Author Archive | James McRitchie

Archives: March 2000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Archives: February 2000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Archives: January 2000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Archives: December 1999

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Archives: November 1999

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In 1997 candidates were denied the right to make even minor changes in punctuation to their statements. Yet, 1998 General Counsel allowed Mr. Crist’s changes because “the First Amendment applies to political speech, and that the purpose of the candidate statements is to permit the voters to make an informed choice.”

In a report to the Board, which CalPERS failed to disclose in its current rulemaking, the Legal Office now contends that prohibiting candidates from disclosing their opponent’s record or expressing their opinions on issues of general concern is not a violation First Amendment rights. Clearly, CalPERS regulations are being used to favor incumbents over challengers.

Governance experts weigh in on battle for American Home Products. Richard Koppes questions whether Warner-Lambert “is fulfilling its fiduciary duty to shareholders” because of its use of an options package explicitly designed to kill any chance other suitors, such as Pfizer. Jeffrey Gordon said the option grant is likely to be upheld in court, especially since the attractive accounting method is being phased out by accounting bodies. As long as shareholders can vote up or down, Warner-Lambert’s moves aren’t violating good governance. Others appear to disagree, including Joseph Grundfest and Nell Minow. (see WSJ, p. C1, 11/17/99)

CalPERS investment committee chair, Charles Valdes, publicly apologized for remarks interpreted as disparaging to state Treasurer Phil Angelides and others of Greek descent. The apology came after critical letters from members of the Legislature and Governor Gray Davis. Assemblyman Louis Papan, said he will urge fellow legislators to discuss setting minimum eligibility requirements for board members. (Valdes reportedly filed for bankruptcy in 2/91 and 1/97.)

“If you can’t manage your own finances, what the hell are you doing as the head of the CalPERS investment committee?” Papan was quoted as saying. Board members may pick a new investment committee chair in March. (CalPERS official says he’s sorry: Remarks were called offensive to Greeks, Sacramento Bee, 11/16/99) The board unanimously approved a “resolution of reprimand” which states that Valdes’ remarks “raised an implication of ethnic prejudice that is unacceptable and hurtful to the mission of CalPERS.” The censure results in further public humiliation for Valdes. (CalPERS officially censures Valdes for insensitive remarks, Sacramento Bee, 11/18/99)

Mutual funds are putting more pressure on underperforming companies. Mentioned in this growing trend is pressure from Heartland Advisers on Commercial Federal, Gehl, and ICN Pharmaceuticals, as well as similar moves by Oakmark on Dun & Bradstreet, and T. Rowe Price on Cort Business Services. Commercial Federal, which was also being hit by Mutual Series, Acadia Fund and John Hancock Funds, apparently has accepted two board nominees from Mutual Series. (WSJ, 11/15/99, C1)

Patrick McGurn’s “The Internet and the Rise of Corporate Governance Activism” in the October 1999 edition of ISSue Alert offers good advice. He outlines some of the recent developments, including: CalPERS “push-back” function which will alow visitors to automatically receive e-mails with the content of new material posted to its site (I have advised CalPERS to create a portfolio function which would not only track in individual’s stock but would directly link to proxy positions taken by CalPERS), permanent sites maintained byGreenway Partners LP and LENS, campaign specific sites such as richmondsavingsbank.com, sites by other players such as AFL-CIO’s Paywatch and Responsible Wealth site as well as chat rooms at Yahoo!, Silicon Investor and Motley Fool. McGurn warns that corporations aren’t keeping up.

In the next century, battles for shareholders’ hearts and proxies will be fought in cyberspace. To defend themselves, companies must adopt governance guidelines and make them a central focus of their web strategies. Boards also must review and update these guidelines on a regular basis.

The same issue also offers some excellent advice on how to design shareholder-friendly poison pills of the type recently proposed by Adaptive Broadband.

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Across the Board, the Conference Board’s magazine, carries an informative article arguing against paying directors in stock. The percentage of firms with stock-base compensation has risen from 17% in 1990 to nearly 80% in 1996. The authors note that while base compensation has remained essentially stable, stock and options awards have skyrocketed. Stock dilution, selling the company short through reloads, market timing, and the increased likelihood of accepting an above-market premium are but a few of the problems raised. Another is the appearance of conflict of interest. “Perhaps it would be wise to restrict such programs to stock awards, but not options, and certainly not resets, reloads, and similar transactions. In this way, some independence of th board – or at least the perception of its independence – might be reasonably maintained. (Daily, Certo and Dalton, Pay Directors in Stock? No., issue 11-12/99, pp. 46-50)

A bad example in this area could turn out to be Tyco’s recent decision to pay its board of directors 90% of their current year cash compensation in the form of Tyco shares or options, or a combination of the two. The move may be designed to show confidence in the company’s price but what will happen if the options are repriced? (WSJ, 11/4/99)

the Corporate Governance Advisor (9-10/99, pp. 10-12) carried on article based on empirical research on the same subject by Bhagat, Carey and Elson, entitled “Director Ownership, Corporate Performance, and Management Turnover.” Their study found a significant correlation between the amount of stock owned by individual outside directors and firm performance. “Second, the greater the dollar value of the individual outside director’s equity holdings in the enterprise, the more likely a disciplinary-type CEO turnover in a poorly performing company would exist.”

The same issue notes a court settlement with Occidential Petroleum in February is what led their board to adopt progressive board corporate governance guidelines. “Such court-sanctioned governance changes are becoming commonplace,” noting such court mandated changes at Computer Sciences, Fleming, and KeySpan Energy.

The company-pay proposal for shareowner proxy voting advice has now been submitted to CitigroupGeneral Electric,GillettePfizerWhole Foods Market and Warner-Lambert, for shareholder vote at year-2000 annual meetings. See theCorporate Monitoring site for the full news release, text of proposals, reasons for selecting these companies, and answers to other frequently asked questions. A balanced article byLynn Cowan appeared over the Dow Jones newswire on 11/12/99. Ms. Cowan indicates that corporate governance experts and a proxy advisory firm had mixed reactions to the proposal. Among the issues raised were concern about the level of independence an adviser could maintain if it was being paid by the company it was supposed to evaluate; the cost of such services eating into shareholder returns; and the likelihood that a company would not adopt such a proposal, since proxy questions are suggestions that management can ignore.

My guess is these issues will begin to resolve themselves as people become more familiar with the proposal. Advisors will maintain their independence because they will be selected directly by the shareholders, not the company’s management. The cost of such services “eating into shareholder returns” is minimal because those costs are capped at $5,000 to $10,000, depending on the size of the firm.

John Wilcox, vice chairman of Georgeson Shareholder Communications, indicated that institutional fund managers own stock in thousands of companies and don’t have the time to sort through every proxy question; small investors, on the other hand, generally don’t own as many stocks and don’t have a fiduciary duty to other investors to research their votes. Yet, the fact that individual investors do not have fiduciary duties doesn’t mean they have no need for proxy advice. The proposal would provide them with an alternative to voting with management or doing the Wall Street Walk. To say that institutional fund managers don’t have time to sort through every proxy question simply reinforces the need for the resolution. Since proxy voting can add value, voting rights should be subject to the same fiduciary standards as other plan assets. If institutional investors can’t find the time to meet their fiduciary duty to review proxy issues they’d better vote for this proposal because it will provide the advice they need.

Jamie Heard, chief executive of Proxy Monitor, felt management may not go along with the proposal, given the voting support that generally comes from individuals. However, those which have shown leadership in the area of corporate governance may wish to stay at the front of the pack. I believe we will find several firms who recognize that informed shareholders can add value. The two which I submitted, Whole Foods and Pfizer, are currently seen as progressive. Wouldn’t they want to maintain that reputation?

Let’s hope there will be a few brave firms ready to move the herd. A few years ago not many had adopted corporate governance principles or established corporate governance committees but times are changing. I’m betting that several firms will be willing to raise the bar. For the laggards, there is always the threat of bylaw amendments or other action.

Fund managers from TIAA-CREF, Franklin/Templeton, Fidelity, Vanguard and others request publishers of global-market indexes factor the quality of corporate governance into rankings. WSJ, 11/5, p. C14.

John Smale, who in 1992 helped lead the corporate governance revolution, has announced he will retire from GM’s board in May, before GM’s annual meeting. seePhiladelphia Inquirer, 11/3.

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AFL-CIO President John Sweeney called on pension fund administrators to manage worker assets in ways that help, not hurt, working families and communities. At a convention of the International Foundation of Employee Benefits, Sweeney spoke in favor of “greater diversity in the boardroom and more equality between the executive suite and the shop floor.” Worker-owners at Taft-Hartley benefit plans won 15 shareholder proposals in 1999, more than any other group. “We want our money to create jobs, not destroy them. We want our money making real investments in communities, not sent chasing after the latest fad. We want to see our money supporting good corporate governance, not lining the pockets of overpaid executives, and we want our money supporting partnerships with workers, not encouraging confrontation and destructive downsizing.” (PR Newswire via Northern Light, 11/1/99)

Korn/Ferry’s 26th Annual Board of Directors Study finds 84% of directors receive some of their compensation in stock, up from 62% 4 years ago. 56% report committees overseeing corporate governance and making committee appointments is shifting from the CEO to the board. Over 60% of respondents are deeply involved in the strategy setting process. Minority directors now have a presence in 60% of America’s boardrooms and women are represented at 73% (ed. but the proportion of representation is still dismal). More than 1,000 directors participated in the 1999 Korn/Ferry International Annual Board of Directors Study, including 215 CEOs, 187 inside directors and 614 outside directors. The study also analyzes proxy information from over 900 of the largest U.S. corporations. (Disclosure: Corpgov.net editor owns stock in Korn/Ferry)

Pensions&Investments reports that “a citizens’ group advising the Labor Department is recommending expanding current law to let companies dip into their pension fund surpluses to pay for anticipated retiree health care liabilities.” Michael Fulotta of ASA Inc is quoted as noting, “there has been a consistent decline in pension assets since 1990, which has resulted in the decline of …funding ratios across all industries.” See DOL panel to suggest wider use of surpluses, 11/1/99.

He survived double bankruptcies, conflicts of interest and ischanging the rules to silence challengers, but now CaliforniaAssemblyman Lou Papan is calling on the chairman of the powerful CalPERS Investment Committee to resign. seeStatement on Turkish Past Fuels Feud at Pension Fund,10/25, LA Times and Resignation of CalPERS Official Urged, Sacramento Bee, 10/27. Papan has now been joined by 22 additional members of the Legislature, including the Speakerand the Minority Leader, in his call for the resignation of Mr. Valdes. Their letter to Mr. Valdes includes the following:

Your attempt to dismiss protests that you were violating California’s open meeting laws by implying that these protests were based on ethnic hatred is beyond acceptability. This is unacceptable not because it is offensive to Greek-Americans, but because it is offensive to all Californians.
In today’s society we cannot stand for any level of racial or ethnic intolerance. Your display of racial insensitivity combined with your blatant disregard of the Open Meeting Act leads us, as elected officials, to insist upon your immediate resignation.

The arrogance of the CalPERS Board has even led some to question the independence which was given to it under a constitutional amendment in 1992. The Sacramento Bee (Low road at PERS: Ethnic remarks are another sign of arrogance, 11/2/99) has editorialized

The CalPERS attempt to hire this consultant without proper notice and then respond with ethnic insults are sadly consistent with other actions, including the board’s move last year to tip its election in favor of an incumbent and its adoption of new election rules this year that deny challengers an opportunity to criticize board policy. Such arrogance can’t be smoothed over with apologies. Ever since voters in 1992 freed PERS from any oversight by the people’s elected representatives, it has grown more haughty and insular. Lawmakers need to give voters an opportunity to reverse that mistake.

When CalPERS broke its own election rules to favor an incumbent, it did so to the thwart a challenge from this editor. When the board voted to change election rules to ban debate, again the editor of this publication was named as the cause of that action. However, the answer is not to amend California’s constitution, which grants a degree of autonomy to CalPERS; the answer is to be found in an active and informed membership. The Sacramento Bee has provided the only press coverage of the issues at CalPERS but only a small minority of CalPERS members live in Sacramento. The membership of CalPERS is likely to be aroused only when the Los Angeles Times, San Francisco Chronicle, Wall Street Journal and others begin covering governance issues at this $160 billion fund.

On the other side of the Atlantic the Chairman of CalPERS, Dr. William Crist, is labeled ‘Darth Vader’ and gets a chilly reception in Paris. see International Herald Tribune, 10/18/99.

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Retirees are uniting online to protect their pension funds, highlight key issues impacting retiree pensions and benefits, and to publicize positive steps some employers are taking to protect and enhance retiree pensions and benefits. The site has a special interest in the right of employees to share in their pension surplus. The site is concerned with ensuring that promised financial benefits are maintained once the employee completes his part of the employment contract. The site includes links to several organizations fighting for retiree rights and trying to get some control over their pensions. SeeRetiree News.

Shareholder resolution presented to CREF (College Retirement Equities Fund) for its November 9th annual meeting in New York City to divest the CREF Stock Account/CREF Global Equities Account of Freeport McMoRan Copper and Gold stock. Freeport runs the world’s largest copper mine in Irian Jaya, Indonesia. Major concerns regarding human rights and environmental impacts continue to
plague this project. CREF’s response is that they don’t want to screen funds no matter what a corporation like Freeport is doing in Indonesia. see http://www.tiaa.org/voting/cref/

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Archives: January 1999

January 1999

Mark Latham, author of the “The Corporate Monitoring Firm” in Corporate Governance An International Review (UK, January 1999), and founder of the Corporate Monitoring Project; has developed a newsletter and is working toward shareholder resolutions to be introduced in the year 2000. His articles on this innovative system were published in five countries and four languages last year. Robert Monks has written that Latham’s system proposes a “solution to two core problems – free riding and genuinely independent nomination of directors – that are rarely addressed effectively.” Planning a conference of institutional investors? Inviting Mr. Latham to speak would be a sure way to create a little excitement. To subscribe to the Project’s free newsletter MailTo:[email protected]

The Supreme Court rejected a bid from Hughes Aircraft employees who contributed to the plan to share in the firm’s $1.2-billion pension fund surplus. The employees argued that money diverted to the underfunded pension plan of General Motors was protected because the pension represented an “exclusive benefit” to workers and couldn’t be diverted for other uses. Hughes was joined in their appeal by the Clinton administration and the U.S. Chamber of Commerce. Hughes “never deprived [the retirees] of their accrued benefits,” wrote Justice Clarence Thomas. No surplus funds were available for distribution to the former employees, he said. John Chevedden, a Hughes retiree and shareholder activist (this year at Raytheon), said the decision emphasizes the need workers to have greater control over their pension funds. The ruling “gives companies carte blanche to siphon money from one pension plan to another” he said. “I think it shows a need for a change in the law.” (LATimes, 1/26/99)

Pensions & Investments has unveiled a redesigned web site today with daily news and more than 200,000 pages of databased information for institutional investors. Wow!

