to their own investors. According to Cadbury, we need to focus on conflicts of interest.

College faculty have launched a nationwide campaign to persuade TIAA-CREF to begin “positive investing” of a small portion of their pension funds. Campaign for a New TIAA-CREF is calling for 5-10% of assets in the Social Choice Account, a socially responsible fund, to be invested in companies that are models of social and environmental responsibility. They cite a recent survey showing that over 80% of TIAA-CREF’s Social Choice Account participants favor “seeking out for investment companies [that] have an outstanding record of good performance on social issues, rather than rely on negative screens.” Only 3% oppose this investment strategy. For a brochure and other campaign materials, contact Social Choice for Social Change: Campaign for a New TIAA-CREF, MC Box 135, Manchester College, 604 E. College Ave., North Manchester, IN 46962, (219)982-5346/5009, or e-mail Neil Wollman at [email protected]or Abigail Fuller at [email protected].

ISS reports that NYSE has extended their deadline for comments on their revised proposal regarding shareholder approval of stock option plans. The new comment period extends to January 25th. Under the proposal, shareholder approval of stock option plans would be mandatory unless at least 50% of employees are eligible and a majority of the shares are issued to employees who are not officers or directors.

Most mergers (58%) fail to create substantial returns for shareholders, according to a recent study by management consultants at A.T. Kearney. The first 100 days are the most critical for success when speed in appointing top management , specific goals and excellent communications are critical. SeeInvestor Business Relations, 1/4/99, p. 9. See also Alexandra Reed Lajoux, The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities, McGraw-Hill, 1997.

Jürgen Schrempp of DaimlerChrysler chats with Forbes in their 1/11 issue on converging corporate governance.

New Jersey removes barriers to internet proxy voting. seeBergen Record, 1/6.

Corporate Governance Review from Fairvest Securities Corporation covered recent Canadian developments in poison pills and lock-up agreements in their October/November issue. Fairvest also reports on its research on 300 TSE companies which finds ownership broadening. In 1983 48% had a 50% or over control owner; that is now down to 23%. Similarly, firms with a 20% or higher shareholder have dropped from 78% to 43% during the same period.

Catherine R. McCall reports on the Kirby Commission findings. The Report expresses concern that boards of public pension funds may not have the skills to deal with complex financial issues. The Standing Senate Committee on Banking, Trade and Commerce recommends that individuals appointed to pension plan boards have the necessary knowledge to enable them to effectively monitor. The Committee found that social investment should be subordinate to long term growth of the fund. Like the Dey Report, the Committee looks to peer pressure rather than a legal requirement to report annually to pension plan members on adherence. In their review of mutual funds, the Committee rejected a suggestion that such funds have a responsibility to exercise their proxy votes. However, they did recommend that the federal government examine the issue of confidential proxy voting with respect to mutual funds. See Corporate Governance Review for Ms. McCall’s analysis of 11 recommendations.

Back to the top with the Corporate Governance NETwork!

Contact: [email protected]

All material on the Corporate Governance site is copyright ©1995-1999 by Corporate Governance and James McRitchieexcept where otherwise indicated. All rights reserved.

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Archives: October 1999

California Treasurer Phil Angelides may lead an effort to pull state investments out of companies negotiating Holocaust-related forced labor and asset seizure claims if they don’t reach a settlement soon. The companies involved include German banks, Daimler Chrysler, Ford and General Motors. (seeTreasurer: Settle Holocaust claims, Sacramento Bee, 10/29)

Mike Cohn, of the Cohn Family Business Group, is the newest member of the Corporate Governance NETwork. The firm advises family-owned businesses on succession planning and related governance issues. Their quarterly newsletter, TRANSITIONS & traditions®, helps stakeholders confront tough technical and emotional family business issues. Continue Reading →

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Review: Fair Shares: The Future of Shareholder Power and Responsibility

Much has been written about the role of directors and boards but far too little on the how shareholders can add value. Carolyn Kay Brancato did so in her excellent book, Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value. However, Brancato was primarily writing from the perspective of managers. Although there was general recognition that shareholders can add value, the thrust of the book was on what managers need to know about shareholders and how to attract shareholders who will support them. Charkham and Simpson take a larger societal viewpoint. At bottom, they are concerned not with what is best for managers but what system will best provide the goods and services that society needs. Continue Reading →

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Archives: September 1999

NYSE to consider stricter listing rules, including a much higher hurdle for adopting stock option plans without shareholder approval.ISS Friday Report (9/24/99) contains analysis by Patrick McGurn of a provision which requires adoption of the standard by NASD for the rules to go into effect. McGurn elaborates on why this may be the “kiss of death.”

