Author Archive | James McRitchie

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 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. (

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. (

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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Archives: February 1998

The Employee Ownership Report is critical of Edwin Welles’ assessment in 2/2/98 Inc. that only executives can “truly” affect a company’s performance, therefore broad option grants have little value. In “Deciding How Much Ownership is Enough,”NCEO notes that data from American Capital Strategies has shown firms with more than 10% broad employee ownership outperform the market. NCEO argues that giving employees token ownership can create cynicism; 5% is a minimum and the average is 8-10% of pay per year. (see Employee Ownership Report, 3-4/98)

Also from the Employee Ownership Report. A DOL advisory group recommends defined contribution plans should have limits placed on investments in the employer. (seehttp://www.col.cob/pwba/public/adoun/acemer.htm) GAO report, “401(k) Pension Plans: Extent of Plans’ Investment in Employer Securities and Real Property” disagrees. (call 202-512-6000 for a copy of publication GAO/HEHS-98-28) U.S. Court of Appeals for the Sixth Circuit held that voting rights in an ESOP are not a plan asset (Grindstaff v. Green, CA 6, No. 96-5628, 1/8/98).

Names That Made Corporate Governance, is an excellent summary by Vineeta Anand of some of the contributions made by 8 individuals to the field (Millstein, Hanson, Monks, Regan, Goldin, Leban, Clapman, Walker). This article is not to be missed by anyone interested in the roots of the movement. (Pensions?, 2/23) Next, I’d like to see a list of the most influential books and/or articles on corporate governance. Any nominations? contact: [email protected]

U.S. corporate codes on global labor practices is the subject of an IRRC study, The Sweatshop Quandary: Corporate Responsibility on the Global Frontier. “No matter how strongly or comprehensively the companyÍs policy is worded,” Meg Voorhes, the director of IRRC’s Social Issues Service, notes, “our field research showed that without strenuous efforts by top management to communicate its policies to contractors and ensure that contractors meet these standards, there are likely to be breaches in their observance.” This is by far the best report we have seen on this subject; it does not shy from addressing the complexities of the problem. Also provided, the complete text of more than 50 codes of conduct from corporations as well as the White House Apparel Industry Partnership prototype “code of conduct” and monitoring principles.

31 of 100 companies on Fortune’s “Best 100 Companies in America to Work For” have at least 10% of the stock owned by employees, instead of 10% as we might expect from statistical averages. (see Employee Ownership Report, 3-4/98)

Pensions? weighs in on CalPERS gifts and travel (see CalPERS Board Bans Political Contributions: News and Analysis). “The vast majority of trustees and pension administrators won’t sell their funds out for a few trips or drinks. It’s a shame the public doesn’t know that.” Their editorial notes, “these trips of trustees probably would be far more productive if trustees – not money managers – could set the meeting agendas, because the managers pay for most everything.” According to P?, “public pension fund boards need to start paying the full cost of sending trustees to those exclusive resorts they attend from Moscow to Tokyo. They need to pay for those big bar tabs some trustees run up, too.” (Pensions & Investments, 2/23)

Risk: Part I – Double or Quits? sets the reader up with the first part of a critical look at modern portfolio theory (MPT) and its extension, the capital asset pricing model (CAPM) by questioning the fundamental assumptions. Is there really a correlation between specific and systematic risk, so that specific risk can be reduced to near zero through diversification? Are expected excess returns really proportional to risks?

The article introduces Glyn Holton, of Contingency Analysis, who reminds us of the “fallacy of false concreteness” when we apply such risk models to systems which extend beyond the original assumptions of the theories. The seed is planted that “systemic risk,” such as a rogue trader or a “contagion,” may bring down the entire system. Yet the “answers” must wait for Part II. Part I, focuses, instead on two icons, Mark Mobius and Hazel Henderson, and their perspective on how global risks might be better managed.

Mobias eschews models but tries to analyze companies from the ground-up, considering risks as varied as war, industry, management, etc. He finds the “perceived risk is often different from the actual risk.” Interrelationships and their impacts are likely to increase (noting Thailand). Government controls magnify opportunities for hedge funds, but increase subsequent volatility. A good example is the attempt to prop up exchange rates. The solution, for Mobias, lies in the direction of transparency…full and fair disclosure, not in attempting to fix variables such as interest rates, exchange rates, and money flows.

Hazel Henderson distinguishes between markets and commons. The rational economic model deals fairly well with the money economy but can only deal with the commons by “turning it into the property of all.” “The market is an open system with divisible use of resources.” The commons is indivisible and “requires win-win rules to make them operate equitably and efficiently.” The risk profile of the commons is “always higher,” because it requires cooperation to protect it. Henderson claims that “most of the GNP growth of the last quarter-century has been at the cost of externalizing environmental and social problems,” with taxpayers being the “insurers of last resort.”

Derivatives and the “latest commons – global financial cyberspace,” leave no one responsible for the whole system. Part of the solution may be taxing currency speculation. She agrees with Mobias that a central bank defending simply presents traders with an opportunity to make money. Reducing risk through diversification would, for Henderson, mean looking for companies that “reduce to a bare minimum the flow of energy and materials…investment in the solar-age, information-rich economy.” Henderson’s intrigued with screening to find those firms who practice good political risk management…managing their resources and points positively to the Domini 400 Social Index contrasted with the S&P 500.

“If you follow the herd and say you have to stick to the prudent-man principle, which is basically neo-classical, short-term profit maximising, at some point they are not going to perform as well as companies which have taken a longer view.” Her solutions lie in a mix of market products, such as “The Virtuous Circle Global Sovereign Bond Fund,” and international public/private partnerships, such as a Global SEC. (International Fund Strategies, 12/97)

We look forward to the next issue of International Fund Strategies and are proud to have added them to our growing list of “stakeholders.”

Patrick McGurn’s recent article in The ISS Friday Report(2/20) address one of the more serious problems facing corporate America, corporate “overhang,” or the potential dilution from stock options outstanding plus those available for grant as a percent of the total outstanding shares. He cites several studies which show levels increasing. 14% in one study already exceed 20%. Another finds the rate averages 15% forThe Red Herring’s Technology 250. McGurn concludes the cure may be to “promote responsible use of awards that truly tie shareholders’ and option holders’ fortunes by linking compensation to company performance” through mechanisms such as “premium-priced options, step options, and other types of ‘real value’ awards.” Perhaps, as frustrations increase, pressure will build to revisit the source of this problem, in the accounting treatment of such schemes. In the meantime, McGurn’s advise would be well taken.

CalPERS continues to make headlines by banning political contributions from those doing business with the System. Board President William Dale Crist, who proposed the reforms, said there “has been no evidence or even suspicion of corruption” at the System. This, despite a series of articles in the Sacramento Bee and LA Times, as well as an FBI probe. Representatives of state Treasurer Matt Fong and state Controller Kathleen Connell abstained from voting on the campaign contribution ban. Treasurer Matt Fong scolded his colleagues, calling their action “window dressing” and called, instead, for full disclosure. (see 2/20 LA TimesExcite News,CalPERS press release). For more in-depth coverage of the issues, see CalPERS Board Bans Political Contributions: News and Analysis.

Back to the topCalPERS named Electronic Data Systems, Louisiana-Pacific, Sybase, Advanced Micro Devices, International Flavors & Fragrances, Michaels Stores, A. Schulman, Stewart & Stevenson Services, and TBC. For the first time, the fund incorporated EVA calculations to find “companies where poor market performance is due to underlying economic performance problems as opposed to industry or extraneous factors.” Resolutions from CalPERS are pending at 5 of the firms. (2/24,WSJ, A4)

TIAA-CREF announced it will sell its funds to the general public. TIAA-CREF’s mutual-fund lineup consists of six funds: stock funds TIAA-CREF Growth Equity, Growth-and-Income and International Equity Funds; TIAA-CREF Bond Plus Fund; TIAA-CREF Money Market Fund, and TIAA-CREF Managed Allocation Fund, which blends the style of the other five portfolios. (2/24,WSJ, C27)

Pension, 401(k) retirement plans and charitable foundations and endowments grew by more than 10% in 1997, to nearly $5.1 trillion, according to an annual survey by Nelson Information, Inc. To order Nelson’s Directory of Plan Sponsors, call 800-333-6357 or 914-937-8400, e-mail [email protected], or visit (PR Newsire)

We’ve added Pensions World to our list of “stakeholders” and look forward to reporting on items carried in this authoritative publication.

The Conference Board reports U.S. investment in the equities of foreign corporations more than quadrupled from $91.5 billion in 1988 to $397.7 billion in 1996 and then rose to $423.5 billion by mid-1997. The largest 25 U.S. pension funds held $110.8 billion in international stocks as of September 30, 1996, roughly 30% of the foreign equity held by all U.S. investors in 1996. These funds have increased their international holdings from 4.8% of their assets in 1991 to 11.2% in 1996.

Foreign corporations are also coming to the U.S. and learning to live with the “increasing expectations of improved transparency and disclosure demanded by U.S. investors,” says Dr. Carolyn Kay Brancato, editor of the report and Director of The Conference Board’s Global Corporate Governance Research Center. “There is a staggering increase in the number of non-U.S. companies who now trade their stock in U.S. markets through the American Depositary Receipt (ADR) process,” says Dr. Brancato. By the end of 1997, the securities of an estimated 1,400 foreign companies from more than 44 countries were traded in U.S. public equity markets.

Financial assets of U.S. institutional investors were six times those of the United Kingdom and 10 times higher than those of France and Germany in 1995. While the biggest institutional investors in major U.K. and U.S. companies were domestic pension funds (42.4% and 35% of institutional investor financial assets, respectively), this was not true for France (0%) or Germany (5.9%), according to 1995 OECD data. Managed funds were more important in France (49.8% of its total institutional financial assets) and Germany (33.2%). Insurance funds were least important in the U.S. (23.8%), but played a dominant role in Germany (61%).

Almost 70% of institutional financial assets in the U.K. were held in equities in 1995; in U.S. 36%; France 22%; Germany 12%. U.K. companies have a high proportion of their equity (44.1%) controlled by their largest 25 financial institutional shareholders, while the U.S. proportion is 27.5%. When cross-shareholdings are added in, however, concentration of ownership in Germany and France is higher than even in the U.K. In Germany, the percent of equity in the largest 25 corporations held by the largest 25 investors is 47.2% (14.5% held by institutions plus 32.7% held in cross-shareholdings); in France the proportion is 48.3% (23.5% held by institutions and 24.8% held in cross-shareholdings).

“As these cross-shareholdings are unwound, and French and German companies seek to move from debt financing to look for expansionary equity capital in the global markets, this will have a profound effect on the nature of international capital requirements. It will also give global equity investors, especially those in the U.S. who play such an important role in this market, more clout to shape the international corporate governance debate of the future,” Dr. Brancato concludes. (To order the report, call 212 759 0900 or e-mail [email protected].

Link added to John Wachowicz’s Wachowicz’s Web World: Web Sites for Discerning Finance Students…an incredible resource.

Three bills requiring CalPERS to begin divesting its tobacco investments over the next few years have been introduced.CalPERS opposes.

The Benefits and Program Administration Committee ofCalPERS passed several resolutions designed to bar campaign contributions to fiduciaries from interested parties, prohibit fiduciaries from soliciting contributions of any kind from interested parties, and require monthly reporting of gifts from interested parties. Recommendations will go to the full Board, which is expected to adopt the recommendations with few changes. The reforms come on the heals of recent articles and editorials in the LA Times and Sacramento Bee on conflicts of interest and high living by Board members. Recent election returns were reported and minor adjustments to procedures recommended. No action was taken on a recommendation from a member to require run-offs when winning candidates receive less than a majority vote. Currently, Board members can be elected by a tiny minority of members since only about 20% vote and they typically split their votes among an incumbent and 20 other candidates.

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Joseph Sargent points out that most academic studies on poison pills “only take into account completed transactions. In doing so they omit examples where takeovers were rebuffed because companies refused to redeem their poison pills – which, to many shareholders, is precisely why pills should be abandoned in the first place.” In addition, the Georgeson & Company research is criticized for failing to address the use of dead hand pills which provide that only continuing directors are able to redeem the pill. (January ISSue Alert)

February’s Directorship included an article outlining the widely quoted findings of Georgeson & Company researchers on poison pill voting. They find shareholders of companies with poison pills received $13 billion in additional takeover premiums during the five-year period from 1992-1996, and shareholders of companies without pills gave up $14.5 billion in potential value. The edition also included the 1st of a two part series by James W. Casparie on the importance of corporate governance among venture capital firms. Casparie is critical of VCs who bring in “freshly-minted” MBAs to sit on boards and provides good advise on recommendations for improvement in several areas.

Suicide of the entire board is what one shareholder called for at a poorly performing company. IRRC points out, however, the proposal would be “ineligible for a number of reasons, one of which is that the value of the shareholders’ investment has fallen well below $1,000, the minimum threshold for submitting a resolution.” IRRC’s Corporate Governance Bulletin also projects the issues of the 1998 season (lists all to date), summarizes the SEC reform controversy, addresses trends in board practices, and highlights corporate governance developments in Germany, UK, Australia, Thailand and Japan.

In addition, the issue provides a needed comparison of U.S. guidelines on corporate governance from the Business Roundtable, NACD, TIAA-CREF, CalPERS, CII, GM and Campbell Soup. Years ago we hoped to index hundreds of such guidance documents online but although many firms have adopted policies, few have put them online. We’ve bookmarked some in our Library under Codes and Principles. Please let us know as you if you find others.

Pactrick McGurn indicates in the February 6th edition of The ISS Friday Report that shareholders are increasingly seeking seats on corporate boards. This is a trend which to us would appear to be at the heart of a movement to more democratic forms of corporate governance. “Prior to 1997, McGurn reports, “campaigns for board seats typically hinged on a dissident’s offer of a control premium. In essence, proxy fights served as a referendum on the underlying offer.” Several examples are cited, including Northstar Health Services, SLM Holding, Talley Industries, TCC Industries and TIS Mortgage Investment. He notes the trend is continuing in 1998 with Apria Healthcare Group, Mesa Air Group and several others. In addition, shareholder activists are also joining boards, such as John Pound’s recent appointment to CML and his involvement in their strategic review.

Director’s Monthly, the NACD publication, included brief excerpts from presentations made at their 1997 Corporate Governance Review meeting. At a panel on Shareholder Resolutions, Charles Elson described the recent shift from political activism to corporate governance. He sees as critical to that shift, the rise of institutional investors, recommendations from organizations such as NACD (several “blue ribbon” commissions) and the activism of shareholder groups, particularly IRAA. Patrick McGurn points to several trends. First, direct action resolutions seeking to change a fundamental corporate strategy or direction and the new entry into the field of “highly motivated financial investors – mutual fund and investment managers.” Second, a shift from “precatory” to binding bylaw resolutions. Third, McGurn points to higher success rates, 35 in 1997. Last, he mentions the new focus on performance, noting that if you’ve been targeted by one shareholder you are likely to be in the sights of others as well.

Cost-free assistance is being offered to issuers and shareholders in meeting obligations under Rule 17Ad-17 by Shareholder Communication Corporation, according to a recent report in the January Corporate Secretary. To contact SCC about its Free Compliance Program, call (212) 805-7000 or send e-mail to [email protected]. The same issue includes an article by Patrick McGurn, Director of Corporate Programs for ISS, “Some tips for establishing a working relationship with ISS.”

The January 30th edition of The ISS Friday Report notes theAssociation of British Insurers (ABI) has launched its Institutional Voting Information Service on the internet. Both ABI and the National Association of Pension Funds (NAPF) have entered into contracts with ISS to market ISS services to their members.

ADP Investor Communications Services has opened a site which will allow shareholders to indicate a willingness to receive proxy materials and voting instructions via the internet. Registration is at Last year 56% of shares were voted electronically or via telephone.

Venture capital keiretsu? That’s the term used by Kleiner Perkins’ partner John Doerr to describe how Kleiner Perkinsencourages its companies to help each other by forming “buy-sell, licensing, or endorsement arrangements.” However, according to Red Herring‘s Alex Gove, “all the major venture capital firms foster cooperation among their portfolio companies.” He goes on to describe similar efforts by theMayfield Fund and Accel Partners but then focuses on Ken Fox of the Internet Capital Group (ICG). ICG plans to invest 50% of its fund into three “core” companies and issue ICG shares to all of its portfolio companies. “Sharing the ownership of the company will give the entire portfolio a concrete financial incentive to work together.” American Keiretsu inRed Herring describes Four models for cross-company networking for venture capital.

David Ikenberry, a finance professor at Rice University in Houston, found a stock’s price jumps an average 3.5% on the day it announces a buyback. Companies with buyback programs outpaced control firms by producing 45% greater return during the first 4 years. (see Stock Buybacks Boom at

The text of a letter from Corporate Value Partners, LP to the Chairman of the Nominating Committee of the Board of Directors of The Reader’s Digest Association, Inc. is reprinted by PR Newswire.

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Union activism received an endorsement from an editorial inPensions & Investments as well as an admonition to advance the objective of earning the highest return for the appropriate level of risk, “not some other agenda that might be addressed better through other means.” The same issue reports that executive pay is the top corporate governance issue this year (by number of shareholder submissions, 71) and environment and energy is the top social policy issue (64 submissions). The issue also contains an excellent short summary of highlights of the role of pension funds in the corporate governance “revolution” by Ricki Fulman. (2/9/98)

More lobbying via the internet. SmokeScreen Action Network is making it easy to send letters to NYCERS trustees on tobacco divestment. I’m told their vote comes up March 5th and that NYCERS owns more than $300 million in tobacco stocks.

An interesting proposal to increase the independence of directors at mutual funds has been posted to the internet byChris TobeMutual Fund Governance – CFA’s as Independent Directors proposes that mutual funds be required to have an independent CFA on their board to represent shareholders. He believes this could improve performance and lower costs.

The LA Times continued its coverage of the conflicts of interest at CalPERS in its 2/5 edition. Apparently their previous coverage (see 6th story below) is having an impact. Senators Adam Schiff and Tom Hayden are drafting bills to prevent board members from meeting privately with anyone who has a deal before the board. Schiff’s legislation would also require reporting of campaign contributions, more open meetings, and would reform the way that six of its members are elected by plan beneficiaries. Hayden is looking to limit the role of money in influencing the process.

The article by Paul Jacobs also notes the FBI is continuing its probe of CalPERS and CalSTRS board members. James Burton, CalPERS CEO faxed a memo to trustees advising they “are under no legal duty to agree to be questioned” until they “receive a subpoena to testify before a grand jury.” Although this may be simply conveying the board’s alternatives, it didn’t have the ring of cooperation one might expect.

The LA Times carried an editorial the same day titled “Not Quite Clean Enough: CalPERS must tighten its rules to erase any doubts.” The Times calls for reforms in the areas of gifts, travel, contacts with investors and disclosures.

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The newly redesigned internet site of IRAA declares “IRAA has asked William Steiner and his group to no longer be associated with the organization due to their conflicts of interest and methods of activism.” The statement goes on to explain the split is due to Steiner’s confrontational tactics and that “IRAA will still make use of shareholder resolutions but only as a last resort.” The new site has a much cleaner look and additional features, such as a discussion group (bulletin board) feature. See also

Dawn Yoshitake explains the advantages of “structured yield products exchangeable for stock,” or STRYPES for a CEO wishing to unload a portion of their stake–“without diluting the holdings of his existing shareholders and putting pressure on the stock price.” Developed by Merrill Lynch, STRYPES lengthen the dilution or payout process by paying a periodic cash coupon, much like a dividend. “After a predetermined period, the selling shareholder can either convert the note into shares of common stock or pay the cash equivalent of those shares to investors.” (How CEOs can cash in quietlyc/net, 2/8/98)

First majority shareholder vote of the season came at King World Productions where the LongView Fund won 52.4% of votes to declassify the board. LongView has also submitted a binding shareholder poison pill resolution at SuperValu. (IRRC, 1/30/98)

Zero Corporation? John Chevedden wants to declassify the board…see our Bulletin Board.

Mike Quevedo Jr., a business manager of the Southern California District Council of Laborers, was appointed to the CalPERS Board by the State Senate Rules Committee and Assembly Speaker Cruz Bustamante. Quevedo is also the co-chairman of the Laborers’ Pension Trust which serves laborers in 11 Southern California counties.

Top story of the month is from Paul Jacobs of the LA Times. His 2/2/98 “Firms Lobby, Woo State Pension Officials, Win Pacts” raises disturbing questions about the integrity of decisions made at CalPERS, the nation’s largest public pension fund and a world leader in corporate governance.

Jacobs recounts a series of investments made by the fund, often after being rejected by staff, where the decisions to invest apparently hinged on individual board members being lobbied by investment firms. Examples include $60 million invested in a real estate partnership that employed the son-in-law of a board member. In another case “a pension fund trustee who was also a top deputy to Los Angeles Mayor Richard Riordan, took the lead in committing $75 million to a Los Angeles firm co-founded by the mayor.” Jacobs cites several such deals.

Assemblyman Dave Elder authored legislation in 1991 intended to stop such lobbying. However, the bill carried no penalties and CalPERS attorneys reportedly concluded the law applies only to competitively bid contracts, not to decisions affecting individual investments. Elder suggests the Legislature “ought to remove the ambiguity.” The LA Times is expected to print another article by Jacobs soon, with further revelations on CalPERS.

The second Jacobs article on abuses of power at CalPERS was published 2/4/98 and is entitled “Trips, Perks for State Pension Fund Trustees Raise Questions.” Jacobs recounts a pattern of expensive global trips paid by businesses who contract with CalPERS, free meals, a charity golf tournament financed by CalPERS real estate consultants, and using System connections to raise money for nonprofits and political campaigns.

According to Jacobs, 112 foreign and out-of-state trips were taken by CalPERS board members in the last 3 years; a third were subsidized “entirely or in part by private interests, often by companies that do business with CalPERS or would like to do so.” The pace seems to be accelerating, with 13 overseas trips and 29 to other states last year. President Crist takes credit for calling the shots on board travel and for raising “a lot of money” for Kathleen Brown when she ran for governor in 1994. Jacobs reports that Brown received at least $150,000 in contributions from CalPERS contractors but Crist indicates, “I always tried to be clear I was speaking as a faculty association person.” Crist was chair of the political action committee of the California Faculty Association at the time.

Robert Stern, co-director of the Center for Governmental Studies in Los Angeles, notes in the article that members of the California Coastal Commission are required to abstain from decisions if they have solicited contributions of $250 or more during the previous 12 months from applicants. CalPERS board members are under no such obligation. However, reforms of board policy may be taken up this month.

Will there be an outcry from the public or CalPERS beneficiaries? Last year the Senate held an oversight hearing on the issue without much information coming forward. CalPERS made some reforms in what can be the subject of closed sessions and what eventually gets disclosed. The Jacobs articles may put the pressure on for further reforms. A question many may be asking is, does the CalPERS Board meet the same high standards of disclosure and independence that it seeks from corporations in its lead role in the field of corporate governance? Let us know what you think. Write to[email protected] or post a note to our Bulletin Board.

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Options are the subject of 3 articles in the current issue of Inc. According to Mark Edwards of iQuantic, compensation consultants to high-tech companies, “while the typical Fortune 500 company grants options equal to about 1.25% of its outstanding shares each year, the number for the typical high-technology company is 3.5%–almost three times greater.” For software and internet companies the rate is between 5% and 8%. Patrick McGurn, of ISS , is quoted as saying, “In Silicon Valley the attitude right now is, ‘If I [the CEO] go for a little more dilution each year, my investors won’t figure it out.'” The total value of options outstanding in U.S. public firms has increased 10-fold since 1985, from an estimated $60 billion to $600 billion. That doesn’t count pre-IPO firms, where the practice of granting broad-based options is most pervasive.

Motherhood, Apple Pie, and Stock Options offers a good primer. CEO’s Notebook: Stock Options & Equity offers some tips, such as one from Mark Zweig, founder of a $4.2 million publishing and consulting company. “If there’s no sanction involved in selling their stock, you create an incentive for someone to leave,” says Zweig. “To get the full value of their stock, employees who leave the company voluntarily have to wait two years before joining or starting a competing business.” The article also points to sources for more information on equity compensation, such as NCEO andF.E.D.Know Your Options discusses nonqualified plans vs incentive stock options (ISOs) as well as phantom-stock plans (stock-appreciation rights).

According to an article by Richard Ferlauto, multiemployer plans and labor may be submitting between 70 and 100 resolutions during the 1998 proxy season. Areas include board performance, executive compensation, director independence and conflicts, binding bylaws, political soft money reporting, outsourcing and sweatshop issues. (see 1/30, ISS Friday Report)

An editorial in Pensions & Investments calls on pension fund executives to work with Congress and DOL to “reconcile the advantages and disadvantages” of defined benefit and defined contribution plans and to “speak out more in the debate to improve Social Security” by “relating the advantages of a privatized system.” P? warns the $4.1 trillion held by the 1,000 largest funds is a target for those with other agendas and their potential to influence corporate governance can lead to potentially risky areas such CalPERS‘ announcement they may seek to put their own representatives on corporate boards.

Release of the final report on corporate governance by the Hampel committee seems to have done little to forge a consensus. Hampel’s report is expected to be added to the earlier Cadbury code and Greenbury report, now part of theLondon Stock Exchange‘s listing requirements. The Hampel report encourages publication of proxy votes and statements by shareholders on how often they vote. However, the final report failed to call for separate voting on pay or to provide for abstention with regard to directors. Institutional shareholders are encouraged to “make considered use of their votes” but the report fell short of recommending that voting at company meetings should be compulsory. Sarah Wilson, managing director of Manifest, a corporate governance analyst, noted that “institutions own more than 80 percent of shares, fewer than 40 percent of these are voted – clearly more needs to be done.” Britain’s Trade and Industry Secretary Margaret Beckett said she would issue a “green” or consultative paper on company law in the spring.

We’ve added a link to Bernstein Litowitz Berger & Grossmann LLP in our Legal Services section of Links.

All material on the Corporate Governance site is copyright © 1995-1997 by Corporate Governance and James McRitchie, except where otherwise indicated. All rights reserved.

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Archives: January 1998

Clemente Global Growth Fund, CLM, has approved a proposal to allow shareholders to vote on converting fund to an open-end investment company in the Spring of the year 2000, if the Fund is trading at a discount in excess of 15% of NAV. The current discount is about 16%. Management also offered a proposal to tender 10% of the Fund’s shares at NAV in the third quarter of this year and the third quarter of 1999. The proposals are subject to shareholder approval. (BUSINESS WIRE)

Companies have been slow to act on shareholder proposals. Anti-pill proposals won an average of 54% of the vote last year but only 6 of 38 companies where majority votes occurred have disclosed taking any action. This may be fueling the growth of binding resolutions and potential new proposals such as “fire the CEO.” The Teamsters and New York City Employees’ Retirement System have proposed a binding resolution to amend Kmart’s bylaws to declassify its board. The Teamsters and other unions are focusing on executive pay (no cashing of options within 6 months after a layoff, prohibiting option repricing without shareholder approval). Cref’s emphasis will be on director independence. Then there is Wyser-Pratte’s proposal for Pennzoil to dissolve the poison pill after 90-days unless shareholder approval is won to continue it. (Summarized from Corporate Agenda, 1/98) The Carpenter’s Ed Durkin is reportedly focusing on revamping their accountability mechanisms to create long-term share-value growth. Concerned that past practices encouraged a short-term focus, Durkin hopes to have changes in place for 1999. (1/16, IRRC).

IRRC reports that Becton, Dickinson has been indexing its stock option awards since 1990. This year they’re fine-tuning criteria to shift from the S&ampP 500 to a peer group and with another portion based on EVA and revenue growth. (IRRC, 1/23)

Corporate governance expert, John Pound, was appointed to serve as chairman of the board at financially troubled CML.

Voluntary corporate governance guidelines released by the Belgium’s Employers’ Federation (FEB) and Banking and Finance Commission (BFC) last week were the forerunner to the bourse’s Commission for Corporate Governance, set to be finalised in June. (Reuters)

Reforms announced at ARCO will eliminate all employee directors except the CEO.

To get their salaried employees thinking like owners, GM will award stock options for 25-100 shares to 70,000 salaried employees in the United States and Canada. (1/27, Detroit News)

Marjorie Kelly, editor of Business Ethics, address the difficult question of who owns intellectual capital with a look at DSC Communications v. Brown and its implications. The same issue also includes an article on the “best” socially screened mutual funds, referencing a recent study by the Social Investment Forum which claims that more than $1 trillion in assets are now under management in “socially and environmentally responsible portfolios.” (Jan/Feb)

Back to the topRalph Ward, editor of The Corporate Board and Ralph Ward’s Boardroom INSIDER speculates on the “shock wave” sent through the boardrooms of corporate America when CalPERS announced their shift in policy re a new willingness to place its own representatives on the boards of some troubled companies. (San Francisco Business Times)

Graef Crystal, editor of the Crystal Report, attacks the compensation awarded Lester M. Alberthal Jr., head of EDS. “If EDS were following a strict pay-for-performance philosophy, Alberthal would long before 1996 have been fired.” Instead, he’s gotten millions in bonuses and lavish perks such as “$53,000 for his personal use of the company’s aircraft and another $84,000 for ‘security services and equipment provided at his residence.” (Tampa Bay business Journal)

Last year’s shake-up at closed-end mutual funds is the subject of Fortune’s Feb 2nd The Fund Industry’s French Revolution. Proxy fights resulted in a change over of two slots on the board of the Growth Fund of Spain and close calls at Clemente Global and Scudder Spain & Portugal.

Suzanne Fallender, focuses on Yves Michaud’s battle to bring corporate governance reforms to Canadian banks (see hisProposals to Canadian Minister of Finance on our Bulletin Board). Michaud and his (APEIQ) were able to win substantial support for various proposals last year, although none received a majority. This year he submitted 9 proposals. He’d like to require that board members be elected individually and that shareholder’s with 1% of a bank’s shares be able to nominate board members (currently 5% is required). He hopes to be able to nominate a candidate to the National Bank of Canada’s board by early 1999. (ISS Friday Report)

Update from Yves Michaud this morning indicates growing support. At stockholders meeting of Canadian Imperial Bank of Commerce, his proposals won up to 40% of votes. The proposal for limitation of salaries was seconded by the leader of the New Democratic Party, Mrs. Alexa McDonough, who said that she will put the issues to the House of Commons, through a parliamentary commission.

Back to the topTidbits from (Jan, Across the Board). While CEO compensation for large firms jumped 56% last year, those heading small firms (sales under $15 million) declined 5%. Linda Wachner was the top paid female executive last year with a total compensation package of 11,165,000 for serving as CEO and president of the Warnaco Group and Authentic Fitness. Also included is an article by Melissa Berman, of The Conference Board, on “Sweating the Soft Stuff.” In a recent Conference Board study, CEOs identified people and cultural differences as their worst problems in the global growth area. Berman believes the corporate governance debate may be “moving from procedure to performance.” The challenge is to find objective evidence that some forms of governance produce much better results than others…key features that can be “objectively described and readily duplicated.” CEO succession is one of the prime areas of focus. People issues will be key.

Hoffer Kaback, president of Gloucester Capital Corp, writes that typical tests for “independence” of directors miss the point. Proxy rules should be amended to add something like the following: “Set forth fully for each director (and nominee) the duration and extent of his personal and business relationships with the CEO prior to, and since, becoming a director (or nominee). ‘Director,’ ‘nominee,’ and ‘CEO’ shall be deemed to include the immediate families of each.” (Nov/Dec, Across the Board)

February issue of SmartMoney magazine carries an article onEquus II which comes closer than most to being a corporate governance mutual fund. It isn’t diversified. It hangs onto its investments for years and it’s a closed-end fund. Equus buys controlling shares in private companies, often sits on the board, and takes them public, continuing to own a portion of the stock. At any time, its portfolio is a mix of public and private holdings. In its five-plus years as a public fund, the market value of Equus has appreciated 225%, compared with 164% for the S&ampP 500.

The SEC will make the short form Schedule 13G available, in lieu of Schedule 13D, to investors owning less that 20% of the outstanding class that haven’t “acquired and do not hold the securities for the purpose of or with the effect of changing or influencing the control of the issuer of the securities.” However, as Patrick McGurn, points out in the 1/16/98 ISS Friday Report, the “bad news” is that the SEC “failed to draw bright lines for Schedule 13 G filers (‘Passive Investors’) that engage in corporate governance activism.”

McGurn offers a lesson in investor passivity, as he explains that several years ago the SEC solicited comments as to whether the Section 13(d) reporting obligations restrict a shareholder’s ability to engage in proxy-related activities. Was relief with respect to soliciting activities necessary? Only seven commentors responded and the SEC provided only limited guidance which McGurn outlines. Since proposals and soliciting activity relating to executive compensation, removal of poison pills and removal of staggered boards might not have a disqualifying purpose or effect, the SEC is allowing a degree of leeway. However, solicitations calling for a change of control (contested election of directors) would clearly fall under 13D. “Under the new Rule 13d-1(h), if a reporting person loses Schedule 13 G eligibility due to soliciting activities and is required to then report on Schedule 13D, the reporting person can switch back to Schedule 13G when the reporting person is no longer involved in the soliciting activities and can make the necessary certifications.” At least the reform is a step in the right direction, from our viewpoint.

Britain’s National Association of Pension Funds (NAPF)launched a new shareholder governance initiative to increase the level of investor voting at shareholder meetings. The move may quell legislation requiring institutional investors to vote. The move was endorsed by the Institute of Chartered Secretaries and Administrators. (LONDON, Jan 14, Reuters)

Back to the topDeloitte & Touche LLP, have released their annual guide, Questions at Stockholders’ Meetings 1998. Stockholders will be particularly interested in M&ampA issues in 1998. Computer technology and year 2000 issues will be another prominent area. Copies are available, free of charge, by contacting Natalie Saviano of Deloitte & Touche at (203) 761-3065.

When CEO’s who reach the natural end of their tenure are replaced by an outsider the firm often experiences reduced financial performance. Whereas if the CEO has been forced out for poor performance, the appointment of an outsider can lead to better financial results. (Rakesh Khurana and Nitin Nohria, “The Effects of CEO Turnover in Large Industrial Corporations: A Study of the Fortune 200 from 1978-1993,” 1997, Harvard Business School. E-mail: [email protected]and [email protected], reported in Wharton Leadership Digest)

The Belgian Commission on Corporate Governance is recommending a code of best practice, to be finalized by June 1998, instead of legally binding provisions to strengthen corporate governance. It also suggested that companies on the Brussels Stock Exchange should disclose measures governance measures in their directors’ reports.

The SEC plans to hold a number of “diversity roundtables” in coming weeks in an effort to boost the role of women and minorities in corporate America. They will begin in Los Angeles and will continue in other parts of the country. (WSJ, p. A6, 1/19/98)

A Watson Wyatt survey of 1406 companies found that option “overhang” — the number of shares available for future options + options previously granted as a % of total outstanding shares — has almost tripled in 6 years. Average share overhang was 13% in 1996 compared to 11% in 1995 and 5% in 1990. Overhang was highest in services (15%) and lowest utilities and energy (7%). (Ira Kay, global practice director for compensation consulting)

Barbara Kouskoulas and Srikant Raghavan propose that because of the conflicts of interest inherent between board members, boards should be constituted strictly on the basis of ownership of shares. No officers of the company would sit on the board. Board members would serve at their own expense and would not get any perquisites from the company. Composition and leadership would change yearly based on ownership percentages. (1-2/98, The Corporate Board) I can imagine a spate of objections. For example, institutional investors such as pension funds, who take a seat may lose indemnity protections and trading opportunities. Still, the idea may be worth exploring.

In the same issue, an analysis by William M. Mercer, Incfound that median year-to-year increases in CEO total compensation was 13% at top-performing companies and less than 1% at bottom-performers. The study confirms that CEOs achieve “greater financial gains when their companies do so.” However, can a causal relationship be assumed? If so, in which direction?

Stephen E. Hall, Managing Director of Pearl Meyer & Partners reports in the January issue of Directorship that the value of stock option grants accounted for 52% of CEO pay in major US corporations. “In fact the 200 largest US industrial and service corporations now set aside over 13 percent of the outstanding stock for senior executive and employee non-qualified equity incentive programs.” Fixed pay represents 15% and variable pay 85% of CEO pay at the top 200 corporations. CEOs of the top 100 firms owned an average equity stake of over $36 million or 1/2% of outstanding shares.

The Ontario Municipal Employees Retirement System (OMERS) makes available their investment and proxy voting guidelines to all interested parties. 12/97 ISS Alert includes an article by Lynn Clark, VP of Economic Policy and Strategic Research, on their corporate governance considerations. The same issue also notes a study by University of Pittsburgh professors Kenneth Lehn and Anil Makhija which finds a strong inverse correlation between EVA and CEO turnover.

Back to the topA shareholder proposal by UNITE requests that Dole Foodamend its bylaws to create a separate nominating committee composed entirely of independent directors. LENS will submit a resolution asking Temple-Inland to hire an investment banker to look into possible sale or merger of the company. (IRRC, 1/9/98).

IRRC released the study, Board Practices 1997: The Structure and Compensation of Boards at S&ampP Super 1500 Companies. Average base pay for board members increased 10%. A majority of new plans were tied to executive pay plans. 76 companies in the S&ampP 500 lack majority independent boards. Only 25% of all companies in the study have nominating committees made up completely of independent directors. Governance committees are reported in 36% of large, 15% of midcap and 9% of the smallcap companies. The report is available for $275 by calling Heidi Salkeld at 202-833-0700.

The SEC is expected to rewrite shareholder proposal regulations along lines suggested by Goldschmid and Millstein, according to 1/16/98 article in WSJIRRC has indicated Goldschmid and Millstein recommend the SEC keep current practices in the area of personal grievance and relevance exclusions, resubmission thresholds, and right to challenge company statement. They agree with reversing Cracker Barrel but recommend clarifying the commissions’s “ordinary business exclusion” on a case-by-case basis. They would scrap the override proposal. In addition, they recommend deleting the provision requiring management to include a box on the proxy card allowing shareholders to withhold discretionary voting authority from management.IRRC reports the SEC received 1,200 comments and hopes to have final rules out early this spring.

5th annual Mid-Sized Pension Management Conference will be held at the Hyatt Regency in San Francisco 3/8-11/98.

Trustees of CalPERS approved a $200 million investment with Active Value Fund Managers L.P., a UK fund using activist corporate governance tactics such as buying undervalued companies, making recommendations to management, and taking stronger steps if unheeded. Steven Davis indicates AVFM is likely to be aggressive. P&ampIreports a previous AVFM fund generated an internal rate of return of 29%. In other news from P&ampI, U. S. pension assets grew by 23% last year to $7.3 trillion. In an editorialP&ampI praises the Swiss Pensionskasse Schweizerischer Elektrizit?tswerke (PKE pension fund) posting its investment management structure, asset mix, manager mandates, performance results and volatility quarterly on its internet site. The action has been criticized because it will likely lead to questions by participants on managerial performance.P&ampI‘s position is that “the pension industry has too long hidden from public scrutiny. PKE, at least, is breaking away from that attitude.”

Back to the topMore on TIAA-CREF‘s shareholder resolution urging that Disney take steps to restructure its Board so that a majority of its directors will be independent of the Company’s management. (see Jan. 14th, PRNewswire)

Our Bulletin Board is starting to get some use. See postings on ADP’s growing monopoly in the beneficial and registered proxy industry and advise to the Canadian Minister of Financeon protecting the interests of shareholders.

The M&ampA market should remain white hot in 1998, ISS reports. Six annual records have been broken in a row with 10,700 U.S. transactions worth $919 billion compared to 1996’s record of 10,340 deals worth $626 billion according toSecurities Data. What’s the hottest new field in M&ampA? Our guess would be post-merger integration. A trio from theBoston Consulting Group provides advise to boards in the January/February edition of The Corporate Board. For more depth see The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities (McGraw-Hill, 1997) by Alexandra Reed Lajoux. There are nearly 500 books in print on M&ampA but less than a dozen on the postmerger period. Those seeking advise on what to do after the papers have been signed will find Lajoux’s work a practical guide. It fills a vacuum in the field with an instant classic.

PBS is running a series entitled “Surviving the Bottom Line” starting January 16th. The 1st episode “Running with the Bulls” takes viewers behind Wall Street to reveal a massive power shift from CEOs to Wall Street.

Tne National Center for Employee Ownership (NCEO) recently completed a study which shows that adding open book management practices such as sharing the income statement and balance sheet, sharing production and other data, encouraging employees to use the information at work, training employees to understand financial numbers and grainsharing, resulted in higher average growth rates ranging from 1.3% to 2.2%.

Proxy Season Preview from IRRC, New York, 2/13/98

Bowne & Co is offering The Best In D&ampO Duties And Liabilities (780 pages, $175).

Director’s Monthly, the NACD newsletter, includes part one of a report on supplemental executive retirement plans(SERPs) undertaken by TIAA-CREF. They found that the maximum potential annual pension for CEOs of companies with independent compensation committees is, on average, $800,000 lower than those of companies with non-independent compensation committees. It wasn’t a statistically valid sample but it confirms our instincts. Part II will look at suggested approaches to avoid abuse. NACD notes the study is available from Brett Hammond of TIAA-CREF at 212-490-9000, extension 2279.

The December issue also includes an interview with judge William Webster focusing on the first decision of the Delaware Chancery Court in which a special litigation committee settled, rather than dismissed, the derivative claims. ($14.9 million settlement of TLC Beatrice) Director compensation at 220 surveyed firms rose about 10% to $73,000 according toExecutive Compensation Reports. NACD’s 1997 Corporate governance Survey finds 60% of company boards are still all-male, 80% have no minority directors. (call 202-775-0509 for a copy) The Conference Board released their report on Corporate Directors’ Compensation in 1997; stock based packages are up from 54% in 1996 to 84% with retirement plans are down from 30% to 19%. Median pay was about $58,000.

Australian requirements for disclosure of executive compensation in annual reports could be significantly reduced under Federal proposals according to the 1/7/98 Sydney Morning Herald.

The LA Times reported that TIAA-CREF filed a shareholder resolution to “force” Disney to increase it independent directors. TIAA-CREF claims 9 of 12 independent directors have “significant personal or financial ties to the company’s management.”

We’ve posted a review of Donald H. Chew’s excellent reader,Studies in International Corporate Finance and Governance Systems: A Comparison of the U.S., Japan and Europe. The book is primarily a compilation of articles previously published in the Journal of Applied Corporate Finance.

Back to the topThe number of firms offering DRIPs has grown from about 50 to more than 350 in the past 3 years. These small investors are more loyal shareholders and customers. DRIPs are also often a cheaper source of funds than a secondary offering. (The Business Journal)

A 1996 study by Steven Huddart of Duke University and Mark Lang of the University of North Carolina, found that 90% of lower-level employees sold their stock right after exercising options. Senior executives tended to hang onto their stock for a significantly longer period of time. (St. Louis Business Journal)

Investor Business Relations (IRB) reports that ADP Investor Services is set for proxy voting via the internet and/or telephone. Also on the internet is Data Downlink Corp. which offers information from several databases dowloadable to the users spreadsheet (see

IRRC continued its excellent coverage of the SEC shareholder proposal by reporting on recommendations from Millstein and Goldschmid. The corporate governance experts recommend scraping most of the proposal. IRRC also reported on shareholder proposals being filed by the Teamsters, including proposals at AlliedSignal and Time Warner “asking that shareholders be allowed to vote on severance packages that cross certain monetary thresholds” and one at American Home Products asking for a report to shareholders on political contributions.

Graef Crystal suggests investor activists might profit from CEO pay abusers by shorting the company’s stock. He outlines the case of Lester Alberthal Jr. at EDS. Under his leadership EDS underperformed the S&P500 Index by 67% yet Alberthal received a salary increase of 8.6% to $733,333, a bonus of $1 million, and 150,000 shares of stock valued at $6.75 million. (San Francisco Business Times)

I‘ve uploaded my comments on the SEC Shareholder Proposal regulations. Among the many amendments suggested is one to allow shareholders to use the Rule 14a-8 process to nominate directors by deleting subsection (c)(8). Although I have not seen this explicit suggestion from others responding to the proposed regulations, it would seem to be one which is fundamental to democratic capitalism and a free society. If directors more frequently faced a true contest, they will be forced to take stands on issues of importance to shareholders such as poison pills, staggered boards, etc. Most shareholder proposals might thereby be eliminated.

The current system of corporate governance is like having the executive cabinet appoint our legislative representatives and relying on the initiative process to pass any significant legislation. Imagine how badly drafted our laws would be under such circumstances. Now imagine the shareholder proposals twenty years from now if shareholders continue to be locked out of the nominating process.

Patrick McGurn, with ISS, reports that NACD recently surveyed CEOs. Shareholder nominations of directors ranked as the “most unpopular” reform on the corporate governance front. “Nearly three-fourths (72 percent) of the CEOs turned thumbs down on the idea.” “Ironically, when the NACD asked these CEOs to check off what ‘constituency representation,’ if any, could be found on their current boards, 70 percent said shareholders.” Most CEOs believe shareholder activists are acting irresponsibly by interfering in areas beyond there expertise. There’s probably more than a grain of truth to that belief but wouldn’t shareholders be less like to raise such issues if they could hold directors accountable?

CalPERS tentatively approved a staff draft policy that could result in taking a more active role in corporate board elections, including direct pursuit of directorships when the fund owns enough shares to be seen as a “controlling shareholder” and where the benefits “outweigh the risks of increased liability exposure, potential conflicts of interest and trading restrictions.” (12/26, WSJ)

The move promises to open a new chapter in shareholder activism and follows the recent move by Franklin Mutual Advisers who earned a board of directors seat at Chicago-based Telephone and Data Systems. “Franklin’s nominee received overwhelming support from TDS shareholders, garnering substantially more votes than the management’s nominee.” (The National Law Journal via Law Journal Extra, Koppes, 9/8)

Patrick McGurn, with ISS, suggests that CalPERS already holds stakes in equity investment vehicles such as Relational Investors LP and Active Value Fund Managers Ltd. who could offer such board representation. CalPERS trustees and staff apparently heard advice from corporate governance experts at a recent forum calling on CalPERS to take larger positions in companies and a more active stance.

However, CalPERS spokeswoman Patricia Macht said “anyone who thinks this is a new weapon in our arsenal for corporate governance is going down the wrong track.” “Historically, we have declined to be represented on corporate boards,” she said. “Even when we are a controlling shareholder, our practice has been not to designate a Calpers representative on board. … That has not changed.” (seeLubbock Online, 12/28) In addition, the tentative policy reportedly continues a CalPERS policy of not recommending possible director candidates.


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Archives: December 1997

Delaware Court of Chancery has made important rulings concerning stock option plans for directors and the issuance of stock to directors in Noerr v. Greenwood and Linton v. Everett. According to Edward P. Welch and Andrew J. Turezyn, the cases “counsel directors and their legal advisors to consider carefully such issues as fairness, disclosure to shareholders and approval by disinterested directors and/or shareholders after full disclosure.” (The National Law Journal via Law Journal Extra, 10/13)

The Florida State Board of Administration, the nation’s fourth-largest public pension fund, sued Sears, Roebuck & Co. for $3.5 billion, saying the retailer’s executives should have known about the company’s controversial handling of bankrupt debtors. “The people that are home free are the directors and the CEO, who caused Sears that loss,” said Horace Schow II, the Florida fund’s general counsel. “They ought to cough up something.” (see Houston Chronicle, 12/22)

SEIU Master Trust filed a resolution with Columbia/HCA to give all candidates for director equal access to the proxy. The binding resolution would amend Columbia’s bylaws. Currently, only candidates who have been nominated by the board are listed in the annual proxy statement. Shareholder nominees are not disclosed. (for more info. contact: Joni Ketter, SEIU, 202-898-3374.)

CalPERS reported 1996 costs of 13.7 basis points for investment operating costs. The fund also indicated it earned a 24.3% return during the year ended 9/30. Domestic stocks, which comprise two-thirds of the $126 billion fund’s assets, earned a 38.9% during the 12-month period compared to the benchmark of 38.4% for the Wilshire 2500 Index.

The Communications Workers of America announced that Walt Disney Co agreed to elect its board members every year instead of every three years as it does now. Before agreeing to the change, Disney tried to block a CWA proposal and urged the SEC to allow it to omit the proposal from their proxy statement for the 1998 annual meeting. Business Week, recently ranked Disney as the nation’s worst corporate board.

Rift at IRRA reported by IRRC, as William and Kenneth Steiner have distanced themselves from the organization due to what seem to be questions of continued independence.

Business Week joins the chorus calling for the SEC to “return to what it started to do in the first place: reverse the Cracker Barrel policy and review employment-related resolutions on a case-by-case basis, as it once did. Everything else should stay the same.” (see 12/29 edition) The Business Rountable and theAmerican Society of Corporate Secretaries both generally endorsed the proposal. Opposition comes from a broad shareholder coalition of religious, environmental, labor and social investment groups, joined by Nell Minow of LENS and Ralph Whitworth of Relational Investors, according to IRRC(12/12).

John Gilbert is interviewed by CNNfn. At 83 he’s still going strong, although he’s cut back from 75 meetings every year to “only” about 35 or so. Charles Elson, professor of corporate law at Stetson Law School discusses the Gilbert brothers role in the landmark 1947 case, S.E.C. vs. Transamerica, that helped define shareholder rights.

Molly Ivins brings corporate governance news to her readers. Her Dec. 17, 1997 column mentions Doug Henwood’s book,Wall Street: How It Works and For Whom and the SEC’s “proposed new rules that will damage the tiny move for corporate democracy.”

Bernard Black’s Shareholder Activism and Corporate Governance in the United States reviews a wealth of unpublished sources and provides needed insight to a struggling field but fails to give much of a glimmer of hope to those of us who believe corporate governance monitoring efforts could yield substantial rewards. (See Black)

Disclosure of Corporate Governance Practices by Australian Companies, a report by the Center for Corporate Law and Securities Regulation, University of Melbourne is noted in our bibliography. (see Ramsay)

Catalyst survey found the number of women holding a place among the top five earners at Fortune 500 companies more than doubled since 1994. But only 20% of female corporate officers — the people in the senior ranks of a corporation — hold “line positions,” compared with 41% of male corporate officers. Line positions are jobs that directly involve corporate profits and losses and that traditionally lead to the highest positions in business. (see PBS)

Guy P. Wyser-Pratte, president of Wyser-Pratte & Co. Inc., announced today that he has filed amended preliminary proxy materials for the Pennzoil Company meeting, including a proposal to elect himself to the Pennzoil board. As a result of Pennzoil’s cumulative voting system, Mr. Wyser-Pratte may be elected to the board by slightly more than 20% of the shares that vote. Wyser-Pratte’s by-law proposals would require a unanimous board vote for anti-takeover defensive actions taken by the board, unless such actions have been approved by a shareholder vote. Other proposals by Wyser-Pratte would reportedly allow the holders of 10% of the shares to call a special stockholders meeting, would make it easier for shareholders to make proposals and nominations at shareholder meetings, and would facilitate business combinations with large shareholders and their affiliates.

Calvert has posted a press release on their response to the SEC Shareholder Proposal regulations.

Masters’ Select International fund will ask five highly regarded international investment managers to pick 8 to 15 of their favorite stocks. Masters’ Select Equity used this technique for domestic stocks and gained 23.4% from 1/31 through 12/11. That was better than the 17.3 % gain for its peer group of large growth funds. Such a strategy would also facilitate closer monitoring of governance issues. However, this possibility wasn’t addressed by 12/14 New York Times article “When Mutual Fund Stars Converge.”

Hong Kong’s coming Mandatory Provident Fund is the major subject of December’s Company Secretary. Total pension assets in Hong Kong, currently estimated at US$15 billion are expected to rise to $75 -$300 billion in ten years. The MPF will require every employer to provide a qualifying retirement scheme if enabling legislation is enacted during this session. In addition, the issue describes an Institute-funded research project currently being conducted. Over 6,000questionnaires were sent out to company secretaries and directors. Many of the questions address the Consultancy Report on the Review of the Hong Kong Companies Ordinance.

December’s Corporate Agenda includes a profile of Eli Lilly. In 1993 their board ousted its CEO of 32 years. Four years later market capitalization has risen from $12-13 billion to $70-75 billion. The active board and members of senior management go on a 2-3 day annual retreat to review the year and discuss strategic planning.

The issue also includes an article by Lucy Alexander on poison pills. She cites Georgeson’s study finding that pills have resulted in an 8% premium for take-over targets over the last 5 years. IRRC’s Robert Newbury questions their methodology and TIAA-CREF’s Peter Clapman says “the economic evidence is still very ambiguous.” The Corporate Governance Advisor includes a related article by Terence Gallagher and Walter Gangl on Pfizer’s TIDE (Three-year Independent Director Evaluation) plan. Incorporated into the plan are requirements that the board maintain its majority of independent directors, that the pill will be reviewed every 3 years by the corporate governance committee (comprised solely of independent directors), and that the committee may review a number of listed factors such as shareholder opinions, relative valuations academic studies, etc. The author’s believe the TIDE plan represents “a new generation” addressing investor concerns. While that view may be questioned by institutional investors, the plan does encourage dialog between investors and corporations.

Women now hold almost 9% of board seats in the Fortune 1000 (up from 6% in 1992 and 7.6% in 1994), according toDirectorship.

Criticism of Business Week’s recent board ranking is rampant. Many thought the survey questionnaire was a guessing game. Another criticism was that respondents were asked to use corporate performance as one measure to rank boards…then the evaluation announces that “good governance appears to pay off”…circular reasoning. (IRRC’s CG Highlights 12/5/97) The same issue carries continuing coverage of the SEC proposal to overhaul rule 14A-8.

Ira Millstein and Paul MacAvoy have completed a study based on 1991-95 data which demonstrates that corporations with active and independent boards appear to have performed much better than those with passive boards. (see Millstein)

A recent Stanford study found that interlocking directors have less influence in large firms and in those firms whose chief executive belongs to a Business Roundtable or Business Council. (see Business Wire)

Global Proxy Watch reports that Proxinvest and Andre Baladi &Associates will launch a fund aimed at European shareholder-friendly firms. They expect to start with $34 million from French institutional investors and to attract additional funds from U.S. and U.K. once the fund is up and running. Selection criteria include an assessment of whether a company structures its board and motivates directors to produce shareholder value, discloses sufficient information to investors, and produces exceptional shareholder returns. (contact Stephen M. Davis of Davis Global Advisors) Davis also reports there have been over 85 corporate governance conferences this year so far.

Election results are out for the CalPERS at-large directors. Incumbents Charles P. “Chuck” Valdes and William B. Rosenberg were reelected by wide margins.

Unions are examining the voting records of 91 money managers to identify practices which conflict with AFL-CIO proxy voting guidelines. “While some union fiduciaries have been activists in corporate governance, many others have been virtually asleep on the subject until now with no idea of how money managers have been casting proxy votes for plan assets, some union officials said.” (Pensions &Investments, 12/8)

In another storey from P&I the Swiss Pensionskasse Schweizerischer Elektrizit?tswerke (PKE pension fund) will post its investment management structure, asset mix, manager mandates, performance results and volatility quarterly on itsinternet site.

Directors & Boards editor James Kristie has created the first corporate governance timeline with 100+ entries. Sure to be a useful reference, the timeline starts with Morgan’s appearance at the Pujo hearings of the U.S. Congress in 1912 and ends with this year’s SEC’s announcement of potential significant modifications to its shareholder proposal rules. Complementing the timeline in the latest issue of Directors &Boards are several historical-oriented features including:

  • An examination of the all-time top 10 legal cases that have impacted the way boards operate. Charles Elson takes us through the cases that confirmed business is carried on primarily for the profit of shareholders, director decisions must be made on an informed basis, action against director requires causation, exec compensation must bear some relation to services performed, the rights of shareholders and the power of the board, judicial review of takeovers, director duties regarding compliance, the private enforcement of proxy rules, and the applicability of insider trading;
  • A 10-year quest for director accountability. John Wilcox takes us through 3 stages of institutional activism from defining a role, to reform of the proxy rules, to a focus on financial performance and board accountability. Wilcox calls for a compilation of reports from all a board’s standing committees as an effective accountability mechanism for boards to shareholders;
  • Louis Lowenstein argues that although U.S. mechanisms to motivate shareholder groups and those which facilitate control of the board are weak, disclosure systems more than make up for these weaknesses; and
  • A history of executive compensation (with its own timeline from the 1800s to the present). The recent emphasis here is on the mega-grants of stock options which may bring about a rank and file uprising, government intervention shareholder resistance or an expanding pool driving pay levels down.

For more information on Directors &Boards see their listing on our Stakeholders page or call James Kristie at 215/405-6081.

The SEC has extended the comment period on charitable giving by public companies. The SEC is studying these issues in connection with HR 944 and 945. One bill would require public companies to disclose their charitable contributions; the second would require each to allow its shareholders to participate in deciding which charities the company should contribute to and how much to contribute…much like the system developed at Berkshire Hathaway. See comments to date as well as Another option, not being studied, might be a similar requirement for political contributions…of course, to be fair, the same limitation would need to apply to labor as well.

To stimulate discussion on the SEC Shareholder Proposal regulations we have uploaded comments submitted by CalPERS. To facilitate communication, we have created a Corporate Governance Bulletin Board.

Stephen Davis, of Davis Global Advisors, reports that in a 1996 survey of European shareholders by the Centre for European Policy Studies and Davis Global Advisors “none of the respondents – including those who said they vote up to 100 per cent of their domestic securities – cast ballots for more than 10 per cent of the shares they hold in outside markets.” To address this issue and others the International Corporate Governance Network voted to convene two working groups charged with drafting best-practices principles by June 9, 1998, 30 days prior to their next annual conference held in San Francisco. (Company Secretary, 10/97)

Catching up on other news from Stephen Davis, the National Association of Pension Funds (NAPF), representing about 30% of institutional investment in Britian, called for a number of reforms including:

  • Shareholders should vote each year on the report of a corporate board’s remuneration committee.
  • Nonexecutive directors serving more that 9 years should no longer be considered independent.
  • Confidential voting.
  • Directors should be required to undertake formal training within 12 months of appointment.

For a more complete list of highlights and commentary, see the Global Proxy Watch (10/3/97).

A binding anti-pill proposal by the Union of Needletrades, Industrial and Textile Employees hit a setback when U. S. District Court dismissed a lawsuit from UNITE challenging the use by May Department Stores of discretionary authority to vote down the proposal. The proposal apparently would have won approval if the company was denied discretionary voting authority. Judge Koeltl notes, the case “provides a clear example of the disruption and confusion that would be created by an interpretation of SEC Rule 14a-4(c)(1) that forced the company to include any and all potential shareholder proposals in its original proxies.” For a much more complete report see IRRC’s CG Highlights 11/21/97. In the same issue, IRRC reports that “smaller, more active boards that meet less frequently were held up as the ideal at a Nov. 18 American Society of Corporate Secretaries issues seminar in New York.”

Investor Business Relations (12/1 e-mail: [email protected]) reports Ameritech is 1st company to offer shareholders a completely paperless alternative for reports and voting.

Czech Republic enacted law establishing country’s 1st securities commission. (The ISS Friday Report, 11/28)

Forbes ran a cover article on 12/1 on Turning employees into stakeholders which focuses on Science Applications International Corp. in San Diego. “Employees own 90% of the company; the other 10% is held by consultants or employees who left in the early days before SAIC instituted a requirement that departing owners sell their shares back to the company…Its four different employee-ownership programs are among the most sophisticated in the country.”

Graef Crystal writes “If ever there were a case for indexing stock options to the market (i.e., causing the price that must be paid to exercise an option to rise and fall with changes in the broad stock market), that case exists with Fisher at Kodak. Assuming that he has not made any option exercises thus far in 1997, his option shares, on Nov. 11, 1997, contained a paper profit of $21 million. That’s a lot of money for performing at only 34 percent of the market during your tenure as CEO and for destroying 23 percent of your shareholders’ wealth in the last year alone.” (The Business Journal, Portland 12/1)

Investor Relations Magazine will hold its first annual Canadian awards ceremony on Thursday, February 26, 1998. Winning companies will be chosen for their outstanding performance in key areas of investor relations including financial reporting, corporate governance, takeovers and other areas. (see Canadian Corporate News)

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Archives: November 1997

A study by Cotter, Shivdasani and Zenner, reported in the November issue of Directorship, found that returns to a target firm’s stockholders were 20% higher when their board was independent than when a majority of directors were insiders or outsiders with ties. The same issue also carries an article by Robert Heidrick on making director evaluations work.

According to recent estimates by NCEO, there are now 8.7 million participants in ESOPs with $213 billion in assets. In addition 2 million participate in 401(k) plans investing primarily in employer stock (totaling $250 billion) and another 5 million employees have stock options. In the same Nov/Dec issue of the Employee Ownership Report, China is moving swiftly to employee ownership through privatization of state industries. In addition, a case study of Whole Foods finds employees own 19% of the company, employee decision-making power is high using a team approach, and no one in the company can make a salary of more than 10 times the average wage. Maybe these factors help account for the firm’s phenomenal growth?

A new study by Georgeson & Co finds companies with poison pills receive higher premiums. (see Businesswire) “Georgeson noted that support for shareholder-sponsored proposals to rescind poison pills (typically they also ask to put rights plans to binding votes) has been increasing gradually for the last 11 years, despite a series of studies demonstrating that poison pills are associated with increases in shareholder value in binding contests. (The ISS Friday Report, 11/21)

Consensus @nyWARE by Soft Bicycle Company facilitates online meetings. (NACD, 10/97)

The IRRC’s report “Disclosure of Environmental Information about S&ampP 500 Companies’ Non-U.S. Operations” by Alison Cassady is available on their internet site.

Litman/Gregory set up a fund run by 6 fund managers where each manager was limited to 15 stocks. Masters Select Equityhas outperformed each of the individual funds run by its managers. Year to date returns as of the end of November are 27.8%. Writing on the results, Roger Lowenstein indicates “over-diversification is a sign of a manager investing so as to minimize short-term volatility at the expense of long-term results.” (WSJ, 11/20, p. C1) Now, what if the fund shifted the expense which would normally go to more stock picking and instead focused on monitoring, acting as an owner?

The NACD released its 1997 Corporate governance Survey. Among the findings: 84% agreed majority of boards should be independent, about half of the CEOs would consider formal limitations on outside board participation, the number of firms with mandatory retirement for directors fell from 53% to 43%. Copies of the survey are available by calling 202-775-0509. The Corporate Governance Forum of Japan released its report on reform calling for cutting the number of directors, reduce conflicts of interest and establish renumeration, audit and nomination committees with a majority of independent directors. Copis of the report can be obtained from Ariyoshi Okumura at [email protected]. (IRRC’s CG Highlights 11/7/97)

Repricing underwater options is the major issue for State of Wisconsin Investment Board this year, according to a report by IRRC. IRRC analyzed 326 new exec stock option plans and found about 1/3 allowed repricing. IRRC also announced a partnership with Russell Reynolds Associates to produce a series of reports on global governance practices. (IRRC’s CG Highlights 10/31/97)

Retirement plans held 35% of all U.S. mutual funds assets at the end of 1996, according to a study by the Investment Company Institute. (P&ampI, 11/10)

At the conference commemorating the 25th anniversary ofIRRC, Stephen Davis of Davis Global Advisors, noted that France and South Africa have recently adopted corporate governance codes and Spain, Belgium and India will soon follow. “He noted that 40% of the shares of French public companies are held by U.S. investors; 40% in the Netherlands; 40% in Sweden and 16% in Britain. Jella Benner-Heinacher of the German shareholder group Deutsche Schutzvereingung fur Wertpapierbesitz noted they are struggling to reduce the number of members on supervisory boards and barring directors from sitting on supervisory boards at competing companies. (Investor Relations Business, 11/17/97, e-mail:[email protected])

Corporate Reputation Watch, a recent study by Yankelovich Partners for Hill & Knowlton, found employee and internal communications (37%) was the top mission of corporate communication programs. Audience/constituency information and outreach was cited second (32.5%) and managing corporate reputation third (22%). (Investor Relations Business, 11/3/97, e-mail: [email protected])

Accountability of individual board members promises to be the major corporate governance issue next year, according an article in the December 8, 1997 issue of Business Week. The name of the game is “CIAO;” commitment, independence, attendance, and ownership. The Teamsters publish an annual list of the worst directors; the Council of Institutional Investors (CII) has its list of “director turkeys.” According to Patrick McGurn of ISS, 3 years ago, roughly 60% of companies handed out pensions to directors. “Today, because of activists and investors who believe pensions discourage directors from challenging management, that number has dropped to about 15%.” Attendance, conflicts of interest, and owning a significant amount of stock will be among the tests for the coming “just vote no” campaigns.

In the same issue Disney, AT&ampT, H.J. Heinz and Archer Daniels Midland have won the dubious distinction of being named the worst boards in America in BW’s second annual analysis of the state of corporate governance. Kudos went to Campbell, General Electric, Compaq Computer, and IBM. “The best 25 boards in BW’s 1997 ranking boasted annual total shareholder returns of 27.6% over the past five years.” “The 25 worst boards earned average annual returns of only 5.9%.” In addition, Terence Gallagher tells us what a VP of Corporate Governance does.

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The Detroit News’ fourth annual Corporate Report Card for putting shareholders first gave the nod to Lear Corp. of Southfield and MCN. “The best public companies delivered strong financial performance and stock growth while practicing a corporate creed that enriched shareholders before executives and directors.” They also list the worst MI firms and include includes a primer on what to look for in corporate proxy statements and annual reports. (

U.S. Trust Company’s survey of senior corporate executives finds their three biggest worries are that “too much of their net worth is tied up in company stock; too much pressure is on them to hold large quantities of it; and too much of their pay is linked to its price.” (SF Business Times, 11/24)

Nell Minow of Lens calls for indexing option awards or linking them to a company’s peer group. Compensation consultant Pearl Meyer advocates premium-priced options. (Fortune, 12/8)

SEC to meet with American Bar Assn, AFL-CIO, American Society of Corporate Secretaries, Business Roundtable and the Interfaith Center on Corporate Responsibility, among other in NYC on 12/1 to try to nail proxy rule revisions. (LA Times, 11/27)

Under pressure from Corporate Governance editor, McRitchieTestimonyBPAC, and others, the CalPERS Board voted to hold more open meetings and to disclose closed-door votes. (see Sacramento Bee)

The SEC backed off proposed regulations to make it more difficult for shareholder resolutions to be put to a vote. According to WSJ the pressure came from a private meeting between Sweeney and Levitt as well as the coalition, organized by the Council of Institutional Investors and the Social Investment Forum. As I understand the issues, WSJ characterized them realistically as they are viewed by each side. However, they end the article with, “under the new proposals, the agency would open the door to shareholder resolutions on such issues as hiring policies in foreign factories and adoption of Labor department recommendations on worker-friendly practices. Even so, the coalition says it doesn’t go far enough.”

I believe many in the coalition would disagree with this characterization. The SEC “proposes to narrow and clarify the operation of rule 14a-8(c)(5), which is often called the ‘relevance’ exclusion.” They do so, in part by removing the current exception for “otherwise significantly related” proposals. The SEC indicates this exception “frequently overshadows the 5% standard.” Yes, the SEC proposes to lower the 5% standard to “the lesser of either $10 million in gross revenues or total costs (whichever is appropriate), or 3% of gross revenues or total assets (whichever is higher).” However, since the “otherwise significantly related” exception has overshadowed the 5% standard on the very proposals of concern, the removal of this current exception would “overshadow” the proposed 3% formula. I don’t think it is reasonable to assume the proposal doesn’t “go far enough.” For the coalition, the proposal is a reversal, not a too small step in the right direction.

Independent reports from the coalition indicate the request for extension of the comment period to Jan. 2nd came from the corporate side. Ira Millstein and Harvey Goldschmid have been asked to “help moderate a possible compromise.” Yet, except for the reversal of Cracker Barrel, anything else contained in the proposal that might become part of new regulations would be a net loss to shareholders. While everyone might have the greatest respect for the team’s mediating skills, it’s hard to see how a compromise will be reached.

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The AFL-CIO released tough new Proxy Voting Guidelines. Voting fiduciaries “must consider” factors such as independence, excessive compensation, attendance, etc. the basic dilution cap is set at 10% but the guidelines allow further dilution if plans are broad-based. Importantly, it urges funds to insist that managers who have been delegated voting authority “fully disclose and report their voting records” on every proxy cast on behalf of the trustees, providing written justification on controversial proposals. An ISS report expects increased “withhold” votes, “higher votes for shareholder proposals seeking cutting-edge boardroom reforms, more robust opposition to stock option plans, and higher voting support for a number of social issues.”

We’ve added a review of M. Blair and L. Stout’s innovative “A Theory of Corporation Law as a Response to Contracting Problems in Team Production” to our Bibliography. The paper argues that the corporation is best seen “not as a nexus of implicit and explicit contracts, but as a decisionmaking process to which many and varied individuals submit themselves by giving up control over their firm-specific investments to an independent third party in hopes of sharing in the economic rents that can flow from team production.”

Tobacco opponents filed to win approval of a resolution urging CREF to divest its $1.8 billion in tobacco investments. CREF is the $119 billion variable annuity component of the $211 billion TIAA-CREF pension system. 27.2% voted for the resolution, 67.4% against, and 5.4% abstained.

Graef Crystal says envision a scenario where Michael Ovitz was driving home after being fired from Disney. The back seat is stuffed with $80 million in severance pay. “The car phone rings and Michael Eisner is on the line. He says: ‘Come back. I need you after all. We’ll sign a brand new contract and you can keep the $80 million.’ Well, for all practical purposes, that’s the deal Oxy’s board seems to have made.” (see Triangle Business Journal)

A Wall Street Journal article indicates ISS’s influence is growing. It cites the battle for ITT Corp. and “pilgrimages” made to Bethesda by Hilton’s CEO Stephen Bollenbach, Starwood Lodging’s Barry Sternlicht, ITT’s Robert Bowman and others. ISS was also credited with helping topple the board of Student Loan Marketing Association in the summer and influencing the outcome at Rexene Corp., Great Western Financial Corp., and Kansas City Power & Light Co. Started in the 1980s by shareholder activist Robert Monks, ISS provides record-keeping and/or proxy advise to 400 institutional investors.

ISS has released its “The 1997 Proxy Season: The Year in Review” which contains 66 pages summarizing the trends: growing ranks in shareholder activism, a surge in proxy contests, renewed focus on directors and boards, continued interest in executive and director compensation, binding bylaw amendments and an increased use of shareholder activism by socially conscious investors. To obtain a copy call Joseph Sargent at (301) 718-2255 or e-mail: [email protected].

Director’s Monthly, NACD’s publication contains a fascinating article by Dorothy K. Light on the changing role of the corporate secretary under “empowered boards.” What a study in contrasts! The September issue also reports on a study by Harvard professors Kotter and Heskett which found that firms with a strong corporate culture outperformed a control group. Revenue grew 4 times faster, job creation 7 times higher, and stock price 12 times faster.

According to IRRC, 34 shareholder resolutions opposed by management won majority votes this year, up from 23 last year and 22 in 1995. The two most popular measures were anti-pill and repealing classified boards. Despite wins last year, most of the targeted companies have not implemented changes; this is expected to lead to more binding bylaw amendments next year.

Former Surgeon General C. Everett Koop and Infact are leading a movement at TIAA-CREF to drop its $1.8 billion in tobacco stock. The Board opposes the move. (WSJ, 11/3)

The European Bank for Reconstruction and Development (EBRD) released its Transition Report for 1997 calling on governments across the former communist world to create new laws and market institutions that boost competition and crack down on corruption. Shareholders must be allowed to press for changes — including the sacking of its managers. (see Radio Free Europe)

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Archives: October 1997

Stern Stewart’s EVA product got a boost when CalPERS adopted its use in creating their annual focus list. It should help CalPERS pinpoint their targets with better accuracy and may result in increasing the “CalPERS Effect.” In other CalPERS news, they voted 36% of the time against executive stock plans and 39% of the time against exec bonus plans during the 1996-97 season. They voted in favor of management proposals 78% of the time and against 57% of shareholder proposals. Continue Reading →

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September 1997 News and Views

On September 19, 1997 the SEC released its draft amendments to Rules on Shareholder Proposals [Rel. No. 34-39093; IC-22828; File No. S7-25-97]. Comments are accepted for 60 days. Amendment language is available online at from Commissioner Wallman are also available. As expected, the rule would overturn the 1992 Cracker Barrel Old Country Store decision that the restaurant chain didn’t have to include a shareholder resolution that sought to bar discrimination against gay job applicants. The proposed rule was crafted to benefit both activist shareholders and companies seeking to limit shareholder proposals. It includes a provision allowing shareholders who can muster significant support to override some of the exclusions companies now use to keep resolutions off their proxy statements but it also raises the support needed for resubmissions. (see SEC Proposed Rules) Comments can be submitted via electronic mail to [email protected]. We urge our readers to do so and to cc us at [email protected]. Continue Reading →

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Archives: September 1997

On September 19, 1997 the SEC released its draft amendments to Rules on Shareholder Proposals [Rel. No. 34-39093; IC-22828; File No. S7-25-97]. Comments are accepted for 60 days. Amendment language is available online at from Commissioner Wallman are also available. As expected, the rule would overturn the 1992 Cracker Barrel Old Country Store decision that the restaurant chain didn’t have to include a shareholder resolution that sought to bar discrimination against gay job applicants. The proposed rule was crafted to benefit both activist shareholders and companies seeking to limit shareholder proposals. It includes a provision allowing shareholders who can muster significant support to override some of the exclusions companies now use to keep resolutions off their proxy statements but it also raises the support needed for resubmissions. (see SEC Proposed Rules) Comments can be submitted via electronic mail to [email protected]. We urge our readers to do so and to cc us at [email protected].

World Bank came out with a report which said “Governments are more effective when they listen to businesses and citizens and work in partnership with them in deciding and implementing policy.” Money has been pouring into authoritarian states such as China, Indonesia and Vietnam from the market at a much quicker rate than India and Russia. The World Bank says that “capable” countries have managed to boost per-capita income by about 3% a year, as opposed to 0.5% for weaker countries. Its not exactly a ringing endorsement for democracies. India is “capable” by these standards but gets only 16% of the capital that goes to China. Ideal for the “market” seems to be Hong Kong. A first world infrastructure that fulfills “work in partnership” bordering an authoritarian state. One of the more hopeful signs is the chief economist of Deutsche Bank in Asia saying “In the end, the risks of autoritarian rule are so much higher than the prospective payoffs.” (9/18, WSJ, Free to Choose)

Labor’s use of pension funds to reshape corporate governance and policies is covered by an article in 9/29 edition of Business Week entitled “Working Capital: Labor’s New Weapon?” AFL-CIO Secretary-Treasurer Richard L. