Author Archive | James McRitchie

October 2002

Webster Named

The US Securities and Exchange Commission voted to approve five members of a new national accounting oversight board to be headed by ex-FBI-CIA chief William Webster whose only experience in accounting, as far as we know, was heading the auditing committee of U.S. Technologies, now bankrupt and facing fraud accusations. Shortly before Webster was appointed he told Harvey Pitt but Pitt chose not to tell the other four commissioners prior to their vote.

Webster edged out the much better qualified pension fund chief John Biggs, who would have done much to restore trust. The vote was 3-2. Webster becomes the first chairman of the Public Company Accounting Oversight Board, expected to get up and running early next year.

In addition to Webster, the commission approved former CalPERS attorney Kayla Gillan; accountant and former SEC general counsel Daniel Goelzer; former congressman Willis Gradison; and SEC Enforcement Division Chief Accountant Charles Neimeier. Continue Reading →

Continue Reading ·

September 2002

CorpGov Bites

How the Corporate Landscape Is Changing. outlines the prospects for pages of corporate governance reforms.

Providence Capital to another institutional shareholders meeting. This one will focus on Healthsouth (NYSE: HRC). Items on the agenda include Medicare issues, current leadership and business strategy, the Company’s corporate governance and the host of lawsuits recently filed against and on behalf of the Company. Shareholders can attend in person or via teleconference. Tuesday, October 1, 2002
Time: 4:15 pm (EDT)
Place: Providence Capital, Inc.
730 Fifth Avenue
Suite 1002
New York, New York 10019
RSVP at 212-888-3200

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

Alaska Permanent Fund Corp. Corporate Governance Forum, 10-11:30 a.m., Egan Library in Juneau. Public invited. Details: (907) 465-2047.

According to a recent Harris Interactive poll commissioned by the Calvert Group found that 32% of investors with employer-sponsored retirement plans say that their plan offers an SRI option. 68% of investors with such an option choose it.  74% of respondents whose companies do not offer an SRI option for their retirement plan said they would invest in one if offered.  On the other hand, only 41% were aware that SRI mutual funds exist – and of these, just 25% actually invest in at least one SRI mutual fund.

“No one can legislate, or by rule-adoption, mandate honesty,” Grasso told the Council of Institutional Investors. “What we can do, what we must do … is send a very powerful message. The system isn’t broken.” Forbes reported that pension fund managers didn’t buy it. “Tough talk and rule proposals have not halted the market decline or alleviated the worries of individual investors whose retirement savings are at stake.” (NYSE chairman faces heat from U.S. pension fund managers, 9/24/02)

CorpGov Classes Grow

More universities are recognizing the importance of corporate governance. The Executive Development Center in the Office of Extended Studies at California State University San Marcos offers a course on “Corporate Governance: Building Better Businesses Through Better Boards,” beginning Oct. 15. Panelists will lead students through a three-hour class that meets one night each week for five weeks. The course covers board leadership, strategy, structure, operations, oversight, financial and accounting models and ethical and legal issues.

The University of Technology Sydney, in Australia, has established a Centre for Corporate Governance to address weaknesses within the corporate sector.

Underfunded Pension Funds

Standard & Poors noted that the average funding ratio of corporate defined benefit plans stood at 94% at the beginning of July, compared with a 100% funding level at the end of 2001 – and noted the funding level may have declined another 4-5% since then.  The following companies account for $37.5 billion out of a total funding shortfall of $65.4 billion :

  • General Motors
  • Exxon Mobil
  • UAL
  • Ford
  • Delphi
  • Delta Air Lines
  • United Technologies
  • Northwest Airlines
  • AMR
  • Pfizer

State pension plans report with more of a significant time lag. Wilshire Associates forecasts that underfunded retirement systems will grow from 51% to 75% of systems when 6/30/02 reports are available and analyzed. (S&P: Pension Pressures May Push Public Funds,, 9/24/02)

Support for SEC Petition No. 4-461 and Variations Grows

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

I have reason to believe that leaders from organizations as disparate as the AFL-CIO and the Business Roundtable might support the petition if the threshold were set at something like the 13D level of 5%. I would encourage everyone to suggest their own amendments to our petition. Please do so formally to the SEC, either by commenting on our petition or submitting one of your own so that your views will be heard and considered.

Investors dumped $49 billion in mutual funds during July and another $5.8 billion in August, according to Lipper. Harvey Pitt’s 9/23 Remarks Before the Council of Institutional Investors’ Fall Conference that he has asked staff to consider eliminating the “ordinary business exception” indicates a willingness to consider major changes to restore investor confidence. At the core of making “shareholder suffrage a reality,” as Mr. Pitt termed it, are the rules that govern board elections. CII took a stand years ago against broker voting. I hope they will lead the movement to resurface that issue and I hope they widen their vision to include the central issues of shareholder nominations and access to the company proxy.

CGF Report Carves New Niche

I’ve mentioned it before, but Maureen Nevin Duffy’s new publication, Corporate Governance Fund Report, has quickly become an invaluable service to those of us who are “pushing back” to restore trust in capital markets. Her reporting on Proactive Investors is outstanding.

In “Who’s Hot in September? – Andrew Shapiro,” Duffy reports his most recent innovation is being appointed to “Board Observer” status at Earl Scheib. Another first, as far as we know. Shapiro shares the same trading restrictions as Earl Scheib directors and basically will act much like a board member but without the vote and without the liability. We’re waiting to see what he will do at Arlington, where he is Chairman of the board’s Corporate Governance Committee. (In the interest of full disclosure, the editor of CorpGov.Net is a limited partner investor in a fund managed by Lawndale Capital Management, LLC.)

Duffy also discusses what governance leaders thought of the agreement between Computer Associate’s and Sam Wyly’s Ranger Governance. She takes you behind the scenes in what Guy Wyser-Pratte calls the “German Enron” (Babcock Borsig), reviews Ralph Whitworth’s success at ousting Tyco directors and even keeps us informed of what’s happening in Brazil at the Sao Paolo Stock Exchange. Observing that “reforms are spreading through Corporate America faster that the Dow is dropping,” Duffy predicts “we’re going to see dramatic changes in investor involvement, on the scale of the consumer movement of the 60’s and 70’s.” As more read the Corporate Governance Fund Report, her predictions could become self-fulfilling prophecies.

Class-Action Suits Up

Millions of angry investors have lost billions and there are many to blame: corporations, fat-cat executives, boards, lawyers, accountants and financial advisers, investment bankers and analysts. Enron and its executives have been hit by 45 securities lawsuits, Adelphia by 56 and Tyco by 60. The potential legal fees are staggering. In the suit against Enron and its Wall Street advisers, some experts estimate claims could exceed $30 billion. Last year, the average class-action settlement in securities cases jumped to $17.2 million, up from an average of $14.1 million in the previous five years, according to a study by PricewaterhouseCoopers (PwC).

Lawsuits targeting banking and brokerage firms have jumped to 12% of the total this year, up from 2% last year, according to PwC. In a highly unusual incentive program, CalSTRS and two other large California pension funds have offered to pay their lawyers higher fees in a case against WorldCom if they can substantial contributions from former CEO Bernie Ebbers or 14 other executives. Executives almost never pay a penny of their own money and pushing for them to do so usually drags out the settlement process. In a study of a dozen $100 million-plus class-action settlements since 1995 by Joseph Grundfest, a Stanford University Law School professor, only two included contributions from executives, representing a fraction of the total settlements. Here’s hoping the percentages rises quickly. For more information, see the Securities Class Action Clearinghouse.

Koppes Joins IRRC Board

Richard H. Koppes, former Deputy Executive Officer and General Counsel of CalPERS and currently with Jones, Day, Reavis & Pogue, has joined the board of the Investor Responsibility Research Center. Mr. Koppes also serves as Co-Director of the Executive Education Programs at Stanford Law School, and does private consulting for corporations. Koppes is recognized internationally as a leading expert in corporate governance, especially in the role of pension fund investors in corporate governance and fiduciary duties. Mr. Koppes served as a member of the NY Stock Exchange Board of Governors’ Legal Advisory Committee from 1994 to 1997, is a member of the American Society of Corporate Secretaries, the Council of Institutional Investors, the Advisory Board of the National Association of Corporate Directors, the Blue Ribbon Commission on Board Evaluation of the NACD, the American Law Institute, and the International Bar Association where he serves as Vice Chairman of the Corporate Counsel Committee of the Section on Business Law. He is the founder, past president and current administrative officer of the National Association of Public Pension Attorneys. IRRC’s research, software products and consulting serve a wide range of clients including some of the largest institutional investors in the world, as well as corporations, law firms, and socially responsible organizations. Although somewhat dated, we interviewed Koppes as he transitioned from CalPERS in July 1996.

Corporate Governance in the U.S. and Japan: A Changing Environment

On Wednesday, October 2, the Japanese Chamber of Commerce and Industry of New York, in collaboration with Michael Solomon Associates, is sponsoring a half-day symposium that will examine the changing corporate governance environment in the U.S. and Japan from the viewpoint of corporations, institutional investors, and legal and academic experts.

Holly Gregory (Weil, Gotschal & Manges) and Bruce Aronson (Columbia Law School) will discuss the changing regulatory environment in a panel moderated by Satoru Murase (Bingham McCutchen Murase). In the second panel, moderated by Hugh Patrick (Columbia University), Carolyn Brancato (Conference Board) and Hideji Tanaka (Cerberus Capital Management) will discuss how corporations in both countries are responding to pressure to improve their governance practices.

The role public pension funds and other institutional investors are playing in promoting better governance practices will be discussed by Peter Clapman (TIAA-CREF) and Yasuhiro Fujii (Ministry of Health and Welfare). The luncheon keynote speaker will be John Towers, the vice chairman of State Street Corporation, who will provide a perspective on these issues from one of the largest investment management firms in the U.S. Contact Leslie Brown of the JCCI at (212) 246-8001 or[email protected].

4th Annual Triple Bottom Line InvestingConference 2002

When: 7 & 8 November 2002
Where: Hotel Le Plaza, Brussels, Belgium
The theme for this year’s conference is SRI and Governance. In addition, there will be analyst meetings where leading multinationals from various sectors will present their sustainable performance for the last year and their strategy for the coming year. 24 workshops and 105 speakers, TBLI is truly the leading SRI learning and networking event of the year. Call Netherlands + 31 (0) 20 428 6752 or email: [email protected]

Strategic Summit on Auditing and Governance in the New Era of Accountability

When: December 9-12, 2002
Where: The Embassy Suites Hotel, New York City
Fees: Summit: $1095, Summit after 12/2: $1195, Workshops: add $450 each
More Info: MIS Training Institute

SEC to Require Mutual Fund Disclosure of Votes?

Staff members at the SEC are expected to propose that mutual fund and other investment managers be forced to say publicly how they vote their shares in corporate proxy fights. Mutual fund managers push for openness from companies in which they invest while, at the same time, battling similar initiatives to bring more disclosure to the fund industry itself.

The proposed rule will be considered at an open meeting Thursday. In addition to requiring disclosure of their proxy-voting records, investment managers would be mandated to disclose the policies and procedures they use to determine how to cast their votes. The SEC will set a public-comment period on the rule proposal, normally at least a month. Then, before taking a final vote on the matter, the commission will spend a few additional months reviewing the comments, which may result in modifications to the original rule proposal.

Mutual funds hold about $3 trillion in stocks, about 21% of the U.S. stock market on behalf of 93 million investors, and are often the largest stakeholders in public companies but only a few SRI funds disclose their votes. Fund companies are worried about offending corporations which subscribe to their 401(k) retirement plans.

The SEC’s disclosure on the subject consists of a two-paragraph news digest item published recently. It says the SEC is considering requiring mutual funds and certain other investment companies and advisers to disclose the “policies and procedures” they use to determine how to vote proxies. Additionally, it might require “management investment companies to file with the commission, and make available to shareholders, their proxy voting records.”

Update 9/20: The SEC’s proposal would require mutual fund companies to

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

The Commission proposal will include the requirement that mutual funds make their voting records available, upon request, within 3 working days, to any investor seeking that information. The information will also be made available on the SEC website on the EDGAR Filing System. Posting the guidelines and voting results on a mutual fund’s website is optional and at the discretion of the Fund company. It was not mandated that votes be posted on fund company websites. The rules for investment advisors are tailored to the “customized” nature of their investment advisory mandates. A 60 day comment period is likely to begin shortly. The new rules would be a tremendous victory for corporate governance advocates. At CorpGov.Net we have been pushing for voting disclosure since the inception of our internet site in 1995. Scandals do provide opportunities.

Domini Social Investments was the first mutual fund company to start publishing its proxy voting guidelines in 1996 and its proxy voting record in 1999. A few other SRI firms followed suit, including Pax World Funds in May 2000, MMA Praxis in October 2000, the Calvert Group in April 2001, and Citizens Funds in September 2002.

Providence Capital to Hold Disney Meeting

Providence Capital, a corporate governance reform advocate will hold a meeting open to Disney shareholders on Sept. 17 in New York. “In view of Disney’s recent stock performance, we believe the board would welcome the views of its largest stockholders prior to instituting changes in the company’s governing body,” said Providence Capital President Herbert Denton. (Disney suffered a 22% decline this year) The purpose of the meeting is “to provide a forum for Disney’s major shareholders to discuss their views on a number of critical issues which have undermined investor confidence in Disney’s stock.”

Providence spokesman Jay Hill, who recently endorsed our Petition for Democracy in Corporate Elections (SEC Rulemaking Petition File No. 4-461), said his company is a relatively small institutional shareholder, owning less than 1 percent of Disney’s outstanding shares. He said the company organized the meeting because of its past emphasis on corporate governance issues, which have included meetings about troubled conglomerate Tyco International Ltd. and ICN Pharmaceuticals, where dissident investors forced founder Milan Panic to step down after a proxy fight in May.

For additional information on the meeting, please contactJay Hill, Providence Capital, Inc., 730 Fifth Avenue, Suite 2102, New York, New York 10019 RSVP at 212-888-3200 Fax: 212-888-3203.

AFL-CIO Office of Investment Seeks Financial Initiatives Coordinator

The AFL-CIO Office of Investment is seeking qualified candidates for the position of Financial Initiatives Coordinator. Workers’ retirement savings constitutes the country’s largest single source of investment capital. The Office of Investment seeks to promote the interests of worker-beneficiaries in the capital markets by leading shareholder initiatives, advocating for effective legislative and regulatory reform, and supporting active ownership and corporate governance reform strategies of worker pension and benefit funds.

Recent office initiatives include shareholder proposals to enhance board of director accountability, promote auditor and analyst independence, reign in excessive executive pay and encourage the adoption of ILO labor standards; shareholder campaigns to oppose re-incorporations in Bermuda and the re-election of Enron directors to other public company boards; and multi-pronged efforts to defend and strengthen defined benefit plans and the Social Security system in order to protect workers’ retirement security.

As a member of senior staff, the Financial Initiatives Coordinator will:

  • Design and oversee highly skilled, multi-disciplinary research and campaign teams for capital market initiatives, including shareholder campaigns, corporate governance projects, proxy contests by worker funds, and public policy and research initiatives.
  • Identify capital market intervention opportunities for worker funds, conduct supporting research, including the preparation of detailed corporate critiques, and develop and implement effective initiatives.
  • Identify key public policy and legislative issues, and formulate capital market advocacy strategies.
  • Implement departmental projects, including production of specialized analyses, reports, speeches and testimony, and preparation and staffing for conferences and meetings.
  • Work with pension fund trustees, investment managers, investment bankers, and financial industry organizations to implement initiatives.


  • Masters degree or higher in relevant field, with law or MBA degree strongly preferred. Must be published on relevant subject mater in a reputable publication (candidates will be required to produce a portfolio of published articles).
  • Demonstrated competence in corporate finance and governance, including familiarity with securities laws and rules and regulations, and pension and benefit issues, including ERISA; quantitative and qualitative research, including financial analysis, industry research, corporate research and issue research; researching and writing high quality reports that will withstand significant legal, media, public, legislative, regulatory and business scrutiny and criticism.
  • Excellent writing skills, political and organizational skills, and the ability to work well with others.
  • At least seven years relevant work experience.


Send your resume and a writing sample to Michael Garland, AFL-CIO Office of Investment, 815 16th Street NW, Washington, DC 20006 or fax it to (202) 508-6992.

Deloitte & Touche Provides Online Learning Opportunity

DeloitteLearning provides a valuable online corporate goverance training curriculum available for free to anyone who registers on the site. We’ve added their listing to ourClasses page. Courses include:

  • Capital Markets Overview
  • Complex Financial Instruments
  • Executive Compensation
  • Information Technology for Executives
  • Privacy and Data Protection
  • The Securities and Exchange Commission

Expensing Options Inevitable

A recent survey by Mercer Human Resource Consulting found that 8% of US employers believe that option expensing will be mandated within five years. Only 37% have formally considered the issue at the executive or board level. Only 5% plan to lobby actively against option expense recognition. (see Coming: No Option on Options,, 9/6)

Corporate Governance Goes Mainstream

CBSMarketWatch carried a series of articles on corporate governance. Shareholders strike back, credits Walter Hewlett with starting “a war that has spread to every boardroom in corporate America.” After providing some background, the article concludes, there is no shortage of proposed solutions to fix corporate governance practices.

“They include creating an independent office of the chairman to restrict CEOs from wielding too much influence; banning directors from selling stock while serving on the board; formal nominating committees to select directors; and mandatory boardroom peer-reviews.

What investors are likely to see is a tighter definition of independent directors, compensation committees run by directors unaffiliated with the company, a greater number of outside directors sitting on boards, and continuing education requirements for boards.

More controversial regulatory reforms — such as stockholder approval of all stock option plans and limiting the influence of CEOs on boards — will be more difficult to get accepted, corporate governance experts predict.”

Small investors: Little clout on boards reviews the responsibilities of boards and what small shareholders can do. The average board has eight directors. “Last year, directors spent an average of 175 to 200 hours at each board they served, according to the NACD. Public companies pay them from an average of $45,000 for small companies to an average of $152,000 for the top 200 U.S. companies in salary and stock options, the trade group said. And directors of most for-profit companies don’t have term limits.”

The article provides an example of a shareholder activist. Jill Ratner, who heads the Rose Foundation for Communities and the Environment, sought to curb Maxxam’s logging practices. Even with the backing of major pension funds, it’s almost impossible to change the board, she found out.

The list of shareholders cost her $1,000. Then she then hired an attorney to draw up a proxy statement and card for an expensive mailing to each stockholder urging them to vote for her slate of directors. “The three proxy battles she waged failed by voting margins of 78 percent to 97 percent.” The article goes through a number of tactics but in the end appears to conclude that the best course for small investors is to sell.

A commentary, More disclosure, not regulation, is what’s needed, by Nell Minow offers more hope. As we press for changes, she suggests we keep the following three caveats in mind:

  • Structural solutions are easily subverted. Tinkering with the definition of “independent director” or removing non-independent directors on various committees will have no real impact. “Independent” can mean “indifferent.” While it is tempting to impose new requirements about who should be on what committees and how many meetings they should have, that would have little impact on substance.
  • Consider the law of unintended consequences. We do not want to turn minimum standards into safe harbors. We have to be careful in crafting the listing standards so that instead of imposing obstacles to innovation, they reward it. The best way to address these two concerns is to change the rules on disclosure rather than structure.
  • The third caveat is that all of the reform proposals I have seen so far focus on what I call the “supply side” of corporate governance, on what corporations must do. We must consider these issues from the perspective of the “demand side” to make sure that barriers to shareholder oversight are eliminated.
    • Companies should be required to include their corporate governance policies and conflict-of-interest policies in their proxy statements. If they waive those policies at any time, that should be disclosed, along with the reasons for the waiver.
    • Institutional investors should be required to disclose their proxy voting policies, any votes cast contrary to those policies, and all votes in contested elections. Their votes should be kept confidential until after the date of the meeting at which they are cast, so that management can’t coerce them into changing.

In EMC activist gets post-Enron boost, Tim Smith of Walden Asset Management, credits the change in mood since Enron with his ability to win majority support for a resolution that calls on the company to put more independent directors on its board.

The legacy: a fair share of victories recounts the history of shareholder activism and includes a timeline of important events. Crashing the party highlights some of the “big moments” at annual meetings this year. Stung by critics, Disney reforms board recounts how Disney is finally getting the message by making a number of reforms and by hiring Ira Millstein, noted attorney and corporate governance expert, to help guide them. Teamwork of dubious value discusses a mechanism used to “foster teamwork among the highest ranks of a corporation” the office of the chairman that includes the chairman, chief executive, president and the vice chairman in a structure that allowed for “power and responsibility sharing.” In acutuality, it appears more likely to reduce checks and balances, as well as accountability. The series of articles includes filmclip interviews wth Harry Snyder of the Consumers Union who puts his faith in lawsuits and with Charles Elson, director of the University of Delaware’s Center for Corporate Governance, who see market forces ralling the needed reforms.

The series ends with Are shareholders the problem?Marjorie Kelly, editor of Business Ethics magazine and author of The Divine Right of Capital. “Under the current rules of governance, as long as he didn’t get caught, Enron CEO Ken Lay had a fiduciary duty to lie, cheat and steal in the name of the shareholders, she says. because maximizing shareholder value is the only principle corporations understand.” Kelly argues that corporate boards that represent only shareholders are like feudal societies that only served the interests of the aristocracy. “People say we need better alignment” between management and shareholder interests, Kelly says. “I say no, that’s the problem.” Paying managers in stock increases the incentive for them to cook the books or to engage in shortsighted behavior that might boost the stock price now while eroding the long-run value of the company.

Hats off to for a fine series of articles.

Back to the top

Improvement Would Pay Dividends in in Thailand

A study of the 100 largest companies listed on the Stock Exchange of Thailand found that companies with strong corporate governance practices have higher market valuations. Many Thai companies have ample room for improvement, particularly in the areas of minority shareholder rights, management oversight and incentives, and disclosure. A Mckinsey report suggests that Thailand’s government and regulatory authorities could help by providing corporate governance rules, incentives, and educational efforts.

SEC Adopts Rules

Members of the SEC voted to require companies to file annual 10-K reports 60 days after the end of the year, instead of 90 days, and quarterly 10-Q reports 35 days after the end of each quarter, instead of 45 days. The SEC also voted to:

  • Require corporate officers to disclose any purchase or sale of their company’s stock within two days.
  • Require that CEOs and CFOs certify the accuracy of their financial reports. (SEC speeds up reporting, CNN, 8/27/02)

Issues in Corporate Governance: Bloomberg Roundtable 

Raymond Troubh, interim chairman of Enron, Charles Elson, director of the Corporate Governance Center at the University of Delaware, and Damon Silvers, associate general counsel for the AFL-CIO, talk with Bloomberg’s Mark Jaffe about the impact of new corporate governance rules on companies’ boards of directors. Damon Silversvoiced his opinion that shareholders representing 5-10% should be allowed to nominate board members and those nominations should appear on the corporate proxy. Elson favors, instead, an easier takeover process for replacing inefficient boards. Troubh wants more in the way of forensic accounting. Listen to the Bloomberg Roundtable.8/23/02

Directors Go Back to School

Back to School, but This One Is for Top Corporate Officials, reads the article’s headline in the 9/3/02 New York Times. It’s not reassuring to learn that only 20% of the class of “about 80 officers and directors from companies including Pfizer, McDonald’s, Motorola and Dow Chemical” knew the definition of “retained earnings — undistributed earnings that have not been paid out to stockholders or transferred to a surplus account.” Still, it’s good to know that more directors are getting an education. For information on similar programs, see oureducation page.

Two courses focusing on leadership and business ethics, both from an Islamic perspective, will be taking place in Dubai in October. The courses have been organised by the Middle East offices of the Institute for International Research (IIR) in Dubai. “In the light of recent financial scandals, we are noting an increased interest in the issue of corporate governance from companies operating on Islamic principles,” said IIR event organiser Chris Mullinger. “Both the Leadership and Motivation and the Business Ethics courses have been designed for Muslims and non-Muslims in business. They will provide direct, practical guidance to executives and key workers in a Muslim organisation as well giving expatriate executives of multinational companies valuable insights into working in Muslim countries and with Muslim companies.”

Proxy Season Roundup

NACD publication, Director’s Monthly, reports the message from this proxy season was loud and clear – “put more independent directors on boards, let shareholders vote on executives’ pay and severance packages and don’t allow a company’s auditor to do consulting work with the firm.

The new winner this year was the “auditor conflict” resolution, which asks companies not to hire the same accounting firm for audit and non-audit services. This labor resolution at 12 companies won an average of 29.8% of the vote, with the vote at PG&E coming in at 46.5%.

At Mentor Graphics, investors approved – by a margin of 57% – a resolution by TIAA-CREF asking the company to put all stock plans with material dilution to a shareholder vote.

John Chevadden’s resolution at Airborne on their poison pill garnered 91.4% of the vote. Seventeen out of 100 social proposals won votes exceeding 15%. “High vote-getters focused on human rights, equal employment and global warming. For a full roundup, see IRRC Tally Shows Record Support for Shareholder Proposals in 2002.

Canadian corporations faced fewer shareholder proposals, according to Fairvest’s Corporate Governance Review. In 2001, 12 companies included a total of 39 shareholder proposals, compared to 16 companies and 63 resolutions in 2000. As Fairvest wrote their June/July edition in 2002, 13 companies accounted for only 28 shareholder proposals. The five big banks accounted for 21 of all shareholder proposals.

At the Hudson’s Bay Company 36.8% of voted shares supported a shareholder proposal calling on the company to reflect the International Labor Organization’s Fundamental Principles on Rights at Work in its Company Code of Vendor Conduct and standard purchase contracts. The level of support is high, considering that the Caisse de depot et placement du Quebec, which holds more than 10% of outstanding shares, abstained from voting on the proposal.

The identical proposal at Sears Canada, which is 55% owned by Sears in the U.S., garnered only 6.3% support, whereas in the U.S., the same proposal got 9.35% of shares voted.

CorpGov Bits

Arianna Huffington joins those calling for mutual funds to meet their fiduciary responsibilities by becoming active in corporate governance. Mutual funds: Corporate crime’s lumbering, narcoleptic giant, 8/26/02.

The California Court of Appeals set oral arguments for 11/13 on a lawsuit blocking pay hikes for 10 CalPERS internal portfolio managers as well as for board members themselves. Last October, a Superior Court judge ruled that the System attempted to circumvent state. CalPERS appealed the ruling. State Controller Kathleen Connell, who refused to grant the pay increases, sued CalPERS for issuing the checks directly.

Standard & Poor’s is surveying corporate pension plans to get a handle on their unfunded liabilities. S&P sent out 700 surveys as part of a broader move to better factor in unfunded liabilities of corporate pension plans when rating companies’ debt. Early indications show that pension plans of manufacturing companies have been hardest hit because the number of retirees receiving benefits often outnumber the amount of employees still working. One warning that a company is having trouble with its pension fund is when it uses the proceeds of a securities issue to help cover the unfunded portion of its pension plan. (S&P Surveys Companies To Factor Pension Plans More Heavily In Ratings, 9/4/02,

The 8/19 version of Investment News included an interesting interview with Jamie Heard, the CEO of Institutional Shareholder Services Inc. See One on One: “We have a huge problem now – the public mistrust of corporate America.” From the Archives search function near the bottom of the page, search Jamie Heard.

A study by the National Whistleblowers Center found that about half of whistle-blowers who expose workplace wrongdoing experience are fired. Others face harassment, or unfair discipline.

Richard Grasso, head of the New York Stock Exchange and an outspoken advocate of corporate governance reform, d failed to disclose his stock ownership properly to financial regulators for five years. Grasso, a director of Computer Associates, didn’t file reports with the SEC over the past five years that noted company stock awards. Neither did Former US Senator Alfonse D’Amato, another Computer Associates director.

eRaider joins move to petition the SEC to mandate that public companies place the names of all legitimate director candidates on ballots distributed to shareholders,similar to that submitted by McRitchie and Greenberg. Additionally, they will ask the SEC to disallow broker votes, ban the use of corporate funds for campaigning for any candidate and strike down unreasonable qualification tests for director candidates.

Research by the Institute for Policy Studies found that CEO pay at 23 companies under investigation for accounting irregularities earned 70% more than the typical CEO at a large company. They banked an average of $62 million from 1999 to 2001, compared with $36 million for the remaining 300+ CEOs in the survey. [The (Fat) Wages of Scandal, BusinessWeek, 9/9/02]

The contribution of the CEO’s reputation to the corporate brand has increased 20% from 1997 to 48% today, according to research by Burson-Marsteller. (Director’s Monthly, NACD, 8/02)

Chief executives at five of the six leading Wall Street banks hold one or more outside corporate directorships, in some cases on the boards of companies that have a close banking relationship with their firms, according to an informal survey by AFX Global Ethics Monitor.

A survey conducted by the Investor Responsibility Research Center found that 72% of the $5.7 billion in fees paid by 1,200 public companies to their auditors in 2000 was for nonaudit services. The Sarbanes-Oxley Act will place new restrictions on the services that auditors can provide for their clients and will establish an independent board to oversee the industry for the first time in its history. The New York Stock Exchange will prohibit auditors of listed companies from serving on the boards of clients for five years. Nasdaq-listed companies will be prohibited from hiring former auditors at all levels for three years. (No More Mr. Nice Guy,

Book Bites

Building Public Trust: The Future of Corporate Reportingby Samuel A. DiPiazza and Robert G. Eccles argues the restoration of trust requires a drastic overhaul corporate reporting.

Corporate Boards: New Strategies for Adding Value at the Top by Jay Alden Conger, et al argues that, with technology at the heart of 21st-century business, corporate directors need to recognize the value of knowledge as a strategic asset, putting their focus on meeting not only the demands of shareholders but also those of stakeholders, including employees and the global communities in which they operate.

Takeovers, Restructuring, and Corporate Governance by J. Fred Weston, Juan A. Siu, Brian A. Johnson provides a conceptual framework.

Reinventing Your Board: A Step-By-Step Guide to Implementing Policy Governance by John Carver, Miriam Mayhew Carver outlines effective board decision making and offers practical advice on such matters as setting the agenda, monitoring CEO performance, defining the board role.

A Theory of the Firm: Governance, Residual Claims, and Organizational Forms by Michael C. Jensen examines the forces, both external and internal, that lead corporations to behave efficiently and to create wealth.

Business: The Ultimate Resource by Perseus Publishing is an ambitious compendium of essays, biographies, and source materials. With over 2,000 pages, it weighs a ton, so don’t plan on taking it the beach. Includes:

  • Original best-practice essays from over 150 of today’s thought leaders
  • Profiles 100 influential business pioneers and management thinkers (few in the area of corporate governance)
  • Summaries of 70 most important business books (again, short on corporate governance)
  • Over 300 practical checklists, covering many areas of management and career development
    –A world business almanac covering more than 150 countries, all 50 US states, and 24 industries
    –A dictionary of 6,000 business terms
    –A list of 3,000 information sources (books, journals, Web sites and organizations), covering 115 topics

Business: The Ultimate Resource doesn’t compare withCorporate Governance (International Library of Critical Writings in Economics), but the price is hard to beat, especially if you can get it used. I’ve got both on my shelf.

The Audit Committee: Performing Corporate Governanceby Laura F. Spira argues that the audit committee is an arena where members can form and strengthen shifting and fragmentary networks with each other and with the external auditors.

How Governments Privatize: the Politics of Divestment in the United States and Germany by Mark Cassell argues that privatization must be understood as a political and administrative puzzle rather than simply an exercise in economic efficiency. He studies two successful divestment agencies, the U.S. Resolution Trust Corporation and the German Treuhandanstalt. 0878408797 (case : alk. paper) (American governance and public policy series: American governance and public policy.

Transformational Boards by Byron Tweeten offers an engagement framework for board leadership designed to help boards lead their organizations through times of change.

Back to the top

Continue Reading ·

August 2002

Board Services Grow

Houlihan Lokey Howard & Zukin introduced a new Board of Directors Advisory Service to support outside directors with their increasingly demanding fiduciary duties. Houlihan Lokey will assign a team of investment bankers to provide information, analysis and advice to board members. The Service will review information supplied by clients, analyze the companyís financial situation and stock performance, track institutional investor and market analyst views on the company, review accounting issues, coordinate other board advisors and facilitate communication between the board and management. “By providing an independent source of information, analysis and advice, this service will allow directors to effectively spend their time on important corporate issues and, at the same time, facilitate communication between the board and management,” a spoksman said.

Tip of the Iceberg

How Companies Lie: Why Enron Is Just the Tip of the Iceberg, by A. Larry Elliott and Richard J. Schroth, contend that “gamesmanship has replaced business management competence as executives and their boards have focused on managing the stock first, the business second and strategic value last.” The authors argue for greater SEC authority to review corporate books and accounting practices. At bottom, however, the burden is on investors to display a healthy skepticism toward all financial reports. (Ed., such skepticism might lead investors to take a stronger role, for example, in choosing the company’s auditor) They focus on five areas for reform:

  • Accurate and verified communications
  • Full disclosure of conflicts of interest
  • Real-time accounting and real-time reporting
  • Straightforward accounting rules
  • Real accountability by executives.

SEC Petitioned to Strengthen Environmental Disclosure

Led by the Rose Foundation for Communities and the Environment, foundations with more than $3 billion in aggregate invested assets petitioned the SEC on 8/21/02 to improve requirements for accurate and consistent disclosure of environmental risks.

To clarify the intent of the SEC’s material disclosure requirements and help ensure compliance with existing material financial disclosure requirements, the foundations urge the Commission to adopt the standards for estimation and disclosure of environmental liabilities developed by the American Society for Testing and Materials International (ASTM).

“These standards, which were developed by a consensus process conducted by one of our nation’s leading engineering organizations, provide guidance to companies for the accurate estimation of environmental liabilities and explicitly require reporting companies to aggregate environmental liabilities to determine whether they exceed the SEC’s materiality threshold. The ASTM’s development of these standards has been backed by the insurance industry, in response to the current paucity of information about the financial significance of environmental liabilities.

Disclosure consistent with the ASTM standards would provide investors with standardized information critical to their evaluation of the financial risk associated with a company’s environmental liabilities. Complete and accurate disclosure of financially material environmental risk furthers the Commission’s mission of protecting investors and the public and protecting and restoring public confidence in our markets and in publicly traded companies.”

The petition was signed by the following:

  • Alaska Conservation Foundation
  • As You Sow Foundation
  • Beldon Fund
  • Bullitt Foundation
  • Columbia Foundation
  • Compton Foundation
  • Conservation Land Trust
  • Deep Ecology Foundation
  • Educational Foundation of America
  • French American Charitable Trust
  • Gaia Fund
  • Richard & Rhoda Goldman Fund
  • Gordon Lovejoy Foundation
  • First Nations Foundation
  • Needmor Fund
  • Andrew Norman Foundation
  • Jessie Smith Noyes Foundation
  • Rockefeller Family Fund
  • Rose Foundation for Communities & the Environment
  • San Francisco Foundation
  • The Seventh Generation Fund for Indian Development, Inc
  • Surdna Foundation
  • The Tides Foundation
  • Wallace Global Fund
  • Weedon Foundation
  • William B. Wiener, Jr. Foundation
  • Wilburforce Foundation

This is an important step forward for activism among foundations and, if enacted, will do a great deal to ensure environmental liabilities are reflected in share price. When that happens, we expect corporations will be much better environmental stewards and there will be a stronger correlation between environmentally responsible business practices and corporate profits. According to a 1998 study by the Environmental Protection agency, nearly three-quarters of companies who were fined more than $100,000 for environmental violations failed to tell the SEC in their annual filings.

We urge readers to support this petition by writing to Mr. Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549 or e-mail Mr. Katz at [email protected], indicating that you support the petition to improve requirements for accurate and consistent disclosure of environmental risks submitted by the Rose Foundation for Communities and the Environment and others.

Back to the top

Profits Down, CEO Pay Up

Even as corporate profits fell 13% in 2001, CEO pay rose by 7%, according to a survey by consulting firm Mercer.

The survey, which looked at 350 of America’s largest corporations, found hat the rise in pay was mainly due to stocks and stock options. In 2001, stocks made up 59% of top executives’ pay, up from 57% in 2000 and 44% in 1997, according to the Mercer report.

CEOs at 23 corporations under investigation for improper accounting pocketed $1.4 billion, or an average of $62 million each, in the last three years. Meanwhile, their companies’ stock values plunged $530 billion, or about 73% of their total value, and their companies laid off a total of 162,000 workers.

Those are key findings in the ninth annual CEO compensation survey of large public companies by United for a Fair Economy and the Institute for Policy Studies.

Additionally, corporate profits reported to the Internal Revenue Service fell from $660 billion in 1996 to $658 billion in 1998, while profits reported to shareholders rose from $753 billion to $817 billion over the same period. (see Statistics on CEO compensation show opposite of pay for performance, 8/26/02, The Kansas City Star)

16 Companies Missed SEC Deadline

The results are in, and 16 of the 691 companies required to certify their financial statements with the SEC by August 14 failed to comply. (The rest must certify by December).

Delinquent companies include: ACT Manufacturing, Adams Resources & Energy, Adelphia Communications, Alaska Air Group, CMS Energy, Consolidated Freightways, Dynegy, Enron, Gemstar-TV Guide, IT Group, McLeodUSA, Mirant, Qwest Communications International, LTV and TruServ. Only IT Group didn’t at least file an excuse.

The SEC has not yet decided what it will do to punish the companies that failed to comply with the certification order.

Jump in Board Turnover Expected

The boardrooms of Fortune 1000 companies could see a director turnover of as much as 50% over the next year, according to executive recruiter Christian & Timbers. “We are getting flooded with calls for board searches as more and more executives ask to be rotated off,” said Christian & Timbers Chairman and CEO Jeffrey Christian. “Many do not want to return to the board.” Christian said that in the post-Enron corporate culture, many directors regard the risk of serving on a board as not worth the rewards.

Recent governance reforms, such as the Sarbanes-Oxley bill, have also increased the overall responsibility of directors, with new requirements for paperwork, conference calls, and committee meetings. Roger Raber, president of the National Association of Corporate Directors, said the average yearly commitment for each board seat is 175 to 200 hours, up from 100 to 125 hours in 1999, often compelling director who once sat on three boards to choose only one.

Stephen Mader, president and chief operating officer of Christian & Timbers, believes the turnover is ultimately positive. “To us this is really a constructive process,” said Mader, “We think that it will open the door for many better motivated directors. Boards are going to have a much better profile of members.” (, 8/14)

Momentum For Expensing Options Grows

No, the major high-tech firms haven’t endorsed expensing options, but they have started to bend. TechNet, a Palo Alto based trade association, whose 250 members include Intel, Microsoft, Oracle, Cisco Systems, and Hewlett-Packard, is considering a new proposal put forth by Intel: “quarterly impact sheets” detailing the number of option grants, the timetable for exercising them, and the potential effect on the corporate bottom line. The group is also considering requirements that executives hold options for five years before exercising them and restrictions on executives’ ability to sell shares. says “the group’s new tactic represents a tacit acknowledgment by the technology industry that support for expensing options among accounting industry groups like FASB, lawmakers on Capitol Hill, and institutional investors has reached a critical mass.” reports that at least 76 public companies, including General Motors, General Electric, Merrill Lynch, American Express and Home Depot have announced that they will expense options in their next fiscal year. (Will Tech Companies Join the Options Parade? 8/26)

Corporate Reincorporation/Inversion/Expatriation

However termed, when done for tax avoidance, companies should be called on it. The August 19th issue of Pensions&Investments carried an editorial objecting to Phi Angelides’ recent efforts to have CalSTRS and CalPERS divest stocks of companies that move corporate registration offshore to avoid US corporate income tax. Pension&Investments argues these firms are simply using legal means to avoid double taxation, once in the country in which profits were earned and again in the US.

The editorial argues that moving to Bermuda simply puts US firms on an equal footing with foreign competitors and increases their ability to continue employing thousands of US workers. “Mr. Angelides either too thick to understand this…” should be using his clout to lobby to eliminate the double taxation of foreign earnings.

While it is true that corporate income tax laws could use a makeover, the picture painted by the editorial falls far short of realism. Companies not only avoid double taxation but can shift their debt disproportionately to their U.S. subsidiary and then deduct interest payments from taxes. As reported in the Washington Post, Stanley Works predicted its move to Bermuda would cuts its taxes by $30 million a year. Only $7 million was due to taxes on foreign income.

It is entirely appropriate that public pension funds avoid investments in companies that avoid paying the taxes that support pension fund members and the state budget. Public pension funs should no more tolerate such blatant tax avoidance by firms in their portfolio than unions should support companies that lock their members out of work.

Back to the top

Broker Voting Issue Continues

The New York Times carried an article recently that called to the importance of proxy voting. The author, Gretchen Morgenson, praised the New York Stock Exchange for submitting new rules to the SEC requiring all listed companies to put proposed stock option plans to shareholder votes. However, brokerage firms are still free to vote for shareholders on many important issues:

  • election of auditors and directors,
  • proposals to increase the number of shares authorized for issuance,
  • social issues, and
  • compensation schemes that are not related to stock options.

How significant are broker votes? ADP Corporation, which practically has a monopoly on tabulating proxy votes, says that 23% of the votes in the most recent proxy season were cast by brokerage firms that lacked instructions from the true owners of the shares.

As expected, small shareholders with a 1,000 shares or less voted least frequently, 41.5% of the time. But institutional holders (which estimated were those with more than 50,000 shares) who have a fiduciary duty to vote, only voted 72% of the time.

“As long as brokerage firms vote the shares with management, the opposition of shareholders to an issue raised in the proxy will be overridden. The current broker-vote rules, combined with investor apathy, mean that shareholder votes are unlikely to represent what most of the owners want in contested situations.” Those of advocating more democratic corporate governance need to continue to press to eliminate broker voting, except for the purposes of obtaining a quorum. (See “Pick Up the Proxy, Fill It Out and Exert Some Control,” 8/25)

Mutual Fund Industry Calls for Expensing Stock Options

Reality is setting in. The Investment Company Institute, the national association of mutual funds, urged the Financial Accounting Standards Board (FASB) to adopt accounting standards requiring companies to treat stock options as an expense and ensuring uniformity in how those options are valued.

“The mutual fund industry, on behalf of millions of individual investors, invests nearly $4 trillion in equity and fixed-income securities issued by U.S. corporations. Expensing stock options will benefit investors and enhance our nation’s reputation for having the most rigorous accounting and disclosure standards in the world,” said Institute President Matthew P. Fink. (seepress release and letter of 8/21/02)

CalPERS Adopts Conflict of Interest Reforms

The California Public Employees’ Retirement System (CalPERS) adopted reforms at the urging of state Treasurer Philip Angelides that will require banks to root out potential conflicts of interest if they want to do business with the largest US public pension fund. CalPERS will give “significant consideration” to the reforms in hiring money managers to pick stocks and bonds, though it won’t necessarily make the reforms a condition of hiring.

The principles call for brokerages to separate analyst pay from investment banking revenue, create a committee to review and approve all stock recommendations and ask brokerages to disclose whether they have been paid by companies they research. Ted White, director of corporate governance at CalPERS, said staff will send a copy of the guidelines to money managers asking them how they will comply.

The rules were drafted jointly by officials from California, New York and North Carolina in response to recent disclosures of conflicts of interests among investment houses. For example, Pacific Corporate Group, which advised CalPERS to invest more than $750 million in Enron, also earned fees from Enron for locating investors. (see CalPERS rules to prevent conflict of interest , SFGate, 8/20 and CalPERS Adopts Reforms on Conflicts, LA Times, 8/20)

Open Ballot Movement Grows: Holy Grail of Corporate Governance in Reach?

The 8/19 issue of Pensions&Investments includes an article entitled “Wisconsin fund could lead charge for open balloting” by Barry B. Burr. “The State of Wisconsin Investment Board may make open access to corporate proxy ballots – allowing shareholders to place candidates for directors on the ballots – one of its key corporate governance focus issues for the next proxy season.”

The article goes on to mention a call by the Social Investment Forum to the SEC to consider a two candidate minimum and to develop a way for corporations to include shareholder nominees (see nyseletter.html). It also mentions the rulemaking petition to the SEC to require shareholder-nominated director-candidates to appear on the corporate proxy ballots, which I submitted, along with Les Greenberg and the Committee of Concerned Shareholders.

Although Patrick McGurn of Institutional Shareholders Services is quoted in Pension&Investments saying ballot access is “the Holy Grail of corporate governance,” he also points out that “you don’t want 1,000 names on the ballot” and the “feasibility of the idea depends on the details.”

Charles Elson of the University of Delaware’s Center for Corporate Governance says “the solution is an independent nominating committee and independent directors.” TIAA-CREF’s Kenneth Bertsch says they’re interested in hearing ideas but it’s not clear “democratic style election(s) would be worth the conflict and confusion.” Richard C. Ferlauto, of the American Federation of State, County and Municipal Employees says the 2003 season presents an opportunity to rise the issue of “access to the corporate proxy ballot.”

I wish SWIB and AFSCME luck with any plans to raise the issue at individual firms during the next proxy season. I’ll certainly be voting with them but I fear the SEC will simply write a lot of no action letters because of the very rule we have petitioned to change – Rule 14a-(8)(i)8, which prohibits resolutions relating to elections.

Pat McGurn is right, details need to be worked out concerning just how shareholders should get access to the ballot. Our petition could have suggested rules requiring that nominees show the support of shareholders holding at least 1% of the firm. Of course, McGurn could then come back and say you don’t want 100 names on the ballot either. We’re hoping SIF’s letter and our formal petition will result in a flood of letters, cards and e-mails to the SEC, not only supporting shareholder access to the corporate ballot, but also providing detailed suggested amendments. Our petition is one of the opening salvos but it’s a formal request, which I believe requires formal consideration and response by the SEC.

When starting negotiations I don’t think its a good idea to raise the bar too high. That’s why we left the threshold just where it is for resolutions. We generally don’t see 1,000 resolutions on each corporate ballot, although we might get a dozen on some next year.

I think this could be a great debate and I hope some of the ideas spill over into civic elections. If we’re afraid of too many candidates, one way to make the elections more workable would be to institute Instant Runoff Voting. Using IRV there are no wasted votes because you rank the candidates and your votes for losers are instantly reallocated until a consensus winner is chosen. With IRV you could have voted Nader, for example, without throwing the election to Bush.

As C. Russel Hansen, Jr. points out is his August newsletter from “None of the current regulatory proposals changes “who effectively nominates or can veto a director candidate (the CEO), who controls the preparation of the proxy statement (the CEO/CLO), who manages the election meetings and voting process (the CEO/CLO), who effectively determines or can veto director compensation (the CEO), who cuts the director compensation checks (CEO/CFO), who cuts the expense reimbursement checks (CEO/CFO), who cuts the checks to the auditors (CEO/CFO), who cuts the checks to the audit committee advisors (CEO/CFO), who develops the budget, including the piece dealing with board expenses (CEO/CFO) or who procures and pays for the D&O insurance (CEO/CFO).”

Hansen ends his article on “CEO-Centric Boards After the Sarbanes-Oxley Act of 2002” with the following: “…as long as (1) a director’s election, compensation and protection remain in the hands of (or at least preventable by) the CEO, (2) the CEO performs his or her side of the unwritten covenant to nominate, elect and protect, (3) the board likes it like that, (4) the board looks to management to staff the board and committee workload and (5) the underperforming board dragon looks dead, then Sarbanes-Oxley-NYSE-Nasdaq leave the CEO-centric board very much alive and quite well — indeed healthier than ever.”

Shareholder access to the company proxy is as close as we can get at this point to the Holy Grail. Write Mr. Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549 or e-mail Mr. Katz at [email protected], indicating that you support the petition for democracy in corporate elections submitted by the Committee of Concerned Shareholders and James McRitchie, Rulemaking Petition File No. 4-461. Let him know of any amendments you favor. Or, write supporting the SIF letter of 7/24/02. Don’t let the momentum die.

Back to the top

What You Must Know About Corporate Governance

This book is timely, coming on the heels of the 2002 King Report (King II) and of an increased interest in corporate governance as a result of Enron, Global Crossing and other failures due to corruption and incompetence. From the forward, “If South African companies are to compete for international capital and if much needed jobs are to be created through increased direct foreign investment, behaviour in our boardrooms must be beyond reproach.” The 2000 McKinsey & Company study is cited to reinforce the message that more than 80% of global institutional investors are willing to pay a premium for shares in well-governed companies.

In about 150 pages, corporate managers, secretaries, board members, advisors and investors get a tidy summary of the most essential principles and practices of corporate governance, with a focus on South Africa but with a great deal of applicability in any country using an Anglo-American model (here termed the Anglo Saxon model). The book weaves its tale around King II, which was made public in March of 2002.

After a brief introduction, focusing on the historical development of the corporation, corporate governance (mostly citing the eminent R. I. Tricker), as well as Cadbury and King reports, the book addresses “Strategy and Its Implementation.” Here, the authors point out the duties of executive management vs. those of the board, ensuring the strategy is well formulated and executed. Wixley and Everingham stress the importance of have an independent board with a variety of perspectives “so that a disinterested voice will be heard on any subject of importance.”

The book moves from there to:

  • selecting board members,
  • expected behavior of individual directors,
  • duties of directors and how they function as a group,
  • board committee structures,
  • financial reporting and communication,
  • assessment of risk and internal controls,
  • accountability re financial information,
  • reliability via external audits and internal audits,
  • non-financial information and
  • applicability to the public sector.

Each chapter includes relevant examples from real life. Although the authors closely follow the King report, they do not hesitate to provide advice on controversial subjects not addressed by those reports, such as advocating that options not be repriced and that by should be expensed. “Our view is that the interests of good corporate governance would be well served by accounting for the cost of share options granted as an expense in the company’s income statement.”

Perhaps unique to the King Report, among corporate governance standards, is its treatment of the HIV/AIDS pandemic, recommending that each company describe their strategy, plans and policies. What You Must Know About Corporate Governance is written by Tom Wixley and Geoff Everingham, published by Siber Ink, Cape Town, South Africa, 2002.

Corporate Attorneys Owe Duty to Shareholders, Not Management

In a speech to the American Bar Association’s Business Law Section, SEC Chair Harvey Pitt said, “Outside auditors owe a duty to shareholders and the investing public to assure that a company’s financial reports are reliable and truthfully prepared. Similarly, lawyers who represent corporations serve shareholders, not corporate management.” “This should be self-evident,” he noted. “But recent events indicate some corporate lawyers have lost sight of this axiom, a form of professional blindness that isn’t new….” (see Corporate Attorneys Have Role Similar to Auditors, Says Pitt,, 8/13/02)

Profit From Vice launched the Vice Fund, a no-load mutual fund described as the “first and only open-end mutual fund to invest primarily in “socially irresponsible” industries,” such as alcohol, gambling, tobacco and the weapons industry. In SEC filings the Fund contends that companies in these industries, if managed correctly, will continue to experience significant capital appreciation during good and bad markets. According to the Vice Fund, over the five-year period June 30, 1997, to June 30, 2002, an individual simply investing 25% into each of the alcohol, tobacco, gaming & casino, and aerospace/defense sectorswould have outperformed the S&P 500 index (earning 52.96% versus 11.83%, according to the firm).

Cross My Heart and Hope to Die

That’s what Nell Minow calls the new SEC requirement. Corporations have long been liable for penalties for knowingly filing false or misleading material information. This time, of course, corporate executives really mean it.Just the same, criminal charges will still require proof the officer “knowingly” submitted false reports, which is no different from current law. A recent article Motley Fool article walks readers to the new requirement. See “CEOs Signed. So What?” The SEC says that nearly all of the 697 companies that were ordered to file certified statements about the accuracy of their financials met their 8/14 deadline. More than two-dozen companies failed to certify fully or asked for postponements.

By the end of the year, all 14,000 companies overseen by the SEC must certify their financials, including foreign issuers of debt and equity, under provisions of the recently signed Sarbanes-Oxley Act, which will become effective by 8/29. The typical D&O policy has a dishonesty exclusion, which means that insurers do not have to pay on behalf of a director if he/she is proven to have committed fraud. However, insurers may still have to pay defense costs up until the point that any fraud is actually proven. It is only at that point that insurers can try to claim the money back from a director found guilty of fraud. Expect insurance costs to rise.

Kill the Corporate Dividend Tax

I don’t often favor lowering taxes on corporations, but this idea looks good. It comes from Jeremy Siegel, author ofStocks for the Long Run: The Definitive Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, Andrew Metrick and Paul Gompers. Since interest costs, but not dividend payments, are deductible, management is inclined to raise debt and retain earnings. This tax treatment and CEO dependence on option-based compensation schemes contributed to capital gains, not dividends becoming the preferred source of shareholder return.

If dividends were deductible and retained earnings expensed, corporations would be motivated to pay profits out as dividends. The incentive to take on massive debt, risking bankruptcy, to gain a tax deduction and build management’s power base would be reduced. The emphasis on dividends, rather than capital gains, would reduce use of stock options. Here, I’ll add my two cents, if stock options were also required to be expensed, awards to management and employees would soon be made in shares, rather than options…thus, to some extent, aligning the interests of shareholders, management and employees.

Siegel, Metrick and Gompers also note eliminating the corporate tax on dividends would reduce the number of firms who seek to re-incorporate outside the US in order to shield foreign-earned income US taxes, since they could avoid taxes on foreign-earned income simply by paying out their profits as dividends. Their proposal would also reduce the propensity to over-allocate company stock in employee 401(k) plans since all dividends, not just those in such plans, would be deductible.

Caveats: The authors envision greater use of dividend reinvestment plans (DRIPs), subject to the personal income tax. Secondary offerings would become more common source of raising capital. Firms with good investment prospects would find easy access to additional capital if they released adequate information about expansion strategies.

Although corporate tax revenue be reduced, some losses would be recouped through increased personal taxes on dividends. Additionally, if their corporate dividend exemption idea is adopted, they favor eliminating all other corporate tax credits. “Elimination of these loopholes would not only simplify the corporate tax but should sharply reduce corporate influence-peddling and lessen some of the all-too-cozy ties between politicians and big business.” (A Simple Solution to Stock Market Woes: Kill the Corporate Dividend Tax, [email protected] Newsletter, 8/14-27/03)

Banks Sold the Ponzi Schemes

Wall Street banks sold public investors – especially pension funds, a bill of goods – $20 billion worth of “investment grade” WorldCom bonds that protected the banks from their own credit exposure are now worthless. Read more at the Corporate Governance Fund Report, where Institutional Investors are “Pushing Back.” 

Verification Specialists

Fred S. Golden has joined the Corporate Governance Network. His firm, Verificaiton Specialists, can can lead you through the maze of requirements and regulations that now govern the Audit Committee, especially as a result of the new Sarbanes-Oxley Act.

DB Plans Drop 6%, DC Plans 8%

Pensions&Investments reports that defined benefit plans kissed goodby to $208 billion and defined contribution plans $98 billion since September 30th due to the falling market. Defined contribution plans were harder hit because they had a higher percentage of their funds in equities (61.7% v 56.9%). Corporations will no longer be able to carry pension plan funding on the back of investment returns.

Shifting Currents

Forget about global warming and sweatshop labor. This year’s crop of shareholder resolutions is all about excessive chief executive pay and squeaky-clean accounting. The new battleground is corporate governance…making sure company executives don’t cook the books and enrich themselves at the expense of shareholders. We can expect much more of the same next year.

Several comentators on the NYSE amendments pointed out that “the election of directors is currently not a democratic process. This is problematic, as directors represent shareholders, not management. In only the rare circumstances of proxy fights do shareholders get to vote in competitive Board elections. In the current system, the directors nominate and elect one another, with shareholders playing a passive role of rubberstamping nominees.” (Adam Kanzer, General Counsel & Director of Shareholder Activism, Domini Social Investments LLC) We’re starting to get a few signatures for our petition in support of Democracy in Corporate Elections. Activism pays.

Cood Governance Pays in Italy

Does good corporate-governance pay? A new stock maket, he STAR exchange, launched in April 2001 by Italy’s Borsa Italiana for companies that follow a strict set of governance requirements provides more evidence that it does. Listed companies must have a minimum number of independent, nonexecutive directors; ensure that the compensation of managers and directors reflects their performance; and adhere to rigorous disclosure requirements. Companies on the STAR exchange outperformed those on the main board by 16.5% and had a weighted average market-to-book ratio of 3.8, compared with 2.1 on the main exchange. (The McKinsey Quarterly, 2002 Number 3)

Shift to Quality and Away from Risk Means Shift to SRI

The Social Investment Forum and fundtracker Lipper indicate that US investors are pulling money out of most mutual funds but are increasing allocations into socially responsible investment (SRI) funds. Between January and June 2002, SRI fund assets grew 3% while US diversified funds averaged a 9.5% loss. When the S&P 500 lost over 13% in June and diversified funds suffered net redemptions of $13 billion, SRI funds saw net inflows of $47 million.

“The market faces a real crisis of credibility caused, in part, by a seemingly endless procession of corporate scandals,” according to Social Investment Forum President Tim Smith. “Socially and environmentally responsible mutual funds use their influence to promote more corporate responsibility through resolutions, dialogue and encouraging reforms in corporate governance. When you combine that far sighted leadership with good relative performance, screened funds are an increasingly attractive alternative for many of the nation’s investors.” The public is searching for quality and lower risk; 13 of 18 socially or environmentally responsible funds with at least $100 million in assets achieved top performance rankings from Morningstar and/or Lipper for the one and three year period ending June 30, 2002. (Investors Continue to Put Money into SRI Mutual Funds 8/1/02)

Yet even SRI funds are getting nailed. It is one thing for a fund to determine whether a company is, say, a weapons maker. It is quite another to detect whether a company is quietly playing games with its numbers. Better screens are needed. Not everyone can agree that making weapons isn’t socially responsible. However, most would agree that accounting fraud and excess CEO pay shouldn’t fit into the SRI mold.

Computer Associates Sued for Paying Greenmail

Chevra Machzikai Torah, a Brooklyn, New York-based non-profit organization, filed a lawsuit against Computer Associates International and its directors, seeking a refund of the $10 million paid to dissident investor Sam Wyly to call off his proxy fight. The suid claims CA’s 12 directors breached their fiduciary duty in the pay-off agreement, which stipulates that Wyly must not launch another bid for a CA board seat for 5 years. The suit alleges that the payment was made so the existing directors and managers can keep their jobs. It damaged CA’s share price as well as its reputation. (News Briefs,The Corporate Library, 8/6/02)

India Places Last

A McKinsey & Co. survey of 188 companies from a cross-section of emerging markets placed India last in terms or transparency. The survey looked at the emerging economies of India, Malaysia, Mexico, South Korea, Taiwan, and Turkey. South Korea earned the highest score as the emerging market that had adopted the highest quality corporate governance rules or guidelines. Malaysia topped the list with a score of 81 in disclosure and audit quality. (News Briefs, The Corporate Library, 8/6/02)

Questioning the Call for More Shareholder Power

In a recent posting with the above title, Russell Mokhiber and Robert Weissman take a page from Marjorie Kelly’s excellent book, The Divine Right of Capital. “A common diagnosis of the current scandals is that they can be traced to company executives’ ability to function with little accountability to shareholders. An alternative view is that the problem was that executives were thinking too much about what shareholders want.” No, shareholders didn’t want CEOs to rob them blind, but they did want share prices pumped up, “especially in the short term.” That assessment is on target, especially for many mutual funds with high churn rates.

“People are saying we need to align executives closer to shareholders,” Kelly says. “I believe their alignment was too close. We need a corporation that is accountable to someone besides shareholders.” To me, that would be society, enforced by governments. That’s what laws are for…they need to be enforced.

Kelly’s book contains many interesting ideas; Mokhiber and Weissman focus on “time-limited shareholding.” Shareholder control would be progressively transferred to employees, a public entity or a non-profit enterprise. Although they admit, such an idea is “far from immediate enactment,” they see possibilities in coming bankruptcies. (see Questioning the Call for More Shareholder Power, Russell Mokhiber and Robert Weissman)

I’ve long been a huge fan of expanding employee ownership and greater participation by employees in decision-making. At almost every opportunity, I remind readers that firms with these characteristics grow about 10% faster every year than the norm. We’ve built in employee ownership when restructuring through bankruptcy before, as in the Chrysler bailout; we could do it again. There may be cases where progressively transferring control of a corporation to a public entity makes sense, such as with private toll roads and sport arenas. However, keeping the bulk of a corporation’s shares available to the market also has advantages, such as liquidity and the ability to raise capital. In addition, if functioning properly, there are great advantages in having independent outsiders on the board of directors and the profit incentive is a great motivator.

The recent corporate implosion was not due to over-alignment between shareholders and management. Instead it was built on accounting gimmickry embodied in stock options. Because of business pressure on the FASB in the mid-nineties, the cost of stock options resulted in a 9% overstatement of earnings by the S&P 500. Among information technology firms in the S&P 500 the average overstatement due to the cost of options was 33%. Options are not an alignment between shareholders and managers. They are a usurpation of power in the form of heads I win, tails you lose. Options are a one way street, with plenty of upside potential but no downside risk. They motivate CEOs and other executives to undertake risky ventures and aggressive accounting practices. Long term value is out the window when all they need is a timely spike in the value of stock.

A study of 10 different industries by Jack Dolmat-Connell, a principal at Clark/Bardes Consulting, found that companies in which executives had large shareholdings performed significantly better that those in which ownership was small. “Southwest Airlines had high stock-ownership levels and good performance, while Delta Airlines had low ownership and poor performance. Likewise, Dell Computer had high ownership and good performance, while Apple Computer (Steve Jobs owns all of two shares in the company) had low ownership and much poorer performance.” (see Pay for Nonperformance?,, 8/1/02)

Contrary to Kelly’s assertion, shareholders don’t have too much power; they have too little. It was the Business Roundtable, an association of CEOs, not shareholders, that lobbied Congress to keep options “free.” It was CEOs, not shareholders, who have controlled corporate boards…even those with “independent” boards. Allow shareholders to use the company proxy to nominate and elect directors and we’ll see the beginning of truly independent boards. Require options to be expensed and we’ll see those independent boards move away from compensating CEOs with options and towards granting restricted stock. (see below, Options: Expensing and Restricting) (Sign Petition in support of Democracy in Corporate Elections. See our press release: Petition for Democracy in Corporate Elections)

Options: Expensing and Restricting

Citigroup has become the latest company to jump aboard the expensing bandwagon. Reports are they will begin expensing all stock options to management, employees and corporate directors in January, reducing next year’s earnings by 3 cents a share. When fully phased in over the next five years, it should cost about six cents a share.

Citigroup also announced that the bank’s CEO, Sanford Weill, and CFO, Todd Thomson, have personally certified the bank’s financial statements, thus meeting an SEC requirement that 900 of the nation’s biggest companies officially sign-off on a company’s books by August 14.

One of our readers, Thomas Ernst Huenefeld of Cincinnati, writes that sales of stock from exercised options by top executives need to be restricted until after they leave the company. He suggests they only be allowed to sell sufficient shares to pay their income taxes, until ninety days after they leave the company. (They wouldn’t be restricted from selling shares which they acquired in the open market.)

Mr. Huenfeld’s idea is excellent, although I’d favor even a longer restriction on sales…say two years after they leave. This would align the long-term interests of CEOs and shareholders, CEOs would place a greater emphasis on succession planning and we would expect a reduction in accounting trickery, since final compensation would be, at least in part, dependent on the next administration.

Back to the top

AFL-CIO Supports Worker Access to Corporate Ballots

During a July 30 rally outside he New York Stock Exchange, AFL-CIO President John J. Sweeney announced the organization’s agenda, which calls for putting workers first, holding CEOs accountable, putting integrity back into the markets and ending corporate corruption of politics. “CEOs should no longer have access to company funds to run candidates for their board while worker funds have to spend their own money to elect independent directors.”

We hope the AFL-CIO will urge its members to support the Petition for Democracy in Corporate Elections.

“Cliff Notes” on Corporate Responsibility by Newsbatch

Can’t keep up with all the news? A summary on Corporate Responsibility has been added to The summary provides an in depth account of the major recent scandals, discusses proposals for reform and the extent to which the recent legislation passed by Congress has enacted these proposals.

Mckinsey & Company’s Latest Global Investor Survey, July 2002

Corporate governance remains of great concern for institutional investors, according to the 2002 Global Investor Opinion Survey released by McKinsey & Company, with strengthening the quality of accounting disclosure as the top priority.

Corporate governance is at the heart of investment decisions

  • Investors state that they still put corporate governance on a par with financial indicators when evaluating investment decisions.
  • An overwhelming majority of investors are prepared to pay a premium for companies exhibiting high governance standards. Premiums averaged 12-14% in North America and Western Europe; 20-25% in Asia and Latin America; and over 30% in Eastern Europe and Africa.
  • While the relative significance of governance appears to have decreased slightly since 2000, this highlights that (i) many countries have implemented governance-related reforms that have been welcomed by investors, and
    (ii) more than 60% of investors state that governance considerations might lead them to avoid individual companies with poor governance with a third avoiding countries.

Financial disclosure is a pivotal concern

  • In pursuit of better accounting disclosure, investors resoundingly express support for the introduction of a single unified global accounting standard, with 90 percent favoring such a move. However, investors are split down the middle on the preferred standard.
  • Investors are unified on expensing stock options in P&L statements, with over 80 percent supporting such a change.

Reform priorities focus on rebuilding the integrity of the system

  • Investment behavior is affected by a broad spectrum of factors, not just those at the corporate level. The quality of market regulation and infrastructure is highly significant, along with enforceable property rights and downward pressure on corruption.
  • After strengthening corporate transparency, investors believe companies should create more independent boards and achieve greater boardroom effectiveness through such steps as better director selection, more disciplined board evaluation processes and greater time commitment from directors.
  • Specific policy priorities include strengthening shareholder rights, improving accounting standards, promoting board independence and tighter enforcement of existing regulations.

See Global Corporate Governance Forum.

How International Are European Boards?

Based on the 101 responses received so far, the preliminary findings of the study are:

  • About 20% of executive and non-executive board members are not nationals of the country of incorporation;
  • Swiss and Dutch respondents have the most international boards, while German and Italian respondents are the least international;
  • About 15% of companies that responded have a non-domestic CEO; 10% a non-domestic Chairman;
  • Non-domestic CEOs and Chairmen are found most often among Swedish respondents;
  • In contrast all the CEOs and Chairmen of the German and Italian respondents are domestic.

See presentation by André Sapir, Member, European Commission Group of Policy Advisors, at the ECGI launch, Tuesday 15 January 2002 at La Maison de l’Europe at the Bibliothèque Solvay, Brussels.

Petition for Democracy in Corporate Elections

The Committee of Concerned Shareholders, and James McRitchie, Editor of CorpGov.Net, have jointly filed aPetition for Rulemaking with the Securities and Exchange Commission.

The Petition seeks to create corporate democracy and true accountability. Petitioners ask the SEC to amend its Rule 14a-8(i) so that ALL Shareholders, using the Shareholder Proposal process, will be able to nominate Director-candidates and the names of those Director-candidates must be placed on the corporation’s ballot.

The myth is that the Management reports to the Board. The reality is that the Board reports to the CEO. Strengthening the definition of “independent” Directors will have little impact, as long as they owe their positions to the CEO.

A corporation’s ballot is paid for with assets belonging to ALL Shareholders. Yet, under current Rule 14a-8(i), ONLY the names of Director-candidates nominated by the corporation appear on the corporation’s ballot. Shareholders are denied equal access to the ballot. Instead, Director-candidates nominated by Shareholders must go through an extremely expensive proxy solicitation process.

The present system is rife with conflicts of interest. Since Directors are beholden to Management and/or fellow Directors for their position, they will most likely not ask the “tough questions” of Management, even though they owe a fiduciary duty to Shareholders to ask those questions.

An investor from Germany recently summarized the current system. “When I have started to invest in the USA about 3 years ago I was sure that elections of directors are fair. … So when I have discovered that elections of directors of USA public companies are not democratic I was very surprised and disappointed. … This is EXACTLY how voting in communist countries worked. Everyone could vote, but there was just NO CHOICE of candidates. The point was not how to be elected, but how to get on the election list. With this system no changes were possible, so there was no motivation to improve the governance.” (Emphasis in original.)

The major barrier to democratic corporate elections is the fact that, under present SEC Rules, only the names of those persons nominated by the corporation are required to appear on the corporation’s ballot. The Committee of Concerned Shareholders and James McRitchie have petioned the SEC to amend Rule 14a-(8)(i)(8) to require that ALL nominees for Director positions, who meet the other legal requirements, be included in Corporate proxy materials.

