Advisors to Disclose Vote Policies
See my “Comments on SEC Proposed Rule: File No. S7-10-00.“
In 1988 the Department of Labor (DOL) set forth the opinion that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets. I have argued for many years that the same standards of trust law should also hold for mutual funds and other institutional investors. The SEC is now proposing rules which would take an important step in that direction by requiring that registered investment advisers disclose proxy voting practices on Form ADV. The form would keep clients and the public informed about who is responsible for voting proxies and how their interests are protected. Advisers that vote client proxies would be required to disclose their voting policies, practices and procedures.
The proposal is contained in Item 16 of “Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV.” Comments must be received on or before June 13, 2000. The proposal was released on April 5, 2000. [Release No. IA-1862; 34-42620; File No. S7-10-00] (File name: 34-42620.htm) See SEC Proposed Rules for comment instructions. The filling changes are part of an effort to create an internet based system for advisers similar to the EDGAR database for companies. I urge all readers to review this most significant proposal and to submit comments. In addition, I would welcome comments to [email protected] so that we can discuss the proposal further. (IRRC CG Highlights, 4/14/00)
Equity Shifts to Individual Investors
Individual investor ownership in the largest 1,000 U.S. corporations is increasing, according to a report released by the Conference Board. Institutions have substantially increased their holdings of the largest 1,000 U.S. corporations — from 46.6% of total stock in 1987 to an average of 59.9% by year-end 1997. But for the first time since 1987, the upward trend of average institutional holdings for the Top 1000 turned downward to 57.6% at the end of the third quarter of 1999.
“Online trading, direct stockholding, employee stock ownership, and the general proliferation in information availability and individual awareness are all contributing to the increasing importance of the individual shareholder,” says Dr. Carolyn Kay Brancato, Director of the Conference Board’s Global Corporate Governance Research Center. “Historically, companies have focused their investor relations efforts on institutional investors, money managers, and sell-side analysts working for big brokerage houses. But the growing significance of the individual investor has induced some leading U.S. corporations to explicitly devise approaches to attract the long-term and stable individual shareholder.”
NYSE turnover in 1998 climbed to 76% — beating the 1997 record level of 69%. The number of block trades, most of which are done by investors, increased during the last year as well. Institutional investors experienced average annual turnover of 44.3% in 1998, up from 42.5% in 1997. See press release “Institutional Investor Stakes in Largest 1,000 Corporations have Peaked”
CalPERS May Be Changing Course
The Sacramento Bee said the rulemaking would “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” However, this week we saw a new willingness of the Board to listen to members and take a more even handed attitude toward their own elections. A Board policy committee modified proposed rules which would have encouraged candidates for the Board to use deceptive tactics. Instead, committee members voted for a policy which comes closer to safeguarding full disclosure. More importantly, the committee also agreed to hold a workshop on the election process which currently leans heavily in favor of incumbents. Reforms are desperately needed if CalPERS is to live up to the high governance standards it sets for others.
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CalPERS Continues Fight at Maxxam
CalPERS continues supporting a coalition of environmentalists and unions in the push for independent directors, former U.S. Sen. Paul Simon of Illinois and Abner Mikva, a former Congressman from Illinois. Maxxam announced in March that it has nominated Michael J. Rosenthal and J. Kent Friedman, Maxxam’s general counsel, to serve on the board. Josh Reiss, a Maxxam spokesman, said that the company never agreed that two independent directors are needed. However, my sources indicate CalPERS had delayed continued work with the coalition, given statements from Maxxam that they would nominate two independent directors on their own. See California Pension System Backs Dissident Directors for Holding Company
Proxy Monitor Backs Resolution at Advanced Micro Devices
Proxy Monitor, a leading proxy voting advisor, announced recommended to clients that they vote in favor of a shareholder resolution to name an independent director as chairman of Advanced Micro Devices (ADM-NYSE). The proposal, sponsored by CalPERS, is scheduled to come to a vote at ADM’s April 27, 2000 annual meeting.
“It’s time to loosen the grip that ADM’s Chairman and CEO W.J. Sanders has on the board,” said James E. Heard, Proxy Monitor’s CEO, in announcing support for the proposal. “Naming an independent director to chair the board is a necessary first step.”
“We also think Mr. Sanders should resign from the nominating committee, which he chairs.” Heard added. “It’s a poor reflection on the board’s independence to permit the CEO to be a member of the nominating committee, much less serve as its chairman. This is a key board committee, and it should be composed only of independent directors.”