Canadian Imperial Bank of Commerce shareholders overwhelmingly approved shareholder activist Yves Michaud’s proposal that directors must hold shares in the bank equal to six times the annual fee they’re paid for their services (approximately $180,000). Michaud reportedly became a shareholder-rights activist after losing part of his retirement savings. In 1996, he won a landmark court ruling that forced a number of banks to put his proposals to a vote at their 1997 annual meetings. (Montreal Gazette, 1/22/99)

United for a Fair Economy, a network of wealthy investors, has filed shareholder resolutions asking eight companies to research, report and, in most cases, reduce pay gaps. The companies are AlliedSignal Aerospace Co., AT&T Corp., BankAmerica Corp., BankBoston Corp., Citigroup Inc., General Electric Co., Huffy Corp. and R.R. Donnelley & Sons Inc.

ATraitor To His Class: Robert A.G. Monks and the Battle to Change Corporate America, a new biography by Hilary Rosenberg, show Monks to be a specimen of a vanishing species: the Yankee Republican gadfly, according to David Warsh of the Boston Globe. Monks took shareholder activism to a new level of behind-the-scenes respectability, says Warsh. (Boston Globe, 1/19/99)

John Bogle, founder of The Vanguard Group, asks why mutual funds haven’t been more involved in corporate governance initiatives. One reason is that most mutual funds are short-term investors but that is changing with the growth of market indexing which he expects will take 15% of the market within the next decade. More central to Bogle’s analysis is that “we would prefer not to advise the companies in our portfolios about governance when our own houses are so fragile.” The fund’s manager typically sets its own fee which is duly rubber stamped by the fund’s “independent directors” who were appointed by the manager.

“Measured over the past 50 years, the average equity mutual fund has carried a volatility risk quite similar to that of the market, but has lagged the market return by about 1.5 percent annually over the long term, and about 2.25 percent over the past 15 years…professional managers, despite their expertise, have failed to outperform the market before the deduction of costs. Their costs doom them to below-market returns.” seeThe Corporate Board, 1-2/99

In the same issue, William Dimma asks “Why Not Director Accreditation?” and Susan Mosoff reviews “Global Stock Ownership Plans.” Mosoff’s article points to ShareNet , an Arthur Andersen product designed to help companies answer questions about operating stock ownership plans in different countries. The site notes that 54% of the world’s largest companies operating in the North America and Europe operate global share plans.

Back to the topAfter years as a corporate governance “bad boy” because of its poison pill polices, Fleming (FLM: NYSE) seems to have turned over a new leaf, announcing proposals to eliminate classification of directors and to require all new stock option plans to be submitted to shareholders for their approval. (Excite News)

Federal Reserve Chairman Alan Greenspan assailed President Clinton’s proposal to invest Social Security funds on Wall Street. “I do not believe that it is politically feasible to insulate such huge funds from government direction,” he told the House Ways and Means Committee. The $133 billion CalPERS experience demonstrates it would not be an easy task. That system finally gained its independence when California voters approved Prop. 162, making raids or interference illegal. However, now there are questions as to the accountability of its Board. For example, the Board continues to insist CalPERS is exempt from the California Administrative Procedure Act, which requires public notice and publication of rules. How can its members hold the CalPERS Board accountable if its rules aren’t easily accessible? Clearly independence must be combined with systems of accountability if either Clinton’s proposal or CalPERS have any hope of measuring up to the high standards Americans have come to expect.

Anthony Neoh, who I had the pleasure to meet last fall at the International Company Secretaries Conference in Hong Kong last November, reports on important developments in China in the January 14th edition of the Far Eastern Economic Review. A new Chinese Securities Law promises to further the transformation of the Chinese economy by requiring regulation of the markets by the China Securities Regulatory Commission which is about to quadruple in size. Public securities must now comply with specified disclosure standards, and be traded in approved exchanges. Company officers and all professionals will have specified duties, such as disclosure, and prohibitions, such as insider trading and market-manipulation.

Neoh points out that the savings rate in China is about 40% of income but the public owns stock valued at just 7% of the country’s GDP. “Clearly, the stockmarkets have immense growth potential? The new Securities Law will not provide a cure for all the markets’ ills, but it will provide a firmer foundation. It compares well with the securities laws of emerging markets.” By this April, CPAs engaged in securities work must be members of independent partnerships with unlimited personal civil liability. “Already, in a Shanghai court, an investor is suing a listed company’s directors and its public accountants for deficient disclosure of company accounts.”

As Mr Neoh points out, “the test for this law, however, lies in its implementation.” Anthony Neoh is a visiting professor of law at Peking University and the former chairman of theSecurities and Futures Commission in Hong Kong.

CalPERS vs. Felzen, 97-1732, went before the Supreme Court to block an Archer-Daniels-Midland $8-million settlement that went entirely for legal fees. (see LA Times, 1/11/99)

Not everyone agrees with the shareholder value mantra…but maybe their arguments aren’t too strong. (see Earth Times News Service)

Annual meetings are getting “shorter, more boring and less well-attended, say those who follow annual meeting trends” but Sarah Teslik says “the annual meeting ought to be the single most important thing for shareholders.” Corporate internet sites, electronic chat rooms, and teleconferences with analysts and the media seem to be displacing much of the role of annual meetings. (read more in the 1/10/99 Philadelphia Inquirer)

Back to the topGovernance: The International Corporate Governance Newsletter has joined our growing list of Stakeholders. From their November issue. European share plans are quickly catching up with North America. Global Share Plan Survey 1998 revealed that 75% of UK companies have set up global executive share plans, compared with 66% in North America. In Continental Europe 80% had employee stock purchase plans covering all national employees compared with 65% in US and 24% in UK. UK firms favored option plans with 82% of firms, vs 56% in the US and 36% Continental Europe. The issue also included a useful matrix comparing the membership, duties and other features of audit, remuneration and nomination committees.

The December issue discusses the new Hermes/LENS alliance and promises an interview with Bob Monks in the next issue. An analysis of board structures and practices in six countries reveals some real differences in the professions of outside directors but typical size hovered around 12. The authors could not find any correlation between board size, structure and profitability. An interview with Sir Adrian Cadbury reveals that in the UK institutional investors own 75% of big companies. Although they’ve increased their voting, 40% compared with 20% in 1990, that still leaves 60% “who just collect their money and do nothing.” Cadbury believes we need to focus on the responsibilities of institutional shareholders for the standards of companies in which they have put their funds. However, a second major issue is the accountability of institutions to their own investors. According to Cadbury, we need to focus on conflicts of interest.

College faculty have launched a nationwide campaign to persuade TIAA-CREF to begin “positive investing” of a small portion of their pension funds. Campaign for a New TIAA-CREF is calling for 5-10% of assets in the Social Choice Account, a socially responsible fund, to be invested in companies that are models of social and environmental responsibility. They cite a recent survey showing that over 80% of TIAA-CREF’s Social Choice Account participants favor “seeking out for investment companies [that] have an outstanding record of good performance on social issues, rather than rely on negative screens.” Only 3% oppose this investment strategy. For a brochure and other campaign materials, contact Social Choice for Social Change: Campaign for a New TIAA-CREF, MC Box 135, Manchester College, 604 E. College Ave., North Manchester, IN 46962, (219)982-5346/5009, or e-mail Neil Wollman at [email protected]or Abigail Fuller at [email protected].

ISS reports that NYSE has extended their deadline for comments on their revised proposal regarding shareholder approval of stock option plans. The new comment period extends to January 25th. Under the proposal, shareholder approval of stock option plans would be mandatory unless at least 50% of employees are eligible and a majority of the shares are issued to employees who are not officers or directors.

Most mergers (58%) fail to create substantial returns for shareholders, according to a recent study by management consultants at A.T. Kearney. The first 100 days are the most critical for success when speed in appointing top management , specific goals and excellent communications are critical. SeeInvestor Business Relations, 1/4/99, p. 9. See also Alexandra Reed Lajoux, The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities, McGraw-Hill, 1997.

Jürgen Schrempp of DaimlerChrysler chats with Forbes in their 1/11 issue on converging corporate governance.

New Jersey removes barriers to internet proxy voting. seeBergen Record, 1/6.

Corporate Governance Review from Fairvest Securities Corporation covered recent Canadian developments in poison pills and lock-up agreements in their October/November issue. Fairvest also reports on its research on 300 TSE companies which finds ownership broadening. In 1983 48% had a 50% or over control owner; that is now down to 23%. Similarly, firms with a 20% or higher shareholder have dropped from 78% to 43% during the same period.

Catherine R. McCall reports on the Kirby Commission findings. The Report expresses concern that boards of public pension funds may not have the skills to deal with complex financial issues. The Standing Senate Committee on Banking, Trade and Commerce recommends that individuals appointed to pension plan boards have the necessary knowledge to enable them to effectively monitor. The Committee found that social investment should be subordinate to long term growth of the fund. Like the Dey Report, the Committee looks to peer pressure rather than a legal requirement to report annually to pension plan members on adherence. In their review of mutual funds, the Committee rejected a suggestion that such funds have a responsibility to exercise their proxy votes. However, they did recommend that the federal government examine the issue of confidential proxy voting with respect to mutual funds. See Corporate Governance Review for Ms. McCall’s analysis of 11 recommendations.

Back to the top with the Corporate Governance NETwork!

Contact: [email protected]

All material on the Corporate Governance site is copyright ©1995-1999 by Corporate Governance and James McRitchieexcept where otherwise indicated. All rights reserved.

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Archives: October 1999

California Treasurer Phil Angelides may lead an effort to pull state investments out of companies negotiating Holocaust-related forced labor and asset seizure claims if they don’t reach a settlement soon. The companies involved include German banks, Daimler Chrysler, Ford and General Motors. (seeTreasurer: Settle Holocaust claims, Sacramento Bee, 10/29)

Mike Cohn, of the Cohn Family Business Group, is the newest member of the Corporate Governance NETwork. The firm advises family-owned businesses on succession planning and related governance issues. Their quarterly newsletter, TRANSITIONS & traditions®, helps stakeholders confront tough technical and emotional family business issues. Continue Reading →

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Review: Fair Shares: The Future of Shareholder Power and Responsibility

Much has been written about the role of directors and boards but far too little on the how shareholders can add value. Carolyn Kay Brancato did so in her excellent book, Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value. However, Brancato was primarily writing from the perspective of managers. Although there was general recognition that shareholders can add value, the thrust of the book was on what managers need to know about shareholders and how to attract shareholders who will support them. Charkham and Simpson take a larger societal viewpoint. At bottom, they are concerned not with what is best for managers but what system will best provide the goods and services that society needs. Continue Reading →

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Archives: September 1999

NYSE to consider stricter listing rules, including a much higher hurdle for adopting stock option plans without shareholder approval.ISS Friday Report (9/24/99) contains analysis by Patrick McGurn of a provision which requires adoption of the standard by NASD for the rules to go into effect. McGurn elaborates on why this may be the “kiss of death.”

Business Ethics (7-8/99) offers “A New Vision of the Corporate Board” by Corporate Governance editor, James McRitchie. Based on the writings of Margaret Blair, the board is not just an agent of shareholders but acts as a mediator among all members of the team with firm-specific investments. Continue Reading →

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Archives: August 1999

Caux Round Table (CRT) to develop a Total Social Impact (TSI) system of benchmarking the social responsibility performance of corporations in terms of trust, the environment, labor standards and other critical issues. CRT to step up efforts to encourage corporations around the world to accept the Principles, train their employees in the Principles and then to act by the Principles. (see Industry leaders discuss social responsibility and good corporate governance by Frank Vogl, Earth Times News Service)

Executives’ incentive-plan stock and options at the end of 1998 represented 13.2% of corporate equity or $1.1 trillion, at the 200 largest U.S. corporations according to Pearl Meyer & Partners. cbs.marketwatch.com Continue Reading →

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Corporate Governance Archives: July 1999

Stephen Davis, of Davis Global Advisors, is assembling a long-range list of global corporate governance-related conferences/workshops/events for the World Bank website and Global Proxy Watch newsletter. Please pass on the date, city, title, sponsor, location, and contact information for any such events you may know about by e-mailing [email protected]. Please cc me at [email protected] so that I can add a select few to our education pages. You can also post a message on the ECGNlist, the information and discussion list of the European Corporate Governance Network.

When is a company ready to form a board? A recent article in the Atlanta Business Chronicle offers advice from Paul Lapides, director of the Corporate Governance Center at Kennesaw State University, Donald R. Duckworth, chairman and CEO of Atlanta-based Horton International Inc., an executive search firm, and others. Continue Reading →

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Archives: June 1999

SEC considers expanding reporting requirements for financial relationships between board members and their chief executives. Revisions are being proposed by the Council of Institutional Investors. Personal, professional, and financial relationships during the previous five-year period would need to be disclosed. Family relationships would include those by blood, marriage, or adoption through first cousins. Financial ties would include purchases, sales, loans, financing, common investments, and charitable contributions. Professional ties would include service on a government body, having the same employer, or rendering professional services. The cause of further disclosure was aided recently when four members of the Cendant audit committee were found to have undisclosed personal and financial ties to the company. (Bergen Record, 6/22 )

Mark Latham has continued to develop the Corporate Monitoring Project which now includes the beginnings of a helpful tool for individual investors, Voting Your Stock: A Guide. Continue Reading →

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Archives: May 1999

Company Secretary: The Official Publication of the Hong Kong Institute of Company Secretaries (May 1999) is largely devoted to the question of offshore incorporation. Should Hong Kong be worried? We might also add, should the U.S. or other jurisdictions be worried? Probably.

Mark Sharp begins his article by noting a 43% increase in the number of companies listed on the Hong Kong Stock Exchange (SEHK) over the past 5 years but the number of companies listed in Hong Kong has practically remained unchanged. Over the past 10-15 years almost half of all locally listed companies were incorporated in Bermuda. For years, it was assumed the political uncertainty of Hong Kong’s political future was the driver but the move offshore continues to accelerate, attracted by reduced cost and less burdensome regulations. Continue Reading →

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CalPERS muzzles critics: Ballot rules protect board, keep others in the dark

CalPERS“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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CalPERS muzzles critics

CalPERS-logo

CalPERS Ballot rules protect board, keep others in the dark

“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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Archives: April 1999

CalPERS approved a $200 million investment in theHermes UK Focus Fund which will acquire large stakes in a small number of undervalued publicly traded companies in the UK, using its influence as a large and active investor to affect financial and operational restructuring to increase value for all shareowners. (see CalPERS press releases)

UK survey shows institutions ignored the Government’s calls to improve their voting record. If anything, there appears to have been a slight decline at small companies. (Governance[email protected], 3-4/99, reported by Sarah Wilson[email protected]) Continue Reading →

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Archives: March 1999

ISS backs TIAA-CREF’s shareholder proposal to strike down Lubrizol Corp.’s (LZ) dead-hand poison pill. (Dow Jones newswires)

Ed Durkin, director of special programs for the United Brotherhood of Carpenters and Joiners of America, says labor might sponsor proposals to link executive pay to worker safety, job creation and the number of employees with health benefits. He also expects labor to vie for board seats. (Labor groups push change at local firms, Cincinnati Business Courier) Durkin has been a long time activist and played acritical role in the fight at ADM. Isn’t it about time the Carpenters got an internet site? Durkin sure helped me when he gave me a copy of IRRC’s excellent 1987 publication, “Conflicts of Interest in the Proxy Voting System.” I’m sure union members would like to learn more about Ed’s activities. Continue Reading →

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Archives: February 1999

Jerry Adams is sure to stir controversy with his recent statement: “I personally do not think that the corporate governance movement and particularly the PERS program has had any positive impact on the retirement benefits of active and retired members of California retirement systems.”