Business Ethics (7-8/99) offers “A New Vision of the Corporate Board” by Corporate Governance editor, James McRitchie. Based on the writings of Margaret Blair, the board is not just an agent of shareholders but acts as a mediator among all members of the team with firm-specific investments. Continue Reading →

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Archives: August 1999

Caux Round Table (CRT) to develop a Total Social Impact (TSI) system of benchmarking the social responsibility performance of corporations in terms of trust, the environment, labor standards and other critical issues. CRT to step up efforts to encourage corporations around the world to accept the Principles, train their employees in the Principles and then to act by the Principles. (see Industry leaders discuss social responsibility and good corporate governance by Frank Vogl, Earth Times News Service)

Executives’ incentive-plan stock and options at the end of 1998 represented 13.2% of corporate equity or $1.1 trillion, at the 200 largest U.S. corporations according to Pearl Meyer & Partners. cbs.marketwatch.com Continue Reading →

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Corporate Governance Archives: July 1999

Stephen Davis, of Davis Global Advisors, is assembling a long-range list of global corporate governance-related conferences/workshops/events for the World Bank website and Global Proxy Watch newsletter. Please pass on the date, city, title, sponsor, location, and contact information for any such events you may know about by e-mailing [email protected]. Please cc me at [email protected] so that I can add a select few to our education pages. You can also post a message on the ECGNlist, the information and discussion list of the European Corporate Governance Network.

When is a company ready to form a board? A recent article in the Atlanta Business Chronicle offers advice from Paul Lapides, director of the Corporate Governance Center at Kennesaw State University, Donald R. Duckworth, chairman and CEO of Atlanta-based Horton International Inc., an executive search firm, and others. Continue Reading →

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Archives: June 1999

SEC considers expanding reporting requirements for financial relationships between board members and their chief executives. Revisions are being proposed by the Council of Institutional Investors. Personal, professional, and financial relationships during the previous five-year period would need to be disclosed. Family relationships would include those by blood, marriage, or adoption through first cousins. Financial ties would include purchases, sales, loans, financing, common investments, and charitable contributions. Professional ties would include service on a government body, having the same employer, or rendering professional services. The cause of further disclosure was aided recently when four members of the Cendant audit committee were found to have undisclosed personal and financial ties to the company. (Bergen Record, 6/22 )

Mark Latham has continued to develop the Corporate Monitoring Project which now includes the beginnings of a helpful tool for individual investors, Voting Your Stock: A Guide. Continue Reading →

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Archives: May 1999

Company Secretary: The Official Publication of the Hong Kong Institute of Company Secretaries (May 1999) is largely devoted to the question of offshore incorporation. Should Hong Kong be worried? We might also add, should the U.S. or other jurisdictions be worried? Probably.

Mark Sharp begins his article by noting a 43% increase in the number of companies listed on the Hong Kong Stock Exchange (SEHK) over the past 5 years but the number of companies listed in Hong Kong has practically remained unchanged. Over the past 10-15 years almost half of all locally listed companies were incorporated in Bermuda. For years, it was assumed the political uncertainty of Hong Kong’s political future was the driver but the move offshore continues to accelerate, attracted by reduced cost and less burdensome regulations. Continue Reading →

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CalPERS muzzles critics: Ballot rules protect board, keep others in the dark

CalPERS“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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CalPERS muzzles critics

CalPERS-logo

CalPERS Ballot rules protect board, keep others in the dark

“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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Archives: April 1999

CalPERS approved a $200 million investment in theHermes UK Focus Fund which will acquire large stakes in a small number of undervalued publicly traded companies in the UK, using its influence as a large and active investor to affect financial and operational restructuring to increase value for all shareowners. (see CalPERS press releases)

UK survey shows institutions ignored the Government’s calls to improve their voting record. If anything, there appears to have been a slight decline at small companies. (Governance[email protected], 3-4/99, reported by Sarah Wilson[email protected]) Continue Reading →