Entrenched Managers and Directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with Directors chosen by shareholders. Please join with us in this request to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission. Please e-mail Mr. Katz at [email protected], indicating that you support the petition for democracy in corporate electionssubmitted by the Committee of Concerned Shareholders and James McRitchie.

SRI Funds Take Hold

Investor interest in socially responsible investment funds (SRIs) is running high. According to fund research company Lipper, overall, stock funds experienced outflows of $12.7 billion in June (net after new money is invested and redemptions are made). Yet, SRIs had inflow of $47 million during the same month.

Calvert will soon be screening model for corporate-governance problems, using data compiled by Institutional Shareholder Services. ISS ranks major companies on 51 separate measures from compensation to anti-takeover pills and independence of boards. Those with the lowest scores will be avoided.

Along with labor unions and pension funds, SRIs are quickly becoming the most active in the use of shareholder resolutions. Walden Asset Management’s resolution at data storage company EMC to make its board more independent, won support from 56% of votes cast in 2002, vs. an average 22.5% support for this type of proposal last year. (Not So Bad at Do-Gooder Funds, BusinessWeek, 8/1/02)

Back to the top

Continue Reading ·

July 2002

Last Chance to Comment on NYSE Proposed Changes to Listing Standards

The New York Stock Exchange released recommendations from its Corporate Accountability and Listing Standards Committee, which propose new standards and changes in corporate governance and disclosure practices of NYSE-listed companies.See press release. See written commentsWrite to help restore investor trust and confidence. Comments are due on August 1st. Below is this editor’s comments.

Dear Ms. O’Neill, Mr. Levin, Mr. Panetta, & Mr. McCall:

This is to support the New York Stock Exchange’s (NYSE) proposed changes to its listing requirements and to suggest additional changes to enhance corporate governance standards.

I am an individual investor and the editor of Corporate Governance, an Internet publication at Corpgov.Net, which I established in 1995 to provide research and advice to governments, boards, unions, institutional investors and individuals on improving corporate governance.

NYSE Proposed Changes

Shareholder Votes on Equity Compensation & Broker No-Votes: I strongly support the NYSE’s proposal to require shareholder votes on this highly contentious issue. The right to vote is an important democratic right. However, the proposal would be improved by prohibiting all broker votes on any subject unless the broker receives prior instruction from their customer. When companies need shareholder approval, management has come to rely on broker votes because, unfortunately, brokers tend to blindly vote on the side of management.

Board Independence: I support your recommendation that independent directors must comprise a majority of board members. However, the proposal could be substantially strengthened by joining with me in petitioning the SEC to permit shareholders to use Shareholder Proposals for the purpose of electing directors.

Directors do not become independent just because they have no economic ties to the company beyond their job as a director. Disinterested outsiders can mean uninterested outsiders. The key is not “independence, ” arbitrarily defined, but whether a director’s interests are aligned with the shareholders. If a director is to represent the interests of shareholders, they must share those interests. Moreover, they must be intimately familiar with those interests. Put simply, they must be shareholders, nominated and elected by and accountable to shareholders.

Additional Areas for Consideration

1. Listed companies should be required to include their corporate governance policies and conflict of interest policies in their proxy statements. If they waive those policies at any time, that should be disclosed, along with the reasons for the waiver.

2. Any online proxy voting system should be required to include all proxies circulated by all parties. Both sides in a proxy contest should have access to the cheaper and more accurate system for counting votes available through ADP. All votes should be counted the same way, especially if there is any form of shareholder initiative, from a proposal to a contest.

3. Social and environmental risk should be classified as “material” and be mandated for disclosure to protect investors from the adverse impact of undisclosed liabilities, obligations, and impairments. Research demonstrate a link between financial performance and environmental performance. Outstanding cases/complaints, and number of aggregate violations found by the National Labor Relations Board, Department of Labor, Equal Employment Opportunity Commission and the Office of Federal Contract Compliance Programs should also be included.

4. Require options to be expensed. Options are a form of compensation that clearly have value. A representation of that value should not remain hidden in the footnotes of financial statements. In the year 2000 options resulted in a 9% overstatement of earnings by the S&P 500. Among information technology firms in the S&P 500 the average overstatement due to the cost of options was 33%. The total cost to shareholders was $284 billion in dilution.

5. Split the roles of chair and CEO. How can the board act independently if the CEO sets the agenda? The “lead director” concept was a half way measure that appears to confuse many and hasn’t caught fire. A McKinsey survey of more than 180 US directors representing 500 companies suggested that more than two-thirds believe the board should split the role of chief executive and chairman. Let’s give them what they want and need to do their jobs.

Thank you for this opportunity to share my views on the NYSE proposals.

Corporate Governance Fund Report Debuts

The Corporate Governance Fund Report (CGFR), a monthly newsletter that track funds and investments aimed at improving or rewarding the corporate governance practices of the invested companies, emerged in July with a free trial offering. The editor/publisher is Maureen Nevin Duffy, perhaps best known as the founding editor of the Journal of Performance Measurement. The debut issue discusses Herbert Al Denton, who led dissidents at ICN Pharmaceuticals’ shareholder vote – a 3 – 1 landslide. (In the interest of full disclosure, the Editor of CorpGov.Net is an ICN shareholder.) The issue also discusses Guy Wyser-Pratte’s recent initiatives at German engineering/defense contractor Babcock Borsig, Brazilian activists and funds. Most interesting to this reader was the most comprehensive list of proactive investors’ funds worldwide that I have seen.

CGFR’s mission is to “follow and analyze the activities of investors seeking better Corporate Governance. These investors are agents for change, whether they bear the label ‘active investors,’ ‘relational investors,’ ‘value investors,’ ‘proactive investors,’ ‘head bashers’ or ‘institutional investors.’ They pack the potential of restoring trust in our capital markets. They are Pushing Back!” We look forward to Ms. Duffy’s future reports from the front lines.

Angelides Take Another Bold Move

Congressional efforts to stop tax evading corporations from moving offshore have stalled. Yet, California’s Treasurer Phil Angelides won’t be deterred. He announced that his office will no longer invest in US companies that move to offshore tax havens. Angeledies also urged CalPERS and CalSTRS to divest $752 million worth of investments from such expatriates. “These are American companies doing business in this country, living here, enjoying all the fruits, yet they do not want to abide by our rules. Where does it stop?”

While Angelides has taken a bold step; is it the right one? True, governments and government employees shouldn’t be supporting companies that undermine our tax base. Selling off these firms makes news when the action is taken but this step should be a last resort. We won’t have as much influence with expatriate firms when we aren’t shareholders.

CalPERS and CalSTRS shouldn’t be bullied into selling. They should submit shareholder resolutions or bylaws amendments to every expatriate firm in their portfolios to require them to move back. They should work with the Council of Institutional Investors, the Social Investment Forum and other investor groups to ensure our voices are heard. Additionally, they should more fully utilize their own internet sites. Every member should be able to track their individual portfolios online and should receive advice from CalPERS and CalSTRS concerning how to vote on upcoming corporate proxies.

Hush Money Draws Attention to Greenmail

One early morning in 1984 California Treasurer Jesse Unruh read that Texaco had repurchased almost 10% of its own stock from the Bass brothers at a $137 million premium so that Texaco’s top brass could avoid loss of their own jobs in a takeover. That action stirred resentment and woke a slumbering giant. The California Public Employees Retirement System began its long involvement with corporate governance issues.

Computer Associates denies their recent payment of $10 million to Sam Wyly is greenmail because they didn’t buy his stock; he simply agreed not to wage a proxy fight. Whatever it’s called, it’s still stealing from shareholders to entrench management. This time shareholders are already awake. The Sarbanes bill is only the opening shot; let the shareholder revolution begin!

IOSCO Recommends OECD Principles for Emerging Markets

The Emerging Markets Committee of the International Organisation of Securities Commissions (IOSCO) has recommended that its members foster good corporate governance through legislation, regulations and codes of good practices using the OECD’s “Principles of Corporate Governance” as a benchmark.

Consult the 2nd Edition of the Corporate Affairs Newsletter, offering articles on the launch of the White Paper on Corporate Governance in Russia and insights on accounting and audit conflicts. The newsletter also provides information on the corporate governance programme in Romania.

Six Ways to Improve Corporate Governance

Republicans and Democrats are stumbling all over each other to show who can be toughest with corporate “wrongdoers.” The Senate and House have passed competing legislation calling for everything from 20-year jail terms and extended statutes of limitations to new accounting rules and oversight boards. Many of the reforms are good but others are more for show. The 20-year jail terms, for example, will require proving intent to defraud and you can bet the defendants will have some of the best lawyers money can buy. Here’s a list of six reforms, the first has been widely discussed but many of the others have received too little consideration.

  1. Require stock options to be expensed. Expensing options is supported by Federal Reserve Chairman Alan Greenspan, Senator John McCain, Citigroups’s Sanford I. Weill, billionaire investor Warren Buffett and the several of the companies on whose boards he sits, such as Coca-Cola and the Washington Post.

    Unions, representing groups ranging from sheet-metal workers to the Teamsters, have filed 11 shareholder resolutions focusing on expensing stock options that will be voted on from September to November. This fall’s action is a practice run for 50 and 60 companies to be targeted next year. It is a winning issue for unions, a losing one for those seen as “fat cat” CEOs.

    Options are a form of compensation that clearly have value. A representation of that value should not remain hidden in the footnotes of financial statements. In the year 2000 options resulted in a 9% overstatement of earnings by the S&P 500. Among information technology firms in the S&P 500 the average overstatement due to the cost of options was 33%. The total cost to shareholders was $284 billion in dilution.

    “How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg,” said a wise Abraham Lincoln. Shareholder activist Robert Monks has related this analogy for years and it still holds up; our accounting standards recognized the truth.

    The culture of greed has overcome even our youngsters. A Junior Achievement survey, reported in Across the Board, found that 34% of teenage girls believe they will be earning $1 million/year by the time they are 40. Among teenage boys, it was 65%. In actuality, less than 5% of households have a $1 million in total assets, let alone earning that much every year. It’s the lottery/options/superstar mentality…let’s get back to reality.

    If shareholders had a larger role in setting the pay of corporate executives, we would see greater use of restricted stock that can’t be sold until at least two years after the executives leave office. This form of golden parachute would only pay off only if the CEO has laid a firm foundation for the firm’s long term future, instead of simply concentrating in jacking up stock prices so they can cash out options in any given quarter.

  2. Permit direct nomination of board members by shareholders. The current process, where shareholders coercively ratify incumbent nominees is plainly not an “election.” Running an independent nominee or slate using the solicitation process is prohibitively expensive, except in the most unusual circumstances. Why should shareholders be required to run candidates by paying for an expensive solicitation, while current management uses our funds to tout their candidates on the company proxy?

    The current system is worse than voters trying to run a state government by proposition. We need our own elected leaders on corporate boards. The idea of requiring a majority of “independent” directors is a half way measure. Historically, the chief executive serves as the chief recruiter for board vacancies. Board members can be “independent” and still owe their jobs to the CEO; that’s not independence. Board members who are actually nominated and elected by shareholders will be accountable and will, in turn, hold the CEO accountable. (see“Independent” Directors = Oxymoron)

  3. Require institutional investors to report their voting policies and their votes in corporate elections. 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 (see “Avon” letter). The same standards of trust law also hold for mutual funds, as clarified by SEC Chair Harvey Pitt, in a letter dated 2/12/2002. However, if votes are not disclosed, how can these standards be enforced? How do we know when the money managers are voting in our interest if we never know how they vote?
  4. Split the roles of chair and CEO. How can the board act independently if the CEO sets the agenda? The “lead director” concept was a half way measure that appears to confuse many and hasn’t caught fire. A McKinsey survey of more than 180 US directors representing 500 companies suggested that more than two-thirds believe the board should split the role of chief executive and chairman. Let’s give them what they want and need to do their jobs.
  5. Election reform via instant runoff voting (IRV). Government elections need to be reformed if business is to shift its focus from earning the most money possible for CEOs to maximizing total returns. Doubling prison terms for dishonest CEOs means little if none are convicted. Big government can’t balance big business because both major parties will remain beholden to their largest contributors. Voting for third party candidates is wasting your vote. IRV would encourage candidates take real stands on the issues because voters would be voting for their favorite candidate without fear of wasting their vote or helping elect their least favorite candidate.

    Less than half of those eligible vote in presidential elections. During off years, only about 35% vote. In last December’s special election in San Francisco less than one in six registered voters participated. The poor and middle class feel disenfranchised. In plurality voting systems, typical in the US, candidates can win with less than a majority when there are more than two candidates running for the office. IRV ensures that the winner enjoys true support from a majority of the voters, rather than from a simple plurality.

    Used for major elections in Australia, Ireland, Great Britain, and soon in San Francisco, IRV accomplishes the goals of a traditional runoff election in one efficient round of voting. Voters indicate both their favorite and their runoff choices by ranking candidates in order of preference. If no candidate wins a majority of votes, the first-choice preferences of the last-place candidate’s supporters are eliminated and their second choices are used instead. If there still is no majority winner, the first choices of those voting for the next-to-last candidate is discarded in favor of their second-ranked choices, and so on, until a majority winner is determined. (see the Center for Voting and Democracy)

  6. Eliminate broker voting. Currently, if shareholders don’t vote their proxies within 10 days of the annual meeting, their brokers will vote for them…always in favor of management’s recommendations. The Council of Institutional Investors has opposed the use of broker votes for anything except achieving a quorum for a shareholder meeting and has urged the SEC to prohibit broker voting without client instructions. When will the SEC listen? Its time we all urged this action.

Conflict of Interest at CalPERS

CalPERS directors are involved in potential conflicts of interest that threaten to erode the fund’s sterling image, according to a report by Sharon L. Crenson of the Associated Press. Five members of the board owned stocks also held by CalPERS in 2001, according to the latest state records. Three board members have received thousands of dollars in political campaign contributions from companies CalPERS invests in. I say that even though CalPERS is one of the best, there’s much more beneath that surface. Keep digging. (see Potential Conflicts of Interest at Nation’s Largest Public Pension Fund, 7/16)


Many retirement plan sponsors don’t believe or don’t realize that they are responsible for their plan’s investment performance. Surprise! You may find yourself facing personal liability if participant investments turn out badly. Members of corporate pension committees and plan sponsors who – in light of the recent Enron controversy and other litigation —  are concerned about their responsibilities under ERISA might consider signing up for a class.

Ugly Americans?

In the latest issue of Ralph Ward’s Boardroom Insider, Ralph gives thanks that he hasn’t spoken to any international groups on corporate governance for a few months. When he did so in India earlier this year, post-Enron comments could be summed up as “How dare the US try to tell us how important good governance is.” Ralph notes that “in less than a year, US corporate governance has gone from a light shining on the hill of global commerce to become an ‘ugly American’ outrage, calling into question a decade of economic growth.”

He concludes that “America has always been, for good or ill, a nation based on pushing the envelope. The good side of this has been a willingness to gamble on creating wholly new industries, and personally staking everything on an entrepreneurial pipe dream — to create fortunes out of nothing. Yet the dark side has also been a talent for creating fortunes out of nothing — and skipping town with the cash before anyone got wise.”

Of course, many on the speaking circuit, Ralph included, are not out to impose America’s values on others. Certainly, I don’t feel in a position to do so. First, I can barely keep up with cutting edge developments in the US, let alone all the other countries of the world. I try to point to some of our successes, failures and what we are working on to push the envelope. My hope is that by sharing, others can learn from our experience.

And, of course, we can learn from the experience of others. Asian corporate governance, especially in Korea, appears to have taken a great leap forward as a result of reforms put in place after the 1997-98 financial crisis. This is reflected in a healthier market. Morgan Stanley’s Far East Index (ex-Japan) gained 8.9% in US dollars so far this year, whereas the Dow and S&P 500 have dropped 12% and 19.8% respectively.

Let’s look at another indicator, financial leverage. Salomon Smith Barney recently reported that in Asia the ratio of average credit to gross domestic product fell from 123% in 1997 to 114% in 2001. In the US, it has gone from 204% in 1994 to 288%.

Kwong Ki-Chi, chief executive of the Hong Kong Exchanges, told a business seminar recently, “There is now some suggestions in the U.S. that the share option scheme should be approved by the shareholders.” “In Hong Kong, we already require share options to be approved by shareholders.” Of course, use of options isn’t as pervasive in Asia, so CEOs are less prone to take a short-term view for personal gain.

If there is an “Ugly American” phenomenon, based on the arrogant imposition of American systems of corporate governance, surely recent events have humbled the perpetrators. Surely we have much to learn from each other. (Statistics taken from a 7/11 Reuters report entitled “Asia no longer ‘bad boy’ of corporate governance, by Sabyasachi Mitra.)

The Worsening Crisis of Confidence on Wall Street: The Role of Auditing Firms

A new study of the above title by Weiss Ratings found that auditing firms gave a clean bill of health to 94% of the public companies that were subsequently cited for accounting irregularities. The companies in the survey dropped from a total peak market value of $1.8 trillion to only $527 billion, an aggregate shareholder loss of almost $1.3 trillion. Of the Big Five firms, PricewaterhouseCoopers came out best.. (Survey: Auditors Don’t Spot Problems,

ICGN Urges Action

The International Corporate Governance Network (ICGN) whose members hold more than $10 trillion in assets — calls for:

  • more board independence as a way to improve transparency and protect shareholder interests
  • full publication of the salaries, short and long-term incentives and other benefits for all main board directors
  • shareholder vote on remuneration at companies’ annual meeting
  • rein in the use of options because they tend to reflect more general economic conditions rather than management.

“Investor inactivism has been an aider and abettor in what has happened,” Peter Clapman, ICGN chairman and senior vice president of the College Retirement Equities Fund (TIAA-CREF) says. “If an investor thought previously that corporate governance did not have to affect the bottom line or fund performance, that view has been dashed now.” (Investor Group Seeks Cuts In Executive Compensation, WSJ, 7/11/02)

Bleeding Continues

The President’s long awaited speech called for stricter enforcement, tough penalties and more disclosure. He called the Senate “to act quickly and responsibly so I can sign a good bill into law” but, according to the Wall Street Journal, his “aides suggest they’re hoping to water down whatever passes.”

Tough talk, but he failed to address many of the most basic issues, such as expensing options. Individual investors were told to take proxy voting more seriously but Bush didn’t say anything about the fiduciary duty of institutional investors to disclose their proxy policies and votes. Small individual investors aren’t going to police corporate “wrongdoers.”

Stocks began the day higher but sank steadily after Bush’s speech. Will his tough talk stave off more sweeping reforms? That seems to have been the purpose but we may be on our way to our first corporate governance led recession, if the bleeding doesn’t stop. Moral exhortations to CEOs won’t work, especially coming from a president who refused to make the record of his own transactions at Harken and the SEC investigation public. (see Bush Crackdown on Business Fraud: Is Sure Signal That New Era Is Here (WSJ Online, 7/10/02, and discussion forum) Learn more about the first MBA White House at George and Dick’s Amazing Corporate Misadventures and Bush: Corporate Confidence Man.

New Corporate Paradigm?

After Enron, WorldCom and dozens of other frauds, the time may be ripe for a new corporate paradigm. Certainly, mistrust of the current system is at an all time high…at least during my 54 year lifetime. Marjorie Kelly’s The Divine Right of Capital offers insights in a readable style (favorably compared to Tom Paine by one prominent reviewer) and the beginnings of a viable alternative. Instead of maximizing the return to shareholders, corporations should be maximizing total return…a concept we have been advocating here at CorpGov.Net since 1995. Total return here implies the long term efficient use of all resources, both natural and human. Of course, at the heart of the efficient use of resources is the need to recognize humanity as part of nature, not separate from it.

The aim of her book is to start a dialogue about the “core problem of capitalism.” Bloated CEO pay, sweatshops, stagnant wages, corporate welfare, environmental indifference and, I would add, the unraveling of political democracy, are all symptoms. “They spring from a single source: the mandate to maximize returns to shareholders.” Kelly argues that “this mandate amounts to property bias, which is akin to racial or gender bias. It arises from the unconscious belief that property owners, or wealth holders, matter more than others.” We have yielded control to an economic aristocracy.

“Civilization has crossed a great divide in history, from monarchy to democracy. But we have democratized only government, not economics. Property bias keeps our corporate worldview rooted in the predemocratic age.”

Corporations used to be chartered for social purposes, as well as to bring a profit to investors. Today they seem out of control. Too many are focused on pumping up the price of their stock, rather than creating real value. Most of the enormous wealth generated by corporations is channeled to a very small number of investors. Kelly points out that between 1976 and 1997 the top 1% doubled their share of household wealth in the US from 20% to 40%.

Contrary to popular opinion (I wonder if most people really are this misinformed), “investing” in the stock market is really speculating; 99% of the money invested in stocks simply represents a bet on future growth. The stockholder isn’t providing capital to a company but is buying shares from another stockholder, gambling that the price will rise. Only about 1% of stock sold (mostly during initial public offerings) actually finds its way to the corporation itself. The vast majority of corporate capital comes from retained earnings, not from the sale of stock.

A more accurate description of “investors,” according to Kelly, would be “extractors.” Most investors contribute nothing to the company. Instead, they are buying the right to extract wealth from it. Looking at the other stakeholders, such as suppliers and the community, one group stands out…employees. Employees and investors and present an interesting comparison.

Employees typically invest a great deal in the companies they work for in terms of what Margaret Blair calls “firm specific human capital.” They develop knowledge and skills, much of which is specific to their individual firm’s operations. In addition, employees often have 401(k) or other investment plans that are overweighted in their employer’s stock. In contrast, most shareholders have a relatively small proportion of their investments in any one company because they recognize the reduced risk of a balanced portfolio.

The fiduciary duty of directors is to maximize the wealth that can be extracted from the corporation by shareholders, typically in the form of dividends, buy-backs or increased share value. Fundamental to standard operating procedures is the idea of minimizing expenses such as wages and income to employees. Even though employees have a greater stake in the coporation’s success, they have no formal say as employees in corporate governance…no vote for the board of directors. Kelly argues employees are not treated as corporate citizens, in the current model, but as subjects. In today’s paradigm, you either own property or you essentially are property.

Kelly gives the interesting example of St. Lukes, an ad agency spun out of Chiat/Day where employees refused to be sold with the company. Without its employees, the ad agency was worthless, so the new owners sold out to employees for $1 and a percentage of profits for seven years. (see The Ad Agency to End All Ad

Although we have made some progress in addressing racism and sexism, we’ve only scratched the surface of wealthism. There wasDorr’s Rebellion in 1842. But since owning property was largely abolished as a requirement for voting, the issues surrounding wealthism have largely gone unaddressed.

Kelly argues the socially responsible investment movement, while in the right direction, doesn’t go far enough, since outperforming other investments is still the measure of success. In her vision, other measures matter…good wages, schools and a healthy environment. Wealthism is the key to many separate problems, just as sexism and racism are key in resolving many others.

Kelly argues that efficiency is best served when gains go to those who create wealth. Indeed, almost all the studies I have read conclude that democratically run companies, where decision-making and profits are shared, are better at producing wealth than the typical corporate model, which more closely resembles a dictatorship. Diversity and democracy pay, but most of those who run corporations and many shareholders are not interested in creating wealth most efficiently. They are happy to settle for less efficiency, if it will disproportionately increase their own power and wealth.

Kelly’s revelation that stock trading doesn’t raise corporate capital isn’t new. In 1967 Louis Kelso and Patricia Hetter wrote, “less that half of one percent of aggregate new capital formation during the eleven years 1955-1965 came from newly issued stocks, while 99.5% was financed through internal sources and through issuance of debt securities that in due course must be repaid from internal sources.” (Two-Factor Theory: The Economics of Reality. See also Democracy and Economic PowerKelso, and his longtime ally Senator Russell Long, truly made a difference through the invention and popularization of employee stock ownership plans (ESOPs). Today, 8.8 million employees participate in 11,000 plans with assets valued at 400 billion. Want more information on how ESOPS can be made even more productive through employee involvement? Contact the National Center for Employee Ownership (NCEO).

Maybe Kelly’s book and her energy can help take these prior efforts to the next level. Some of her more interesting ideas include the following:

  • Create a Federal Employee Ownership Corporation to promote employee ownership like Fannie Mae and Freddie Mac promote home ownership.
  • Require a majority vote of workers for mergers, acquisitions or hostile takeovers.
  • Bar corporate felons from federal contracts. The Clinton administration enacted a rule to bar recidivist businesses with a record of breaking labor or environmental laws from getting government contracts. The Bush administration overturned it immediately on taking office. Kelly suggests the idea be extended to include a ban on campaign financing and lobbying for such corporate offenders.
  • Reaffirm the right of the people to revoke corporate charters.

A word of caution; I’ve met corporate governance scholars who have read Kelly’s book and refuse to even discuss it because the book doesn’t fit the current paradigm. I, for example, have spent years believing that if employees would just take more control of their pension funds, corporate executives would be held accountable to standards that more closely reflect our long term interests. Sure, 10% of the wealthiest families may hold 62% of the value of all pension accounts (they did in 1992), but many average Joes and Janes at least have some voice in how this money is invested and how companies owned by their pension fund are governed. Some, like the members of CalPERS, have a direct vote in elections for board members. Others vote for union officials who sit on pension fund boards or appoint those who do. Such votes aren’t in proportion to holdings, so pension funds tilt more towards democracy than traditional shareholdings.

How do I reconcile Kelly’s vision with mine? We’re both headed down a road in the same basic direction to a more efficient model of corporate governance. No one has a monopoly on how to get there but working together should make the going a little easier for all of us.

Speak Loudly and Carry a Small Stick

Gorge W. Bush is “deeply concerned” and will “hold people accountable,” but his words provide the reassurance of an accounting certification by Arthur Andersen. Six months since the president promised “a lot of government inquiry into Enron,” we’re getting a prominently billed speech on corporate governance. As Frank Rich noted in a New York Times editorial, “Playboy has done a better job of exposing the women of Enron than the Bush administration has done at exposing its men.” “The sight of a corporate crook being led away in handcuffs, Giuliani-style, would do far more to restore confidence in Wall Street than any more presidential blather.”

Why the slow pace in locking up America’s corporate “wrongdoers?” Frank Rich thinks it has something to do with the fact that several of those who profited from Enron work at the White House. Fellow Times editorial writer Paul Krugman, notes that Bush profited by exactly the same accounting misdeeds at Harkin as were used by Enron a decade later. (Yes, Arthur Andersen was the accountant.) (see Succeeding in Business, NYTimes, 7/7/02)

“WorldCom is a political boon to the president because it allows him to moralize about epic-scale crime without mentioning Enron, Halliburton or Harken,” writes Rich. The rise of Enron and the corrupt Bush presidential dynasty have been compared to that of the Harding administration’s Teapot Dome scandals.

Bush has already voiced opposition to expensing stock options, one of the simple fixes endorsed by Alan Greenspan and Warren Buffett. His Treasury Department, according to Newsweek, is hard at work stifling legislation that would end offshore shelters that allowed Enron (with 800-plus such entities) to evade taxes in four out of five years.

I look forward to his major address to the nation on corporate governance issues. Unfortunately, just when the country is looking for a Teddy Roosevelt to “speak softly, but carry a big stick,” we’re likely to witness just the opposite. (All the President’s Enrons, Frank Rich, NYTimes, 7/6/02)

Nader Offers to Organize Individual Investors

People want to make corporate bosses to pay back their ill-gotten billions to laid-off workers and pensioners. “They want to see these corporate crooks convicted and sent to jail,” Nader said. HE offered to help organize individual investors to pressure the White House, Congress and the Securities and Exchange Commission to bring justice and honesty back to the market. “Greed, unrestrained by the rule of law, knows no boundaries,” he said. “Greed has pushed the envelope.”

Nader called on the SEC to reopen its 1991 investigation into President Bush’s insider sale of $850,000 worth of Harken Energy shares in June 1990, just two months before the shares plunged. See White House defends Bush SEC filing. He also suggested other top executives in the administration, including Vice President Dick Cheney, should abe investigated by the SEC for contributing to accounting irregularities.

For reform to be meaningful, it must restore real independence to corporate auditors and must create a strong and independent oversight body for the accounting industry, Nader said. (Nader calls for investors movement: Rationale is to give the little guy a ‘seat at the table,’, 7/5/2002)

Cracking Down on Corporate Crime

First, the Federal Bureau of Investigation should be required to compile an annual report on corporate crime in American, to accompany its current Crime in the United States report, which is unfortunately confined to street crime.

Second, the federal government should refuse to do business with companies that are serious and/or repeat law breakers, as well as deny other privileges (for example, granting broadcasting licenses) to corporate criminals. This would involve some new or strengthened laws and regulations, as well more stringent enforcement of debarment, contractor responsibility and good character laws now on the books. States and local governments should adopt similar measures.

Third, whistleblowers and private citizens should be able to enforce laws regulating corporate conduct. One way to facilitate this enforcement approach would be to expand and creatively adapt the False Claims Act, which currently enables whistleblowers to initiate lawsuits against entities which have defrauded the government, and which reclaims for the government every year hundreds of millions of dollars stolen by unethical contractors. (Russell Mokhiber and Robert Weissman)

Investment Bankers to Meet New Requirements

California Treasurer Phil Angelides called on investment banking firms and money managers to follow new conflict-of-interest guidelines or face the loss of billions of dollars in government investment business. Investment bankers must sever links between their corporate business deals and their payments to stock analysts; they must create a review committee to approve all research recommendations; and they must monitor their own progress. Money managers who provide advice to the California Public Employees’ Retirement System and the California State Teachers’ Retirement System will have to follow the guidelines if the boards of the pension funds agree.

“CalPERS and CalSTRS lost $850 million on WorldCom alone,” Angelides said. “These are not sustainable losses.” The investment protection principles are patterned after a May agreement between Merrill Lynch & Co. and New York Attorney General Eliot Spitzer following allegations that that company’s investment advice was tainted by conflicts of interest. Angelides oversees California’s $50 billion Pooled Money Investment Account, which is the checking account for state government and more than 3,000 local jurisdictions.

CalPERS Calls Members to Action

CalPERS is urging its 1.3 million members and all investors to push passage of S 2673, the Investor Protection Act of 2002. CalPERS posted sample letters for organizations and individual investors to fax to their Senators on its Shareowner Forum. “There is currently a crisis of confidence with the accounting industry,” said James E. Burton, Chief Executive Officer for CalPERS. “The independence of accounting firms that audit financial statements of public companies must be beyond reproach. The conflicts of interest that are prevalent throughout the accounting industry have fueled the erosion of investor confidence. Nothing but a ‘bright-line’ ban will end the inherent conflicts created when an external auditor is simultaneously receiving fees from a company for non-audit work,” Burton said.

A review of 1,200 U.S. companies in the System’s stock portfolio during the 2002 proxy season indicated that more than half of the audit firms’ revenues were derived from non-audit services.

“We consider this unacceptable and a significant impediment to objective and independent auditing,” added Burton. The Act also calls for creating an oversight board for regulating accounting firms that audit public companies that would represent the interests of investors, and those whom investors rely upon. CalPERS believes that this new body must have the power to investigate, adjudicate and discipline the industry through authority set by Congress, as well as have an independent funding mechanism. CalPERS has estimated that its unrealized and realized stock and bond losses in WorldCom total more than $580 million.

Back to the top

WorldCon, WorldRot

Booking fees associated with its use of third-party network services and facilities as capital expenditures, instead of expenses, was a $3.85 billion fraud. Obviously, civil and criminal penalties for committing accounting fraud are not strong enough to deter such crimes. Will an SEC call for CEOs and CFOs of large companies (revenues totaling more than $1.2 billion) cure the problem? I doubt it. In spite of the Enron debacle, the SEC continues to allow corporate management to exclude from the proxy a proposal for shareowners to select the auditor by vote. The SEC deems auditor selection to be an “ordinary business” decision that shareowners should not consider undertaking.

“The wider implications of the WorldCom debacle will not be shrugged off so lightly,” says Tom Holland. Foreign investors owned $1.75 trillion in US equities, nearly 13% of the outstanding capitalization, as of March 2002. During the last 3 months global capital flows have pushed up the yen by nearly 12% against the dollar. “Even if only a small percentage of that capital is reallocated to Asia, the effect on relatively illiquid regional currencies and stockmarkets could be significant.” (World Con, Far Eastern Economic Review, 7/11/2002)

But taking money overseas may yield no better results in the long run. A research paper by Christian Leuz, Dhananjay Nanda, and Peter Wysockia studying investor protection regulations in 31 countries shows that accounting abuses such as self-dealing are far worse in Continental Europe and Southeast Asia than in the US. (Feeling Burned by Accounting Scams in the U.S.? Just Look Overseas[email protected] Newsletter)

Joint Venture Consequences

Unocal will stand trial late September for alleged human-rights abuses committed by the government of Burma, the oil giant’s joint-venture partner in the development of a gas field. “Companies are going to have to take more account of the social consequences of their operations,” says Stephen Davis, who editsGlobal Proxy Watch. “We’re asking for $1 billion,” says Terry Collingsworth, head of the International Labour Rights Foundation, which filed the case against Unocal.” “Unocal’s involvement in Burma acts as a poison pill,” says Simon Billenness, a consultant to U.S.-based Trillium Asset Management. “Unless a company adopts a human-rights policy that is transparent, you’re going to face greater risk of damage to your business, your stock price, your image and your brand.” (The Era of Responsibility, Far Eastern Economic Review, 7/11/2002)

Banking Governance Questioned

Mike Mayo, an analyst at Prudential Financial, says four out of five chief executives at the 30-odd banks that he examined are also their chairmen. One out of four board members has a financial relationship with his bank. At FleetBoston Financial and SunTrust, only half of the directors can be considered independent. Of the fees banks paid to external auditors, 70% were for services other than auditing, such ad providing consulting and tax advice. (A murky sort of pond life, 7/4/2002,The Economist)

CFO Qualifications

Only 20% of CFOs in a recent survey were found to be Certified Public Accountants; 35% had MBAs, and 5% had both qualifications. Only 1% of high-school students want to major in accountancy, compared with 4% in 1990. According to a recent article in The Economist, “an accountancy training encourages respect for numbers; an MBA breeds creativity.” Maybe its time to get back to counting beans. Their advice? “Appoint a CFO old enough to remember the trade.” “Bring in a foreigner. ‘In Britain, finance directors seem to be more loyal to their practice than to their firm,’ observes Frank Schroeder. Now president of DBM Europe, a human-capital consultancy.”

Unfortunately, “Chief executives clearly want a CFO who will be part of the team. If he isn’t, he goes. A survey by CFO magazine in 1999 found that 39% of chief executives had fired their last CFO, and 75% had hired the current incumbent—40% of them within the previous three years.” And from Nell Minow comes the advice for audit committees to hold at least some meetings without the CEO and take part in hiring and firing of CFOs. If CFOs were required to be CPAs, just as a general counsel must have passed the bar, the numbers might be presented more honestly. (Too creative by 50%?, 7/4/2002)

Martha Stewart Isn’t Alone

George W. Bush “has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive,” according to Chuck Lewis of the nonpartisan Center for Public Integrity. As reported in the Wall Street Journal on March 4, 2002, Bush sold off two-thirds of his stake in Harken Energy, for $848,000 (about four times bigger than the sale that has Martha Stewart in hot water). The law required prompt disclosure of insider sales but Bush neglected to report his transaction to the SEC for 34 weeks.

According to Paul Krugman’s recent OpEd piece in the New York Times (Everyone Is Outraged, 7/2/2002), “an internal SEC memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.”

It took Nixon to go to China. Maybe Bush, Cheney and Pitt have the insider knowledge it takes to stop accounting fraud and corporate crime. For more, see Bush Family Value$, September/October 1992, Mother Jones and Bush And The Corporate Crime Wave: Part of the Solution or Problem? File Under “Takes One to Know One.” June 27, 2002, The Daily Enron.

Bush may be calling for reform but he is unlikely to call for severing links between investment bankers and analysts, strengthening auditor independence by banning consulting for accounting clients, or requiring that options be expensed. Without these reforms, let alone opening up the board nomination process, investors aren’t likely to head back into the market.

Public confidence in Big Business is at its lowest since 1981, according to the latest Gallup Poll. Bruce Nussbaum, writing for BusinessWeek says that “a growing buyers’ strike in the stock market, the flight of money into housing, and the rising price of gold all indicate that the early stages of a panic may be building… if the corporate crime wave leads people to pull back from the stock market, the economy could sink into a double-dip recession.”

“Markets can work only if information is honest, rules of the game are clear, and people follow them. Realizing that this isn’t the case today has left many Americans doubting their own futures and jeopardizing the future of the economy.” (Can Trust Be Rebuilt?, BusinessWeek, 7/8/2002)

Governance Leader, TIAA-CREF, Faces Shareholder Resolutions

Based on longstanding dissatisfaction with TIAA-CREF’s weak external and internal corporate governance policies, the attachedshareholder resolution requesting a shareholder vote on separation of the CEO and Chairman of the Board positions has been submitted to TIAA-CREF. Additionally, a secondParticipant Proposal has been submitted concerning issues related to social and environmental responsibility, proxy voting and governance efforts. No decision has been made as of July 2nd regarding whether TIAA-CREF will omit or include the resolutions in its fall proxy material. Like corporate shareholder resolutions, those to mutual funds are advisory but can send a strong message. (The hyperlinks have been added by James McRitchie, Editor, Corpgov.Net, in order to provide readers additional information.) To discuss the 1st proposal, contactDavid E. Ortman. To discuss the second, contact Curt Verschoor.

Governance & SRI Resolutions Get Votes and IRRC report that shareowner proposals concerning corporate governance socially responsible investing (SRI) are getting record votes post-Enron.

The central corporate governance issue is conflicts of interests by auditors. So far this year, 12 resolutions addressing the issues have received an average 30% support. Union funds initially submitted 29 auditor proposals, with 17 filed by the Carpenters. First out of the box was Walt Disney, in February, where 41% of voting shareowners supported the proposal. That strong showing early on led at least 11 companies to agree to new policies in order to have proposals withdrawn. Pacific Gas & Electric shareowners registered the highest vote, at 47% of votes cast.

“Golden Parachutes,” lucrative separation packages for executives, have received an average 40% support, based on results from 13 of the 19 golden parachute resolutions voted so far, up from last year’s average of 31% on 13 such resolutions. Board independence proposals also getting 29%, up 23% last year.

Votes for SRI proposals are up, as well. In each of the last 2 years, less than 15 of more than 150 social and environmental proposals received more than a 15% vote. This year, 17 resolutions have already so, with only 100 taken up so far.

Fall From Grace

The United States runs a huge trade deficit, which has been covered by a net inflow of $1.3 billion in foreign investments every day, according to Edmund L. Andrews, in writing for the New York Times. (U.S. Businesses Dim as Models for Foreigners, 6/27/2002) The dollar has been falling in relation to the Euro and Yen but Andrews says the more enduring impact may be a revolt against the “American model,” which “emphasizes bare-knuckle competition, aggressive deal making, a high level of public disclosure and fantastic rewards for executives who deliver the goods.”

“European leaders are also pushing for greater acceptance of their auditing rules, known as the international accounting standards, as an alternative to American rules. The great virtue of the international accounting standards, which all European Union companies will have to adopt by 2005, is that it is a simple and fairly compact list of basic principles. The American system, by contrast, is made up of volumes and volumes of decisions reached over the years on the finest nuances and shadings of every issue.” A survey by UBS Warburg and the Gallup Organization found that only 32% of European investors now rank the United States as the most attractive market in the world.

A recent survey by the Pew Research Center for the People and the Press found that President Bush’s approval rating on the economy had slipped to 53% from 60% in January. Only 30% of the public sees the economy improving over the next 12 months, down from 42% a year ago, and a third said the president was doing all he could to improve economic conditions, down from 48% six months ago.

VIP Rollout

After a year of successful cooperation with three of the six biggest German asset managers, the Association of Institutional Shareholders (VIP) is now able to expand their activities to the whole of Europe. As a first step to global and cross border transparency VIP made up a list of the dates of the annual general meetings of all EuroStoxx companies for the years 2002/2003. The second step will be completing it with all DJSI dates. This chronological and alphabetical list will be regularly updated according to the latest information at

Back to the top

Continue Reading ·

June 2002

CalPERS Fails to Act on Expensing Options

“Stock options should not be treated as a business expense,” California’s Governor Gray Davis told the Silicon Valley Manufacturing Group at their board meeting in San Jose. (Davis backs tech firms on options,, 6/13) No Davis doesn’t hold much influence with the SEC or the Financial Accounting Standards Board (FASB) but he does appoint two members to the 13 member CalPERS Board and two officers of his administration also sit on the Board. A week later members of the CalPERS Board took up the issue and delayed any action to endorse or reject expensing stock options until August.

The Council of Institutional Investors, an association of some 120 public, corporate and Taft-Hartley pension funds with assets of $1 trillion, which CalPERS helped to found, threw its support behind expensing options back in March. Federal Reserve Chairman Alan Greenspan cautioned that failure to expense stock options has “introduced a significant distortion in reported earnings, one that has grown with the increasing prevalence of this form of compensation.”

A growing number of editorials in the business press, such as Fortune magazine, have called for expensing options. Standard and Poors announced recently that when it computes core earnings, it will deduct stock options as compensation expense. The International Accounting Standards Board (IASB) is likely to weigh in on the expensing side as our Financial Accounting Standards Board did before Congress interfered at the request of CEOs and Silicon Valley years ago. CalPERS should be taking the lead on this issue. Instead they are hiding.

Options are a form of compensation that clearly have value. A representation of that value should not remain hidden in the footnotes of financial statements. On average options overstated earnings among the S&P 500 by 1% in 1995 when CorpGov.Net went online. In 2000 options resulted in a 9% overstatement of earnings by the same group and among information technology firms in the S&P 500 the average overstatement due to the cost of options was 33%. The total cost to shareholders was $284 billion in dilution.

“How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg,” said a wise Abraham Lincoln. After the accounting disclosures of Enron, Global Crossing, Tyco and now WorldCom, the investing public deserves the truth. Ignoring the cost of options doesn’t mean they are not an expense. Let’s hope CalPERS comes to its senses, even if we have to wait until after the elections.

Wealth Transfer

Writing for Directors & BoardsMartin T. Sosnoff, Chairman of Atalanta/Sosnoff Capital, says “Enron ain’t the problem.” (Spring 2002) “Over the past decade there was a landslide transfer of wealth from public shareholders to corporate managers.” Enron is the tip of the iceberg.

The great surge in productivity gains of the back half of the nineties was probably a scam. “After you make adjustments for too liberal assumptions on pension fund rates of return, factor in take-a-bath plant closings, the capitalization of R&D and huge inventory of write-offs, and low salaries to balance the options substitution, it looks as if earnings for the S&P 500 Index grew at their long-term pace of 5%, not the 10% that was reported.”

Sosnoff says the country “needs a swelling populist rage against managements’ venality comparable with the vilification of the trusts, typified by John D. Rockefeller Sr.” “Where’s the Teddy Roosevelt in the wings holding a big stick and ready to pounce.”

Can CalPERS Afford to Throw Stones?

Christopher Palmeri’s article with the above title inBusinessWeek (6/24) raises the issue that CalPERS knew about Fastow’s self-dealing partnerships but didn’t blow the whistle on him or Enron. There has been a spate of resignations at CalPERS, which has underperformed in comparison with other funds. However, his primary focus is on conflicts of interests by board members and those who appoint them, as well as the move to socially responsible investing (SRI).

Should CalPERS have reported Fastow? Undoubtedly. Maybe if those favoring SRI had been more fully in control, they would have. Too often fiduciaries take the attitude that yes this guy is a crook, but he’s our crook and he’s making money for us. Those favoring SRI are more likely to take the long term view. We’re all better off in the long run if crooks are in jail.

Yes, political contributions are troublesome and the potential payoff of a $100 million investment in return for a relatively small political donation continues to be problematic at CalPERS and in the other halls of government. Every time a department awards a contract, every time the legislature passes a bill, we can speculate about the influence of political contributions. And we should. It is obvious to all the money plays too big of a role in politics. At least CalPERS is run by a board that operates, to a large extent, in the open, rather than by a single elected official, as is the case with many pension funds in other states.

If Palmeri’s wanted to raise questions about CalPERS’ governance, why didn’t he discuss board members who leave the board and after a year lobby in order to obtain huge placement fees? One such former board member was recently reelected. Maybe he’s trying to renew his influence so that he can once again try for those fat placement fees when his term is up.

Why didn’t Palmeri discuss board members that simultaneously serve on other private investment boards? Does due diligence on one board serve the other equally? Which board comes first with regard to fiduciary duty? If he wanted to get into good governance practices, what about questioning value of having members serve on a board for more than 30 years? Can such directors still be considered independent? CalPERS has had more than one in this situation.

Is it good governance to have a board member in charge of a $150 billion fund who has declared bankruptcy not once, but twice? One CalPERS board member served as head of the investment committee while declaring bankruptcy twice. California’s Probate Code, which generally governs trustees, says that the office of a trustee that has declared bankruptcy is declared vacant. Is CalPERS above the law? Is it good governance to have voting rules which don’t provide for runoff elections and allow candidates to be elected with as little as 5.5% of the vote, as has happened at CalPERS. I don’t understand why Mr. Palmer failed to mention these issues that seem so much easier to fix than the question of political contributions.

With regard to SRI, CalPERS has been too timid. Had they gotten out of tobacco stocks years ago, as the lawsuits were taking hold, Angelides’ strategy would have been brilliant, financially as well as socially. True, blacklisting several emerging market countries has been widely criticized but not because people think CalPERS would make as much money in the short run wherever it can.

The criticism I heard over and over again while attending a meeting of Asian Development Bank was that CalPERS shouldn’t write off whole countries when there are good companies within those countries with excellent corporate governance practices that can set an example. Why write off India, for example, when Infosys has governance practices that are at least as good as many companies in the US. CalPERS needs to refine its policies to include company rankings as well as country rankings. That way, they will not miss excellent investment opportunities. At the same time, they will encourage individual firms operating in developing countries to adopt good corporate governance standards to attract foreign direct investment. (In the interest of full disclosure, the editor is an Infosys shareholder.)

System Failure

That’s the title of Fortune’s June 24th article on how to bring back investor confidence through 7 suggested reforms:

  1. Earnings- trust but verify. Git rid of so-called proforma earnings; report real results. Expense options, stop the abuse of restructuring charges. Include pension costs but not pension income. The quality of earnings should be graded by auditors.
  2. Rebuild the Chinese wall. Enact regulations that forbid analysts from being involved in banking deals; let them evaluate companies only after they have gone publie.
  3. Let the SEC eat what it kills. The SEC has 100 lawyers to study the disclosure documents of 17,000 public companies. SEC examiners are paid 25 – 40%less than those of other federal agencies. Employee turnover is 30%/year. Yet, the SEC took in $2 billion, 5 times their entire annual budget. Congress should stop diverting their money to other uses.
  4. Pay CEOs, yeah – but not so much. Stock options should be expensed.
  5. Fire the chairman of the bored. Fortune’s writers praise the NYSE’s proposed reforms. The requirement that outsiders on the board meet regularly without management “will have a huge impact.”
  6. Put the “public” back in IPO. “For every dollar startups raised in 1999 and 2000, they paid 58 cents in a combination of fees and forgone proceeds.” The solution has been out there since 1998 when W. R. Hambrechtbegan auctioning IPOs on the Internet. Shares go to the highest bidder and the “IPO slush fund, that big pool of money that feeds all the corruption, evaporates.”
  7. Shareholders should act like owners. 75 mutual funds, penisons and other institutions control $6.3 trillion…44% of the market. “Real reform is only a proxy vote away.” They then reference the next article, “Investors of the world unite!” That article, by Marc Gunther, weaves the story of activism by institutional investors around the central figure of Robert A.G. Monks and does a great job of presenting the struggle through his efforts. “The so-called elections of corporate boards are mostly a sham, and will remain so until dissidents can get access to the company proxy statement to challenge the management slates.” Hopefully, Monks, John Bogle and others will help create a culture of ownership responsibility.

Would Institional Investors Create Better Corporate Governance?

Be careful what your wish for, says BusinessWeek’s John A. Byrne in “Investor Power Has Its Downside, Too” (7/1/02). “Why? For starters, the focus on quarterly numbers would become even more intense.” Shareholder turnover jumped from 12% in 1960 to 98% most recently. Institutional investors made “maximizing shareholder value” the prevailing principle of American business. Byrne argues that shareholders hardly made a peep about the runup in CEO pay and stock dilution as long as prices were going up.

Byrne has a point, but positive directions from such efforts are most likely to come from public pension funds, index funds and SRI funds who tend to be long term holders.

Capital Stewardship Certificate Program

The Center for Working Capital and the National Labor College are offering a certificate program in capital stewardship. The program has four classes. Introduction to Capital Stewardship provides an overview of key concepts, laws and policies. Fiduciary Duties outlines the legal duties of trustees regarding pension fund management. Investment Strategies grounds trustees in the fundamentals of investment decision-making while emphasizing investment techniques for highroad economic strategies. In the final class, Active Ownership and Corporate Governance, trustees will gain a thorough understanding of the benefits of active ownership through proxy voting and monitoring corporate governance. Trustees and plan professionals will explore avenues for maximizing long-term value through corporate governance. This is a great program for union activists who are either pension fund trustees or are hoping to be a trustee. Learn more.

4th World Congress on Environment Management

We understand the 4th World Congress on Environment Management held in Palampur from 7-9 June 2002 on “Sustainability through Good Governance” was a success despite adverse publicity in the international media about the impending nuclear conflict between India and Pakistan. The conference had several outstanding speakers from overseas and was attended by over 400 business leaders, government ministers, policy makers, CEOs, directors and senior managers of public private sector and multinational companies, NGOs and environmentalists. His Holiness the Dalai Lama inaugurated the Congress and presented the Golden Peacock Environment Management Awards.

The conference adopted a “blueprint for action” referenced as the “Palampur Declaration on Sustainable Development.” According to UN Report on Human Development (1998), the income ratio between 20% of the world’s poorest and 20% richest was 1:30 in 1960. It increased to 1:61 in 1990. In 1999 it was 1:74  and today it stands at 1:87. According to the Congress, “poverty is the single largest barrier to sustainability.” Partners in Action for Sustainability (PIAS) is one initiative adopted in the Declaration. The PIAS task will be to disseminate good work done by companies and thus provide role models that we badly need and at the same time encourage companies to seek 3rd party certification to ISO 14001.

Women on Board

The current [email protected] Newsletter contains a discussion by a panel of women executives (scroll down). Sally W. Stetson, president of the Forum of Executive Women, cited statistics showing that the percentage of Fortune 500 corporate boards with at least one woman grew from 63% in 1993 to 84% in 1999. However, women held just 11.2% of total board seats. Why? According to Deborah M. Fretz, CEO of Sunoco Logistics Partners, its because “CEOs go after other CEOs of publicly traded companies.” Maybe stacking the board with CEOs should be considered another conflict of interest, since each member of such a board has a vested interest in raising CEO compensation.

Trade Unions Call for Sustainable Development

Trade unions issued a challenge that could result in one of the biggest ‘grass-roots’ initiatives on sustainable development to date. It may involve millions of workers around the world in joint actions to implement needed changes in their workplace and communities. The proposal to initiate an international program of “Workplace Assessments’ could bring unions and employers together in action plans for change on water and energy uses, transportation, toxic substance and wastes, public and occupational health, as well as participation and basic security.

“We look forward to the day when workers can engage their employers in joint action to set common targets, monitor progress and implement change on broad range of issues,” said Ms. Ching Chabo from the International Confederation of Free Trade Unions’ Asia Pacific office. (Unions issue challenge to UN “Sustainable Development” Meeting, 28/5/2002)

Short Term Efficiencies = Long Term Inefficiencies

The stock market is becoming more efficient over the short term and less efficient over the long term, according to some experts, as reported in Pensions&InvestmentsAlbert S. “Pete” Kyle of Fuqua School of Business, Duke University, says “the market is getting more and more efficient over very short periods of time, over a day or week or month” because more people are trying to make money off price discrepancies through hedge funds. Barr Rosenberg, chairman of AXA agrees because managers face increasing pressure for short term results. Hedge fund assets have grown 1,500% in the last 10 years to $563 billion.

Peter L. Bernstein, a consultant, thinks investors are still driving while looking through the rearview mirror and Robert D. Arnott, managing partner of first Quadrant Corp. is quoted, “I would bet very, very long odd that the risk premium in the next 20 years will not be even as half as large as what we saw in the last 20 years.” (Time is of the Essence, 6/10/02)

Short Term Thinking and CEO Pay

Many CEO’s and board’s are not creating value on a medium term basis and investors would be better off investing in T-bills, according to Mark Van Clieaf of MVC Associates International. His analysis finds that 35% of S&P 500 firms failed to return an after tax profit agreater than the cost of capital over 5 years. In an analysis of the proxy statements of the complete S&P 500 he found that the duration of time over which CEO performance was measured was only 1-year for 55% of the firms. Are they really trying to create long term value?

Fidelity To Fight Excessive CEO Pay

Fidelity Investments, which oversees $800 billion in assets is reviewing how to use itsballots in shareholder votes to protest outsized corporate pay packages, according to Mr. Roiter, Fidelity’s general counsel. Fidelity is considering token gestures such as withholding its votes for corporate directors that have approved excessive executive compensation plans. However, in accordance with a longstanding policy, it probably won’t disclose how it votes, so the effort, while a step in the right direction, will not have as much impact as it could.

In the past Fidelity’s votes against management’s recommendations often involved stock-options plans. The company usually objects to plans that dilute the shares outstanding by more than 10% at large companies or more than 15% at smaller companies. CEO pay increased 535% since 1990, far surpassing the 297% gain in the S&P 500 stock index, the 116% jump in corporate profits and the 32% bump up in workers’ pay, according to Legg Mason Value Trust manager Bill Miller who has joined with CalPERS in withholding support from directors to protest specific corporate practices, such as hiring auditing firms that also do consulting work for a company. (see Fidelity Uses Voting Threats To Fight Excessive CEO Pay, WSJ, 6/12/02)

Gregg Li Joins NETwork

Gregg Li, the Chief Architect of G. Li & Company Ltd., has joined the Corporate Governance NETWork. Mr. Li has over 20 years of experience in the Pacific Rim. He has served as a troubleshooter for the US Federal Government, as a regional internal consultant for American Express in East Asia, as a development consultant for the Vocational Training Council (VTC) in Hong Kong, as an external consultant to the former Coopers & Lybrand MCS Asian operation, and has headed a management think-tank at the University of Hong Kong during the period of Hong Kong’s handover to China. Other principals with the firm include

  • Robert Tricker, an honorary professor at the University of Warwick, Exeter, and Hong Kong.
  • Anthony Siu, engineer, venture capitalist, management consultant, and business angel.
  • Alfred Ho, 30 years in management and organizational development.

Governance and Junk Bonds

Poor corporate governance practices are strongly correlated to U.S. firms getting downgraded to junk bond status, according to Pax World High-Yield Fund manager Diane Keefe. Participate in a briefing at 1:30 p.m. EDT on Wednesday, June 19, 2002 by calling 1-800-966-6338 at 1:25 EDT and asking for the “Pax” or “junk bond” call. The live, two-way phone-based telenews event (with Q&A) will focus on the raft of “fallen angels” — investment grade companies on the cusp of being downgraded to high-yield status but already trading at “junk” levels. Ms. Keefe will discuss the bonds of Tyco, Qwest, E-Trade, Adelphia, WorldCom and a number of other firms.

Pax World High-Yield Fund bills itself as the only socially responsible junk bond mutual fund in the United States. Can’t make it? A streaming audio replay of the call will be available on the Web as of 6 p.m. EDT on June 19, 2002.

Governance Tip-Sheets posted an interesting article on 6/6 entitled “Whose Company Is It, Anyway?,” which dicusses some of the changed proposed by NYSE and Nasdaq. However, the bulk of the article centers on the suddenly increasing number of organizations that have recently come out with governance metrics. Standard and Poor’s Corporate Governance Score (CGS) and Institutional Shareholder Services’ (ISS) Corporate Governance Quotients (CGQ). The Corporate Library and GovernanceMetrics International will release a governance metrics later this year.

No, the rating systems won’t be perfect, Enron might have scored high, but credit rating systems also evolved. “If investors are to take such governance ratings at face value, they must be convinced that the providers of the scores are on the side of shareholders — and not corporate clients,” says CFO’s Jennifer Caplan. The ever quotable Nell Minnow doesn’t see this as a big problem. “I am confident that the market will determine which information is really useful,” she predicts. “It’s like buying a tip-sheet at the race-track. After a while, you learn which ones really work.” It could make the difference between gamboling and investing.

Owners Must Step Up to the Plate

In “The Value of Trust” (6/6/02), The Economist raises three main investors concerns:

  • the role of the research that is published by investment banks;
  • the way in which shares in IPOs are allocated; and
  • the use of accounting rules to mislead investors.

Although the article explores several reforms, at bottom “governance is unlikely to improve much until the institutions that own large chunks of corporate America start acting as real owners, by keeping a sharper eye on their boards and their management.”

Again in “Under the Board Talk” (6/13/02) “shareholders should play a bigger role in the selection of directors.” The Economist also calls for “separating the job of chief executive from that of chairman.” Shareholders should steer board recruitment away from the tiny pool of CEOs of other firms. “Why not trawl more widely, among academics and public servants?”

Finally, in “Designed by Committee,” The Economist notes that “the most powerful catalyst for change ought to be the big institutional investors that have their own fiduciary duty to protect their investors. Right now, these institutions are busily blaming boards for recent wrongs. But this seems rather convenient. One of the more interesting features of the assorted revelations now scandalising the market is that many of them are hardly news….As part of its reforms, the NYSE proposes to give shareholders more opportunity to monitor and participate in governance. This includes allowing them to vote on stock and stock-option plans for bosses, and making companies disclose codes of business conduct and ethics on their websites. In Delaware, judges seem more willing to put their faith in the judgment of sophisticated institutions, and may increasingly throw open contentious issues to a vote. When it comes—as it inevitably will—the next wave of corporate scandals might put institutions, not boards of directors, in its crosshairs.”

Chinese Court Sends Mixed Message

Shenzhen court’s verdict on 6/4 sends a mixed message re investor rights. In Fountain Corp. vs. Caijing magazine, Pu Shaoping and the Stock Exchange Executive Council a Chinese listed company took a media organization to court to defend its reputation. The court ruled that Caijing was guilty of defaming Fountain Corp. because of what the court deemed to be an inaccurate paragraph in a Caijing exposé. At the same time, however, the judgment broke ground in upholding what it said was the media’s “right to expose, comment, criticize, and monitor negative phenomena in society”–as long as the reporting is accurate. (see Wielding a Double-Edged Sword, Far Eastern Economic Review, issue dated 6/20)

Technology Trends

The following technology trends were noted by Broc Romanek, Director of Marketing for RR Donnelley Financial and Editor-in-Chief of I summarized from the Spring issue of the Corporate Secretary (a publication of the American Society of Corporate Secretaries). Sign up for Romanek’s E-Zine and stay informed.

  • Online Proxy Fights used internet-based solicitation strategies last year at Travis Street partners LLC, Pioneer Group, ICN Pharmaceuticals, Luby’s and Goldfield Corporation, as well as during the Hewlett-Packard Compaq merger. Dissidents used web sites and message boards extensively to access “street name” holders.
  • Electronic Stockholders’ Meetings. Inforte, a small company located in Chicago but incorporated in Delaware, held the first annual meeting exclusively in virtual reality on the internet. 5500 registered and beneficial holders attended. It was cheap; Inforte spent only $2,000 for the webcast through PR Newswire and for an election inspector. I doubt if many will follow suit but simulcasting is likely to grow rapidly.
  • Electronic Offerings. A variable annuity offered by The American Life Insurance Company was probably the first to not also be available on paper. The SEC declared the registration statement effective on October 25th. We can expect more.
  • Electronic Delivery and Voting. Online voting caught up with telephone voting and can be expected to pass it during the 2002 proxy season.
  • Not so FreeEDGAR. Many EDGAR-based services started changing subscription. (see EDGAR,,TheCorporateCounsel.netRealCorporateLawyer.comand
  • Regulatory Changes. SEC proposal that companies post disclosures on corporate web sites at same time they are filed and increased use by the SEC of their own site.
  • Director Communications. More companies are utilizingextranets for their boards and committees to communicate with management and each other. See RecordCenter andBoardVantage for off the shelf systems.
  • Online Education. Some state bar associations claim over 10% of their members have earned CLE credit online or through a CD-ROM. Additionally,

NYSE Rule Changes in Works

New York Stock Exchange announced new rules for improving corporate governance for NYSE-listed companies. The draft rules, which must be approved by the Securities and Exchange Commission, require listed companies to:

  • maintain a majority of independent directors on their boards and refine independence to require “no material relationship with the listed company either directly or as a partner, shareholder or officer of an organization that has a relationship with the company” (current rules say that a listed company must have an audit committee that includes at least three independent directors.);
  • conduct regular meetings among non-management directors,
  • shareholders owning 20% or more of the company’s shares may not vote on audit committee matters, and
  • get investor approval for all equity-based compensation plans (current rules require shareholder approval of only those stock plans where officers and directors may participate). The is probably the portion of the proposed rules most likely to change do to pressure (see below). The draft rules also state that brokers can vote their clients’ shares only on such proposals after checking with them first (I say, why not just eliminate broker voting altogether?).

NYSE Governance Rules Have Activists Salivating, says Diane Hess of “These rules accomplish, in one fell swoop, what shareholders have been striving for,” Nell Minow is quoted as saying. Peter Clapman, senior vice president of TIAA-CREF, the largest pension system in the world, says the guidelines would “remove barriers to effective communications” and “harmonize relationships.” The Business Roundtable has already come out against the NYSE’s proposal for shareholder approval for all plans, saying it could end up reducing the number of options and stock granted to rank-and-file employees because of the additional costs of shareholder approval. Significant changes…definitely, but certainly not everything desired by shareholder activists. Investor approval for all equity based compensation plans is the most radical of the ideas but it probably wouldn’t be as hard for management to take as expensing options.

Ditto Nasdaq, but Less

Nasdaq Stock Market, Inc. announced key rule changes approved by its board on May 22, 2002. These proposed rules will soon be published in the Federal Register, be subject to comment periods, and could be implemented later this summer. Further corporate governance reforms will be examined at the next meeting of the Nasdaq Listing and Hearing Review Council in San Francisco June 26-28. They include:

  • a majority of independent directors on corporate boards;
  • compensation committees composed solely of independent directors;
  • a cooling-off period during which former auditors would be precluded from serving on corporate audit committees;
  • expanding the scope of audit committee authority;
  • strengthening continuing education for directors;
  • increasing the use of corporate codes of conduct and compliance methods to support them; and
  • mandate non-U.S. companies to disclose if they have received waivers of corporate governance standards through a new SEC disclosure requirement.

The rule filings, to be submitted to the SEC now, concern the following subjects:

  • Stock Option Plans. Require shareholder approval for all plans in which officers and directors participate. Although existing exemptions for inducement grants to new executive officers and tax qualified, nondiscriminatory plans such as Employee Stock Ownership Plans (ESOP) were retained, the new rule does not include the so-called “treasury share” exception that would permit a company to use certain repurchased shares to fund options to executive officers without prior shareholder approval.
  • Independent Directors. The definition will be extended to prohibit any payments, other than for board service, including political contributions, in excess of $60,000 and will extend to receipt of such payments by a family member of the director. Furthermore, a director will not be considered independent if the company makes payments to a charity where the director is an executive officer and such payments exceed the greater of $200,000 or 5% of either the company’s or the charity’s gross revenues.
  • Disclosure of material information will be harmonized with the SEC’s full-disclosure rule to facilitate disclosure by issuers using Reg FD methods such as conference calls, press conferences and Web casts, so long as the public is provided adequate notice and granted access.
  • Related Party Transactions. A company’s audit committee or a comparable body of the board of directors must review and approve all related-party transactions.
  • Explicit Prohibition on Misrepresenting Information to Nasdaq. A material misrepresentation or omission by an issuer to Nasdaq may result in the company being delisted.

CEO/Chair Split Favored

The demise of Enron has triggered a spate of criminal investigations and lawsuits against companies and directors, spreading “angst and paranoia through boardrooms.” A McKinsey survey of more than 180 US directors representing 500 companies reveals that just under 40% were not confident they had processes in place to control potential conflicts of interest and even more thought they were not prepared to deal with risk management issues such as assessing the impact of pay on performance. The survey suggested that more than two-thirds believe the board should split the role of chief executive and chairman. (Financial Times, Enron’s Demisse has Taken the Shine Off Boardroom Tables)

15 Minutes

Our 15 minutes of fame came on June 4, 2002 when Paul Krugman’s editorial “Greed is Bad” brought CorpGov.Net to the attention of thousands of New York Times readers.

Krugman points out that “distrust of corporations threatens our still-tentative economic recovery; it turns out greed is bad, after all. But what will reform our system? Washington seems determined to validate the judgment of the quite apolitical Web site of Corporate Governance (, which matter-of-factly remarks, ‘Given the power of corporate lobbyists, government control often equates to de facto corporate control anyway.'” No, we’re not all that apolitical. This is not a situation which we embrace, only the current reality.

As Krugman’s editorial indicates, corporations show no signs changing their ways. “Who will save that malfunctioning corporation called the U.S.A.?” Only the owners of corporations have that power. The most fundamental reform needed is to eliminate the SEC prohibition against using the shareholder resolution process to nominate directors but owners so far aren’t demanding that kind of power. Currently, shareholders can only nominate candidates by paying for an expensive solicitation, while the current management uses company funds, our money, to elect their own candidates. A democratic election process would bring about a real shareholder revolution and fundamental improvements in corporate governance. Other reforms simply treat the symptoms of a failure in democracy.

Global 100 Names ISS to Gadfly List

CFO Magazine’s The Global 100 lists a fairly arbitrary but not unreasonable 100 “major influencers” on global business by category: Raters & Regulators, World Players, Politicians, Taxmen, Exchange Masters, Bankers, CEOs, Investors, Lawyers, Risk Managers, Gadflies, Thought Leaders, and the Rest. There are some of the usual suspects and some surprises. What I don’t understand is the Gadfly label applied to ISS.

“Gadflies” are various types of insects that bite or annoy livestock. But here it is the second definition that obviously applies; “a person who stimulates or annoys, especially by persistent criticism.” Neither definition is particularly flattering but in the corporate world it is generally applied to the Gilbert brothers, Evelyn Davis and others whose shareholder proposals are strictly precatory.

As Robert Monks has eluded, although individually they are often ignored, together gadflies irritate the individual animals and sometimes the herd enough to get them moving. Included in the Global 100 are Toshiaki Murakami M&A Consulting in Japan and David Webb, Editor, of in Hong Kong. Both have shaken up their respective markets. Murakami’s campaign to open up the value of cash-rich apparel maker Tokyo Style Co. has the look of an American style corporate raider. Webb’s attempt to advance minority shareholders’ interests in Hong Kong-listed companies through his HAMS proposal was recently rejected by the government. Maybe the gadfly label is appropriate to them and even to Mark Mobius, who is termed the “dean of emerging markets investing.” Each has obvious respect but their victories have been limited to date.

However, I’d draw the line at including Institutional Investors Services in this category. “When ISS talks, people listen,” CFO indicates. No kidding; if CEOs and other corporate officers don’t listen, they’ll soon find themselves out on the street. ISS was already responsible for 20% swings in proxy voting. Now they have launched a new service that will initially rate all companies in the Russell 3000 Index and will eventually extend coverage globally. The ratings are scored from 1 to 100, with 100 being a perfect score, and are based on seven aspects of corporate governance:

  1. board structure and composition,
  2. charter and bylaw provisions,
  3. laws of the state of incorporation,
  4. executive and director compensation,
  5. qualitative factors, including financial performance,
  6. D&O stock ownership, and
  7. director education, from an accredited program, including those offered by the National Association of Corporate Directors, the University of Wisconsin/State of Wisconsin Investment Board, the Wharton/Spencer Stuart Directors’ Institute, Dartmouth’s Center for Corporate Governance, and the Stanford Directors’ College.

Companies will be scored individually and will be ranked relative to their peer groups. If ISS is a gadfly, who is the 800 pound gorilla?

Errosion of Investor Confidence

Growing mistrust due to a steady stream of accounting scandals, poor corporate governance and conflicts of interest are is taking a toll. The S&P 500 has lost 7% this year while the Nasdaq composite lost 17.2 percent of its value and is trading 68% below its 2000 peak. The number of investors who say it’s a good time to invest has dropped to levels not recorded since September 2001, according to a monthly Gallup poll. Dubious accounting practices topped the list of concerns.

David M. Blitzer, chief investment strategist at Standard & Poor’s, said investors appeared deeply frustrated today. The New York Times quotes him as saying, that investors “want a sense that it is a fair game and that everybody has an equal chance to win or lose. People seem to feel that for the matter to be settled, somebody is going to have to go to jail.”

Average daily trades at Charles Schwab in April came in at 192,900, down from 235,000 a year earlier and a high of 420,100 trades daily in March 2000. Moody’s, tracking the first five months of 2002, Only 21% of respondents expect higher incomes in six months, according to Moody’s. That is below the 25.7% average from 1996 to 2000 and below the 23.9% of a year ago. (What If Investors Won’t Join the Party? NYTimes, 6/2)

Annual Reports Continue Spin

Despite the call for improved disclosure, annual reports look like business as usual, according to a report by Reuters. “Most corporate reports have become an exercise in spin, offering cheery photos of balding executives with big smiles and reams of only thinly interpreted, financial boilerplate.” Maybe we’ll see better reports next year if the SEC adopts new rules requiring more and timelier reporting on accounting policies and trades.

“Companies will wait for more guidance from the SEC and the exchanges before they do anything more than they absolutely, positively have to,” says Nell Minow, editor of The Corporate Library. “They still just haven’t learned that the one who provides the best, clearest, most accessible information wins.” (U.S. corporate reports yet to heed Enron’s lessons, 5/31)

4th World Congress on Environment Management

7-9 June 2002 in Palampur, Himachal Pradesh (India). The Congress will be inaugurated by Noble Laureate His Holiness the Dalai Lama. Help create a blueprint for good corporate governance which creates long term value for all stakeholders by mobilizing not only the physical capital but also the human capital, social capital and natural capital.

Back to the top 

Continue Reading ·

May 2002

Monitoring By Shareholders Pays

Research by Peter Wright of the University of Memphis, Mark Kroll of Louisiana Tech University, and Detelin Elenkov of the University of Tennessee, Knoxville recently found that in actively monitored companies, CEO pay raises connected to major acquisitions tend to reflect improved company performance. In laxly monitored companies, they tend to reflect little more than increased corporate size.

The findings are based on an analysis of corporate acquisitions between 1993 and 1998 that involved publicly owned firms and met a number of conditions. One condition was that the merger had to boost the acquirer’s revenues by 10% or more. Another was that the same CEO had to be in place the year before and the year after the acquisition. Still another was that the acquiring firm did not undertake another acquisition in the same year or during the following year. To make the final cut for the sample, the acquiring firms had to be clearly in one group or the other — actively monitored or passively monitored. How they were classified depended on whether they were above or below the median in terms of 1) number of stock analysts following the company, 2) percentage of ownership by activist institutions, and 3) proportion of independent board members — that is, board members not employed by the company or beholden to it in some other way.

For the group of actively monitored companies CEO pay was significantly related to both a rise in stock price upon announcement of the acquisition and an increase in the firm’s return on equity during the following year. Thus, CEO pay boosts reflected both the stock market’s approval of the acquisition and the subsequent enhancement of the company’s bottom-line results. They were not influenced, however, by the extent of the firm’s revenue growth deriving from its greater size.

For the passively monitored companies, however, the findings were the reverse: increases in CEO pay bore no significant relationship to either of the performance measures but only to the amount of increase in corporate size. They concluded that lax monitoring encourages top executives to “adopt acquisition strategies in order to enhance their own rewards.” In contrast, “for firms with vigilant external monitoring activities, changes in CEO compensation will be directly associated with returns accruing to their shareholders due to acquisitions.” (June/July issue of the Academy of Management Journal)

Enron Amusement of the Month

Accountants at Arthur Andersen knew Enron was a high-risk client even back in 1995. Testifying in court earlier this month, partner James Hecker said he wrote a parody back then to the tune of the Eagles hit song Hotel California which included the following: “They livin’ it up at the Hotel Cram-It-Down-Ya, When the [law]suits arrive, Bring your alibis.” (From Business Ethics magazine’s online news report, BizEthicsBuzz. Subscribe free.)

Four Ideas for Reforming Corporate Governance After Enron

Reprinted with permission from the author, Marjorie Kelly, Editor and Publisher, Business Ethics magazine.

The picture on the front page of the New York Times in early May was memorable: five Enron directors with hands upraised, swearing to a Senate subcommittee they were not responsible for the company’s collapse. Pathetic as they seemed, they were telling the truth. Corporate directors are not in any real sense “directing” companies. And that’s the problem.
In a telling moment before the subcommittee, the directors confessed they “had no inkling that Enron was in troubled waters until mid-October 2001” – right before the house of cards collapsed. This may seem unconscionable negligence, but it is more fundamentally a result of the design of corporate governance. Boards of directors don’t govern because all essential governance happens before the board meets. State law mandates directors must act in the best interests of the corporation and its shareholders, which courts interpret to mean maximum share price. So as long as share price remains high, directors feel confident. Yet it was precisely the hyper-inflation of share price that destroyed Enron.

Post-Enron, it’s clear that pursuit of profits must stay within ethical bounds, and that executives and shareholders may not enrich themselves by extorting the public or employees. Toothless codes of ethics like Enron’s are no help. Ethical concerns must grow teeth – which means biting into reform of corporate governance. While most proposals for reform today merely tinker at the margins, some get to the heart of the matter. Below are four of the best.

  1. Ensure auditors really audit by making them fully independent.
    Instead of having companies be the “bosses” of their own auditors – selecting and paying the firms they want to work with – a Corporate Accountability Commission could assign auditors and pay them from fees assessed on companies. That’s the proposal of Ralph Estes, emeritus professor of accounting at American University, in his proposed Corporate Accountability Act. The commission would be empowered to expand reporting requirements beyond stockholder needs to encompass data needed by other stakeholders – such as pollution emissions, wages and benefits paid, and corporate welfare received.
  2. Bar law-breaking companies from government contracts.
    Earlier this year, both Enron and Arthur Andersen were suspended from contracting with the federal government. Yet suspensions like these remain far too rare, as companies with far worse records still feed at the government trough in massive amounts. Lockheed Martin, for example, has an outrageous 63 violations and alleged violations, yet its 1999 government contract awards totaled $14 billion. “There’s no reason to be giving a contract to a repeat violator,” says Rep. Carolyn Maloney, a New York Democrat on the House Government Reform Committee, who plans to introduce legislation requiring a central database of contractor violations.

    Ultimately, contract suspensions or debarments should be required for companies who face more than one criminal conviction or civil judgment in three years – that’s the recommendation of the Project on Government Oversight (POGO) in its May report “Federal Contractor Misconduct.” Companies like Boeing with $14 billion in federal contracts, Raytheon with $8 billion, and General Electric with $1.6 billion, all have two dozen or more violations and alleged violations. If they faced threat of contract suspension, ethics would become a genuine bottom-line concern – which is the only way to make ethics real to these folks.

  3. Create a broad duty of loyalty in law to the public good.
    Today a corporate duty of loyalty is due only to shareholders, not to any other stakeholders, and Enron behaved accordingly – using tricks to drive electricity prices up 900 percent in California and thus fuel a spike in the company’s share price. Such piracy against the public good would be outlawed under a state Code for Corporate Citizenship, proposed by Robert Hinkley, formerly a partner with the law firm Skadden, Arps, Slate, Meagher & Flom. His change to the law of directors’ duties would leave the current duty to shareholders in place, but amend it to say shareholder gain may not be pursued at the expense of the community, the employees, or the environment. (For an article by Hinkley in Business Ethics, A group has formed in Minnesota to pursue passage of the new law there, led by John Karvel.
  4. Find truly knowledgeable directors: Employees .
    If we’re tired of boards with no “no inkling” of what’s going on, we should seek directors who have a clue. Who better than the people who work at a company every day? As directors, employees would be concerned with the long term and not next quarter. Since we don’t import people from outside the U.S. to govern the nation, why import people from outside companies to govern them? If the problem is that CEOs will appoint cronies, make board elections a real horse race: allow persons to self-nominate and run, being elected one by one, not as a slate. In short, get some real governance going. If Sherron Watkins had been on the Enron board, the whole scandal might have been averted.

Marjorie Kelly is editor and publisher of Business Ethicsmagazine and author of the recently published The Divine Right of Capital (Nov. 2001, Berrett-Koehler)

Asian Development Bank Forum on Corporate Governance in Asia

As part of the Thirty-Fifth Annual Meeting of the Board of Governors of the Asian Development Bank a Forum on Corporate Governance in Asia was held in Shanghai, People’s Republic of China, on May 11 2002. The forum invited internationally known scholars and practitioners to share their views on the key challenges on improving corporate governance in Asia. As the final speaker, I was invited to offer my views on the shareholder activist movement and on good corporate citizenship. I would advise interested readers to contact the other panelists directly for information concerning their excellent presentations.

Dr. Shamshad Akhtar, Director of the Governance, Finance and Trade Division, East Asia and Central Asia Department of the Asian Development Bank acted as the moderator and graciously introduced the panel, summarized and added important points of her own.

Emeritus Professor Wolfgang Kasper, from the University of New South Wales and Senior Fellow at the Center for Independent Studies, asserted that universal, rather than case specific, rules of corporate governance inspire trust and lead to lower transaction costs, innovation and growth. But, he reminded us, the opportunism of managers and politicians will only be curbed when good rules are enforced effectively and consistently.

Professor Jinglian Wu is a Senior Research Fellow, Development Research Center of the State Council Professor of Economics, Graduate School of Chinese Academy of Social Sciences, a member of the Standing Committee of the Chinese People’s Political Consultative Conference, and is Chief Economist, China International Capital Corporation Limited (CICC). Professor Wu reminded us that even large dominate economies like the PRC need to improve corporate governance if they are to continue to attract enough Foreign Direct Investment to underwrite future growth. He expressed disappointment in China’s failure to move forward with a proposal to privatize state companies by turning over stock to support pensioners. China needs to implement laws and regulations that will provide the necessary incentives for management and will protect the rights of small/public shareholders.

George Dallas, Managing Director with Standard & Poor’s, informed us that his firm has developed a service that evaluates corporate governance practices. The corporate governance scores they assign will be an important new tool for investors in calculating potential risk. These scores will also provide an important source of objective feedback for companies and countries wishing to see where they stand relative to others on a global basis.

Dr. Nik Ramlah Nik Mahmood, Director of Policy & Development Division with Malaysian Securities Commission, described several innovations in Malaysia such as the new KLSE Listing Requirements for mandatory accreditation and training of directors.

Professor Larry Lang, Chair of Finance at the Chinese University of HK, used humorous examples of corporate governance incompetence from Hong Kong, China and other Asian countries and discussed improvements needed.

Post-Enron Observations on Corporate Governance

Quite frankly, Enron has left American investors scared and distrustful. The watchdog systems designed to protect us failed and that failure was widespread, extending to investment banking, auditors, regulators and business leaders in general, none of whom acted to prevent the actions that led to Enron’s fall. Take a look at the last two covers of BusinessWeek, our most popular business magazine. One headline reads, “The Crisis in Corporate Governance,” the other “Wall Street: How Corrupt is it?” There is a growing realization that the system is broken. To fix it, we need to reduce conflicts of interest and we need greater democracy both at the top, in the accountability of boards and CEOs, and at the bottom in the form of increased ownership and participation by employees.

There is no question that globalization of capital is on the rise. Countries and companies that seek to attract investors will need to attain ever higher scores by rating systems, such Standard & Poor’s, if they are to obtain low cost financing. Long term investors will seek markets where their legal rights are known and protected and where those using their money can be held accountable.

US investors are even more sensitive to issues such as fraudulent financial reporting, conflicts of interests and lack of auditor and director independence since the demise of Enron, once our 7th largest company. Countries with political stability, transparent accounting practices, shareholder rights, as well as employee protections, will attract long term investors who are willing to pay a premium for shares in well-governed companies.

Let’s examine the recent decision by CalPERS to pull out of several Asian markets. It wasn’t an aberration. I’ll talk about how standards at CalPERS are likely to change over time and I’ll close by noting some of what I see on the horizon.

You’ll have to be the judge of how these developments will impact Asia. The problems we face are different. In the US ownership is widely dispersed. That leaves management in control. Shareholders can loose everything if the CEO is unethical. In Asia, there is usually a dominant shareholder (either the state or a family). The problem is how to guarantee the investments/rights of minority shareholders. US industries are increasingly based on intellectual capital, while yours are more dependent on attracting cash investments. But knowledge work isn’t confined to office workers and even capital intensive industries benefit by putting all the brains of their employees to work. America and the emerging markets of Asia would benefit from something of a convergence and in greater democracy.

The Decision by CalPERS

CalPERS, the California Public Employees Retirement System, has assets of over $150 billion. As was widely reported in February, they announced they would be pulling out of several emerging markets: Indonesia, Malaysia, Thailand and the Philippines on ethical grounds.

Their standards assign a 50% weighting for the following factors:

  • political stability
  • financial transparency
  • labor standards

The other half of the review is based on:

  • market liquidity and volatility
  • market regulation and investor protections
  • capital market openness
  • settlement proficiency
  • transaction costs

Their investments in Asian emerging markets were relatively small to begin with: under $100 million each in Indonesia, the Philippines and Thailand, with a little more in Malaysia. So, was it important?

Yes, without a doubt, CalPERS is a leading indicator of policies that will eventually apply to a larger segment of US investors, and to others around the world well. I understand that each of the affected countries sent delegations to Sacramento, California to plead with CalPERS to reverse their decision. At an April 19th meeting, the Filipino delegation, led by their Secretary of Finance Jose Isidro Camacho, succeeded in convincing CalPERS that it meets their guidelines. They’ll be taken off the blacklist next week.

No Aberration

Pension funds in the US hold a little over 25% of our market. They tend to be long term investors (holding stock for 7-8 years), while most mutual funds turn over their portfolio’s at a rate of 85% a year. CalPERS doesn’t sell when the market goes down or another type of investment comes into fashion. Many pension funds, like CalPERS, are controlled in part by labor unions and their members. At CalPERS, members directly elect almost 1/2 the board. 20-30 years ago union members started waking up to the fact that our pensions were often invested in companies with “unfair” labor practices that were undermining our jobs or, in the case of public funds, the taxbase that pays for our jobs.

At about the same time, our Department of Labor issued a directive that required pension funds to pay attention to how their votes cast in corporate elections. DOL required that proxies be voted in the interest of plan beneficiaries, not the money managers.

During the last ten years, unions and their pension funds have become the leading proponents of shareholder resolutions. Unions know how to organize winning campaigns at shareholders meetings, in the press and with the public. Our pension funds are becoming a more important organizing tool than the threat of a strike.

Typically, large pension funds like CalPERS have used a strategy of buying a little of almost the entire listed market and holding. When company performance lags over a long period, CalPERS doesn’t sell because selling would only drive the price of their large holdings down further. Instead, they work with other investors to target those companies for change. They negotiate with management. If that doesn’t work, they file resolutions to encourage more independent boards and other best corporate governance practices. Sometimes they’ve backed dissident slates … voting out board members and CEOs.

Another fast growing segment of the US market is SRI (socially responsible investment) funds. Religious and other nongovernmental organizations led the way in making corporations and the public more aware of social impacts. Churches began introducing resolutions at shareholders meetings, for example to get Dow Chemical to stop producing napalm when we were at war with Vietnam, and later to get Nike to improve labor conditions at their factories. Mutual funds catering to SRI investors developed screens for whatever they thought was sinful or unethical – tobacco, unfair labor practices pollution, etc. Typically, they don’t buy shares in companies that try to profit from activities they don’t approve.

The U.S. leads the way in “ethical investing” with $2.03 trillion invested in a “socially responsible manner” in 2001, or 10 percent of the $19.9 trillion funds managed. However, Britain and Germany have in the past two years issued laws requiring pension funds to state their position on social, environmental and ethical issues. I understand that France is set to follow suit.

A month or so ago, the Chairman of the Securities and Exchange Commission (Mr. Pitt) clarified in writing that the same policy that applies to pension funds (proxies must be voted in the best interest of shareholders, not money managers) also applies to mutual funds (which hold almost another 25% of the market). This will put some pressure on all funds to examine their voting practices.


Pension funds are becoming more like SRI funds. Members of employee/labor influenced funds, such as CalPERS want them to reflect their values. They are starting to screen out markets and companies that don’t provide minimum protections to investors…of the kind Mr. Dallas has described, and they are doing it first primarily in emerging markets, where risks are perceived to be the greatest. But this trend will probably extend to domestic markets as well.

We’ve already seen evidence of the shift to SRI considerations when CalPERS sold off its tobacco stocks. Sure, they wanted to avoid the risks inherent in tobacco lawsuits but many members of the system are public health workers who want better alignment between their values and the practices of their pension fund. During the day, we’re working to convince kids not to start smoking and to help adults quit. Our pension fund shouldn’t be investing our money to bet against our success at work.

CalPERS should have either sold its investments in Enron much earlier or should have used its corporate governance clout to change their behavior. Enron was a known tax dodger and they helped bring about an energy crisis in California. It is not in the best interest of public employees to invest in companies that avoid taxes or that manipulate markets to defraud consumers. As public employees, we depend on taxes and we spend much of our working lives trying to get companies to obey both the letter and the spirit of the law.

As governments and market forces institute reforms, CalPERS and other funds will get more sophisticated in their approach. Country ratings should be used in tandem with corporate ratings. Combining the country’s score with a given company’s score would more accurately measure risk. CalPERS would still invest substantially more in countries with transparency, political stability and good labor practices. However, exceptional corporations in difficult environments would not be completely out of bounds. CalPERS practices engagement in the US market; many of us believe it should do the same in emerging markets.

On the SRI side. Mutual funds are using more sophisticated screens. Instead of banning entire industries, more are moving to eliminate the worst offenders or invest in companies with best practices. This will be combined with corporate governance and social activism, resulting in a double payoff; better economic returns and social reforms.

Here’s an example. Innovest, an investment advisor, found that the top half of firms ranked by environmental sensitivity outperformed the bottom half by up to 21.8% over a two year period, depending on industry. Their Eco-enhanced S&P 500outperformed the actual index by 11% over the same period. SRI funds and pension funds like CalPERS will use Innovest’s information to screen out the worst offenders and enhance their return.

At the same time, social activists, such as the Rose Foundation for Communities and the Environment, are drawing attention to a 1998 study by the US Environmental Protection Agency that revealed 74% of companies failed to meet SEC disclosure requirements regarding environmental liabilities that exceed $100,000. Only once in the past 25 years has the SEC taken action to enforce the disclosure of environmental liabilities. The Rose Foundation wants the SEC to require that companies aggregate environmental liabilities so that more must report….and it is leading a movement to have the law enforced. Enforcing the law will further improve the return of investments in companies that are already acting more responsibly.

Enron and the events of 9/11 are accelerating a merger of interests between the worlds of corporate governance and social resolutions. This season finds “crossover” resolutions that fuse corporate governance and social issues. Examples include resolutions asking for increased racial and gender diversity on corporate boards, and those asking for executive compensation to be linked to corporate social responsibility. Robert Monks, prominent in corporate governance, is now working in conjunction with the ExxonMobil campaign to address global warming and split the CEO and Chair.

Enron and Arthur Anderson have raised the stakes. The SEC has traditionally banned shareholders resolutions on such “ordinary business” practices as choosing an auditor. But many now see that “voting mindlessly with management is no longer classified as the responsible thing to do.” (as SIF Chairman Timothy Smith recently noted)

As I have mentioned, the law requires pension funds to vote shares in the best interest of beneficiaries. However, that law has never been enforced. Now we have a pronouncement by the head of the Securities and Exchange Commission that the same fiduciary law applies to mutual funds; voting rights must be treated as an asset, not as a mechanism for money managers to get more business at the expense of shareholders.

Enforcement won’t happen until it is easy to recognize how to vote in the best interests of shareholders. That’s where research findings will come into play. Disclosure should also be required. How can we hold our pension and mutual fund fiduciaries accountable unless we know how they vote?

Growing Sophistication

We’re going to see more reports that point to the need for greater democracy and eventually the laws requiring votes to be cast in favor of pension fund beneficiaries and mutual fund owners will be enforced.

Corporate Governance and Equity Prices” is the title of a study by Paul A. Gompers, Joy L. Ishii, Andrew Metrick, published in August 2001 supports the need for greater democracy at the top…to reduce management entrenchment.

They used 24 corporate governance provisions to build a proxy for shareholder rights. These fall broadly into the categories of

  • tactics for delaying hostile takeovers,
  • voting rights,
  • director/officer protections
  • state laws

They looked at 1,500 firms and found a striking relationship between corporate governance and stock returns. Firms in the lowest decile of the index (strongest shareholder rights…the democracy portfolio) earned 8.5% higher returns than firms in the highest decile of the index (weakest shareholder rights…the dictatorship portfolio) during the 1990s. Furthermore, they found that weaker shareholder rights are associated with lower profits, lower sales growth, higher capital expenditures, and a higher amount of corporate acquisitions. Pension and mutual funds that vote in favor of weakening shareholder rights could now face legal action.

Other studies demonstrate the need for greater democracy at the lower rungs of the corporate ladder are equally, if not more, important. Firms with significant employee ownership and participation in decision making grew 8 to 11% faster than their counterparts (NCEO, 1986). The GAO found that such firms experienced a 52% higher annual productivity growth rate.

In the U.S. tangibles contributed by capital, such as property, plant and equipment, accounted for 62% of the total value of mining and manufacturing firms in 1982 but only for 25% more recently. Intangibles contributed by employees, such as labor, patents and trademarks, now contribute 75% of the total value.

A 1998 report, “Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets,” written by an advisory group to the OECD (led by Ira Millstein), concluded: “The more important human capital is to a business, the more those investors should stand to gain – or lose – and the greater voice they should have in governing it.”

Those who vote against measures designed to empower workers will in the not too distant future face lawsuits for not voting in the interests of shareholders.

Alan Greenspan, Chairman of our Federal Reserve Board,recently addressed the need to restore public trust in the governance of corporations after Enron. His is a pessimistic assessment of the situation. According to Greenspan, the “CEO-dominant paradigm, with all its faults, will likely continue to be viewed as the most viable form of corporate governance for today’s world. The only credible alternative is for large–primarily institutional–shareholders to exert far more control over corporate affairs than they appear to be willing to exercise.” Further, “if the CEO chooses to govern in the interests of shareholders, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave in ways that produce de facto governance that matches the de jure shareholder-led model.”

It is unfortunate that Mr. Greenspan appears to place more importance in appearances than in reforms that would give shareholders more real rights. Mr. Greenspan is probably correct in his short term assessment of the politics of the situation but institutional investors have made a difference and will again. One area where they’ve made an enormous difference is in CEO pay…but in the wrong direction.

CalPERS had helped set up the Council of Institutional Investors, whose members control well over a trillion dollars in assets. They wanted to be able to communicate more freely with each other concerning corporate governance issues but an SEC rule required them to file a lot of paperwork and made strategizing on corporate campaigns impractical.

At the time, there was a large public outcry about CEO pay and the fact that it kept rising, even when company profits fell. In order to get a change in the SEC rules, CalPERS and others agreed to support the more popular notion that executive pay should be linked to performance. Unfortunately, that language was poorly crafted and the unintended result was that while workers’ pay rose 28% in the 1990s, CEO pay rose 443% and there doesn’t seem to be much of a correlation between performance and compensation. Now CEOs are earning 500 times what their workers make and CEOs are still getting raises when their companies underperform.

Lesson: Watch out for unintended consequences.

So, what reforms are on the horizon? Here are a few.

  • Transparency. We will continue to work for transparency in all aspects of corporate operations, including disclosure of off-balance sheet debt and offshore tax havens.
  • The Audit. The integrity, independence and reputation of the audit must be restored. Auditors won’t also be able to serve as the firm’s a business consultant and should be rotated periodically.
  • Campaign Finance Reform. Corporate donations corrupt the one-person one vote system of political democracy. We’re making strides but money will find other routes.
  • Boards of Directors. Boards will be closely monitored for independence, diversity, interlocking positions and conflicts of interest. CEOs shouldn’t chair Board of Directors.
  • Executive Compensation. Pay shouldn’t be so linked to share and option price that executives put their own short-term gain over the long-term health of the company. Stock options should be expensed. In 2000, the net profits of Standard & Poor’s 500-stock index companies would have been 9% lower reported, according to Bear, Stearns & Co.
  • Professionals. Too often accountants and attorneys represent senior management, not the company. Professional organizations must do a better job through education and discipline to minimize these abuses.
  • Role of Stock Exchanges. The New York Stock Exchange and NASDAQ should impose stronger standards for director independence and education, shareholder approval for all material equity plans, and policies that seek out conflicts of interest.

Unlikely Anytime Soon, But Sorely Needed

  • Tax Policies. We need to encourage long-term ownership… perhaps through increase in short-term capital gains tax.
  • The law should require that employees get to elect the trustees for their 401(k)s and pension plans; it’s a simple matter of democracy and controlling our destiny.
  • Broker voting should be eliminated. Currently, if shareholders don’t vote their proxies within 10 days of the annual meeting, their brokers will for them…always in favor of management’s recommendations.
  • Board elections. The SEC prohibition against using the resolution process to nominate directors must go. The only way shareholders can run candidates is to pay for a solicitation, while the current management uses our funds to tout their candidates on the company proxy. When this prohibition happens, you’ll know the shareholder revolution has been finally won.

Thank you for the opportunity to address such a distinguished audience. If any of you are ever in Sacramento, California please look me up. I’ll take you to lunch. In the meantime go to CorpGov.Net on the Internet and drop me an e-mail. Let’s keep in touch.

Institutional Investors Roundtable

high level meeting, organized in cooperation with Pacific Pension Institute and Institutional Investors Magazine was also held at the ADB.

Nicholas Brady, chairman of Darby Overseas Investment, Ltd. and former secretary of the US Department of the Treasury from 1988 to 1993 under presidents Reagan and Bush, indicated that China must address its nonperforming loans and develop and credit culture. He led off the discussion with seven points learned in resolving the savings and loan industry crisis.

  1. The health of the banking sector is key to economic recovery and development.
  2. The cost of fixing the crisis increases over time.
  3. Regulatory measures that undermine the banking system must be addressed.
  4. No single solution is appropriate for all countries.
  5. The most essential ingredient is political courage.
  6. No help will come from the economic interests that caused the crisis.
  7. Be bold; time is your enemy.

Robert D. Hormats, vice chairman and managing director of Goldman Sachs (International) and former assistant secretary of state for economic and business affairs, discussed the fact that corporations and governments would be rated on risk factors. He suggested the possibility of Fannie Mae type institutions to pool together nonpermforming loans. Hormats stressed the need for more Asian firms to increase the proportion of outside directors, deal fairly with minority shareholders and reduce conflicts of interest.

Barry Metzger, of Coudert Brothers and formerly General Counsel of the Asian Development Bank, commented on Enron/Anderson. Even in the best systems there will be Enrons because of greed. Accountability will come about through fines, awards of damages and jail. Institutional investors have a responsibility to help address the need for stronger contract rights to protect their investments. When questioned about the environment, he responded by nothing the big race won’t be for dollars but for talent and talented people want to live in a healthy environment. Javed Hamid of the World Bank added that companies who meet World Bank environmental standards and corporate governance best practices find that the extra due diligence reduces risk and adds value to the bottom line.

Hubert Neiss, chairman of Deustche Bank’s Asia Pacific Head Office and formerly with the International Monetary Fund, indicated banking reforms are needed, along with further deregulation, transparency and governance reforms. The latest global slowdown did not result in a major financial crisis in Asia due previous actions, such as:

  • Expansionary fiscal policies.
  • Structural reforms.
  • Flexible exchange rates.
  • Foreign exchange reserves had built up.
  • The U.S. Recovery was driving up Asian exports and he projected a further rise.

Mark Mobius, president of Templeton Emerging Markets Fund, pointed to the need for organizations in other countries to duplicate the work of Professor Ha-sung Jang and the People’s Solidarity for Participatory Democracy (PSPD) organization in Korea go rotect minority shareholders’ rights and foster transparent corporate governance.

Back to the top

Continue Reading ·

April 2002


A major study from Claros Consulting will show that ExxonMobil’s attitude towards global warming could cost the company’s shareholders billions of dollars in coming years. The Claros Consulting report finds that ExxonMobil’s climate-change strategy involves unnecessary risks and missed opportunities – and is helping its competitors more than ExxonMobil itself. Commissioned by shareholder activist Robert A.G. Monks, CERES and Campaign ExxonMobil, the study also details the five steps shareholders can take to encourage ExxonMobil management to act responsibly on climate change. The release of the report comes about one month before ExxonMobil shareholders will vote on two related resolutions at the company’s annual stockholder meeting on May 29, 2002. Speakers during the live, two-way media briefing (including Q&A) will be:

  • Shareholder activist Robert A.G. Monks, publisher of and founder of Institutional Shareholder Services.
  • Report author Mark Mansley, Claros Consulting of London, England.
  • Peter Altman, national coordinator of Campaign ExxonMobil.
  • Ariane van Buren, senior project manager of the Sustainable Governance Project at CERES.

TO PARTICIPATE: A live, two-way telenews media briefing will take place at 1-800/966-6338 (or 1-415/217-0050 outside the U.S.) at 1:30 p.m. EDT on May 2, 2002. Ask for the “ExxonMobil study” or “global warming” call. To ensure that you hear the media briefing from the beginning, make sure to call in by 1:25 p.m.

CAN’T PARTICIPATE?: A streaming audio recording of the news event will be available on the Web as of 6 p.m. EDT on May 2nd at

FOR MORE INFORMATION, CALL: Stephanie Kendall, 703/276-3254 or [email protected].

Options Aren’t Free

Stock options accounted for 58% of CEO pay at big American companies last year and diluted corporate equity at America’s top 200 corporations by 16.4% of total shares outstanding as of 2000. Accounting treatment of options has overstated profits by a little over 10% in 1998 but this has risen to an average of 19.7% in 2000 and a staggering 72.8% in the case of information-technology companies. Unlike wages and other benefits, options are not subtracted from current earnings. President Bush’s suggestions for improving corporate governance avoided the issue. But the International Accountancy Standards Board will produce a new draft standard on options in the autumn. According the The Economist, “There are no good arguments for continuing to pretend that options cost nothing. The rules should at last reflect reality.” (An expense by any other name, 4/4/02)

Without Warning

According to a report by Bloomberg News, Andersen’s apparent unwillingness to sound warnings about Enron’s financial health was not unusual. In 54% of the 673 largest bankruptcies of public companies since 1996, auditors provided no warning in annual financial statements before the bankruptcy filing. System Software Associates, for example, was given a clean audit, even though the company was being investigated by the SEC for alleged accounting fraud.

Investors lost $119.8 billion in the 10 largest bankruptcies following audits that raised no concerns. Bloomberg also noted that Andersen actually issued audit warnings before bankruptcies more often than any of the Big Five accounting firms. Bloomberg also found that auditors are much more likely to raise concerns with small rather than large companies. The implication: professional services firms don’t want to risk losing big accounts by issuing warnings. In the 50 largest bankruptcy cases since 1996, only 14 of those companies received an auditor’s caution letter. Auditors issued caution letters to 70% of the 50 smallest companies that declared bankruptcy. (seeTeetering on the Brink at

Survey Results on Board Compensation

BoardSeat, a Silicon Valley search firm that specializes exclusively in board director and advisory board searches and consulting, published a report on the compensation and administration of boards of directors and advisory boards of venture capital-backed companies. Call 415-648-0808 to order. A few highlights are as follows:

  • 68.8% of companies that had raised $10 million or less have an advisory board as compared with only 37.5% of companies that had raised $50 million or more. There is a wide range in the number of advisors retained by companies, with the average advisory board size being about five members.
  • 84% of companies compensate independent directors with stock options only
  • Only 6.6% of companies compensate investors for sitting on the board of directors
  • 38% of companies have no independent directors
  • Just over half the companies surveyed hold directors and officers’ insurance
  • 73% percent of very early stage companies hold monthly board meetings

CalPERS Focus List

CalPERS’ new Focus List consists of only five companies. They include: Lucent Technologies of Murray Hill, New Jersey; NTL, Inc. of New York, New York; Qwest Communications of Denver, Colorado; Cincinnati Financial Corporation of Cincinnati, Ohio; and Gateway Computers of San Diego, California. However, CalPERS is closely monitoring four other companies. Possible actions regarding the companies will be disclosed throughout the proxy season.

“Focus List” companies were selected from the pension fund’s investments in more than 1,800 U.S. corporations, and was based on the companies’ long-term stock performance, corporate governance practices, and an economic value-added (EVA) evaluation. EVA measures a company’s after-tax net operating profit, minus its cost of capital. By using EVA and stock performance, CalPERS has pinpointed companies where poor market performance is due to underlying financial performance problems as opposed to industry or extraneous factors.

Gateway Computers, for example, has some of the worst performance in its industry. The California developer of desktop and portable personal computers underperformed all comparison indices and its direct competitors last year. The company turned in a loss of 55% for the one-year period ended 12/31/01 and showed little profitability between 1998 and 2000. An EVA evaluation performed for CalPERS by Stern Stewart & Associates revealed that Gateway’s cumulative EVA for the three-year period was a negative $141 million.

Gateway’s poor governance practices include a lack of complete independence on the company’s audit and nominating committees, a classified board and a recently adopted poison pill. The CEO and Chairman Theodore Waitt also chairs the Nominating Committee. Gateway has not answered requests from CalPERS to meet, citing that letters take a month to read and are responded to if they are “worthy.”

CalPERS filed a shareholder proposal to declassify Gateway’s Board and require annual elections of all directors. It also filed the same proposal at NTL, Inc., but given the company’s restructuring, a vote may never come to pass.

CalPERS is also outraged at recent reports that Qwest’s Chief Executive Joseph P. Nacchio received a $1.5 million bonus last year and a $24 million cash payout, during a period when the company is cutting jobs and its performance has fallen. “These decisions demonstrate blatant disregard for shareholders,” said Mark Anson, CalPERS Chief Investment Officer. “We have lost complete confidence in Qwest’s management and board.”

Qwest also has a number of egregious conflicts of interest. There have been multiple reported business transactions between Qwest and the Anschutz Company, where Qwest’s Chairman and Founder Phillip F. Anschutz also sits as a director and Chairman. CalPERS plans to vote against any Qwest director up for re-nomination this year.

NTL, Inc. has corporate governance issues that show particular disregard to its shareowners. The owner and operator of broadband communication networks has underperformed its peers by approximately 292% for the five-year period ended 7/31/01 and has underperformed the broad market by nearly 144%. NTL also recently announced a massive debt-for-equity swap that CalPERS believes will severely impact common stock holders.

NTL’s Board does not allow shareowners to call special meetings, has re-priced options in recent years for a handful of executives, and is replete with interlocking directors.

Lucent Technologies is refusing to adopt a shareholder proposal to declassify its board that passed by a shareholder majority vote last year. CalPERS has already voted against Lucent compensation committee directors Paul A. Allaire and John A. Young for awarding the company’s former CEO, Richard McGinn, an excessive severance package.

Cincinnati Financial Corp. is also on the list for poor corporate governance pitfalls. More than half of Cincinnati Financial Corporation’s Board is comprised of inside or affiliated directors.

Paper Tigers

A PricewaterhouseCoopers survey reported in Investor Relations Business found that, although institutional investors hold 60% of the shares at most major companies, they don’t wield much influence. Of company executives surveyed, 34% said the influence of institutional investors is neutral and over a quarter said they have no influence at all! The vast majority put this down to good investor relations – keeping institutional investors informed about long-term strategies. The 10 largest institutional investors typically own 27% of large firms; the top 5 own just under 20% and the largest holds a 9% stake. (IRB, 4/22/02, Many Institutions Take a Back Seat)

Back to the top

Continue Reading ·

March 2002

Kennesaw Weighs in on Corporate Goverance Reforms

Enron, Global Crossing and other recent debacles have stirred a great deal of thinking in recent months. Kennesaw State University’s Corporate Governance Center released a set of17 principles “to advance the current dialogue and to promote investor, stakeholder, and financial statement user interests.” Dana R. Hermanson, Director of Research, notes “we believe that these principles should be at the heart of current efforts to reform corporate governance and financial reporting in the wake of the Enron disaster.” Paul D. Lapides, Director of the Corporate Governance Center indicates the principles are offered “to promote investor, stakeholder, and financial statement user interests.” Most of the recommendations are fairly standard fare for post-Enron reviews (directors should be independent, audit firms should perform no consulting for audit clients, etc.) but several are either long overdue reforms or are building cutting edge consensus:

  • The current GAAP financial reporting model is becoming increasingly less appropriate for US public companies. The industrial-age model currently used should be replaced or enhanced so that tangible and intangible resources, risks, and performance of information-age companies can be effectively and efficiently communicated to financial statement users. 
  • The roles of Board Chair and CEO should be separate.
  • Analysts should not be compensated based on their firms’ investment banking activities.
  • Corporate management should face strict criminal penalties in fraudulent financial reporting cases.  The Securities and Exchange Commission should be given the resources it needs to effectively combat financial statement fraud. 

The Center draws on a distinguished list of staff, fellows and advisors. Their major strengths in the area of accounting are getting a lot of attention as a result of Enron.

Corporate Boards Should Focus on Performance, Not Conformance

After the corporate governance revolution of the 1990s that led to a new era of accountability to shareholders, the Enron debacle has brought new attention to the role of corporate boards and governance. Board members increasingly realize the need to act more vigorously to hold managements accountable. They are more likely to actively probe areas such as conflicts of interest and compensation of top executives. At the same time, however, would-be reformers must guard against going too far and imposing rules that tie managements’ hands.

These were some key issues that Wharton professors and a former CEO of Campbell Soup discussed at a session on corporate governance in Philadelphia as part of the Wharton Fellows program.

Proxy Voting Is a Fiduciary Duty, Pitt Says

The head of the Securities and Exchange Commission, Harvey Pitt, has asserted that money managers should view their corporate proxy votes as a fiduciary duty in a private letter to a former affiliate of LENS. The letter was in response to a 1988 request for guidance. In the letter Pitt explained that “an investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with the general antifraud provisions of the Advisers Act, as well as its fiduciary duties under federal and state law to act in the best interests of its clients.”

“We have asked every SEC chairman since 1988 about this” and delivered each a copy of the 1988 letter, recalled Nell Minow, a former Lens principal who now runs the Corporate Library. Investment managers “are going to have to justify every [proxy] vote they make,” Ms. Minow said. “The fact that management recommends it won’t be enough.” The move will certainly be used by activists to persuade mutual funds and others to vote in the best interests of fund holders. Let’s hope it has an impact similar to DOL’s Avon Letter of February 23, 1988. (WSJ, 3/21)

Reforms Needed Post-Enron

Joan Bavaria, President and CEO of Trillium Asset Management, founding Chair of CERESand co-founder the Social Investment Forum recently offered Ten Responses to the Enron Crisis for Socially Responsible Investors, summarized and annotated here as points 1-10. Appearing before the House Financial Services Committee Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Peter Clapman, senior vice president and chief counsel for corporate governance of pension and financial services provider TIAA-CREF commented on five major areas in need of reform, summarized here as points 11-15. Since many more reforms are needed, I took the liberty of adding four of my own recommendations.

  1. Transparency. We need to continue to work for more transparency around all aspects of corporate operations. “Transparency” of the future will include more disclosure of such items as off-balance sheet debt and secret off-shore tax havens. A coalition known as the Corporate Sunshine Working Group is pushing the Securities and Exchange Commission to require greater disclosure from companies on their environmental liabilities. CERES and the GRI have made gigantic strides around the environment and other sustainability issues.
  2. The Audit. The integrity, independence and reputation of the audit must be restored. We must fight against the conflict of interest inherent when the auditor also serves as a business consultant.
    • Ed. note: One of the more innovative approaches to ensure auditor independence was introduced at Fleetwood Industries by Mark Latham of the Corporate Monitoring Project. Latham’s proposal would let shareowners vote to select the auditor, not just ratify a firm selected by the board of directors. Latham believes competing to please shareowners rather than directors who often serve at the pleasure of management, would create “new pressure for higher standards and tougher audits.”
  3. Off Balance Sheet Transactions. Socially responsible investors might consider careful scrutiny of the balance sheet as part of routine social analysis, looking for signs of off-balance sheet or hidden transactions. Responsible companies have nothing to hide.
  4. Campaign Finance Reform. Once campaign finance reform legislation has passed, socially responsible investors should begin to ask companies for information on their contributions, even if they are channeled to obscure non-profits in lieu of political parties or politicians.
  5. Boards of Directors. Boards should be closely monitored for independence, diversity, interlocking positions and conflicts of interest. Board compensation should not be so excessive as to discourage questions and dissonance in Board meetings. The CEO of a company should not also chair the Board of Directors.
  6. Executive Compensation. Top managing executives’ pay should not be so linked to the short-term valuation of shares and options to tempt managers to foreclose on the future of a company for the benefit of their short-term enrichment. Shareholders should continue to advocate more balanced compensation plans. According to United for a Fair Economy, after nearly two decades of real wage declines, workers’ pay rose 28% in the 1990s (before adjusting for inflation). Meanwhile, CEO pay has rose 443%.
    • Ed. note: An increasing abuse is the use of zero-cost collars to hedge their bets on stock options. As Charles M. Elson, director of the University of Delaware’s Center for Corporate Governance: “It’s like a baseball player betting on the other team. If the executive is collaring, shareholders should be aware of it.” Hedging undermines the purpose of performance-based pay, since it cuts the risk of ownership. Unlike an outright sale of stock, investors rarely learn of hedging transactions because they are reported to the SEC on Form 4, and are rarely filed electronically. They’re not included in other company filings, such as the proxy or 10-K reports. Most services that provide insider-trading data to investors fail to pick up such transactions.
  7. Ethics Policies. Internal ethics statements and policies should be scrutinized, disclosed and discussed at shareholder and Board meetings. Mere disclosure does not guarantee compliance. We can ask companies how they monitor internal compliance.
  8. Tax Policies. The SRI community should put its weight behind all efforts to increase the short-term capital gains tax or otherwise change the tax structure to encourage long term ownership of stock. The short-term focus of Wall Street causes honest corporate managers to eye Wall Street minute by minute when they should be looking out for the long-term welfare of their company.
    • Ed. note: I’d like to see the SRI community also taking shareholders actions to encourage corporations to pay their taxes or even screening out investments in habitual tax evaders. Enron not only avoided paying income taxes in four of the last five years (they paid $17 million in 1997), using almost 900 subsidiaries in tax-haven countries and other techniques, it also collected $381 million in tax “refunds.” They wiped out much, if not all, of their tax liability despite reporting nearly $2 billion in profits from 1996 through 2000. That’s not a good SRI record as far as I’m concerned. From 1995 to 2000, corporate earnings jumped by more than a third, but taxes rose by only about 17%. The tax code has become so riddled with loopholes that tax avoidance has become a profit center of its own. Reforms are desperately needed.
  9. Renewable Energy. Socially responsible investors should continue to advocate sustainable sources of energy. Distressingly left out of most of the public debate around Enron, energy issues sit at the heart of both this scandal and the terrorist acts of the fall. This country is dependent on external sources for what remains the essential plasma of our economy and life style. There has been a distressing step backwards away from support of alternative clean fuels.
  10. Sustainable Investments. The SRI community should advocate legislation that requires pension managers to ask companies in which they invest for long-term planning that addresses sustainability issues (environment, human rights, community interaction).
  11. Conflicts of Professionals. Too often accountants and lawyers ostensibly representing the company, in fact, wind up representing only its senior management such as at Enron. Professional organizations must do a better job through education and discipline to minimize these abuses.
  12. Regulation of Accounting Profession. An independent board should oversee the accounting profession with its own funding source and with the legal authority to enforce rules and impose sanctions for wrongdoing. TIAA-CREF also favors periodic rotation of a company’s auditors and not using the same firm for accounting and consulting services.
  13. Executive Compensation. Reforms are needed to require that the cost of stock options be reflected in financial statements and that shareholder approval for dilutive stock option plans be in place.
  14. Role of Stock Exchanges. The New York Stock Exchange and NASDAQ must be an important engine for change. The exchanges must impose stronger standards for director independence and education, shareholder approval for all material equity plans, and policies that seek out conflicts of interest.
  15. Education of Directors. Not all individuals are qualified to be directors in today’s complex market place simply because they are asked to serve. Audit Committee directors only recently had to meet a standard of financial literacy — literally the ability to understand a financial statement. Compensation committee directors often do not take a proactive role on behalf of the company because they lack an understanding of issues and do not hire independent consultants when needed. Stock options overuse and abuse stems from the inadequate performance of many compensation committees and the board as a whole.
  16. Options. Their costs need to be not only reported but expensed. If the estimated cost of options were taken as an expense against earnings in 2000, the net profits of Standard & Poor’s 500-stock index companies would have been 9% lower reported, according to Bear, Stearns & Co. Properly accounting for options is not easy but ignoring their costs is the wrong solution.
  17. Employees should get to elect the trustees for their 401(k)s and pension plans; its a simple matter of democracy and controlling your destiny.
  18. Voting. Broker voting should be eliminated. Currently, if shareholders don’t vote their proxies within 10 days of the annual meeting, their broker will vote for them…always in favor of management’s recommendations. Second, institutional voting must be in the investors interest. Since 1988 Department of Labor has held that voting rights must be voted in the interests of members and beneficiaries, not plan sponsors. That rule should be enforced and extended to mutual funds and other institutional investors. The rule should also require disclosure. How can we hold our pension and mutual fund fiduciaries accountable unless we know how they vote? Third, not really a reform but we need a third-party provider to consolidate the voting advice of CALPERS, Calvert, Citizens, Domini Social Investments, Meritas Mutual Funds, MMA Praxis, Pax World Fund and others who will surely follow.
  19. Board elections. The SEC prohibition against using the resolution process to nominate directors must go. The only way shareholders can run candidates is to pay for a solicitation, while the current management uses our funds to tout their candidates on the company proxy.

Poor Showing for India

Indian blue chips garnered poor ratings in a Standard & Poor’s survey of transparency and disclosure at 350 prominent Asian and Latin American companies. The survey awarded 10 possible points on a basis of 98 information attributes grouped into 3 categories: financial transparency and information disclosure; investor relations and ownership structure; and, board and management structure and processes. Nineteen out of the 43 Indian companies surveyed, including Hindustan Lever, Hindustan Petroleum, ITC, the State Bank of India, and Reliance Industries, received a score of 4. Six Indian firms, including Mahanagar Telephone Nigam Ltd., Reliance Capital, Sterlite Industries, Raymond and Silverline Technologies, each scored 3, while Cipla walked away with a paltry 2. Conversely, Infosys Technologies and SIS scored 7, a score which no other Indian corporations equaled. (The Corporate Library)

Shareowner Action Center updated for 2002 recently updated its online Shareowner Action Center with new information from the Investor Responsibility Research Center. The new IRRC Proxy Voting Checklistprovides summary information on all corporate social policy shareowner resolutions filed in the United States for the 2002 proxy season. Issues raised in these resolutions address energy and the environment, fair employment, global labor standards, executive pay, board diversity, and a host of other issues. The IRRC checklist includes the company name, annual meeting date, resolution subject, and sponsor (including resolutions withdrawn or omitted). To date, the IRRC Proxy Voting Checklist includes 271 resolutions filed with 177 US companies for 2002, by far the largest list available on the Internet without charge.

I only wish they had included resolutions on all issues. I’ve always believed that corporate governance defenses, which aim to further entrench management, should also be of interest to those concerned with social issues. If we spent more effort addressing the root of the problem, undemocratic corporate governance, we wouldn’t have so many symptoms to deal with.

The checklist in the Shareowner Action Center will be updated with voting results in early June. For more immediate information, contact IRRC.

Federal Class Action Suits Surged in 2001

Post-Reform Act settlements average almost $25 million, up from $8 million Pre Reform Act, and rise significantly if an accounting firm or underwriter is also a defendant.

The 327 federal securities class action litigation suits filed in 2001 represent a 60% increase over the number of filings in 2000, and the companies sued lost a total of more than $2 trillion in market capitalization during the class periods, a 157% increase from the market capitalization loss during the class periods for the 204 companies sued in 2000, according to the figures released by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. The 327 cases do not include an additional 138 securities class actions filed in 2001 alleging fraud in the IPO underwriting process with no additional allegations. The IPO cases were analyzed separately.

Earnings Overstated by $130 Billion

US firms may have overstated their earnings by $130 billion, according to the London-based Centre for Economics and Business Research (CEBR), which believes that accounting practices are “less rigorous” in the US than they are “elsewhere.” “There is a systematic bias toward making profits look rosier than the underlying economics might suggest,” according to DEBR Director Mark Pragnell. Investor Relations Business (IRB) 3/11, carries an interesting commentary on the report and notes, “if the report’s claims about corporate overstatements are correct, the Dow Jones Industrial Average’s current range of 7,500 to 9,500 is some 2,000 points higher than they should be.” Pragnell attributes the source of the problem, in part, to the link between executive pay and performance.

Worried? You could sell your stock or resign from the board but you might do better by reading Zabihollah Rezaee’s timely book Financial Statement Fraud: Prevention and Detection. This will be especially helpful to boards of directors and audit committees so you’ll know when accounting practices are going over the line.

In 1999 the Committee of Sponsoring Organizations of the Treadway Commission (COSC) identified 300 public companies involved in alleged financial statement fraud. They found CEOs and CFOs linked in 83% of the cases. Most had been audited by one of the Big Five. Enron and a skeptical market call for more conservative reporting. Rezaee takes you through familiar cases such as Waste Management and Sunbeam but also goes to the cutting edge of electronic reporting using XBRL taxonomy, which enables online and real-time disclosure of financial information…thus, providing a tremendous aid in addressing the SEC’s Fair Disclosure regulation. Equal and simultaneous access, I hope that’s where we’re headed.

In the meantime, Mr. Rezaee reminds us to:

  • Employ senior execs who are knowledgeable about financial reporting.
  • Directors need to pay special attention to pressures caused by pay for performance incentives.
  • Develop and attitude of professional skepticism.
  • Pay close attention to integrity and reputation issues.
  • Monitor opportunities and motivations for management to override internal control structures (don’t waive your ethical code like the Enron board did).
  • Appoint knowledgeable, experience, and independent directors

Another good source for insights on the subject is Ralph Ward’s Boardroom Insider. Ralph reminds us that even “America’s gold standard of supermarket tabloid trash,” the National Enquirer, recently featured “Enron: Adultery, Greed, How they ripped off Americans!” Accounting fraud is right up there with two headed space monkeys. Of course, its also grabbing headlines at C-SPAN, CNN and CNBC. The latest issue gives the following advise on outside auditors

  • Is the outside audit firm performing any of the inside audit functions, and if so, how many? Enron has been slammed for farming out many of its internal audit tasks to outside auditor Arthur Andersen, but such contracting is not uncommon. In the future, though, such an arrangement, which pretty well lets auditors audit their own work, will be outside the pale.
  • Does the audit firm perform any other consulting work for the company? Ask your inside auditors about the various formulas used to calculate how much consulting work is too much, but be aware that the rules here are shifting overnight. Barbara Hackman Franklin, one of America’s most respected audit committee pros, reports that one of her boards had a rule that any consulting expenditure with the audit firm over $500,000 required board approval. Just 6 months ago this limit would be considered fairly strict, but at the audit committee’s February meeting the approval threshold was lowered – to zero.  Any expenditure now requires board pre-approval.
  • Major corporations have long had a revolving door between the outside auditor and inside staff positions, with audit partners easing directly into high-paying jobs with the company. While this offers nifty career options, it weakens auditor independence. More companies now head off temptation by banning the hiring of partners or managers of the audit firm who worked with company accounts. Usually this limitation is for a set period of time, typically 3 years.
  • Of course, coziness between the auditor and the company can be more inbred. Carol Zacharias, of CNA in New York, recalls the case of a company that engaged a Big 5 audit firm when it went public in 1971, and used the same auditor for the next 3 decades (also hiring its CFO and accounting chief from the same firm). The familiarity seems to have bred contempt, however – the company was socked with a multimillion dollar SEC fine a few years ago for overstating income. Moral of the story – term limits for auditors (anywhere from 3 to 7 years) may be a wave of the future.
  • Here’s one often overlooked conflict, says Zacharias. Does the outside audit firm’s own retirement plan hold stock in the company? This sounds like a whole barrel of conflicts, yet it is not uncommon, especially with some young venture firms (the ones who most need an independent eye on their accounts).

M&A Consulting Battles for Independence at Tokyo Style Corporation

M&A Consulting, whose mission is to unlock value with effective corporate governance and to promote shareholder value in the Japanese market, submitted a second shareholder proposal to Tokyo Style Corporation (TSE 8112), nominating two candidates as independent directors. This proposal is in response to the company’s failure to respond to their initial proposal dated January 31, 2002, which requested that they produce their own candidates for independent directors.

Predicting Key Shareholder Reaction

Identifying and understanding important investors can help predict the direction of share prices, according to a recent study reported in The McKinsey Quarterly, 2002 Number 2. Just as it is possible to know and predict your customers well, because there are only so many of them, it is also possible to predict stock price movements since the average firm there is a maximum of only 100 current and potential investors that significantly influence share prices. By identifying these critical individual or institutional investors and their motivations, executives can predict how they will react to announcements—and more accurately estimate the direction of stock prices.

Investors who have weight and a propensity to throw it around can reasonably account for at least 1% of a stock’s trading volume for a given quarter. Once a company has identified each of its primary movers, the next step is to profile all of them, describing how they make decisions. “What does the investor want to invest in, using what valuation methodologies? How is it likely to react to events or to data, which after all can be interpreted in many ways? Are its investments subject to any constraints, such as their size and frequency? Second, the profile should describe each investor’s views on issues that the company might face.”

Of course data gathering for such analysis must be done with great care since SEC regulations prohibit companies from disclosing material information to some but not all investors. “Typically, indirect questions work best,” seems like an understatement. Companies adopting such a strategy will stop viewing the market as a monolithic adversary. Instead of asking why the market moved, “they should pinpoint who bought, who sold, and why.” Think of your company as a private company and you’ll immediately see the need to understand your owners.

Will investor relations units head the call of authors Kevin Coyne and Jonathan Witter? If they do, they will take on a newly strategic role, testing major plans for their effect on share price and suggesting modifications to bring the plans into better alignment with the views of key shareholders. (see What makes your stock price go up and down)

Chevedden Puts TRW on the Spot at Annual Meeting

From the TRW annual meeting proxy dated March 4, 2002: The Company received a letter from a shareholder indicating his intention to request a vote at the annual meeting of shareholders for the Company to report, orally and in writing, at the annual meeting and in the next Company news release after the annual meeting the following information:

  • the identity of Directors who have philanthropic links to the Company, quantifying these philanthropic links and reporting whether such Directors are also members of the Audit Committee;
  • the attendance of Directors at the annual meeting of shareholders;
  • whether the Company’s independent auditors perform audit consulting services and the categories of other consulting services the Company’s independent auditors perform, including the percentage of their overall fee for each category representing more than 10 percent of their annual fee; and
  • the topics and outcome of any Rule 14a-8 proposals, including challenges by the Company of such proposals to the Securities and Exchange Commission.

If any of these matters properly comes to a shareholder vote at the meeting, the holders of the proxies solicited by this proxy statement intend to exercise their discretion to vote against any request for reports on these matters and against modifying the Company’s existing policies and practices on the matters to which the proposal relates.

In addition to taking a position of nondisclosure, management scheduled the meeting for 8:30 AM on April 24. According to John Chevedden, “an 8:30 start is a good way to discourage attendance: Force all local shareholders to fight rush-hour traffic and make sure that all out-of-town visitors spend a night in Cleveland.” John, why not stay two nights? Take in the 2nd City Student Improv at Kennedy’s Theatre where audience members are encouraged to yell out suggestions for the scenes and be a part of the show. Let’s see what they can do with topics from the TRW meeting.

Further Disclosure for Options

Starting in April, companies must include tables in their 10-K reports disclosing information about all employee stock option plans. In the past, only plans voted on and approved by shareholders had to be disclosed, and then only in footnotes. Now, companies will have to include tables identifying the number and weighted average exercise price of outstanding options; warrants and rights; and the number of securities available for future issuance under existing equity base compensation plans. The requirement certainly falls far short of a proposal by the International Accounting Standards Board to expense stock options but it is a move in the right direction.

Denton’s Providence Capital Turns Up Volume

Providence Capital’s corporate governance seminar entitled “Good Governance Pays” was well attended by a virtual whose who in the field. Professor Gompers’ study, “Corporate Governance and Equity Prices,” was well received. Providence’s small private investment portfolio returned more than 29% last year. “After Enron, the institutional investor community can no longer count on regulators, boards, lawyers, auditors or credit rating agencies,” Denton said. “They can’t rely on those folks. They have to rely on themselves by sponsoring their own director nominees.”

Companies targeted by Providence face the threat of a shareholder resolution urging the redemption of poison pills adopted without shareholder approval, a Denton-backed board slate, and a “director nomination by-law amendment.” Directors who refuse to heed a majority shareholder vote to dissolve a poison pill would be later disqualified as a director.

The bylaw amendment will likely face a legal challenge before it even came to an annual meeting vote but if it flies “the subject matter it would open up to shareholder action would be voluminous,” according to Pat McGurn, director of corporate programs at Institutional Shareholder Services. Look also for a rise in activity from Ralph Whitworth’s Relational Investors and Andrew Shapiro’s Lawndale Capital.

Corporate Governance Developments and the New Tools of Governance

The 1st International Conference on Corporate Governance: Corporate Governance Developments and the New Tools of Governance, will mark the official launch of the Centre for Corporate Governance Research at the Birmingham Business School, University of Birmingham, Edgbaston, Birmingham, UK. There will be specially invited sessions from keynote speakers, including Ariyoshi Okumura from Japan and Howard Sherman from the US; and presentation of papers by leading academics in the field including Marco Becht. Sir Adrian Cadbury will be attending the event as the External Advisor to the Centre for Corporate Governance Research.

Papers are invited on issues relating to any field of corporate governance. Possible topic areas may include boards of directors, executive remuneration, corporate governance ratings systems, internet and corporate governance, electronic voting, institutional investors, developments in corporate governance codes, etc.

Date: Tuesday 9th July 2002. Conference Fee per Delegate: £140 fee includes lunch and refreshments, and a set of conference papers.

Death Threat for Whistle Blower

Liu Shuwei, a researcher at the prestigious Central University of Finance and Economics in Beijing, reportedly blew the whistle on Hubei Lantian Co — a producer of fish and lotus root. Revenue seemed unusually high and the government had no record of some claimed assets. She wrote a brief article for publication in an “internal” magazine for bankers with a circulation of just 180, recommending they shut off credit to the company. Shortly afterwards China Construction Bank, Bank of China and others followed her advice.

Then she was served her with a writ for defamation and received dozens of death threats. Lantian apologized to investors in a public announcement. Apparently, 10 officials have been questioned in an investigation into whether the company had provided false financial information. The defamation case was postponed indefinitely. Lantian could be a test case for a new judicial decision allowing shareholders to sue companies for releasing false information. CITIC Industrial Bank and Minsheng Bank are suing for nonpayment of $16 million in loans after banks froze the company’s accounts. The case may not have the impact of Enron but it has drawn attention to poor accounting practices in China.


In an appearance before the Senate Banking Committee, Federal Reserve Chairman Alan Greenspan said “even though Enron was a great tragedy for a number of people, especially the employees who worked there, it probably has created a positive set of forces to improve corporate governance.” “I think we are going to find it was a net plus to our economy,” if corporate rules were improved as a result.”

Triple Bottom Line Simulation

Increasing evidence demonstrates that socially responsible investing (SRI) generates returns at least comparable to traditional investing. On 5/21/01, more than 40 institutional treasurers and investors met in New York City to participate in the Triple Bottom Line Simulation Conference. Five of their peers, institutional investors like themselves, presented case studies on actual social investments of more than $100 million. Next, socially responsible investment firms presented the products to be considered for the simulation. Finally, the large investors sat down and created five portfolios of social investments.

Each portfolio focused on a different aspect of socially responsible investing: social screening, shareholder activism, community development, and social venture capital, while one portfolio followed general SRI investing guidelines. Groups then divided the funds in each portfolio, allocating percentages to equity, fixed income, alternative investments, and cash. Once they chose the actual investments comprising their portfolio, they were ready to commence the simulation. All five simulations so far are outperforming the financial benchmarks. seeInstitutional Investors Try Their Hand at Socially Responsible Investing at

Who Is To Blame For Outrageous Executive Pay?

According to Frank Glassner CEO, Compensation Design Group, it’s a combination of institutional investors, Congress, corporate governance activists and the media. Institutional shareholders see the corporation’s main purpose as maximizing shareholder returns and profits, emphasizing short-term profits rather than the long-term health of the company.

Legislation enacted by Congress to deal with excessive executive compensation tied the deductibility of executive compensation to a pay for performance. Again, emphasizing short-term profitability and stock performance. CEO pay soared with stock prices. The “eagle eye of corporate governance activists and the omnipresent role of the media” simply add fuel to the fire.

Glassner believes corporations must correct their ambitious need to push short-term stock prices and institutional shareholders should back off. Management should be “more sensitive to the hardships you are asking your employees to endure… some type of sacrifice in today’s environment is a must.” “One less Barbie Dream House isn’t going to hurt anyone.” If the rank-and-file has to make financial sacrifices, so should the company management. In turn, when the company experiences increased profitability, all levels of the organization should share the wealth in one way or another.

“When Chairman Pitt said that the SEC will act in cases where executives collect from illusory gains but do not ‘suffer the consequences of subsequent restatements, the way the public does,’ he could have been speaking directly to Kenneth Lay himself. With Enron, plenty of innocent people were hurt and lives were ruined.” “Enron and Global Crossing have been a slap in the public’s face,” said Glassner. “Allowing those executives to walk away with the cash would be the equivalent of letting a bank robber keep the stolen proceeds and lecturing him to ‘never, ever, rob a bank again.'”

Good Governance Pays

Providence Capital will host a corporate governance seminar entitled “Good Governance Pays” in New York City on Friday, March 8, 2002 at 10:00 AM at the Peninsula Hotel (700 Fifth Avenue at 55th Street). The session will highlight the growing awareness of corporate governance’s impact on stock price performance. The seminar will also discuss how the institutional investor community is reacting to corporate governance post-Enron and effective tactics for promoting shareholder-friendly corporate governance at publicly traded corporations.

“In the last couple of years there have been many companies that have ignored majority shareholder votes on non-binding proposals concerning poison pills, staggered boards and other corporate governance matters. Examples include Merck, Albertson’s and Electronic Data Systems Corporation,” said Herbert A. Denton, President of Providence Capital. “When companies routinely reject shareholder wishes, institutional investors need to consider alternative tactics, including submitting an alternative slate of director nominees.”

The discussion will be open to the media and members of the institutional investor community. A Q&A session will follow the presentation. Presenting will be Mr. Denton, and Paul A. Gompers, Professor of Business Administration and Director of Research at Harvard Business School. Professor Gompers co-authored a recent study entitled “Corporate Governance and Equity Prices.” The study found that, from 1990 through 1999, investments in well governed companies responsive to shareholder interests outperformed – by over 900 basis points per year – investments in companies structured to resist change.

Participants can register to attend in person by calling (212) 888-3200 and asking for Ester Done. In addition, a live conference call will be available by calling (785) 832-1077. To view PowerPoint presentation and to read the study, go to

Summary of the Recommendations
2nd International Conference on Corporate Governance

Despite the threat of an impending South Asian war, the conference sponsored by the World Council for Corporate Governance was attended by 416 business leaders and policy makers from 20 countries. There was a consensus that corporations must recognise that globalisation offers them both the strength and opportunity to usher in a just and conflict free world for their own security, survival and sustainability. Corporate governance must integrate the issues of environmental and social responsibility for sustainable wealth creation. It was felt that a free market is meaningless without internalisation of true costs. Economic costs must reflect the full ecological costs; Also valuing true worth of the earth was the only hope of bringing the 3 billion poor in the market economy and help them reap the benefits of globalisation and bridge the widening gap between the world’s poor and rich.

The launch of Indian Sustainability Movement planned on 5th June 2002 in New Delhi to synchronise with World Environment Day is to sensitise the government and business on the enormous business opportunity in restructuring the economy on renewable fuels and innovating products and services to make them environmentally sustainable.

The launch will be followed by a 3 day Environment Congress beginning in Palampur (HP) on 7 June 2002 and incorporating International Mountain Convention to coincide with International Year of Mountains 2002. It will focus world attention on the plight of mountain people, creating sustainable livelihoods for them and protecting and promoting their unique heritage and culture. The theme of the Congress is “Sustainability through Good Governance”. The output of these discussions will be presented to the 3rd International Conference on Corporate Governance to be held in New Delhi on 27th and 28th September 2002.

  1. Corporations must recognize that globalisation offers them both the strength and opportunity to usher in a just and conflict free world for their own security, survival and sustainability.
  2. The scope of Corporate Governance should be enlarged to encompass Good Governance in all its aspects taking cognizance of the political, administrative, economic, social and judicial environment in which they function. Board of Directors ought to balance the interests of capital providers with those of other stakeholders and aim for a long term and sustained business success. Good Corporate Governance ought to create value for all stakeholders including society at large.
  3. As the Enron debacle indicates, a good corporate governance code is no guarantee of good corporate governance. There needs to be stricter monitoring and enforcement of laws, as well as punishment for corporate scams to ensure that those who violate the public trust do not go without penalty. Along with a requirement of disclosures and accountability, laws should be amended to mete out swift and deterrent punishment to the offenders.
  4. There needs to be a separation of the role of Chairman and CEO and greater scrutiny of CEO by the Board of Directors.
  5. There should be a clear separation of the audit and consulting functions. These should in no circumstance be done by the same organization.
  6. Corporate Governance ought to cover disclosures on Environmental and Social responsibility.
  7. Sustainability ought to be the end game of business. No business activity that jeopardizes the ability of future generations to meet their own needs should be permitted.
  8. There is a need for economic costs to reflect full ecological costs. Accounting practices need to ensure that environmental costs are properly internalized.
  9. There needs to be greater recognition of the importance of intellectual and reputational capital and the tectonic shift in public values with the onset of knowledge economy.
  10. Rapid obsolescence and irrelevance are the two greatest risks to corporations in the knowledge economy. Governments and businesses need to collaborate to provide incentives for innovations of new business designs and products with least impact on environment.
  11. A primary goal of good corporate governance ought to be to foster a culture of creativity, innovation and entrepreneurship to protect the business from irrelevance and obsolescence. It should aim to leverage the intellectual capital to serve the unarticulated customers and untapped markets.
  12. There needs to be greater awareness of the need for Corporate Social Responsibility. An Award to recognize achievements of Corporate Social Responsibility as distinct from the existing award on Excellence in Corporate Governance will be a good way to encourage corporate role towards society.
  13. It is unpractical to hold non-executive Directorship or Directorship in ten and more companies. The rules for Directorships need to be amended so that the number of directorships a person can hold is less then ten.
  14. It is vital that a minimal training programme be designed and organized for Directors, both Executive and Non-executive, covering key aspects of good corporate governance and director responsibilities – statutory, environmental and social. There should be a compulsory induction programme for institutional nominees.
  15. Corporations should continuously internalize the evolving best practices in corporate governance.
  16. To strengthen Boards of Directors and in order to induct people of eminence and ability into Boards to discharge the functions as watch dog of other stakeholders interests on Audit Committee, on Remuneration Committee etc., these people should be insulated from the failings of the day–to–day management. Non Executive Directors should be freed from accountability for failures such as a cheque bouncing or a pollution device failing. Amendments in the laws and Rules & Regulations in this regard should be made.
  17. The issues involving risk management and reputational capital need to be discussed more in-depth.
  18. Expeditious and cost-effective resolution of commercial disputes is an integral part of Good Corporate Governance. There is a need for WCFCG to establish an Arbitration and Reconciliation Centre which offers cost-effective and time-bound resolution of disputes.
  19. Standardized, universally applicable, unambiguous and transparent accounting procedures need to be evolved and internationally adopted.
  20. There is a need for stricter internal audit controls to ensure that debacles such as that of ENRON do not recur.
  21. WCFCG should set up a Centre for benchmarking best practices in Corporate Governance.
  22. International Conferences need to be held at frequent intervals to provide opportunity for exchange of ideas on implementation of best practices in corporate governance.