Mr. Adams recently retired from the California Legislative Counsel’s Office and was chief counsel at CalPERS when they took up the corporate governance banner. Adams was the first CalPERS representative to publicly address corporate governance and its relationship to the interests of public retirement systems. In May 1984 he delivered a statement at the annual meeting of the Texaco Corporation in Dallas, Texas. Later, Adams prepared the bylaws for the Council of Institutional Investors. In an interview which appears in the January edition of The Public Retirement Journal, Adams expressed his opinion that:

A decade of record investment returns and low inflation has resulted in dramatically reduced employer contribution rates in most retirement systems, including PERS?but I have not seen or heard of comparable improvements in the retirement benefits of active or retired members of California public retirement systems during that period?I’m particularly dissatisfied with the PERS program. In my opinion, the PERS Board’s micro management of the investment program and its emphasis on corporate governance issues diverted Board, staff, public and even legislative attention, from the basic needs of the PERS membership. (For a copy of the article, call 916-455-7322 or 916-456-5282) Continue Reading →

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Archives: January 1999

Mark Latham, author of the “The Corporate Monitoring Firm” in Corporate Governance An International Review (UK, January 1999), and founder of the Corporate Monitoring Project; has developed a newsletter and is working toward shareholder resolutions to be introduced in the year 2000. His articles on this innovative system were published in five countries and four languages last year. Robert Monks has written that Latham’s system proposes a “solution to two core problems – free riding and genuinely independent nomination of directors – that are rarely addressed effectively.” Planning a conference of institutional investors? Inviting Mr. Latham to speak would be a sure way to create a little excitement. To subscribe to the Project’s free newsletter MailTo:[email protected]

The Supreme Court rejected a bid from Hughes Aircraft employees who contributed to the plan to share in the firm’s $1.2-billion pension fund surplus. The employees argued that money diverted to the underfunded pension plan of General Motors was Continue Reading →

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Archives: December 1998

OECD Corporate Governance Guidelines have been released in draft. They will not give detailed prescriptions for national legislation but rather delineate basic principles to serve as reference points for efforts to evaluate and improve each country’s regulatory framework. The guidelines cover five broad headings:

  • the rights and responsibilities of shareholders;
  • the role of stakeholders in corporate governance;
  • the equitable treatment of shareholders;
  • disclosure and transparency and
  • the duties and responsibilities of boards.

While primarily aimed at governments, the guidelines will also provide guidance for stock exchanges, investors, private corporations and national commissions on corporate governance as they elaborate best practices, listing requirements and codes of Continue Reading →

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Archives: November 1998

Barbara Hackman Franklin reviews 3 proactive processes to help audit committees prevent problems. Identify areas of potential risk with key players, hold regular executive sessions at each meeting with each of the key players separately, and report to the full board each meeting. (see Tone at the Top, 9/98)

NACD’s “Report of the Blue Ribbon Commission on CEO Succession” was released last July and is reviewed by John F. Olson (senior partner at Gibson, Dunn & Crutcher LLP) in the Corporate Governance Advisor (11-12/98). The Commission arrived at 5 Continue Reading →

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Archives: October 1998

G7 leaders to urge greater co-ordination in cross-border regulation of capital flows and to recommend a new code of conduct for open economies on financial disclosures and corporate governance, according to the the Financial Times. “It is likely to include support for a code of conduct for all open economies, requiring rules for disclosure of financial information and statistics on fiscal and monetary policy, with an agreed approach to corporate governance.” (10/30, Reuters)

John C. Bogle assailed the mutual fund industry at the Investor Responsibility Research Center’s annual conference for its failure to act on corporate governance issues and for failing to ensure that funds are managed in the interest of the shareholder. He noted the short term outlook of funds may change as more turn to indexing, which now represent 17% of institutional investments, since, in effect, they will be holding stocks forever. “It is hard to imagine that the trend toward indexing will not mean that all institutions — including mutual funds — will become far more assiduous, not only in their voting policies and in making proxy proposals where necessary, but in expressing their informed opinions to corporate directors and managers.” (CBS Marketwatch, 10/27)(Reuters) Continue Reading →

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Archives: September 1998

IRRC released a new report, Executive Pay 1997, which shows that every element of CEO pay is on the rise, especially rewards due to optoin grants. The report provides a comprehensive study of compensation paid to the chief executives of S&P Super 1,500 companies as reported in 1997Executive pay is sure to be one of the hotly debated topics presented at IRRC’s Investor Responsibility and Shareholder Value conference, October 25-27 at the Renaissance Mayflower Hotel in Washington, DC. Contact Charine Adams at 202-833-0700.

Japanese firms considering U.S. style accountability to shareholders. Foreign investors now hold up to 40% of companies such as Sony and Orix. Pressure is growing for Japanese firms to increase public information. Proposals to improve corporate governance Continue Reading →

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Archives: August 1998

Patrick S. McGurn, with ISS, continues his excellent coverage of the options issue in the 8/21 edition of the ISS Friday Report. He points out that the proposed treatment of option repricings (see FASB below) is consistent with a 1972 accounting rule (APB Opinion 25) that distinguished between “fixed” option plans and “variable” plans. While fixed option plans were not considered a business expense, variable plans were…repricing makes it a variable plan. If all goes according to plan, they might have the new policy in place around January 2000. We expect to see a lot of pressure on FASB to back off and hope our readers will help them hold firm.

Writing about the Board’s 1993 proposal that options be charged to earnings as an expense Edmund Jenkins, Chairman of the Financial Accounting Standards Board, notes “the Board was wrong to back away from what some are belatedly recognizing was a Continue Reading →

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Archives: July 1998

Pensions&Investments, 7/27, editorial calls on the New York State Common Retirement Fund to drop out of the lead in the class action suit against Cedant. H. Carl McCall, sole trustee, as elected comptroller of New York state, apparently got a $40,000 political contribution from Bernstein Litowitz Berger & Grossman, the same firm handling the case. The editorial is especially timely given the recently released American Bar Association task force report on lawyers’ political contributions and pay to play.

The same issue of P&I also notes the growing influence of the internet in linking shareholders, citing CIILENSAFL-CIO’s Executive PaywatchCalPERSMotly Fool and our own “huge website on corporate governance.” Yes, and we’re just getting started.

Risk of being sued down but 37% of corporate directors report being sued at least once, according to a 1998 Louis Harris report.

Nell Minow took the NYSE to task for appointingDavid Smith, head of the American Society of Corporate Secretaries, to represent shareholders in reviewing its proposal to exempt certain broad-based stock option plans. ISS reports that while Minow has high regard for Smith, she believes it is “unimaginable” that he could be considered a representative of the very group that files resolutions often opposed by the members of ASCS. Minow also called on the SEC to hold a hearing on the proposed policy. (ISS Friday Report , 7/24) We suggest you may want to join her by e-mailing your objections to Ms. Catherine Kinney, NYSE Group Executive Vice President. We couldn’t locate her address but we used theNYSE form and asked them to forward our note to Ms. Kinney.

Nicholas Benes, president of Japan Transaction Partners, advocates breaking the power of managers by requiring the boards of all listed corporations to have a majority of outside directors–not insiders nor from cross-shareholding companies. “The bridge-bank scheme as it is now conceived looks to be just a clever way of continuing the old practice of keeping deadbeat borrowers on life support. Nobody should believe the Japanese government is serious about reform until it takes power away from managers and puts it in the hands of shareholders, where it belongs.” (WSJ, 7/27)

Delaware court rules against “dead-hand” poison-pill, saying it strips shareholders of their rights. The court found that continuing-director provisions make a proxy contest realistically unattainable. “Absent express language in the charter, nothing in Delaware law suggests that some directors of a public corporation may be created less equal than other directors, and certainly not by unilateral board action,” wrote Delaware Chancery Court Vice Chancellor Judge Jack Jacobs. (WSJ, 7/27)

Who should be entitled to a voice in running a corporation? Carlin Meyer asks the question in the context of SEC’s reversal of Cracker Barrel. “It is time to reassert greater public control over these entities — to collectively establish policies, guidelines and even rules for everything from employment policies (including officer salaries) to product decisions to political and charitable giving to advertising campaigns.” Ms. Meyer calls for international treaties that subject corporations to democratic control. (San Francisco Chronicle,7/24, A25)

Drawing on data for 258 large U.S. companies in 1992, Gerard Sanders and Mason Carpenter found that multinational firms with more international operations have higher:

1) levels of CEO pay;

2) fraction of the CEO’s compensation that is long-term (largely stock based);

3) size of the top management team and its governing board.

Source: W. Gerard Sanders and Mason A. Carpenter, “Internationalization
and Firm Governance: The Roles of CEO Compensation, Top Team Composition,
and Board Structure,” Academy of Management Journal, 1998, Vol. 41, No. 2,
pp. 158-178. From Wharton Leadership Digest, July.

James Kristie won the Philadelphia Prize, awarded by the Financial Analysts of Philadelphia, for his article “Timeline: The Evolution of 20th Century Corporate Boards” which appeared in the Fall 1997 edition of Directors & Boards. If we gave a prize for the best article of 1997, we’d give it to Kristie as well.

Mutual funds, in theory owned by its shareholders; in practice owned by one fund company. At even the fund families, directors “can range in background from experienced corporate managers and directors to the friends or college buddies of the top executives of the fund management company.” This fall, the SEC will host a round table intended “to air the issues and to work toward a consensus on whether changes are needed in the current system,” accoding to SEC Chairman Arthur Levitt Jr. (NYTimes, 7/7) Also in the same issue, “directors with a lot of money tied up in the stock of the company they oversee are more likely to dismiss a poor-performing chief executive than directors who don’t have much money at stake, according to a new study.

As little as 1/3-1/2 of most companies’ stock-market value is accounted for by hard assets such as property, plant and equipment. This has led to a search for elaborate computer models to measure the links between employee satisfaction, customer satisfaction and revenue. Sears, for example found that if employee attitudes improve by 5%, customer satisfaction will jump 1.3%, resulting in a 1/2% rise in revenue. (WSJ, 7/22, B1)

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NACD’s Blue Ribbon Commission on CEO Succession recommends assessment take place regularly by independent directors and that boards have a contingency plan in place at all times. Core principles include: finding the right leader at the right time, board driven collaborative process, continuous, ensure CEO builds talent-rich firm by attracting and developing right people, driven by corporate strategy. For a copy of the report call 202.775.0509 or 202.467.8076.(IRRC, 7/13)

Fortune magazine compiled a list of the top 50 companies for Asians, Blacks and Hispanics. Pacific Enterprises, a $2.8-billion-a-year Southern California utility holding company comes in first. Companies that do good things for minorities also do well by shareholders. “The average return to investors for the publicly traded companies on our list walloped the S&P 500 over the past three- and five-year periods: 125.4% to 112.2% and 200.8% to 171.2%, respectively.”

Gag Rule. William Crist, president of the CalPERS board, asked Charles Valdes, chairman of the investment committee, to rule State Controller Kathleen Connell’s representative out of order for questioning money management executives about political contributions. Pensions&Investments, 7/13 The majority of the board appears to continue to support a recently enacted policy which cuts off political contributions to the controller and treasurer but leaves intact such contributions to the governor and legislative leaders who appoint four board members.

In other news at CalPERS, Governor Wilson signed a bill appropropriating $332.8 million in court-ordered back-interest payments resulting from a raid on the fund (missed contribution payments) repaid last year. President Crist said the payment shows employers can’t “shortchange” employees. However, Jake Petrosino, a board candidate for the public agency seat, points out the state paid only 8.75% compound annual interest, instead of the annualized system return of 19%. Petrosino says the plan “got screwed” by the state.Pensions&Investments, 7/13

We’ve posted a conversation with Margaret Blair, author of the classic Ownership and Control. Please let us know others in the field you would like to hear from.

Telxon Corp. sued Guy Wyser-Pratte to stop him from making “false and misleading statements” and to prevent him from soliciting proxies for proposals the company believes are “illegal and unenforceable.” Wyser-Pratte who holds about 730,000 shares, or 4.95% of Telxon’s outstanding stock, proposed amendments to Telxon’s bylaws to allow shareholders to vote directly on proposals to buy the company and to defuse Telxon’s “poison pill.” See Akron Beacon Journal, 7/14Wyser-Pratte responds.

Highlights from the International Corporate Governance Network conference held in San Francisco are reported by CalPERS on its press release page.

report by NACD’s Blue Ribbon Commission on CEO Succession “seems sure to intensify many boards’ involvement in power transfers at the top, according to a report in the Wall Street Journal (B6, 7/13). Prior commissions, “sparked extensive boardroom changes in such touchy areas as excess board seats, CEO report cards and stock pay for directors.”

July 10th is the last day to get comments in to the New York Stock Exchange regarding their Shareholder Approval Requirements for Broadly-Based Stock Option Plans. (see letter of comment by Jamie Heard, Chairman and CEO Proxy Monitor) (see also comments by Thomas E. Flanagan on ourbulletin board or on the IRAA site or the CNNfn articleExecutive ‘gravy train?’)

Ousted Sunbeam CEO, Chainsaw Al, seeks to clear his “good name.”

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California Controller Kathleen Connell’s re-election committee sued CalPERS over a new rule prohibiting those doing business with the system from making campaign contributions to its directors. (See Sacramento Bee, 7/6) The rule was put into place only after board actions were heavily criticized in the press, came under the scrutiny of the FBI and were subjected to a Senate hearing. Each focused on possible conflicts of interest such as deals involving relatives and former board members, gifts, allegations of high living, extensive travel, and campaign contributions funded by those doing business with CalPERS.

In total denial, CalPERS President William D. Crist then issued a press release stating “There has been no evidence or even suspicion of corruption by any CalPERS fiduciaries because of political contributions or gifts. Nevertheless, we have taken the extreme measure of banning political contributions and requiring the fullest disclosure possible (of gifts).”

Some speculate the campaign policy was payback for Connell’s aggressive stance on board members accepting free travel. The action may have also been motivated by a desire to focus the spotlight on campaign contributions, largely raised by the Controller and Treasurer, instead of gifts received by most of the 13 member board…gifts which under the new policy, they can continue to receive.

The writ of mandate was filed by Connell’s re-election committee on July 2nd. The committee alleges a violation of First and Fourteenth Amendment rights, discrimination (only incumbents are fully subject to the policies, not other candidates for the same office), lack of statutory authority to enact the regulation, and failure to comply with the Administrative Procedure Act (notice, comment, consistency, clarity, necessity and other requirements). They appear to have an excellent case.

This time CalPERS President Crist said in a July 4 statement, the “board evaluated this issue over an eight-month period, considering very carefully the potential impact on the political process. Ultimately, the board determined that the protection of the system’s one million members from the taint of “pay-to-play” was absolutely necessary to comply with our fiduciary duties.”

However, this editor attended the committee meeting where the rule was introduced. While the board may have contemplated the issue carefully for months, the wording of the policies was not made available to interested parties prior to being publicly discussed and major portions were crafted by Crist on the spot. Because of these improprieties, I petitioned CalPERS to go through the rulemaking process for its conflict of interest policies and, when that was rejected, requested a determination from the Office of Administrative Law (OAL) on 4/30. Unfortunately, because of staffing cutbacks, OAL is not expected to get to my case until next year; we can expect action on the Connell writ much sooner.