CalPERS to Withhold at Bank of America
CalPERS will withhold its proxy votes from four Bank of America directors to protest a $76 million compensation package awarded to CEO Hugh McColl last year when the bank suffered a 16% earnings shortfall and laid off 19,000 employees. see philly.com, 4/13
CalPERS Election Rules to be Heard
CalPERS directors last year proposed that future candidates for the Board be barred from mentioning their opponents in material sent out with the ballots in member elections. The rules also would have banned any statements on issues of general concern to the membership but would have lifted a prohibition against misleading statements. A Sacramento Bee editorial, “CalPERS muzzles critics,” said the measure would “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.”
Although the Board has now shelved that plan, current proposed election rules would allow each candidate to review the statements of their opponent and would then have a minimum of 10 days to rewrite their statements. This would obviously encourage candidates to submit poorly crafted and/or deceptive arguments to throw off their opponents.
In addition, the proposed rules fail to address obvious conflicts of interest, such as having election appeals decided by staff whose reimbursement is determined by incumbent board members. Currently, election rules can be violated with impunity unless challengers can prove the violations would have changed the outcome of the elections. In the last contested election, the incumbent was allowed to review his opponent’s statement and change his own in an apparent violation of the rules but the challenger could not substantiate the number of votes that were changed as a result.
Unfortunately, CalPERS is better at giving governance advice than in accepting it. Many other agencies in California hold workshops with their constituents before proceeding with controversial regulations but CalPERS has argued their Constitutional authority exempts them from normal rulemaking procedures. The court has disagreed. This time CalPERS is going through proper procedures but the rules would still lead to voter obvious deception. The proposal will be heard on 4/18 at 1:30.
Pfizer’s Gallagher to Retire
Pfizer’s corporate governance executive, Terence Gallagher, to retire in June. Peggy Foran, who is already sharing Pfizer’s top governance title, joined the office three years ago, after spending most of her career at J.P. Morgan as a corporate lawyer. Although Pfizer’s governance practices could be improved, most active shareholders agree that at Pfizer they’ll at least get a hearing. (WSJ, 4/12)
Elson to Head New Corporate Governance Center
We’ve mentioned Charles Elson’s move before but it is worth repeating in greater detail. The center, at the University of Delaware, will be a clearinghouse for information on corporate organization. It is expected to offer symposiums, workshops, research opportunities and publications for scholars, students, business leaders, economists, judges and lawyers. Two symposium topics under consideration for the first year: Delaware corporate law in the aftermath of Smith v. Van Gorkom (directors must be informed when they make decisions), differences between dot.com and Fortune 500 board views on corporate governance. (Deleware Law Weekly, 4/12)
Comments Due to OECD
The Organization for Economic Co-operation and Development is undertaking a major review of its Guidelines for Multinational Enterprises. Second round comments are due 4/12.
Billionaire Boys Club Grows
Compensation packages for Yahoo! CEO Timothy Koogle and America Online’s Steve Case both wnet over the billion dollar mark in 1999 due to soaring stock prices. “Koogle’s compensation works out to a staggering $4.7 million a day, compared with median annual household income of about $40,000, or $110 a day.” Seven of 1999’s 10 most highly compensated CEOs run technology companies, according to USA Today,New economy rockets CEO pay, 4/5/00. Median compensation for 200 CEOs jumped to $17.6 million last year, up 111% from1998. Among the growing trends, retention packages to get CEOs to stay put for a few years. Part of the problem, outside compensation consultants. ”No compensation consultant is going to recommend a CEO take a pay cut. They’ll lose their job,” says compensation expert Graef Crystal. ”It’s part of the reason that CEO pay is a never-ending spiral that always goes up.”
Innovative Corporate Governance Votes Set for AT&T, Chase and Ford
Carl Olson, Chairman of Fund for Stockowners Rights, a research and education group headquartered in Washington, D. C. recently announced three novel proposals:
- Resident Analysts, AT&T: Individual directors face the problems of part-time duties and reliance on information provided by management. These constraints inhibit the ability of directors to represent the interests of the stockowners fully. The resolution would allow each director to retain an analyst who would have access to all the corporation’s records and would report only to the director. Directors would receive an additional $100,000 per year to retain and pay expenses of the analysts.
- Permanent Secret Ballots, Chase Manhattan Bank: Only confidential voting policies that can only be changed by stockowners offer real protection. Despite an overwhelmingly favorable advisory vote at the1986 annual meeting on a resolution sponsored by John and Lewis Gilbert to establish full confidential voting, the board never adopted the policy. The proxy statement has only a vague mention of a limited confidential voting policy, and the board can amend or repeal it without a vote of the stockowners. The resolution at Chase calls for a detailed confidential voting policy that only the stockowners can change.
- Abolish “Tissue Paper” By-Laws, Ford Motor Company: If the board can amend or repeal by-laws that the stockowners adopted, then the by-laws are made of “tissue paper” that can easily be torn up. Ford, like other companies incorporated in Delaware, has “tissue paper” by-laws. Stockowners are prevented from directly changing this policy because it requires an amendment to the certificate of incorporation. The resolution requests the board to initiate an amendment to the certificate of incorporation that will ensure the stockowners the ability to adopt by-laws that only they can amend.