New Delhi 12th Feb., 2002

Pledge for a New TIAA-CREF

In a New York Times article (January 6, 2002), TIAA-CREF’s CEO John H. Biggs said he would support the creation of a new retirement fund that would employ not only negative screens (avoiding certain companies), but also positive screens (investing in companies strong on social responsibility).

Mr. Biggs made his offer in the context of a challenge. He would support creating such a fund only “if you could guarantee the investors would be there to invest.” He explained that TIAA-CREF would need $50 million in seed money, and that the minimum commitment needed from investors to justify the development of such a fund would be $25 million. TIAA-CREF would provide the other $25 million, with the expectation that it could be withdrawn as the fund grew.

Social Choice for Social Change: Campaign for a New TIAA-CREF asks that TIAA-CREF members step up and make a commitment to ensure the launch of this new fund. Click here.

Reaction to CalPERS Withdrawal From SE Asia

“CalPERS’ decision to withdraw investment from the emerging markets of South East Asia viz Malaysia, Indonesia, Thailand and Philippines is counter productive and not in the interest of its own shareholders,” says Dr Madhav Mehra, President of the World Council for Corporate Governance.

A review, conducted by pension consultant Wilshire Associates, led CalPERS to withdrew from the Philippines on financial grounds. Social issues were the key factors in withdrawing from Malaysia and Indonesia. At the same time CalPERS announced it will begin investing in Poland and Hungary. All four of the newly excluded markets have outperformed broader world markets this year, with Indonesia, Malaysia and the Philippines posting increases ranging from 25 – 29%. That compares with a decline of 5.6% for the MSCI World Index.

In an interview with BBC World Dr Mehra said, “Emerging markets in South and South East Asia represent some of the most innovative companies engaged in people- oriented businesses applying best practices in corporate governance and developing new business designs and products that offer the best prospects of value creation for investors.” CalPERS – US’s largest pension fund with assets of over $151 billion – has already banned investments in India and Pakistan. CalPERS’ explanation of their decision as the result of their continuing effort to withdraw from unethical investments “sounds hollow on the face of Enron’s record.” Dr Mehra assets that Enron is not an isolated case of fraud. “Its auditors have claimed that the accounting practices used to cover up were within the law and are followed by thousands of US firms,” he asserts.

Dr Mehra added, “It is also difficult to justify withdrawal on the grounds that these countries are low on performance, transparency and political stability. Some of the knowledge based pharmaceutical and telecom companies have outperformed despite recession. Whilst one can admit some political turmoil in Indonesia and Philippines, there is no serious political instability in the four other countries. Certainly, despite its other problems, India’s record of democratisation is unmatched. In regard to standards of transparency when there is so much evidence of cooking the books in developed economies, it is wrong to single out a few South East Asian economies and punish them for such lapses. The withdrawal appears more likely due to the risk factors in these countries. CalPERS’ concern for the investor, therefore, is quite understandable. Nonetheless, one must realise that stability is the thing of the past and that rapid obsolescence, demographic changes and shift in public values have profoundly changed the competitive environment. Markets of 21st century are driven by aspirations of innovation and sustainability. Short term focus on profits is the surest way for shareholder value destruction.”

Dr Mehra went on to opine that CalPERS’ decision “will dampen the efforts of Alan Greenspan to resuscitate the US economy.” “In any event, investment decisions have to be based on the policies of companies and not countries. You cannot outlaw a whole nation because of the failings of a few. You have to judge each company on its own merits. It is not significant that the countries that have been banned by CalPERS represent some 25% of the world population. What is significant is that it is the 25% that are the potential powerhouse of pent up demand needed to lift the US economy out of its current recession.”

London’s Financial Times (2/22) reported that CalPERS’ “modest presence in Asia will limit the short-term impact on fund flows to the blacklisted countries.” However, the more lasting impact will be to influence others concerned with “socially responsible investment” (SRI). “CalPERS has a massive leadership role in the US,” says Allan Conway, head of global emerging markets at WestLB Asset Management. “This will have a snowball effect which can only gain momentum.” Other critics question the rationale of pulling out of SE Asian states while continuing to invest in US companies with significant manufacturing presence in these countries. “While on one level I’m encouraged that CalPERS has come to the decision to use the power of its investment capital to promote certain social objectives,” Matthew Kiernan, of Innovest, said, “I’m somewhat puzzled by their apparent lack of interest in doing so for the other 99 per cent plus of their portfolio which are in countries and regions which themselves are not devoid of social and environmental challenges, notably the United States itself.” Similarly, while CalPERS avoids direct investment in China, because of questionable labor practices and the integrity of its political system, it continues to invest in Hong Kong-listed Chinese companies.

From my own perspective, I believe the action by CalPERS Board is based on good intentions but bad policy. I agreed with the tobacco pull out and advocated such a move years prior to the Board’s action. Tobacco, when used as directed, is harmful. It has no redeeming qualities (other than the ability to earn short term profit at the long term expense of others). I also reluctantly supported the investment boycott of South Africa. I would have rather seen pressure on companies in South Africa to resist unjust laws and bring down apartheid through direct engagement. However, the since the boycott movement was a worldwide effort, it was effective.

In the current case, I do not see CalPERS leading or joining a worldwide effort to reform or bring down the governments of its blacklisted countries. Their action may allow Board members to “wash their hands” but the impact is likely to be minimal in bringing about change. This is especially true since the Board’s action comes at a time when these markets are on the rise.

Rating countries based on transparency, political stability and labor practices/standards is reasonable but the approach should be used in tandem with corporate governance ratings. Combining the “scores” of the two scales would still result in CalPERS investing substantially more in countries with transparency, political stability and good labor practices. However, exceptional corporations in difficult environments should not be completely off bounds. CalPERS practices engagement in the US market. It hardly ever does the “Wall Street Walk.” Something closer to that policy should also hold true for its international investments.

Back to the top

Continue Reading ·

February 2002

End to Political Contributions

BP, the world’s third-largest oil company, announced it will halt all of its political contributions worldwide, possibly motivated to avoid accusations of influence peddling in the era of Enron. BP CEO Sir John Browne said the company would continue to engage in policy debate, but would not fund any political activity or party. According to the Center for Responsive Politics, BP, which makes about half of its money in the United States, spent $1.1 million on the 2000 U.S. elections, with two-thirds going to Republican candidates. BP was the first major oil company to acknowledge the threat of global warming. Royal Dutch/Shell says it had a long-standing policy of not contributing to political parties, political organizations or their representatives. more at: New York Times, 2/28, Reuters, 2/28

CalPERS Adopts New Emerging Market Policy

CalPERS has completed its comprehensive review of emerging market countries, which takes into account broad financial factors as well as transparency, political stability and labor practices/standards.

“We now have in place a blueprint to examine which emerging markets can support institutional investment,” said Michael Flaherman, Chair of CalPERS Investment Committee. “It is a screen and an important entry point for investments into our portfolio that will help to protect our pensioners assets in the emerging markets.”

Based on its new review process, CalPERS will begin taking a public equity position in Poland and Hungary, while eliminating its public equity investment position in Indonesia, Malaysia, the Philippines and Thailand.

Identify Accounting Fraud, Tricks and Best Practices

The Financial Numbers Game, by Charles Mulford and Eugene Comiskey, could not have been released to a more eager audience. Months ago Enron was the country’s seventh largest company, in terms of revenue. Now the company has all but vanished, amid revelations of questionable accounting practices that allowed Enron to overstate profits, while dodging taxes. They did it, in part, by keeping billions in debt off the books through partnerships. The authors help you understand and identify:

  • premature or fictitious revenue
  • aggressive capitalization and extended amortization policies
  • misreported assets and liabilities
  • creative income statements
  • problems with cash flow reporting

Earnings management can fall within or beyond the boundaries of generally accepted accounting principles. Key targets of a recent SEC campaign were big-bath charges, creative acquisition accounting, cookie jar reserves, materiality judgments and revenue recognition practices. Statistical research shows that such practices are not uncommon, given the rarity off small losses and small declines in profits, as well as the large numbers of consensus forecasts that either just meet of barely exceed consensus forecasts. Professional reaction to these practices is discussed.

The book also highlights many of the creative ways of presenting income statements, “the premier playground for those who engage in the financial numbers game” and cash flow reporting. A great reference book for board members (especially audit comittee members), fund fiduciaries, regulators and others. Includes helpful glossaries and references for each discrete chapter.

Lax Environmental Liability Reporting

Three out of four US corporations surveyed openly violated SEC environmental financial debt accounting regulations, according to the EPA. Congressional committees investigating the hundreds of millions of debt hidden in the Enron scandal don’t appear to be aware of the environmental liability problem, according to the Environmental News Service (ENS). “This departure from SEC mandated disclosure puts good companies at a disadvantage in the absence of reporting EPA legal proceedings,” says EPA attorney Shirin Venus.

The SEC is required to enforce federal securities laws, protecting investors and maintaining fair and efficient markets. However, in the past 20 years the SEC has only once enforced its S-K financial environmental accounting regulation. Under current federal securities law, “material” information is anything that an “average investor” ought reasonably to be informed of before buying a security but many auditors and their clients define environmental materiality as any event or news which will affect a company’s revenues by a 10% threshold level. The SEC’s efforts are lagging behind investor needs. The average investor should demand a lower material standard. (Public Companies Tweak Accounting to Hide Environmental Debt, ENS, 2/18/02) For more information, see the Corporate Sunshine Working Group.

Bogle Calls for Federation of Long-term Investors

John Bogle, founder and former chief executive of The Vanguard Group, told the New York Society of Security Analysts that abuses that led to the downfall of Enron are widespread and must be addressed through pressure from mutual funds and other big institutional investors. A “Federation of Long-term Investors,” could be the nucleus of a new shareholder group that could grow in size, bringing in “active” fund managers who pick and choose stocks based on investment potential. The heart of the problem has been the willingness of the corporate governance system to focus on stock prices as opposed to long-term corporate value.

Fat Exec Pay Tied to High Turnover

Matt Bloom and John G. Michel of the University of Notre Dame find that large corporate pay disparities are associated with lower job tenure and higher turnover among company managers. The lesson: Resentment in company ranks over fat paychecks for top executives causes more problems than just grumbling. “Dispersed pay structures promote the survival and retention of star managers, but at the cost of increasing workforce instability and turnover among remaining managers.” In contrast, “minimizing pay differentials creates a more egalitarian environment, which tends to reduce both the competition among managers and the impetus for them to leave…creating greater workforce stability.'”

The findings, “are robust across different samples, at different periods of time, at different managerial levels and after accounting for external labor market effects.” “We believe these findings support the assertion that pay dispersion per se has important implications for employee outcomes and is of strategic importance for organizational decision-makers.” (February/March issue of the Academy of Management Journal)

Another study in the same issue finds evidence of the harmful effect high turnover of personnel has on teamwork in pro basketball. Even on losing teams, the researchers find, keeping teammates together resulted in a significant gain in the following year compared to teams with more turnover.

Enron Gives Black Eye to Corporate Governance

The deception, hubris and possible criminal fraud that led to the decline and fall of Enron was bad enough, say several Wharton faculty members and a former CEO. But just as appalling was the performance of Enron’s board of directors. Read a frank exchange of ideas from Michael Useem and others at Wharton’s Center for Leadership and Change Management.

Airborne Finally Yields on Confidential Voting

After Rick Ziebarth and the Teamsters received 68% or higher of the voting shares for each of the last 3 years, Airborne’s management and Board of Directors finally saw the writing on the wall and adopted a policy that keeps proxy votes confidential but the Board has failed to yield on annual elections of the Board of Directors and the redemption of the company’s poison pill. see Teamster Scores Victory for Airborne Shareholders, PRNewswire, 2/12. Update: On 2/15 the Board authorized redemption of the poison pill.

Plaintiffs’ Lawyers Shudder

The SEC is arguing in a closely watched securities fraud case that high attorney fees could get law firms kicked off federal class actions. (see SEC Weighs In on Securities Fraud Case, Jason Hoppin, The Recorder, 2/13.

Dim View of Bidding for Class Actions

A study commissioned by a federal appeals court has taken a dim view of a controversial practice adopted by some federal judges in big securities class actions-asking law firms vying to represent plaintiffs to bid for the assignment. A study commissioned by the Philadelphia-based U.S.

Circuit Court of Appeals for the 3rd Circuit concluded last month that competitive bidding for class action counsel positions is generally a bad idea. Plaintiffs lawyers often jockey for the position of lead counsel, hoping for the biggest fee. Without a bidding process, the choice is made at the sole discretion of the judge presiding over a case. “The risks and complications associated with a judicially-controlled auction counsel against its use except under certain limited circumstances,” the 3rd Circuit task force concluded in its final report on Jan. 17.

How limited? Of the 14 cases in which competitive bidding was used, only one fit the panel’s criteria. While the 3rd Circuit’s chief judge, Edward Becker, has said the task force doesn’t speak for the court, the report gives class action lawyers with cases in New Jersey, Pennsylvania, Delaware, and the Virgin Islands weighty ammunition for arguments against bidding for work. Time will test how other circuits react, but U.S. Judges Vaughn Walker of the Northern District of California and Milton Shadur of the Northern District of Illinois are already on record as saying the panel’s work was flawed and failed to give credit to the good points of bidding. (Legal Times, 2/4, Study Frowns On Class Action Auctions 3rd Circuit Task Force Says Judges Should Significantly Limit Their Use Of Competitive Bidding For Class Action Counsel)

High Tech SRI Index

KLD and Nasdaq have createe the KLD-Nasdaq Social Index, “the first index to screen Nasdaq companies for social and environmental criteria.” The following social and environmental criteria were applied to Nasdaq Composite domestic companies: over $1 billion in market capitalization; rejection of alcohol, tobacco, gambling, military contracting, nuclear power, and firearm stock; qualitative screens rate companies on community citizenship, diversity, employee relations, environmental protection, product safety, and non-U.S. operations.

Top ten holdings of the KLD-NSI index include Oracle Corp. (ORCL), a computer software and systems producer, which has notably strong diversity policies; Amgen, Inc. (AMGN), a biotech research and production company with exceptional community involvement programs; and Qualcomm Inc. (QCOM), a communications technology firm that KLD has rated highly in terms of involving employees in company ownership and management. Currently only 283 companies qualify for inclusion in the KLD-NSI. (First Nasdaq-based Social Index Unveiled,, 2/12)

Even His Mom Isn’t Buying Skilling’s Story

Former Enron CEO Jeffrey Skilling is not only being grilled by Congressional committees, Skilling’s mom, Betty Skilling, says she finds it hard to believe the former Enron executive was not aware of wrongdoing on his watch. She told Newsweek, “When you are the CEO and you are on the board of directors, you are supposed to know what’s going on with the rest of the company. You can’t get off the hook with me there. … He’s going to have to beat this the best way he can.” Ouch!

Sen. Ernest Hollings told Reuters he is unhappy with the way Pitt is handling the entire Enron fiasco. He thinks Pitt has been quiet on Enron because he did work for Enron’s former auditor (Andersen) prior to joining the SEC. “I’m not satisfied,” Hollings told the wire service. “Whatever he (Pitt) would recommend, I’d look at with a jaundiced eye.” (Hollings Disses Pitt, CFO, 2/12)

NACD to the Rescue

In the wake of Enron’s collapse and last year’s September 11 tragedy, corporate directors are reminded more than ever of their critical oversight responsibility to ensure the safety and proper management of fiscal integrity, human resources and information resources. And yet, according to a <a href="Join other directors who will share their seasoned experience in corporate crisis situations Ð bankruptcy, physical threats to employees and information security breaches that threaten operations and credibility. Learn step-by-step processes for avoiding undue risk and minimizing damage from unexpected events. Register today!

View the entire program and register”>recent survey of national directors conducted by the National Association of Corporate Directors and the Institute of Internal Auditors, only 37% of directors responded that a formal risk management process was in place in their organization. Even more surprisingly, 17% of directors stated they did not even know whether their corporation had a formal method for identifying risks. Join other directors who will share their seasoned experience in corporate crisis situations – bankruptcy, physical threats to employees and information security breaches that threaten operations and credibility. Learn step-by-step processes for avoiding undue risk and minimizing damage from unexpected events. Register.

OECD Launches Newsletter

The Organization for Economic Cooperation and Development launched the Corporate Affairs Newsletter to promote free markets in order to achieve sustainable growth. The first issue (see what’s new) carries a discussion of accounting and audit issues… timely, given the Enron situation. The next edition of the Newsletter will be available in May 2002. To get on the mailing list, register by selecting “corporate governance as your theme.

4th Asian Corporate Governance Roundtable meeting; Mumbai, India, 10-12 June 2002 (Shareholders Rights and Equitable Treatment of Shareholders). Participating countries include Australia, Brunei Darussalam, Canada, China, Hong Kong China, India, Indonesia, Japan, Korea, Malaysia, Mexico, Mongolia (as an observer), New Zealand, Singapore, Chinese Taipei, Thailand, the UK, and the US.

Non-Audit Services by Auditor Associated with Lower Quality Earnings

In their study, The Relation Between Auditors’ Fees for Non-Audit Services and Earnings Quality, Richard M. Frankel, Marilyn F. Johnson, and Karen K. Nelson found the purchase of non-audit services from the auditor is associated with lower quality earnings. They also found evidence that investors associate non-audit fees with lower quality audits and, by implication, lower quality earnings. Their evidence indicates that firms paying high non-audit fees are more likely to engage in earnings management. They predict firms “may reduce the purchase of non-audit services to avoid the appearance of non-independence.

Enron Fallout in UK

Enron’s auditor, Arthur Andersen faces a backlash in the UK.  A number of major investment funds have threatened to vote against the firm’s reappointment at shareholder meetings. Manifest, the UK proxy voting advisor believes that all companies’ audit committees should include a qualified auditor and thinks this aspect of governance is overlooked. “Whereas fat-cat pay grabs headlines, audit can seem trivial,” says Sarah Wilson, managing director at Manifest. “But experience shows that it is a key risk management area for shareholders.  Legislation should be changed in the UK to enforce full disclosure of audit and non-audit related fees paid to the same organization.”

Clarification Sought on What Constitutes Controlling Company in UK

In the face of relatively low voting levels in comparison to institutional ownership levels, The Myners Report recommended the introduction of ERISA-style regulations regarding corporate governance, shareholder activism and intervention in failing companies. These regulations will primarily apply to Pension Funds, Local Government Pension Schemes and their fund mangers.

Manifest received a number of calls concerning the Takeover Panel Rules. Institutions are concerned about possible inconsistencies as to how active governance could be perceived in the context of ‘controlling’ a company. The Myners Report seeks earlier and closer involvement in under-performing companies but Manifest and its clients are concerned with the possible penalties that could be imposed if an institution got involved in the ‘wrong sort’ of activism and was considered a controlling company.

Manifest believes that it would be helpful for the Takeover Panel to undertake an independent review and clarify the position of Concert Parties in the context of governance and activism followed by a guidance note to interested parties. (seeManifest calls on The Takeover Panel for rule clarification) This will have a number of beneficial effects:

  • Elimination of regulatory uncertainty towards legitimate, non-predatory patterns of shareholder intervention;
  • Encourage market-based governance programs without the need for institutional case by case review of individual activities;
  • Demonstrate commitment to continued market best practice policy development

CalPERS: The Watchdog That Failed to Bark

According to a widely published article originating with the New York Times, the CalPERS Board was warned by outside advisors that Enron’s chief financial officer, Andrew Fastow would face conflicts of interest between his duties to the LJM 3 limited partnership, which he pitched to CalPERS, and Enron. Disclosure of such an investment could lead to embarrassment for CalPERS, especially to its reputation as a corporate governance activist.

Roland Machold, a co-founder of the Council of Institutional Investors, said he wondered why the pension fund managers “did not go right to the board, as it used to do in the old days, and say they were concerned that the board had approved something so conflicted.”

Prompt action by the CalPERS Board, such as talking with the Enron board or putting Enron on their focus list, might have made a huge difference to California taxpayers. Stock losses totaled more than $248 million at California pension funds alone, to say nothing of the $325 million loss suffered by the Florida state pension fund and additional losses at other public pension funds.

Why didn’t the world’s most famous corporate watchdog bark? The Board’s own conflicts of interest may have played a part. Bob Carlson (Board member since 1971) serves on the board of 12 Franklin funds. Bill Crist (Board member since 1987) also served on the board of the Pacific Rim Prosperity fund for many years. Which fiduciary duty gets a higher priority when opportunity knocks or conflicts arise, CalPERS or the private investment funds?

Between stints on the CalPERS Board, Kurato Shimada, (served 1987-1999, reelected in 2001) along with former Board member Albert Villalobos and retired state senator William Campbell lobbied the Board to invest $250 million in the CIM California Urban Real Estate Fund. It was the first vote ever attempted without a staff recommendation in the pension fund’s 68-year history. Is Shimada more concerned with members or building placement fee opportunities (typically 1% of the investment)?

Many Board members continue to accept expensive entertainment, diners and other gifts from those contracting with the System. In direct violation of the Government Code, they raised their own salaries and were subsequently sued by State Controller Kathleen Connell. With such conflicts of interest on their own Board, it is not surprising that CalPERS took no action to further investigate Enron.

If they had read Enron’s SEC filings, the following should have lead to questions (see 10-K’s: A Good Read for the Curious Investor, New York Times, 1/20/02):

  • Enron director, John Urquhart was paid $493,914 for providing consulting services to Enron.
  • Enron director, Lord John Wakeham, received $72,000 for advice on Enron’s European operations.
  • Enron director Herbert Winokur was affiliated with the privately owned National Tank Co. that made sales to Enron worth $370,294.
  • Sharon Lay, sister of Enron chairman and chief executive Ken Lay, was paid $517,200 for travel services provided to the firm.

Additionally, they would have noticed Enron not only avoided paying income taxes in four of the last five years, it also collected $381 million in tax “refunds.” Maybe that wouldn’t have mattered to the CalPERS Board. After all, 18 year Board member Charles Valdes largely avoided paying taxes for seven years and declared bankruptcy twice while serving as the Chairman of the Board’s Investment Committee.

How can we end conflicts of interest in corporations when our own pension funds, even those with excellent reputations such as CalPERS, are riddled with such conflicts themselves? CalPERS and other public pension funds should use the Enron scandal as an opportunity for self-examination. Public employee pension funds that invest in tax evading corporations are like police who sell criminals their guns. They’re not following a good long-term strategy. (CalPERS knew of problem but kept silent: State pension fund didn’t share data on executives’ conflicts, San Francisco Chronicle, 2/5/)

BP and Royal Dutch/Shell Leading: ExxonMobil and ChevronTexaco Lag

BP and Royal Dutch/Shell are leading the field in terms of socially responsible and envrionmentally friencly behaviour, while ExxonMobil and ChevronTexaco have been slow to embrace good practics, according to a survey released by Co-operative Insurance Society, the UK insurer. See UK oil companies are better behaved, says survey,, 1/23.

Arthur Anderson Can be Held Liable

According to attorney Brian J. Donovan, Enron’s outside legal counsel, outside auditors/consultants, and investment bankers/stock analysts can be held liable for the losses sustained by the corporation’s investors when the corporate client has committed fraud, despite protections afforded by the Private Securities Litigation Act of 1995.

Section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act provides that “It shall be unlawful for any person employed by or associated with any enterprise… conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” Mail fraud and wire fraud are the two most common forms of racketeering activity relied upon by civil RICO plaintiffs.

A 1993 Supreme Court case, Reves v. Ernst Young, 507 U.S. 170 (1993), which is frequently cited by the accounting profession, held that a RICO defendant must participate in the operation or management of the enterprise itself in order to be subject to Section 1962(c) liability. In that case, the Court held that the outside accounting firm was liable for damages under both the Arkansas Security Act and the Securities Exchange Act of 1934 for material misstatements associated with demand notes. However, the accounting firm, which was sued as an entity enterprise, was not liable under the RICO statute because the firm had maintained its role as an outsider and did not participate in management decisions.

In order to successfully plead a civil RICO Section 1962(c) claim, a plaintiff, in an Enron-like case, should allege that the corporation’s directors and officers, management, outside legal counsel, outside auditors/consultants, and investment bankers/stock analysts had conducted or participated in the conduct of the affairs of the corporation through a pattern of racketeering activity by forming an “association-in-fact” enterprise. The plaintiff would file suit against the insider association-in-fact enterprise rather than against
just a single outsider entity enterprise. As an insider association-in-fact enterprise, the individual defendant entities, e.g., the outside auditor/consultant, could no longer claim, as was done in Reves, that they were outsiders and therefore not liable under RICO.

A civil RICO plaintiff who properly pleads each of the four principal requirements for a Rico civil claim may be entitled to recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee. Maybe this will help stem the flood of earnings restatements and accounting irregularities.

Back to the topConference Board Questions Impact of 911

The Jan/Feb edition of Across The Board carries a cover article, Below the Bottom Line, that asks “do today’s multinationals have a role in ending word hunger, seeking social justice and redistributing wealth.” While weeding out terrorists cells is a necessary short-term step, in the longer term we must improve the conditions that may have contributed to the breeding of terrorists.

Global Conflict on Horizon

Writing in December’s ISSue Alert, Stephen Deane sees a storm brewing between US led globalization and European national or regional sovereignty. Europeans question US accounting and tax structures which disadvantage shareholders. Specifically, not expensing option grants to income statements (if they had, earnings per share would have dropped 9% in 2000) and allowing a tax deduction when employees exercise their options (companies get to write off the difference between strike price and market value).

The Council of Institutional Investors has long advocated recognizing stock option grants as an expense. Even accounting firms Deloitte & Touche and Arthur Anderson agree. TheInternational Accounting Standards Board (IASB) drew fire in September when it announced that one of its top priorities is to develop a global standard for the accounting treatment of stock options.

Let’s hope Congress has learned from the Enron scandal and keeps out of accounting standards setting this time. Unfortunately, Deane reports that is not the case. Michael Oxley(R-Ohio), who chairs the House Financial Services Committee, has fired off letters to the IASB, the US Financial Accounting Standards Board (FASB) and the US Securities and Exchange Commission warning that requiring companies to expense options “would sharply diminish their use, harming American workers in a profound way.”

In our opinion there is just about no action that could help American workers more than proper accounting. Yes, a few greedy CEOs could be hurt but let’s hope the Europeans win.

Options Use Up

According to an article in the New York Times, the issuance of options is up and many question the supposed link to pay for performance. CEOs who received more last year, even as their companies suffered, include Daniel A. Carp of Eastman Kodak, John T. Chambers of Cisco Systems, Scott G. McNealy of Sun Microsystems and Harvey R. Blau of Aeroflex. Pearl Meyer & Partners reported the number of options granted by 50 major companies was up in 2001 an average of 12% from 2000 and expects the trend to continue.

Watson Wyatt Worldwide reports that average options overhang for Standard & Poor’s 500 firms was 14.6% of outstanding shares in 2000, up from 13% in 1999, with another percentage point or two expected to be added in 2001. In 1999, the LongView Collective Investment Fund, which manages some AFL-CIO pension money, submitted a shareholder proposal to the Chubb Corporation seeking to better align option grants with performance. The proposal failed but Chubb got the message; half the options later issued to senior management have an exercise price 25% higher than when they were granted. The NYT article indicates that consultants estimate that only 2-4% of large companies use such premium priced options. (Even Last Year, Option Spigot Was Wide Open, 2/3/2)

CEO Survey on CSR

PricewaterhouseCoopers’ fifth annual Global CEO Survey, “Uncertain Times, Abundant Opportunities,” reported highest confidence among CEOs in Corporate Social Responsibility (CSR) reputation amongst North American CEOs, with 64% feeling strongly that the public perceives their company as a positive social performer and 30% with more guarded confidence. Asia-Pacific CEOs had the lowest confidence in public perception of their companies as positive social performers, with only 28% feeling strongly confident and 54% feeling more cautiously confident. Most CEOs agree that CSR does not amount to public relations “spin” (51 percent), that CSR is vital to profitability (68%), and that CSR must remain a priority, even amidst the current economic downturn (60%). (see CEOs Worldwide Prioritize Corporate Social Responsibility, SocialFunds, 2/1/2)

MassMutual Owners to Take Charge

For the first time in U.S. history, policy owners of a major mutual insurance company, MassMutual, have united to nominate their own slate of candidates for election to a board of directors, announced John H. Jameison, Executive Director, of the MassMutual Owners Association (MMOA), a nonprofit corporation of concerned policy owners of Massachusetts Mutual and the former Connecticut Mutual Life Insurance companies.

Analyst Guidance Anticipated

The National Association of Securities Dealers, the New York Stock Exchange and the Securities and Exchange Commission are planning a joint regulatory measure that would codify industry best practices for research analysts to avoid analyst conflicts. (see Rules Or Guidance Expected, Compliance Reporter, 1/27/02)

Global Markets, Domestic Institutions:
Corporate Law and Governance in a New Era of Cross-Border Deals

April 5-6, 2002, Columbia Law School, New York, New York
The Center for International Political Economy and Columbia Law School are jointly sponsoring a conference on the dynamic tension between the inherently domestic nature of corporate law and governance institutions, and the increasingly global markets for capital, assets, and managerial talent. Topics of discussion are wide ranging. Registration is free, but space is limited, so it is important to register early. The conference will be held in the Kellogg Conference Center, 15th Floor, International Affairs Building, Columbia University, corner 117th Street and Amsterdam Avenue. To register, send an e-mail with the word “Conference” in the subject matter line to[email protected]

Include the following information in your message: (1) name, (2) institutional affiliation, and (3) whether you
plan to attend the lunches on Friday and Saturday, and the reception on Saturday evening.

Speakers and panelists include: Ronald Gilson (Columbia Law School), Edward Rock (University of Pennsylvania School of Law), Henry Hansmann (Yale Law School), Brian Cheffins (University of Cambridge) & Randall Thomas (Vanderbilt Law School), John Core (Wharton), John Coffee (Columbia Law School), Merritt Fox (Univ. of Michigan Law School), Michel Goyer (MIT, Max Planck Institute), Jeffrey Gordon (Columbia Law School), Peter Muelbert (Mainz), Luca Enriques (University of Bologna), Jonathan Macey (Cornell Law School), Lynn Stout (UCLA Law School), Katharina Pistor (Columbia Law School), Reinier Kraakman (Harvard Law School), Bernard Black & Michael Klausner (Stanford Law School), Roberta Romano (Yale Law School), Zohar Goshen (Hebrew University), William Allen (NYU Law School, formerly Chancellor, Del. Court of Chancery), Mark Roe (Harvard Law School), Corporate Law’s Limits, Andrei Shleifer (Harvard Economics Department), Curtis Milhaupt (Columbia Law School) & Mark West (University of Michigan Law School), Hugh Patrick (Columbia Business School), Mark Ramseyer (Harvard Law School) & Yoshiro Miwa, (University of Tokyo, Faculty of Economics), David Weinstein (Columbia Economics Department), Kon-Sik Kim (Seoul National University) & Joongi Kim (Yonsei University), Lawrence Liu (Lee & Li; Soochow University School of Law), Tarun Khanna (Harvard Business School)

Does it get any better than this? If I could get there, I definitely would.

NACD Provides Analysis of Lessons from Enron

The National Association of Corporate Directors has risen to the occasion in response to the recent failure of Enron . TheirDirector’s Monthly Extra includes commentary and analysis on major events in corporate governance… as they are unfolding. DM Extra will be a members-only publication delivered electronically, as critical issues arise. DM Extra is an added benefit of NACD membership. Recommendations include the following:

  • Understand financial reporting practices
  • Recognize, and if appropriate, reduce corporate and board complexity
  • Protect retirement plans
  • Set and follow policies and rules pertaining to conflict of interest
  • Refrain from improper insider training
  • Ensure auditor independence
  • Issue, improve and enforce internal document retention policies
  • Educate and empower the board to detect and ensure correction of inappropriate financial reporting
  • Embrace corporate ethics by creating a climate of integrity and responsibility, expressed in both written codes and living example

The Globalization of Corporate and Securities Law in the Twenty-First Century

Corporations have become dominant players in the global economy. This fact makes it imperative that legal scholars examine how major corporations are managed and financed and how such corporations interact with the nation states in which the corporations conduct operations. The 2002 Annual McGeorge International Law Symposium will explore this topic on 2/23 with distinguished legal experts. The Editor of CorpGov.Net will also be in attendance. The conference is open to the public with a $150 charge for MCLE credit for non-alumni attorneys. For more information on the program, call: (916) 739-7141. Panels include:

  • Comparative Corporate Governance: Converging on an American Model?
  • Global Securities Markets and Regulation
  • Corporate Responsibility and Regulating the Global Enterprise

Back to the top 

Continue Reading ·

The Divine Right of Capital: New Corporate Paradigm?

The Divine Right of CapitalMarjorie Kelly’s The Divine Right of Capital (link) offers insights in a readable style (favorably compared to Tom Paine by one prominent reviewer) and the beginnings of a viable alternative. After Enron, WorldCom and dozens of other frauds, the time may be ripe for a new corporate paradigm. Certainly, mistrust of the current system is at an all time high…at least during my 54 year lifetime.  Instead of maximizing the return to shareholders, corporations should be maximizing total return…a concept we have been advocating here at CorpGov.Net since 1995. Total return here implies the long term efficient use of all resources, both natural and human. Of course, at the heart of the efficient use of resources is the need to recognize humanity as part of nature, not separate from it.

The aim of The Divine Right of Capital is to start a dialogue about the “core problem of capitalism.” Bloated CEO pay, sweatshops, stagnant wages, corporate welfare, environmental indifference and, I would add, the unraveling of political democracy, are all symptoms. “They spring from a single source: the mandate to maximize returns to shareholders.” Kelly argues that “this mandate amounts to property bias, which is akin to racial or gender bias. It arises from the unconscious belief that property owners, or wealth holders, matter more than others.” We have yielded control to an economic aristocracy. Continue Reading →

Continue Reading ·

January 2002

2002 Proxy Season Preview and Briefing

IRRC will provide an overview and detailed information on corporate governance and social responsibility issues facing corporations and their shareholders in the United States and abroad during the 2002 proxy season. A number of new shareholder initiatives are in the works for 2002, promising a particularly interesting year, and making this session a must see event. San Francisco 2/26, New York 3/1. Registration is free, but space is limited.

E-mail from Phil Goldstein on Preventing Future Enrons

Everyone and his brother has proposed changes to prevent future Enrons. My suggestion is more modest but should be more easily implemented. It is designed only to prevent the outrageous scenario we have witnessed of an auditor destroying documents or claiming a Fifth Amendment privilege or lawyer-client privilege during an investigation of fraud. I propose that every accounting firm unilaterally require its employees as a condition of employment to agree to cooperate in and not to frustrate any legitimate fraud investigation of a client and, in that connection, to waive his Fifth Amendment right and any lawyer-client privilege.  I would expect the Big Five will reflexively oppose it but I wonder on what pretext? That they can’t get enough qualified accountants to agree in advance to cooperate in fraud investigations? The simple fact is that any accountant who will not cooperate in a fraud investigation is, by definition, not qualified.

In any event, even if the Big Five try to bury this proposal, it can go forward in other ways. Here’s how.

Corporations themselves can require a cooperation provision to be included in any auditor engagement agreement. So, even if no Big Five firm will break ranks, some lower tier firms looking for work will agree.  Eventually (probably pretty soon) economic reality will set in as multi-million dollar engagements start going to firms that will agree to a cooperation provision. Of course, I don’t expect many large corporations will be willing to take the lead on this either. So what then? A populist approach could get the ball rolling. Binding or non-binding stockholder proposals can be submitted by the good governance types like Calpers or small stockholders to require that the auditor agree not to frustrate any investigation into fraud at the company. (I would love to see an opposition statement explaining why that is a bad idea, e.g, “This is a matter that should be left to the discretion of the co-conspirators in the fraud, uh the board.”) Hell, if these proposals don’t pass, then forget the whole thing. Stockholders are just too dumb to look out for themselves.

Also, while I am concerned with excessive regulation, I suggest that the SEC’s Division of Investment Management propose a rule that a cooperation clause be part of any auditor engagement agreement with a registered investment company. Since the ICA already contains lots of requirements that are supposed to protect small investors, this would seem to be a very small but sound additional protection against fraud. I don’t see PWC, for example, willing to give up its dominant market position in the mutual fund industry by balking at this. Once the mutual fund industry demonstrated that qualified auditors can be found who will agree to waive their constitutional rights in return for getting or keeping work (surprise, surprise), all resistance will quickly disappear.

No matter what is said in opposition to this proposal, it will come out as the self-serving nonsense that it surely will be, i.e., management, directors and auditors looking to save their own skins by frustrating legitimate efforts to investigate fraud. And, by the way, after this proposal is implemented, it would be a good idea to extend it to every employee of every public corporation in the United States.

S&P Rates Hong Kong Below China on Corporate Governance Practices

Based in large part on poor ownership structures due to the high number of family dominated firms, Hong Kong trails the mainland China, according to a new Standard & Poor’s survey. Hong Kong firms averaged 6 out of 10, whereas China averaged 7. Singapore and Australia had the highest scores in the region, with Korea, Thailand, and Malaysia trailing behind Hong Kong and the Philippines, Indonesia, and Taiwan further down. (The Corporate Library,Newsbriefs)

Unions Boycott Enron Directors

The AFL-CIO is urging companies to not renominate Enron directors for election to their respective corporate boards. “Directors who permitted the accounting deception that led to the collapse of a company worth over seventy billion dollars are not suited to serve on other boards,” said Richard Trumka, secretary-treasurer of the AFL-CIO. “Enron’s directors need to be held accountable for their record.”

  • They waived conflict-of-interest rules to let Enron executives participate in related-party transactions that led to a $1.2 billion reduction in shareholder equity.
  • They failed to question Enron’s use of off-balance-sheet entities to remove debt and losses from Enron’s financial statements.
  • They approved Enron’s annual report to shareholders without ensuring Enron’s financial statement disclosure was straightforward and comprehensible. (see Look for the Union Label at

Corruption – a Stumbling Block in Good Governance

In a stirring address to 400 industry leaders and policy makers from 20 countries attending the recently concluded 2nd International Conference on Corporate Governance in Mumbai’s Taj Hotel, Dr P C Alexander, Governor of Maharashtra stated that “corruption in India was the biggest stumbling block to good governance.” Quoting Mehbubul Haque, the distinguished economist, Dr Alexander stated “corruption in India is not down stream but upstream; it travels on wings to bank accounts in Switzerland; it promotes instead of imprisons the corrupts and perpetuates poverty. It is the greatest sin against humanity and calls for a crusade by everyone.”

The theme of the conference was “Corporate Governance – Turning Rhetoric into Reality.” The conference was addressed by Mr N Vittal, Central Vigilance Commissioner, Justice M N Venkatchaliah, Chairman, Constitution Review Committee, Mr P Chidambaram, Former Finance Minister and eminent legal luminaries such as Mr Kapil Sibal, Mr K K Venugopal and Dr A M Singhvi.

Dr Madhav Mehra, President of the World Council for Corporate Governance, in his theme address stated that “the role of Corporate Governance has never been more vital. Transparency, accountability, integrity, equity and responsibility in the governance of corporation can have a transformational effect on our entire economic and social performance. Yet high profile corporate failures are not only taking place in India but also in the west such as Enron, Marconi and Swissair. It is time, therefore, that we reflect why 7 years after the Cadbury Report there continues an enormous cleavage between the rhetoric of corporate governance and reality.”

Dr Mehra continued, “Corporate Governance goes way beyond disclosures and compliance. It is concerned with empowering people, spurring and pursuing innovation and improving efficiency. It addresses conflicts of interest, which can impose burdens on the enterprise and ensures transparency and probity in corporate affairs to improve business standards and public accountability.” He asserted that “the impact of corruption and corporate and public mis-governance is alienating the civil society and is a ticking time bomb. It has widened the gap between rich and poor and created a crisis of confidence which has severely jeopardized our ability to attract investment, both domestic and foreign.”

“The most effective bulwark against fanatic terrorism is the building of a strong middle class o f entrepreneurs, investors and shareholders. This cannot come about without linking corporate governance with good public governance.” Dr Mehra called upon the US to prioritise the expenditure of billions of dollars earmarked for the war on terrorism and allocate resources to proactively facilitate good public and corporate governance systems, that bring about transparency, legitimacy, accountability, equity, integrity and responsibility.

One of the most notable sessions was “Legal, legislative and regulatory framework on corporate governance” addressed by world’s foremost jurists including the two former Chief Justices of India, Justice Venkatachaliah and Justice Ahmadi, Dr A M Singhvi, former Finance Minister Mr P. Chidambaram, Mr Kapil Sibal and Mr K. K. Venugopal. All speakers agreed that what was required was not new codes but a resolve to punish those who are found guilty of violating the existing codes and thereby set example for others.

Back to the top

Enron, CalPERS and Tax Dodgers

As someone who’s known for monitoring and trying to influence CalPERS activities for many years, I’ve been getting a lot of e-mail and telephone calls lately. Public employees in California are worried that Enron’s bankruptcy will mean a drop in our retirement. It has certainly impacted our mutual fund investments, which according the Sacramento Bee suffered losses approaching $800 per person.

The bulk of our funds at CalPERS are invested as a modified index. CalPERS buys a piece of just about every major company and rebalances its portfolio frequently to ensure stocks are held in the same relative proportions. The Los Angeles Times (11/30) indicates that CalPERS owned 3 million shares. At Enron’s peak, its shares traded for nearly $85, so CalPERS’ holdings in Enron were once valued as high $255 million but, presumably because they bought relatively early and held, CalPERS lost less than $50 million.

CalPERS also invested with Enron in two limited partnerships, known as JEDI I and JEDI II, a reference to “Star Wars” that stood for Joint Energy Development Investments. According to a recent article in the Sacramento Bee (CalPERS inadvertently linked to fall of Enron, 1/24) CalPERS reported a gain of $133 million on JEDI, earned $171.7 million on JEDI II, and still has its original investment of $175 million in the second partnership.

The Bee indicates that a decision by CalPERS to cash out of JEDI I in 1997 may have hastened Enron’s demise. “Rather than simply pay CalPERS off, Enron set in motion a convoluted debt plan to raise the money and used questionable accounting methods to keep the whole matter secret from shareholders. That enabled Enron to hide more than a half-billion dollars in debts. Last November, Enron acknowledged that these questionable practices had enabled it to overstate corporate profits by $396 million the previous four years – a disclosure that destroyed what was left of Enron’s weakened credibility, and probably sealed its doom.”

So California public employees can go back to worrying about growing old, gaining weight, the kids, the job, or whatever…our retirement funds at CalPERS are safe from the Enron debacle. That doesn’t mean there aren’t important lessons to be learned. At least eleven Congressional Committees are crawling all over Enron and their auditor, Arthur Andersen. Out of every crisis comes opportunity.

Few saw Enron’s bankruptcy coming but apparently the company did disclose deals with members of its board of directors in their proxy statement published earlier in 2001. The following were among the items that should have lead to questions:

  • Enron director, John Urquhart was paid $493,914 for providing consulting services to Enron.
  • Enron director, Lord John Wakeham, received $72,000 for advice on Enron’s European operations.
  • Enron director Herbert Winokur was affiliated with the privately owned National Tank Co. that made sales to Enron worth $370,294.
  • Enron paid $517,200 for travel services provided by a firm 50% of which was owned by Sharon Lay, sister of Enron chairman and chief executive Ken Lay. (see 10-K’s: A Good Read for the Curious Investor, New York Times, 1/20/02)
  • More than two years ago in an interview with, Andrew Fastow, Enron’s CFO boasted that he had helped keep almost $1 billion in debt off Enron’s balance sheet through the use of a complex and innovative arrangement. (see What Andy Knew)

Shareholders who just read the large print in Enron’s financial reports might have thought Enron paid hundreds of millions of dollars in corporate income taxes over the last five years. However, the footnotes revealed that no taxes were due. According to a report in the New York Times, Enron not only avoided paying income taxes in four of the last five years (they paid $17 million in 1997), using almost 900 subsidiaries in tax-haven countries and other techniques, it also collected $381 million in tax “refunds.” (Enron Avoided Income Taxes in 4 of 5 Years, 1/17/02)

And, of course, there’s the matter of Arthur Anderson. Enron paid Andersen millions in consulting fees and then employed them as auditors. When he was chairman of the SEC, that’s the type of conflict of interest which Arthur Levitt tried to ban. The current SEC chair, Harvey Pitt, seems less likely to move forward in this area, since he has a history of representing Arthur Anderson, each of the Big Five and fraud king Ivan Boesky. So far he has proposed that the largely self-policed accounting profession be overseen by a group dominated by outside experts. But the proposal would not ensure that auditors remained independent from their clients. Mr. Pitt could choose to get tough and break with his past but it would be like Nixon going to China.

Last year the SEC fined Arthur Anderson $7 million for approving the accounts of Waste Management, even though its accounting methods seemed designed to mislead investors, according to a recent article in The Economist. Arthur Anderson also had to pay $110 million to settle a lawsuit over auditing work at Sunbeam. The article indicates Anderson is not the only problematic accounting firm. (The twister hits, 1/17/2002)

One thing is clear; CalPERS should be taking a closer look at proxy statements and SEC filings for evidence of poor corporate governance practices. They’ve got plenty of company in other public employee funds, including Ohio Public Employees Retirement System ($68.8 million loss), New York State Common Retirement Fund ($58 million loss), State Retirement System of Illinois ($15 million loss), to name just a few.

The United Brotherhood of Carpenters union has filed 12 proposals calling on companies not to hire the same accounting firm to do both audit and consulting work. Among the companies targeted are Apple Computer, Bristol-Myers Squibb, Avon Products, Dominion Resources, Liz Claiborne and Manpower, according to the Investor Responsibility Research Center.

William Greider, author of “One World, Ready or Not,” is calling for the creation of public auditors, “hired by government, paid by insurance fees levied on industry and completely insulated from private interests or politics.” (Crime in the Suites, Sacramento Bee, 1/27/02). This would certainly reduce conflicts of interest, but I’m not sure the pendulum of public opinion has swung that far yet.

One of the more innovative approaches to ensure auditor independence was introduced last year at SONICblue by Mark Latham of the Corporate Monitoring Project. Latham’s proposal would let shareowners vote to select the auditor, not just ratify a firm selected by the board of directors. Competing to please shareowners rather than directors who often serve at the pleasure of management, would create “new pressure for higher standards and tougher audits,” according to Latham. (see also

CalPERS should be supporting such proposals. However, I’ve got a more fundamental concern. Should CalPERS, whose members depend on taxpayers, be investing at all in companies flagrantly avoid paying taxes? Should CalPERS aim for the highest returns or should it also be considering the possibility that the very companies we’re investing in could be undermining our jobs, our communities and our way of life. William Crist, who heads CalPERS, was compared to Darth Vader by the Paris daily, Liberation, for allegedly squeezing corporate management for ever higher profits, regardless of the social hardship imposed on French citizens.

At the heart of President Bush’s agenda is mistrust of government. Shift a portion of Social Security to the stock market. Give tax breaks to corporations and the rich because their investments will end the recession. Maybe public attention on politically connected tax dodging document shredding executives will move Americans to finally push hard for campaign financing reform and competent government employees to keep us safe, not only from foreign terrorists, but also from our own home grown greed.

Enron is not an isolated case of impropriety. Before Global Crossing went from $60 to pennies a share, CEO Gary Winnick cashed out. After running Lucent into the ground, executives sold $12 million in shares back to the company and CEO Richard McGinn left with an $11.3 million severance package.

CalPERS’ Statement of Investment Policy for Global Proxy Voting Principles (March 21, 2001) says the System “has a duty to maximize the value of its investments, in order to avoid the increases in state and local government taxes that might otherwise be needed to pay the employer’s share of costs.” However, according to the Constitution, the Board’s “duty to its participants and their beneficiaries shall take precedence over any other duty.”

The courts have ruled that “any reasonable investment that provides direct benefits for the participants – even if it does not necessarily yield an adequate economic return – would be permissible.” (Social Responsibility in Investment Policy and the Prudent Man Rule, California Law Review: Vol. 68, 1980, p. 518) I doubt taking shareholders actions to encourage corporations to pay their taxes or even prohibiting investments in habitual tax evaders would reduce the System’s return. If it does, we’ll have even greater incentive to plug tax loopholes until companies that pay earn more than those that don’t.

In addition, favoring companies that pay their taxes could certainly be considered a “collateral benefit,” which wouldn’t violate the “exclusive purpose” requirements of pension fund trust laws. After all, if taxes don’t get paid, neither do public employees. I’ve been invited by the Asian Development Bank to speak at the Forum on Corporate Governance in Asiaduring their annual meeting in early May. I’d like to be able to tell them California public employees are willing to place limits on the short term “duty to maximize the value of its investments.” Should CalPERS be contributing to an atmosphere of tax evasion and other negative unintended consequences or should it be encouraging portfolio companies to take a long term sustainable approach? Perhaps the Board will address this issue at their offsite later this month.

High Corporate Governance Standards in Nairobi

Corporate Governance rules issued by Kenya’s Capital Markets Authority for the 51 firms that trade on the Nairobi Stock Exchange included the following standards:

  • No person shall be a director of more than three publicly listed companies.
  • Audit committees must include at least three non-executive board members who must be familiar with basic accounting principles and be “informed, vigilant and effective overseers of the financial reporting process and the company’s internal controls.”
  • Directors will be proposed by a nominating committee, with a majority of non-executive directors.
  • Independent non-executive directors should constitute at least one third of the board.
  • Separation of CEO and chairman’s roles.
  • Annual general meetings.
  • Annual reports must disclose the level of compliance with corporate governance rules, and where they have not obeyed them, explain the steps being taken to ensure full compliance.

NACD Governance Survey Available

The 2001-2002 Public Company Governance Survey has been released by the National Association of Corporate Directors. It covers broad structure and practices of more than 5,000 US publicly traded companies and includes the views of hundreds of CEOs and outside directors. Want to know what the current benchmark practices and emerging trends are in corporate governance? Find out by getting the 5th survey. Also available from NACD is Board Leadership in Troubled Times. It may be too late for Enron but you can provide your directors and CEO with the tools they need to manage risk in an uncertain economic and social environment or in times of major crisis.

Also upcoming is NACD’s Annual Corporate Governance Conference, 4/28-4/30, in Washington, DC. “Adding Vision to Oversight” is the theme. Board performance is very often measured on how well directors deal with a crisis and how well they manage the situation after the siege is underway. This year, we hear a new public criticism: Why didn’t the board anticipate a problem in the first place? Where was the board? Where was the planning? This year’s annual conference will provide forums to discuss board strategies – not just when a company is in trouble, but also preemptive practices for when trouble is on the way.

UK to Require Pay Disclosure

UK’s Labor government to require publicly traded companies to report what they pay board members. Shareholders won’t be setting the salaries for individual members but they will be able to cast a nonbinding vote on general remuneration policy and that’s a step forward. Currently, most companies disclose director pay but don’t offer shareholders the right to vote.

Labor to Rebuild Chinese Wall

The AFL-CIO shareowners resolution calls for Goldman Sachs Group to bar its analysts from participating in the sales efforts of underwriters, and to stop linking analysts’ pay to the performance of the investment-banking group. It also recommends that the securities firm prevent its analysts from owning stock in the companies it covers. (see Rank-and-File: AFL-CIO Goes After Goldman: Union Busts Wall Street)

It’s the People

Watson Wyatt Worldwide has found evidence that improvements in human-capital practices (which includes both compensation and traditional human-resources concerns such as employee recruiting and retention) can boost a company’s financial performance. The consultants claim the practices are a leading, rather than a lagging, indicator of financial performance. Former studies found that significant jumps in an index of human-capital improvements tend to lift shareholder value 20%.

Shrinking Pensions

The average corporate pension plan shrank more than 11% in 2001, requiring many plan sponsors to contribute to their funds for the first time since before the boom of the 1990s, says William M. Mercer.

USA Networks Opens Books

USA Networks disclosed its internal operating budget through 2003, division by division. “We think this is a better way of providing information,” says CFO Mike Sileck. “We let analysts see our budget, which by definition is our best indicator of future activity, and we stop wasting time and energy on the game.” That certainly puts them near the head of the disclosure pack, small as it is.

Roundtable on Shareholder Proposals

the Corporate Governance Advisor (Jan/Feb) published a “Roundtable on Shareholder Proposals.” Participants included the SEC’s Martin Dunn, Pat McGurn of ISS, Nell Minow of The Corporate Library, John Wilcox of Georgeson Shareholder Communications and Beth Young, a consultant for the AFL-CIO.

Minow expressed her opinion that it is “unfathomable” that companies go to the SEC without first contacting the proponent to understand their concerns. Two trends she sees is more interest in identifying companies doing business in countries that either support terrorism or have other national security issues and increasing use of message boards. She notes that while she was with Lens she got some of her best information from an employee in a company’s bookeeping office “who gave us all kinds of wonderful data.

Minow also mentioned her own work at The Corporate Library, which includes a list of all directors who own less that 100 shares, who have missed meetings and other information, such as all the CEO employment contracts of the top 2000 companies. She’d like to see more shareholders using their right to inspect records under section 220 of the Delaware Code. Looking at the minutes of the board meetings “we found that what they leave out, as well as what’s in there, can be very useful.”

Wilcox focused his advice on how corporations can prepare for the proxy season. “Get rid of all the red flags that are going to attract shareholder proposals.” Don’t wait until TIAA-CREF is knocking at your door to get rid of that dead hand poision pill. “There’s already enough case law showing that it’s probable not a good idea.” Secondly, analyze who your owners are. This will help your know if you’re likely to risk getting a majority vote and whether you’ll need to negotiate. Third, resolve up front where your firm stands on policy issues. Will you fight standard issues like poision pills, governance issues, and environmental reporting? Then, when you do get a proposal, do a vote projection and meet with the shareholder proponent. Get advice from legal counsel, assess your chances of getting a no-action letter from the SEC and get advice on a communication strategy.

Young agreed with the need to meet with proponents to find out what’s really behind their concerns. She also stressed how important it is to “have a person with the authority to commit the company to a particular course of action present at the meeting and able to commit the company.” Companies often “oppose any request by shareholders to either meet with independent directors or have independent directors involved in the shareholder proposal process and the settlement process. I think this is a huge mistake.” Independent directors can be crucial in facilitating a settlement.

Back to the top

Asian Institute of Corporate Governance (AICG) to Host 2nd Asian Corporate Governance Conference May 16-17, 2002

Proposals for papers to be presented are solicited. The first page should contain the title; name of the author(s), complete address, telephone, fax numbers and E-mail addresses. If there are multiple authors, indicate which author will attend and which will present the paper. Also, indicate whether you would be willing to serve as a session chair and/or discussant. All submitted papers must be accompanied by an abstract of at least 250 words. Send all submissions via e-mail with a Word or PDF attachment to the local organizer: Sooyun Joo, Assistant Director, Asian Institute of Corporate Governance, College of Business Administration, Korea University.

Russian Regulator to Discuss Corporate Governance in New York on February 4th

The chairman of the Russian Federal Commission for the Securities Market, the Russian analog of the U.S. Securities and Exchange Commission, will offer a presentation on the state of the Russian stock market, which was the fastest-growing in the world in 2001, on Monday, February 4 in New York.

FCSM Chairman Igor Kostikov will release for the first time the completed national Code on Corporate Governance, detail the regulatory agency’s accomplishments to date, and outline the government’s capital market development plan for 2002. Detailed printed information on the Russian capital market and the new Code not previously released will be provided in press kits. A reception and opportunity to meet Mr. Kostikov will follow the presentation.

Mr. Kostikov will address journalists, financial analysts, and others at the Reuters 30th-floor auditorium at 3 Times Square (between 42nd and 43rd Streets) at 4:00 p.m. Contact Jonathan Murno of the Emerging Markets Traders Association at 212 908-5000 or [email protected] to register. Preregistration is necessary for admission.

Press and analyst interviews with Mr. Kostikov can be organized by contacting Emerging Markets Communications, LLC at 202 331-7751. Mr. Kostikov speaks fluent English and his biography can be found at the FCSM website. Mr. Kostikov will be in New York Feb. 1-4 to participate in the annual meeting of the World Economic Forum.

3.4 Degrees of Separation

“The Small World of the Corporate Elite” by Mina Yoo,Gerald F. Davis and Wayne E. Baker is a great paper for anyone interested in the interconnectedness of corporate boards. Look for a summary in the 11/2001 issue ofDirectorship or the 11/2001 issue of ISSueAlert. The full text will probably appear in an upcoming edition of the Administrative Science Quarterly.

The research paper demonstrates that the corporate elite in the US is a “small world,” in which the average distance between any two Fortune 1000 companies is 3.4 intermediaries and between any two Fortune 1000 board directors is 4.3. The “small-worldness” of the corporate elite is not the result of conspiratorial design but of the intrinsic properties of the networks themselves. These properties transcend individual directors and companies, sustaining a similar interlocking structure of networks over time despite major changes in corporate governance and organizational structure. For example The mean path length for boards was 3.4 in 1982, 3.5 in 1990 and 3.4 in 1999. For directors it was 4.2, 4.3 and 4.3 respectively.

Today’s “inner circle” of the corporate elite is disproportionately African-American and/or female, serving on several boards at the same time. Interestingly, “the size of the average distance increases roughly logarithmically with the size of the network, not linearly. Thus doubling the number of companies in the network increases the average path length only modestly.” Expanding from the Fortune 1000 to all 5,610 firms on the NASDAQ or NYSE lengthens the path only to 4.7. As more foreign corporations begin trading in US markets, a similarly tight global elite is likely to emerge.

Corporate Irresponsibility: America’s Newest Export

After discussing the possibility that the American model of corporate governance might be adopted around the world,Lawrence E. Mitchell ends his book, Corporate Irresponsibility: America’s Newest Export, with the words, “backlash is likely to arise in cultures that prize community over the pursuit of individual wealth.” The events of September 11, 2001 have proven Professor Mitchell prophetic. Those looking to examine the roots of resentment against American-style capitalism would be hard pressed to find a more relevant critique.

“Corporate Irresponsibility” should be mandatory reading for pension and mutual fund fiduciaries, especially those considering investment abroad, as well as for anyone on the speaker’s tour at international corporate governance conferences. Before advocating universal standards based on an Anglo-American model of corporate governance, we need to consider what the unintended consequences might be.

The United Nations Development Program reported in 1999 that American economic and cultural dominance has accelerated the widening divide between rich and poor nations. Mitchell also cites a study by Richard Freeman and Joel Rogers, “almost two-thirds of the increase in American gross domestic product from 1979 to 1996 went to the top 5% of families,” making our level of income inequality “the most unequal in the developed world.”

At the center of Corporate Irresponsibility is Mitchell’s examination of the impact of putting a short-term rise in stock prices above all other corporate goals. The need to maximize short-term stock prices leads corporations to shift their costs to the general public and the environment. Plant closings, poorly trained alienated workers, unsafe products, underinvestment in research and development, an undermining of democratic institutions, and increased stock market volatility are just of few of the many sins identified.

The “simple lesson about deferring gratification, about foregoing short-term pleasures for long-term benefits,” which many of us try to drum into our teenage children has obviously been lost on money market managers as well. Profits are crucial but trying to maximize profits for shareholders on a quarterly basis is almost certainly a self-defeating strategy for the long term. In addition, although globalization is here to stay, the world will be a poorer place if corporations continue to undermine sovereignty and culture for the sake of extracting increased profits on behalf of those who hold capital.

According to Mitchell, American’s have become increasingly focused on liberties, our right to get what we can and keep it, instead of equality, which often imposes obligations. Our dominate corporate governance model gives artificial creatures (corporations) the rights of natural persons. Unfortunately, no corporation has the moral framework of a human being, which allows us to forego short-term pleasures (profits) for long term goals such as sustainability and a healthy environment.

Corporate law has consistently moved to “replace any sense of common purpose with a very individualized concept of competing legal rights and duties.” Its as if we developed our system thinking, “let the corporations maximize stockholder wealth,” we’ll use “other institutions to keep them in check.” Unfortunately, corporations have come to dominate those other institutions. Schools provide a monopoly to Pepsi or Coke for cafeteria sales. The political system appears to be for sale to the highest bidder, with campaign finance reform still a distant dream. One family was in the news recently for offering to sell their child’s naming rights for corporate advertising purposes. Our own creation has come to dominate our lives. Like Stanely Kubrick’s computer Hal, who does some terrible deeds, like killing off the spaceship’s crew in the movie 2001 a Space Odyssey, corporations are dedicated to their mission and have an instinct for self-preservation.

Mitchell doesn’t hold back his criticism of those traditionally concerned with socially responsible investing either:

  • The Domini Social Equity Fund “held substantial portions of its portfolio in the convicted monopolist Microsoft (7.72 percent), Cisco (7.38 percent), and market-dominator Intel (6.15 percent), among others.”
  • “Between 1995 and 2000 TIAA-CREF made only one shareholder proposal relating to social issues.” Although its Statement on Corporate Governance “professes a concern for nonstockholder constituencies, the Statement notes that these constituencies, unlike stockholders, who have only their vote, have the ability to protect their interests through contracting with the corporation.” Entities with vastly different resources often cannot protect themselves against giant corporations. That point negates TIAA-CREF’s expressed concern for social responsibility.
  • CalPERS voting guidelines may give a nod to human rights abroad by setting forth an expectation that portfolio companies operating in countries where human rights abuses occur adhere to “maximum progressive practices” to eliminate such abuses but their guidelines also acknowledge CalPERS’ fiduciary obligation to maximize returns. “Like the TIAA-CREF Statement, the Guidelines spend most of their time setting out voting principles designed to keep portfolio corporations free and available for hostile takeovers and thus short-term price maximization.”
  • Aided by the AFL-CIO’s Center for Working capital, labor pension funds have taken on the same focus on the short term as TIAA-CREF and CalPERS.

Mitchell offers several solutions:

  • Eliminate stockholder voting and make boards self-perpetuating. One way to move investor focus to the long-term is to eliminate the central premise of mistrust…the system of watchers watching watchers watching watchers. Mistrust leads to untrustworthiness. Mitchell, for example, argues that “the major way compensation is kept in check is not by law — it’s by public disclosure and embarrassment.”
  • Boards should stand for election every five years rather than every year, with a moratorium on hostile takeovers in the interim.
  • Lengthen the time between financial reports. Instead of being required to file financial reports with the SEC every quarter, require them every 2 or 3 years or every 5 years. Companies could report more frequently if they wanted to. This would give managers more “freedom to let their long-term plans mature.”
  • Place a tax on frequent trades so that more stockholders become shareowners. Mitchell quotes consultant Frederick Reicheld, “Many managers find it nearly impossible to pursue long-term, value-creating strategies without the support of loyal, knowledgeable investors.”
  • “Change the accounting rules to treat employees as assets instead of liabilities.”
  • “Disallow depreciation in corporations in which the ratio of highest-to-lowest paid employee exceeds a certain amount.”
  • “Stock issued pursuant to executive option plans would be punitively taxed if the executive sold the stock in too short a period.”

Many of Mitchell’s recommendations hinge on restoring trust. He points out that 33% of the nonagricultural workforce were supervisory in 2000. “Excessive supervision creates a management style of discipline and culture of distrust that is destructive of the social fabric.” However, employees will typically work harder, share ideas and cooperate only if they trust management to share the gains.

Given the Enron/Aurther Anderson debacle, any serious move to eliminate shareholder voting or lengthen the period between board elections or financial reports appears unlikely. In fact, SEC chairman Harvey Pitt wants to move away from quarterly reports to real-time release of corporate results. This will increase the short-term focus. Trust for those at the top has crumbled and won’t be restored by giving them even greater flexibility. Mitchell points out that, if our economic system limits meaningful participation to those with capital, “then a significant proportion of the population is robbed of its ability to participate in economic life other than as consumers, which hardly seems like a role designed to foster human freedom and dignity.”However, many of us do have capital… tied up in out pension funds, our 401(k), and our IRAs. Typically, someone else is managing it for us.

I believe we will only begin to restore our freedom and dignity when we participate in directing that money, how it is used and how our shares are voted. Mitchell’s suggestions for a small tax on frequent trades and changing accounting rules to treat employees as assets, instead of liabilities, are a step in the right direction…much more so than requiring that less information to go to stockowners.

Kelly on NPR

Marjorie Kelly, author of The Divine Right of Capital: Dethroning the Corporate Aristocracy, will be interviewed by David Molpus, workplace correspondent for National Public Radio, for the All Things Considered show. The show will air Wednesday afternoon, 1/16/2002. They’ll be talking about why Enron represented a failure of corporate governance. Kelly’s experience as the editor of Business Ethics magazine and author of the Divine Right of Capital is sure to provide insights into Enron.

One of the primary concerns of her book is that secondary market stock transactions do little to enhance the value of the corporation. The current rights stockholders over corporations is not unlike that of former aristocracies over land and peasants. In reality, employees are the ones who increase the value of businesses and they should get the bulk of the profits.

Shareholder Action as a Social Change Tool

Responsible Wealth will hold a mini-conference combining education and action on February 18th. Conference participants will be introduced to using the shareholder resolution process as a tool for social change The conference will be held across the street from the Hartford Civic Center, the site of the Disney Annual Meeting.

The agenda will include:

  • Information on the history of shareholder activism as a tool for social change and Responsible Wealth’s history of using shareholder resolutions to initiate discussion of executive pay issues.
  • An opportunity to meet and share ideas with others interested in economic justice and corporate social responsibility.
  • A time to hear stories from Responsible Wealth members who have been actively involved in shareholder activism.
  • Small group discussions with options including: Reforming Corporate Governance Practices; How Much is Enough?; and Telling a Different Story about Wealth Creation.
  • A discussion of how pay at the top relates to pay at the bottom. Sister Ruth Rosenbaum, economist and founder of the Center for Reflection, Education and Action (CREA) will talk about her work on sustainable living wages.
  • Discussion of our plans for the Disney annual meeting on February 19.

The conference fee is $125 and includes lunch and dinner on February 18. For more information, contact Scott Klinger <[email protected]> or call 617-423-2148 ext. 20.

Canadians Want SRI

A poll conducted by Vector Research found that most Canadian shareholders believe corporations operating both nationally and internationally must take into account their responsibilities for human rights, the environment, their employees and local communities.

Business executives should expand their responsibilities to embrace a broader social ethic, according to 74% of those polled. Wealthy shareholders (59%) say they prefer pension funds with investments in socially responsible companies, instead of those that seek only the highest returns. The vast majority (75%) want the government to establish standards for social responsibility and oblige firms to report on how well they are meeting the standards. Canadian shareholders (81%) believe Canada should pursue an international agreement for enforceable corporate accountability standards.

A majority (54%) believe corporations and trade unions should be prohibited from donating to political parties and candidates. Copies of the complete poll results and are available at the Canadian Democracy and Corporate Accountability Commission, under the heading public opinion poll.

CalPERS Board Sued Again for Legal Violation

The California Association of Professional Scientists (CAPS) filed a lawsuit in Sacramento Superior Court challenging the December 19 decision by CallPERS to loan the Davis Administration $1.3 billion as part of its deficit reduction plan. CAPS alleges that CalPERS failed to give required legal notice of the action.  CAPS seeks to have the CalPERS approval reversed and have the action properly noticed for a future CalPERS meeting. State law requires at least 10 days advance notice of proposed actions but CalPERS’ spokeswoman Pat Macht said the proposal was announced within the 48-hour time period required for “emergency” situations. “The state only came to us at the last minute, and made an offer that needed to be confirmed in time to prepare for their budget,” she said.

Under the plan, the Davis Administration would be allowed to delay retirement payments and then repay the amount with 8.25% interest, an amount that is higher than the state would have to pay if it borrowed on the open market. The money would be paid back when the governor’s election is over and presumably state revenues have recovered. In return, the state would provide additional inflation protection to state retirees. Historically, CAPS has placed greater emphasis on the need to improving the Miscellaneous retirement benefits by raising the pay formula for future retirees.

Lawsuits filed by CAPS and other groups against previous administrations have established the legal principle that uncompensated borrowing from CalPERS constitutes an illegal raid. In order to make a budget-balancing program involving CalPERS money legal, the Board must make a determination that it provides members a compensating benefit. Although the Board has previously claimed on several occasions that it is exempt from state law, they have not made that argument yet in this situation. The legal battle appears to hinge on what constitutes a legal emergency. Sacramento Superior Court Judge Gail D. Ohanesian will hear the case in the coming weeks. The suit is the second one filed against CalPERS recently for ignoring state statutes. In a successful suit last year, California state controller Kathleen Connell sued CalPERS for not following state guidelines regarding pay increases. That determination has been stayed pending the outcome of an appeal.