The irony is that CalPERS is viewed an effective leader in the area of corporate governance… seeking independent boards with high moral standards. Yet, the ethical policies it chose to adopt for its own board consisted largely of unenforceable window dressing in violation of several laws. Had the policies gone through the legally required rulemaking process, CalPERS would likely have adopted more modest conflict of interest regulations with regard to political contributions and stronger regulations with regard to gifts. As it is, the court will likely throw out the rules regarding political campaign contributions but will probably leave the weaker gift policy standing, since Connell’s campaign committee did not ask the court to address that issue.

Stanford University Law School has announced that it is planning to establish a Fiduciary College for trustees and senior management officials of public and corporate pension funds, Taft-Hartley pension funds and endowment funds. Curriculum of the initial Fiduciary College would focus on the fundamentals of modern finance and portfolio theory and their implications, fiduciary duties and responsibilities, governance issues for the funds, risk-adjusted performance assessment, roles in corporate governance, trading issues, and international investing. Teaching faculty would include appropriate practitioners, as well as faculty from the Law School, including Professor Joe Grundfest. Fiduciary College will be directed by Richard Koppes. For more information, seeNAPPA.

NACD will hold its 16th Annual Corporate Governance Review Meeting in Washington DC, 11/1-3, and will present its Blue Ribbon Commission Report on CEO Sucession as well as its Director of the Year Award. Call 202/775-0509.

Richard Ayers, one of the more interesting characters I’ve met through Corpgov.Net, has finally gotten his way with Nevada Power. As IRRC (5/1) put it, “Third Time is the Charm.” Mr. Ayers used the unususal tactic of phrasing his proposals agaomst the director retirement plan so that a yes vote was a vote against terminating such benefits. He withdrew it this year when he learned the board had finally caved. Congratulations! One relatively small investor can make a difference.

Financial Women’s Association of New York (212) 553-2141, with 1,100 members, has launched a campaign to encourage more women on corporate boards. IRRC (5/1)

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10 year limit on board tenure, as initially proposed by CalPERS staff for their corporate governance principles, would apply to 45.8% of directors at companies analysed byIRRC, according their 4/2 report. As I recall, only about 38% of the CalPERS board itself would fall into that category.

Employees, through their ESOP, sought to send a message toAvondale Industries by sponsoring proposals to redeem poison pill, declassify the board, and implement confidential voting. (ISS, 6/5)

Direct Report announced it can provide their on-line investors with over fourteen separate news, research, and communications functions — all customized and seamlessly integrated with their existing corporate web site.

Meredith Miller, who has served as PWBA’s Deputy Assistant Secretary for Policy for the last 5 years, will carry out the duties of Assistant Secretary until a permanent candidate is appointed to fill the post. She will be responsible for administration, policy making and enforcement of the Employee Retirement Income Security Act (ERISA). (PWBA, 7/2)

Contrasting shareholder meetings. Dell Computer will useADP’s internet voting facility and will conduct an audio broadcast through their internet site, while the Green Bay Football Corporation will hold its shareholders meeting at Lambeau Field, expecting 20,000. (ISS, 7/2)

Apria Healthcare (AHG) has created a model corporate governance board (exceptional talent, independent and strong shareholder orientation) but can they turn the company around? Patrick McGurn, of ISS, reports that “some commentators view this mix of talent and ownership as a prototype for boards in the next millennium. Given the stakes in this game, however, there are some defenders of the status quo who would love to see the grand experiment fail.” If it does fail, it will be hard to know if failure is due to reduced Medicare rates, past billing practices or the new board. I’m betting they’ll succeed. (ISS, 7/2)

Ralph Ward’s Boardroom INSIDER… 7/98, reminds us that Al Dunlap will be remembered for making his boards a real tool of shareholder value. “He frowned on ‘professional’ directors who serve on too many boards (and eased one such member off the board at Sunbeam), favored term limits, and cut the number of Sunbeam insiders at the table. Perhaps Dunlap’s biggest contribution was to make director stock pay and stock holdings a religious conviction.” “So before you cheer too loudly over Chainsaw Al getting the chop, bear in mind that it was his own board reforms that assured he’d receive no slack. Those who live by shareholder value die by shareholder value.”

SB 1879 (Hayden) passed out of the California Assembly Committee on Public Employees, Retirement and Social Security on July 1st. The bill is intended to provide greater clarity with regard to potential conflicts of interest by CalPERSboard members. One provision, for example, requires that any gifts, including the reimbursement of travel expenses by parties financially interested in investment transactions are to be disclosed. Failure to do so would carry a financial penalty of $10,000. SB 1753 (Schiff), dealing with potential conflicts of interest at CalPERS and CalSTRS, is also moving through the Assembly. SB 1753 would bar the boards from considering matters in closed session involving a vendor without prior disclosure of the vendor’s gifts and campaign contributions. Requires investment decisions made in closed session to be made by roll call vote and disclosed within 12 months. Prohibits specified communications by the governing board members with financially interested persons during the contract awarding process. Prohibits specified communications by a financially interested person with board members on matters relating to the transaction or evaluation, without disclosing the communication to the executive officer and the board. Requires elected members of the PERS governing board to file semiannual campaign statements.

The $38 billion New York City Employees’ Retirement System spent four years and as much as $150,000 on 4 studies before deciding to freeze tobacco holdings in their passive portfolios. According to a report in the June 29th edition ofPensions&Investments, their tobacco holdings lost an estimated $50 million in value while they deliberated.

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Archives: June 1998

Chainsaw Al gets sliced. He taught many to think like owners but his tactics crushed morale and his accounting practices reflected an emphasis on salesmanship rather than creating wealth. Press coverage has been widespread, including Time(6/29) and the St. Petersburg Times, (6/21).

Efficient-market theory and a science-based investment strategy has provided the fundamental basis for the investment strategy of Dimensional Fund Advisors. Fortune’s 7/6 issue covers the history of the firm in How the Really Smart Money Invests. Investment in small stocks that also trade at low price-to-book ratios provided the best results of all in Fama and French’s studies, returning an annual 20.2% over 70 years, 8% more than big growth stocks.

Corporate-accountability campaigns, a new tool for the Sierra Club.

Privatization in Bulgaria: Pushing Forward.

Both IRRC and ISS have provided extensive coverage (since April 24th) of a controversial policy adopted by the NYSE on April 8th which allows companies to adopt “broad-based” plans without shareholder approval if at least 20% (the majority of whom cannot be officers or directors) are eligible to participate. Although the rule went through a public notice process, most in the industry failed to take note. Some have expressed concerns since the rule outlines requirements only in terms of eligibility, rather than participation. ISS reports thatCII is “rolling out the troops” in opposition. NYSE agreed to reopen its comment period until July 10th. Contact Stephen Walsh at (212) 656-6240.

Stock options allow top execs to cash in on bull market. (seeSan Francisco Business Times).

The Internet is increasingly popular for launching shareholders actions against publicly traded companies, according to a 6/17 WSJ article, which described message boards and chat rooms as fertile recruiting grounds for potential shareholder plaintiffs. Web sites mentioned included the Motley FoolYahoo!Finance and Silicon Investor. For information on suits filed, see the Securities Class Action Clearinghouse which we have listed under law.

Global Corporate Governance Research Center, released its Institutional Investment Report showing that U.S. institutions topped $14.3 trillion in total assets last year (up from $12 trillion at end of 1996). Pension funds dominate with 47.3% of all assets and 25.8% of total outstanding equity. Public pension fund growth outpaced private funds. Institutional investor’s % of total equities declined to 48% (from 48.8% in 1996). Mutual funds showed the strongest growth (28.7% increase between 1996 and 1997). Total assets of pension funds grew from $5.7 trillion to $6.8 trillion from 1996 to 1997. Mutual funds climbed from $2.4 trillion to $3.1 trillion. To order, call 212-339-0345.

California Public Employees’ Retirement System (CalPERS), the New York State Common Retirement Fund and several New York City pension funds filed suits against Cendant Corp., alleging the business and consumer services company misled investors about its financial results. (cnnfn)

Pensions&Investments reports that pension assets are up 8.7% last quarter (Jan-March, 1998) to $7.5 trillion. CalSTRS staff have been given authority to commit up to $400 million to alternative investment deals without seeking prior trustee approval. San Fransico City & County Retirment System divest $30 million in tobacco stocks held in its S&P 500 index fund. Phil Angelides, candidate for California Treasurer, indicates he would invest a larger portion of CalPERS and CalSTRS funds in California.

Jamie Heard, former Chief Executive Officer of Institutional Shareholder Services (ISS), has agreed to become Chairman and Chief Executive Officer of The Proxy Monitor, Inc. Richard L. Cohen, former Chief Operating Officer of ISS will also join president Arthur Rosenzweig in a senior position. Heard and Cohen are principals of an investor group formed by Breakwater Holdings, LLC, which has acquired an 80% interest in The Proxy Monitor, Inc. After leaving ISS in early 1997, Heard and Cohen, together with Robert Monks and Dwight Allison III, founded Breakwater Holdings, LLC. Breakwater and its affiliates invest in businesses that provide value-added information and services to financial institutions. With offices in New York and Chicago, Proxy Monitor provides proxy research and voting services to pension funds, investment firms, banks, foundations, labor unions, religious organizations and other institutional investors. (contact: Susan Assadi, at 602-860-8792)

Minnesota, the beneficiary of a $6.1 billion settlement of its tobacco lawsuit, will stop investing pension money in companies that get more than 15% of their revenue from tobacco. The decision affects only a fraction of the $43.7 billion in pension funds the state has invested. Secretary of State Joan Growe said tobacco stocks “have consistently lagged. They have consistently under-performed.”

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The Corporate Board’s May/June issue included two provocative articles which deal directly with the question of democratic corporate governance. Both provide arguments which lead in the same direction but both are flawed from the perspective of this editor.

John Vogelstein, president of Warbug Pencus & Company, outlines some of the lessons he has learned in the firm’s “investment banker” role. The firm consistently takes a long term view in these companies, which range from startups to NYSE giants. In most cases they are represented on the boards and Vogelstein believes their presence helps boards face up to problems, such as the need to replace a faltering CEO. With a great deal of capital at risk, their representatives “really do care” and they tend to “pull the nonowner directors along.” One recommendation, stemming from this experience, is that members of the board’s audit committee be paid double fees because these committees tend to uncover the most problems.

Surprisingly, after pointing out how value is added by having a large shareholder on the board, having board members with substantial sums at risk, and after embracing reforms such as the use of nonexecutive chairman or lead director, Vogelstein ends by writing that he would not want to “promote greater democracy in business governance or to empower stockholders further. I do not believe that democracy is an appropriate way to manage a business,” fearing that “increased bureaucracy would be the inevitable result of greater shareholder rights.”

For Vogelstein, much of pension fund activism has been “poorly thought out.” Although he is not explicit in what constitutes increased democracy in corporate governance, he appears to see it primarily as increased government regulation, such as the adoption of tax penalties when executive pay is not linked to pay for performance. However, at the heart of democracy is a system which facilitates representation, not one which necessitates stepping out of its own domain to enforce the opinions of its citizens. I would argue that increasing democracy in corporate governance, by allowing shareholders to more easily nominate and elect board members to represent their interests, would result in less government intervention and fewer poorly framed shareholder resolutions. Greater democracy in corporate governance might lead to a situation where all boards have a majority of directors who behave as responsibly as those of Warbug Pencus. Wouldn’t that be novel? One step in that direction might be to repeal SEC provisions which preclude use of Rule 14a-8 provisions for nominating directors. (see editor’s comments to SEC)

The other article which questions the value of shareholder involvement is by D. Gordon Smith, an associate professor at Lewis & Clark in Portland, Oregon. Smith briefly takes us through changes at Kmart, largely brought about through intervention by the State of Wisconsin Investment Board (SWIB). The main question centers around SWIB’s ability to evaluate the CEO’s competency. Smith argues that Joseph Antonini, Kmart’s CEO, may not have been incompetent and his ouster may have been in error. Placing policy decisions, such as firing the CEO, in the hands of shareholders would likely decrease the value of corporations because “if shareholders can override the discretion of the board, the value of centralized decision making (the primary value of the board) is destroyed.” “Corporate governance reform should strive to construct a system in which shareholders participate actively in director elections but refrain from participating in policy matters.”

Here, I believe, Smith moves toward the right conclusion, but for the wrong reasons. Directors are likely to have more relevant and more timely information concerning the firm than are shareholders. Therefore, board members, not shareholders, are more likely to know what measures should be taken to add value. However, the primary value of the board is not, as Smith claims, its own “centralized decision making” but its function in overseeing that of the CEO by bringing additional information and perspective to bear.

Smith gets it right when he suggests the nomination process be improved to encourage shareholder participation in director elections. However, he fails to provide any evidence or even logic when he asserts that director elections need to be less frequent. He undermines the value of his primary recommendation that less direct involvement by shareholders would probably yield better results.

To this editor, much of shareholder involvement should be seen as a sign of frustration. Even resolutions passed by substantial majorities are often ignored. Shareholders have escalated to binding bylaw resolutions (see “Shareholder Bylaws: A Threat to the Board” in the same issue). However, if shareholders participated in the nomination process and believed they could hold directors accountable each year, there would be little need for most shareholder resolutions and less need for government intervention.

Directorship (May) includes an interview with Ned Regan, former Controller of New York State. Regan reviews the proxy season and compares resolutions as canaries in the mineshaft, a forewarning of shareholder concerns. The current “flashing red light” is SWIB’s opposition to option repricing. Another sign is the growing number of resolutions calling for companies to consider sales, mergers or spin-offs which Regan believes come from newcomers to the proxy process with little interest in board governance matters. Managers can take solice in the fact that both TIAA-CREF and CalPERS seem to have moved to strategy of meeting with boards more privately and from the fact that owners of American businesses “operate only as a modest check on corporate activities. Overall, it appears to be a balance that has worked to the benefit of businesses, the US economy and shareholders.?”

The same issue also includes an article drawn from Ram Charan’s new book, “Boards at Work: How Corporate Boards Create Competitive Advantage.” The article presents solid, but not unusual, observations such as, “boards can do management an invaluable service by viewing the broader business landscape and helping management recognize major opportunities and discontinuities.” The publisher, Josey-Bass Inc., can be reached at 800-956-7739.
Across the Board (June) notes the findings of a survey by the Dentsu Institute on Human Studies. The percent of Japanese who say they live for work has dropped to 28%. This compares with rates of 74% in China, 70 in Thailand, 49% in Indonesia, and 48% in India.

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Ithe Corporate Governance Advisor (May/June) Richard Wagner and Louis Kersten are concerned that in a slower economy 20-25% or more of future value may be siphoned off through dilution from option exercises or through market repurchases. Kurt Schacht, of SWIB, takes on the much lauded State on Corporate Governance by the Business Roundtable (BRT)…”fancy cover, nice presentation but not much there.” Here are a few quotables. “Good corporate governance is not one size fits all…it’s apparently whatever size you want.” “A hint of conflict in the area of cumulative voting quickly relates it to a non-recommended status.” “An outside director, according to the BRT, is essentially anyone the management/board believes can represent the interests of shareholders with appropriate independence.” Their broadest criticism is that “it continues to be the management group being monitored that is setting the terms of its own oversight.”