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Archives: March 1999

ISS backs TIAA-CREF’s shareholder proposal to strike down Lubrizol Corp.’s (LZ) dead-hand poison pill. (Dow Jones newswires)

Ed Durkin, director of special programs for the United Brotherhood of Carpenters and Joiners of America, says labor might sponsor proposals to link executive pay to worker safety, job creation and the number of employees with health benefits. He also expects labor to vie for board seats. (Labor groups push change at local firms, Cincinnati Business Courier) Durkin has been a long time activist and played acritical role in the fight at ADM. Isn’t it about time the Carpenters got an internet site? Durkin sure helped me when he gave me a copy of IRRC’s excellent 1987 publication, “Conflicts of Interest in the Proxy Voting System.” I’m sure union members would like to learn more about Ed’s activities. Continue Reading →

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Archives: February 1999

Jerry Adams is sure to stir controversy with his recent statement: “I personally do not think that the corporate governance movement and particularly the PERS program has had any positive impact on the retirement benefits of active and retired members of California retirement systems.”

Mr. Adams recently retired from the California Legislative Counsel’s Office and was chief counsel at CalPERS when they took up the corporate governance banner. Adams was the first CalPERS representative to publicly address corporate governance and its relationship to the interests of public retirement systems. In May 1984 he delivered a statement at the annual meeting of the Texaco Corporation in Dallas, Texas. Later, Adams prepared the bylaws for the Council of Institutional Investors. In an interview which appears in the January edition of The Public Retirement Journal, Adams expressed his opinion that:

A decade of record investment returns and low inflation has resulted in dramatically reduced employer contribution rates in most retirement systems, including PERS?but I have not seen or heard of comparable improvements in the retirement benefits of active or retired members of California public retirement systems during that period?I’m particularly dissatisfied with the PERS program. In my opinion, the PERS Board’s micro management of the investment program and its emphasis on corporate governance issues diverted Board, staff, public and even legislative attention, from the basic needs of the PERS membership. (For a copy of the article, call 916-455-7322 or 916-456-5282) Continue Reading →

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Archives: January 1999

Mark Latham, author of the “The Corporate Monitoring Firm” in Corporate Governance An International Review (UK, January 1999), and founder of the Corporate Monitoring Project; has developed a newsletter and is working toward shareholder resolutions to be introduced in the year 2000. His articles on this innovative system were published in five countries and four languages last year. Robert Monks has written that Latham’s system proposes a “solution to two core problems – free riding and genuinely independent nomination of directors – that are rarely addressed effectively.” Planning a conference of institutional investors? Inviting Mr. Latham to speak would be a sure way to create a little excitement. To subscribe to the Project’s free newsletter MailTo:[email protected]

The Supreme Court rejected a bid from Hughes Aircraft employees who contributed to the plan to share in the firm’s $1.2-billion pension fund surplus. The employees argued that money diverted to the underfunded pension plan of General Motors was Continue Reading →

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Archives: December 1998

OECD Corporate Governance Guidelines have been released in draft. They will not give detailed prescriptions for national legislation but rather delineate basic principles to serve as reference points for efforts to evaluate and improve each country’s regulatory framework. The guidelines cover five broad headings:

  • the rights and responsibilities of shareholders;
  • the role of stakeholders in corporate governance;
  • the equitable treatment of shareholders;
  • disclosure and transparency and
  • the duties and responsibilities of boards.

While primarily aimed at governments, the guidelines will also provide guidance for stock exchanges, investors, private corporations and national commissions on corporate governance as they elaborate best practices, listing requirements and codes of Continue Reading →

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Archives: November 1998

Barbara Hackman Franklin reviews 3 proactive processes to help audit committees prevent problems. Identify areas of potential risk with key players, hold regular executive sessions at each meeting with each of the key players separately, and report to the full board each meeting. (see Tone at the Top, 9/98)

NACD’s “Report of the Blue Ribbon Commission on CEO Succession” was released last July and is reviewed by John F. Olson (senior partner at Gibson, Dunn & Crutcher LLP) in the Corporate Governance Advisor (11-12/98). The Commission arrived at 5 Continue Reading →

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