Governance Leader on Tour

Madhav Mehra, President – World Council for Corproate Governancea has been involved in a series of one day seminars organized at 4 metropolitan areas in India – Delhi, Kolkata, Bangalore and Mumbai, organized by the Centre for Corporate Governance in association with Institute of Directors, New Delhi, India. Mehra’s tour is a lead up to the 2nd International Conference on Corporate Governance. Western models of corporate governance, are mostly based on maximization of shareholder value. However, Mehra argues that employees, whose knowledge accounts for 70% of corporate assets, must be made part of any governance system. Governance must not focus merely on shareholders but must also consider customers and employees who commit their lives for the corporation.

“Traditionally speaking, the constitution of a company’s board of directors is confined to its shareholders. The aim here is to maximise their value,” said Dr. Mehra. In the current knowledge economy, however, such a policy could lead to a conflict of interest between stakeholders and employees. A modern corporation, therefore, must measure and monitor total wealth creation, including that of employees, suppliers and clients. Good governance should pre-suppose a long-term and sustained benefit to the society at large through collaborative efforts, rather than focusing on short-term gains of enhanced value to the shareholders and efficient management of entities. Indian Institute of Management Director, Rammohan Rao, said companies would have to take a long-term view and not be obsessed with quarterly results.

Proportion of Income from Ownership Rises

Back in the 1950’s, Louis Kelso predicted that the percentage of total income earned from labor would shrink in comparison with that derived from capital. The Economic Policy Institute reports that from 1973-1999 labor’s share dropped from 74.4% to 70.5% while income from capital grew from 14.5% to 20.3%. Apparently, these rates do not include increases from realized capital gains or potential capital gains from securities that have appreciated. If factored in, these gains would have further added to the shift to asset-based income. (Employee Ownership Report, 1-2/2002) Attend an NCEO workshop “Introduction to ESOPs.”

Back to the top

Continue Reading ·

Archives: December 2001

Auditor Proposals on Rise

In the wake of Enron’s collapse, pension funds and others have been flooding the firms they own with proposals for change. Enron paid Andersen $52 million in 2000 for both audit and non-audit services, then declared bankruptcy this year on December 2nd. “What’s new this year is these auditor independence proposals. That’s something that we really haven’t seen before,” says Pat McGurn, vice president atInstitutional Shareholder Services.

The United Brotherhood of Carpenters union have filed 12 proposals calling on companies not to hire the same accounting firm to do both audit and non-audit work. Among the companies targeted are Apple Computer, Bristol-Myers Squibb, Avon Products, Dominion Resources, Liz Claiborne and Manpower, according to the Investor Responsibility Research Center.

In 2001, the SEC handled 438 requests from companies for permission to exclude shareholder proposals from their proxies, down from 477 requests in 2000. Shareholder proposal activity is expected to “increase slightly” this season, according to John Wilcox, vice chairman of Georgeson Shareholder, which manages shareholder communications programs for many big companies.

One of the most innovative approaches to ensure auditor independence was introduced last year at SONICblue by Mark Latham of the Corporate Monitoring Project. Latham’s proposal would let shareowners vote to select the auditor, not just ratify a firm selected by the board of directors. Competing to please shareowners rather than directors, would create “new pressure for higher standards and tougher audits, according to Latham.

“The average investor may seem ill-equipped to assess auditor quality on her own. But she need not do this on her own — she would benefit from consensus-building discussion by the entire investment community. Shareowners are asked to vote each year on the choice of directors, yet it is much easier to assess reputations of auditors than of board members, because there are only a handful of auditing firms, versus hundreds of board candidates for a diversified portfolio of stocks over the years.” (Latham)

Although the SEC allowed SONICblue management to omit the resolution from the proxy, my hope is that with some slight modification it can be reworded to win SEC approval. To read Latham’s SONICblue proposal, management’s response, Latham’s response, the SEC’s no action letter, and Latham’s comment on the SEC decision, see Corporate Monitoring website (

Cash is King

According to pay consultant William M. Mercer, only 18% of the compensation of American chief executives (and 40% of that of UK chief executives) came from fixed salaries last year. The rest came from variable sources, such as stock options and other performance-related bonuses. Watson Wyatt, another pay consultants says 90% of listed American companies have options “under water” (i.e., the share price is below that at which the options were issued). Cash may be coming back into favor. One way to minimize overhang are “stub options,” short-term options which vest within 12 months but expire after 13, compared to most options which vest within four years and expire after ten. (The Economist, Under water, 11/8)

Increase Board Opportunities

In “Tips for Corporate Board Election,” (Wall Street Journal, 12/26) Charles H. King of Korn/Ferry International, suggests involvement in cultural, religious and political groups, as well as corporate governance conferences. Consultant and board director Jenne K. Britell recommends nonprofit board service. Also helpful is Whether you’re looking to get on a board or are building a board of directors or advisors, can help you make the connection. They’ve also got a growing list of articles and FAQs on everything from “Advisory Boards – The Basics” to “What to Do With Not-For-Profit Board Members Who Don’t Do Anything.”

Help for Fiduciaries in Meeting Triple Bottom Line

Since 1995 our Corporate Governance site at CorpGov.Net has served as an interactive resource for those who believe active participation by shareholders in governing corporations can increase triple bottom line returns (adding economic, environmental and social value). SRI World Group, Inc. has now created the most definitive guide in print on the subject that we have seen. Sustainable and Responsible Investment Strategies: A Guide for Fiduciaries and Institutional Investorsis a must read for every director who has been challenged by colleagues, when attempting to consider sustainability in stock picking and when exercising care and judgment as a shareowner.

Sustainable and Responsible Investment Strategies is written by SRI World Group, which has provided consulting services to fiduciaries, walking them through key decision steps and helping them identify what factors may be the most appropriate for their institutions in achieving sustainable and responsible investment strategies. Now you can get many of the benefits of their workshops in a handy, easily referenced volume.

The book is divided into four chapters covering the terms and strategies of sustainable investing, fiduciary responsibilities, performance, how to implement the strategies right for your organization. Appendices include decision trees, profiles of institutions, financial performance graphs of several mutual funds, guidance documents from the US Department of Labor, sample shareholder resolutions, an extensive list of institutions and their strategies, policy guidelines and timetable of important historical events.

Director’s Monthly

Another source for those concerned with the triple bottom line is the National Association of Corporate Directors. The November issue of their newsletter, Director’s Monthly, has articles providing boardroom a guide to the triple bottom line, diversity initiatives, and an update of the Caux Round Table’s principles for business. “The ‘Triple Bottom Line’: A Boardroom Guide” is written by Michael Sauvante, Chairman and CEO of Rolltronics Corporation. Rolltronics has an innovative corporate structure. A limited liability company, controlling 25% of the stock, makes ownership available to employees and contractors. The Rolltronics Foundation, which fosters sustainability through philanthropic and educational enterprises, owns another 25%. Sauvante discusses natural capital and cradle-to-grave closed loop systems, citing: Natural Capitalism and Mid-Course Correction. He goes on to discuss social capital, citing such books as The Emperor’s Nightingale, Profit Building and Wealth Creation and Wealth Sharing.

Other books favorable mentioned in the November issue: Winning the Influence Game, which explains how to maximize effective government relations, and Lessons from the Top, profiles of 50 prominent CEOs.

Raid Agreement May Settle Suit and Help Balance Budget in California

California will save over a billion dollars by “restructuring pension contributions” to CalPERS. The arrangement was made in an emergency closed-door meeting. The state will continue to make its standard contributions for the rest of this fiscal year but will reduce the rates used to determine how much the state contributes to the system. When Governor Pete Wilson deferred payments to the plan to balance the budget in the early 1990s, CalPERS called it a “raid,” sued and won (then reduced the state’s contribution rate in a vain hope that Wilson would use the money to boost salaries of state employees). This time the CalPERS board agreed to the “restructuring.”

According to an article in the Sacramento Bee (CalPERS deal aids budget, 12/20/01) “in return for the lower contribution rates in the short term, retirees will receive stronger inflation protections down the road.” Inflation protection is to kick in when inflation erodes pensions by 20%, instead of 25%. What the Bee leave out is that the “agreement” is dependent on Kathleen Connel dropping a lawsuit, allowing the board to raise its reimbursement rate and that of money managers at CalPERS. Apparently, the only board member to vote against the deal was Charles Valdes, who was recently reelected to the CalPERS board by a landslide election results to be announced later this month) even though he declared personal bankruptcy twice, didn’t pay taxes for about seven years, and was asked to resign by about 1/5 of the legislature.

Connel should stick with her suit despite being widely criticized in the financial press. Connel didn’t sue to stop CalPERS from raising the pay of investment managers, a widely reported; she sued to stop the CalPERS Board from placing itself above the law, the minor impact on the pay of investment managers is incidental.

CalPERS is a great advocate of good corporate governance, including transparency and compliance with the law. Yet, when the CalPERS Board violates California laws and obfuscates their activities, the financial press, including Governance, Pensions & Investments and others, seems all too willing to accept that the primary issue was a pay increase for investment managers.

Here’s the real story. CalPERS Board members wanted a raise but their reimbursement is clearly set in statute. Rather than sponsor legislation, they argued that Proposition 162, which gave the Board independent authority to protect the fund from political raids, allows them to ignore statutory pay limits because such limits interfere with the performance of fiduciary duties.

The Board argued that higher pay was needed to attract competent Board candidates. However, at about the same time they also voted for election rules that would have made it nearly impossible to unseat an incumbent. According to an editorial in the Sacramento Bee their proposed rules risked creation of “a permanent board: unaccountable, untouchable and isolated from the people who elect it.”

Fortunately, CalPERS members were able to head off that action but the salary increases went through. When the Board raised their own pay they provided themselves cover by also raising the salaries of a few investment managers. The strategy worked, since the financial press has not focused on the Board’s own raises at all.

While its true that CalPERS needs to pay its money managers more if it is to continue to attract top talent, the same is true for CalSTRS and the Treasurer’s Office. The same is true for many job classifications in state service. CalPERS isn’t unique.

If the CalPERS Board actually believed their fiduciary responsibilities overrode the law, they could have challenged the Department of Personnel Administration and the Controller in court, instead of simply ignoring the law. However, the courts are no more likely to allow the Board to unilaterally raise their own pay and that of civil servants as it is to forgive traffic tickets to members who claim travel at the posted speed would cause them to violate their fiduciary duty because they’d be late for a meeting.

Dr. Connel should be praised for upholding the law. Retirement boards should be able to plan ahead and go through the normal legal process to raise salaries as needed. Most importantly, they should not place themselves above the law. Kudos to Valdes for the courage to vote against the lastest deal (even though he originally voted for the raises).

Back to the topFood Chain: Watching the Watchers

Governance‘s December editorial, “The food chain,” argues that corporate governance is not just about ensuring managers run companies in the best interests of owners. Since owners and managers exist at “several removes,” trustees, fund managers, and custodians operate in a governance “food chain.” While the past decade focused largely on the relations between managers and directors and directors and shareholders, the focus is now appropriately shifting. He cites, as an example, an article on Unilever in the same issue. It seems the Unilever pension fund, which sued its fund manager for the negligence, was monitored via “nods and winks rather than formal and professional processes.” “Managers and directors have learned to become open, accountable and professional in their dealings with key constituencies. Its time that fund managers and pension fund trustees followed suit.”

ISS Sides With HERE

Hotel Employees Restaurant Employees International Union won support of Institutional Shareholder Services (ISS) in its move to convince shareholders of Loews Corporation to vote against the company’s proposal to create a separate tobacco “tracking stock” for Lorillard. Key points in the ISS report include:

  • (B)ecause the company’s tracking stock will be issued via an IPO, current shareholders of the parent company will receive no direct benefit in the transaction.
  • According to the empirical studies conducted on tracking stock and the parent stock, there is no compelling evidence to suggest that tracking stock maximizes long-term shareholder value for the parent’s stock.
  • One cannot ignore the concerns raised by HERE in that the tracking stock transaction may have been structured to more preserve insider voting interests of Lorillard rather than to maximize shareholder value.”
  • The creation of a tracking stock creates a serious conflict for the company’s board.”

Millstein on 911

Corporate governance expert Ira M. Millstein, of Weil, Gotshal and Manges, wrote to the Financial Times in October expressing his concern that “eliminating poverty and misery is crucial to the “just war”; ideologues and fanatics breed on poverty and oppression.” “Diminishing the great economic divide between ‘haves’ and ‘have nots’ will require as much energy, effort and dedication as rooting out those who perpetrated the events of September 11.” (see posting

I would add that of course we need to root out terrorists, but let’s not sweep away our independent judiciary, the right to a public trial, the right to an appeal, the right to counsel, due process, equal protection and habeas corpus in the process. Good governance depends on broadening stakeholders in the system (per Millstein), while ensuring the system is transparent and protective of civil liberties.

End of Limited Liability

Russell Mokhiber and Robert Weissman’s latest corp-focus advances an idea of Lawrence Mitchell’s; limited liability for corporate shareholders should end. “Limited liability encourages stockholders not to care, ” Mitchell says in his latest book, Corporate Irresponsibility: America’s Newest Export (Yale University Press, 2001). Instead of limited liability, he advocates that corporations buy insurance. Risk would then be factored into the cost of doing business based on risk…better than sticking it to a creditor if the corporation fails.”

Mokhiber and Weissman like the idea but recognize it won’t be adopted anytime soon. They suggest an interim step would be to take away constitutional protections and limited liability from the worst-acting corporations. They call for a Corporate Character Commission (CCC), with members chosen from the “human person community.” (As opposed to the human nonperson community?)

Just as the Federal Communications Commission reviews broadcast licensees, the CCC would review corporate charters. They call it a “modest step” to a future where the corporations are subservient to moral human beings. I call it interesting but unlikely.

I would have rather seen Mokhiber and Weissman focus on Mithchell’s idea that earnings reports be required annually rather than quarterly or that the capital gains tax be increased on stocks held for fewer than thirty days. Both measures could contribute to a longer time horizon by shareholders and management, something that might be positive for everyone…and, in my opinion would be more likely. Another more modest step in the right direction would be requiring mutual funds to adopt and publish proxy-voting policies and to record and publicly disclose their proxy votes (read Amy Domini’s letter to the SEC).

Monks on Forefront Again: ExxonMobil Should Separate Chair and CEO to Protect Value

Robert A.G. Monks’ recent shareholder resolution calling for separation of the Chairman and CEO positions at ExxonMobil may result a giant step forward in cooperation between those concerned with corporate governance and the SRI/environmental communities. The move was sparked by his growing concern that the ExxonMobil Board of Directors is failing to protect long-term value in the company from Chairman and CEO Lee Raymond’s increasingly extreme position and public image.

“In the last year there have been dozens of stories highlighting criticism of the company for its environmental and social positions. Bad publicity destroys shareholder value and Exxon is undervalued compared to its peer group when it should be at a premium. We need to reverse this before investors’ holdings feel the effects more,” said Monks.

His resolution cites ExxonMobil’s bad press “…nearly half of the people familiar with [ExxonMobil] continue to give it a poor grade for environmental responsibility,” (Wall Street Journal, 2/7/01.) “ExxonMobil’s stubborn refusal to acknowledge the fact that burning fossil fuels has a role in global warming is creating a PR backlash against the world’s biggest company.” (O’Dwyer’s PR Weekly, 5/23/01) “The Reputation Institute and Harris also identified companies with the worst reputations in America, including Philip Morris Cos., Exxon and Kmart Corp…” (Wall Street Journal 9/23/99) “the company is increasingly isolated on the issue, not only from the international scientific community but also from its European competitors…” (Wall Street Journal, 3/22/01)

Monks lays primary blame on Lee Raymond. His “unflinching attitude to global warming, to ExxonMobil’s businesses in regressive regimes, and his disdain for gay rights sparked a boycott of Exxon’s products in Britain, and even calls for a boycott in the US.” (PR Week 11/26/01)

Taking a lead from the UK’s Myners Report, which promotes responsible activism, Monks’ resolution argues that Raymond’s antagonistic approach to public issues is causing damage to the company’s reputation, and that the board is failing to meet its basic duties. The resolution states:

RESOLVED that the shareholders request the Board to separate the roles of Chairman and CEO and designate a non-executive and independent director as Chairman as soon as possible (without violating current employment contracts).

Campaign ExxonMobil announced its support for the resolution. “We are pleased to see an investor with the track record and influence of Robert Monks taking on this company over its handling of this issue,” said Peter Altman, National Coordinator of Campiagn ExxonMobil. “I look forward to building support for this resolution over the next several months.” “No matter how hard the company closes its eyes and wishes, global warming isn’t going away. The smart course is to admit it is happening and get on with realistic solutions that will prevent the worst from happening.”

Free gift. I’m not sure why Capstone Publishing keeps allowing Robert Monks to give away his books on the internet but he’s done it again. Hopefully, readers of The Emperor’s Nightingale on-line will enjoy the book so much they’ll want the handy bound edition. If you so, click through CorpGov.Net we need the revenue to keep you informed.

Back to the topBroadgate Survey

The bear market has wiped out an estimated $1 trillion in shareholder value. A year-end survey of US institutional investors by Broadgate Consultants, finds that 76% of the 89 survey participants expect pressure from institutional investors on corporate governance matters to increase next year. Top concerns:

  • Stock option grants and pension fund accounting. The rising quantity of stock options being issued to employees and their potential dilutive effect. Overly optimistic assumptions concerning pension fund returns.
  • Takeover activity in 2002 to contribute to market gains, especially in technology, telecommunications, financial institutions and health care.
  • 51% of the respondents said there should be more federal regulation of IPOs.

Reddy on Indian First Principles

Dr. Y.R.K. Reddy, Chairman of Yaga Consulting Pvt. Ltd., has been researching Corporate Governance with special reference to Public Enterprises and Banking in India. We are delighted to be able to present his insights, including 33 recommendations, in our Commentary section. See The First Principles of Corporate Governance for Public Enterprise.

Domini Challenges SEC; We Urge You to Join Her

Domini Social Investments sent a letter to the Securities and Exchange Commission (SEC) urging adoption of a rule requiring all mutual funds to adopt and publish proxy-voting policies and to record and publicly disclose their proxy votes. The letter from Amy Domini to SEC Chairman Harvey L. Pitt states that proxy voting disclosure “should be considered a fundamental fiduciary obligation that mutual funds owe to their shareholders, and should be required as a matter of law.”

Two years ago, Domini Social Investments became the first mutual fund manager in America to disclose the actual proxy votes it casts for each company in its portfolios. All proxy votes are published on Domini’s website, along with the firm’s annual proxy voting guidelines covering more than ninety corporate governance, social and environmental issues. “We think our shareholders have a right to know how we intend to vote their shares on important issues of corporate governance and social and environmental responsibility,” says Ms. Domini, the firm’s founder and a managing principal.

In her letter to the SEC Chairman, Ms. Domini commends the SEC on its recent efforts to encourage greater disclosure and transparency by mutual funds, including the plain English prospectus and detailed disclosure requirements regarding investment strategies, risks and fees. “Disclosure [of proxy voting] would promote accountability and transparency,” writes Domini, “which are not only guiding principles of our financial regulatory system but have been special concerns of the Commission in recent years.”

“I can think of no other instance where the Commission countenances opacity rather than transparency in the discharge of fiduciary obligations,” continues Domini. “Indeed, when it comes to proxy voting there is not even a record-keeping requirement, let alone a disclosure requirement. I believe it is time to address this anomaly.” Yet, “proxy voting is the most direct means by which individual investors – either directly or through financial intermediaries like mutual funds – can play an active role in influencing corporate behavior.”

Ms. Domini’s letter also points out that “there is mounting evidence that progress on social, environmental and corporate governance issues is linked to long-term corporate performance.” “The Commission need not embrace the notion that proxy voting on social, environmental or corporate governance issues positively impacts fund value or corporate financial performance in order to acknowledge that many investors surely believe that it does,” writes Domini. “And if this is true, then they should be entitled to this information – just as they are entitled to information on mutual fund strategies, risks and fees.”

“Proxy voting disclosure will provide the information that mutual fund investors need to ensure that their mutual funds are accurately representing their interests when they vote on corporate governance, social and environmental issues,” concludes Ms. Domini. “I would urge the Commission to propose for adoption a rule requiring all mutual funds to adopt and publish proxy-voting policies and to record and publicly disclose their proxy votes.”

Read MS. Domini’s full letter. Please join Ms. Domini and others by dropping an e-mail to SEC Chairman Harvey L. Pitt. Let him know that you agree; mutual funds should be required to adopt and publish proxy-voting policies and to record and publicly disclose their proxy votes.

Asian Institute of Corporate Governance (AICG)

The first “Asian Corporate Governance Conference” on December 14, 2001 appears to a sellout event. The AICG invited internationally renowned scholars, economic policy makers, and practitioners from Asian countries and the US to discuss the current developments in corporate governance. Congratulations!

Longer term goals of the AICG are

1. Maintain and conduct research on corporate governance related databases
2. Support top-rated academic research on corporate governance
3. Organize international conferences on corporate governance
4. Provide education programs for top-level directors
5. Publish monographs and working papers on corporate governance
6. Interact with other leading research institutes on corporate governance throughout the world

Crompton to Head IRRC

The Investor Responsibility Research Center, (IRRC) announced the appointment of Linda Crompton, MA, MBA, as President and CEO, effective January 1, 2002. Crompton is the founder and former President and CEO of Citizens Bank of Canada, Canada’s first truly electronic bank and the country’s first bank with a publicly stated social mandate. Crompton is recognized in Canada as an innovative business leader and a compelling speaker on the global significance of corporate social responsibility.

“At a time when business is feeling both economic and shareholder pressure, IRRC will benefit greatly from Linda Crompton’s expertise,” said Luther Jones, IRRC’s chair. “Ms. Crompton understands first hand, the dynamic and often difficult balance between meeting business objectives and being accountable to stakeholders.”

In addition to her academic credentials, Crompton brings 25 years of experience in business, finance and organization development as well as a deep understanding of social and environmental issues. “It is an honor to take over the leadership of such an important organization as IRRC,” said Crompton, “Never before has the world felt so small and so interconnected. It is in times like these that we become acutely aware of the need to understand the greater impact of our business decisions.”

Crompton succeeds Scott Fenn, who announced plans to retire earlier this year after a 23-year career at IRRC, including six years as President.

For over 25 years, IRRC has been the pre-eminent source of high quality, impartial information on corporate governance and social responsibility issues affecting investors and corporations worldwide. Today, IRRC provides research, software products and consulting services to nearly 500 subscribers and clients representing institutional investors, corporations, law firms and other organizations.

Back to the topHistorical Review

Fro its 25th anniversary issue, Directors & Boards does is again with “An Oral History of Corporate Governance, 1976-2001.” The editors interviewed luminaries from business, finance, law and academia who trace the evolution of corporate boards from the largely ceremonial bodies of the 1970s to the more activist boards of today. Among participants are longtime corporate directors Raymond Troubh and Barbara Hackman Franklin, fund manager John Neff, arbitrageur Guy Wyser-Pratte, shareholder activist Nell Minow, former CalPERS General Counsel Richard Koppes, Vanguard Co. founder John Bogle, Spencer Stuart recruiter Thomas Neff, National Association of Corporate Directors founder John Nash, Harvard business professor Jay Lorsch, and former Delaware Court Chancellor William Allen.

Other sections include “The Way It Was,” which features exerts from past issues and “The Shape of Things to Come,” which examines emerging issues such as the increasing involvement of small and mid-size companies in corporate governance issues and the continuing effect of globalization. Close to 300 executives, past and present, appear in the issue as commentators on how boards have transformed themselves over the past quarter of a century.


Few saw it coming but apparently the company did disclose deals with members of its board of directors in their proxy statement published earlier this year that should have lead to suspicions about other practices.

  • Enron director, John Urquhart was paid $493,914 last year for providing consulting services to Enron.
  • Enron director, Lord John Wakeham, received $72,000 last year for advice on Enron’s European operations.
  • Enron director Herbert Winokur was affiliated with the privately owned National Tank Co. that made sales to Enron worth $370,294 last year, the proxy statement said.
  • Enron paid $517,200 last year for travel services provided to Enron employees. The travel agency business that provided the services is 50 percent-owned by Sharon Lay, sister of Enron chairman and chief executive Ken Lay.

Perhaps the Ohio Public Employees Retirement System ($68.8 million loss), New York State Common Retirement Fund ($58 million loss), CalPERS ($45 million loss), State Retirement System of Illinois ($15 million) and others will now spend more time carefully reviewing proxy statements for clear evidence of poor corporate governance practices.

Good Governance Pays

Firms that preserved shareowner rights had stock outperformed those that bolstered management’s power during the 1990’s, according to “Corporate Governance and Equity Prices,” a paper co-authored by Harvard economists Paul A. Gompers and Joy L. Ishii and Wharton School professor Andrew Metrick.

“Firms with weaker shareholder rights earned significantly lower returns, were valued lower, had poorer operating performance, and engaged in greater capital expenditure and takeover activity,” according to the paper at the Yale School of Management Finance and Accounting Seminar series.

The study tracked data on corporate governance provisions collected by the Investor Responsibility Research Center (IRRC) on about 1,500 firms from September 1990 through December 1999. The authors then constructed a straightforward “Governance Index,” assigning one point for every provision that reduced shareowner rights. The higher the score, the weaker the shareowner rights and the stronger the management power. An investment strategy that bought the firms in the lowest decile of the index (strongest shareholder rights) and sold the firms in the highest decile of the index (weakest shareholder rights) would have earned abnormal returns of 8.5 percent per year during the sample period.

Weaker shareholder rights are associated with lower profits, lower sales growth, higher capital expenditures, and a higher amount of corporate acquisitions.

In a related item, in emerging markets good corporate governance tends to be a good indicator of superior stock performance. A recent study of 495 companies by CLSA Emerging Markets showed that while the stocks of the largest 100 companies covered fell an average of 8.7% last year, the stocks of the companies rated best for corporate governance rose an average of 3.3%.

Catalyst Reports on Women’s Progress

Women continue to make small gains by taking board seats at large companies in the world. In the 2001 Census of Women Board Directors of the Fortune 1000, Catalyst found that women now hold 12.4% of the board seats, up from 11.2% in 1999. “We have seen a 25.8% increase in the number of Fortune 500 companies with women on their boards since we started counting. Between 1993 and 1996 the number jumped from 345 companies with at least one woman on their board to 417. The pace the slowed over the last five years and there are now 434 companies,” said Catalyst President Sheila Wellington. “If the rate of change remains constant in the F500, women will occupy 25% of the board seats by 2027,” said Wellington.

Catalyst also tracks “Blue Ribbon Boards” with more than 2 women. In 1999 their were 296 companies. This year the number has risen to 317 companies. In the first year of the Catalyst census, 155 of the F500 companies had no women board directors. In Catalyst’s ninth year of counting, only 67 of the F500 still have no women. Women of color comprise about 2% of the F1000 boards seats and 18.1 % of the board seats held by all women. They hold 178 of the 8,941 seats among the 839 companies for which Catalyst could confirm race and ethnicity.

Of the 178 seats:

  • 131 seats are held by African American Women
  • 30 seats are held by Hispanic Women
  • 15 seats are held by Asian American women
  • 2 seats are classified as “other

For additional information or to obtain a copy of this report, please call 212-514-7600.

HERE Opposes Lorillard Tracking Stock

The Hotel Employees Restaurant Employees International Union (HERE) announced opposition to a proposal by Loews to create a “tracking stock.” representing its minority interest in the economic performance of Lorillard, Loews’ tobacco subsidiary. “Rather than spinning-off Lorillard to shareholders and allowing shareholders to realize the full value of the tobacco asset, our company has proposed a financial gimmick that doesn’t maximize value for shareholders,” said Matthew Walker, HERE General Vice President.

HERE concerns include:

  • The limited voting rights of tracking stock, with no recourse to assets, no board representation, and options by Loews to redeem the shares – would likely dampen market appetite for a public offering. Studies show that tracking stocks have a poor performance record.
  • There are no assurances that the proceeds of the proposed tracking stock sale will flow directly to Loews’ shareholders since Loews will use the proceeds of the tracking stock offering for “general corporate purposes.”
  • The tracking stock will create significant potential conflicts of interest among stockholders, the board of directors and management.
  • The tracking stock was approved by a board dominated by insiders. The tracking stock will allow the Tisch family, which owns over 30% of Loews, to retain control of Lorillard.
  • “As part of Loews, Lorillard is currently valued by the market at less than $20 per share. If an independent Lorillard were to trade at P/E ratios similar to other tobacco companies, it would trade in the $40-50 range,” Walker said. HERE has filed a shareholder proposal for the Loews’ 2002 annual meeting seeking a spin-off of Lorillard to shareholders.

Back to the top 

Continue Reading ·

Archives: November 2001

Monks Online

Capstone Publishing has made available online the full text of The New Global Investors by Robert A. G. Monks. You can download it a chunk at a time in Adobe or the entire book via a zip file. That’s the second book Monks has made available online. The first was Power and Accountability. That book, with Nell Minow, brought many into the field of corporate governance. With The New Global Investors, Bob is introducing his important work to another generation. Read it online and then buy them both through Amazon (Global and Power).

Corporate Governance – Turning Rhetoric into Reality

2nd International Conference on Corporate Governancescheduled to be held in Hotel Taj Mahal, Mumbai on 18th and 19th January, 2001 will proceed despite the monumental tragedy of 11 September 2001. Most countries have developed their corporate governance codes. Therefore, the most challenging task is to assess how these codes are being implemented. The Conference will provide a unique platform for exchanging information on the practices of corporate governance worldwide. It is expected to be attended by 500 delegates from 30 countries and offers an unrivaled opportunity for interaction and networking with global leaders in business and government.

CREF Keeps Tobacco

At its annual meeting, College Retirement Equities Fund (CREF) encountered a large number of activists seeking to have the fund withdraw its investment tobacco companies led by the national corporate accountability organization, Infact. TIAA-CREF is one of Philip Morris’ largest institutional investors. The resolution was defeated by 70.1% to 24.6% (with 5.2% abstaining).

“Philip Morris’ Marlboro Man is arguably the world’s leading source of youth tobacco addiction. It was designed nearly 50 years ago to capture the youth market and it has succeeded,” said Camille Chow, a sophomore at Brown University who participated in the protest. “How can an investment fund that is dedicated to serving the education and research communities justify funding the Marlboro Man’s global rampage?”

The activists also challenged Elizabeth Bailey, a professor of business ethics at the
University if Pennsylvania’s Wharton School of Business, a CREF trustee and holds a seat on Philip Morris’ board.

401(k) Fatally Flawed

Watson Wyatt Worldwide examined 252 large companies with both defined-benefit and 401(k) plans for the 1990-1995 period and found the defined-benefit plans bested the 401(k) plans by 2.4% per year. 401(k) plans at Morningstar, Prudential, and Hewitt Associates between 1995-1998 earned annualized returns of 13.5%, 10.5%, and 11.8%, respectively, versus a 21.2% return for a global 70/30 mix of stocks and bonds. According to an article in Barron’s, “Given low equity returns, high expenses, and poor planning, it is likely that most 401(k) investors will obtain near-zero real returns in the coming decades.” “The inevitable government bailout will make the savings and loan resolution of the last decade look like lunch at Taco Bell.”

“The self-managed defined-contribution concept is fatally flawed,” according to William Bernstein. (Barron’s, Riding for a Fall: The 401(k) is likely to turn out to be a defined-chaos retirement plan, 11/26)

State Pensions Squander Surpluses

According to an article in November’s Institutional Investor, before he became the Bush administration’s antiterrorism czar as head of the new Office of Homeland Security, Tom Ridge bought off Pennsylvania opponents of a piece of legislation by giving legislators a 50% hike in their retirement packages, while the state’s 234,000 teachers, and 109,000 other public workers, won a 25% increase. Critics blasted the compromise as a $10 billion giveaway.

Ridge did it by making use of the surplus in the Pennsylvania Public School Employees’ Retirement System. “Arcane rules of pension accounting” allow states to average their assets over several years. “Smoothing” allows them to bank on “surpluses” by using financial data that is two to five years old. Institutional Investor reports that at least 4 of the 11 states that tapped their pension funds in the past year have moved from surplus to deficit. Assuming current market valuations, Pennsylvania, has smoothed a 123.8% level of funding on June 30, 2000, to about 97%. However, Stephen Nesbitt, senior managing director at Wilshire Associates, estimates “the actuarial value of assets is roughly 10 percent less than the market value of assets.”

The average pension fund has fallen from a 116% to a 106% surplus, according to Wilshire Associates, and 44 states have seen revenues decline this year. In 1996 the average public pension was funded at 92% but with the four year bull market, that increased to 116% by January 2000. Assets rose 20% annually, from $825 billion to $1.72 trillion.

Over the last two years, not only have assets been falling but liabilities have been rising due to both benefit hikes and the decline in interest rates, which should lead states to use lower discount rates and expected earnings. “According to the pension liability index produced by New York-based money manager Ryan Labs, between September 2000 and September 2001 pension liabilities grew at a 14.64 percent clip.” While some retirement systems have chosen to lower their discount rate assumptions, Governmental Accounting Standards Board rules do not require them to do so.

Smoothing works both ways. asset growth lags as market values climb bu smoothing works to prop up values when the market declines. However, a fund can also choose to ignore its normal smoothing process to embrace market values. Institutional Investor provides examples, most dramatically West Virginia and Louisiana, where lower contributions and generous pay hikes produced large unfunded pension liabilities and dramatic debt loads. (Institutional Investor, Squandering the surplus, 11/2001)

CEOs on the Line

The 2001 survey, “CEO Turnover in a Global Economy,” administered for Russell Reynolds by Wirthlin Worldwide which conducted interviews with 300 institutional investors in Australia, Canada, France, Japan, the UK and the US, found 15% of institutional investors called for a CEO’s termination in the past year. In Australia and the UK the numbers were even higher, 37% and 27% respectively said they had “contributed” to a CEO’s departure. Succession planning has become a major concern of 81% institutional investors.

US investors express dissatisfaction with a CEO either through written communication (37%) or selling their stock (35%), while investors in Australia, France, Japan and the UK convey opinions of a CEO’s performance through meetings with a company’s board and senior management. Most investors believe that companies in their country adhere to sound corporate governance practices; notable exceptions include Japan (3%) and Australia (37%). Establishing global corporate governance standards are favored by Canadian (68%), Japanese (53%) and French (51%) investors more than those in the UK (43%), US (38%) and Australia (37%). Two-thirds of investors surveyed have voted for a shareholder resolution within the past year; 15% have sponsored a resolution. (CEO Turnover in a Global Economy)

UK Firms Improving but Still Fall Short

Four out of five companies fail to meet corporate governance expectations, according to the UK’s National Association of Pension Funds (NAPF). In a report on compliance with the FSA’s Combined Code, NAPF found that 49% of UK’s top 400 companies failed to meet the recommendation that only independent non-executive directors should set directors’ pay levels. However, the percentage complying with NAPF policy expectations in all respects has nearly doubled in just two years.

Labor’s Money

Labor funds showed increased sophistication in choosing where to file proposals, and the more focused approach was rewarded with high shareholder votes, especially for executive compensation proposals, according to the IRRC. The average vote on executive compensation proposals rose from 8.5% in 2000 to 13.45%. The International Brotherhood of Electrical Workers (IBEW) Pension Benefit Fund proposal with the New York State Common Retirement Fund (NYCERS) asking Sprint’s directors to adopt a no-repricing policy won the support of approximately 46% of the votes cast. For a wrap-up of the last season, see Labor’s Money.

Back to the top

IRRC Study Results

IRRC’s “Board Practices/Board Pay 2001: the Structure and Compensation of Boards of Directors at S&P 1,500 Companies,” found advancement in rising director independence and in the overall composition of audit committees. However, after years of gradual director diversification, it appears that the spread of women and minority directors to more boards has come to a halt. Cash amounts paid to directors continue to increase and 81% of the S&P 1,500 companies analyzed grant their directors supplemental stock options or share awards, or both, and most companies make grants every year.

Study highlights include the following:

  • The trend toward increased independence on boards goes on, rising another 2% this year. Compensation committees continue to post high levels of independence, but the biggest jump occurred on audit committees, which rocketed to 90% average independence overall this year. Also, 70% of the companies surveyed had completely independent audit committees, increasing from just 51% three years ago.
  • Most boards have stabilized in size, but Technology boards actually got smaller in 2001.
  • Women and minorities are more likely than directors overall to be independent from the company where they sit on the board. 86% of directorships held by women and 82% held by minority directors are classified as independent, compared with 66% generally.
  • Annual retainers grew by 7% this year, to $28,292 while the median level rose more than 10%. Interestingly, the biggest jumped in retainer levels occurred in the beleaguered Communications Services sector, where the average retainer rose 14% to $41,818, and the median level soared almost 17% to $35,000.
  • Slightly more than 10% of companies have disclosed stock ownership guidelines for directors.
  • The average value of one-time stock option grants is typically about three times that of annual option awards.
  • About a fifth of companies give directors an opportunity to take stock in lieu of cash annual pay—and 30% of those companies provide directors with an incentive to do so.

Canadians Call for Greater Board Independence

In Canada, the Joint Committee on Corporate Governance released its final report, Beyond Compliance: Building a Governance Culture. Key recommendations include:

  • All boards should have an independent board leader who is chosen by the full board and who is an outside and unrelated director. This requirement should be a condition of listing on a Canadian stock exchange.
  • The independent board leader should be accountable to the board for ensuring that the assessment of the CEO and the succession planning functions are carried out and the results discussed by the full board.
  • All boards should develop and disclose a formal mandate setting out their responsibilities. Performance should be assessed against this mandate and the results of the assessment discussed by the full board.
  • Outside board members should meet at every regularly scheduled meeting without management and under the chairmanship of the independent board leader.
  • Independent directors of a public corporation remain responsible for significant shareholder. All parties must ensure the proper functions of governance are carried out.

Joint Committee was established by the Canadian Institute of Chartered Accountants (CICA), the Canadian Venture Exchange (CDNX) and the Toronto Stock Exchange (TSE) to review the state of corporate governance in Canada and recommend changes to ensure Canadian governance practices are among the best in the world. A copy of the final report can be downloaded from the at the Joint Committee on Corporate Governance’s internet site.

CalPERS Turns Up Heat

The CalPERS Board of Administration approved a strategic plan that adds $1.7 billion to the pension fund’s active corporate governance investments and targets additional corporate governance strategies in Japanese and European markets. The action brings CalPERS investments in active corporate governance strategies to $3 billion. The plan includes a $1.2 billion investment to external active corporate governance managers in the U.S., Japan, and Continental Europe; and a $500 million allocation to establish “CalPERS Internal Relational Program.” Listed below are some developments in the Japanese and European markets cited by CalPERS staff as recent developments that “make governance strategies attractive to institutional investors.”


  • Cross shareholdings have declined from 45.8% to under 35% and will likely continue to decline
  • Foreign equity ownership has increased steadily since the mid 1980’s and is now approximately 20%
  • Merger and acquisition deals in Japan reached a record 1,635 in 2000 up 40% from 1999
  • Shareholder lawsuits have risen from less than 30 in 1992 to nearly 300 in 1999
  • Implementation of mark to market accounting effective March of 2002
  • Foreign acquisitions are becoming more common, for example, Ford taking over Mazda, Renault acquiring Nissan, and GE Capital taking over Japan Leasing
  • Financial deregulation laws passed in 1999

Continental Europe

  • June 2000 Publication of Berlin Group’s German Code of Corporate Governance
  • January 2002 marks the start of new tax reforms in the EU which will limit the capital gains burden for unwinding cross shareholdings
  • Germany and France now allow any shareholder with a 5% holding in a company to call an Extraordinary General Meeting
  • Privatization of retirement obligations from the state into private sector pension funds in the EU will significantly increase the funds flowing into European equity markets. Globalization of capital markets have forced companies on the Continent to focus on governance issues or be shunned by foreign institutional investors
  • Corporate collapses of Metallgesellschaft and Schneider property group in Germany and the financial scandal of Olivetti in Italy are breaking the traditional stakeholders power over these companies

CalPERS’ primary source of potential investments for the internal program will be “through value and governance screens developed in the Corporate Governance Unit. Potential investments may include current, previous, or potential Focus List companies. However, we expect the number of Focus List companies that will be held in the Internal Relational Portfolio to be limited.” (for more information see Item 6E from theNovember 2001 Investment Committee agenda)

Great to see this move. It would be more encouraging, however, if CalPERS were actually commit to increase investments in its Focus List companies before announcing them. Would Warren Buffett or Robert A. G. Monks target firms without adding additional investments? Neither should CalPERS.

New Books

Two major issues in corporate governance are the extent to which governance impacts financial performance, and the growing impact of social issues on corporate activity.

Corporate Governance and Economic and Economic Performance, edited by Claus Bugler, tackles the first issue with an analysis of Austria, Belgium, Germany, France, Italy, Japan, the Netherlands, Spain, Turkey, and the UK. He concludes that more direct shareholder monitoring is beneficial to a firm’s success and that minority shareholders are consistently worse off in countries with weaker shareholder protection and illiquid securities markets. The key to more efficient corporate governance is vigilance by institutional investors and prudent regulation by government.

John Elkington, whose Cannibals With Forks: The Triple Bottom Line gave us the concept of “triple bottom line” reporting (company disclosure of social, environmental and economic performance), now provides advice on how companies can build sustainability into their operations. The Chrysalis Economy: How Citizen CEOs and Corporations Can Fuse Values and Value Creation claims to be “an early guide to new forms of capitalism that will eventually come to dominate the global economy.”

Back to the top

CalPERS Board Overruled

Last year the CalPERS Board raised their own salaries in defiance of Government Code limits and also raised their portfolio managers’ pay by 11%, claiming a provision in the state constitution that gives them protection from political interference also gives them broad authority to ignore state laws which make it difficult to fulfill their fiduciary duty. The California Department of Personnel Administration (DPA) refused to recognize such extralegal authority. The CalPERS Board then issued letters to State Controller Kathleen Connell to implement the pay hikes over DPA’s objections. When Connell refused, the Board set up its own payroll system. Connell took the Board to court, arguing the Board is subject to state law. I filed a similar action with the Office of Administrative Law.

Judge Charles C. Kobayashi, of the Sacramento Superior Court ruled that CalPERS can’t ignore state law. “The authority to administer the retirement fund does not mean CalPERS has become a separate system that is no longer subject to existing state laws that apply to all governmental agencies.” If CalPERS believed they were right, they should have challenged DPA and the Controller in court, instead of simply ignoring the law. CalPERS was permanently enjoined from increasing the per diem of Board members or employees, increasing the reimbursement to public agency employers of Board members, maintaining a separate payroll system for employees, increasing employee salaries and, most importantly, “declaring a statute unenforceable…unless an appellate court has made a determination that such a statute is unconstitutional.” CalPERS appealed the ruling. I’d guess their chances of success are slim to none. The only press coverage I saw on the ruling itself was in the October 29th edition ofPensions&Investments.

CalPERS Chief Investment Officer Daniel Szente also seems to have little faith the Board will prevail, announcing he will step down on November 30, 2001 to take a new job at McMorgan & Co. rather than await the outcome of the legal battle to roll back his compensation. Szente lasted only 15-16 months. SeeCalPERS press release.

Szente said that if Connell is successful it will hamper CalPERS’ ability to achieve excellent investment returns and effectively manage risk. Yet, for many years the CalPERS system operated just fine without offering enormous salaries to attract investment managers from outside the civil service. It would be interesting to see a comparison of portfolio performance (based on value added above the market) before and after the higher salaries. Since CalPERS has offered no such evidence of pay for performance, I doubt a positive correlation exists.

In addition, many, if not most, professionals who choose to work for the State of California are underpaid in relation to private sector counterparts. Why should investment managers at CalPERS be singled out for higher pay than their counterparts at CalSTRS or the Treasurer’s Office? The Board is in danger of creating a revolving door where CIO’s pick up a year or two investing huge amounts for CalPERS and then negotiate a fat deal for themselves elsewhere. If the Board really believes the high salaries are justified, they should sponsor legislation to raise their own pay and should document the need for higher pay for their investment officers with DPA.

Appealing through the courts on this case is a waste of money better spent on member retirements and services. In addition, whereas before the Board could argue they were complying with the law, even though their constitutional authority grants them certain exemptions, it will soon be clear to everyone that the constitution protects the fund against political raids; it doesn’t place the Board above the law. The court is no more likely to allow the Board to unilaterally raise their own pay and that of civil servants as it is to forgive speeding tickets to members who claim travel at the posted speed would cause them to violate their fiduciary duty because they’d be late for a meeting. Board members should learn to follow the law and plan ahead.

Which Shareholders Should Decide at TIAA-CREF?

Business Week’s Robert Barker has weighed in on the running battle between TIAA-CREF and SRI activistsLet Shareholders Decide This One, he says in the 11/19 edition. Barker points out that SRI advocates have failed to seek to get their issue on the TIAA-CREF “proxy” for fear of losing, even though a 1995 survey found that 81% of what he says are “contributors” (I’m sure most would see themselves as investors) to/in the Social Choice Account favored seeking out “companies who have an outstanding record of good performance on social issues rather than relying on negative screens.”

Barker says “the people whose money is at stake” should be able to “make broad decisions about how it is invested.” However, its not clear if his solution is to let all members of TIAA-CREF decide the issue by vote or just those invested in the Social Choice Account. How many of TIAA-CREF’s 2.3 million clients are invested in the Social Choice Account which makes up about 1.5% of its $260 billion portfolio? If investments are proportionate to members, should 98.5% of members who have nothing invested overrule the 1.5% that are willing to put their money at risk.

On the surface a vote appears very reasonable. I wish other funds, such as CalPERS had provisions for such voting on issues the board refuses to address. Even if the vote is limited to those with investments in the Social Choice Account, we all know that TIAA-CREF can easily influence the voting by inflating cost projections or claiming that positive investments are likely to earn less or that they are somehow illegal. TIAA-CREF should either honor the 1995 survey, which was to evaluate “whether any changes should be made,” or they should agree to be neutral on a vote by Social Choice investors.

SRI Gains Ground

Australian pension funds must now report on how they handle social issue proposals at corporations they’ve invested in, according to Fairvest’s Corporate Governance Review (CGR). Similar legislation was enacted not long ago in the UK and has been introduced in Canada as bill S-11. According to Stephen Davis, editor of Global Proxy Watch, pension fund disclosure will emerge as the “darling corporate governance bill of political parties around the world.” The same issue reports that average voter turnout (including proxies) ranged from a low of 35% in Australia to 83% in the US, with Britain, Germany, France and Japan following between from low to high.

Blueprint for Success

The October edition of Director’s Monthly contains an informative article on Compensation Committee Structure by James Reda of Buck Consultants in Atlanta. He include much of the usual good advice concerning the need for independence, the scope of activities, communication and minutes. However, one factoid stood out in my mind; committee chairmen are nominated by the CEO 40% of the time. Not exactly independence, eh?

E-Delivery Offers Savings Aplenty

The 2001 survey by the American Society of Corporate Secretaries estimates that E-delivery of annual reports and proxy materials could save $38 million industry-wide in postage savings alone. One method used is to collect e-mail addresses and send an e-mail notice when proxy season rolls around. No paper is involved so the potential savings is great. However, sending a paper proxy in the mail and instructions for finding the annual report online results in greater savings because twice as many shareholders opt in.

Also in the Fall edition of The Corporate Secretary is Gwendolyn King’s expectationss of a corporate secretary. They should have the administrative skills of a chief administrative officer, interpersonal skills of the chief human resources officer, legal skills of the general counsel, financial skills of the CFO and vision and decisiveness of the CEO.

Creative Accounting and Shareholder Lawsuit

The SEC’s Financial Fraud Task Force expects to review one out of every four annual reports. Prosecutors last year obtained convisions in 62 of 64 cases.

Ten Overnite Transportation worker/shareholders filed a shareholder suit against executives at parent company Union Pacific charging breach of ficuciary duty for wasting corporate assets on a “concerted, unlawful anti-union campaign.” According to the NLRB, Overnight has had more complaints filed per employee than any othher company in the US. “The severity of the misconduct is compounded by the involvement of high-ranking officers,” according to the NLRB. (For these and other interesting items, see Business Ethics, 9-10/2001 edition.

Back to the top

Insurers Support Disclosure of Social, Environmental and Ethical Risks

The Association of British Insurers (ABI) announced that its members expect companies to disclose how social, environmental and ethical risks are being handled. Examples include board-level identification and assessment of risk, descriptions of company policies for managing risk, and descriptions of procedures for verifying company disclosures.

“SRI disclosure will provide investors with confidence that a company understands the risks it faces and is positioning itself to deal with them,” said Chris Mellor, chief executive of AWG, one of the UK’s largest water utilities. “The ABI’s guidelines are a crucial and valuable step in helping companies prove to themselves and others that they are up to the mark.” (Social Funds, 10/30)

ISO Tackles Corporate Social Responsibility

The International Organization for Standardization has launched an online forum to study the feasibility of standardizing the measurement of corporate social responsibility. The forum, hosted by the Canadian Office of Consumer Affairs, has been set up to facilitate worldwide discussion of the possible role of standards in defining the elements of corporate social responsibility. It is designed to provide a mechanism for increasing awareness and promoting constructive discussion of new and existing corporate social responsibility initiatives, and their relevance to existing or potential standards projects.

The forum operates as a list-serve. E-mail postings are sent to every member of the forum, and there is no cost to participate. To join the online forum, contact the forum facilitator, Dr. Kernaghan Webb, senior legal policy advisor and chief of research at the Canadian Office of Consumer Affairs, at[email protected]. At the initiation of the Trinidad and Tobago Bureau of Standards, a workshop on corporate social responsibility will take place on 10 June 2002, in Port-of-Spain.

IOD Establishes Indian Corporate Governance Center

Institute of Directors forms Corporate Governance Center to improve the functioning of corporations and the credibility and liquidity of stock markets by promoting research and practice of Corporate Governance Principles. For more information, contact [email protected]. The center will undertake the following functions.

  • Formulate Codes for good Corporate Governance in government, trade and industry.
  • Advise government and industry on best practices in good Corporate Governance.
  • Conduct research relating to best practices in Corporate Governance internationally.
  • Organize seminars, conferences, and workshops to create awareness in the Indian corporate sector of the need for good Corporate Governance.

NACD Report on Board Evaluation

The National Association of Corporate Directors has released its Report of the Blue Ribbon Commission on Board Evaluation: Improving Director Effectiveness. This groundbreaking study on effective self-evaluation is designed to help boards and individual directors improve performance. The report was led b a commission of 30 corporate directors and leading governance experts.

Regular board and directors evaluations are favored by 91% of directors, according to a recent NACD survey. The report provides tips on directors, issues, information, evaluation process and performance goals. It also provides sample evaluation forms, a case study and diagnostic tools. Copies available by calling Doreen Kelly Ruyak at 202-779-0509 or e-mailing you request to [email protected].

Director’s Pay Up in 2001

A Towers Perrin survey of annual proxy statements filed this year by 250 companies representing a cross section of the S&P 500 found that nonemployee corporate director compensation has risen to $118,337 in cash and stock in 2001, up from $100,807 in 2000. Most of the increase is in the form of stock options. Directors received three-quarters of their compensation in stock and one-quarter in cash, a shift from last year’s mix of two-thirds stock and one-third cash.

Ninety-four percent of all companies provided some form of annual or recurring stock compensation to directors. Median annual stock compensation, based on each company’s 2000 fiscal year-end stock price, jumped 23% to $73,205 in 2001 from $59,430 in 2000. Median cash compensation of $49,000 was up modestly from $46,000 in 2000.

Seventy-four percent awarded stock options; 26% made outright grants, and 25% awarded deferred, or phantom stock, which settle upon termination or at some future date. Restricted stock, granted subject to limits on sale or transfer until certain future conditions are met, was awarded by 18% of the companies.

One-time grants were awarded by 29% of the companies, typically paid when a director is first elected to a board. The median one-time stock-based grant was $151,587. Only 4% of companies reported a retirement plan, down from 22% four years ago.

Back to the top

Continue Reading ·

Archives: October 2001

Code Compliance Listed on Italian Stock Exchange Site

The Italian Stock Exchange site now includes information concerning the level of compliance with the Exchange’s voluntary corporate governance code. Unicredito SpA and Banca di Roma SpA are currently among the country’s most transparent firms with detailed annual or financial reports. Bulgari SpA was at the other end, ignoring most to the code’s recommendations and operating without a compensation committee, an internal audit committee, or any clear rules to determine how directors are chosen or how shareholder meetings are governed. The voluntary rules were adopted in 1998 to attract both foreign and domestic investors.

UK Pension Plan Reporting Incomplete

A survey by Friends of the Earth, London, indicates that more followup is needed to ensure recently enacted disclosures have an impact. Since 7/2000 UK pension plans have been obligated to publish a “Statement of Investment Principles” concerning the extent to which social, environmental and ethical considerations are taken into account when making investment decisions.

FOE surveyed the UK’s largest 100 plans but 35 either refused to participate or didn’t provide enough detail to properly evaluate. FOE found the majority of statements to be “vague or ambiguous,” with responsibility for implementation often passed to money managers without guidance or monitoring plans. (The same is true of studies of US funds who are charged with ensuring that proxies are voted in the best interest of beneficiaries.)

It appears that many funds are simply complying with the new legislation with the least amount of effort and commitment possible. Those plans that did include social, environmental, ethical and corporate governance issues often failed to include accountability mechanisms allowing trustees to monitor fund managers. Less than 1/3 of funds surveyed were able to show how they reported back their actions.

“It is clear that pension funds will have to significantly increase resources in the area of monitoring…to ensure the effective implementation of socially responsible investment objectives…,” the report said. (Large U.K. plans get failing grade on social responsibility concerns,Pensions&Investments, 10/1/01)

Proxy Solicitation at CREF

The College Retirement Equities Fund will hold its annual meeting at 10 a.m. on November 13, 2001. The event will take place at the company’s headquarters at 730 Third Avenue in New York City.

The annual meeting gives CREF participants the opportunity to elect or reelect trustees and vote on participant proposals presented in the proxy statement. TIAA trustees are selected by the TIAA Board of Overseers, but the annual balloting process allows participants to express their preferences for current nominees and recommend future candidates. Mailing of CREF and TIAA election materials to participants began on October 12. Eligible participants have until noon on November 13 to cast their votes.

The TIAA-CREF coalition for responsible investment plans an interesting twist by seeking to rally support by those in attendance and by proxy solicitation.

FIRST: Those who can attend the meeting are encouraged to attend a pre-meeting on Monday evening, November 12 in New York City. RSVP to Neil Wollman, no later than Monday, October 29, 2001.

SECOND: The group has appealed to those who are unable to attend to lend their proxy to another CREF activist so that they may legitimately attend the Annual Meeting. Kelle Louaillierat Infact is coordinating the paperwork and that effort.

Sheryl Pressler and Hypocrisy

Not long ago I got a call from Barry Burr ofPensions&Investments asking what I thought of Sheryl Pressler’s almost $8 million severance package from Lend Lease Corp. Pressler had been Chief Investment Officer at CalPERS prior to her stint at Lend Lease’s US unit, Lend Lease Real Estate Investments. I’m often critical of both high corporate severance pay packages and CalPERS, so Mr. Burr might well have expected something more than “no comment.”

Of course $8 million is a lot to pay when giving someone the sack, but apparently Ms. Pressler had a good law firm representing her in negotiating her entrance and exit packages. Jones Day Reavis & Pogue is the same firm that now employees her former general counsel at CalPERS, Richard Koppes, one of the major brains behind CalPERS’ successful corporate governance strategy. I thought to myself that Pressler’s package was outrageous but what else is new?

Now comes an editorial by Mr. Burr in the October 15th edition of P&I, right next to one on the 911 attack on the World Trade Center. Burr chides institutional shareholder activists from hypocrisy because of their lack of response to the large Pressler pay-out after only a year due in part to her refusal to take another assignment.

Having done no research on the matter, I may be completely off base, but I’d speculate that although TIAA-CREF, Lens and the various state pensions that Mr. Burr chides may use Lend Lease’s services, few have substantive investments in the firm itself. The Council of Institutional Investors and its members are generally critical of executive compensation at companies in their portfolio because excesses tend to drive down the value of their holdings.

It didn’t surprise me that Pressler didn’t work out at Lend Lease. CalPERS is a much different animal. Its portfolio generally tracks the market because such a large percent of its equities are essentially indexed. Doing well at CalPERS may mean moving the market through corporate governance activism, rather than picking good investments or timing the market.

For additional insight on those who manage investment managers take a look at the latest McKinsey Quarterly (2001/4). Based on a survey of 3,320 people working in the asset management industry, they found that only 38% of respondents feel their companies recruit better staff than do their competitors. “Most of the respondents think that their managers have effective processes for evaluating their performance but don’t use that information to develop and reward potential high performers or to move out low performers.” “Asset managers could manage their talent more effectively for less than they spend now on managing it poorly—in the eyes of their employees, at least.”

If Mr. Burr wants to look at pension funds and cry hypocrisy I’d advise him to look no further than the CalPERS Board. His editorial points to their alleged violation of state law when they raised the salary of 10 internal portfolio managers. Even clearer was the fact that raising their own salaries violated the law. I have requested a determination by the Office of Administrative Law and State Controller Kathleen Connell included that action in her recent lawsuit. Both may takeseveral additional months for a decision.

Even better, take a look at the current election at CalPERS. If Burr did, he would be the only member of the press doing so, even though 1.2 million members are eligible to vote and CalPERS Board members wield enormous power. The press has taken absolutely no interest. Want to write about hypocrisy? Incumbent Charles Valdes, currently seeking reelection, brags of his financial acumen and that “your fund will be safe” if he is reelected. What he doesn’t mention, and neither does the press, is that during the time he chaired the CalPERS Investment Committee he also declared personal bankruptcy twice, 24 members of the Legislature called for his resignation, and he represented public employees but failed to pay state and local taxes for approximately seven years.

CalPERS is widely known as a proponent of good corporate governance and more open corporate elections, yet Mr. Valdes voted with a majority of the Board for rules which, according to the Sacramento Bee “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it” (Calpers Muzzles Critics). They want corporate board members to avoid conflicts of interest, yet, this Board member and others routinely accepted gifts from CalPERS contractors.

(Note: In the interest of disclosing potential conflicts of interest, the Editor of Corporate Governance, James McRitchie, is running for the CalPERS Board against the incumbent.)

Back to the top

Sidney Abrams Appointed to CalPERS Board

California Governor Gray Davis named Abrams to serve as the insurance industry representative on the California Public Employees Retirement Board. His term expires in January 2005. Abrams is an actuary with more than 30 years of experience providing services to Taft-Hartley pension (joint union/management) and other employee benefit plans. (press release)

SRI Funds Edge Out Competition

According to Morningstar, 35% of the socially responsible mutual funds (19 out of 54) they track earned either four or five stars, compared with 32.5% of all mutual funds. (Social Investment Forum News)

Reuel Khoza to Focus on Corporate Governance

South Africa’s new president of the Institute of Directors says “Good corporate governance creates an attractive climate for foreign direct investment. If investors do not know what to expect, their interest is dampened. My objective is to make corporate governance the thing for local companies to subscribe to not just for the major organizations but also for medium-sized and small businesses.” Mr. Khoza is also chairman of Eskom and Co-ordinated Network Investments, and a director of Standard Bank.

“I have been involved with Judge Mervyn King in hosting events to exchange points of view with other members of the commonwealth. Now, with the review of the King commission (final report due mid-February), there will be new challenges. Lately the thrust has been for the triple bottom line, involving the social, environmental and economic or financial aspects of business. I aim to push to the fore with this.”

Khoza, a long-time member of the institute and its deputy president for the past three years, says he will promote corporate governance in the Southern African Development Community and Europe. “I aim to be more than just the figurehead for the institute,” he says.

Khoza is the Institute’s first black president and Carol Scott, executive chairwoman of Imperial’s car rental and touring division and of Tourvest, is the first woman to be appointed a vice president of the body.

The latest membership figures show a female membership of 12%, while black membership is at 15%. (10/22, Africa News Service)

Back to the top

Symposium on Corporate Governance in the Banking and Financial Services Industries

Few public policy issues have moved to center stage as quickly as corporate governance. Shareholders, creditors, regulators, and academics are all examining decision making in corporate and other organizational forms and, in some cases, are proposing changes to governance structures to enhance efficiency and accountability. In the banking and financial services industries, governance and board oversight received close attention during the turbulent late 1980s. A recurring theme among the interested parties is that poor governance played an important role in many serious problems. With this issue in mind, the Federal Reserve Bank of New York, the Journal of Financial Intermediation, and the Salomon Center and Department of Finance at New York University’s Stern School of Business have organized a symposium to foster a better understanding of managerial decision making and sound corporate governance practices in financial institutions.

The sponsors cordially invite you to attend the symposium, to be held at the Kaufman Management Education Center of New York University’s Stern School of Business on November 8-9, 2001. There is no registration fee for attending the symposium. Seating, however, is limited and therefore, you must register in order to attend the symposium.

Liabilities Up, Assets Down

Pension liabilities went up 26% in 2000 and assets dropped 2.5%, resulting in a drain of about 28.5%. This year, liabilities are up 2.8%, while assets are down 12.5%, resulting in a drain of 15.3%. As a result, pension funds with funding less than 140% two years ago may now be facing a deficit. Rob Arnott, of Quadrant LP, believes pension funds can no longer assume 8-10% returns. “I’d be leary of return assumptions of more than 6% to 7%,” he said. (Pension plans face tougher times as funding levels dip, Pensions&Investments, 10/1/01)

FSBA Wins Under PSLA

The Florida State Board of Administration (“FSBA”), the employee pension fund for Florida State and County employees, announced a $61 million settlement against Vesta Insurance Group.

This action, under the Private Securities Litigation Act of 1995, was brought as a class action on behalf of Vesta investors. Vesta has also agreed that a majority of its Board will be independent directors, that it will appoint audit, nominating and compensation committees comprised entirely of independent directors and that its audit committee would comply with the recommendations of the Securities and Exchange Commission’s blue ribbon panel on the effectiveness of audit committees.

Boardroom Analysis

The Boardroom Analysis Online Resources Database (BAORD) is a relatively new site intended as a resource for academics, analysts, activists – anyone with a general interest in issues of corporate governance and corporate social responsibility. It indexes hundreds of resource “providers” that make a contribution of one kind or another to this broad field.

Resource “providers” qualify for inclusion into BAORD if their sites make available documents, publications, databases, directories, events notifications, projects, online discussions, commentary, reference lists – anything that facilitates the research or information-finding process.

BAORD categorizes resources to facilitate focused searches. Search criteria can be set by the user via a simple web-based search form. The user can further narrow their search by using keywords or simply by selecting from a directory of “providers.”

If a potential “provider” would like to be included in BAORD or if an existing provider would like to make changes their listing this can also be done at the BAORD site. All submissions are moderated for appropriateness and authenticity.

This is a free resource and in order to keep it current and useful resource providers are encouraged to review listings.

Simon Deakin Named Robert Monks Professor of Corporate Governance at Cambridge University

Simon Deakin as the inaugural holder of the Robert Monks Professor of Corporate Governance. Professor Deakin joins the Judge Institute of Management from the University’s law faculty where he has been a lecturer for the last ten years. He is a leading expert in corporate governance and has published widely on the subject through a variety of research projects on inter-firm contracting, hostile takeover bids, the duties of company directors and the role of ‘stakeholders’ in corporate restructuring and insolvency.

The professorship has been established in perpetuity thanks to a donation of $4M from Mr Dennis Kozlowski of Tyco International. Press release. Robert Monks has already funded a research center at the Judge Institute. We look forward to great work coming out of the Judge Institute at Cambridge.

Accountability of Institutional Investors

CalPERS and TIAA-CREF are widely known as advocates of good corporate governance, but what about their own governance?

I have often called the CalPERS Board into question on this site and am currently engaged in running for the Board of Administration. (For more on the election, see the CalPERSand PERSWatch sites) The incumbent, Charles P. Valdes, wants to continue to represent CalPERS’ 1.2 million members, even though he didn’t pay “$6,000 in federal income tax; $54,856 in state income taxes, interest and penalties; $23,808 in county property taxes, interest and penalties; and $18,254 in delinquent mortgage payments, according to court documents. Valdes has not paid property taxes on his house in Carmichael since 1989 and is nearly six years delinquent in paying for garbage collection, sewer and storm drainage, according to county records.” (Member of PERS Board Faces Financial Difficulty; Debts Include More Than $84,000 in Taxes, 8/9/97, Sacramento Bee)

If having a tax evader represent public employees is not ironic enough, Mr. Valdes also chaired the CalPERS Investment Committee while declaring bankruptcy twice. Valdes voted for rules which “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (Calpers Muzzles Critics, 5/25/99, Sacramento Bee Editorial) He and others on the Board accept gifts from CalPERS contractors and have voted to ignore various California laws, claiming their constitutional authority exempts them from public notice and other rulemaking requirements, as well as from statutory limits on their own salaries, even though the overextension of their authority has been discredited in Sacramento County Superior Court. (Kathleen Connell for Controller et al. v. CalPERS Board of Administration, case no. 98CS01749) (CalPERS board votes itself big pay increase, 9/21/00, Sacramento Bee) Further, as a result of his ethnic slurs, 24 members of the California Legislature have called for his resignation. (Resignation of CalPERS Official Urged, 10/27/99, Sacramento Bee)

The list goes on and on. Yet, since he has been endorsed by the California State Employees Association, has all the advantages of incumbency and because the elections traditionally receive no press coverage, he is likely to be reelected. In California we need to not only reform the CalPERS election process (some reforms that I worked on will take effect next year) but some of our unions as well. At least the CalPERS structure provides for direct nomination and election of almost half its board by members of the System. I’ve frequently reported here on the efforts of Abby Fuller, Neil Wollman and others involved in the Social Choice for Social Change: Campaign for a New TIAA-CREF. Recently, I received the following article from David E. Ortman, Executive Director of the Northwest Corporate Accountability Project, which calls into question TIAA-CREF’s Corporate Governance policy and attributes some of its failings to TIAA-CREFs own governance structure.

TIAA-CREF’s Policy Statement On Corporate Governance Disappoints Shareholders

In March 2000, TIAA-CREF posted its latest Policy Statement on Corporate Governance. What is surprising is how weak it is. If TIAA-CREF is complying with its own policy there is little to praise because the bar is set so low.

For example, TIAA-CREF does not oppose “independent” directors working on contract for the corporation. TIAA-CREF does not support shareholder resolutions concerning separation of the positions of CEO and chairman. Otherwise, TIAA-CREF’s own CEO, Chairman of the Board, and President John Biggs couldn’t wear so many hats. TIAA-CREF does not support the formation of shareholder advisory committees, the requirement that candidates for the board be nominated by shareholders, or a requirement that directors must attend a specific percentage of board meetings, unless the board supports such measures. TIAA-CREF’s policy says that staggered election of directors can provide legitimate benefits to the board.

As much a concern is what TIAA-CREF’s policy does not say. Under “Fiduciary Oversight” nothing is said about the current controversy of auditors also working as consultants for the corporation. Under “Global Standards of Corporate Governance” nothing is said about avoiding bribery in international dealings. Under “Social Responsibility Issues” there is no specific reference to an environmental audit. Also, in the Appendix on “Executive Contracts” TIAA-CREF opposes any outright ban on “golden parachute” severance agreements.

Don’t TIAA-CREF participants deserve better?

If you have comments on Mr. Ortman’s observations, please send them directly to him at [email protected] and cc me at [email protected].

The “Get Out of the Bad, and Into the Good” campaign continues in New York City. As the nation’s largest pension fund, TIAA-CREF, a retirement fund mainly for educators, prides itself on being responsive to shareholders and a “concerned investor” on social responsibility matters. The fund, however, continues to hold large investments which put public health, factory workers, and citizens at risk. Why should life-giving pension money be invested in deadly tobacco, sweatshop labor, or an oil company tied to one of the most brutal dictatorships in the world? There are more positive ways to invest and still earn good returns. A broad-based coalition is calling for funds to be invested in affordable housing and in companies which are, for example, pioneering socially or environmentally responsible products or services. Contacts for further information: Main contact in NYC is Dave Wilson, 212–674-9499, [email protected]; or national campaign organizer, Neil Wollman, 219-982-5346,[email protected].