Contact: Carl Olson, at 818-223-8080. Fund for Stockowners Rights,West Coast Office, P.O. Box 6102,Woodland Hills, CA 91365
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Shann Turnbull Speaks out on AMP Limited
On 4/3 the chairman and four other directors resigned from Australia’s largest financial institution the AMP Limited. Shareholder activist Shann Turnbull met with the newly appointed company secretary, Christine McLoughlin and called on AMP and other Australian companies to establish Corporate Governance Boards (CGBs) as proposed in Parliament by Democrat Senator Andrew Murray. The following are excerpts from Turnbull’s op ed piece which appeared in the Australian Financial Review, 4/6/00 on page 21.
The constitution of AMP Limited, like most publicly traded companies in Australia gives the Chair power to determine the conduct and procedures of General Meetings, including the processes of electing directors. This can makes the position, influence and perks of Directors subject to the Chairman’s favour.
The solution is a division of power such as introducing a CGB, which would take over some of the roles delegated to Board Audit, Remuneration and Nomination sub-committees. This would also provide a process to ethically manage any related party transactions with their dominant shareholder as occurs with Coles-Myer, Qantas, Axa and many other companies.
Without a CGB directors are placed in the unethical situation of setting and marking their own exam papers…Without a member of the CGB chairing shareholder meetings it can become impossible for shareholders to make directors accountable…As the largest shareholder in many other companies the AMP Limited should be both a role model and agent for raising standards.
However, last year the AMP Chairman not only entered into the debate on motions before the Chair but those in which he had a financial interest to double the level of director’s fees!…its time Parliament ensured that our public corporations cannot register constitutions, which allow unethical and uncompetitive practices. This would also remove the nervous energy and deliberating turmoil required at present to change a company Chair.
AFL-CIO Announces Key Votes
The list of 34 resolutions are intended to “represent a worker-owner view of value that emphasizes creating value for the long term through management accountability, partnerships with workers, and the protection of brand integrity.” See Key Votes.
Dot-Com Directors Involved
Karen Jacobs, of the Wall Street Journal, argues that dot-com directors must be “active participants in creating and shaping strategy, defining markets and building senior-management teams. They have to hit the ground running, and sometimes help build a business from the roots up. And they have months, not years, to make an impact.” How do cash poor startups attract the talent? New York-based Skyauction.com, which auctions travel packages, landed seasoned experts in compensation, auditing, cable TV, and a former head of state by offering them options worth $1M each. Jacobs says companies are also looking passed CEOs to division directors and others. (see Running Boards, WSJ, 4/6)
Japanese Trusts to Exercise Voting Rights
A survey conducted by Jiji Press found 83% would consider abstaining or voting against items presented at annual meetings. Only 5 said they would rubber-stamp all decisions. The firms cited illegal practices, poor earnings results, and poor information disclosure as reasons for voting against management. The Corporate Library News Briefs, 3/28
Preparing for the Annual Meeting
Brian Machburn and Robert Obray offer an excellent checklist in the March issue of Directorship. The checklist, based on “Questions at Stockholders’ Meetings 2000” published by Deloitttee & Touche LLP, is broken into 4 broad categories: board composition and activities, board practices, audit committee, and executive compensation and benefits. For example, be prepared for “what perquisites–such as club memberships, professional services, apartments, automobiles or use of company airplanes –does the company provide for executives and their families?” ….elsewhere in the same issue, Directorship reports the percent of women on Fortune 1000 firms grew from 6% in 1993 to 8.3% in 1996 to 9.3% in 1999.
Wendt Speaks in La Jolla on Issues Facing Corporate Boards
The Corporate Directors Forum will present a session on “Contemporary Issues Facing Boards Today,” during its April 27th meeting at the Radisson Hotel La Jolla from 5:30-7:30 p.m. Henry Wendt, the former CEO pharmaceutical giant SmithKline Beecham, will offer his perspective on issues facing emerging companies to Fortune 500 companies. Wendt has been an active board member for companies such as Allergan, Atlantic Richfield Company, Computerized Medical Systems, and West Marine Products. Recently he was selected as a Harvard Business Review article panelist on board issues surrounding CEO succession. Contact: Larry Stambaugh, Chairman of the Board of Corporate Directors Forum, 858-455-7930. (Excite News, 4/4)
Governance Changes at Cendant
Cendant, the franchiser of Century 21 real estate offices, Howard Johnson hotels and Avis car rentals, is restructuring its board of directors from 15 to 13 to comply with terms of a class action settlement that arose out of accounting irregularities. Robert Kunisch and John Snodgrass, former employee directors, resigned effective March 31. Myra Biblowit, vice dean for cultural affairs at New York University, and Sheli Rosenberg, vice chairman of Equity Group Investments, were elected to replace Kunisch and Snodgrass, effective 4/3. This brings the number of employee directors to 3 from 4. Additionally, Michael Monaco, a former employee director, and Carole Hankin resigned effective with the annual meeting on 5/25. Cendant agreed to pay shareholders about $3 billion and make significant changes in corporate governance to settle a massive class-action lawsuit brought on by several large pension funds.