In the same issue Patrick McGurn, of ISS, discusses SWB’s battle with the SEC over their declaration that option repricing is “ordinary business.” McGurn also describes CII’s new Shareholder Bill of Rights, adopted on March 31st. The definition of boardroom independence has been tightened to include an examination of ties between directors and the CEO, as well as calling for full disclosure of payments and other data necessary, to directors and their families, for shareholders to determine independence, whether or not such disclosures are required by law. The new guidelines recommend a 2/3 majority of independent directors and indexed options. Although it has been a decade since its last revision, CII plans to form a standing committee to update the policies each year.

We received the 3rd issue (Winter 1998) of a new publication by the National Investor Relations Institute, IRQ, which contained several articles which I expect would be of significant interest to our readers. In “Don’t Wag That Dog!” Shelley Taylor reviews a 1996 study which ranked the importance of 95 types of information institutional investors used making investment decisions. In the governance arena, investors want to know management has a significant stake in the company but the don’t particularly care if the firm has adopted a set of corporate governance policies. In “Does Shareholder Activism Make a Difference?” Marilyn Johnson reviews the literature and finds no widespread evidence that activism has made an impact on CEO turnover. Proposals are likely to be triggered by poor firm performance and negative press. They are more often by institutional rather than individual investors and the evidence supports the efficacy of institutional actions; they are successful in getting companies to adopt recommended governance changes. Firms that successfully negotiated settlements with CalPERS experienced a 1% increase in market value. In “Technology and IR” Hank D’Amrosio describes Bell & Howell’s experience with broadcasting its annual meetings over the internet starting in 1996 and allowing on-line proxy voting starting in 1997. “IR on the Net” provides a valuable guide to corporate governance sites on the internet; we thank IRQ for listing CorpGov.Netfirst as a “great starting place” and for noting our current news section.

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May”s “Corporate Governance Today” conference at Columbia Law School’s Sloan Project on Corporate Governance brought together a broad diversity of academics. In his summary introduction, Mark Roe divides the papers presented into the following eight categories: venture capital, hierarchies and boundaries, the boardroom, employees and the firm, abstractions of the American academic view, whether corporate governance systems world-wide are converging, comparisons and differences in national systems; and the corporation in its social and political context. Copies of papers are available from Lisette Lavergne.

Many interesting findings and theories were put forth, continuing to build a strong base of academic scholarship. Arnoud Boot and Jonathan Macey, for example, argue that transparent firms will tend to get diffuse ownership because distant shareholders would get the advantage of objectivity but not need closeness to get good information. Opaque firms would attract block ownership because diffuse owners couldn’t do much without good information. Margaret Blair and Lynn Stout argue the board’s job is to divide the pie up fairly, not to maximize shareholder return. Sanjai Bhagat and Bernard Black find little correlation between independent directors and enhanced value but theorize that independent boards might be better in some settings, such as responding to a hostile tender offer. Roe adds that maybe independent directors need more of a personal or institutional financial stake or stronger ties to shareholders to be effective.

Katharina Pistor finds that managers are the principal beneficiaries of codetermination because they play off labor against capital. Jeffery Gordon looks at United Air Lines and theorizes that employee ownership may be unstable in the long run as employees see the need for diversification. However, it may have critical advantages in managing an economic transition, including facilitating cuts in wages by trading for equity. If a culture of commitment can be built, long-time employee ownership may enhance a firm’s ability to compete and adapt. In looking at Italy, Jonathon Macey notes that derivative suits are not permitted, takeovers don’t happen and institutions don’t hold large blocks leading them to monitor. As a consequence, firms that are large enough to go public in the U.S. stay private where monitoring is easier. In examining pension funds, Jeffrey Gordon finds that employees haven’t benefited much from the run-up in stocks. If they are in a defined benefit plan, the sponsoring firm wins; if they are in a defined contribution plan they tend to lose again because many tend to invest less heavily in equities.

The latest edition of Ralph Ward’s Boardroom INSIDERrecommends the Management Assistance program for Nonprofits. “The Nonprofit Manager’s Library offers solid board links on agendas, job descriptions, and legal issues, plus a helpful discussion board.” He also summarizes a May 25 article by Geoffrey Colvin in Fortune who points to research findings that independent boards exert LESS power over CEOs. Companies whose directors own a lot of stock are often POOR performers. Boards actually DO pay CEOs for performance. Boards are NOT under increasing pressure from shareholders. These anomalies often stem from friends, families, poor performance measures and the fact that “a rising stock tide lifts all boats.”

CEO’s average tenure in the US is about 3 years, says Edward Ryan, managing director of Executive Interim Management, based in New York. (see CEOs need speedy success).

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Europe II’s Programs for Reform in Strategic Markets (IFC-PRISM), has recently been approved to implement a Corporate Governance project in Armenia, in partnership with the Netherlands. They are currently looking for a Dutch expert in Corporate Governance to serve in the capacity of Project Manager in Yerevan, Armenia. Contact: Lynne Soukup, Assistant Privatization Officer, Room F-10P:206, 2121 Pennsylvania Ave, NW, Washington, DC 20433 Fax: (202) 974-4321.

The Social Investment Forum released its second edition of “Tobacco’s Changing Context.” The guide contains new information about tobacco settlements, updated lists of responses by institutional investors, new performance information and more. Call 202-872-5304.

The shot heard round the world? That’s how Sarah Teslik ofCII characterized TIAA-CREF’s victory in ousting the entire board of Furr’s/Bishop’s Inc. (a struggling cafeteria company). “Once one pension fund does it,” others are likely to follow, she is quoted as saying in the 5/29, WSJ. However, the article goes on to describe relatively unique circumstances. TIA-CREF holds almost 18% of Furr’s/Bishop’s. Seven other shareholders own another 66%. It could be the start of a revolution, but the original “shot heard round the world” was soon followed by many more. So far, this appears more like target practice on a sitting duck. In the same issue several had harsh words for Providence Capital president Herbert Denton. Is he a real reformer or just a blackmailer? (see also Be not a wimp, Forbes, 6/2)

Fortune’s Anne Fisher, asked readers if CEOs in the U.S., who now earn 185 times their employees’ average pay (up from a ratio of 142 to 1 in 1992) are worth it. 70% of the 718 respondents said CEOs make too much money at the expense of shareholders and the employees who do the real work. Middle managers seem especially embittered. Others pointed out that entertainers and athletes are the real overpaid Americans, (see “Readers on CEO Pay,” 6/8).

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Archives: May 1998

Company Secretary: The Official Publication of the Hong Kong Institute of Company Secretaries (May 1999) is largely devoted to the question of offshore incorporation. Should Hong Kong be worried? We might also add, should the U.S. or other jurisdictions be worried? Probably.

Mark Sharp begins his article by noting a 43% increase in the number of companies listed on the Hong Kong Stock Exchange (SEHK) over the past 5 years but the number of companies listed in Hong Kong has practically remained unchanged. Over the past 10-15 years almost half of all locally listed companies were incorporated in Bermuda. For years, it was assumed the political uncertainty of Hong Kong’s political future was the driver but the move offshore continues to accelerate, attracted by reduced cost and less burdensome regulations.

“Bermuda will bend over backwards to ensure its company law is user-friendly.” The British Virgin Islands (BVI) has become the country of choice for private businesses. Lack of disclosure requirements mean that SEHK does not approve BVI companies for listing but the BVI has now registered about 300,000 so-called international companies during the past 10 years. Minority interests are not well protected in the BVI where even who owns the company cannot be learned at the registrar.

David Holloway, an investigator, points out that international offshore financial centers (IOFCs) lack transparency and allow easy concealment of assets. The Bahamas, for example, require little in the way of credentials screening, no screening of company assets, no regulation of trusts – “virtually no regulation whatsoever – and banking secrecy.” In Liechtenstein you can incorporate, through your banker or attorney, without even disclosing your identity. There are an estimated 1 million anonymous companies incorporated in IOFCs with assets around $5 trillion. Search the internet for “offshore incorporation” and you’ll come up with over 4,000 “hits,” usually someone offering to help you hide assets from someone else.

Nisson plans to cut its board from 37 to 10 with three of those directors coming from Renault, which recently bought a 37% stake in the company. The new board will be in their 40s and 50s instead of the current Japanese board average of 60. Several other Japanese boards are sliming down to provide “sharper oversight and more accountability to shareholder,” according to a 5/1/99 report in The Economist (No Country for old men, pp. 60-61). Firms are beginning to bring in outside directors but more change is needed.

Pensions&Investments editorial warns pension executives to ask their consultants to report how much revenue they have recieved in the previous 12 months from each of the money managers they recommend…an area missed by the SEC in proposing “pay-to-play” rules at public pension funds. The same issue includes an article on the interesting Social Choice for Social Change campaign being conducted by Neil Wollman and Abby Fuller in order to get TIAA-CREF to invest 5-10% of social choice account assets ($150-300 million) in companies that are models of social and environmental responsibility. (P&I, 5/17/99)

The Corporate Board 5-6/99 includes an article entitled “CEO Pay: Facts and Fallacies” by Jay W. Lorsch which attempts to demonstrate, through comparisons with the pay of sports players and other arguments, that CEOs are really not overpaid. “No mater how you look at it, CEO’s get less than one-half of one percent of pretax corporate earnings.”

Lorsch steps through several criticisms and often addresses them on the basis of a survey he recently completed of compensation committee chairs at 72 large public companies. For example, addressing dilution because of options he notes that use of options for broader groups are likely to cause the greatest dilution and that buying back stock to match the options being granted avoids dilution. True, however, broad based options are more likely to provide motivation to those who will make the most difference. It is absurd to believe that piling options on highly compensated CEOs will increase company performance as well as more broadly based options. In addition, many, including Gene Epstein of Barron’s, believe that “most options exercises involve the issuance of Treasury stock.” (see Little Big Men, Barron’s, 5/3/99)

Lorsch also indicates that “almost all of those he surveyed said they had not reset option prices and would not do so in the future.” While Lorsch does include good suggestions on how to reduce the “Lake Wobegone” effect (all CEOs are above average) it would be interesting if The Corporate Board ran a follow-up article by Graef Crystal to do a little fact checking counterpoint.

The same issue of The Corporate Board includes an article onDemocratic Governance by James McRitchie and a look ahead at “Your Next Generation of Directors” by Linda Wilson of Holland & Davis.

Australian study finds proxy vote averaged only 32% of voting capital. Very few institutions bother to vote. When they do they tend to vote in favor of the board position. (see It’s time for institutions to stand up and be counted, by Stephen Bartholomeusz in The Age, 5/14/99)

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John Chevedden, one of our forum contributors, achieved an 18% vote at Ford for a resolution to appoint independent directors to key board committees. As noted by the Wall Street Journal, “an 18% vote against management where the Ford family controls 40% of the voting rights is a signal to Ford that holders are looking for a more independent voice on the board.” In a personal note, Chevedden pointed out that at least Ford has welcomed attendance and has, in fact broadcast the meeting in Times Square and on the internet. In contrast, GM has held recent meetings in Wilmington, Delaware. The highlights of the Delaware meetings have been metal detectors for all shareholders, a hotel basement location, attendance of about 99 shareholders and timing to coincide with the eve of the 3-day Memorial Day weekend.

John tells us of a real victory at Northrop Grumman, with 3 shareholder resolutions winning: Restore simple majority vote 66% (authored by Jerome McLuaghlin), restore annual election of all directors 52% (Larry Anduha) and enable stockholders to vote on poison pills 69% (John Chevedden) Chevedden said these votes send the message that shareholders want greater management accountability for company performance. He has posted the text of the shareholder resolutions at http://messages.yahoo.com/?action=q&board=NOC. Warning: you’ll have to search on that board for messages 1343, 1384 and 1387, but it is a simple task.

Update on the above. According to a May 20 1:57 PM ET wire service report, Northrop said one of three proposals narrowly missed victory by a margin of 50.16% vs. 48.7% of votes cast. Preliminary tallies had shown the measure passing, but those did not include a large block of shares voted at the company’s annual meeting Wednesday.

Northrop’s last-minute acceptance of ballots (to its own advantage) is in contrast to Boeing that announced that it was closing its telephone and internet voting 1-day before the annual meeting. Boeing later admitted it actually closed voting 3-days before the meeting. One shareholder proposal on the Boeing ballot received a 49.9% yes vote.

Chevedden notes, “This raises the question of who establishes and monitors the rules on closing the polls. This is particularly important because according to the Investor Responsibility Research Center, Washington, DC, Northrop does not have confidential voting. Hence, management can track how large blocks of stock are voting and could contact large blocks of stock to submit a vote or change a vote. Did Northrop allow extra time past a previously established deadline to enable lobbied votes to arrive?”

IRRC reports on a recent meeting of the ABA. Among many issues discussed, it was noted that because the SEC rule requiring disclosure of repricing activities in a proxy statement generally applies only to the 4 most highly paid employees and the CEO and because repricing outside director’s stock options might not be considered significant under FASB rules, “many companies may not disclose information about the repricing of outside director’ stock options.” (see Corporate Governance Highlights, 5/7/99)

Center for International Private Enterprise (CIPE), an affiliate of the U.S. Chamber of Commerce, has posted an excellent international review of corporate governance by Stephen M. Davis, president of Davis Global Advisors, entitled “The Race for Global Corporate Governance.” Davis contends G7 leaders last year identified corporate governance reform as the “newest pillar of the post-Cold War economic architecture” and view it as “key to spurring prosperity and jobs by strengthening corporations’ ability to compete for global capital.” Davis reviews how countries around the world are performing on five Leading Corporate Governance Indicators™ tracked by DGA which include:

1. presence of national best practice codes for corporate boards;

2. relative participation of non-executives on corporate boards;

3. tendency to split the roles of chairman and CEO;

4. presence of key board committees; and

5. degree of disclosure of executive compensation information.

BusinessWeek senior writer John A. Byrne says challenges to poison pills are long overdue. “Shareholders should have the right to vote on whether a pill–which could affect the stock’s value–should be nenewed and under what circumstances.” Addressing Lubrizol’s reluctance to accept TIAA-CREF’s winning initiative to dump their dead-hand pill, Byrne writes, “perhaps the ultimate irony is that it was exactly this kind of self-serving management that helped fuel many of the raiders that these pills were designed to ward off in the first place.” (see Poison Pills: Let Shareholders Decide, 5/17, p. 104)

European CEO pay may be catching up with those in the US but it’s a trend that doesn’t go over too well among many, according to Forbes writer Deborah Orr. Her 5/17 article, entitled Damn Yankees, includes a brief recount of findings by Korn/Ferry, news reports and opinions. One anecdote involved a change in Dutch law after 4 board members at Dutch insurer Aegon made $50 million off stock options. The new law adds a tax formula to factor in the implied future value of options.

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Call for papers. GOUVERNANCE, aims to be a forum for the dissemination of knowledge, innovative developments, best practices and new approaches in the field of corporate, organizational and institutional governance for French speakers around the world. The first issue, to be launched in winter Y2000, will be focused on the theme of Corporate governance: theories, challenges and paradigms. For more information contact: Valérie Lehmann, MBA, coordinator, or Editor: Ameur Boujenoui, Ph.D.

Peter Eigen, chairman of Transparency International, argues NGOs must fight for freedom of the press, an independent judiciary, effective auditing of government and protection for whistle-blowers, and the environment as part of an international corporate governance strategy. (see Can we count on industry to ensure good corporate governance becomes reality? By Frank Vogl, Earth Times News Service)

Shareholder Communications to acquire Georgeson to create Georgeson Shareholder Communications, the largest global proxy solicitor with combined revenues of $100 million.

Sacking season: CEO purges abound, according to CBS MarketWatch. “Technology companies were among the biggest contributors to growth in the first quarter, corporate America’s best yet in terms of profit growth since the fall of 1997.” Patrick McGurn, of ISS indicates the higher turnover in that industry is probably due to short product cycles. “These guys keep their resumes up to date because they know they are only as good as their last quarter,” said Ralph Ward, publisher of the Boardroom Insider newsletter.

Binding proposals are up this year with 39 submissions thusfar compared with 23 last year, according to IRRC. Shareholders won major victories to eliminate Bergen Brunswig’s dead hand poison pill (74% in favor), do the same at Lubrizol (68% in favor), and allow shareholders to redeem or vote on renewal of Chubb’s poison pill (69% in favor). Chubb has made it clear they will not implement the bylaw. John C. Wilcox, Chairman of Georgeson argues Binding Shareholder Proposals are Un-American, arguing in part, that to the extent shareholders disagree with their representatives’ actions, they should “elect new ones in their place.”

Boeing internet voting glitch or fraud? A shareholder proposal calling for annual election of all directors won 49.9% of votes cast; 47.8% opposed it and the remaining shares abstained. Some shareholders complained they were shut out because they couldn’t cast their vote on the Internet starting on the Friday pior to the meeting. (see 1st Boeing e-mail proxy vote called success, South County Journal, 5/5/99)

Maxxam shareholders activists are urging election of outside directors and cumulative voting. (see PR Newswire, 5/5/99)

Nell Minow spoke about shareholder activism to the 36th annual conference of the Society of American Business Editors and Journalists. (see Shareholder Activist Nell Minow Addresses SABEW Convention)

Pension funds in the US increased equity allocations from 39% in 1993 to 61% in 1997. Watson Wyatt analysts expect to see increased pension equity allocations by 2002 in Hong Kong, Canada, Ireland, Australia and most major European markets with declines only in the UK which is already at 72%. Passive management strategies, such as indexing, is expected to increase from 26% in US to 35% of equity asset investments. In the UK it is expected to grow from 20% to 30%. Foreign equity exposure is also predicted to rise around the globe. (see Foreign pension markets growing faster than U.S., Watson Wyatt survey says, P&I, 5/3/99)

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Daily inflow of investments to index funds contributes to performance of S&P 500. As reported in 5/10/99 edition of Business Week, researcher William N. Goetzmann notes the data “suggest that the performance of the S&P 500 has gotten a permanent lift from the popularity of index investing.” (seeIndex Funds and Stock Market Growth, William N. Goetzmann, Massimo Massa) Implications for corporate governance? We touched on this subject in a conversation withRichard Koppes in 1996.

Caisse, Ontario Teachers, the Ontario Municipal Employees Retirement System, Burgundy Asset Management Inc. in Toronto and Montreal’s Jarislowsky Fraser & Co. Ltd. identified as activist investors in Canada. Others prefer to apply pressure through surrogates like Fairvest Securities, a Toronto brokerage that specializes in shareholder-rights advocacy. (Montreal Gazette, 4/30/99, When the head of Ontario teachers’ fund blasts management greedheads, shareholders benefit.)

If any CEO deserves to be highly paid, Gap’s Millard Drexler has to be the man. But, asks consultant Graef Crystal, “is it appropriate to give someone restricted stock and stock options that, using contemporary values, would be worth some $1.4 billion?” Crystal suggests that Drexler take $200 million of his after-tax option profits and make a $2,000 gift to each of his “front-line” employees. “And that $2,000 would be tax-free to the employees, because Drexler is permitted to give small gifts tax-free to any number of people in a given year. Even after doing this, he would still be left with his hundreds of millions in stock as well as lots and lots of remaining option profits.” (San Francisco Business Times, 5/3/99, Gap CEO’s bounty could be perfect perk for clerks)

Ira Millstein to highlight ASCS annual conference to be held at the Greenbriar on June 23-27. Participants will also hear from SEC Commissioner Laura Unger. ASCS survey finds May is still the most popular month for annual meetings and 10 a.m. is the most popular starting time. More than 80% continue to serve lunch or refreshments, 13% provide sample products. The Society’s “Job Bank,” which encourages companies to turn first to society membership when filling vacancies, is reportedly off to a good start (“members only” part of their site). The ASCS site has one of the better summary listings of SEC proposals and a discussion about the comprehensive “Aircraft Carrier” release.

Ralph D. Ward takes a look at the recent sacking of Compaq Computer’s CEO, Eckhard Pfeiffer, and reaches an interesting conclusion. See his guest commentary, “COMPAQ: Management Failure or Boardroom Success?” in our Forumssection.

More evidence of a paradigm shift from “managed” corporations to “governed” corporations can be seen in April’sDirectorship which reports the number of CEOs sitting on their own nominating committees has decreased by 116 since 1994 among those firms in their databank. Further, Richard Koppes discusses his experience on Apria Healthcare Group’sboard. The board includes a mix of talent and ownership which some see as a prototype for the next millennium. (In the interest of full disclosure, the editor made an an investment in Apria when Koppes was appointed; its value has more than doubled.)

Foundation for Enterprise Development has developed a “virtual interactive consultant,” VIC, designed specifically to help entrepreneurs who are considering using equity sharing (employee ownership) as a means to recruit, motivate, and retain their workforce. Also of interest is their online Ezine,Leading Companies. Each issue contains case studies, tips, trends and articles on employee ownership and open book management.

Mutual funds, the fiduciary obligation of directors is to hold down costs for investor/owners. Yet, Nikolaj Siggelkow, of the University of Pennsylvania’s Wharton School, finds that fund sponsors do everything they can to increase their own profits. The dubious theory is that fund holders pay 12b-1 fees so the fund can run ads. As more money flows economies of scale are created and total costs will fall. It doesn’t happen. Business Week advises, “although 6,722 of the 10,614 funds in Morningstar’s database charge 12b-1 fees — and more than a third take the maximum — that still leaves 3,892 that don’t. Look to those first.” (Business Week, 4/30/99, “Who Do You Think Those Mutual-Fund Fees Fatten?“) Visit their Fund Fee Hall of Shame.

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Book Review – Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value

Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value by Carolyn Kay Brancato. Viewing your stock as you would the products you sell, and trying to woo shareholders as you would potential customers offers the ultimate offers “win-win” situation, but only if the shareholders so selected continue as passive consumers. Continue Reading →

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Archives: April 1998

April’s Director’s Monthly focuses on Mergers & Acquisitionsincluding Vice Chair Joseph G. Sponholz of Chase Manhattan reviewing their merger with Chemical Bank. Eileen Birge and Nicholas Vitalari of the Concours Group write on integrating information technology in M?. Also included is an extensive listing of upcoming NACD seminars around the country.

AFL-CIO “10 Key Votes Survey” found 45 money managers of union funds cast an average of 44% of their votes against the unions’ position. Votes apparently will be watched more closely this year. The report was reportedly a “real wakeup call” for some officials but also demonstrates there’s room for labor to increase its impact. (see 4/20 P?)

Thomas A. Stewart, author of Intellectual Capital: The New Wealth of Organizations, has written a provocative series of two articles in Fortune. The first appeared on April 13th and posits that is useful to think of employees not as assets but as investors since, increasingly, we are all expected to be knowledge workers. He points out that “overall, U.S. companies today need 20% less in tangible assets to produce a dollar’s worth of sales than they did a quarter-century ago.” Companies provide a place where the individual can do things they can’t do alone and they can also do them at lower cost. Today’s companies are magnets for intellectual capital; they provide a stimulating community of practice, a learning environment. In addition, they provide brand and reputation; Stewart notes that because he works for Fortune, people return his phone calls and presume he is talented. Third, the company “limits our liability, annualizes our income, tides us over during unproductive patches, collects money owed by our customers, borrows on out behalf. But if the intelligence of employees is contributing an increasing proportion of return, compared to the capital invested by stockholders, it may be time to reexamine how the returns from such different forms of equity are divided.

Stewart’s second article, which appeared in the May 11th edition, begins to address that issue. For example, if we are now to consider employees as investors, that has implications for the duty of directors, since it’s their responsibility to maximize investors’ rewards. The board becomes a “mediator of rents,” according to Ira Millstein. Millstein proposes that compensation committees ought to be replaced with “remuneration committees,” responsible for the entire reward system, setting the mix of wages and equity compensation appropriate given the nature of employees’ human-capital investment. “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.”

In law, accounting, and consulting partnerships human capital is already king. Contrast these partnerships with a company relying primarily on large capital intensive factories, such as Alcoa, and we’ll find that most firms lie somewhere in the middle. Seeking a solution, Stewart points to Macquarie Bank, Australia’s premier investment bank. At Maquarie the entire first 10% goes to shareholders but additional profits are divided according to a formula whereby, as return on equity rises, the staff takes an increasing % of the pot.

Boards should use stock to compensate people for company specific knowledge investments for two reasons, according to Stewart. First, equity provides the knowledge employee (investor) with greater incentive to invest and a way to keep at least a portion of the returns even if they lose their job. Second, the voting power of stock offers a means of protecting their investment. Stewart eschews the use of options as a free ride using phony accounting.

Government should keep its hands out of regulating charity giving by corporations, according to an editorial in Directors & Boards. HR 944 would require disclosure of each gift in the annual proxy statement and HR 945 would require polling of shareholders to determine their wishes. Both measures are by Paul Gillmore. In another item, editor James Kristie notes the day Campaq was named to have the board of the year its stock went down 3 and 1/2 points, so we’re still looking for evidence to support the McKinsey & Company study.

Companies with at least 20% employee ownership were found to be more organizationally stable than non-employee ownership companies, in a recent study by Margaret Blair of Brookings and Douglas Kruse and Joseph Blasi of Rutgers. None of the employee ownership companies disappeared due to bankruptcy, liquidation, or private buyouts, while 25% of the matched sample did. Return on assets was also higher at 20.4% vs 16.7%.

Data compiled by London-based Capital Strategies shows an index of companies with at least 10% employee ownership continued to grow faster; up 26% in 1997 compared to 21% for FTSE. 100 pounds invested in the index in 1992 would be worth 341 pounds, compared to 196 pounds if invested in the FTSE.

The same issue of the Employee Ownership Report, (May/June) includes a case study on R.R. Donnelly & Sons. This Fortune 500 firm uses a broad option grant pland and open-book management, and focus groups to foster its participation in decision-making by its employee ownership community.

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Royal Dutch/Shell published its first social responsibility report, detailing failings and successes on issues from bribery to global warming and community projects. (abcnews.com)

Making CEOs whole is the subject of an article in 4/22 WSJ. Highlighted is Ronald T. LeMay’s movement to Waste Management and back to Sprint.

Tracking shares, which don’t represent legal ownership of corporate assets and carry practically vote-less rights, have reached about $100 billion in issues, according to a report in the WSJ (4/20).

McKinsey & Co. reviewed 115 acquisitions in the U.K. and the U.S. done in the early 1990s; 60% failed to earn returns greater than the annual cost of the capital. Keefe Bruyette & Woods found that 6 out of 8 of the largest bank mergers announced in 1995 underperformed Keefe’s bank-stock index from the day before the mergers were announced to last July 16th. First Union’s purchase of CoreStates, for example, was for more than five times CoreStates’ book value. “First Union has talked about wringing out $250 million in annual cost savings, and, if in place last year, that would have brought the annual take to $1.1 billion and increased the return — to 6.8%.” Hardly stellar. A study by, Steven Kaplan at the University of Chicago and Michael Weisbach at the University of Arizona done in 1992 found that 44% of acquired companies were later sold off — often at a loss. (Barron’s, 4/20) (see also BusinessWeek, 4/27 and The Hindu, 4/20)) For help in avoiding these problems see The Art of M? and The Art of M? Integration by Lajoux.

Apple bars the press from their shareholders meeting which is scheduled for April 22 at 10 a.m. Pacific time at Apple headquarters in Cupertino, Calif. (ABCNews.com)

Study finds small-to-midsize companies grant more than four times the median current-year stock option grant than large companies. Directors at small-to-midsize companies own a median of 51,080 shares — at large companies, the median is 15,674. The median number of board members at large companies is 16; of these 11 (69%) are outside directors. At small-to-midsize companies, the median is nine with only four (44%) independent directors. For a copy of the complete survey report, fax a request to Mary L. Feldman, Senior Vice President, Public Affairs, The Segal Company, One Park Avenue, New York, NY, 10016, 212-251-5490. (PRNewswire)

Y.R.K.Reddy invites submission of articles for a book to promote Corporate Governance in India. Papers on specific country models (American, German, East European); country comparisons; Corporate Controls & Market Structures; debates on specific codes (like the Cadbury Committee’s); and theories on handling dilemmas, carrying out fiduciary responsibility under hostile conditions are welcome. Contact[email protected]

Control of the internet to be given over to an independent global board to reduce the government’s legal liability. “What we are looking to do is to turn over all the authorities we have to a neutral, private, non-profit organization that would have a fully international board of directors which would be constructed in a way so that it could withstand legal challenges and not have to depend on the authority of the U.S. government or any other government,” said Ira Magaziner, Clinton’s information technology policy adviser. (WSJ, 4/17)

Use of the internet is up. Ameritech reports 10 times as many voting on the internet for this year’s annual meeting as last year’s. ADP says it offers to log votes via the internet for about 1,000 companies and plans to extend this option to all by next year. (WSJ, 4/16)

The current Ivey Business Quarterly contains a facinating article entitled “Beyond Carrot and Stick” which attempts to build from the work of Alfie Kohn. Authors Paul Britton and Terrence Walker indicate the first step is to get base pay right. This is the amount the market is willing to pay for the level of talent required. The danger is in losing sight of the value of the employee’s contribution to the organization. Although the author’s don’t note it, this might be what Blair terms firm specific human capital. “Designing a plan without stretch will get you entitlement, and designing an incentive plan with no hope of payout will demoralize.” One of the case studies cited is that of Springfield Remanufacturing Corporation (SRC) and open-book management which Jack Stack documented in The Great Game of Business. “When you appeal to the highest level of thinking, you get the highest level of perfomance.” Britton and Walker, following Stack, point out that employees must have access to information and the ability to understand how to translate business objectives into action locally. (reprint BQ97205; call 800-6496355 to order)

The Board of CalPERS adopted revised corporate governance principles. The draft released last June probably served as something of an embarrassment to the Board. The most aggressive standards, such as recommending that directors who sit on a board for more than 10 years be considered company insiders and that boards limit those over age 70, have been dropped. One of CalPERS’ own board members has served for more than 27 years. The head of the Investment Committee and the President of the Board have both served more than ten years. Those over 70? I won’t go there. Under the standards adopted, boards should “consider the issue of continuing director tenure” and take steps to ensure the board “maintains an openness to new ideas and a willingness to critically reexamine the status quo.” (see press release)

The Public Employment and Retirement Committee of the California Senate approved SB 1753 (Schiff) and SB 1879 (Hayden), both measures intended to prevent conflict abuses at CalPERS and CalSTRS. For more information contact David Felderstein or Nancy Shipley at 916-445-8958.

Nuevo Energy Co. will name shareholder activist Charles Elson to its board, according to a report in the 4/14 WSJ. Elson’s may come at the behest of Relational Shareholders LLC, a La Jolla firm that invests in companies with undervalued stock which tries to turn companies around by seeking to change the board, either through proxy battles or through the appointment of new board members. Relational Shareholders bought 5% of Nuevo Energy last year. Nuevo’s largest investor is CalPERS.

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Pactrick McGurn continues his coverage of options issues in the 4/10 ISS Friday Report. He reports that SWIB has asked the full SEC commission to reverse a staff decision that may allow Shiva Corp to exclude an anti-repricing bylaw from its ballot because staff considered the subject “ordinary business” excluded under Rule 14a-8(c-7). SEC staff believes that since SWIB’s proposal covers all corporate employees, it relates to general compensation policies. According to McGurn, they left the door open for SWIB, CII and other interested parties to raise concerns over “changing capital structure” and the cost of repricings to shareholders via dilution.

McGurn notes several reasons why the SEC should “graduate” option repricing from the ranks of “ordinary business.” These include the fact that repricing is becoming commonplace (14% of the Technology 250 repriced last year), and they are a matter of growing public concern. An ISS survey of 118 large institutional investors found 71% in favor of prohibiting repricings without shareholder approval. Additionally, the use of board-based option programs has exploded, the cost of repricing such plans is likely to be large, and broad-based plans are rarely put to shareholders for a vote.

Management Fads and Fashions by Richard Petty, provides a handy one paragraph synopsis of four major areas, such as performance measurement, as well as over a dozen fashions, such as customer profitability analysis. (see Company Secretary, April 1998) In the same issue, Bob Garratt, Chairman of Organisation Development Limited, calls for tougher regulation of boards and directors in his “Targeting Complacency in the Boardroom.” He warns readers, primarily in Hong Kong, that Singapore is looking to establish its own institute of directors, codes of conduct, and accreditation. Hong Kong could be left behind unless complacency is reduced. Garratt points to the accredited diploma program run by the Hong Kong Institute of Directors and foresees a time “when all directors will be accredited and registered.”

Over the last two months South Korea, Thailand and Indonesia have agreed to implement IMF reforms that call for greater governance and accountability from financial and investment institutions and corporations. The driving force is the need to provide investors with transparency — timely, accurate information about company performance. Agreements call for audits of corporations and financial institutions to be conducted according to internationally acceptable standards using teams from internationally recognized audit firms. (seeModel of Compliance: U.S. Corporate Governance Standards Go Global, New York Law Journal, 4/9)

Assets of U.S. pension funds stood at $7.4 trillion at the end of 1997, up from $6.3 trillion a year earlier, dwarfing the $5.6 trillion held by mutual funds and life insurance companies combined. Equity holding were down to 28.1% vs 28.5% at end of 1996. As a share of total wealth by American households (excluding real estate), pension fund assets represented 27.5% (19% if real estate is included). Public pension funds increased 22%; private pension funds grew 17.6%. Defined benefit pension plans exceeded contributions by $2.7 billion, while defined contribution plans netted $85.6 billion. DB plans have been net sellers of equities for more than a decade, whereas DC plans have continued to be net purchasers. (see 4/6 P?)

Long-term corporate investment and the % of institutional ownership were found to be positive correlated in a study entitled “Do Institutional Investors Exacerbate Managerial Myopia?” Contact authors Sunil Wahal, Emory University and John J. McConnell at Indiana University. (see 4/6 P?)

Ronald Machold, director of the New Jersey Division of Investments and one of the first co-chairs of CII, is profiled inP?.

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Three new funds in Europe are aimed at creating shareholder value. As we reported last month, Hermes Pensions Management, the parent company of one of the UK’s largest pension management groups, and Lens Investment Management, the United States-based investment group, are linking up to create the UK’s first institutionally-backed fund manager with the specific aim of assisting in the improvement of shareholder returns on companies with hidden underlying value. The first fund, Hermes UK Focus Fund, will be launched in the Summer and will concentrate on mid- to large-capitalisation companies quoted on the London Stock Exchange, taking stakes of 2-10%. The fund will work with management but confrontation might be necessary at times.

The European Renaissance Fund Ltd., will be an open-end fund with an initial target of $109 million. It’s a joint effort of Arlington Capital Management Ltd and Taube Hodson Stonex Partners Ltd. Arlington will reportedly communicate specific business strategies to boards of portfolio companies and may take seats on boards.

The third new fund is ABF Euro V.A., a combination ofAndre Baladi, co-founder of the International Corporate Governance Network, and Pierre-Henri Leroy, founder of Paris-based Proxinvest. It will use an index-fund strategy (180 stocks) tilted in favor of companies that meet corporate governance criteria. Fees will run 1% of annual asset value plus 20% outperformance relative to the FT Europe index. Criteria include corporate communications, voting rights, board composition, corporate strategy, corporate performance compensation, shareholder returns and stock price. Favorably rated stock will be overweighted and those with a poor rating will be underweighted. (see 4/6 P?)

New service available through First CallInstitutional Shareholder Services (ISS) is making its information available over FIRST CALL Research Direct and FIRST CALL Notes(tm). The Wall Street Transcript, a weekly publication representing the interests of long-term investors, is now available on Research Direct as well. With these agreements,there are now 15 subscription services available on Research Direct.

Arecent survey of leading U.S. banks, insurance companies, pension funds and mutual funds by Broadgate Consultants(212-232-2222) found that although they expect to increase investment substantially over the next twelve months in European equities, over 90% were are concerned that foreign companies do not pay enough attention to shareholder value and governance issues. Nine of 10 said information was less complete than what they are accustomed to receiving, 40% felt that European-based research was not useful in for specific companies. Most felt regular and systematic contact with senior management was very important.

Areport to the OECD chaired by Ira Millstein by titledCorporate Governance: Improving Competitiveness and Access to Capital in Global Markets, recommended that OECD issue voluntary “best practices” guidelines for boards, formulate standards for transparency and accountability, and consider the right to vote and participate in annual meetings an asset that provides opportunity to influence the direction and management companies. These and many other recommendations are listed and discussed in an April 3rd IRRC Corporate Governance Highlights.

The Teamsters lauched their annual attack on the “least valuable” directors with Robert Stone, who sits on the boards of Kirby, Tandem Computer, NovaCare, Core Industries, Russell Reynolds Associates and various funds managed by Scudder, Stevens and Clark, in the number one position. (IRRC)

Expanded thoughts on The Emperor’s Nightingale; Restoring the Integrity of the Corporation in the Age of Shareholder Activism by Robert A. G. Monks, our featured book of the month. (see review. Please share your opinion).

New Shareholders’ Bill of Rights adopted by the Council of Institutional Investors calls for indexing options granted to directors and managers to peer or market groups. In other news covered by ISS, IBM, which doubled the number of employees receiving stock options last year, more than tripled the number this year. The move is intended to keep talent with the firm.

Weil, Gotshal & Manges produced a report for the OECD on best board practices around the world. Contact Holly Gregory at 212-310-8038 for details. (reported in Directorship)

Business philosopher, Charles Handy, and author of The Hungry Spirit: Beyond Capitalism: A Quest for Purpose in the Modern World, calls for voting and nonvoting shares. Voting shares would be confined to and traded among core employees, long-term investors, and others with a long-term relationship with the business, such as large suppliers. This would differentiate among those who are merely betting on the company and those who have a real stake in its future.

Handy notes that much of the wealth of advanced industrial societies is now derived from the knowledge that workers bring to the job. “If anyone buys the business, they are buying a customer list, some product brands, and maybe some research, but, mainly, the hope that the best of the people working there will stay with the new owners for the ride.” Handy believes the influence of shareholders has become too dominate, that individuals will “begin to expect from their work communities the same collection of freedoms, rights, and responsibilities that they have in the wider society. People are property no more.”

As businesses realize their best people are really volunteers, there because they want to be and not because they have to, Handy expects models will be created which will provide them with a more democratic workplace. (see interview and A Better Capitalism, Across the Board. 4/98)

An assessment of the impact of the 1995 Private Securities Litigation Reform Act by Jay Eisenhofer and Abbott Leban leads off the March/April edition of the Corporate Governance Advisor. They find that only 6 public pension funds have participated as lead plaintiffs in the first 124 cases. They point to a recent perspective offered by Wayne Schneider, General Counsel of NYSTRS; a Federal securities law claim is a plan asset, and as such, it must be managed with a view to optimizing the fund’s return. The incremental return from a fund taking a lead plaintiff role is often not worth the costs. The authors review landmark cases and conclude that total volume of securities class litigation hasn’t changed much; traditional firms still dominate; and there has been a shift to state courts. They don’t expect institutional investors in the private sector to seek an activist role because most are “hopelessly conflicted.” On a positive note, increased competition among the qualified firms for the business of activist funds is reducing the attorney-fee portion of expenses.

Vermont enacted legislation banning trustees of the state teachers’ pension fund from accepting gifts and favors from money managers and others conducting business with the fund. (Pensions & Investments) California will consider two bills which attempt to address conflicts of interest at public pension funds at a hearing of the Public Employment and Retirement Committee on April 13th.

The Corporate Governance site was visited 27,000 times in the last year. Our influential readership is small but growing and is expected to easily double or triple in the coming year. Most of our readers are from the U.S. Most access the site Monday through Thursday. Readership outside the U.S. is greatest in the Britain, Australia, Canada, Japan, and the Netherlands (in that order). Thanks to members of ourNETwork for their continued financial support. Please let us know what news or features you would like and keep those link suggestions coming.

Arecent ISS Friday Report carried more on the previously reported move by Taiwan’s Securities and Futures Commission to require foreign institutions to vote in favor of all management proposals. Apparently, the rationale is to reduce the lack of quorums. ISS notes a better way to resolve the issue is to provide timely disclosure of meetings and greater detail of the items being submitted to a shareholder vote. Investors are invited to comment on the proposed regulation by faxing Philip Ong, Deputy Director of the SFC, International Division at 886-2-8773-4146. We would also suggest e-mailing the SFC, attention: Mr. Ong at[email protected]

Update 4/2/98. Mr. Ong responded to our recent inquiry as follows: “The issue you raised concerning the possibility of requiring institutional investors to vote in favor of all management proposals is still under consideration. The draft proposal was originally intended to require local securities investment trust enterprises to vote in favor of management resolutions. Yet in a preliminary meeting, participants suggested that it be expanded to apply to foreign institutional investors as well. The Commission will hold a public hearing to invite more thoughts on this issue. The public hearing is scheduled on April 4 (9:30am) at my Commission. Your comments are welcome.”

The Council of Institutional Investors adopted recommendations calling for options to be indexed against the performance of the overall stock market or an executive’s peer group. It also called for full disclosure and the unbundling of money that brokers charge investors for trading shares used to pay for other purposes, such as research.

The Essays of Warren Buffett: Lessons for Corporate America (Cardozo Law Review, $14.95) by Lawrence A. Cunningham distills 20 years of Buffett’s annual letters to Berkshire Hathaway shareholders. The author is interviewed in the April 6th edition of Forbes.

French investors want more disclosures by directors. A poll carried out by Ecocom, a communications consuzltancy, in conjunction with accountants Deloitte Touche Tohmatsu, found that 82% wanted directors to disclose the boards on which they sit, 80% wanted disclosure of the number of shares they hold and 73% wanted details of directors’ pay. (Financial Times, p. 17, 3/30)

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All material on the Corporate Governance site is copyright ©1995- by Corporate Governance and James McRitchie, except where otherwise indicated. All rights reserved.

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Archives: March 1998

Boardroom Basics are covered at the Online Business Women Center. Thanks to Ralph Ward for pointing us to this site.

Graef Crystal presents this year’s CEO pay heroes — and one villain. Villain Sanford Weill of Travelers’ Group was awarded 20 different option grants covering over 12 million shares. If Weill manages only to deliver gains equal to Treasury securities he’ll gain $177 million. In contrast, John Reed of Citicorp must achieve a 10.7%/yr. gain. Richard Sharp of Circuit City must show a stock price growth of 12.2%/yr. With Robert Shapiro of Monsanto, if the stock price fails to climb by at least 50%, he and other participating executives will actually lose real money, although not much of it. Crystal’s #1 pay hero this year is Frank Herringer of Transamerica. He not only has to raise the stock price, it has to stay up for at least 10 days out of 30 and “the option cannot be exercised unless Transamerica’s total shareholder return is at least equal to the median of a group of peer financial companies.” (San Francisco Business Times)

SEC ruled that Maxxam must include a resolution in its upcoming proxy statement demanding the cessation of clear-cutting and the harvesting of old-growth trees. Maxxam stated that clear-cutting virgin redwoods constituted “ordinary business operations.” However, the SEC disagreed; Maxxam’s next shareholders’ meeting is scheduled for Houston on May 20. Maxxam regulators are close to an agreement on the preservation of the 7,500 acre-Headwaters Forest but the plan is coming under fire for not preserving nearby groves owned by Maxxam and inadequately addressing wildlife and fisheries protection.

According to a recent Reuters report The average chief executive at a large U.S. company earns about 40 – 50% of pay from stock, and 27% from salary. Five years ago, about 30% came from stocks, 37% from salary.

Venture capital investments have been earning about 34% annually from 1990 to 1996. CalPERS recently decided to increase investments in this area by $350 million. They will invest through a third party, taking the form of a partnership, limited liability company or joint venture.

The European Corporate Governance Network went online last month. ECGN is a non-profit research network based at the European Centre for Advanced Studies in Economics.Corporate Governance NETwork member Stephen M. Davis’Global Proxy Watch says ECGN’s recent report, available on their site, points to “alarming information gaps in Europe” that “could be disabling shareholder oversight and undermining companies’ ability to compete for global capital.”

Empowering Investors: A Market Approach to Securities Regulation, by Roberta Romano, upcoming in June’s Yale Law Journal, is previewed in The Economist. Romano argues firms, with the approval of their shareholders, should be able to opt out of SEC oversight in favor of another regulatory jurisdiction, another state or even another country. The article points out this would be similar to the European Union’s system of mutual recognition of securities regulations. Would rivals compete to impose the lightest burden? Not necessarily, says Romano, capital is cheaper where regulations are believed to be sound.

In the coming year CalPERS hopes to add new features to its internet site, including:

  • A shareowners’ forum on corporate governance issues.
  • Expanded investment information to include historical pension fund growth and investment performance, policies and strategies.
  • Daily net asset values for CalPERS public agency deferred compensation investment funds. (Business Wire)

Iwerks Entertainment Inc. announced that ISS issued a Proxy Analysis on March 24, 1998, that concludes that Iwerks’ proposed merger with Showscan Entertainment is “beneficial to both Iwerks and its shareholders” and that the merger “warrants shareholder support.” (ENTERTAINMENT WIRE)

Japanese companies begin adopting merit-based system. Fujitsu will become the first manufacturer to entirely abandon the seniority system. Matsushita Electric said Tuesday it would repurchase shares, introduce a stock option plan for senior executives and directors, link managers’ salaries to the performance of its stock and streamline its board room. (International Herald Tribune, 3/26)

March Director’s Monthly carries an article by Sir Adrian Cadbury which looks at some common trends in corporate governance, including: disclosure, checks and balances to guard against undue concentrations of power, diverging interests generally resolved through independent board members, harmonization across borders, employee representation (notes only German employees represented on most supervisory boards in Germany even though companies are now international), pressure groups communicating through new channels such as the internet, and growing importance of institutions (especially U.S. pensions who are required to vote shares).

Importantly, Cadbury notes “the issues of power and accountability were raised at the outset in relation to corporate boards. They will increasingly be raised in the context of the growing power and relative lack of accountability of institutional investors…Their exercise of power over boards will only be seen as legitimate if it is open and reflects the views of those who have entrusted their money to them.”

Editor’s note: The CalPERS corporate governance core principles and guidelines indicate that board members should no longer be considered “independent” if they have served for more than 10 years. Yet, their own board president has served for more than 10 years, their vice president for more than 14 years; one board member has served for more than 27 years. And the CalPERS board is probably more accountable to its investors/beneficiaries than most. How can corporations be expected to live by standards which institutional investors themselves refuse to follow?

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Taiwan’s Securities and Futures Commission is contemplating a rule to require foreign institutions to vote in favor of all management proposals, according to a report by Davis Global Advisors and reprinted by IRRC under the headline “Just Vote Yes.” Editor’s note: They’re really making progress; too bad it’s in the wrong direction.

IRRC also covered SWIB‘s appeal of an SEC no-action letter re Shiva‘s right to omit a binding proposal to prohibit repricing without shareholder approval.

Bernard Black’s ([email protected]) “Does Shareholder Activism Improve Company Performance” is featured in The Corporate Board (March/April). The available evidence is consistent with the level one might expect from a low level of effort, “namely, not much.” Black seems to believe institutions exaggerate the regulatory barriers to coordinated efforts. “The 13D filing is not complex, and the risk that a company will sue a major institutional investor is low.” “Failure to surmount this modest hurdle to coordinated activism suggests that there are limits, not rooted in legal barriers, on how active they are prepared to be.”

The Corporate Board also includes articles on takeovers, automating the boardroom and board evaluation.

The letter from Corporate Value Partners, L.P. to the Chairman of the Nominating Committee of the Board of Directors of The Reader’s Digest Association, Inc. substituting one of their nominees, William E. Mayer, with Daniel Kurtz, former Assistant Attorney General-In-Charge of the Charities Bureau Office of The Attorney General of New York is available via PR Newswire. (see also 3/2 Time)

Britain. Royal Dutch/Shell will publish an audited social responsibility report this year. Last year they defeated a proposal from Pensions &; Investment Research Consultants(PIRC) for external monitoring of its environmental and human rights policies. In a speech to PIRC, President of the Board of Trade Margaret Beckett warned of legislation if companies did not get their own house in order when it came to acting in shareholders’ interests and paying their boards. She wants success to be properly rewarded but pay policy transparent and widely understood. PIRC called for a changes including:

  • full and relevant information to shareholders and stakeholders, including directors’ biographical and career history, attendance at board and committee meetings, environmental, social and employee information
  • annual elections of all board members
  • easier access for shareholders to resolutions at annual meetings
  • shareholders to vote on remuneration committee report
  • report of executive pay in relation to the company’s relative performance, benchmarked against employee remuneration
  • all institutional investors should have to disclose their corporate governance policies and their voting record, and
  • setting up of a companies commission “to ensure clarity and efficiency in the interests of competitiveness and public accountability.”

Italy’s cabinet approved a package of long-awaited new corporate governance rules including stiffer penalties for insider trading, an enhanced right to vote by proxy, more powers for internal auditors, and clearer rules governing takeover bids. The rules leave the ceiling for cross shareholdings at 2%, with 5% for “strategic or industrial reasons approved by shareholders.” The limit in France is 10% and in Germany 25%. Proxy votes may be collected by anyone, banks included. Shareholders can call an extraordinary meeting with 10%.

IMF’s Michel Camdessus called on Russians to make a major push towards transparency and quality of corporate governance in the wake of discipline measures taken by the federal securities commission against three different companies for securities law violations.

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The Ontario Municipal Employees Retirement Systemupdated its guidelines to limit the length of time a director can serve on the board of a specific company to 15 years. The guidelines also call for individual election of board members (instead of slate) and splitting the positions of chief executive and chairman (allowing a lead director as an option).

CalPERS called for corporate governance reforms in Japanincluding: directors independent from the corporation and its affiliates, reduction in the size of boards, and independent auditors.

New fund launched. Hermes Pensions Management, the parent company of one of the UK’s largest pension management groups, and Lens Investment Management, the United States-based investment group, are linking up to create the UK’s first institutionally-backed fund manager with the specific aim of assisting in the improvement of shareholder returns on companies with hidden underlying value. The first fund, Hermes UK Focus Fund, will be launched in the Summer and will concentrate on mid- to large-capitalisation companies quoted on the London Stock Exchange.

Questions at Stockholders’ Meetings 1998, serves up a checklist of issues likely to be raised. The booklet includes industry specific-sections and corporate governance issues, as well as many others. Contact Deloitte &; Touche at 203-761-3065 to get a free copy.

Apple set aside 17 million shares or 13% its outstanding shares for top execs and key employees. “They are using the only currency they have,” says Alan Johnson, an executive pay consultant. Kodak’s CEO, George Fisher, and 800 other managers won’t receive a bonus for 1997. The company is laying off 19,900 workers and paid Fisher a $1.98 million bonus on top of $2 million base pay for 1996. This year he says “I don’t deserve a bonus this year, and that’s half my pay.” To improve morale, Kodak will make a special grant of options to 90,000 nonmanagement employees. (3/14, WSJ)

Ned Regan’s article “Board Governance and Corporate Performance: Assessing the Connection,” does an excellent job of reviewing this topic in a few pages. Bernard Black’s conclusion that there is very little, if any, impact made by governance activity and Ira Millstein and Paul MacAvoy’s opposite conclusion that governance can positively impact the bottom line are not inconsistent. Regan points to a crucial difference, Millstein and MacAvoy’s methodology leads them to look not just at who has adopted governance practices but rather who is acting on such board structures and practices. When corporate governance procedures are present there is no direct link to corporate performance. “But when governance procedures demonstrate that the board acts independently of management, there is a correlation with improved performance.” “The proxy resolution was like a doorknocker. The thump of the knock was heard throughout the executive suite signaling the occupants that, after an absence of several generations, the owner was back. Management and boards listened and reacted, to the benefit of shareholders and the economy.” (Directorship, 3/98)

Family-owned firms, “provide heftier stock market returns and more cash flow per employee, and use less short-term debt than their counterparts,” due to greater control by owners according to a study by University of Cincinnati associate professor of management Charles Matthews and some of his colleagues. (Fortune, 3/16)

Privatization of Social Security is the subject of a 3/23Business Week series of articles.

Geoffrey Colvin writes about some of the all-star dogs when it comes to shareholder value. In a few paragraphs he covers the transition from the golden age of management (1930-90) to the rise of shareholders (caused by crossing the 50% line and the 1992 SEC rule change). His don’t-get-it list includes: Advanced Micro Devices (repricing), Apple Computer (wrong strategy, wrong CEO), Dow Jones (a family that didn’t care), Occidental Petroleum (tradition of shareholder disrespect), Ogden (too many old inside directors who can’t make up their minds), Reader’s Digest (CEO George Grune heads controlling nonprofits). (Fortune, March 30)

CEOs would loose 33% of their total equity if the market plunged 25% because of their heavy ownership of options. Those in the top 200 firms owned $57 million equity. (3/98,Across the Board)

CalPERS to soften its proposed corporate governance standards. The age limits are gone and the 10 strict measures of independence now show up as “guidelines.” Proxy statements should disclose what the corporation’s definition of independence. The lead director concept is kept. Fund officials also say they have dropped plans to grade the 300 biggest U.S. companies in its $128 billion stock portfolio on whether they meet “core principles.” A vote on the revised proposal isn’t expected before April. (3/13, WSJ)

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Repricing seems to be the issue of the year at SWIB who is submitting binding bylaw amendments to 4 companies. Apparently, they won concessions from most of 22 companies approached last fall.

Japan likely to join the shift to defined contribution poension plans as the Liberal Democratic Party announced plans to ease restrictions. (Marc Goldstein,ISS)

Indexing in the S? 500 hasn’t grown as quickly as many of us thought. At the end of 1991, 6.7% of all U.S. stocks were so indexed, estimates Melissa Brown, head of quantitative research at Prudential Securities. By the end of 1997, it was down to 6.1%. Only 26% of actively managed U.S. stock mutual funds were beating the S? 500 so far this year, according to Morningstar Inc. Apparently size does matter. From 1995 to 1997, the top 100 rose 140%, the middle 107%, and the smallest 100 only 92%. But the 700 largest stocks outside the index were up 99%. Brown believes two drivers are foreign investors “who favor large, well-known stocks and active managers trying to keep up with the index.” (3/11, WSJ)

We’ve added another “stakeholder,” the Institute of Internal Auditors and their publication, Tone at the Top.

Robert Monks’ new book The Emperor’s Nightingale; Restoring the Integrity of the Corporation in the Age of Shareholder Activism is now available. If widely read, it could be one of the most significant contributions to reuniting the corporation, our most powerful disembodied force, with the spirit of humankind in nature. Monks blends the new science of complexity with the insights he and Nell Minow have developed on corporate governance to arrive at fresh insights on the future of capitalism.

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Ralph Ward’s Boardroom INSIDER for March discusses the idea of advisory boards, especially at pre-venture stage firms. They can give the founder needed contacts and advice as well as building the firm’s reputation. Ralph also indicates smaller companies, particularly those in high tech, are using secure online chat sessions to let them use director expertise around the world, and they use more email and remote committee meetings. The March newsletter also provides tips on evaluating personal conduct problems of a CEO unrelated to his executive duties.

Innovations to avoid takeover proliferate. Echlin is asking Connecticut legislators to take away the right of a newly elected board to make decisions over a merger, leaving that decision to the old board. Computer Sciences stripped shareholders rights, raised personal questions about Computer Associates’s Chinese-born chairman, and sued CA’s bankers for using nonpublic information. For more, see WSJ 3/10, More Companies Avoid Takeover Through Use of Innovative Tactics.

14% of companies tie 401(k) contributions to corporate performance, up from 4% two years ago, according to Hewitt Associates. 93% provide some match to employees’ savings plans. (LATimes, 3/9, Many Firms Link 401(k) to Bottom Line)

Who Owns American Companies? Managers Of Course. That was headline in a New York Times article by Floyd Norris on 3/8. Citing moves by Computer Sciences and Echlin Inc. to disenfranchise owners by changing bylaws, in the one case, and seeking legislation to end the right of shareholders to throw out the board through a special shareholder meeting, in the other. Dividends are at a record low. “Most corporate executives have a lot of stock options…but few actual shares. And while option holders benefit from rises in the stock price, they do not share in dividend payments.” Norris ends with a lament, “It will probably not be until the good times are over, and a long bear market is in force, that the owners of American companies start looking for ways to take back the prerogatives of ownership.”

South China Morning Post calls for an end to Japan’s roller-coaster market. They report that corporations and banks have been selling off each other’s stock but the slack has been taken up by the postal savings bank and public pension funds. Rather than “keeping brain-dead companies on life support,” Japan should “let the markets do their thing.” “Inefficient firms would perish…the day would also come when management could be forced to resign by shareholders and when hostile takeovers become a possibility.” (SCMP, 3/6)

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Margaret Beckett, President of UK’s Board of Trade, unveiled a three-year review process. The first working group will publish its proposals in December. A final report is due in March 2001. (speech to PIRC, see Financial Times, 3/4)

Retired Conrail employees lost a legal battle to block the company from using surplus pension fund assets to help pay for an early-retirement program. (3/3, Philadelphia Inquirer)

Venture capital firms have so much money pouring in that firms are increasing the “carry,” or the percentage of profit general partners keep. “Hal Brown, an investment officer with the California Public Employees Retirement System (CALPERS) said that the $130 billion pension fund is upping the ante with virtually all its partnerships simply to meet its goal of keeping 5 percent of its total portfolio in private equity investments. In some cases it is willingly accepting diminished terms of the partnership in order to do so.” (3/2, San Francisco Business Times) It appears CalPERS may be letting its William M. Mercer Study: Key Terms and Conditions for Private Equity Investing go to waste.

Highlights from the CalPERS annual report can be found on their press release page.

Readers of the LA Times are warned not to use CalPERS’target list as an investment strategy, citing mixed evidence that such targeting results in gains. Michael Smith, who did one of the studies showing gains for CalPERS, notes that its unlikely that individuals could profit by investing in targeted firms because “the price of the stocks will change as soon as the market finds out CalPERS has targeted them.” What the article fails to note is that CalPERS itself doesn’t even invest more heaviliy in their own targets, and they have advance notice. (3/3, LA Times or 2nd version)

On February 2nd the American Bar Association approved the Uniform Management of Public Employee Retirement Systems Act promulgated by the National Conference of Commissioners on Uniform State Laws. Some have indicated its provisions endanger “socially responsible investment” (SRI) by pension funds. Section 7(h) in a draft I saw appears to allow the application of social screens only if they provide “collateral benefits” and only if the screened investments are at least as good as the unscreened, in terms of expected return and risk. Is this really a plot by drafters, such as Professor John H. Langbein of Yale and others, to weaken SRI? Apparently John H. Langbein’s &; Richard A. Posner’s, Social Investing and the Law of Trusts, 79 Mich. L. Rev. 72 (1980) made quite an impact on the SRI community.

The Drafting Committee suggests that laws in 22 States with statutory language on economically targeted investments and 10 States with language limiting investments in South Africa, Northern Ireland, Cuba, or companies complying with the Arab League’s boycott of Israel, believe these statutes should be repealed when the Act is enacted. Have any pension fund attorneys analyzed these provisions of the Act further? I’d like to see more analysis, if available. I’m surprised I didn’t see anything in the news on this. It seems like a rather large step to go unnoticed.

CalPERS press release on targeted firms includes hyperlink to explanation of EVA and profiles of each target company in their most thorough job to date in this area.

David Leonhardt assails the lack of board member independence at McDonald’s where only 4 of 15 “can be called independent–meaning they don’t work for the company, do outside business with it, or have a McDonald’s exec sitting on their own board.” See THEY DON’T BITE THE HAND THAT FEEDS THEM in 3/9 Business Week.

Lawndale Capital, lead by by Andy Shapiro, has returned 21.8% on an annualized basis over the five years ended January 30th by using various corporate governance strategies, according a report in Barrons. “We help companies find new board members, new customers, new joint-venture partners. And we can pass along feedback from Wall Street to help management maximize shareholder value.” (Valuing Complexity, 3/2)

Received for review, Corporate Governance and the Duties of Company Directors, edited by Ian Ramsay, Centre for Corporate Law and Securities Regulation, 1997.

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