The coalition urges supporters to call John Biggs, CEO, 1-800-TIA-CREF (842-2733), ext. 4280.; or 212-490-9000. You’ll likely have to leave a message with his secretary, but do ask for a response. You can also email Mr. Biggs, as well at “Contact Us” or at [email protected].

Back to the top

Join eRaider’s Battle to Redefine Contested Elections

The NYSE has given eRaider a unique chance to make its case against broker votes in contested elections and they are asking for your help. Please visit their website and help them write their proposal. While many have been trying for years to do away with all broker votes, they have met with stiff opposition and have been unsuccessful thus far. eRaider is proposing a narrower but more winnable argument. They have asked the NYSE to re-consider how it designates elections. Currently there is a strict rule that for an election to be declared contested, dissidents must solicit each shareholder by mail. For any beneficial owner who is unsolicited and does not vote, the broker will be allowed to vote the shares and of course will vote them for management. Broker votes are the reason why proxy contests are expensive and weighted towards management. A recent stuy found that allowing broker votes added an average of 14.2% to management’s total.

eRaider had requested that the NYSE change the way it defines active solicitation to include the Internet and to drop the exclusive focus on each separate shareholder. In return, the staff at the NYSE has requested that we present a position paper on the subject. eRaider proposes changing the definition of “active solicitation” from mailing a letter to actively soliciting on the Internet. Those methods would include emailing owners, posting on all active message boards and maintaining a website with proxy material.

Come to their Shareholder Rights message board and post your thoughts about defining contested elections. They will submit their proposal on October 10, and are open to any ideas, suggestions or arguments. They want to convince the NYSE that they speak not just for an Internet activist fund, but also for a representative sample of serious stockholders that use the Internet.

You can be part of our proposal in three ways. If you agree with eRaider, just post your name and they’ll list it in the final document. If you don’t agree, argue and maybe they’ll change their proposal. Anyone is free to add a comment that they will include as an appendix to the proposal to show the NYSE the range of individual investor opinions. Comments must be signed with a real name and address; and emailed to eRaider at[email protected].

Corporate Governance Series by Council on Foreign Relations

Is capital market integration inducing global convergence on the so-called “Anglo-American” model of minority investor protections? What explains the variation in response to convergence among countries and between institutional practices? Who are the winners and losers from governance reforms, what types of resistance does this provoke, and what is the role of foreign governments in molding governance changes? Above all, what are the policy implications of corporate governance change for the United States government and its regulatory agencies? Is there a role for official intervention, or should this be left to market forces?

The Roundtable series will seek to answer these questions on two parallel tracks. One track will examine the role in global governance changes by actors such as institutional investors, financial professionals such as accountants and investment bankers, international financial organizations such as the IMF, World Bank, OECD, and BIS, and governments, including the European Union. The other track will analyze the pattern of governance change in specific countries and regions.

James Shinn and Peter Gourevitch are managing the Roundtable series. Jim Shinn is a Fellow at the CFR in New York. He spent 15 years in Silicon Valley, where he founded Dialogic, later acquired by Intel, and several other software firms. He has a BA from Princeton, an MBA from Harvard, and a PhD from Princeton. Peter Gourevitch is a Professor at the University of California San Diego, former dean of UCSD’s Graduate School of International Relations, and editor of International Organization. He has a BA from Oberlin and a PhD from Harvard, where he is spending 2001/02 as a Research Fellow at Harvard’s Center for European Studies.

Founded in 1921, the Council on Foreign Relations is a nonpartisan membership organization, research center, and publisher. It is dedicated to strengthening America’s role in and understanding of the world by better comprehending global trends and contributing ideas to U.S. Foreign Policy. For further information about the Council or the Roundtable Series, please contact Lisa Shields, the Director of Communications, or James Shinn.

South Africa’s First Corporate Governance Unit Trust

The Fraters Earth Equity Fund aims to influence corporate behavior by constructive engagement in the companies in which it invests. The fund will also has a socially responsible investment fund agenda but no restrictions imposed on the portfolio manager. According to James Frater, managing director of Frater Asset Management, “The release of the draft King II report on corporate governance, set to be implemented in January next year, has highlighted the need for broader reporting, not just purely financial disclosure.” “We fully support the call for reporting on social, environmental, health and ethical issues, or the so-called ‘triple bottom-line reporting’ as we acknowledge the relationship between good corporate citizenship and financial performance.”

The collapse of Leisurenet, Regal, Macmed, Paradigm, and other have demonstrated the need for better corporate governance monitoring by shareholders in South Africa. Corporate Footprint will provide Frater with an analysis of corporate citizenship practices to be used to guide investment decisions and engagement strategies. Practices to be monitored include transparency, accounting, community involvement, workforce engagement, AIDS awareness, empowerment, customer and supplier relations, and environmental concerns. Like more progressive funds in the US and EU, the Fraters Fund will publish their voting records on our web site.

“A typical resolution could call on the company to appoint additional independent directors, adopt an environmental management plan or declare its HIV/AIDS policies and strategies,” said cofounder Michael Leeman. Fraters, established in 1998, has managed the Futuregrowth Pure Fund unit trust, which has excluded tobacco, alcohol, gambling and financial services since July 2000 and earned a 38.5% return over the 12 months ending June 2001. (Africa News Service, 10/05/01)

Corporations Becoming More Dependent on Open Market Equity

Corporations have become increasingly dependent on open market equity to finance their expansions, according to The Conference Board. Governance activism is “shifting the economic clout to investors with equity stakes,” says Carolyn Kay Brancato, Director of The Conference Board’s Global Corporate Governance Research Center and co-author of the report.

International equity holdings by the largest US pension funds continue to show that a small group of activist investors among them can exert considerable leverage over corporations in these countries. The largest 25 US pension fund holders of international equity held $288.4 billion in international stocks as of September 30, 2000, accounting for roughly 16% of the $1.85 trillion foreign equity held by all US investors.

US and UK financial institutions held 57.2% and 57.7%, respectively in the largest 25 corporations. There is significant pressure to bring disclosure of information up to US standards. Regulators and/or stock exchanges are pushing companies to increase disclosure and transparency. Global equity markets are competing for capital, opening up traditionally close relationships between companies and institutional investors, especially banks, in countries such as the United Kingdom and Germany. As major blocks of shares are unwound in favor of broader equity participation, minority shareholders insist on improvements with regard to fair voting rights, access to proxies, and ability to provide input to management.

The attitude of management of a company toward corporate governance is a crucial factor. Does management view the board of directors as an asset, or as a barrier to overcome so that they can get on with the business of running the company? Is the board kept properly informed by management and, in turn, does the board keep investors informed so that they can act as responsible owners?

Also high on the list of investor wants are adequate auditing systems. Boards must establish procedures to ensure the reliability and independence of the auditing process, and to quickly come to terms with and correct any failures. “A striking development is the extent of communications among institutions around the world,” concludes Brancato. “Institutional investors abroad are able to give support to local investors and learn from them about the key issues in their particular markets. When possible, they also try to forge alliances with local investors to share knowledge and expertise, creating a world of global investors.”

Research Report 1297-01-RR, The Conference Board: What Do Institutional Investors Want? Calling The Conference Board’s Customer Service Department at (212) 339-0345 or visit The Conference Board’s website. Media can request a free copy by calling (212) 339-0231.

Back to the top

Continue Reading ·

Archives: September 2001

World Council for Corporate Governance to Hold Conference

The Council’s mission is to make a difference to national economies by improving the quality of their corporate governance practices. They hope to become a leading provider of knowledge about best practices in corporate governance to company boards, policy makers, investors, fund managers, financial advisors, researchers, academics and other interested parties by creating active partnerships and fostering cooperative relationships between organizations committed to improving quality of corporate governance worldwide.

The theme of their second conference, ICCG 2002, is “Corporate Governance -Turning Rhetoric into Reality.” It is recognized that many countries have developed corporate governance codes. Yet, how are these codes being implemented? The Conference will provide a unique platform for exchanging information on the practices of corporate governance worldwide. It is expected to be attended by 500 delegates from 38 countries and offers an unrivaled opportunity for interaction and networking with global leaders in business and government.

ICCG 2002 will be held from 18-19 January 2002 in The Taj Mahal Hotel, Mumbai, India. For more information, contactKlaus Bohnke, Director General.

FASB Accepts Comments on Intangible Asset Project Until October 5th

Due to the recent tragic events in New York, Washington and Pennsylvania, the Federal Accounting Standards Board (FASB) has extended its deadline for comments on its is proposed project on disclosure of intangible assets until October 5th. Go to and download “Proposal for a Project on Disclosure About Intangibles.”

I encourage readers to write a note of support to FASB’s Director, Timothy Lucas. Better disclosure and valuation of key intangible assets could eventually lead to better corporate disclosure on topics such as human capital, corporate governance, environmental management, labor issues, human rights and other corporate responsibility indicators.

Corporate governance experts and social investors argue that governance and social issues impact the bottom line through the creation or destruction of intangible assets such as the trust of shareholders, reputation, satisfaction of its workforce, consumer appeal, etc. Here a chance to eventually get the leading accounting standards body in the US to put some methodology, numbers and hopefully accounting principles in place.

The proposed scope is relatively narrow, being focused on disclosure about “intangible assets that are not recognized in statements of financial position, but would have been recognized if acquired either separately or in a business combination. It would also include in-process research and development assets that, under FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, are written off to expense on the day they are acquired.”

I believe that focus is about right for an initial project. However, I would hope the FASB’s focus would eventually evolve to include corporate governance and social issues.

Delaware Remains Virtually Alone

Shareowner activists succeeded in amending a provision in a Massachusetts bill that would have allowed companies to hold their annual meetings solely over the Internet. The bill now allows companies to broadcast annual meetings over the Internet, but still requires face-to-face meetings. The bill also allows companies to send proxy statements via the Internet to shareowners. Stephanie Haug, Assistant Portfolio Manager at Walden Asset Management, also indicates there is an effort underway in Delaware to rescind their recently enacted law allowing annual meetings to be held solely online. (see Shareowners Rally to Defeat Online Annual Meeting Provision in MassachusettsSocialFunds.Com, 9/21)

Shareowner Alignment Index

Stern Stewart and Hackett Benchmarking & Research released findings of a new study of best practices in generating and sustaining shareholder value. Over 60 Global 2000 companies participated in the study, including Allied Waste, Briggs & Stratton, Conoco, Best Buy, Kimberly-Clark, RR Donnelly & Sons and Northrop Grumman, along with many leading firms based in Europe, Asia and Latin America. Top performers in the study produced more than twice the amount of shareholder value than nonaligned firms over the past five years. Overall, the study found that “value-aligned companies” — those that consistently deliver value to shareowners — share the following characteristics:

  • Business decisions are made based on long-range economic value over short-term earnings impact
  • Board members and top managers have significant equity holdings at risk
  • Performance measurement focuses on a few objective and straightforward value metrics that include the cost of capital
  • Incentive plans are uncapped, to instill a culture of ownership by offering an unlimited upside pegged to sustained value-creation
  • Projects are ranked and funded strictly according to their economic value
  • Middle-level managers possess a high degree of business and financial literacy
  • Financial information is measured and freely shared throughout the

An executive summary of the Shareowner Alignment Index is available online from Hackett Benchmarking & Research.

Florida State Board of Administration Nations Most Litigious Pension System

The FSBA is involved in almost 300 securities fraud lawsuits against companies whose deceptive behavior it alleges compromised the value of its investments. “We have all seen an increasing number of corporate actions that border on criminal – and sometimes are criminal,” commented FSBA Executive Director John T. Herndon. The agency is currently lead or co-lead plaintiff in eight lawsuits, and has filed private actions against an additional 14 companies. In comparison, CalPERS, widely held as the paragon of corporate governance activism, has acted as lead plaintiff in only one suit. (Miami Daily Business Review, September 11, 2001 as reported by The Corporate Library, 9/18/01)

Providence Capital to Launch Anti-Poison Pill Campaign

Providence Capital will launch a major Anti- Poison Pill Campaign at a “Town Hall” meeting and simultaneous audio webcast on Tuesday, September 25, 2001 at 4:15 PM. The meeting will be held in New York City at the Le Parker Meridien Hotel (118 West 57th Street). The discussion will be open to the media and members of the investment community. A Q&A session will follow the presentation by Bert Denton, Founder & President of Providence Capital.

Speakers will include Jeffrey N. Gordon, of the Columbia University School of Law; and Michael Hanrahan, a Delaware corporate practitioner. Participants can register to attend in person by calling (212) 888-3200 or sign up for the webcast online or by calling (800) 540-0559, Conference ID: PC925.

The focus of the seminar will be on a director nomination by-law amendment (DNBA), viewed as a potential cure for the poison pill. The DNBA would attempt to hold board members accountable for failing to abide by shareholder votes to eliminate poison pills. Courts in Delaware, where most U.S. companies are incorporated, have ruled that poison pills fall under the domain of the board of directors. However, if the suggested DNBA is passed by the holders of the majority of outstanding stock, board members who have failed to approve elimination of poison pill rights within 180 days after passage of a stockholder resolution requesting such action would no longer qualify for nomination for an additional term as directors, unless the board has submitted to the stockholders a binding resolution to abolish the poison pill.

Advance publicity quotes include the following:

  • Denton: Poison pills impede the maximization of value. If the DNBA initiative is successful, institutional investors will be able to hold directors accountable for their support of poison pills.
  • Gordon: Drastic anti-takeover measures destroy stock value and investor confidence, injuring those they purport to protect. The DNBA will use corporate democracy to respond to directors who ignore those who the company is intended to serve – its owners.
  • Hanrahan: Because the DNBA does not require or preclude board action, it avoids the primary legal argument against poison pill bylaws, by relying instead on the very mechanism pill supporters have cited in defending the pill – the ultimate right of the stockholders to control who serves on the board.

Back to the topMore Thoughts on The New Global Investors

Anne Simpson, senior specialist in corporate governance with the World Bank and coauthor of Fair Shares: The Future of Shareholder Power and Responsibility, has also written areview of Robert Monks’ recent book, The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide. In contrast to my own rambling essay (several items below), Simpson gets right to the point. “Monks’ prognosis is useful” but the problem is that his proposals don’t adequately address “the conflicts of interests within the private pension funds” which his book highlights so well. “Tackling these requires overhauling the governance regime of investors. Principles of good governance – transparency and accountability – need to be applied to the institutions that invest on behalf of the public.”

Transparency, according to Simpson, would mean that banks, insurance companies, mutual and pension funds would all be required to provide full details of their voting records. “We do not yet have a fully fledged model of investor governance that reflects the principles of transparency and accountability. One solution is visible in the activist public funds in the US, which elect trustees from active members and pensioners and thus allow the funds to tackle corporate abuse without fear or favor.”

Activist public pensions, such as CalPERS, do offer a model for private funds in that six of their 13 members are elected by members. However, many distant observers of CalPERS, along with many members of the System, appear to have an unrealistic view of its operations, which are far from ideal.

For example, the CalPERS Board long argued that they were under no legal or moral obligation to release minutes or vote counts from closed door investment sessions. Without such a record being made public there was no way to determine if contributions or gifts were influencing Board members in their decisions and no way to hold them accountable. Only after a scandal involving what was essentially a Ponzi scheme, made against the advice of staff and a CalPERS consultant, was legislation enacted requiring such disclosures.

The Board of CalPERS continues to argue that their constitutional authority places them above the law, even though that position was discredited in Sacramento County Superior Court. (Kathleen Connell for Controller et al. v. CalPERS Board of Administration, case no. 98CS01749) and again in a 1999 Office of Administrative Law Determination (No. 18), which I filed.

The purpose of Proposition 162, which grants the Board authority under Caliofornia’s Constitution, 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. Last year the Board gave itself a raise even though their reimbursement rates are set in the Government Code. Kathleen Connell again took them to court; I again sought the less expensive route of a determination by the Office of Administrative Law.

When one recent candidate (the author) raised potential conflict of interests during his campaign, such as the Board members accepting gifts from contractors and serving, staff violated the System’s election rules in order to assist the incumbents reelection. After negative press, the Board proposed rules to avoid such future embarassments by banning discsussion of the issues in materials sent by the System to members. A Sacramento Bee editorial said the proposed rule “muzzles challengers in ways that risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (CalPERS muzzles critics: Ballot rules protect board, keep others in the dark, 5/25/99)

Anne Simpson is right, the most likely route to getting corporations to be responsible and accountable is through a law or other action that allows direct election of a substantial proportion of pension fund trustees from acttive members and pensioners. However, even if more funds provide such elections, like CalPERS, we will still need to educate members and pensioners.

One might expect that at a minimum, members and beneficiaries of CalPERS would vote out Board representatives who have declared bankruptcy more than once, failed to pay their taxes for years that support members and don’t get along with the Legislature whose support is required for raising benefits. Yet the incumbent in this year’s election is almost certain to get reelected, even though he failed all the above tests and more. (Member of PERS Board Faces Financial Difficulty: Debts Include More Than $84,000 in Taxes, 8/9/97, Sacramento Bee and Low Road At PERS: Ethnic Remarks Are Another Sign Of Arrogance, 11/2/99, Sacramento Bee). Since CalPERS is one of the best pension systems, it makes me wonder what world shaking changes would occur if all pension funds were run democratically and their members were well informed.

Activism Pays, But Could Pay Better for CalPERS

Gary L. Caton (Washington State University), Jeremy Goh (Singapore Management University) and Jeffery Donaldson (University of Tampa Florida) found that institutional activism to reform corporate governance pays. Evaluating 108 companies included in the Council of Institutional Investors’ annual hit list. “For those companies with little chance for improved performance (measured by Tobin’s Q-ratio), inclusion on the focus list is interpreted by the market as bad news initially but (it) tends to stop the slide in stock performance indicated in the pre-release period.” “For companies with performance slack, however, making the list not only stops the pre-release slide in equity values but also seems to mark an upturn in stock market performance, as indicated by the post-release average of abnormal (excess) return.”

Perhaps the most frequently cited study of such efforts is that of Stephen L. Nesbitt of Wilshire Associates. He found that prior to being targeted by CalPERS the stock returns for the 95 companies appearing on their targeted lists averaged 14% below the S&P index return. For the 5 year period after targeting, they averaged a return 2.6% above the S&P. (“Study finds activism does pay off,” Pensions & Investments, 8/20/01)

What continues to amaze me is that that CalPERS doesn’t take greater advantage of the “CalPERS effect” by increasing investments in targeted firms prior to public release of such lists. Would Warren Buffet, Michael Price, Robert A. J. Monks or any other rational investor who targets corporations for needed changes fail to take advantage of probable bounce in price? I don’t think so and neither should CalPERS. The current Board is cheating CalPERS members, beneficiaries and employers out of the benefits of their own activism. When will they wake up and smell the money?


In 1998 and 2000, the National Center for Employee Ownership conducted surveys of companies using broad-based stock option plans. In 1998 they found that 35% of respondents said they had repriced in the last three years. In 2000, only 8% had repriced since the new accounting rules requiring variable accounting for became effective (12/15/98). Attracting and retaining employees was the primary objective of options plans. About 3/4 also hoped to create an ownership culture. Half the companies reported regularly scheduled meetings for employees to discuss work issues in 2000, compared to 38% in 1998. To obtain the full 500 page report, “Current Practices in Stock Option Plan Design,” contact NCEO.

Geneva based Sustainability Asset Management has created a European Employee Ownership Index. Each company is assessed in terms of the availability and quality of its broadbased employee ownership program. ABN/AMRO Bank (Germany) will offer a specific financial product based on theSAM Employee Ownership Index.

NCEO, in conjunction with Watson Wyatt Worldwide and Katherine Klein at the University of Maryland, is conducting a major national survey. Participating companies will receive detailed feedback on how their plans compare with the others in the sample. If your company is interested in participating, contact Ed Carberry.

Employee ownership case studies sought for articles to be developed for trade and professional publications. ContactCorey Rosen. International case study participants sought for large-scale case study and survey on US and US multinational companies. If interested in participating, contract Michael Jones.

Guy Adams Wants Reforms

Guy Adams, the Lone Star Steakhouse & Saloon shareholder who unseated its chairman in July, told a Dow Jones reporter that the proxy process needs reform to make it easier for small shareholders to vote over the Internet and to make it easier for dissident groups to get reimbursed for legal efforts if they win. Adams reportedly spent about $50,000 on proxy materials and $350,000 in legal costs to defend his campaign. I’m a small shareholder and I’ve found it fairly simple to vote over the internet. Just how difficult is it to get legal expenses reimbursed? Can anyone enlighten me? (Dissident Who Won Wants Proxy Fights To Be Easier To Wage, Dow Jones Newswires, 9/10)

Compromised Audits

Research of 4,200 companies concluded that auditors are potentially compromised if clients pay them less for the annual audit then they do for consulting services…and almost half of the surveyed companies did. The authors found that such companies are more likely to carry substantially higher discretionary reserves for hyping future earnings. They’re also more likely to beat earnings benchmarks, suggesting a reduction in the quality of earnings. However, such companies may be paying a price, since the authors also conclude that investors are discounting the earnings and paying less for the stock of companies that pay the most in consulting fees to their auditors. (Does consulting compromise independent audits?Directorship, 9/01)

Back to the topVirtual shareholder meetings flop

That’s the headline of a c/net article by Margaret Kane. Flop refers to the fact that although Delaware recently passed a law allowing companies to hold shareholders’ meetings in virtual, instead of physical reality, none have done so. Charles Elson, director of the Center for Corporate Governance at the University of Delaware is quoted saying, “No one has (held a meeting solely online) and no one will. The surest way to encourage substantial shareholder ire and potentially run afoul of possible legal constraints would be to do that.”

Sorry, I’m just too cynical to believe no one ever will. Amy Domini, of the Domini Social Equity Fund points out in the article that management today can “just turn off the mike and say, ‘we don’t want to hear from you,’ but they can’t physically turn (shareholders) away. You go online and the sky’s (the) limit. You can have a phony person pretending to be a real person, zero accountability, and total control by management of the owners.”

Most will recognize they need to continue to play the charade that shareholders control the corporation. They’ll increasingly webcast the meetings and secretly hope that shareholders will eventually just go away.

I love the quote near the bottom of the article from Donald H. Meiers, a partner at Holland & Knight and a former adviser with the Securities and Exchange Commission. “If you take a typical look at shareholder votes on board-of-director-initiated proposals vs. shareholder-initiated proposals, board proposals usually get a 90 percent approval and shareholder proposals usually get a 5 percent approval. So you can’t say there’s ever been any meaningful input by shareholders from that standpoint.” I think there’s been “meaningful input” from shareholders on a growing number of issues but Meiers conclusions just adds to the need for a wake-up call, perhaps for something like the Shareowners’ Alternative Voting Information proposal.

Recognition of Need for Board Independence Grows

Written corporate governance guidelines are up this year (75% vs 69% last year). Two-thirds have a formal process for evaluating the CEO and 71% believe directors should receive individual performance evaluations regularly but only 19% conduct them, so there is still plenty of room for improvement. Independence is evolving, according to the latest Korn/Ferry Study. “Five years ago, 57 percent of respondents said the CEO chose committee chairs and members. This year, only 37 percent indicate the CEO continues to wield the same authority. Now, this responsibility is assumed by a corporate governance committee (33 percent) or the full board (27 percent).” (Korn/Ferry’s ’28th Annual Board of Directors Study’ Finds CEO, Board Evaluations on Upswing, Outsiders Deciding Committee Membership, Compensation Static, 9/5)

CalPERS Bows to Pressure

CalPERS has deleted individual fund performance statistics for private equity firms from its website. “Based on feedback we got from the market, we concluded that posting per fund performance might hurt our competitive position,” a CalPERS representative said. Publishing the data was felt to put at risk accessibility to further investment in some of the funds. According to a report in London’s Financial Times, “the figures, listing the returns to the end of last year for every private equity fund in which Calpers has invested in the last decade, lifted the lid on the performance of a secretive industry.” The data had been available for years in reports to the CalPERS Board, but apparently posting on the Internet got a lot more attention. (Calpers bows to pressure and axes fund data from website)

CorpGov.Net Bytes

King Committee Report

Another King Committee Report on Corporate Governance in South Africa was released and assigned some blame for the inertia of shareowners and, more particularly institutional shareowners, as being responsible for the non-enforcement of steps taken against directors and managers who breach their trust. The report recommends the office of the Registrar of Companies should establish a register of delinquent directors which should be posted on a website. Committee chair, Mervyn King says responsible corporate entities are driven by fairness, accountability and transparency.

The King Report also calls for the separation of the positions of chairman and chief executive. The primary responsibilities of the chairman are to ensure governance, conduct director inductions and director evaluation. The chief executive should be able to develop a vision, strategy, business plans, values of the organization and monitor operations.

The report recommends that payment of directors be transparent and disclosed in the company’s annual report. A substantial portion should be performance based. While share options can be granted to directors, prior approval by shareowners should be required.

New Institute

The European Corporate Governance Network – a loose grouping of people interested in governance issues – has incorporated. With plans for permanent funding and new articles of association, it has launched itself as the European Corporate Governance Institute. The 11 directors are split five academic and six general. ECGI’s mission is to improve corporate governance through independent scientific research and related activities taking into account the interests and concerns of the corporate, financial and public sectors.

Another Good Year for Dissident Shareholders

Shareholders seeking minority positions on boards have captured victories in 40% of 20 proxy contests, according to figures from proxy advisor Institutional Shareholder Services (ISS). The Wall Street Journal (WSJ) reports that record is on track with last year and compares with 26% in 1999. Entire boards are rarely outsted (partly because 57% have staggered boards). This year was no exception, with no such revolutions.

Shareholders who endorse the need for change often see attempts to replace the entire board as going too far. Yet, even minority changes can be dramatic. Last month investors of Lone Star Steakhouse & Saloon Inc. ousted Chairman, CEO and largest shareholder Jamie B. Coulter and replaced him with Guy W. Adams, an individual investor with no background in the restaurant business but who did have the backing of ISS. (Shareholders Shy From Board Ousters, Instead Opting for Dissident Members, WSJ, 8/30)

Back to the topWorker Owners: Global Investors

Monks, Robert A. G., The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, Capstone Publishing, 2001.

Like many, Robert Monks recognizes that corporations have become the most dominant institution of our time. While they appear to be the most effective tool for creating wealth ever created, they also exact a growing cost…primarily the corruption of government and externalization of risks and responsibility with growing social and environmental damage.

Monks weaves an effective tale but his perspective is that of an aristocratic shareholder activist, not a street demonstrator against the World Trade Organization. For example, he sees the biblical Parable of the Talents as a lesson in active investment. In the parable, those with more money (talents) invested and doubled their money, while the poorest amongst them buried it, stagnated and caught God’s wrath. I always viewed the Parable of the Talents as a Darwinian justification as to why the rich get richer and the poor deserve what they get.

Monks discusses early innovations of the East India Company, such as power sharing between investors and the leaders of government (often the same people) and the growing recognition of the need for long-term commitments, instead of voyage by voyage investments. Yes, this was an important innovation but the relationship of the Company with the government might also be seen as one of the earliest military-industrial complexes, with its corrupting influences.

When discussing Bill Gates’ rise through the “fruits of his own genius” and “some help from outside investors,” his praise appears unqualified. There is no mention of criminal activity or anticompetitive practices. Again, when Monks discusses the classic Berle Means dilemma of the separation of ownership and control, he sees it as the death of corporate social responsibility. Maybe so, but the social responsibility of Carnegie and Rockefeller certainly was very paternalistic…not based on balanced power and too often came at the end of their careers.

I have my differences with Monks’ perspective but our basic concerns are similar and our musings regarding solutions at least point in the same general direction. Fundamentally, Robert A. G. Monks is worried that corporations aren’t being socially responsible. He quotes a Harris poll conducted in late summer of 2000, which found that only 4% of Americans thought corporations should have only one purpose – to make the most profit for the stockholders, while 95% agreed that corporations owe something to their workers and communities (1% weren’t sure or didn’t answer).

Monks appears to believe, and I agree, that corporate control has been largely hijacked by CEOs for their own selfish interests. “Corporations are truly getting to the same place as Church and nation state before them, where the position of the leader rather than the institution becomes paramount. This is the condition that precedes loss of legitimacy and collapse.” At bottom, we’re both not so much concerned with the corporation as an institution but with the people who are impacted by it. Monks sees the rise in CEO pay to 475 times what their workers earn, as well as their political arrogance and their path of environmental degradation, as analogous to Marie Antoinette’s “Let them eat cake.”

David Korten presents an interesting analogy in his recent book, The Post-Corporate World. Just as King Midas destroyed and himself and those he loved when everything he touched turned to gold, the modern corporation has the potential to destroy everything in its path by turning nature and human relationships into money.

Change can come from outside the corporation in the form of laws or the marketplace or it can also come from inside the corporate structure itself, through the CEOs or shareholders. In previous books, Monks has rejected the need for new laws. “No new laws need be passed, no new regulations promulgated, no new agencies formed,” he says on page 184. However, by the next page he concludes that “amendments or possibly new regulations may prove necessary.”

My guess is that as a Republican, he’d love to see our problems solved by the marketplace, without government intervention. He founded Institutional Shareholders Services (ISS), a service which tells institutional investors how to vote in corporate elections to increase shareholder value. He founded LENS, a corporate governance turnaround fund, which has successfully outperformed the S&P 500 since its inception. Monks has certainly done more than most to use the market to move corporations toward more responsible governance to their shareholders.

As both a Democrat and public employee, my primary reservation against depending on government to solve our problems is that it is too often indistinguishable from the interests of corporate CEOs. Corporate contributions appear to determine who gets elected and corporate lobbyists largely determine what laws they write. That concern also appears to be shared by Monks.

We’re both pinning our hopes on pension funds. They’ve got the money, holding almost a third of US and a growing portion of global equity markets. With a base in millions of employees, their long-term perspective and universal ownership (owning a chunk of virtually all public companies) make them the vehicle of choice. Pension funds can set the standards for corporate governance around the world. The flow of money, much of it from pension funds, “creates the future of society”…”determining which regions will prosper, what technologies will be advanced, which jobs will be created, and what educational requirements will be set.” (p. 81)

“Why substitute a new institution – pension funds – for an existing one – large corporations? The answer is simple: pension funds have more of a stake in the good of society and the world.” “If pension funds can be liberated from the dead hand of tolerated trust abuse, this significant ownership element can function as the independent force that can call management to account.” (p. 181)

Pensions have more of a base in the average worker than other funds. They have more flexible rules governing their investments than other funds and they also have a longer timeline. They’re not dependent on getting a bump in the next quarter. Instead, they can look to the next ten or twenty years. With that long-term perspective, they should be more likely to favor sustainable environmental practices, community involvement, and employee participation.

We’ve identified the tool, but now the problem is putting it to use. Pension law, ERISA, requires funds to be administered solely in the interests of the participants and beneficiaries. That standard applies to all duties charged to a fiduciary, including the voting of proxies. However, as Monks points out, “there is the problem of proof. How can it be proven that the vote, or failure to vote, of a single shareholder caused a specific amount of damage.” Certainly corporate pension funds don’t want to develop an activist stance; voting against management at other corporations is likely to lead to retaliation.

One part of his solution would be a revision in the law, which would presume the following:

If a corporation has underperformed drastically for a substantial period of time, it can be presumed that the fiduciary shareholders have failed to take appropriate action to safeguard the interests of their beneficiaries.” (p. 130)

Monks provides support for his position that active investors help unleash wealth enhancing. A few of his citations include:

  • McKinsey Study showed investors are willing to pay up to 27% more for companies with good governance.
  • LENS, Hermes, and ABF Euro V.A. funds have all performed better than the standard indexes.

Investing based on corporate governance practices is likely to get a boost with the recent announcement by ISS that they will soon release their “corporate governance quotient” (CGQ). This will give clients one number, ranging from 0 to 100, which will reflect ISS’ judgement as to where a company’s corporate governance practices rank. Better performers will not only be more open to shareholder influence, as a reflection of their standing in the ratings, but will also be viewed favorably for additional investments, thus lowering their cost of capital.

Monks is nothing but prolific in citing good ideas.

  • He points to the need to reform Generally Accepted Accounting Principles (GAAP), since “the absence of a convention for valuing ‘intellectual property’ has doomed GAAP to obsolescence.” Although he doesn’t mention Margaret Blair’s work in this area which shows that such intangibles often make up about 75% of a firm’s value, he does cite Baruch Lev’s “Knowledge Capital Scoreboard,” which attempts to rank companies by their return on investments in research and development.
  • Paul Hawken and W. McDonough’s “Seven Steps to Doing Good Business,” which include eliminating waste, restoring accountability, reflect cost in prices, promote diversity, make conservation profitable, trade based on sustainability, minimal interference by businesses and unions in government.
  • Coalition for Environmentally Responsible Economies (CERES) Global Reporting Initiative (GRI) to design globally applicable guidelines for enterprise-level sustainability reports based on environmental, social and economic factors…the triple bottom line.
  • Innovest’s survey that found the top half of firms ranked by environmental sensitivity outperformed the bottom half by up to 21.8% over a two year period, depending on industry. Their Eco-enhanced S&P 500 has outperformed the actual index by 11% over the same period.
  • Brightline, Monks’ own brand of performance simulation that he hopes will be used by pension fund trustees a prudent basis for activism, directing their focused portfolio companies to comply with the law. His simulations have shown that while “the most aggressive, externalizing and Eco-unfriendly companies gain a market advantage” in the short-term, the focus companies win 17 out of 20 simulations over a 12 year time horizon.

His idea that chronic underperformance and inaction by pension fund trustees should give cause to lawsuits by beneficiaries has merit. I’m not sure this will lead to social justice but at least it will help dislodge CEO dictators who rob from their own companies.

What tears it for me is Monks’ belief that the President of the United States “can simply state that as a matter of policy the public good and the law of the land require effective and informed shareholder involvement in the governance of corporations.” (p. 184) What would that mean coming from the President, especially the current President?

While Monks has embraced the probable need for new laws, his proposed vehicle to explore what “may prove necessary” is Congressional and Parliamentary hearings regarding shareholder rights, conflicts of interests among fiduciaries, and the role of governmental agencies in enforcing trust laws. Certainly such hearings could result in great steps forward. However, they aren’t likely to address the needs of people marching in the streets against corporate power.

A more likely vehicle, although not nearly as well written (because it is a collection of essays, rather than the more coherent package of one brilliant mind) is the book Working Capital: The Power of Labor’s Pensions by Archon Fung, Tessa Hebb and Joel rogers (ILR Press, Ithaca, New York, 2001). Working Capital is written from a worker owner perspective. Like Monks’ book it stresses sustainable economic growth and triple bottom line returns. However, it also focuses on more equitable distribution of the wealth created by corporations, their employees, and their communities.

Worker owners (largely pension fund holders) want more secure better paying jobs, affordable housing, reduced environmental degradation and a more cooperative/participatory workplace. High CEO pay lowers worker morale. One of the authors, Marleen O’Connor, goes so far as predicting that corporate governance will trump labor laws in importance. Institutional shareholders, led by public pensions are creating new norms of conduct in the boardroom. Labor-shareholder proposals receive a statistically higher percentage of favorable votes. Unions have a great incentive to make sure firms are healthy because of the firm specific investments their members make, not just in their 401(k) plans but in their “firm specific human capital.”

Working Capital is replete with examples of innovations by labor in corporate governance from binding bylaw amendments to acting by written consent without waiting for formal shareholder meetings. Unions have become the leading proponents of shareholder resolutions and they know how to organize a winning campaign in the boardroom, in the press and on the streets. Unions can provide their members with the academic research needed to justify taking “social issues” into account in fiduciary voting. For example, Executive Paywatch (the AFL-CIO’s Internet site on CEO greed) cites a 1992 Berkeley study that found that pay inequality leads to less cooperative work environments, higher turnover, and lower product quality.

Labor’s shareholder activities provide good publicity for labor by demonstrating concern for long-term value. Those reading Working Capital will learn that pension plans with representatives from labor are more likely to transmit gains from bull markets to plan beneficiaries than single employee plans. They also have enhanced security. Maybe if enough of us learn about the power of our deferred wages we’ll recognize the need to get greater control over how our money is invested and how our shares are voted. Teresa Ghilarducci’s essay, “Small Benefits, Big Pension Funds and How Governance Reforms Can Close the Gap,” discusses legislation has been introduced to require pension boards to have worker representation but who knew about it? Ideas like that need to be pushed by voters all around the country.

Reforms and revolution will take the combined efforts of those working with corporate and institutional investor elites, as well as union members and street demonstrators. The New Global Investors and Working Capital point to the enormous potential of pension funds. Both provide ideas and examples that provide realistic models for pension fund management in the the twenty-first century.

Back to the topContact: [email protected]

All material on the Corporate Governance site is copyright ©1995- by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.

Continue Reading ·

Review – The New Global Investors & Working Capital Contrasted

Monks, Robert A. G., The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, Capstone Publishing, 2001.

Like many, Robert Monks recognizes that corporations have become the most dominant institution of our time. While they appear to be the most effective tool for creating wealth ever created, they also exact a growing cost…primarily the corruption of government and externalization of risks and responsibility with growing social and environmental damage. Continue Reading →

Continue Reading ·

Archives from August 2001

Survey Finds “Enormous Potential” for Growth in Religious Investing

A national opinion survey sponsored by MMA Praxis Mutual Funds found that of the more than 1,000 investors surveyed nationwide by Opinion Research International in late June, 36% said they incorporated their faith with their finances at least part of the time. An additional 20% said they would do so if they knew how. Four out of five survey respondents said they didn’t know religious-oriented mutual funds existed. The majority of these investors said they would be inclined to invest in religious funds once they learned more about them.

Out of 15, 573 open-ended mutual funds in the US, 43 have a religious orientation, according to Lipper Inc. With 8 out of 10 respondents describing themselves as religious or spiritual, there appears to be room for considerable growth. The top five corporate ethical issues were the same for religious and non-religious investors:

  • product safety,
  • involvement in sweatshops,
  • environmental impact,
  • labor relations, and
  • equal employment opportunity

However, religious investors are somewhat more likely to avoid investments in traditional “sin” industries such as alcohol, gambling, and tobacco, as well as companies producing abortion-related products. (Putting Their Faith in Investment Choices, LATimes, 8/30)

ISS to Set Corporate Governance Quotient

Institutional Shareholder Services, a proxy advisor, is putting the final touches on a newly developed corporate governance rating system, targeted to begin early next year. The corporate governance quotient, CGQ, will give clients one number, ranging from 0 to 100, which will reflect ISS’ judgement as to know “how good a corporate governance performer a company is,” according to Patrick McGurn, director of corporate programs at ISS.

The raw score will reflect 50 measures, 40% of which are derived from board issues and practices. Beginning with the Russell 3000, ISS plans to include all 10,000 US public companies that ISS follows. ISS expects the ratings will be used as an investment screening device or in deciding which way to vote in close merger contests.

Phyllis Plitch of Dow Jones Newswires notes, “those governance laggards who want to start getting in shape may want to think about taking steps like establishing a corporate governance committee, setting up a structure for independent directors to meet outside the presence of company insiders and asking shareholders for their approval before lowering the strike price of underwater executive stock options – all point boosters.”

Beta tests, involving several hundred companies, showed a strong correlation between financial performance and the measures to be used in the CQG. Personally, I see it as the ideal base for a corporate governance mutual fund that would keep most of its investments in a CQG index, but would use a relatively small portion of its funds for active targeted investments aimed at converting laggards to the fold. (Proxy Adviser To Rate Companies On Investor Friendliness, 8/21, Dow Jones Newswires)

Financial Literacy Quiz

Each month Ralph Ward’s Boardroom INSIDER provides a wealth of information to help create better boards and directors. Ralph depends on subscribers to keep his business going so I can’t reproduce most of what he says here but often there are a few tidbits I just can’t help passing on. One such item is a quiz on financial literacy put together by Financial Executives International. The 24-question test will take you about 15 to 30 minutes. No, you won’t get a certificate suitable for framing but you will have some idea if you need to brush up. Ralph does a lot by the numbers. This month’s issue includes 5 boardroom yardsticks, 5 lures for tempting CFOs onto your audit committee, and 5 ways boards drive CEOs nuts. You’ll find information that’s quick and to the point.

Seedling Technologies Takes a Run at

Seedling Technologies Corporation announced that is has initiated legal proceedings in Nevada in order to present a new slate of Directors to the shareholders of Nettaxi has seen its stock decline 99.5% since its peak in April of 1999. According to Seedling, has failed to hold annual shareholder meetings for the past three years, and its current Board of Directors is anything but independent. (Seedling Initiates Shareholder Vote To Oust Incumbent Board Of Directors)

Mobias to Focus on Corporate Governance Issues

Over the last 5 years, Templeton Emerging Markets has returned a compound negative 33.89%, while the S&P 500 has returned 95.08% in the same period. According to the Wall Street Journal, Mark Mobius realizes poor returns are a result of poor corporate governance in emerging markets. Although weak regulations and legal systems make fighting questionable governance practices expensive and usually unrewarding, Mobius is cutting the number of firms in his portfolio so that he has less incentive to follow the Wall Street Rule. He’s also thrown out a house rule prohibiting investments of more than 10% in any given firm. Limiting themselves to small stakes didn’t guarantee they would be able to get rid of them” during a selloff.

Mobius wants to own companies “where we can get on the board and where we can vote” or where they can help those with sympathetic views act as their watchdogs. (Wall Street Journal, “Templeton Fund Manager Takes Aim At Corporate Governance Problems,” 8/9/01) We wish Mr. Mobius well in his strategy and believe it is a good one. The often quoted McKinsey study (search Three surveys on corporate governance, The McKinsey Quarterly, 2000 Number 4 Asia) found that while investors say they would pay 18% more for the shares of a well-governed UK or US company, they would be willing to pay a 27% premium for a well-governed company in Indonesia. There is more room for improvement in emerging market countries where the quality of financial disclosures and shareholder rights protections are poor. Identify companies in such markets that meet international standards and other investors will follow with additional investments.

Additional Coverage of Proxy Monitor’s Purchase of ISS

“They are the Dear Abby and Ann Landers of the arcane world of proxy advice, and now they’re teaming up to write one column,” wrote The Wall Street Journal. (Is Anyone Left to Give Advice After This Deal? 7/26) Proxy Monitor, which began in 1989, serves about 150 clients and was joined in the buy-out by Warburg Pincus and Hermes Pensions Management. Founded by Robert A.G. Monks in 1985, ISS boasts more than 700 institutional and corporate clients in North America, Europe, and Asia with assets in the trillions. ISS issues voting recommendations for more than 9,000 U.S. and 10,000 non-U.S. shareholder meetings each year.

It is rumored that Thomson Financial received $45 million for ISS. Others who may have been interested in purchasing ISS included the Investor Responsibility Research Center (IRRC) and Automatic Data Processing. Proxy Monitor and ISS will apparently maintain their respective voting guidelines, and each will continue to provide sometimes conflicting voting advice based on those guidelines. (see Proxy Monitor Buys ISS,, 8/13) James Heard, CEO of Proxy Monitor and former CEO of ISS said the deal will allow the companies to expand faster into Europe and Asia, where governance issues are increasingly taking center stage.

Back to the top

Monks Editorial in Barron’s

A guest editorial by Robert A.G. Monks, author of The New Global Investors, cites a study by Innovest that found the stock price of the more environmentally friendly top half of surveyed firms outperformed the bottom half by 21.8% in global forest products, 15.9% in U.S. chemicals, 17.2% in U.S. petroleum and 12.4% in U.S. electric utilities. He also cites a June 2000 survey by McKinsey & Co, which showed that institutional investors are willing to pay a premium of 18% to 27% for companies whose directors own stock and have no ties to management. (Profiting Responsibly: Companies can do well by being good, 8/6)

Monks calls on institutional investors to require the companies they invest in to:

  • Fully disclose all of their impacts on society.
  • Reveal how much they spend on involvement in the elective, administrative and regulatory public processes.
  • Obey the law, which itself should not have been improperly influenced by corporate power.

Guidance for Corporate Secretaries

The American Society of Corporate Secretaries has published a new report, Responsibilities of the Corporate Secretary’s Office. The report includes detailed data and analysis on the duties performed by corporate secretaries and their staffs, based on a 2001 member survey. (2001) ($95) Call 212.681.2000.

EDGAR Hyperlinks

Although EDGAR does not publish hyperlinks outside the system, “if a filer includes impermissible hyperlinks in a filing, the linked material will not become part of the official filing for purposes of determining whether the disclosure requirements are satisfied. The linked material will, however, be subject to the civil liability and antifraud provisions of the federal securities laws.” See Final Rule: Rulemaking for EDGAR System. As explained previously in SEC Interpretation: Use of Electronic Media, you’re basically liable for whatever you link to in a filing. “In the context of a document required to be filed or delivered under the federal securities laws, we believe that when an issuer embeds a hyperlink to a web site within the document, the issuer should always be deemed to be adopting the hyperlinked information.”

In fact, as explained by Eileen Smith Ewing in July’s The Corporate Counsellor, you can not only be liable for misinformation found on the third-party site you link to, but also for any misinformation found on other, more remote web sites hyperlinked to the third-party web site. Lesson: don’t link outside your own documents.

NYSSA Ends Forum

The New York Society of Security Analysts (NYSSA) dissolved its corporate governance forum known for challenging the governance practices of such high profile firms as and Dun & Bradstreet. Society president Jeffery Evans said the decision came “in view of the possibility that the forums could be misinterpreted by individuals as platforms for the expression of their own personal opinions.” Evans also cited limited participation in the forums by NYSSA members. The Financial Times, 7/19/01, The Corporate Library

Results from TIAA-CREF Institute’s Forum on Pay for Performance

“In order to maximize investment performance, some institutional investment managers, such as TIAA-CREF, continually monitor the performance and policies of the companies in which they invest. A key governance issue at many public companies is compensation policy: the system of incentives and rewards that corporations use to encourage employees to act in shareholders’ interests.”

A recent TIAA-CREF Institute forum on compensation policies at public corporations provides important background information on compensation issues, demonstrates the need for a judicious and informed approach in the design and implementation of compensation programs, and highlights the consensus on several issues that arose at the forum. See Has Pay for Performance Gone Awry? Views from a Corporate Governance Forum.

The forum’s diverse audience included corporate officers and directors, academic and other researchers, compensation consultants, corporate human resources, personnel, institutional investors, regulators, and other practitioners. It was recognized that investors are concerned with the “heads I win, tails you lose ” arrangement of stock options grants, which company representatives argued the need to motivate in a tight labor market. The conference went beyond the executive suite and included a discussion of other general issues such as measuring the cost of options, repricing, as well as the role of the board.

The forum highlighted the widely recognized disconnect between pay and performance but also pointed to the apparent undervaluing of options by employees, relative to their potential cost to shareholders. Surprising to me, the wide ranging group did reach some consensus.

No, they didn’t agree to seek a reversal of the Business Roundtable’s 1994 victory which successfully lobbied the Senate to express its “sense” that the cost of options didn’t need to be included on company income statements. The Financial Accounting Standards Board seems to have been left out of the equation for now.

However, they did agree on 10 points, including that “development of ‘best practices’ from accounting, board, investor and company perspectives is essential” and that it would be desirable to level the accounting playing field “so that alternate forms of performance-based compensation are not disadvantaged relative to standard at-the-money options.”

I feel another task force coming on. “There may be a role for a task force of qualified representatives to focus on the elements of compensation policy and the pay-setting process.” Who will be included?

TIAA-CREF Institute has made an important contribution to establishing a dialogue on this important issue as TIAA-CREF continues their campaign to ensure that all stock-based plans for which executives and directors are eligible, and any plan that could result in significant dilution, will be submitted to shareholders for approval. See TIAA-CREF Policy Statement on Corporate Governance.

[email protected]

Olivia S. Mitchell, professor of insurance and risk management, and a member of the Bush Commission to Strengthen Social Security, explains individual accounts and where we may be headed in Social Security: You Do the Math.

News From the Foundation for Enterprise Development

Corey Rosen, Executive Director of the National Center for Employee Ownership, reviews Thomas Petzinger’s The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace. The corporate organism is better able to react to its increasingly complex environment than the mechanical model. According to Petzinger, there “came a great awakening, a sense that people are gifted with the instinct to innovate, collaborate, and economize; that through countless local actions, whether in corporations, communities, or entrepreneurial confederations, they create global order without central control.” Participation and ownership are key.

study by Martin J. Conyon and Richard B. Freeman finds that firms and establishments that use shared compensation tended to outperform other firms and establishments in productivity and financial performance.

The Future of Success

Robert Reich’s The Future of Success reflects on the changes in the work lives of Americans. The former U.S. Secretary of Labor describes how standardization gave way to personalization because computerized technologies allow narrowly targeted marketing. In an economy focused on constant growth, work never ends and social attachments are commodified. Reich apparently concludes that you can either be successful or have a life…but not both. We’re stuck working 350 more hours a year than the average European.

Yet Reich recognizes there is no such thing as a free market. Markets are social constructs made up of rules about property and contract and liability. Rules about bankruptcy, rules about reorganization, rules having to do with how the system is going to be run. Markets are human creations. It is our obligation to make it operate within just and moral boundaries.

Back to the top

Contact: [email protected]

All material on the Corporate Governance site is copyright ©1995- by Corporate Governance and James McRitchie, except where otherwise indicated. All rights reserved.

Continue Reading ·

July 2001: Archives

Acutant Shareholder Sought

If you are a Actuant (ATU) shareholder who voted for the shareholder proposal recommending a shareholder vote on poison pills (approved by shareholders at the 2001 annual meeting), the proponent, John Chevedden asks that you contact him immediately at [email protected]. He would like to discuss options for encouraging the company to adopt the proposal prior to the Aug. 3, 2001 deadline for resubmittal for the Jan. 2002 annual meeting.

ISS Selling to Proxy Monitor

Financial information group Thomson Corp. announced it is selling its much-respected proxy vote research arm Institutional Shareholder Services to smaller rival Proxy Monitor. Both firms provide proxy research, vote recommendations, and voting agent services to institutional shareholders who use them while deciding on corporate strategies including mergers and restructuring at companies in which they invest.

Privately owned Proxy Monitor is being backed by private equity firm Warburg Pincus and Hermes Pensions Management, a UK-based firm owned by the pension scheme of the British Telecommunications.

ISS did not say give any value on the deal but industry sources said it was around $45 million. The deal will, however, leave money managers with just one major provider of influential advice on how to vote proxies.

The only remaining proxy analyst is Investor Responsibility Research Center, a provider of impartial analyses on shareholder issues that provides analysis but not recommendations.

Tobacco Transition

IRRC reports that more government-owned tobacco companies are falling into private hands, presenting new opportunities and ethical dilemmas for investors. While the privatization trend supports economic reforms advocated by free-trade groups like the World Trade Organization, it also invites more aggressive marketing practices that spread the health risks of smoking. To view the entire press release clickhere.

Labor Standards

IRRC also reports that an analysis of 2001 proxy votes showed an increase in shareholder concern over labor and human rights standards. Of the 28 proposals garnering 10% or more of the shareholder vote, 16 related to fair employment or the adoption of International Labor Organization standards. “These votes reflect that a growing number of shareholders are sending management the message that they don’t want their companies profiting at the expense of workers being discriminated or ruthlessly exploited,” said Meg Voorhes, director of IRRC’s Social Issues Service.

The main benefactors of the ongoing industry consolidation are private sector tobacco companies now dominated by three global players — Philip Morris, British American Tobacco and Japan Tobacco. These companies account for more than 60 percent of tobacco product sales by 99 publicly traded tobacco companies worldwide, according to the just-released tenth edition of IRRC’s Tobacco Industry directory. Besides Japan Tobacco, other large regional players that were until recent years wholly owned government enterprises include Altadis, Korea Tobacco & Ginseng and Austria Tabak. Gallaher Group of the United Kingdom is acquiring the Austrian government’s remaining stake in Austria Tabak, making it the latest government-owned tobacco company to be fully privatized.

Labor Shines Light on Bunge Limited IPO

The AFL-CIO Office of Investment criticized the proposed initial public offering of agribusiness giant Bunge Limited (NYSE:BG). Closely held by the descendants of company founder Johann Peter Gottlieb Bunge, Bunge Limited hopes to raise an estimated $300 million from outside investors next week. This small group of insiders will continue to control 79 percent of the outstanding shares following the IPO.

“We feel the proposed offering price may be too high for a company with significant risk factors such as Bunge. Institutional investors who are the pension fund fiduciaries of America’s working families need to carefully review the terms of the Bunge IPO,” said Richard Trumka, Secretary-Treasurer of the AFL-CIO.

According to the report, Bunge is a highly leveraged company with poor profitability and weak cash flow. The proposed offering would create liquidity for Bunge’s family-owners, but will do little to address the company’s high leverage or marginal profitability. Bunge shareholders will also be exposed to substantial risks associated with emerging market investments, including currency and political risk from its South American operations.

Bunge’s shares will be registered in Bermuda and subject to Bermuda securities laws, which afford weaker rights and protections to shareholders than they generally enjoy under U.S. law. Bunge’s operations are also subject to additional risks that may not be adequately discussed in its Registration Statement, including its exposure to genetically modified organisms and the growing labor problems related to the ten-week strike at its Danville, Illinois plant that is believed to be the largest dry corn milling facility in the world.

The AFL-CIO Office of Investment provides research and assistance in support of shareholder advocacy and corporate governance initiatives by collectively-bargained benefit funds. A copy of the report is available by calling the AFL-CIO Office of Investment at 202-637-3900 or at

Global Compact

The Global Compact, a U.N. program intended to help businesses become better world citizens, celebrated its first anniversary this week with more than 300 corporate partners, up from 44 at its launch. However, critics say that it has little to show for its efforts. Participating firms are to post their techniques for dealing with the many labor, human rights and environmental challenges spawned by globalization on the program’s Web site but even the United Nations itself was not yet applying the guidelines in its own procurement policies.

Back to the top

United Airlines Active Ownership Committee

The International Association of Machinists (IAM) held the first meeting of its new United Airlines Active Ownership Committee in New York. Input from rank and file employee owners will be the basis for the committee to formulate proposals that will allow employees to be more involved with the governance of their company.

“The employees of United Airlines control 55% of the company,” said District 141 President Randy Canale. “This marks the beginning of a campaign to address our members’ requests to be more active shareholders. We will educate our members on how to use the power they posses as a result of the ESOP.”

The committee is discussing various means for exercising ownership rights, including possible proposals to be submitted in connection with the next annual shareholders meeting. “Our members wanted to be more involved as owners of United Airlines,” said General Vice President Robert Roach, Jr. “This committee will allow them to have their voices heard. It is time Jim Goodwin and his team realized they work for us.” (prnewswire, 7/30)

Directors’ Summit

The Directors’ Summit is one of the first conferences accredited by Institutional Shareholder Services as a Preferred Boardroom Education Program. As a result of this designation, boards composed of directors who have participated in the Directors’ Summit will receive an upward adjustment in their corporate governance quotient (CGQ) under ISS’ new rating system to be introduced later this year.

Keynote speakers include:

  • Abby Joseph Cohen, chief market strategist, Goldman Sachs, speaking on the occasion of the 50th anniversary of the State of Wisconsin Investment Board
  • Patricia Dunn, global chief executive officer, Barclays Global Investors, on the importance of corporate governance to stakeholders
  • Lynn E. Turner, chief accountant, Securities and Exchange Commission, on government regulatory issues
  • Constance Horner, director, Pfizer, on director independence and board culture

More than 18 sessions, breakouts and keynote speeches on best practices, current issues and regulatory trends in corporate governance.

For additional information:
Contact: Ted Beck, Associate Dean, at 1-608-441-7300
E-mail: [email protected]
Contact: Patricia Seaman, Marketing Director, at 1-608-441-7315
E-mail: [email protected]

Michaels Stores

Its great to see more firms proclaiming their corporate governance reforms. A recent press release by Michaels Stores, (Nasdaq: MIKE) announced:

  • Expansion of its Board of Directors to seven members. Five of the seven Michaels directors will be independent of the family of Charles J. Wyly, Jr. and Sam Wyly, currently Chairman and Vice Chairman of the Board of Michaels Stores. (Its not clear if they are independent of the firm though.) All seven directors will be independent of the CEO, Michael Rouleau, who is not on the Board.
  • Creating a new Corporate Governance and Nominating Committee, whose duties include developing corporate governance guidelines for Michaels Stores.
  • Disbanding the Board’s Executive Committee, which will result in key corporate issues being reviewed by the full Board.
  • Eliminating staggered election of Board members in favor of a Board that will stand for re-election all at once beginning in 2002, subject to shareholder approval.

This is in addition to existing policies such as:

  • Executive compensation tied to profit targets and share price appreciation.
  • No repricing of stock options without shareholder approval.
  • No poison pill.

Swiss Developments

The SWX Swiss Exchange and Economie Suisse, a private economic development group, are developing codes of corporate governance that are expected to be issued in 2002. The SWX code will deal with disclosure and transparency in financial reporting, while Economie Suisse is preparing a code to address such issues as shareholder rights. The drafts will go out for comment sometime this autumn.

New King Report Calls for Additional Reforms

South Africa’s 2001 King Report on Corporate Governance call for the use of state resources to deal with company directors and officers who break the law. Financial observers have pointed out that the absence of a proper system able to monitor compliance with corporate rules and regulations has resulted in local companies paying only lip service only to the original 1994 report.

The second report recommends that the Registrar of Companies be provided with sufficient resources to monitor compliance with the Companies Act. “The resources of the South African Police Service and those of the judicial system also need to be enhanced to ensure that complaints are adequately investigated.”

The of a contingency fee system would allow minority shareholders faster, easier access to the law “in the context of delinquency in the management of a company.” The Report also calls for amending the Companies Act to compel private companies to file their annual statements with the Registrar of Companies. Such statements would then be open to public inspection.

The registrar should also be encouraged to establish a register of delinquent directors and the votes of the top 25 shareholders, or of those holding at least 1% of the equity securities in a company, should be made public on conclusion of the shareowners meeting. (Africa News Service)

ICGN Draws Crowd

The International Corporate Governance Network (ICGN), representing institutions with some $10 trillion (US) in assets, concluded its seventh annual meeting in Tokyo with a call for regulators to treat global investors equally and for companies to be responsive to the concerns of all shareholders. A record 450 members attended the ICGN meeting, jointly sponsored by the Tokyo Stock Exchange and the Japan Corporate Governance Forum.

“The large attendance for ICGN’s first meeting in Asia since our founding in 1995 underscores the intensified interest in good governance as a way to alleviate some of the economic malaise in the region,” said Peter Clapman, director of corporate governance activities for TIAA-CREF and chairman of the ICGN for 2001-2002.

ICGN members stressed their support for: uniform global accounting standards; equitable shareholder voting procedures for all investors, whatever their country of origin; and sharper focus on corporate governance matters by company managements; the need to address and resolve cross-border proxy voting problems.

The organization accorded three members special recognition for exceptional achievements throughout their careers to promote good corporate governance and fair treatment of all shareholders: Sir Adrian Cadbury, former chairman of the Cadbury Group; Ira Millstein, managing partner of the law firm of Weil, Gotshal and Manges, LLP; and Professor Hasung Jang, finance professor at Korea University.

Four new individuals were elected to the ICGN Board: Leo Goldschmidt, director of the Brussels-based European Association of Securities Dealers (EASD); Sanda Guerra, managing director of the Brazilian Institute of Corporate Governance; Peter de Koning, an attorney and a managing director of the Dutch Railways Pension Fund; and Sophie L’Helias, CEO of Franklin Global Services, an advisory firm which assists corporations in governance matters.

The next annual meeting of the ICGN will be held in Milan, Italy in July of 2002.

Back to the top

Independence in China Not Enough

The announcement by the China Securities Regulatory Commission (CSRC) in May requiring a system of independent directors for all domestically listed firms has been well received. However, since most listed companies in China came from restructured State-owned enterprises (SOEs), the State and its representatives will still control a majority of shares in listed companies. Ni Xinxiang, vice-president of the Asia Business Consulting, points out that smaller shareholders need minority rights “such rights as vetoing and appealing.” In addition, the impartiality of independent directors may mean little because they can easily be fired. Under the proposed model, a gathering of 7% of shareholders can fire an independent director.

According to the rules set by the CSRC, all listed firms must have at least one-third of its directors as independents by July next year. Based on the number of listed companies, that means at least 3,000 independent directors. Currently, most are drawn from universities and research institutes. However, some scholars already act as independent directors for as many as 10 companies at the same time. Ni also calls for regulations to require independent directors to report on their performance every year at the general shareholders’ meeting. (see Asiaport Daily News, 7/4)

Actuant Corporation (ATU)

Shareholder activist John Chevedden has issued a call for help. His proposal for shareholder vote on poison pills passed in Jan. 2001 and he would like to resubmit it before the 8/3 deadline for the January 2002 meeting. Unfortunately, he needs a co-sponsor since the value of his stock has dropped below $2000 in value. ATU is a Milwaukee-based diversified global company that provides electronic systems and components, tools, equipment and supply items to a variety of end users and OEMs in the computer, semiconductor, telecommunication, datacom and other industries. Sales are $500 million annually.

If you own more that $2,000 worth of Actuant stock, and would consider co-sponsoring Mr. Chevedden’s proposal, please e-mail him immediately at [email protected].

Stakeholders v Shareholders

David Finegold, Edward Lawler III, and Jay Conger ask how stakeholders can have a say in corporate governance, given the dominant Anglo-American model. Failing to recognize the importance of firm-specific human capital can result in “alienating their most valuable and mobile assets,” their high skilled employees. Yet, the German model of codetermination and the Japanese model of lifetime employment aren’t real options when countries risk alienating world capital markets if their governance standards are less friendly to shareholders.

How to avoid a race to the bottom and poor relations with knowledge employees? The authors embrace “enlightened self-interest,” demonstrated through

  • High levels of employee involvement in decisionmaking.
  • Flexible work schedules and other programs which help balance work and personal life.
  • Heavy investment in employee training.
  • Generous benefits and perks.

Yet, they doubt such programs will lead boards to value employees as highly as stockholders. Boards can too easily breach their trust with workers through corporate takeovers or due to recession. In addition, such programs often fail to address the needs of 80% of the workforce that have seen their incomes stagnate or decline.

The answer is to turn employee stakeholders into employee shareholders. Eventually employee ownership will translate into employee voice in the boardroom. They cite Margaret Blair’s arguments that employee ownership:

  • Fits well within existing US governance systems
  • Is embraced by both right, left and center political factions.
  • Brings firms closer to a widely successful entrepreneurial model.
  • Provides a powerful retention tool in tight labor markers.
  • Provides a basis for employee commitment in the absence of job security.
  • Fosters greater alignment between employee and shareholder interests.

coverTo learn more, see “To Whom Are Boards Accountable?” in the July/August edition of The Corporate Board or order a copy of Corporate Boards: New Strategies for Adding Value at the Top.

Japan’s Stock-Buying Companies

The Asian Wall Street Journal — July 4, 2001, carried a commentary by Nicholas Benes, president of JTP Corporation. He discusses Japan’s plans to establish a “stock-buying fund,” supported by government guarantees and tax advantages. “The objective is to soak up the supply overhang that will occur when banks sell stocks worth Y14 trillion through 2004 to comply with new rules that limit their stockholdings to total bank capital.”

Apparently, the proposed stock-buying corporation has no duty to exercise corporate governance rights (e.g., voting by proxy) for stocks that it holds. “It’s likely that corporate governance rights either will not be exercised — reducing the efficiency of the capital markets — or will be retained by the banks (who do not exercise them much either).”

Benes calls for various conditions for any such funds including: “The fund managers must exercise corporate governance rights (e.g., voting by proxy) solely in the interests of the fund as defined by its investment criteria and standards, and must document their actions.”

Agreed, this would be an important condition, not only for these proposed funds but for all funds around the world where fiduciaries hold other peoples money in trust. Yet, nowhere is it currently required, except in the US under ERISA for pension funds and here the Department of Labor has never taken an enforcement action against any violation.

Back to the top

Dutch Revolution

The Amsterdam Court of Commerce ruled in favor of shareholders in construction company Hollandsche Beton Group (N.HBG), that an investigation was warranted into actions taken by management over the past eighteen months. HBG had rejected an attractive-looking bid for its dredging operations from rival Koninklijke Boskalis Westminster, then hastily announced a merger with Ballast-Nedam, without an explanation to shareholders.

Peter Paul de Vries, head of the Dutch shareholder rights advocacy group VEB, hailed the decision. “What it says in essence is that management must take shareholders’ interest more into account when making decisions.” (Dow Jones Newswires, 7/5)

European Summer University

Better hurry; deadline: July 15th, 2001. “Corporate Governance of European Companies, Between National Systems and
,” September 8-15, 2001, Montpellier, France.

– Trends of the World Economy and Theories of “Corporate Governance”
– Facts and Experiences in Several European Countries (I & II)
– Convergence ? World Model or European Model ?
– Emerging Issues

The program includes:
– a special session on corporate governance and sustainable development
– a Doctoral Seminar

Travel and accommodation scholarships are available. Sessions will be bilingual (French or English).

Focus on NACD

The National Association of Corporate Directors encourages professional excellence in corporate leadership and encourages self-improvement in the boardroom. Members get discounts to continuing education programs, NACD’s annual corporate governance conference, publications, director’s registry, and fast and reliable corporate governance information fromExpresSource. If you’re a director, you’re bound to benefit from membership and as shareholders we all benefit our firms have enlightened directors.

Everyone can view the cover article in this month’s issue ofDirector’s Monthly, but only members can read the additional insights on regulation FD, antitrust in M&A transactions, intellectual property management, book reviews and more. For example, this month’s Capitol Hill column discusses the AFL-CIO’s Paywatch site, the SEC’s proposed rule on executive compensation and President Bush’s call for Social Security Reform.

36% of Households Have a Stake

Wall Street Journal/NBC found that 36% of respondents (65% of whom were employed) said they have stock options or a financial stake at their place of employment. That percentage is consistent with NCEO‘s estimates that 25 to 30 million individual workers out of a civilian work force of 108 million people currently own stock in their companies. (May/June 2001 newsletter)

Northwest Poison

Northwest Airlines announced that a proposal to repeal their poison pill won 35% shareholder approval. However, given that executives and directors own 40% of the outstanding stock, the introducing shareholder, John Chevedden, finds the results impressive. Independent shareholders apparently gave a majority approval for the shareholder right to vote on maintaining any poison pill at Northwest. According to Chevedden the annual meeting was postponed 2 months due to its labor problems.

News from Electronic Business

Electronic Business says the best defense against irritating corporate gadflies is tender loving care. Michael Claes, managing director of public relations firm Burson-Martseller, recommends the following: CEOs follow these principles when dealing with active shareholders:

  1. Treat all shareholders with respect as owners, regardless of how many shares they own.
  2. Act in the interest of all shareholders.
  3. Seize every opportunity to build and strengthen relationships with shareholders.
  4. Every announcement should reinforce key messages about a company’s strategy or plan.
  5. CEOs should never be rude, brusque or unresponsive to shareholders. As owners of the company, shareholders should be treated with respect. (A pox upon you, 7/1/01)

Investment professionals believe companies are using the SEC’s new Regulation FD as an excuse to tighten their news grip. In polling 6,000 of its analyst and portfolio manager members last winter, the Association for Investment Management and Research, found that 57% believed public companies were releasing less information. Over 80% agreed with the following statement: “Now that Regulation FD has gone into effect, companies that want to minimize communication can do so more effectively.” Stonewallers now have another defense. The SEC has not yet brought any charges, but says it is investigating roughly half a dozen potential cases. (Tight lips sink stock tips, Electronic Business, 7/1/01)

ESOPs Improve Performance

In what NCEO calls the “largest and most significant study to date,” Douglas Kruse and Joseph Blasi of Rutgers have found the employee stock ownership plans apppear to increase sales, employment and sales per employee by about 2.3% to 2.4% per year. ESOP firms are also more likely to have other retirement-oriented benefit plans than comparable non-ESOP companies.

In Review

I just received a review copy of Working Capital: The Power of Labor’s Pensions. It covers the groundwork of how pension funds are failing workers and what reforms are necessary to build sustainable wealth. I’ll have more to say on this book later, but it appears like a good wake up call.

Too Many Carrots, Too Few Sticks

“There’s no risk anymore in being a CEO,” says compensation expert Graef “Bud” Crystal. Priceline gave outgoing CEO Daniel Schulman a separation package worth $5.8 million. Webvan’s ex-CEO George Shaheen, 58, will collect $375,000 a year for the rest of his life–equal to $7.5 million over the next 20 years. That’s in addition to a $6.7 million loan that isn’t expected to be repaid.

My own tiny investment in Webvan has gone from a value of $740 to $16 and I didn’t buy anywhere near the peak. Nell Minow, editor of The Corporate Library, says board members should know that an executive candidate who asks for a cushy severance package is “telling you he’s the wrong person for the job.” Severance proposals were the subject of eight proxy votes this year and the number is expected to go up, especially if the economy stays flat or goes down. (Some departing tech CEOs land big money,

EBF Debates: Is Corporate Governance Delivering Value?

The European Business Forum, a joint initiative of PricewaterhouseCoopers & Community of European Management Schools, invited distinguished panel to address corporate governance issues. Valter Lazzari, outlines the basic, theoretical principles from which corporate governance has emerged and explaiw why divergent patterns in Europe are best understood by reference to national law.

Robert Monks exposes the gulf between appearance and actual practice in the US and UK, as well as offering reflections on the appropriate model for continental Europe. Next, Sir Adrian Cadbury argues that what we are witnessing a convergence of governance standards and processes, if not necessarily of structures. Claudio Demattè, former chairman of Italy’s Railways and main television network, and Lutgart van den Berghe, founding partner of the European Corporate Governance Forum, put the spotlight on organisations where governance standards should be improved.

EBF then focus on governance issues in three European countries: the merits and demerits of the German supervisory board system (Wolfgang Salzberger and Manuel René Theisen); the case of voting rights in Italy (Francesco Chiappetta and Stefano Micossi); and the impact and significance of recent corporate governance initiatives in Spain (Miguel Trias). Finally Graham Gilmour of PricewaterhouseCoopers sums up the debate and offers some useful guidelines.

Continue Reading ·

Archives: June 2001

Proxy Monitor Recommends Lone Star Shareholders Dissidents

In a contested election, Guy Adams, is seeking to unseat Jamie Coulter, the company’s chairman and CEO. Mr. Adam’s objective is to enhance the independent representation on this board and to bring change and accountability to a board he believes has supported unacceptable corporate governance practices and a management team he believes has failed to return sustainable value to shareholders.

Two month’s after Adams filed his solicitation materials, Lone Star sued seeking to prevent him from soliciting or accepting proxy votes. The company alleged that Adams filed misleading proxy materials but a federal judge ruled he could proceed after correcting two errors in his filing. The company also implicated a highly-regarded institutional investor, claiming that Adams was a “stalking-horse” for the investment fund and “not a bona fide Lone Star investor.” In doing so Lone Star alienated at least a few investor groups who found the move to be arrogant and offensive.

Proxy Monitor ultimately asked and answered two questions:

1) Has the board done its job?
2) Could Mr. Adam’s membership on the board enhance shareholders’ long-term interests?

To the first question, we answered no. Not in terms of its compensation decisions, not in terms of its governance practices, and certainly not in terms of fully appreciating its fiduciary role nor respecting the shareholder franchise (including those “activist pension funds” with “unknown political agendas”). Indeed, we believe that management’s over-the-top response to Mr. Adam’s exercise of his ownership rights, lends itself to support the dissident’s concerns about the board’s commitment to an impartial and high-quality decision-making process, not to mention its good judgment.

To the second question, we answered yes. Mr. Adams is not seeking to gain control of the board or to push an agenda that management describes as different from other shareholders. Quite simply, Mr. Adams is seeking to ameliorate shareholders’ rights on a rather basic level – by respecting proper governance practices and by restoring accountability. Furthermore, we are not swayed by management’s assertion that Mr. Adam’s membership would “disrupt” or “destroy the progress that Lone Star has achieved.”

Accordingly, we recommend that shareholders DISCARD the WHITE proxy card, and vote FOR Mr. Adams using the GOLD proxy card.”

Institutional Shareholder Services also reportedly supports the dissident slate.

Rationalization of SRI Codes Predicted

Corporate social responsibility have proliferated so much that leaders in the field say they’re worried about company confusion and fatigue, as well as inconsistency. At the recent conference of Social Accountability International, Michael Goldstein, chairman of Toys R Us, and Mil Niepold, director of programs at Verite, said the proliferation of codes has left many suppliers “reeling.” The publication Ethical Performancepredicts that “ultimately institutional investors will force a rationalization because they require standardized measurement tools in order to assess companies.” From the July issue of BizEthics Buzz, a free service of Business Ethics magazine. Just e-mail your postal address to [email protected] and they’ll send you a sample issue and include a special introductory offer for new subscribers.

SRI Codes Meeting Benchmark

Resolutions asking companies to improve worker standards — or adopt those set forth by the International Labor Organization — were among the top vote-getters of 138 social policy shareholder proposals that came to votes during annual meetings. Of the 27 proposals garnering support from 10 percent or more of shareholders, 15 addressed global labor standards or fair employment in the United States and Northern Ireland. The highest votes were at two companies with operations in Burma — Unocal Corp. (23% and McDermott International (16%). The International Labor Organization and other rights monitoring groups have raised alarm about the extensive use of forced labor in Burma, also known as Myanmar, which is run by a military junta.

“These votes reflect that a growing number of shareholders are sending management the message that they don’t want their companies profiting at the expense of workers being discriminated against or ruthlessly exploited,” said Meg Voorhes, Director of IRRC‘s Social Issues Service. Voorhes noted that some institutions, like CalPERS, are placing labor and human rights screens on their investments in emerging markets.

Among the other social issues proposals getting support of 10% or more were ones linking executive pay to social criteria at AT&T, Boeing, FleetBoston Financial and Unocal, and a resolution asking Chevron to report on its controversial plans to drill in Alaska’s Arctic National Wildlife Refuge (ANWR). Another ANWR resolution — filed with ExxonMobil — fell just shy of the 10% mark.

The 10% figure is an important because under the SEC a proposal that earns this level of support may be resubmitted, regardless of how many times it has appeared on the company’s proxy statement. Overall, the number of social issues shareholder proposals receiving 10% or more support this year has nearly doubled compared to recent proxy seasons, according to IRRC, which has tracked such shareholder activity since 1972.

Transparency Begins at Home

Pax World Funds, home of the original socially responsible mutual fund to be made available to investors, announced another milestone: The fund family is now the first in the socially responsible investment (SRI) world to provide complete details on the Web about the voting at its own annual meetings. The new step by Pax World also is a rarity in the broader mutual fund world, which has been slow to divulge the specifics of the voting behind closed doors at investment companies.

Information is now available about the most recent annual meeting of shareholders held on June 14, 2001. Voting tallies are accessible on such matters as the selection of fund Directors and public accountants, as well as other key administrative functions. In May 2000, Pax World was among the first mutual fund families to announce that it would publish its proxy voting in individual portfolio stocks. This information, provided in conjunction with Proxy Monitor, has become one of the most popular areas of the Pax World Funds Web site.

ASCS Survey

The American Society of Corporate Secretaries, with membership at 3/31 of 4,256, reports that

  • 51% of surveyed companies provided electronic voting as an option for their annual meeting, compared with 39% last year
  • 41 companies are making their annual meetings available via Internet with 24 “live,” compared to 4 companies using “live” broadcasts last year
  • 89% reported all directors attending their annual meeting (88% schedule a board meeting for the same day

Directors Survey

The Segal Company has conducted “The Annual Study of Small-to-Midsize and Large Public Company Boards: 2001” which examines the compensation of directors of companies by size group and reports on director’s fees, non-cash compensation, stock-option grants and stock held.

  • Large companies pay higher retainer fees than do small-to-midsize companies ($36,000 median annual retainer vs. $10,000).
  • Small-to-midsize companies grant more stock options than do large companies (Initial stock awards — 8,250 vs. 3,000). The median ongoing award at small-to-midsize companies is also greater (5,000 compared to 3,500).
  • Although most board members of small-to-midsize companies (82%) and large companies (91%) own company stock, directors of small-to-midsize companies have a greater number of shares in the companies they serve than their large company counterparts (50,000 vs. 18,787).
  • Some large companies offer benefits such as deferred compensation plans, life insurance, or retirement plans to directors; but very few small-to-midsize companies follow this practice.
  • Large companies address more issues at the board-committee level than do small-to-midsize companies. Only 51% of small-to-midsize companies have 3 to 6 board committees compared with 85% of large companies.
  • More large companies have committees dealing with corporate governance issues than do small-to-midsize companies. 37% of large committees have a governance committee compared with 2% of small-to-midsize companies.

The sample in the 2001 study includes 189 large public companies with median annual sales of $17 billion and median net earnings of $932 million as of December 31, 1999. It also includes 180 small-to-midsize companies with median annual sales of $154 million and median earnings of $13 million as of December 31, 1999. This is the fourth study of this type that The Segal Company has conducted. The first two were conducted with Grant Thornton, LLP. Contact Mary Feldmanfor copies of the complete study report.

Challenges to Executive Pay

Randall S. Thomas’ and Kenneth Martin’s paper, “Litigating Challenges to Executive Pay: An Exercise in Futility?“, finds that plaintiffs win a greater percentage of the time in compensation cases against closely held companies than against publicly held companies. Plaintiffs average about 30% success in maintaining duty of care claims. With waste claims, plaintiffs succeed about 40% of the time, while for duty of loyalty claims, they win about 35% of the time.

Comparison of Takeover Law

‘Share Ownership, Takeover Law and the Contestability of Corporate Control’ in Company Law Reform in OECD Countries. A Comparative Outlook of Current Trends is th title of Guido Alessandro Ferrarini’s paper on corporate control contestability as a policy objective for company law reform. He considers the impact of large shareholdings disclosure on the market for corporate control and posits that legal barriers to takeovers have a limited impact on the contestability of corporate control; their practical effect might simply be to re-orient defensive actions towards different techniques.

Ferrarini finds, for example, that legislation directed at mitigating the impact of mandatory bids on transfers of corporate control will lower the number of efficient transfers of control but a higher number of inefficient transfers will be allowed if the bid’s price is lower than that paid for the controlling block.

Self-Dealing: A Comparative Analysis

Luca Enriques, of the Universita’ di Bologna, looked at the legal tools employed in the United States, the United Kingdom, Italy, France, and Germany in order to regulate self-dealing. His paper, “The Law on Company Directors’ Self-Dealing: A Comparative Analysis,” published in the International & Comparative Corporate Law Journal, Vol. 2, 2000, describes the trade-off that any legal system faces in regulating self-dealing (deterrence versus the risk of overkill). It then provides a description of the individual legal tools adopted to regulate self-dealing transactions (i.e., prohibition, disclosure, approval or ratification by the board, approval or ratification by shareholders).

His analysis shows that the regulation of self-dealing is more sophisticated and has more bite where equity markets have a longer traditions and dispersed ownership is more common, i.e., in Britain and the United States. The paper concludes with possible explanations for the minor significance of self-dealing regulations in continental Europe, and advocates a reform of the Italian law on self-dealing.

Shareholder Activism in Malaysia

A minority shareholder watchdog group has been set up in Malaysia to encourage active shareholder participation in listed companies. According to Securities Commission chairman Ali Abdul Kadir, “the watchdog group will be licensed as an investment advisor in order to ensure its independence and is expected to be fully operational by this year.” Ali also said corporate success in raising funds hinges directly on their ability to earn good corporate governance reputations. Institutional investors will pay a premium for shares of companies with good corporate governance but will also butally punish companies perceived to practice poor corporate governance. (AFX News, 6/26)

Back to the top

South Africa Leads

South Africa is ahead of other emerging markets in terms of corporate governance, according to Stephen Dover, chief investment officer for Franklin Templeton Investments’ global activities. However, he believes institutional investors should be more proactive to ensure independence of directors, protection of minority interests and linking executive remuneration to performance.

The World Bank’s task force promoting corporate governance indicates that South Africa, Brazil, South Korea, Russia and India would benefit most by corporate governance reforms, but, according to Dover, South Africa is “far ahead” of the other four. (Country Faring Well in Terms of Corporate Governance)

Monks and Sykes Offer Advice on Myners

The central proposal of the Myners review of UK institutional investment, closely modeled on the approach taken on corporate governance by the Cadbury (and subsequent) Codes, is a short set of clear principles of investment decision-making. These would apply to pension funds and, in due course, other institutional investors. As with the Cadbury code, they would not be mandatory.  But where a pension fund chose not to comply with them, it would have to explain to its members why not.

One of the more provocative recommendations is incorporation of the US ERISA principle on shareholder activism into UK law quoted on p. 92 of the report, making intervention in companies, where it is in shareholders’ interests, a duty for fund managers. According to the report, managers should have an explicit strategy, elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy.

In a recent e-mail, corporate governance author and activist Robert AG Monks writes, “There has been so much talk about activism and corporate governance over the last 15 years that it is gratifying finally to contemplate a government formally adopting activism as a national policy and taking specific steps in order to implement that policy.” He also includes a link to a recent posting to his own site, a letter to the Myners Commission with some specific suggestions entitled “Principles of Institutional Investment Decision Taking: A Response to the Treasury’s Requested Consultation on the Myners’ Proposals,” by Robert A G Monks (author of The New Global Investors: How shareholders can unlock sustainable prosperity worldwide and Allen Sykes (who recently wrote Capitalism for Tomorrow: Reuniting Ownership and Control).

Monks and Sykes argue that government retirement policies have fundamentally altered the previously existing state of shareholder control by encouraging development of pension funds, which are now majority shareholder. “No longer do individuals have the power to require accountability because government created fiduciaries have majority control which they choose not to exercise.” “Only government action can remedy the fault created by government inaction.”

Under absentee ownership, managements have become self-governing, self-perpetuating and self-serving. “This concentration of power has led to widely recognised abuses by executive directors, to often huge remuneration packages poorly related to performance, and to takeovers and mergers frequently driven by managements’ motives rather than shareholders’ interests.”

In both America and Britain the most active fiduciary shareholders are public sector pension funds, even though they are largely staffed by personnel with little or no professional business experience. This is because of the more direct conflicts of interests faced by funds in the private sector. Investment institutions have trustee and fiduciary duties to their beneficiaries to act solely in their interests but cannot exist without corporate business. The crux of the problem is that institutional investors are powerless to fulfill their fiduciary duties to it and there is at present no enforcing mechanism.

I also raised this issue years ago in an essay entitled Fiduciary Responsibilities For Proxy Voting where I noted that the Pension Welfare Benefits Administration had never taken an enforcement action against a fiduciary for failing to monitor or for voting a proxy contrary to the best interests of plan participants.

Referring primarily to the Myners recommendation to incorporate an ERISA type duty for fund managers to intervene in companies where it is in shareholders’ interests, Monks and Sykes indicate the result is “by far the boldest and most far reaching of any major official enquiry on institutional investment for a generation, and on corporate governance ever.” However, they believe that voluntary efforts are likely to be “stillborn,” since the risk-cost-benefit ratios are likely to be unfavorable for pioneering activists as compared to their passive competitors who also reap the benefits of their action.

To address these concerns, Monks and Sykes recommend the following:

  • The government should affirm that creating an effective shareholder presence in all companies is in the national interest, that there should be no power without accountability and that this principle should be taken into account by all regulators, the Takeover Panel, the competition authorities, etc.
  • All pension fund trustees and other fiduciaries holding shares, must act solely in the long-term interests of their beneficiaries and for the exclusive purpose of providing them with benefits. (While it can fairly be argued that this is already trust law, it needs to be given specific, continuous and strong public emphasis and enforcement to overcome present inertia and conflicts of interest – i.e. to make all trustees, fiduciaries, etc., pro active in the sole and exclusive interest of their beneficiaries.)
  • To give full effect to the first two proposals institutional shareholders should be made accountable for exercising their votes in an informed and sensible manner above some sensibly determined minimum holding (e.g. £10m). As the Report notes, votes are an asset (voting shares always have a market premium over non-voting ones). Accordingly they should be used to further beneficiaries’ interests on all occasions. In effect, the voting of all institutionally held shares would be virtually compulsory.

Additionally, the authors call for a regulator to enforce the law and express their belief that once market forces have been established there may be no further need for such government enforcement.

While I strongly agree that enforcement is the key and am eager to see the Myners recommendations implemented, along with the reforms called for by Monks and Sykes, I think the best long term answer may lie in developing a framework which 1) allows the members and beneficiaries of trust funds to have more say in their governance, 2) provides a clear framework for disclosing how proxy voting and other fiduciary decisions are made, and 3) provides a clear avenue to sue for breach of duty. As Monks and Sykes indicate, “no-one looks after other people’s assets as well as their owners.”

Back to the top

CalPERS Approves $250 Million Investment to Relational Investors

The action increases CalPERS’ investment in Relational to $750 million. Relational’s investment strategy often involves two steps. The fund makes a moderate investment and begins to communicate with the company’s management, board of directors and other investors. Depending on the outcome of the communications, the firm may increase its investment to gain more leverage in negotiations with management. In cases of persistent underperformance or where other factors warrant, Relational may submit shareholder proposals or seek board representation.

As of March 31, 2001, Relational made 34 investments. Examples include Apria Healthcare Group, Mattel, and Waste Management. Annualized returns on realized investments have exceeded more than 70%, versus an approximately 24% return for the same period for the S&P 500 Index.

Shareholders Less Patient

Russell Reynolds Associates annual survey of institutional investors finds that investors in a bearish market increasingly willing to act. Fifteen-percent of investors polled reported having called for a CEOs’ termination within the past year.

Ninety-four-percent of all respondents cite a company’s financial performance as among the most important factors influencing investment decisions. Eighty-five-percent point to poor strategy and lack of vision as key early warning signs indicating that a CEO is in trouble. With regard to CEO compensation, overwhelming majorities of those polled feel that boards should link CEO compensation more directly to performance and that CEO severance packages are excessive (93 percent and 89 percent, respectively).

Most noteworthy among this year’s findings may be that succession planning is a major concern of the institutional investor community. Eighty-one-percent of investors surveyed are troubled by the perceived failure of companies to properly groom internal CEO candidates. Most investors believe that companies in their country adhere to sound corporate governance practices; notable exceptions include Japan (3 percent) and Australia (37 percent). Two-thirds of investors surveyed have voted for a shareholder resolution within the past year; 15 percent have sponsored a resolution.

The survey, titled “CEO Turnover in a Global Economy,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, an international opinion research organization, and is based on interviews with more than 300 institutional investors from six countries: Australia, Canada, France, Japan, the United Kingdom and the United States.

High Plains Continues Reforms

Ethanol makers, High Plains (O-HIPC), moved to de-stagger its board of directors. Lawndale Capital Management’s Andrew Shapiro noted, “that High Plains voluntarily and pro-actively adopted this governance improvement is quite refreshing. We hope more companies will follow High Plains’ lead and come to the realization that good corporate governance adds shareholder value.”

This action will increase the Board’s accountability to shareholders,” said Donald Schroeder, High Plains’ Board Chairman, “and is one more step in the progression of good corporate governance we initiated last year with the adoption of a formal corporate governance by-law.” The prior by-law amendment, announced May 9, 2000, formalized increased oversight responsibilities of the Board, and requires at least two-thirds of the Board (and 100 percent of many critical committees) to be independent, and to meet in independent executive session each meeting.

“We believe de-staggering the Board will increase potential institutional interest in High Plains, and will help us focus on our priority of enhancing shareholder value,” continued Schroeder. “The Board has been sensitive to the fact that many large institutions prefer the annual election of all directors. We also recognize that this is an era in which management of many large companies is in conflict with its shareholders over out-dated corporate control provisions, and we are proud to have adopted one of the strongest, and most shareholder friendly, corporate governance programs of any public company,” he concluded. The previous board independence by-law put in place by High Plains Corp. in July 2000 is virtually similar to the Quality Systems (O-QSII) governance bylaw Lawndale introduced to members of the Council of Institutional Investors at its Fall 2000 Meeting in Boston.

Back to the top

eRaider Triumphs in Goldfield Proxy Contest

Activist investor website eRaider claims to have became the first Internet organized group of dissident shareholders to win a proxy contest with its victory at Goldfield Corporation(Amex: GV). ERaider’s Shareholder Value Slate outpolled management on the key question of cumulative voting at the annual shareholder meeting near GV headquarters in Melbourne, Florida. ERaider’s victory to save cumulative voting for the next election ensures that shareholders can continue to make their voices heard by management. “Shareholders won a victory even before a single vote was counted because Goldfield’s stock price has been very well supported during this contest which has energized shareholders and management alike, ” according to eRaider co-founder Aaron Brown.

Although the Shareholder Value Slate prevailed on the question of cumulative voting, the management-recommended slate of directors won a narrow victory over eRaider’s dissident slate. Management nominees received 11.6 million to 10.4 million for eRaider’s nominees. “This victory proves that Internet shareholder activists are a force to be reckoned with,” eRaider co-founder Aaron Brown says. “As big a win as it is for website message boards and eRaider, it’s an even bigger win for Goldfield and its shareholders. We began this fight because we want to make money for this company and its shareholders, and now we’re in a better position to do that..”

Unlike most dissident groups, eRaider’s Goldfield Shareholder Value Slate candidate ran on a platform that pledged not to break up the company, fire management or impose similar radical changes. Instead, it promised more aggressive oversight of management, highlighting low stock ownership among incumbent outside directors, and to raise Goldfield’s profile in the investing community.

Corporate Governance and the Indian Private Sector

A new book by that title has been authored by Jairus Banaji and Gautam Mody, two visiting fellows of the University of Oxford who studied corporate governance in the context of large private sector companies in India, against a changing regulatory background and mounting public concern ((1998-2000). The study consists of two reports:

  • The first report deals with the results of 170 interviews with a very wide range of business representatives including CEOs, non-executives, fund managers and audit firms on the main issues in question (boards, accounting and disclosure standards, institutional investors).
  • The second report examines the fragmented nature of corporate regulation in India and the need for consistency at this level.

The authors recommend that:

  • regulatory intervention needs a much stronger definition of ‘independence’ for directors, in line with best practice definitions now adopted in the US and UK, as well as the mandatory introduction of nomination committees,
  • financial institutions need not rely primarily on their own resources in the job of monitoring managements; a more active approach to corporate governance on the part of these shareholders requires larger changes in the nature of the FIs’ ownership and control by government, greater autonomy for institutional managers, and the active development of a market for corporate control.

Available from Orient Longman Limited, Kamani Marg, Ballard Estate, Mumbai 400 001, Tel: +91 022 261 6918, 261 6919, Fax: +91 022 2691278; E-mail:[email protected] Special 10% discount on orders for 6 copies and above.

Phantom FDI

The staggering increase in foreign direct investment into Hong Kong last year suggests a growing flight of hot money out of China with Hong Kong at considerable risk to its financial reputation. FDI into Hong Kong climbed from about $14.7 billion in 1998 to $24.4 billion in 1999 to a staggering $64.3 billion last year, far in excess of the $38 billion in offshore investment that poured into mainland China. Over the same period that $64.3 billion flowed in last year, about $62.9 billion described as outward FDI left the city. Under IMF guidelines, FDI is defined as when an investor based in one country acquires an asset in another country with the intent to manage that asset.

Money from tax havens and the mainland made up almost 70% of Hong Kong’s FDI inflows according to official statistics. Apart from mainland money, the boom in Taiwanese investment in the mainland could also explain some of the influx because the island’s businesses are forced to conceal their transactions to avoid Taipei’s restrictions on cross-strait economic ties. Analysts see much of the inflow as due to tax avoidance and disguised capital flight from domestic corporations which overprice exports and the “re-nationalize” the money, taking advantage of generous tax breaks and other incentives extended to foreign investors.

Apparently, Beijing has been trying to curb illegal outflows but it is extremely difficult for governments to tackle this problem when the international banking system is so accommodating. (China’s Money Laundry, Far Eastern Economic Review, 6/21 issue) See also People’s Republic Of Cheats in the same issue. “Half of all business contracts signed in China are fraudulent in some way, officials say, while two-thirds of all state firms cook their books.” According to recent officially published figures:

  • Economic corruption eats up 13%-17% of the country’s annual GDP.
  • Tax evasion accounts for 50% of taxes due in the private economy, while total losses from tax evasion are 100 billion renminbi ($12 billion) a year.
  • Counterfeit goods and substandard goods account for 40% of all products made in China, with losses running at 200 billion renminbi a year.
  • Two-thirds of the biggest state firms produce false accounts.
  • The underground economy is the equivalent of 20% of GDP (actually twice that, say independent estimates).
  • 15%-20% of the spending on an average infrastructure or building project is lost to bribery, fraud, and poor-quality work.

Phantom Wealth

Thomas Parker is the author of What If Boomers Can’t Retire : How to Build Real Wealth Security, Not Phantom Wealth. An article based on his book appears in the May/June issues of the Conference Board’s magazine of ideas and opinion, Across the Board. Parker argues that baby boomers will all want to cash their stock in upon retirement and the result will be an insufficient number of workers continuing in employment to pay the prices boomers expected. Stocks are a dangerous way to fund your retirement unless you sell them all out long before 2008 because of demographics.

Parker argues that we should value the stocks in our retirement portfolios conservatively at cost or market, whichever is lower. “Gains should not be recorded until the stocks have been sold and the gains have become cash in hand.” What would that do for a portfolio the size of CalPERS, which recently dipped about $20 billion? He has good points. Many with dotcom investments would agree with his assessment that “phantom wealth often comes before the company has created real wealth by adding to the pie, and sometimes it vanishes before additions have been made to the pie.

The article and book are certainly spurring debate. The same issue of Across the Board contains commentaries from Ken Goldstein of the Conference Board, corporate governance notable Robert A. G. Monks, and Jeremy J. Siegal of the Wharton School. In my opinion, Parker is raising important issues but offers little in the way of solutions.

Instead of recommending more money be funneled into smaller more risky ventures as he seems to, I’d recommend that we require our pension and mutual funds to act more like owners instead of speculators. If they were to take a growing role in governance, we’d have greater disclosure and fewer bubbles. In addition, corporations think they are surrounded by gadflies at annual meetings now; just wait until we retire! I know people who are amassing wealth and investments primarily so that they can wield power in their old age. They’re not going to cash out. They hope to keep building wealth through eternal vigilance.

Back to the top

ISS Backs Goldfield

The Goldfield Corporation (Amex: GV) announced that Institutional Shareholder Services (ISS) recommended that shareholders vote FOR management’s slate of director nominees at the Company’s Annual Meeting, scheduled to be held on June 19, 2001, rather than the dissident nominees proposed by an e-Raider activists.

ISS noted: “The company’s operational and stock performance have been exemplary, especially for a micro-cap company. Management has implemented a specific long-term strategy for the company to improve shareholder value.” The report concluded that “it would be in the best interests of all shareholders for the company to ‘stay the course.'”

However, Aaron Brown, eRaider co-founder provides perspective. According to him, ISS “supported eRaider’s ( Inc.) dissident recommendations over management’s on two out of the three agenda items. On the third item ISS took a neutral stance, recommending an independent outside director with mining or electrical construction experience (eRaider’s original proposal) over eRaider’s and management’s nominees.”

“Goldfield adopted many of our proposed changes in order to win the neutral verdict on one item,” Brown stated. “John Sottile indicated he would resign from the nominating committee of the board, thus opening up the board to independent nominees. Further he said he would have no objection to the board redeeming his preferred stock, which gives him controlling voting rights in some circumstances, despite representing only about 1.5 percent of the shares outstanding. He finally answered questions about a missing $583,000 that shareholders have been asking for ten months. Outside members of the board increased their holdings of Goldfield stock from a low of $375 among all members to $65,000 and officers of the Company bought another $425,000. Sottile outlined a long-term strategy that impressed ISS, but had never before been communicated to shareholders. Even if we lose on every agenda item, we have won most of what we set out to accomplish.”

There appears to an inaccuracy here one party or the other but it also appears that eRaider may be on the verge of a victory dispite that lack of full support from ISS.

Social Choice for Social Change’s Response to Editorial inPensions&Investments (see Limits to Activism, CorpGov.Net, May)

We are writing to present the context of our protest tactics that you judge “extremist” (“Brokers, not soldiers,” April 30, 2001). In particular, our group decided to carry signs in front of the high-rise residence of CEO John Biggs only after several years of using less confrontational means failed to convince the firm to heed its own survey, which found that 81 percent of participants support positive investing in its socially responsible Social Choice Account. We want TIAA-CREF to invest in companies
with outstanding track records on environmental or social issues. The respected Natural Investment Service rated the fund one of the worst ethical funds because of its failure to do so.

We have presented sound arguments for positive investing that are supported by experts in the field. We met with Mr. Biggs personally (and were told within three minutes why he wouldn’t implement our proposal). We instituted a call-in campaign. We took our story to the press. We held a peaceful protest in front of TIAA-CREF headquarters. Nothing worked. So, in the time-honored tradition of grassroots groups in pursuit of a just cause, we upped the ante.

This is deja vu for us. In the 1980s, we lobbied for four years for TIAA-CREF to create the fund in the first place. We heard essentially the same arguments then–financial, administrative, and legal–as now. When they finally consulted with experts who assuaged their concerns, they set up the fund. TIAA-CREF has refused to meet again with outside consultants. We hope the picture is becoming clear.

Intimidation? Groups like ours must utilize the kinds of power we have at our disposal (short of violence or threats thereof), which includes the power to bring public attention to the actions of a high-ranking executive. The anti-apartheid movement that the author finds “honorable” was successful in part because when polite entreaties to divest from South Africa failed, activists organized more disruptive rallies and sit-ins. In any case, the possible negative consequences of ours and others’ protests typically pale in comparison to the injustices they fight.

Instead of brokers seeking protection against protesters, perhaps they should pay more attention to what activists–and shareholders–are saying. More often than not, protests escalate because people in powerful positions fail to listen to reasonable arguments in support of popular causes.


Abigail A. Fuller
Co-chair, Social Choice for Social Change: Campaign for a New TIAA-CREF
MC Box 178, Manchester College
604 E. College Ave.
North Manchester, IN 46962

Back to the top

BusinessWeek’s Barker to Fidelity’s Johnson

BusinessWeek’s Robert Barker offers advice to Fidelity’s Abigail Johnson (Offering Advice to Abby, 6/18/01), indicating that “Fidelity does little to explain the key legal fact of life for every investor in every mutual fund: when investors buy in, they become the outright owners of the fund.” Barker expresses his disappointment that Fidelity’s trustees are almost nonexistent on; he found only their names on the last page of the fund’s annual reports. As an example, he notes a new name on the list, Marie L. Knowles, indicating that investors can only find out about her by obtaining an “obscure Securities & Exchange commission filing called ‘Statement of Additional Information.'” Fidelity is not alone in leaving its trustees in obscurity. He found no mention of directors at Janus and only the barest of description at T. Row Price, although the Vanguard Group did a much better job.

“By early next year, the SEC will force funds to include basic information on trustees in annual reports. That’s why now is the moment to steal a step on your rivals…Encourage your independent trustees to take a high profile. Highlight their watchdog role in your marketing materials and new-account applications.”

I would add that disclosing how Fidelity votes its proxies would also go a long way in helping the owners of the fund know if trustees are doing their job. Such disclosures would be welcomed not only by those interested in the many social issues raised in proxies but also by those looking for the correlation between good governance and increased profitability.

eRaider’s Shareholder Value Battle

Goldfield’s management has countered eRaider’s Shareholder Value Slate challenge by spending more than 1.5% of the Goldfield’s market capitalization on a proxy fight and trying to reverse the company’s 95-year-old policy of cumulative voting for directors, which gives dissidents a better chance of gaining a seat. If management fails to overturn cumulative voting, it now plans to adjourn the meeting before electing directors. eRaider is soliciting proxies for Goldfield’s annual meeting on June 19, 2001. eRaider strongly advises all shareholders to read the proxy statement or by emailing [email protected], or a free copy is available from:

Privateer Asset Management
PO Box 20170
Park West Station
New York, NY 10025

Goldfield’s market capitalization declined from over $100 million in 1969 to $5 million in 1998, despite the injection of additional shareholder capital. If it had performed in line with the S&P 500 over that period, Goldfield share would be priced about $75 rather than the current $0.66. The stock has rebounded 76% from its low since eRaider announced it had accumulated shares in the company and invited stockholders to its Internet message board to use them as a resource to revitalize the stock. (6/10/01)

Watch for June 19th News of Internet-Organized Victory Inc. filed a definitive proxy statement to run a dissident slate of directors at Goldfield Corp. (AMEX: GV). eRaider is unhappy with the level of oversight offered by the existing Goldfield board so it has nominated a short slate of Sam Rebotsky (a 25-year shareholder and CPA), Aaron Brown (eRaider CEO and finance professor) and Deborah Pastor (eRaider portfolio manager and MBA). Other participants in the solicitation are Martin Stoller (communications professor), Paul Zarowin (accounting professor), David Groelinger (CFO of Riddel Sports) and Scott Lodin (Chief Counsel of Andrx).

eRaider has organized an Internet alliance of individual Goldfield shareholders (there are no known institutional holders other than eRaider) with 875 names. If self-reports are accurate and everyone in this group votes for the slate, eRaider expects to elect two or three directors on June 19th under cumulative voting. Should eRaider succeed in getting even one nominee on the board it will prove that Internet energy can wage a successful proxy contest without the expenses of mail or telephone solicitation.

The larger message will be that activist institutions can hope to gain 25 percent to 40 percent of the individual shareholder vote in contested elections on business issues without significant expenditure. For many companies this would be the difference that will allow a jump from passing generic governance resolutions to electing directors, requiring or vetoing merger proposals and enforcing binding shareholder will on major strategic issues. I’m looking forward to the news. (6/08/01)

Union-Based Shareholder Activism

The Council of Institutional Investors (CII) reports that CII member union funds file 58% of all proxy resolutions in 1999. Georgeson, a proxy solicitation firm, said they filed 43% of those dealing with corporate governance in 1998. Nneka Fletcher discusses the trend in ISSue Alert, 3/2001. She points to labor based web sites such as and the AFL-CIO’s Executive Paywatch. Critics argue that shareholder activism is being used simply as another tactic to further collective bargaining. Some inside labor are concerned that maximizing shareholder value may take away from traditional concerns.

Fletcher, however, concludes that union shareholder activists bridge the gap between shareholders and stakeholders. If shareholder value is maximized using excellent corporate governance practices, the company will perform better with increased profits also trickling down to employees in the form of pay raises. The way I see it is that unionized employees typically receive higher compensation. Shareholder activism is one more tool in a long tradition of working smarter and ensuring that unionized workplaces are more efficient.

“CalPERS Effect” Updated

Stephen Nesbitt, senior managing director and a principle of Wilshire Associates, updated his assessment of the impact of CalPERS’ good governance campaign. CalPERS has been a leading activist in the US corporate governance movement since its beginnings. Indeed, CalPERS has been the prime instigator of many aspects, including annual focus lists for poor performance and governance, which CalPERS awards each proxy season. Nesbitt, who’s firm has provided CalPERS with advice concerning firms to be targeted, assessed the performance of the 95 firms awarded this dubious distinction, beginning in 1987 through November 2000.

Key finding: “Despite underperforming the S&P 500 Index by 14 percentage points for the five years up to CalPERS’ shareholder activism, the 95 companies that were targeted by the system from 1987 to 2000 have outperformed the S&P 500 Index by 14 percentage points over the subsequent five-year period.” (The “CalPERS Effect” on targeted company share prices, Directorship, 5/01)

The obvious lesson is that poorly managed corporate assets present a substantial opportunity to obtain a premium on investments. However, the implication is that such turnarounds are not merely regression to the mean but are the result of intervention by CalPERS. Resources spent on identifying and rectifying poor corporate governance can be profitable. Both Nesbitt and CalPERS have been asserting such for years.

I assume that Nesbitt has earned money over the years by providing his advice to CalPERS. What strikes me as absurd, however, is that, as far as I know, CalPERS has still never made a move to increase its holdings in target firms prior to announcing their intention to seek changes. Although they have benefited financially from their annual Focus List because their existing holdings include most top US firms, they continue to forgo additional revenues that any private investor, such as Warren Buffett, would not fail to mine by increasing his stake prior to announcing his efforts to add value at the firm through corporate governance activism.

Perhaps this is because almost half the Board members are elected by members of the System who do not benefit directly from increased earnings? Most of the System’s gains have gone back to employers in the form of lowered contribution rates and members of the System have seen little in the way of increased benefits. If they shared more directly in the gains, wouldn’t the “CalPERS Effect” be mined more deeply?

Back to the top

Continue Reading ·

Archives: May 2001

Colorado Covered

Colorado Public Employees’ Retirement Association has embraced covered call selling as a way of “having your cake and eating it too,” according to Norman G. Benedict, deputy executive director for investments at the $31 billion fund. The hedging strategy designed to limit downside risk allows them to hold 80% in equities with the sam risk of a normal equity allocation of 65%. The obvious drawback to covered calls is the limit they also impose on upside gains but in today’s volatile market, that’s a risk more might be willing to take. Ohio and Wisconsin pension funds are apparently looking into the possibilities. (Pensions & Investments, “Colorado’s use of call strategy covers its 80% equities allocation,” 5/14/01)

Great Opportunity!

The Center for Working Capital is a nonprofit corporation based in Washington, DC, with a current staff of five. The Center is looking for an executive director to oversee all activities of the organization. This person will report to the Board of Directors.

The Center for Working Capital focuses on five program areas:

1. Pension fund trustee education and training programs;
2. Developing the capacity of trustees to be active fiduciaries;
3. Trustee information sharing through a quarterly newsletter and a website;
4. Developing the capacity of trustees to be effective participants in the global capital markets; and
5. Supporting capital stewardship initiatives by assisting trustees with such issues as corporate governance.

Responsibilities of the executive director will include:

  • Providing a vision for working capital
  • Managing staff and overseeing work product
  • Coordinating trustee training and education activities through seminars, conferences and information programs
  • Coordinating a team of consultants, investment managers, financial advisors and legal service providers to advise the Center on approaches to capital stewardship
  • Developing and implementing a fundraising plan; and
  • Developing effective forms of accountability for service providers.

The ideal candidate should have:

  • A broad and deep knowledge about issues related to pensions and capital investment;
  • Previous experience developing curricula for and implementing adult education programs;
  • A proven record on managing non-profit organizations, including successful fundraising, building staff, working with a board of directors, and coordinating communications initiatives;
  • Successful experience collaborating with unions, government and companies on pension and benefits issues and with pension and benefits fund trustees and service providers;
  • An understanding of the role of worker partnerships, collective bargaining and organized labor in creating investment value for beneficiaries; and
  • An advanced degree with minimum of five years experience managing an agency.


The compensation for the Executive Director will include a salary comparable to executive directors of not-for-profits of a similar size and an excellent benefits package.

To apply
Please send your resume to Bill Patterson, Director of the Office of Investment, AFL-CIO, 815 16th Street, NW, Washington, DC 20006 or fax it to (202) 508-6992, or e-mail it to[email protected]. The closing date for applications is June 11, 2001. Once you get the job, get in touch with me at [email protected] so that we can collaborate.

News from the Corporate Monitoring Project

Mark Latham and company have put out Newsletter #11. Support for the “Shareowners’ Alternative Voting Information (SAVI)” proposal to let shareowners choose an independent proxy advisor was mixed this year. Mr. Latham represented me at the Equus II shareholder’s meeting and we won approximately 17.8% of the vote. As far as I know, this was without major institutional backing. However, at Gillette Latham’s proposal only picked up 2.4% of the vote, including the 1,842,391 cast by CalPERS. Both firms lost about 40-45% of their value during the last two years. You’d think both groups of shareholders would be equally receptive to innovative ideas for recovery.

I was disappointed to learn that Latham’s proposal to let shareowners vote to choose the auditor, instead of just rubber-stamping the Board’s choice, was killed by the SEC as an ordinary business decision. Clearly, the importance of auditor independence was raised by no less than the chair of the SEC itself. According to Arthur Levitt, shareholders could be compromised if audit partners are concerned about losing lucrative consulting business.

Maybe next year. In the meantime, I highly recommend subscribing to Mr. Latham’s informative newsletter and keeping up on the Project’s latest activities.

Back to the top

Emerging Trends

Half of Americans log onto the Internet on a daily basis. Increasingly, we want a say in how “our” corporations are governed. Just as sharing information with employees led to a managerial revolution that generated wealth, informed investors are also adding value.

As in any revolution, there are casualties. This year, eRaider related Allied Owners Action Fund folded and iBullhorn was still-born. However, more funds are posting their votes and the AFL-CIO is grading money mangers. Sites like allow readers to research issues and to communicate directly with corporate investor relations officers. The Wall Street Journal’s Portfolio feature is sure to follow suit. Rational shareholder apathy is fading because activism via the Internet is inexpensive and easy.

Corporate Board Member, a journal for corporate directors and boards, has formed an Academic Council to participate in identifying emerging trends in corporate governance and issues impacting today’s corporate boardrooms. The council – made up of the leading academic authorities on board governance representing the country’s most prestigious universities and graduate programs – will convene for its first set of roundtable discussions in Boston, Massachusetts on May 30.

Members of the Academic Council include William T. Allen, professor of law and director for the Center for Law and Business, Stern School of Business, New York University; Duke K. Bristow, financial economist, Anderson Graduate School of Management, University of California, Los Angeles; B. Espen Eckbo, director of the Center for Corporate Governance, Tuck School of Business, Dartmouth College; Charles M. Elson, chair of corporate governance, Center for Corporate Governance, University of Delaware; Steven N. Kaplan, professor of entrepreneurship and finance, University of Chicago Graduate School of Business; Paul D. Lapides, director of the Corporate Governance Center, Coles College of Business, Kennesaw State University; and Jay W. Lorsch, professor of human relations and former senior associate dean and chair of the Executive Education Program, Harvard Business School.

Peter D. Crist, of Korn/Ferry International, and Richard M. Steinberg, of PricewaterhouseCoopers, the largest global professional services organization, will co-chair the Academic Council and facilitate the two upcoming roundtables.

“Our goal for the council is to identify emerging trends in America’s boardrooms through council roundtables, interviews, and selected research,” says Corporate Board Member COO TK Kerstetter. “Our belief is that directors, officers, educators, and students can benefit as we create a more focused approach to this cottage industry commonly referred to as governance.”

The dialogue of the council’s May roundtable discussions will be highlighted in a Corporate Board Member supplement titled “Emerging Trends in Corporate Governance.” CEOs, chairmen, and presidents of every publicly traded company on the Nasdaq, AMEX, and NYSE will receive the supplement. In addition, the proceedings of the roundtables will be published in their entirety on Web Resource Center.

Willamette Employees Silenced

On 5/7 the Wall Street Journal Interactive Edition reported that employees of Willamette Industries Inc. have shut down a Web site that opposed an ongoing hostile bid for Willamette being made by Weyerhauser Co. According to the report, the US Securities and Exchange Commission informed a representative of the employee group that the group would have to file a Form 14D-9 with the Commission if it wished to keep the site up. The group reportedly decided to close the Web site when it learned that legal fees for such a filing could be “as high as $50,000.” Volume 2, Issue 33 of CyberSecuritiesLaw Tribune (Week of May 21, 2001)

Proxy Monitor Supports Dissident Slate at Willamette Industries

New York-based Proxy Monitor, a leading proxy voting advisor to institutional investors, announced today that it is recommending clients vote for the dissident slate of director nominees brought forth by Weyerhaeuser Co. at Willamette Industries, Inc. (NYSE: WLL) annual meeting. The slate of directors is scheduled to come to a vote at the meeting on June 7, 2001.

Weyerhaeuser has made numerous attempts to negotiate a merger and in doing so has made a couple of tender offers including the most recent on May 10, 2001, offering a price of $50 per share. The Willamette board rejected the $5.5 billion offer as a gross under-valuation of the company.

Proxy Monitor said in its recommendation to clients:

“One has to wonder whether the Willamette board would accept ANY offer from Weyerhaeuser, or any other suitor for that matter. Management has consistently refused to negotiate with Weyerhaeuser, has not given any indication of a price it might accept, and has not looked for other buyers…While there is certain to be discord in the boardroom if Weyerhaeuser’s nominees are successful, Willamette shareholders must ask themselves if they wish the present board to continue to represent their interests. We think not.”

Will the West Face a Boardroom “Trade Deficit?”

Booming Western economies take great pride in the powerful success their economic structure provides and even feel a bit smug, sure that they have nothing to fear from those young economies of Asia. Such hubris nearly led to trade disaster a few decades ago — but a replay could now be underway in a vital new arena — good corporate governance.

Ralph D. Ward, editor of the Boardroom INSIDER online newsletter, warns in the May issue that good governance standards (disclosure; shareholder laws; strong, independent boards) “probably offer nations and companies a stock price premium.” Western nations, especially the U.S. and the U.K, have long been the world leaders in offering these protections to global investors, but today, Ward notes, “Asian countries are making strong moves to build their own world-class corporate governance.”

For example, Hong Kong in March published a model governance code with excellent financial disclosure and board oversight. In January, new rules from Malaysia’s Kuala Lumpur stock exchange demanded continuing education for corporate directors, “something even the West hasn’t caught up with yet.” Surprisingly soon, Ward warns, “Western economies may find that the good governance rules that now swing world investment their way have become a global commodity.”

Exercise in Creative Writing

Phil Goldstein, of Opportunity Partners, continues his creative use of SEC filings in his battle with Lincoln National Convertible Securities Fund, Inc. His latest, DFAN14A “THIS IS THE LETTER LNV MANAGEMENT WILL NEVER SEND YOU!! (so I wrote it for them),” is so creative that we decided to republish the entire letter here. Further information can be obtained from
Phillip Goldstein
60 Heritage Drive
Pleasantville, NY 10570
(914) 747-5262 // Fax (914) 747-5258

Dear Shareholder:

I am writing to you on behalf of my fellow directors. We recently advised you that the Annual Meeting of Stockholders of Lincoln National Convertible Securities Fund (the “Fund”) has been postponed from May 18th to June 22nd to give shareholders “adequate time to consider important issues and developments in connection with this year’s proxy contest.” Because you may be wondering what the heck we were referring to, we have decided to come clean. Here’s what really happened.

When we originally told you that the incumbent directors were “duly elected” at last year’s meeting of stockholders by a “valid vote of the Fund’s shareholders” that was not really true. After a trial, a federal judge determined that (1) we breached our fiduciary duty to shareholders by conducting an illegal election last year (2) we violated the anti-fraud provision of the SEC’s proxy rules by failing to disclose how we staggered our own terms so that shareholders could not later de-stagger them. As a result, the judge ordered us to conduct another election for the two seats that were filled last year. The court’s opinion can be found at the following address:

Our lawyers have been trying to put a more favorable spin on this “development” but it is hard to find a euphemism for “violation of fiduciary duty.” One thing we have done is to fire the law firm that lost the case for us and hire another one to appeal the judge’s decision. If we had to spend our own hard-earned money, we would probably think long and hard about appealing. Being able to use shareholder money makes the decision much easier. So, despite what the judge said, please continue to trust us. By the way, we appreciate your financial support of our efforts to clear our tarnished names.

As long as we are `fessing up, here are some other things you should know. We hope our belated candor will induce you to vote for our nominees instead of Mr. Goldstein’s.

  • We still don’t know how much the litigation to prevent Mr. Goldstein from electing directors has cost and we don’t know what the final tab will be. OK, it could be millions of dollars. We just don’t know. Thankfully, the costs are being paid by shareholders and not coming out of our own pockets.
  • Mr. Goldstein has complained that we are targeting $190,000 of shareholder money for our solicitation expenses without obtaining SEC approval. We do not think we need SEC approval as long as we say our re-election is in your best interests. It is in your best interests that we get re-elected, isn’t it?
  • We were totally unprepared for the court’s decision. If we had promptly notified shareholders that we had breached our fiduciary duty and the annual meeting had taken place as scheduled on May 18th we might have lost the election. So, we passed a legal bylaw authorizing us (but not Goldstein) to postpone the meeting in order to give us time to plan our strategy after a crushing legal defeat. We apologize to any shareholders that showed up on May 18th for themeeting but it is not our fault. We just never imagined that we could lose in court.
  • We admit that we owe the investment advisor our jobs. We all serve on at least one other fund that it manages and we hold the directors’ meetings for both funds simultaneously. Also, we delegate much of the work to the advisor’s well-trained lawyers. So, how independent can we be? However, we do get a very nice paycheck for very little work. It is a pretty sweet deal. Please let us keep it.
  • The advisor benefits from keeping LNV a closed-end fund. Even though shareholder wealth would increase from open-ending, it might lead to lower management fees for the advisor. Goldstein is right about that. Hey, if you were in our shoes, would you oppose an advisor who can get you on more boards?
  • We have accused Mr. Goldstein’s nominees of being “hand-picked.” We now admit that it is a silly charge. How should a nominee be chosen? By a lottery?
  • We have also accused Mr. Goldstein of having a personal agenda, i.e., he wants to make money from his investment. We admit we also have an agenda. As a high level employee of the investment advisor, I want the investment advisor’s fees to be as high as possible. Open-ending the Fund would be contrary to that objective. There, I said it! I feel so much better.

Finally, if you have any questions, we have good news. In accordance with our new open-door policy, you no longer have to talk to our proxy solicitors. We are now willing to speak to any shareholder. Please call the Fund’s secretary, David Connor, at (215) 255-8864 and ask to speak directly to me. (I still need someone to filter out crank calls.) In the meantime, I will try to find out what the Fund’s legal expenses are. Thank you for your continued support. Who cares about fiduciary duty anyway?
Very truly yours,

David K. Downes (aka Phil Goldstein)
President and Director of 33 Funds
Managed by the Investment Advisor

Back to the top

Korn/Ferry Launches Board Services Practice in China

Korn/Ferry International (NYSE:KFY), the world’s leading recruitment firm, announced the launch of its Board Services Practice in “Greater China.” The new practice will focus on providing independent board of director searches and corporate governance counsel to clients in China under the leadership of Korn/Ferry Managing Director, Robin Sears.

Sears began his career with the firm in Tokyo in 1994 and has since worked at the CEO- and board-level for global clients in the telecommunications, private banking, insurance and professional services areas, and additionally led Korn/Ferry’s Advanced Technology Practice in Asia. Sears will continue to serve those clients as Managing Director, Asia/Pacific Client Services, based in Hong Kong.

“With China’s imminent entry into the WTO, and the increasing role of international institutional investors in Asian companies, requests for assistance with independent director searches and corporate governance counsel are increasing rapidly. We have a large global network of experienced director candidates and 28 years of corporate governance expertise that we would like to share with our Asian client base,” Sears said. (Business Wire, 5/21)

Delaware Supreme Court Rules in Favor of Preferred Shareholder Rights

Andrew Shapiro, President of San Francisco-based Lawndale Capital Management (phone 415-288-2330), announced a long-sought legal victory in Delaware Supreme Court against Agrium, Inc. (AGU) for former Nu-West Industries Preferred Shareholders. The Delaware Supreme Court affirmed an October 2000 Chancery Court ruling that dividends on Nu-West’s Preferred Stock accrued daily to the date the Preferred Stock was redeemed and against Agrium’s position that dividends accrued annually. Mr. Shapiro initiated this action in 1996 to enforce the Preferred Shareholders’ rights when Agrium management and directors attempted to deny shareholders what was rightfully owed.

As a result of the decision (Smith v. Nu-West et. al. C.A. NO. 15442), Agrium must pay the Preferred Shareholders an additional $10.43 per Preferred Share redeemed plus 10% compounded interest since the 1996 redemption date. The judgement combined with the interest is expected to cost Agrium, a Canadian fertilizer company, approximately US$1.6 million, far more than the original $1 million claim.

Mr. Shapiro, a corporate governance and shareholder rights advocate, commented, “The decision certainly sends a clear message that management and directors owe a fiduciary duty to both the preferred and common shareholders alike. The award of compounded interest should also reinforce that delay doesn’t pay.”

We’ve Moved

The offices of Corporate Governance have recently relocated to 9295 Yorkship Court, Elk Grove, CA 95758-7413. E-mail address for the editor remains [email protected]. We are sorry for recent disruptions and sparse postings. We hope to be fully up and running within a couple of weeks.

Minority Shareholder Treatment Improves

Mark Mobius, of Templeton Emerging Markets Fund finds that Asian companies are starting to improve their corporate governance and treatment of minority shareholders. Improvements are driven by a concern that institutions may invest elsewhere if shareholder rights are not protected. Two years ago, Mobius campaigned in Hong Kong against companies placing new shares without first offering them to all existing investors, to enable them to avoid their holdings being diluted. (Minority shareholders’ lot improving)

Limits to Activism

Animal rights activists, upset with animal testing at Huntingdon Life Sciences Group PLC have taken their campaign to brokerage firms who deal in their stock. Protesters marched into the offices of securities firms, disrupting business, and then demonstrated at the homes of executives to intimidate them to stop trading their stock. Their tactics have met with success. Schwab Europe announced it will bar its clients from dealing in Huntington securities. MSF, the union for skilled and professional people, gave its whole- hearted support to the Association of the British Pharmaceutical Industry (ABPI) in its threat to boycott financial institutions who give in to animal rights extremists. (see PR Newswire, 5/2) Even social investors Matthew Kiernan, of Innovest Strategic Value Investors, and Peter Kinder of KLD & Co., have criticized their tactics of personal intimidation.

The April 30th edition of Pensions and Investments carries an editorial, “Brokers, not soldiers,” which is critical of the intimidating tactics used at Huntingdon and sees parallels in those used by Social Choice for Social Change: Campaign for a new TIAA-CREF. We embrace their goal of getting TIAA-CREF to invest 5 to 10 percent of social choice account assets ($200-400 million) in companies that are models of social and environmental responsibility. Social Choice has not, as far as I know, disrupted business as brokerage firms, but they have taken their protest to the high-rise residence of John H. Biggs, its CEO. The borders of civility are not immediately apparent but we agree with P&I that brokers should not have to be soldiers and that they should demand protection from the police, rather than giving in to intimidation.

Champion of Civil Rights and African Affairs, Leon H. Sullivan Dies at Age 78

Reverend Leon H. Sullivan, convener of the 6th African-African American Summit and world leader on Africa and related issues has succumbed to leukemia, announced his daughter Hope Sullivan Rose.

“Reverend passed away at 8:30 p.m. (PST), yesterday, at Scottsdale Healthcare Osborn Hospital; he was surrounded by his family and friends and was at peace. We ask that everyone respect our family’s wishes and give us time to grieve privately. We have shared our father with the world; allow us one moment to remember him amongst ourselves.”

Reverend Sullivan is survived by his wife, the former Grace Banks, three children: Julie, Howard and Hope, seven grandchildren and admirers around the world. The family asks that donations be made to:

The International Foundation for Education and Self Help (IFESH)
5040 E. Shea Blvd. Ste. 260
Phoenix, AZ 85254

Global Corporate Governance Forum Seeks Program Manager

The Global Corporate Governance Forum, founded by the World Bank and the Organization for Economic Co-operation and Development (OECD) promotes global, regional and local initiatives aimed at improving the institutional framework and practices of corporate governance of middle and low income countries. The Forum’s main activities include:

  1. awareness raising and best practice dissemination;
  2. capacity building and technical assistance; and
  3. sponsoring research and analysis on the costs and benefits of corporate governance reforms in developing and transition markets.

The Forum is governed by a Steering Committee and operated day-to-day by a Secretariat. The Steering Committee defines and directs the strategy of the Forum and oversees the Secretariat. The Secretariat is responsible for carrying out the work program of the Forum and is led by a Program Manager who heads a small team of professional and administrative staff. Applications and expressions of interest should be forwarded by May 11th. For additional information, see the Forum’s announcement.

Will corporations trump nations?

William Greider, a columnist for The Nation, sees corporate governance of a different form in FTAA negotiations designed to expand NAFTA’s rules to cover the entire western hemisphere. Chapter 11 of NAFTA allows corporations to demand compensation if the profit-making potential of their ventures has been injured by government decisions.

Greider cites the familiar case of Methanex, which filed a $970 million claim against the United States after California banned gasoline additive, MTBE, after the EPA reported potential cancer risks and at least 10,000 groundwater sites were found polluted by the substance. As many as 15 cases have been launched to date, according to Greider but no one can be sure of the number, since there’s no requirement to inform the public. “The contesting parties choose the judges who will arbitrate, choose which issues and legal principles are to apply and also decide whether the public has any access to the proceedings.”

Unlike other trade agreements, NAFTA allows corporations to litigate on their own, without having to ask national governments to act on their behalf in global forums. This isn’t the corporate governance advocated here. While corporations should be accountable to investors, they shouldn’t trump the rights of nations to protect the environment, the rights of labor and their own cultural values.

Back to the top

Continue Reading ·

Archives: April 2001

Enhancing Director Performance

Strong boards provide competitive advantage and add value. Six keys to top-performance based on research findings by P. Michael Masher and Talcum C. Munro are as follows:

  • Peer recognition. Ego and the basic need for recognition is a powerful motivator.
  • Peer association. The mental stimulation produced by interaction with bright experience individuals provides further motivation to work hard and perform well.
  • Opportunities to “make a difference.” If the expertise of individual board members is recognized and their talents sought out, they will work harder to accomplish agreed upon goals.
  • Communicate effectively. Ongoing opportunities for communication between meetings and agendas received well in advance, accompanied by well-focused material, facilitate good performance.
  • Celebrate victories. Selecting some directors with crisis management experience is critical to sucess in many difficult situations and may avoid the de-motivating effects of constant crisis management.
  • Choose board chairperson carefully. The chairperson is primarily responsible for harnessing the energy and talent of individual members. Setting the tone and establishing the culture are critical skills.

For more information, see the March/April edition ofBoardroom. That issue also contains a tribute to J. Keith Louden, author of The Corporate Director, a corporate governance classic from 1966, and The Director in 1982. Louden was an early advicate that the CEO should be the only inside director and that the chairman should always be an independent director, realizing that nobody could monitor performance objectively if they also held executive management responsibility.

Domini Issues Challenge

Amy Domini, the founder and a managing principal of Domini Social Investments, issued a challenge along with disclosure of their proxy voting guidelines and actual proxy votes. “In our view, mutual funds have an obligation to their shareholders to disclose how they intend to vote and how they actually do vote on important issues of corporate governance, including social and environmental policies. Proxy voting transparency should not simply be considered an aspect of socially responsible investing – it should be considered a fundamental indicator of responsible mutual fund governance.” “We strongly encourage our colleagues in the mutual fund industry to follow our lead by making their proxy voting record public so that investors can properly assess the full implications of their investment .”

Domini disputed the view, taken by some of the nation’s largest mutual funds, that investors “are not interested” in how their funds vote. In addition to publicly disclosing its voting guidelines and how it voted its shares, Domini also files shareholder resolutions each year on important social and environmental issues. This year, Domini filed sixteen resolutions on a range of issues, including diversity, environmental reporting and sweatshops.

CEO Turnover Slows

Boards may be more tolerant of poor results when the CEO can blame external factors. During the first quarter of 2001, 9 of the nation’s largest 200 public companies replaced CEOs who retired, quit or were fired, according to Pearl Meyer & Partners. By contrast, during the first quarter of 2000, 14 of the nation’s 200 biggest public corporations replaced their chiefs.Total search activity was off about 17% in the first quarter from a year earlier. (see MSNBC, 4/24)

Bragging Rights

Comments by Royal Bank of Scotland Deputy Chairman Sir George Mathewson have sparked fury over executive remuneration policy. Mathewson was quoted as saying that his 750,000 share of the GBP 2.5 million bonus awarded to himself and three other executives “wouldn’t have given you bragging power in a Soho wine bar.” He defended the bank’s decision not to seek shareholder approval for the plan by saying, “Frankly, it was not worthwhile talking to shareholders about.” The National Association of Pension Funds (NAPF) disagrees. Angered by the comments, NAPF is recommending blocking the re-election of two non-executive directors serving on the company’s remuneration committee. “It is pretty crass to talk about pounds 750,000 not being enough to talk about in a bar when it is a sum most can only dream of,” said one Royal Bank shareholder. (The Corporate Library, 4/3)

Governance Strong Predictor Where Laws Are Weak

Bernard Black, of Stanford Law School, examined the relationship between corporate governance behavior and market value for a sample of 21 Russian firms. The correlation between value ratios and governance ranking is striking and statistically strong: Pearson r = 0.90 (t = 8.97). A worst (51 ranking) to best (7 ranking) governance improvement predicts a 700-fold increase in firm value.”The results suggest that corporate governance behavior has a powerful effect on market value in a country where legal and cultural constraints on corporate behavior are weak.” see The Corporate Governance Behavior and Market Value of Russian Firms, forthcoming in Emerging Markets Review, Vol. 2, 2001.

Back to the topSocially Responsible Investing Gains Institutional Ground

Interest in SRI mutual funds has grown in recent years. A 1999 Yankelovich Partners study based on interviews with 800 men and woman showed that 35% worked for companies that offered a SRI 401(k) or similar option, up from 16% in 1996; seven in 10 said they used those options, up from 56% in 1996. Of those that did not have access to a SRI option, 70% said they would invest in one if it were available, the study said.

Last year, California State Treasurer Philip Angelides encouraged two of the state’s largest pension funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest tobacco and stocks. The funds have combined assets of about $265 billion. CalPERS also approved a plan to follow tough human rights, labor, and environmental standards when investing overseas. (see Dow Jones Newswires — April 20, 2001, Socially Responsible Invest Gaining Institutional Ground)

Class Action Settlements

Bank One Corp. has agreed to pay $45 million to settle a class action lawsuit that alleged the bank misled shareholders about the financial standing of its credit card operation. Shares of Chicago-based Bank One started to slide in August 1999, shortly after the company disclosed pricing and customer service woes at the unit First USA – problems that led to earnings shortfalls at Bank One. U.S.D.C. Judge Milton Shadur in Chicago is expected to rule on the settlement June 1. Plaintiffs’ lawyers plan to request payment up to $2.75 million, plus interest and reimbursement of expenses, all to be paid from the $45 million settlement fund.

MicroStrategy Inc.’s year long legal battle with shareholders accusing it of fraud officially ended recently when a federal judge approved a class-action settlement that awards investors an I.O.U. due in five years, but no cash upfront. The settlement approved by U.S.D.C. Judge T. S. Ellis III in Alexandria may deliver only pennies on the dollar for investors who bought MicroStrategy stock before the Vienna software firm reported in March 2000 that it overstated years of revenue and earnings and its share price plummeted.

Twinlab Corp. says that it has reached an agreement in principle to settle a series of shareholder securities class action lawsuits filed in the U.S.D.C. E.D. New York in late 1998 and early 1999. Under the agreement, which is subject to approval by the court, the company will pay $26 million, all of which is covered by existing insurance.

A federal judge in Chicago has ordered final approval of a $4.02 million agreement that settles five securities class actions filed against Nanophase Technologies Corp.

More details on these and other class actions can be found at the Stanford Securities Class Action Clearinghouse which is launching a new and improved database Their Website contains several new features designed in response to user requests. In addition to a new home page, they have dynamically updated tables that sort alphabetically, by name of corporate defendant, jurisdiction, and date of filing. They have also improved search features, and will soon be providing more extensive news services and bibliographies of securities related research.

Back to the topBelgian Government to Propose Reforms

The Belgian government will propose corporate governance reforms to meet concerns of investors in stock market-listed companies, L’Echo newspaper reported, citing finance minister Didier Reynders. The law will address conflicts of interest within groups, directors’ responsibilities, the independence of auditors, and disclosure of important stakes in companies. (AFX News, 4/20)

Canadian Social Investment Conference, June 3 – 5 in Montreal

For the first time in five years, financial advisors, asset managers and investors will gather to explore trends and developments in Canadian social investment. Confirmed speakers include:

Peter Kinder of Kinder, Lydenberg and Domini. Peter will discuss SRI trends and developments in the US. He will be joined by Michael Jantzi of Michael Janzti Research Associates (sponsor of the session); Stephen Hine of London-based Ethical Investment Research Service (EIRIS) and Dave Mowat, CEO of VanCity Credit Union in Vancouver.

Steve Viederman, formerly of the Jessie Smith Noyes Foundation, who is speaking on foundations and SRI. Steve will be joined by Tim Draimin, Executive Director of the Tides Canada Foundation and will talk about how foundations are aligning their investment policies with their granting missions.

Joe Henzlik of SRI Services, a division of Fairvest Proxy Monitor. Joe will be joined by Bill Mackenzie of Fairvest Proxy Monitor, Ginette Depelteau of Caisse de depot et placement du Quebec, Peter Chapman of the Shareholder Association for Research and Education (SHARE), Francois Rebello of Groupe Investissement Responsible (GIR) and Pat Doherty of New York City Pension Funds. This session will be devoted to the growing area of shareholder advocacy and institutional investors.

Jacky Prudhomme of Paris-based Arese, who will speak about public policy and SRI. Jacky will discuss new regulatory initiatives in France and the European Community on pension disclosure and other SRI-related policy issues.

To receive early registration discounts, register by May 4. Conference fees are CND $395, which includes a 12-month individual membership with the sponsor, Social Investment Organization.

Environmental Groups Endorse Shareholder Resolutions reports that a coalition of five environmental groups led by Michelle Chan-Fishel, with Friends of the Earth, recently announced their support of over 75 pro-environment shareholder resolutions.” The resolutions are divided into six major categories: environmental codes, climate change and energy, threatened people and places, genetically engineered food, toxics and waste, and governance and environmental disclosure.

SEC Examining Vote Disclosure For Mutual Funds

The Washington Post reported that in response to a written request from the AFL-CIO in December, the SEC has started to examine the proxy disclosure issue for mutual funds, according to Douglas J. Scheidt, chief counsel of the SEC’s division of investment management. Domini Social Equity Fund ($1.8 billion) is one fund cited in the article that reports their votes. The $7 billion Calvert Group of funds, based in Bethesda, recently made its voting record available on the Internet (see PR Newswire). The $1.3 billion PAX World Funds, based in Portsmouth, N.H., have been doing so for a year. According to the reporter, a Fidelity spokesmen says their funds’ investors just don’t care how the fund votes. Vanguard would consider disclosing proxy votes if its investors indicated a “significant” interest.

Ned Regan, former head of New York’s state pension fund, and now a director of Oppenheimer Funds, which manages $120 billion is quoted as saying that “I very strongly believe that mutual funds ought to be like pension funds and vote with shareholders in mind” but “nobody wants it.” “If we ever had shareholders asking, would we put it on the Web? I don’t know.” “I’m in favor of it. I’m in favor of lots of things. But it’s not at the top of the list of the items that investors in Oppenheimer want. In fact, it’s not even on the list.” (Prodding for Disclosure of Funds’ Proxy Votes, 4/7)

AFL-CIO Steps Up Campaign to Rein in Runaway CEO Pay

Average US CEO pay in the top 200 firms rose to $10.89 million in 2000, according to Pearl Meyers. The 28% increase in the use of stock options since 1999 results in their making up about 60% of the entire pay package. US Vice President Cheney for example, gained $22 million in 2000 by exercising stock options at Halliburton. Last year’s top pay, $293 million, went to John Reed, who retired at Citigroup.

United for a Fair Economy’s report entitled “The Bigger They Come, The Harder They Fall,” they concluded that a huge compensation package was no guarantee for rising stock prices, in fact the report’s author Scott Klinger says, “When Business Week releases their list of the ten companies with the highest paid CEOs for 2000, that would be a good list of stocks to sell short.” Klinger examined stock price performance of companies headed by the top ten highest paid CEOs for each of the seven years between 1993 and 1999. The stock performance of each company was compared to both the S&P 500 and the company’s peer group over one-year and three-year time periods. In six out of the seven one-year time periods following a CEO’s appearance on the top ten list, at least half the companies under-performed the S&P 500. In 40 percent of the cases, the companies trailed the S&P 500 by more than 15 percentage points.

The AFL-CIO’s Executive Paywatch site lists several ways the average person can use to join in the fight against excess exec pay.

Shareholders of Sprint, for example, defeated proposals to curb executive severance pay and discourage repricing of stock options, but the measures garnered more than a third of the shares cast at the company’s annual meeting. A resolution to limit severance agreements with senior executives received nearly 36%, while a measure seeking to limit option repricings got more than 42%. (The Kansas City Star, 04/17/01)

Business Ethics Puts Procter and Gamble on Top

Business Ethics magazine published its annual list of the top 100 most socially responsible companies. The top ten were listed as: Proctor and Gamble, Hewlett-Packard, Fannie Mae, Motorola, IBM Corp, Sun Microsystems, Herman Miller, Polaroid, St. Paul Cos. and Freddie Mac. Companies were rated on employee relations, environmental standards, community relations, diversity and customer relations. Read Business Ethic’s “100 Best Corporate Citizens” online andsubscribe to a year of informative articles for a mere $25.

Options Exchanges

BusinessWeek Online says “these new practices are just as bad for outside shareholders as the simple repricing schemes they replace. In some cases, they’re even worse.” “Such gimmicks don’t get around many of the problems investors have with repricings. Providing employees with the chance to make a huge equity gain through new, lower-priced options at a time when shareholders have suffered significant losses from stock drops simply isn’t fair play.” They recommend old fashioned cash that doesn’t dilute shares. ” It’s time for a reminder that options were intended to reward superior performance, not simply showing up.” (When Stocks Suffer, So Should Options, 4/11)

Back to the topHong Kong Watchdog Joins Oversight Committees

David Webb, longtime critic and corporate governance activist, joins two stock market oversight committees. Webb’s hard-hitting investment news service at has long been an excellent source of news in Hong Kong and East Asia. See A New Role for a Hong Kong Gadfly, International Herald Tribune, 4/7. Webb is among seven new members appointed to the Takeovers and Mergers Panel and the Takeovers Appeal Committee. He was also recently appointed to the Shareholders’ Subcommittee of the Standing Committee on Company Law Reform. Among other reforms, Webb has been promoting a proposal to establish HAMS – the Hong Kong Association of Minority Shareholders, as a levy-funded body to catalyse shareholder involvement in the corporate governance process.

Laurentian Bank Claims Lead in Corporate Governance

Jon K. Grant, the new Chairman of the Board of Laurentian Bank of Canada, opened the Bank’s annual meeting of shareholders, and discussed several Bank policies that make Laurentian a leader in corporate governance. (listen to speech)

  • separation of the duties of the Chairman of the Board and the Chief Executive Officer since 1984
  • representation of women on the Board at 27% instead of the Canadian averate of 12%
  • cumulative voting for electing its directors since 1993
  • reduction in the number of directors from 18 to 15
  • open and frank character of the Board’s discussions

Shanghai Stock Exchange (SSE) Guidelines for Corporate Governance

Draft guidelines require at least two independent board members in each listed company, who will make up at least 20 percent of the total number of board members. The principles also clarify the rights and duties of shareholders, directors and management, maintain the independence of the board, establish and guide the carrying out of effective disclosure standards, and guarantee equal treatment of all shareholders. (Asiaport Daily News, 4/11)

Proxy Contest

An article in the April 9th issue of Barron’s points out these words take on new meaning this season with “millions of investors in thousands of companies are being offered the chance to enter a $50,000 sweepstakes when they receive their proxy mailings.” Automatic Data Processing, which handles mailings for brokerage accounts, had the brainchild but asserts the prize “isn’t given for anyone who voted in a particular manner.” However, the same might have been said about contests held by Publishers Clearinghouse. Unfortunately, many people will think there is a connection, especially if it, for example, comes with a letter from Caterpillar recommending a vote for its slate of directors and against the three shareholder proposals. It looks like a bad idea from here.

Twilight of the Gods?

That’s the title of a guest editorial in the same April 9th edition of Barron’s by Ralph D. Ward, editor of the online newsletterThe Boardroom Insider. Ward points to the increasing churn rate for CEOs. “Lucent, Gillette, Mattel, Compaq, Maytag, and Campbell Soup are some of the major companies whose boards have pushed out chief executives over the last year. Altogether, 41 of the largest 200 U.S. corporations changed leaders in 2000, says pay consultant Pearl Meyer & Partners, with the pace accelerating in the first months of 2001.”

A turning point, noted by Ward and other commentators was the Coca-Cola board’s turn down of CEO Douglas Daft’s proposal to takeover Quaker Oats. After the $15.75 billion deal was rejected, observers questioned if anyone can negotiate for Coke now. Ward reveals that “those of us who have worked to empower corporate boards greet this revolution with cheers, but also with a few concerns.” How will companies be able to take bold moves or maintain long term strategies? Will we shift from the Imperial CEO to the Imperial Board or to a balance between CEO, board, and owners? For further insights, read Rolf Carlsson’s new book, Ownership and Value Creation.

Important New Book

Ownership and Value Creation: Strategic Corporate Governance in the New Economy by Rolf H. Carlsson argues the “role of the ownership function is to link the sources of risk capital in stock markets to the fundamental processes in corporations and indivudual businesses so as to achieve sustainable vallue-creation.”

Most books on corporate governance focus on accountability, balance of power issues and the costs of separating ownership from control. Whereas, management books focus on value-creation. Carlsson tries to show the role for “strategic” corporate governance or the role of the owner specialist in value-creation. The book does an admirable job of introducing the rise of corporate governance as an ownership concern. He then uses a case history, that of the Swedish Wallenberg dynasty, to explain the success of owner specialists based on ownership values, mega-management skills, institutionalization skills and business risk competence.

Fundamentally, Carlsson believes the corporate governance movement has done a good job in pressing for accountability but that role has been largely a reactive one. He now presses us to acknowledge the proactive role that owners can take in value creation by making direct investments and by investing through owner specialists. He also strongly makes the point that we need to be on guard with regard to instutional investor governance as well. “They should be accountable for how they exercise their francihised ownership as agents of the private owners, how they contribute to fundamental and sustainable value-creation in their total portfolios of investments.”

Carlsson’s work begins the foundations of what will likely become an important frame of reference. In an age of global financial markets, owners are likely to demand access to quality information, formal control aspects and a balance of power with incumbent management which works more in favor of capital. “Incessant renewal and meta-management, to manage the process of taking as well as reducing/eliminating risks, are the cornerstones of strategic corporate governance.”

Back to the topCorporate Governance and Merger Activity in the US: Making Sense of the 1980s and 1990s

Holmstrom and Kaplan describe and consider explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. They conclude that “if the stock markets are flat or down for the next few years, then the extensive reliance on stock options may again dissipate, leading managers to have less focus on stock prices. But even after taking such reservations into account, it seems to us that a more market-oriented style of corporate governance than existed up to the early 1980s is here to stay.” (Download from SSRN)

Does Corporate Governance Matter? A Crude Test Using Russian Data

Do a firm’s corporate governance practices affect its value? In most empirical tests in developed countries, firm-specific corporate governance practices have little or no effect on firm value. But these weak results could reflect limited variation between firms in governance practices.

In contrast, the corporate governance practices of Russian firms vary widely, from quite good to awful. Bernard Black tested whether firm-specific corporate governance affects the value of Russian firms using (1) corporate governance rankings developed in fall 1999 for a sample of 17 Russian public companies by one Russian investment bank, and (2) the “value ratio” of actual market capitalization to potential Western market capitalization for these firms, determined independently at the same time by a second Russian investment bank. He finds strong evidence that firm-specific corporate governance matters – and matters a lot – in a country where other constraints on corporate behavior are weak.

Black’s research has practical significance for investors in Russian firms, in predicting by how much governance affects value. A one-standard deviation governance change predicts a 6-fold increase in firm value; a worst (51 ranking) to best (7 ranking) governance change predicts a 450-fold increase in firm value. (Download from SSRN)

Conference Notice

A New Era in Corporate Governance: Regulatory Demands, Fair Disclosure & Best Practices
June 25-26, 2001
Washington D.C.
Featuring: Laura Unger, Acting Chairman of the U.S. Securities and Exchange Commission. Chancellor William Allen, Director of the Center for Law & Business, New York University, and Lanny Davis, former White House Special Counsel.

Contact: Julie W. Munro
Director of Conferences, C.P.E. Inc.
370 Reed Road, Suite 227, Broomall PA 19008
Phone (610) 328-7086 ext. 1101 Fax (610) 328-7061

Myners Report

The full text of the Myners Report, which calls for much greater transparency and more professional stewardship by pension trustees, is available for downloading at You’ll also find other, mostly UK and EU, related news items on corporate governance.

AFL-CIO Key Votes

Last month the AFL-CIO issued their 2000 Key Votes Survey on the behavior of 156 money managers (representing $6.7 trillion in assets). They were rated on 38 shareholder proposals voted on during the 2000 season. Advocating a worker-owner view that values “management accountability and good corporate governance,” proxy voting performance continued to increase, even as the AFL-CIO was “raising the bar.” In 1998 the median score of money manager participants was 60.8%, rising to 65.1 in 1999 and 72.9 in 2000. The Survey will, once again, help trustees fulfill their fiduciary duty to ensure voting rights, which are pension plan assets, are managed in the long term interests of employee and retiree shareholders.

Ranked at the bottom of the list was PNC Advisors (0 out of 27 votes). It is hard to imagine they will be managing much Taft-Hartley or public pension money next year. According toIRRC‘s Corporate Governance Highlights (3/30), the AFL-CIO has released a list of 30 shareholder proposals, 2 vote no campaigns and one management proposal to be used in its Key Votes Survey for 2001. The proposals reportedly range from routine governance proposals, such as declassifying boards, to business in Burma. No, the management proposal on the list isn’t one they support; its AT&T’s charter amendment, which they have vocally opposed. To receive a copy of the full Key Votes Survey, call the AFL-CIO Office of Investment at 202.637.5372.

Corporate Governance Looking Up in Singapore

Singapore published its first corporate governance code, the result of a 15-month review of business practices by a special government-appointed committee. Recommendations in the code include

  • At least one-third of a board membership to be non-management for independence
  • Disclosure of directors and key executives remuneration
  • Audit committees made up entirely of non-executive directors
  • Disclosure of information to all shareholders should be “in a fair and equitable manner.”

January 1, 2003 is the deadline for all Singapore listed companies to start including their corporate governance practices in their annual reports, with explanations for any deviations from the official code. (AFX News via Northern Light) In related news, Institutional Investors Give Singapore’s Corporate Governance Regime the Thumbs Up. A PricewaterhouseCoopers survey found Singapore’s standard of corporate governance rated slightly higher than Hong Kong’s and Japan’s, with a larger gap separating Malaysia, Taiwan and Korea. Over half of survey respondents also voiced the need for

  • increased disclosure of directors’ dealings with related parties
  • separation of the roles of chairman and chief executive/managing director

Back to the top 

Continue Reading ·

Archives: March 2001

Shareholder Activism

From a 1970 ruling on Dow Chemical’s napalm sales, which opened the door for social issues to be put to shareholder votes, to the focus lists of Council of Institutional Investors,[email protected] reviews the rise of shareholder activism.

Metromedia Yields to Records Demad

Documents will be examined by Lens Investment Management to determine if John W. Kluge, Metromedia’s founder and Chairman, and Stuart Subotnick, its Vice-Chairman, President and Chief Executive Officer, have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting at the expense of Metromedia’s public shareholders. NewsAlert, 3/28

Changing Corporate Bylaws Via Class-Action Suits

At the spring meeting of the Council of Institutional Investors, William S. Lerach, a partner at Milberg Weiss Bershad Hynes & Lerach, said that in recent negotiations with an Internet company, “we accomplished more in one hour than all the shareholder resolutions could have done in 10 years.” As part of larger settlements, Cendant, 3Com and Samsonite have been forced to agree that boards will contain a majority of independent directors, audit committees will be comprised entirely of independent directors, and stock repricings are prohibited without shareholder approval. Now, maybe it is time to make such reforms the central reason for such class-action lawsuits.

The items on Lerach’s wish list include: require that officers hold one-third of the stock they acquire through options for a year; require that directors receive 50% of their compensation through stock and hold it as long as they remain on the board; no stock option repricing without shareholder votes; no insider stock sales during repurchase programs; and no accelerated vesting of options when shareholders merely vote for a merger, rather than waiting for the consummation of the deal. (Dow Jones Newswires, Class-Action Suit A Way To Change Corporate Bylaws, 3/28)

PSPD Criticizes Plan by Samsung Group

The shareholder rights group People’s Solidarity for Participatory Democracy is calling on the Samsung Group to cancel a plan to sell stakes held by Lee Jae-yong, son of group chairman Lee Kun-hee, in eSamsung and other internet companies to Cheil Communications and other profitable Samsung units. PSPD, led by Korea University professor Jang Hasung, said the Samsung group is selling its stakes “to pass the responsibility of Lee Jae-yong’s management failure to minority shareholders of the profitable companies.” (AFX News via Northern Light, 3/27)

Back to the top

Dark Cloud Over Directors

Hoffer Kakback, President of Gloucester Capital and a regular columnist in Directors & Boards, calls for further disclosures by director-candidates and better opportunities for shareholders to evaluate them. Four years ago, in an article “Pals on Board,” Kakback sought to have director-candidates disclose their relationships with the company’s CEO. “Were the candidate and the CEO (or were their wives) college roommates? Have their fathers been best buddies for 50 years?”

Three years ago, in “Two Modest Proposals,” he advanced the idea that proxy statements should contain a short essay from each candidate on why he or she would add value to the board. In addition, directors should participate in a conference call, well in advance of the shareholders’ meeting, at which they could be questioned by the shareholder-electorate.

Now in “The Albanian candidate,” (Directors & Boards, Winter 2001) he renews his call. “If one or two major companies implemented all (or some) of the proposals contained in this column, others might follow. The amazing thing is that our present method of electing directors has remained more or less the same for as long as it has.” Kakback’s proposals are certainly modest, in comparison with electoral politics. He isn’t even calling on shareholders to have a voice in the nomination process or a choice between candidates.

Unfortunately, even his modest proposal is unlikely to be heeded. Instead, we seem to be entering a period of greater entrenchment, with the SEC allowing omission of two more board independence proposals. One proposal, submitted by John Gilbert to Boeing, asked the company to adopt a policy that its key committees will be comprised of a majority of independent directors. The second, a similar proposal, by John Chevedden at AT&T, was also ruled beyond the power of the board of directors to implement. These join earlier rulings on similar proposals at PG&E, Marriott International and Bank of America. Let’s hope this growing dark cloud doesn’t discourage shareholders from continuing to seek sunshine and accountability.

CalPERS Announces Targets

The California Public Employees Retirement System narrowed this year’s “Focus List” to five companies, Circuit City, Lance, Metromedia, Ralcorp and Warnaco Group. Selection was based on a combination of long-term performance, corporate governance practices, and economic value-added (EVA). In other CalPERS news, their International Proxy Voting Guidelines and the Domestic Proxy Voting Guidelines were consolidated and amended on March 19, 2001 by the CalPERS Board of Administration and are now known as theGlobal Proxy Voting Guidelines.

Link Between Governance Activism and R&D

Institutional investors are influencing company decisions through proxy challenges, public criticism, and direct negotiation. Researchers evaluated the impact of investor activism on a company investment in research and development, predicting that companies facing activist holders would increase their R&D budget since owners tend to favor long-term investments, while managers typically prefer short-term payoffs.

Examining the impact of investor activism on R&D as a percentage of sales among 73 large U.S. industrial companies from 1987 to 1993, they found:

  • Companies targeted by investors increase their R&D spending over several years.
  • The impact is greatest on firms that faced growth opportunities and in high-technology industries that have under-invested.
  • Shareholder proposals and proxy contests fostered greater R&D increases than other forms of investor pressure.

See “The Influence of Activism by Institutional Investors on R&D” by Parthiban David, Michael A. Hitt, and Javier Dimeno in the Academy of Management Journal, February, 2001, pp. 144-157.

Canadian Report Recommends Charters and NonExec Chairs

Boards of directors can add value by fostering a culture aimed at improving the effectiveness of governance in Canadian public corporations. The Joint Committee on Corporate Governance report entitled Beyond Compliance: Building a Governance Culture contains 27 recommendations including:

  • All boards should have charters outlining their responsibilities
  • Boards should have non-executive chairs and should meet regularly without management present.

CII Joins Protest

The Council of Institutional Investors joined in protesting a recent decision by the SEC to allow AT&T to exclude from its proxy a proposal from the Communications Workers of America recommending the same person doesn’t serve as chairman and chief executive. AT&T argued the proposal was a thinly disguised vehicle to embarrass AT&T Chairman and Chief Executive C. Michael Armstrong by preventing his reelection as chairman of the board.”

However, CII, whose representatives hold $1.5 trillion in assets, argued the proposal “doesn’t call on shareholders to vote against current chair and CEO C. Michael Armstrong or vote for another candidate. Nor does it prohibit Mr. Armstrong from serving as director. The resolution simply calls on AT&T to adopt a policy that the chair and CEO jobs be held by separate individuals.” (Pension Grp Backs CWA In AT&T Shareholder Proposal Flap, Dow Jones, 3/19) For more, see CWA’s sponsored site, AT&

Back to the top

Link Added to has been added to our Links page. The site, by publisher RR Donnelley Financial, focuses on legal issues involving corporate and securities regulation. Among the items covered are the following: Analyst Communications, Cybersmears and Message Boards, Direct Public Offerings, Direct Stock Purchase Plans, Disclaimers, Electronic Delivery, Free Stock Offerings, Hyperlinks, Multimedia Disclosure, Offshore and Crossborder Offerings, Private Offerings, Proxy Fights, Public Offerings, Regulation FD, Road Shows, Shareholder Proposals, Stock Plan Communications, Stockholders’ Meetings, Voting, and Web Site Liability. The site also features R.R. Donnelley Financial’s complimentary monthly Ezine that updates users on recent corporate and securities law developments and the latest corporate trends and practices. RR Donnelley also launchedAll About Edgar, a comprehensive information site about EDGAR, the SEC’s electronic filing system.

Welcome ALM

American Lawyer Media joins our growing list ofStakeholders, informing the direction of corporate governance debate. Watch for upcoming newsbites from The Corporate Counsellor and book reviews.

International Conference On Corporate Governance

April 23 – 24, 2001, at the Mandarin Oriental Hotel, Kuala Lumpur organized by the Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA) in collaboration with the Malaysian Institute of Corporate Governance (MICG). The theme of the Conference, “From Conformance to Performance,” is in line with the main objective of enhancing awareness and commitment of corporate leaders to accountability and transparency with a view to improving confidence. to view the program, see theMAICSA site. Sign up before March 24th for reduced registration fees.

Foliofn to be Offered at 401(k) Plans

For a flat fee of just $29.95 a month, you get 3 Folios, personalized baskets of stocks you can change as often as you wish. Former SEC Commissioner Steven M.H. Wallman’s online brokerage firm will soon be offered to some 401(k) plan participants, according to a recent article in Pensions & Investments. The average mutual fund investor pays $467 per year in fees on a typical $38,000 investment, according toFoliorfn, whereas Foliorfn costs are only $359. More important, from our perspective, is the increased likelihood that shareholders are more likely to be owner activists than mutual fund holders. (Foliorfn service to mimic mutual funds,Pensions & Investments, 3/5/01)

SEC Reversal?

Dow Jones newswires article asks, Who’s calling the shots in corporate boardrooms? While some corporations claim shareholders do, many shareholder activists think the Securities and Exchange Commission is blocking their proposals to strengthen the independence at corporate boards. Ann Yerger, director of research at the Council of Institutional Investors, says the trend is “extremely disturbing.” The SEC allowed Bank of America to exclude a proposal to install an independent audit committee and Marriott International to strike a proposal for an independent board.

The SEC “seemed to zero in on independence proposals this year” with a different stance, said Patrick McGurn, director of corporate programs at Institutional Shareholder Services. According to the article, activists say the SEC’s hostility emerged when they agreed that Pacific Gas & Electric could omit a shareholder proposal seeking a bylaw revision requiring independent directors on its audit, and nominating and compensation committees, even though it had been introduced and voted on three times before, with last year’s proposal winning 45% of the vote, according to Rosemary Lally, an editor at the Investor Responsibility Research Center.

PG&E argued the company didn’t have authority to implement the proposal since directors are elected by shareholders, not corporate boards. The SEC staff agreed, saying boards don’t appear to have the power to ensure the election of independent directors. Of course, the argument is absurd since shareholders “elect” directors, but boards have control over the nomination process.

Judith Burns, of Dow Jones Newswires, goes on to relate how subsequent approaches were attempted at Bank of America and Marriott. Edward Durkin, director of special programs for the United Brotherhood of Carpenters, says shareholders will eventually prevail. “We’ll get to the issue in another time and another way.” Shareholder activists don’t give up easily. (Shareholders See SEC Reversal On Corporate Governance, 3/14)

Back to the top

SEIU Opposes Kodak Directors

The Service Employees International Union Master Trust announced it will campaign to oppose the directors at Eastman Kodak, after the company ignored repeated efforts to provide more accountability to stockholders. For an unprecedented fourth year, Kodak has ignored an SEIU proposal calling for annual board elections. That proposal has won majority votes at Kodak each year beginning in 1997.

“This is a core governance principle. Our members who have invested their retirement savings in companies such as Kodak expect them to be accountable to shareholders and meet the highest standards,” said Andrew L. Stern, SEIU president and chair of the Master Trust. “We have been patient investors but it is time for Kodak’s directors to understand that there is a price to pay when they ignore majority shareholder votes.”

This year, Kodak will put four directors on the ballot:

  • Alice F. Emerson, senior advisor to the Andrew W. Mellon Foundation;
  • Laura D’Andrea Tyson, dean of the Walter A. Haas School of Business, and a former Clinton economics advisor
  • Hector Ruiz, COO of Advanced Micro Devices, Inc.
  • A fourth director will be named in the proxy statement.

The vote will take place at the Kodak annual meeting on May 9th in St. Paul, Minn. The SEIU campaign comes as many institutional investors have adopted policies to press shareholder rights in board elections. Institutional Shareholder Services, the leading proxy advisory service, recommends withholding votes from directors where the board “ignore[s] a shareholder proposal that is approved by a majority of the votes cast for two consecutive years.”

The policy of the Council of Institutional Investors, whose members control well over $1 trillion in assets, provides that “Boards should take actions recommended in shareholder proposals that receive a majority of votes cast for and against. If shareholder approval is required for the action, the board should
submit the proposal to a binding vote at the next shareholder meeting.” (from Bart Naylor)

Swiss Cheese Argument by SEC has Holes

Phil Goldstein of Opportunity Partners sent me a copy of his response to SEC no action letter on Mayor Jewelers. The SEC apparently conclude that because his shareholder proposal implies the directors of the Fund violated their fiduciary duty, it may be excluded from the Fund’s proxy materials. Goldstein responds:

However, you do not say that we did not provide a factual foundation to support the charge. Rule 14a-9 only prohibits a malicious statement if it does not have a factual foundation. In fact, our supporting statement discusses the undisputed fact that the directors of the Fund recently adopted a number of bylaws whose primary purpose is to interfere with the shareholder franchise. Under Delaware law, such action is presumptively a violation of fiduciary duty.

We would ask along with Goldstein, is it the SEC’s policy to categorically ban any proposal malicious statement critical of a management regardless of evidence provided to support the allegation? For more on Goldstein’s battle and to engage him in conversation, see the eRaider corporate governance message board. (from Phil Goldstein)

Environmental Responsibility Pays

Investing in companies that use environmentally sound business strategies could lead to increase shareholder value, according to a a new report, “The Emerging Relationship Between Environmental Performance and Shareholder Wealth,” by the Assabet Group. They looked at studied both academic research and nine different environmentally focused investment funds. Each of the nine funds examined outpaced their respective benchmarks.

Bill Clinton in Your Boardroom?

Former president Bill Clinton has grabbed headlines more since leaving the White House than when he was in office but could this notoriety be sidelining his lucrative move into America’s corporate boardrooms? In the March issue of online newsletter Boardroom INSIDER, Ralph D. Ward notes that former presidents have traditionally been eagerly sought by the Fortune 500, and that rumor has Oracle Corp. CEO Larry Ellison flirting with adding Clinton to the software giant’s board.

Given Clinton’s controversial tenure, especially the pardon- and influence-peddling storm that has raged since he left office, Ward doesn’t see Clinton quietly slipping into any boardrooms soon. Ward further notes that corporate boards have become increasingly responsible, public faces for the company. No board can ignore the shareholder reaction of putting Bill Clinton on display at their annual meeting.

Fund Democracy Campaigns Against Self-Dealing Mutual Fund Directors

Maryland is considering a bill that would requiring courts to treat mutual fund directors as independent, even when they have significant conflicts of interest. According to Fund Democracy’s Mercer Bullard, the bill would effectively prevent tens of millions of fund shareholders from being able to sue companies that defraud their funds. We suggest you let the Maryland Assembly know that you oppose House Bill 1045. For more information, see Maryland Protection for Self Dealing Directors.

Fund Democracy has also teamed with proxy advisory firm Institutional Shareholder Services in asking the SEC to hold a hearing on the exemptions it has provided to hundreds of mutual funds from the requirement that shareholders approve contracts with fund managers. See Multimanager Funds and Your Voting Rights. Read about another SEC exemption, this one granted to Goldman Sachs from self-dealing prohibitions so that it could trade securities with the funds it advises. As Mercer Bullard observes, “How will the funds know if they are receiving a fair price from Goldman Sachs the securities dealer? Why, they’ll ask Goldman Sachs the fund manager, of course.” (Another Chink in the Wall: SEC Grants Self-Dealing Exemption to Goldman Funds,, 3/1/01)

Back to the top Reports on Several News Items

The March issue of reports on the following and other items:

  • stock option plans: the drive UK’s Hermes fund to require shareholder approval, the SEC’s proposal and the Wharton School of Management’s outline of the debate.
  • non-financial disclosures: a proposal from Shann Turnbull
  • French Commission des Opérations de Bourse expanded its mediation service between investors, intermediators and issuers.
  • guidance from the American Society of Corporate Secretaries on what proxy statements need to include about audit and non-audit fees paid
  • Call by Pensions & Investment Research Consultants demanding shareholder approval of director compensation at 800 UK firms.

SEC No-action Letters to be Posted

Commissioner Isaac C. Hunt Jr., of the US Securities and Exchange Commission, criticized the Commission for not requiring non-U.S. issuers to make required securities filings electronically via the SEC’s EDGAR system. He hopes that by the end of this year they will be required to do so. In addition, he indicated that the Commission’s no-action letters should be made available on the SEC’s site before the end of this year. (SEC’s Hunt Criticizes SEC, 3/2) Let’s hope that what should be done, will be done.

Unofficial Guide Asks Tough Questions

An editorial, “The Unofficial guide to Questions to Ask at an Annual Meeting,” in February’s ISSue Alert goes well beyond the usual Cliff Notes variety of pabulum regarding what to expect at the annual meeting. Get ready for embarrassing questions on consulting services provided by the company’s auditor, conflicts of interest among board members with other business ties to the company, the correlation (or lack of) between options awarded and shareholder value, severance provisions of CEO contracts and change-in-control provisions. In abbreviated form, that only takes us down the alphabet through letter “c” and the guide goes to “s.” This single page is more informative than most glossy guidebooks.

CorpGov.Net Editor Responds to Pensions & Investments

Joel Chernoff’s 2/19 article in Pensions & Investments asserts that State Controller Kathleen Connell’s suit against the California Public Employees’ Retirement System (CalPERS) over pay hikes will provide the “first court test of CalPERS’ independence” under Proposition 162, which was designed to protect it from political meddling. Unfortunately, that is not the case.

On September 17, 1998 the Sacramento County Superior Court ruled that restrictions imposed by the board on campaign contributions from those doing business with the System were invalid because the board did not follow the Administrative Procedure Act (APA) in adopting its regulations.

CalPERS had argued it was exempt from the APA. However, the court ruled that CalPERS is not exempt from state laws that are not inconsistent with the board’s exercise of its fiduciary duties.

In my opinion, there is little chance the court will accept CalPERS’ argument that it could not meet its fiduciary obligations without setting up its own payroll system, bypassing the State Controller’s statutory authority, in order to award pay increases to key employees.

The court is even less likely to agree that the board cannot meet its fiduciary obligations
(1) without exceeding the statutory limits on board member per diem by a factor of four, or
(2) by reimbursing employers substantially more than allowed by statute for the time their employee board member representatives spend on CalPERS board activities.

An editorial by Pensions & Investments in the same issue argues that “paying below-market salaries to executives at large, complex pension funds is short-sighted.” Agreed. However, the CalPERS board is stretching what was meant to be the minimum protection of Prop 162 against raids into nearly a whole wardrobe.

Skating on the edge of the law would be a bad habit for any public pension fund to acquire. CalPERS should work with the Legislature and Governor Davis to raise legal limits, rather than asserting that the board’s actions are above the law.

Back to the top

Continue Reading ·

Archives: February 2001

Allied Owners Action Fund to Call it Quits

Allied opened for business the same day the Nasdaq reached its all-time high. Now according to “Heard on the Net” at the Wall Street Journal (2/27), the fund is shutting down and returning the money invested by its 300 shareholders.

Allied invited investors and the public people to visit theirmessage boards, recommend underperforming companies and strategize. They aimed to give individuals the same governance clout as institutions such as the California Public Employees’ Retirement System. However, they largely went after relatively obscure firms with a low ratio of activist institutional investors.

Although the Wall Street Journal article indicates that other such “naked funds” such as Metamarkets Investments LLC’s Open Fund and Inc.’s Community Intelligence Fund are also down heavily, they also report that IPS Advisory Inc. plans to launch the IPS iFund shortly. Unlike other community-oriented funds, such as Allied Owners, where professional managers have final say on portfolio decisions, at the iFund shareholders will submit picks and vote on which stocks should be bought. For more on the collective intelligence of the mob, see Out Of Control.

Ownership Intensity Brings Gains

A study by Hewitt Associates found that companies ranking in the top half of their “ownership intensity” index had an average cumulative return to shareholders of 16 percent higher for the 1995-2000 period than those in the bottom half. Ownership intensity is a measure of the degree to which employees receive an equity stake, how much corporate information is shared with employees, and how much employees can influence day-to-day decisions. (Employee Ownership Report, 3-4/2001) Also reported in the same issue, one third of the households in Santa Clara County, California, have stock options.

Malaysian Shareholders Rights

Minority shareholders would gain derivative action and cumulative voting rights under recommendations outlined in the Capital Market Masterplan unveiled by the Securities Commission (SC). Datuk Megat Najmuddin Khas, president of the Malaysian Institute of Corporate Governance and one of the authors of the plan, explained that controlling shareholders “have their own agenda, which may not be the same as that of the minority shareholders and investors.” In addition, the SC is considering disclosure requirements regarding how securities issuance, restructuring, takeovers and merger exercises add value to shareholders. (, 2/23)

Disclosure Deadline Delayed

The Johannesburg Securities Exchange delayed a requirement that listed companies disclose directors salaries. Instead of an October 2000 implementation, the requirement will now take effect in March 2002. Objections have been that if directors revealed their remuneration, they or their families could become the targets of kidnappers or hijackers. (Africa News Service, 02/23)

CalPERS Emergency Election Rules Invalidated

Sacramento Superior Court judge James T. Ford voided emergency regulations filed by the California Public Employees Retirement System which had made several changes in the Board’s election process. Judge Ford ruled that the Board’s finding of emergency did not meet the statutory requirement that they were “necessary for the immediate preservation of the public peace, health and safety or general welfare.” The revisions would have allowed candidates to communicate more freely with members of the System and included language indicating that CalPERS staff cannot favor one candidate over another.

Lens Focuses on Metromedia International Group

Lens Investment Management, LLC, founded by Robert A.G. Monks, has taken shareholder activism to a new level by holding a meeting for shareholders of Metromedia International Group (MMG). Approximately 100 people attended in-person or by conference call, representing about 25% of the company’s common stock, or about a third of all common stock not controlled by MMG management. Shareholders expressed their frustration with MMG’s management and the company’s performance. Listen to a recording of the meeting and its discussion of shareholder initiatives until March 14th by calling 800-475-6701. See the accompanying slide presentation on the Lens site.

Business Courtesy

Normally dry SEC filings got hot on January 30th with thebody of a 13D filing by Robert L. Chapman Jr., whose Chapman Capital owns 9.5% of American Community Properties Trust. Apparently, Chapman’s repeated attempts to talk to management about their “highly leveraged balance sheet and unacceptably slow rate of asset liquidation,” were rebuffed until J. Michael Wilson, the REIT’s chief executive, finally took Chapman’s call. Seeking an explanation for the CEO’s unresponsiveness, Mr. Chapman said in the filing that Wilson responded, “You’re a f—ing pain in the a–, and we don’t want to talk to you.” Then Wilson hung up, according to the filing. Some people just can’t take criticism.

Responsible Wealth Battles for Tax Fairness and Corporate Responsibility

Responsible Wealth gets press coverage as dozens of the wealthy, including Warren Buffett, George Soros and William Gates Sr, join to fight repeal of the estate tax. All that attention should also provide a boost to their shareholder initiatives:

  • Freeze CEO Pay During Periods of Downsizing and Cost-Cutting
  • Executive Compensation Review Report
  • Severance Package Review
  • Broadening Ownership Resolutions

Rule 14a-8 Re-examined

In the Jan/Feb 2001 edition of the Corporate Governance advisor, John Wilcox of Georgeson Shareholder Communications takes another look at SEC rules governing shareholder proposals and declares the system broken. Investors are frustrated with “corporate indifference” to most of the 40 shareholder victories last year. The Council of Institutional Investors has recommended that boards implement any action recommended in shareholder proposals supported by a majority of votes cast. Institutional Shareholder Services recommends withholding votes from directors who ignore shareholder proposals approved by a majority of votes cast.

On the other side, companies complain that shareholder proposals often have little relevance to wealth creation and actually destroy value through costly distractions. According to Wilcox, the SEC’s Director of Corporation Finance, David B.H. Martin, has “warned repeatedly that administration of the rule is consuming staff time and wasting public funds” in processing nearly 500 no action letters last year.

Wilcox provides much good advice to issuers and proponents in preparing for the 2001 season but his assessment of how to move from the current gridlock seems way off. His claim that “shareholder activists have achieved virtually all of their goals in an unbroken string of successes,” would be widely disputed by shareholder activists.

In 1997, the SEC proposed that resubmission thresholds be raised from 3, 6 and 10 percent of votes cast to 6, 15 and 30 percent in years 1, 2 and 3 respectively. Although that proposal generated an enormous number of comment letters in opposition, Wilcox now proposes that thresholds be doubled every year, starting with 5 percent in the first year and rising to 40 percent in the fourth.

The bone he would throw to shareholders would be the power to override a company’s decision to exclude any proposal based on the troublesome “relevance” and “ordinary business” exclusions, if the proposal comes from owners representing at least 5 or maybe as high as 10 percent of the outstanding shares. Again, Wilcox proposes moving the bar considerably beyond the 3 percent bar previously proposed by the SEC.

His proposal looks like a win/win for management and a lose/lose for shareholders, many of whom are unlikely to be satisfied until they can use the proxy process to nominate board members.

CalPERS Board Puts Independence at Risk

By ignoring the legal limits to their own pay and voting themselves a raise (State controller sues CalPERS, 2/2/01, see also Connell’s 2/1 press release) the CalPERS Board breached its duty of care and loyalty. The interests of CalPERS members are served when the Board follows the law, not when they break it.

If CalPERS elections worked properly, we might expect members to vote for change. Unfortunately, the Board’sproposed election rules continue favor incumbents. They allow CalPERS staff, except those “directly involved” in the elections, to use their official positions to sway elections. In addition, they require an expensive dispute resolution process, paid for by candidates, with arbitrators chosen by the Board. Although an improvement over a previous proposal (seeCalPERS muzzles critics: Ballot rules protect board, keep others in the dark, Sacramento Bee editorial, 5/24/99), the draft regulations do little to level the playing field between incumbents and challengers.

Senator Burton has introduced SCA 2 to require Legislative review of CalPERS’ proposed budget for personnel, operating expenses and equipment. It would also require the System to submit to an independent actuarial and financial audit.

Board independence works when a board acts responsibly. Unfortunately, the CalPERS Board has too often abused itsConstitutional authority (see section 17), this time claiming (without evidence) that no qualified candidates would run for the Board without the raise. Not raising their own pay, they argued, would breach of their fiduciary duties and put the System at risk.

More clearly at risk is the Board’s ability to place the interests of the System’s members above their own. If the Board continues to ignore the law and members can’t change the Board, Legislative intervention will become almost inevitable.

Back to the topCoffee Named to Advisory Board

The Nasdaq Economic Advisory Board (EAB) announced the addition of three new members: Professor Michael J. Barclay, Professor John C. Coffee Jr., and Professor Frank M. Hatheway. The Board discusses and communicates specific policy recommendations to Nasdaq, meeting formally twice a year. John (Jack) C. Coffee Jr, a professor at the School of Law of Columbia University should bring a significant corporate governance perspective to the Board. Market News Publishing Inc.

Korn/Ferry Reports on Canadian Corporate Governance

The proportion of directors of Canadian companies who are U.S. residents rose from 10 percent in 1995 to 15 percent in 1999, according to the 8th annual edition of the Report on Corporate Board Governance and Director Compensation in Canada. The Report, the most comprehensive survey of corporate governance in Canada, collected data from 324 public companies for fiscal year-ends in 1999.

Elan Pratzer, managing director of Korn/Ferry International in Toronto indicated, “The trend to U.S. directors on Canadian boards is not surprising, but it is significant. As Canada’s economy shifts increasingly north-south, Canadian companies are coming to view North America as their core market. So it makes sense that they would want counsel at the board level from people who are expert in 90 percent of that core market. If anything, the internationalization of Canadian boards will accelerate as our largest companies become more global in their presence and marketing.”

Nominating and governance committees, rather than CEOs, are increasingly providing leadership in identifying and selecting new directors. As a result of pressure from institutional shareholders and others, the number of companies with Governance Committees has risen from 2 percent in 1993 to 65 percent in 1999. The stock component of board compensation increased from 22 percent of the companies surveyed in 1993 to 65 percent in 2000. Market News Publishing Inc.

Women on Australian Boards

Research by corporate governance adviser Egon Zehnder shows that 65 percent of Australian boards have at least one woman director while 17 percent have at least two. Although this is far more than companies in Asia where 86 percent of boards have no female directors, it is far behind North America, where 16 per cent of all boards have three female board members. (The Australian, 2/7/01)

Back to the top 

Continue Reading ·

Archives: January 2001

Double Nomination Approach Gains Ground

Richard Dee submitted six shareholder proposals last year requesting that companies nominate two candidates for each board seat. Four proposals came to a vote, averaging 8.1 percent support. Bart Naylor submitted a similar resolution at General Motors, receiving 6.9 percent of the votes cast. This year, Naylor plans to submit the double nomination proposal to AT&T, Coca-Cola, Intel, SBC and others. The first vote in 2001 on this type of proposal will come up at the

New Bulletin Board

We’ve moved our Bulletin Board to Yahoo! After five years, many of the old postings were growing stale. This version will be easier to search and will be easier to maintain. Try it out for your corporate governance announcements.

How Many Directorships is Too Many?

The January 23rd edition of the Wall Street Journal looked at that question in an article entitled “Companies Crack Down on Number Of Directorships Members Can Hold.” The Journal reports that more companies are setting guidelines. For example, Nuevo Energy Corp.’s limit for its CEO is two other boards. The article provides several examples of directors who have cut back the number of boards on which they serve in recent years.

Outside directors of the 200 biggest industrial and service concerns have seen their compensation rise to an average of $137,410 in cash and equity awards per directorship last year, from $70,528 in 1995. “About 61% of that compensation came from stock, compared with 28% in 1995.” The following are listed as the 10 directors with the most seats:

  • Ann D. McLaughlin, Chairman, Aspen Institute (9 boards)
  • Vernon E. Jordan, Senior managing director, Lazard Freres (8 boards)
  • John L. Clendenin, Former chairman, president and CEO, BellSouth (7 boards)
  • Willie D. Davis, President and CEO, All Pro Broadcasting (7 boards)
  • Martin D. Walker, Principal, MORWAL Investments (7 boards)
  • H. Jesse Arnelle, Counsel, Womble Carlyle Sandridge & Rice (6 boards)
  • Edward A. Brennan, Former chairman, president and CEO, Sears (6 boards)
  • Elaine L. Chao, U.S. Labor Secretary designate (6 boards)
  • Ronald L. Kuehn, Former chairman, El Paso Energy (6 boards)
  • Rozanne L. Ridgway, Former assistant U.S. Secretary of State (6 boards)

Investor Relations Advice (Update)

Karen Hendricks, CEO of the Baldwin Piano & Organ Company gives advice on the “care and feeding of institutional investors” in the January 2001 issues of Directorship. Having a strong authentically trusting relationship with investors can help your firm weather the downturns.

  • Establish an ongoing personal relationship with the individual decision-maker.
  • Understand and address your investor’s philosophies and policies.
  • Know their marketplace pressures.
  • Know when they are exceeding their expertise re knowledge of your firm or industry.

(Update 1/23) However, for another view on the situation at Baldwin and the advice given shareholders by ISS, see Phil Goldstein’s (of Opportunity Partners L.P.) remarks at (about half way down the page). “ISS supported management in a proxy contest launched in 1997 by a dissident shareholder of Baldwin Piano and Organ Company who had sought to have the company sold. Despite Baldwin’s prolonged underperformance and a consensus view that its stock price of $13-to $14 was significantly less than its breakup value, ISS recommended that shareholders support the incumbent board of directors.”

Goldstein goes on to note that “Baldwin’s board was re-elected in accordance with ISS’s recommendation but the company’s financial performance continued to deteriorate. Baldwin’s stock price is currently around $3.25.”

Call for Papers

Corporate Governance: The International Journal for Effective Board Performance

Corporate governance is a growing area of international interest and challenge, as new issues emerge throughout corporations in the world. Corporate Governance: The International Journal of Effective Board Performance will lead the international debate on board effectiveness by featuring practical and real-world discussions of current, past and future concerns of board membership. It is envisaged that articles will be based on good theory and research, but with the emphasis placed on practicality and application within organizations. Coverage includes but is not limited to the following subjects:

  • Increasing understanding of corporate governance – what it is, how its works and what it demands of organizations
  • Newly evolving techniques and developing trends such as member selection, membership profiling, decision consensus, executive succession and corporate decision making
  • Legal and governmental developments
  • Quality control
  • Ethics and corporate responsibility
  • Systems of outcome based performance
  • Environmental reporting and social reporting

Cases (with teaching notes) are also encouraged and welcome. Manuscript requirements The manuscript should be submitted as a Word or rtf document formatted with double line spacing with wide margins. Articles should be approximately 1,000 – 4,000 words in length and be sent or emailed to the editor below, together with a brief autobiographical note, up to six keywords, and an abstract of not more than 150 words. References to other publications should be in Harvard style. More detailed notes on article format and presentation and copyright requirements may be obtained from the publisher or journal homepage.

Manuscripts, abstracts or outlines of proposed articles should be submitted to:
Dr Samuel M Natale, Professor of Strategic Management, School of Business
Adelphi University
Garden City, New York 11530 USA

Back to the topMessage from Les Greenberg

The Committee of Concerned Luby’s Shareholders is pleased with the results that we have achieved. Our grass-roots campaign, with limited resources in terms of personnel (a few people who met on the Yahoo! Message Board) and funds (less than $15,000) as compared to those employed by the BOD, allowed Shareholders to voice their feelings toward the BOD and what the BOD has allowed to occur at Luby’s. We hope that we have demonstrated to shareholders of other corporations that they can make their voices heard.

We thank all who have shared their ideas with us, supported our efforts with their words of encouragement, voted for us and/or made financial contributions to us.

Even though we did not have sufficient funds to solicit the votes of all Shareholders, we received more than 25% of the net votes cast for Director nominees. Two of the four Shareholder Proposals for which we solicited were passed. Those Shareholder Proposals seek accountability of the BOD by requiring all Directors to stand for election each year and to remove all anti-takeover defenses. The Shareholder Proposal seeking to remove all anti-takeover defenses won by almost a 2-to-1 margin!

We wish the best for Luby’s. The Committee has prodded Luby’s to, at least, say that it is moving in the right direction. We hope that the BOD will become receptive to constructive criticism from customers, all Shareholders, employees and former employees. However, we will remain vigilant.

Hong Kong Event

The Chinese University of Hong Kong is arranging a high-profile event entitled “Corporate Governance and Disclosure: Enhancing the Competitiveness of Hong Kong.” This will take place on 2/22-23 at the New World Renaissance Hotel, Kowloon. Prominent speakers include representatives from the Securities & Futures Commission, China Securities Regulatory Commission, Hong Kong Monetary Authority, and others. David Webb, Editor of, will be speaking in the morning session on 23-Feb.

Tobacco Cut by UC

University of California (UC) regents are expected to adopt a recommendation that would exclude tobacco stocks from the school’s investment portfolio, the San Francisco Chronicle reported 1/12. UC President Richard Atkinson made the recommendation that the university be barred from investing in companies manufacturing tobacco products.

“It is focused on financial reasons, but it is also a result of health risks,” said Judith Hopkinson, chairwoman of the regents investment committee. “Due to the health risks of that product, we just don’t think it is the appropriate investment for the University of California.” (see JTO Direct)

Tidbits (mostly having little to do with corporate governance)

The number of labor disputes in China has risen from 8,000 in 1992 to 120,000 in 1999.
Americans work 350 more hours a year than the typical European and the hours are increasing.
Thirty-six percent of all experienced professionals are “passively” seeking jobs — three times the number of employed “active” job seekers. Target this group through referral programs.
Forty percent of newly promoted managers and execs fail within 19 months, largely because they don’t develop relations with peers and subordinates.

Turfgrass (lawns) cover 25,000 acres in the US — about the size of Pennsylvania. The average American (including men, women and children) spends 30 hours a year mowing lawns. In one hour of operation the typical gas mower releases as much pollution as driving a car 350 miles. In the West, up to 60 percent of all urban water is used to water lawns (30 percent in the East). The average acre of American lawn gets four times as much pesticide applied to it as the average acre of farmland. (from January’s Across the Board, which also has an informative interview with former Secretary of Labor, Robert Reich and features a discussion, “Should a Company have a Noble Purpose,” by Art Kleiner, George Roth and Nina Kruschwitz.)

Competitive Edge

James Wolfensohn, president of the World Bank, has indicated “the governance of the corporation is now as important to the world economy as the governance of countries.” Holly Gregory, of Weil, Gotshal & Manges LLP, argues that “good corporate governance gives US companies competitive advantage” in global competition. In conjunction with her work with the OECD/World Bank Private Sector Advisory Group she has compared the corporate governance systems of about 35 nations.

World Bank studies have shown that erosion of investor confidence was “directly linked to a lack of meaningful oversight of corporate performance and compliance” in the recent Asian meltdown. The US system offers important protections to investors, gives managers and boards discretion and flexibility and has an ability to self-correct and evolve with relative ease. However, it would be a mistake to believe that system can simply be imported into another country. “In order to work, governance reforms must develop over time, in relation to local culture and social values, and with the support of the private sector, writes Gregory.

She points to Russia as a country that tried to copy US securities laws but found that approach failed because they didn’t have a solid framework of private property rights, fiduciary, anti-corruption, antitrust, anti-fraud and bankruptcy laws and regulations. She also points to the support institutions from the exchanges to Institutional Shareholders Services to the American Society of Corporate Secretaries and many others who play an important role…what former Delaware Chancellor William T. Allen called the “institutions of capitalism.”

Gregory will follow her current article in the January 2001 issue of Directorship with a second in February but if you’d like to delve right in to this important subject, I’d advise taking a look at her excellent two part series on “The globalisation of corporate governance” which you can find at

Back to the topFoundation for Enterprise Development Conference

Sign up before Friday, January 19th and receive $40 off the conference fee. The 15th annual conference will be located at the Hilton La Jolla Torrey Pines in beautiful San Diego, California. San Diego, February 5th to the 7th. Learn from the leading experts in the field of equity compensation. see The Power of Sharing Ownership

Colgate-Palmolive Wins “Board Excellence” Award

SpencerStuart and the Wharton School of the University of Pennsylvania have granted its fifth top honor to Colgate Palmolive for outstanding performance. Contributing factors include the formal board evaluation procedures adopted in 1997, the company’s 1998 code of conduct governing all business dealings, and the company’s significant devotion to human resources. Pfizer received an honorable mention. Jan 9, 2001 (BUSINESS WIRE)

Member-to-Member Forum at ASCS

Another reason to belong the American Society of Corporate Secretaries is their member-to-member forum which provides online advice to members concerning shareholder proposals. Find out how similar proposals were omitted in the past. Don’t reinvent the wheel; get the answers directly from those who have already dealt with the same issues.

CERES Conference in Atlanta

On April 5th and 6th, 2001, it will happen again. As in past years, CERES is assembling an extraordinary mix of people–senior executives, environmental activists, labor leaders, major investors, and others–who are willing to reach across the boundaries of organization, culture, and language in a spirit of learning and dialogue. For more information about the conference, you can visit the CERES 2001 Conference Overview.

Option Plan Expansion Rejected at Micros Systems

Corporate Governance Highlights (1/5/2001) reports that shareholders rejected a proposal to increase the reserved shares under a stock option plan at Micros Systems’ November 17th annual meeting. The vote marks a dramatic turnaround since this is the 6th consecutive year they have sought shareholder approval for such an increase. Last year they won support of 78.6 percent of the votes cast but this year only 41.6 percent of shareholders voted in favor. IRRC notes this was the sixth stock option plan rejected by shareholders in 2000.

Shareholders Propose Denying Directors Indemnity

Two shareholders of Vari-L have submitted a proposal to prevent the company from spending money to defend its board members in lawsuits associated with accounting irregularities “first publicized in May 2000 or with their insider trading activities.” The shareholder contend that directors failed to meet the applicable standards of conduct for indemnification required under the company’s bylaws because they did not meet provisions requiring conduct “in good faith” they reasonably believed “was in the company’s best interests.”

The supporting statement says management didn’t disclose accounting irregularities until after three Vari-L directors had sold $10 million worth of their stock. see Corporate Governance Highlights (1/5/2001)

Nasdaq Comment Extended

The deadline to submit comments on Nasdaq’s plans to align stock option disclosures with NYSE recommendations. Comments can be submitted to [email protected] by 2/5/2001. When submitting comments, we urge readers to consider the opinions expressed by CII and also raise the issue of broker voting.

Corporate Governance Highlights (1/5/2001) again discusses the recent exchanges between CII and NYSE. In addition, it notes the study, “Corporate Voting and the Proxy Process: Managerial Control versus Shareholder Oversight,” (link to earlier version) 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 can see no rationale for continuing this anti-democratic practice.

Canadian Governance Awards

Bank of Montreal, the Capital Health Authority and the Deposit Insurance Corporation of Ontario won the first National Awards in Governance by The Conference Board of Canada and Spencer Stuart in the private, not-for-profit and public sectors. The winners will be recognized at an awards dinner on January 30 at the 2001 Corporate Governance Conference, “Springboard to Excellence,” Hilton Toronto. seeNational Awards in Governance Showcase Best Practices the The Conference Board’s registration page.

Back to the topUndermining Pay for Performance

Pay for performance through option awards accounts half of executive compensation. A Business Week commentary by Louis Lavelle warns against the increasing practice of executives hedging such awards through zero-cost collars and similar devices. Microsoft’s Paul Allen saved almost a billion dollars last year through such a strategy.

Charles Elson, director of the University of Delaware’s Center for Corporate Governance is quoted saying, “It’s like a baseball player betting on the other team. If the executive is collaring, shareholders should be aware of it.” When managers sell stock their transactions are widely reported. Hedging transactions, reported on SEC fir 4, are rarely filed electronically and, therefore, do not appear on EDGAR. Since the transactions aren’t widely reported the chances of triggering a sell-off is small and executives retain voting rights while deferring taxes.

According to Lavelle, “whatever the motivation, when top managers hedge, shareholders deserve to know.” When executives hedge part of their stake, the pay for performance link is diminished. Lavelle compares such action to the captain of a ship who “sees an iceberg up ahead and heads for his lifeboat without waking the sleeping passengers.” However, Lavelle’s proposed remedy, to require disclosure in the annual report, is like allowing the captain to announce the iceberg only after he is not only in the lifeboat but is a mile away from the impending disaster. (Business WeekUndermining Pay for Performance, 1/15/2001)

Sprint Managers Sued

Amalgamated Bank’s Longview Collective Investment Fund filed suit in Kansas City accusing Sprint management of a “breach of fiduciary duty, waste of corporate assets, unjust enrichment and fraud,” claiming they used inside information that the merger with WorldCom “was almost certain never to occur.” The proposed merger “was used as a vehicle to make winners out of management and losers out of the shareholders,” according to Longview’s attorney William Lerach.

An accelerated plan to vest employee stock options valued at $1.7 billion went forward despite the failed merger. Early cashout provisions usually aren’t triggered until after a merger is completed. In this case there is apparently some dispute between the parties as to when Sprint’s rules changed so that “change of control” came to mean a shareholder vote to approve a sale or merger, instead of the being deemed to occur with an actual transfer in ownership. What is clear, however, is that the value of Sprint shares went from $60.875 on October 4, 1999, the day the deal was announced, to $18 a share on January 2, 2001. Shareholders lost a bundle and management made out like a bandit. (Pensions & Investments, 1/8/2001)

Green Investing Pays

A study by the Assabet Group of Concord, Massachusetts, finds that all nine environmentally focused funds studied have consistently beaten their benchmarks. The top two performers were the Winslow and Green Century funds with returns of 197% and 72% respectively. (Pensions & Investments, 1/8/2001)

Board Diversity and Independence

While 82 percent of S&P Super 1500 companies (small, mid and large cap companies) have at least a majority of independent directors, women only account for 10 percent and minorities only 7 percent of directors, according to a recent survey by IRRC. Compensation committees are now 90 percent independent, while audit committees average 87 percent independence. The popularity of corporate governance committees appears to be peaking at about 35 percent; many boards address such issues as a whole. (see Board Diversity Needs Improving, Investor Relations Business, 1/8/2001)

In Australia women hold just 3.4 per cent of positions on the boards of Australia’s publicly listed companies, according to a study by Dr Alison Sheridan at the University of New England. Out of 7341 positions on Australian public company boards, women hold just 251 posts while men hold 6409. (see Women in back seat on boards, The Daily Telegraph, 1/16/2001)


“Shaming in Corporate Law,” by David A.Skeel Jr. presents two perspectives: shaming by shareholder activists and judicial shaming. Shaming sanctions are in fashion and “range from requiring drunk drivers to wear tee-shirts announcing their crime to forcing polluters to place advertisements confessing and apologizing for their offense…. each is designed to elicit moral disapproval from the offenders’ fellow citizens” Shaming draws on shared social values.

The article reviews shaming activities by shareholder activists Monks and Minow and CalPERS’ focus firms. A third case study involves a decision of the Delaware chancery court stemming from alleged Medicaid and Medicare violations by Caremark Industries. The article also includes a discussion of shaming by the financial press (Fortune and Business Week). See The Corporate Library, “The Link between Governance & Performance – Reviews by Dr. D. Jeanne Patterson.”

Conference Board

Check out the latest corporate governance Products and Services from the Conference Board.

Back to the topInternational Certification

A Deloitte Touche Tohmatsu team, headed by Richard H. Murray, conducted a year-long study of 6,700 boards and will unveil their findings in the form of discussion points at the World Economic Forum (WEF) in Davos. Among the ideas to be explored:

  • international certification of corporate governance practices
  • active board involvement in strategic planning
  • stakeholder view vs shareholder primacy

See “Is shareholder value the only consideration for companies,” Earth Times News Service.

Aspen Technology

A shareholder proposal requesting the board of Aspen Technology (AZPN), of Cambridge Massachusetts, to rescind their shareholder rights plan reportedly received 54 percent of the votes cast. Last year the same proposal received 49 percent of the votes cast. To join in the fray contact the proponents,Carol R. Aronson and Donald E. Shobrys.

International Right to Know Campaign

A recent survey by the University of Maryland’s Program on International Public Attitudes showed that nearly 90 percent of the American public expect US companies to follow US environmental and safety standards overseas. A coalition of environmental, labor, social justice and human rights organizations will seek legislation to ensure that basic US right-to-know laws are applied to the overseas operations of US-owned companies. It looks like a long term battle.

Environment: The coalition seeks reporting of toxic release inventories, resource extraction, and emissions permits.

Labor: Require OSHA reports, disclosure of hazardous chemicals in the workplace, labor policies, complaints received and posting the ILO Declaration of Fundamental Principles and Rights at Work.

Human Rights: Require disclosure of security arrangements with police, military and paramilitary forces. Report on human rights policies, lawsuits and complaints.

Additionally, they hope to require disclosure of the name and address of all facilities, including those maintained by subsidiaries or contractors, and to enforce the law by allowing government prosecution and citizen suits.

Groups working on the initiative include Friends of the Earth, Amnesty International, American Lands Alliance, AFL-CIO, Global Exchange, Sierra Club, Oxfam America, Student Environmental Action Coalition, People of Faith Network, Rainforest Action Network, and the Center of Concern. For further information, contact David Waskow at Friends of the Earth at [email protected].To endorse the campaign, e-mail [email protected].

BP Targeted

Four resolutions will reportedly be filed at British Petroleum within the next two weeks on the subjects of:

  1. Global Warming – led by Greenpeace UK
  2. Arctic National Wildlife Refuge – led by US PIRG and World Wildlife Fund
  3. PetroChina/asking BP to apply its own human rights and environmental standards to corporations in which it invests – led by ECCR
  4. PetroChina/asking BP to divest from PetroChina – led by the Free Tibet Campaign (UK)

US and Canadian SRI firms likely to join in filing including Trillium Asset Management, Walden Asset Mgt., Green Century, Ethical Funds, MMA-Praxis.

Back to the topPets.Com Wins Anti-Shareholder Award

Shareholder rights advocate announces the winners of its “Bite the Hand that Feeds You” award for the worst corporate insult to shareholders in the year 2000.Pets.Com took first place. The company made headlines by burning up $150 million shareholder dollars in nine months. It went IPO on Valentine’s Day and was in critical condition by early summer. But over 100 other e-retailers failed in 2000; shareholders should have known this was a very risky investment. Then there was the $1.5 million paid out in management bonuses to oversee the liquidation of assets. This, too, is par for the course. According to eRaider, managers expect a big chunk of the gains if the stock price goes up, but cannot be expected to live on their salary alone if the stock price goes down.

The gratuitous insult that put them over the top was its donation of 20 tons of dog food to Alaskan sled dog owners. The company exploited the donation as a platform to attack shareholders. John Cummings, director of investor relations, told ABC News that Pets.Com waited until it was in liquidation before going ahead because it didn’t want to hear from grumpy stockholders who might want the inventory sold instead.

According to eRaider, most shareholders would probably not mind that 2 ounces of dog food per 100 shares—reducing the eventual payout to shareholders by about 1 percent—was given away. But they did mind Cummings’ arrogance—the person hired specifically to help shareholders appears oblivious to who owned the dog food and who pays his salary. Cummings went on to say, “Our company is committed to pets, to animal welfare. Most people at this company are passionate about it.” Not passionate enough to donate their own money, of course, just passionate enough to give away shareholders’ money and insult them while doing it.

Dime Bancorp, which owns and operates New York’s Dime Savings Bank, came in second. The financial geniuses running this bank spent most of the year using shareholder money trying to block a sale of the company to North Fork Bancorpation at a price more than 50 percent higher than the friendly deal negotiated by the board and management (which, of course, included generous contracts for themselves). But, again, this is standard practice and inspires shareholder cynicism rather than action.

Dime management broke new ground by trying to prove 30 percent is larger than 70 percent. The Dime proxy card allowed shareholders to vote for all director nominees or to withhold their vote…23.8 million shares were voted “for” and 55.2 were voted “”withhold.” Dime declared victory and seated its directors. North Fork and shareholder Lawrence J. Toal promptly sued, and the court quickly granted summary judgment against the Dime. Dime added insult to injury by wasting shareholder money to hire Sullivan & Cromwell, one of the most expensive law firms in the country, to argue its absurd anti-shareholder, anti-democratic, anti-common sense position.

Third place went to Sprint for the most insulting use of a poison pill. Pills are designed to prevent unfriendly takeovers by triggering expensive provisions if anyone acquires more than a certain percentage (most commonly 15 percent) of the company. Clearly this entrenches the board and management, and interferes with the free right of shareholders to get the maximum price for their shares.

Sprint made history by triggering its own pill with an announced merger with WorldCom, creating a $600 million windfall for management. The announcement allowed top managers to exercise options at the pinnacle of the stock’s merger inflated valuation, and then retire. When the merger fell apart, Sprint executives got to keep their options windfall. Today, they crowd Phoenix golf courses and make side income as telecommunications consultants while shareholders own diluted, devalued and undermanaged stock.

Four more companies qualified for dishonorable mention:

  • Storage Technology for saying one thing to defeat a shareholder resolution asking management and directors to hold more stock, then exactly the opposite to later justify their innovative method of repricing.
  • Heartland Mutual Funds for losing 70 percent of Net Asset Value in one day in a short-term municipal bond fund, then making nonsensical explanations to shareholders.
  • Lernout & Hauspie Speech Products NV for the famous “I am responsible for nothing” line from the Managing Director after $100 million in cash and all shareholder value disappeared.
  • Hershey for adopting a poison pill when voting control is already locked up in the Hershey Trust, then giving dismissive to shareholders who asked the obvious question of “why?”
  • Others receiving votes: DaimlerChrysler, Warnaco Group, Mattel, Hyundai, Crown Central Petroleum, Willamette Industries.

Warnaco was my nomination. Warnaco Group, Inc. (WAC) which designs, manufactures and markets a broad line of intimate apparel, jeans and sportswear. For the 9 months ended 9/30/00, revenues rose 13% to $1.70B but net losses totaled $130.3M vs. an income of $95.1M for the previous year. The results reflect higher revenues from sportswear and accessories, offset by an increase in personnel and interest expenses… at least in part to the CEO who was paid $2 million plus a $7.7 million bonus in fiscal year 1999. During the past 12 months, while the average value of DJ clothing/fabrics firms has gained 8.5%, Warnaco shareholders have seen the value of their stock decline by more than 86%.

In this age of Internet commerce, it also gripped me thatWarnaco’s Internet site has consisted of the same message for two years, “under construction.” It was “updated” last year …presumably to note lack of construction progress. Why would any company pay a $7.7 million bonus to the CEO for moving from net profit to net loss? Why would any company advertise their incompetence by having a sign posted on the Internet that indicates that can’t even construct a rudimentary site over the course of two years?

AFL-CIO Petitions SEC to Require Disclosure of Mutual Fund Votes

On December 19th the AFL-CIO petitioned the Securities and Exchange Commission to require mutual funds to disclose how they are voting their shares. Currently, mutual funds aren’t required to disclose the principles they use when voting in corporate elections. Nor do they have to tell investors how they voted. Unlike pension funds, there isn’t even a requirement that mutual funds vote in the best interest of shareholders.

Recently, the UK began requiring that pension funds disclose their social investment policies (if they have such policies). (see news) Just as that law brought a new level of scrutiny to the investment decisions of UK pension funds, the reforms advocated by the AFL-CIO would allow individual investors in the US to ensure their shares are being voted consistently with their values.

As early as 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. In my opinion, its about time that mutual funds and other institutional investors also accepted the responsibilities of ownership. (see December 2000 news for a list of mutual funds which do make such disclosures)

Most mutual funds have failed to disclose their proxy voting policies or their votes. Perhaps they have been reluctant to provide such disclosure for fear of being deselected by corporate 401(k) plans. In addition, in many fund families the votes of the funds are probably not in harmony. Some funds will initially find such disclosures difficult, since they risk loosing corporate clients. However, if it is a legal requirement, there will be a level playing field where advantage can best be gained by working in the shareholder’s best interest. Disclosure of mutual fund proxy voting policies and voting behavior should enhance the return on capital by increasing the accountability of corporate officers to corporate owners.

To make the information easy for investors to use, the AFL-CIO asked the SEC to require mutual funds to disclose both holdings and voting information on the Internet in a user-friendly format. A copy of the petition is available by calling (202) 637-3900. For information contact: Bill Patterson (202) 637-3900 or Lane Windham (202) 637-5018. (See AFL-CIO press release) I encourage all readers to join in the AFL-CIO’s request. If fulfilled, it would be one of the most important developments in corporate governance ever.

For more information, read “Make 2001 the Year You Become an Activist Fund Shareholder” by Mercer Bullard in, 1/2/01 or go directly to Fund Democracy for sample letters to the SEC and additional resources. In a follow-up article, “Are Ballots Too Secret? Fund Advisers Should Tell How They Vote Proxies,”Bullard says the AFL-CIO’s proposal “holds out the best hope for improving corporate democracy in 2001.” In my opinion, if adopted the development would rank in importance with the DOL mandate that pension funds treat voting as a plan asset and the SEC’s 1992 communication reforms which allow shareholders to communicate with each other without going through elaborate and expensive filing procedures.

Proxy Monitor Acquires Fairvest

New York’s Proxy Monitor, a leading voting advisor to institutional investors, acquired Fairvest, our primary source of corporate governance information and advice in Canada. The Toronto based firm will now be known as Fairvest Proxy Monitor Corporation. see 01/03/01 press release

Focus on the Corporation

If you’re interested in corporate governance, you may also be interested in a weekly column “Focus on the Corporation,” co-authored by Russell Mokhiber, editor of Corporate Crime Reporter, and Robert Weissman, editor of Multinational Monitor magazine. It reports and comments critically on corporate actions, plans, abuses and trends. Written with a sharp edge and occasional irreverence Corp-Focus can be read at or you can get a free rabble rousing e-mail subscription by sending a note to the moderated listserve at [email protected] with the text subscribe.

The latest edition points to cooperation between the FBI and insurance industry in fighting insurance fraud and asks, “wouldn’t it be great if consumer groups had a working relationship with the FBI — just pick up the phone and call your local FBI agents, and have them knock on the door of the CEO of the insurance company, and begin asking questions? Wouldn’t it be great if law enforcement sided with individuals against corporate criminals in our midst?”

Continue Reading ·

Mutual Funds Should Disclose Votes

On December 19, 2000 the AFL-CIO petitioned the Securities and Exchange Commission to require mutual funds to disclose how they are voting their shares. Currently, mutual funds aren’t required to disclose the principles they use when voting in corporate elections. Nor do they have to tell investors how they voted. Unlike pension funds, there isn’t even a requirement that mutual funds vote in the best interest of shareholders.

Recently, the UK began requiring that pension funds disclose their social investment policies (if they have such policies). Just as that law brought a new level of scrutiny to the investment decisions of UK pension funds, the reforms advocated by the AFL-CIO would allow individual investors in the US to ensure their shares are being voted consistent with their values.

As early as 1988 the Department of Labor set forth the opinion that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets. In my opinion, it’s about time that mutual funds and other institutional investors also accepted the responsibilities of ownership.

Most mutual funds don’t disclose their proxy voting policies or their votes. Perhaps they are reluctant to provide such disclosure for fear of being deselected by corporate 401(k) plans over particular votes. In addition, in many fund families the votes of the funds are probably not in harmony. Some funds will initially find such disclosures difficult, since they risk losing corporate clients. However, if it is a legal requirement, there will be a level playing field where advantage can best be gained by working in the shareholder’s best interest. Disclosure of mutual fund proxy voting policies and voting behavior should enhance the return on capital by increasing the accountability of corporate officers to corporate owners.

To make the information easy for investors to use, the AFL-CIO asked the SEC to require mutual funds to disclose both holdings and voting information on the Internet in a user-friendly format. A copy of the petition is available by calling (202) 637-3900. For information contact: Bill Patterson (202) 637-3900 or Lane Windham (202) 637-5018. I encourage all readers to add their voices to the AFL-CIO’s request. If fulfilled, it would be one of the most important developments in corporate governance ever.

For more information, read Mercer Bullard’s article “Make 2001 the Year You Become an Activist Fund Shareholder” in, or go directly to his Fund Democracy website for sample letters to the SEC and additional resources. In a follow-up article, “Are Ballots Too Secret? Fund Advisers Should Tell How They Vote Proxies,” Bullard says the AFL-CIO’s proposal “holds out the best hope for improving corporate democracy in 2001.”

In my opinion, if adopted, mutual fund vote disclosure would rank in importance with the DOL mandate that pension funds treat voting as a plan asset and the SEC’s 1992 reforms which allow shareholders to communicate with each other without going through elaborate and expensive filing procedures.


Continue Reading ·

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 (, 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

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. (, 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,, 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, 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,’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 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.

Back to the top

Continue Reading ·

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 (, 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

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. (, 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,, 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, 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,’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 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 <

Continue Reading ·

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 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,, 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)


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%. 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.

Back to the top

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 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),’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)

Back to the top

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, 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

Back to the top

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 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. (, 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 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. (

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