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SEC Proposes Major Update of EDGAR
Programming for the next stage of modernization is expected to be implemented in late May 2000. EDGAR will include the following new features according to the current proposal:
- the ability to include graphic and image files in HTML filings;
- the ability to use hyperlinks in HTML filings, including links between documents within a submission and to previously filed documents on our public web site EDGAR database at www.sec.gov; and
- the addition of the Internet, and removal of diskettes, as an available means of transmitting filings to the EDGAR system.
Comment Period Extended on Selective Disclosure Regulation
The SEC extended the comment period for its controversial selective disclosure proposal until April 28th due to pressure from several industry groups on the fair disclosure (FD) provisions, according to a report in the 4/3 issue of Investor Relations Business. The SEC has received about 1,000 comments with retail investors in overwhelming support. However, the Securities Industry Association wants more time to rally opposition to the proposal which it sees as having potential to damage the communication process. The American Bar Association is also concerned the rule will have a chilling effect on communications. Others concerned are reported to include the National Investor Relations Institute.
Shareholders Listen In
83% of companies conduct conference calls and 82% of those allow individual investors to listen in, up from 29% two years ago and 48% webcast the calls, according to a study by the Rivel Research Group for the National Investor Relations Institute. see Executive Alerts
No Action on Dividend Request
SEC held that a shareholder proposal to provide dividends in stock, rather than cash because of more favorable tax treatment, may be excluded from AT&T’s proxy because rule 14a8(I)(13) allows companies to omit proposals related to specific amounts of cash or stock dividends. (reported in 3/20 issue of Investor Relations Business.
Aquisition of Fairvest to Further Level Playing Field
VERSUS Technologies Inc., a leading Canadian provider of electronic, securities trading services to the institutional and retail marketplace, signed a letter of intent to acquire Fairvest Securities Corporation, the leading provider of Canadian corporate governance research. VERSUS intends to continue leveling the playing field for retail investors by distributing Fairvest products and services to its E*TRADE Canada clients in the future.
Fairvest analyzes proxies and provides voting recommendations on corporate governance issues of approximately 1000 corporate issuers and provides institutional investors with a proxy voting department capable of voting all proxies according to specific guidelines while maintaining complete proxy voting records. Fairvest also publishes the Corporate Governance Review six times per year, which has a paid subscription base of over 180 organizations, including law firms, consulting firms, investment dealers and corporate issuers. We’ve enjoyed reading it for years and appreciate its insights into Canadian trends.
Domini Publishes Voting Guidelines for 5th Year
Last year, the firm became the first mutual fund manager to publish their actual votes cast for each company in its portfolio. This year, Domini Social Investments entered its second year as a fully transparent voter, and reissued its challenge to the mutual fund industry to follow suit. During the past 5 years assets in mutual funds have grown from $2.81 to $6.77 trillion. Each has a fiduciary duty to their shareholders to examine each resolution and votes proxies in their shareholders interests.
While few will agree with every one of the Fund’s policies or votes, Domini has undeniably taken the lead in this area of disclosure. I sincerely hope they are soon joined by others. Visitors to Domini Social Investments’ website can choose any of the 400 companies in the Domini Social Equity Fund’s portfolio, see a brief description of the issue being voted on, andview Domini’s vote.
The site also provides another valuable resource which allows users to search for shareholder resolutions by company or social issue and to send email concerning the resolutions directly to the company. The database was created by the Interfaith Center on Corporate Responsibility (ICCR), andSocialFunds.com.
Next, someone needs to create a portfolio tracker which contains all corporate proxy resolutions, links these to the applicable policies of TIAA-CREF, CalPERS, Domini and others and then allows shareholders to vote their own shares.
Family Struggle at Hyundai
Corporate governance reforms appear to have taken a back seat to traditional family control of Korea’s most conservative chaebol. According to a report in the Sydney Morning Herald, the Government is incensed that a top executive in the firm was sacked and then reinstated without reference to the company’s board or shareholders. See Coup at Hyundai takes a family to war, 04/01/00.
Online Voting Up
15% of investors who vote on measures that affect companies in which they own stock will do so via the internet this year, up from 6% in 1999, according to Automatic Data Processing, Inc. ADP processes 90 percent of proxy statements. See Shareholders’ proxy voting online expected to grow,The Arizona Republic, 4/2/00.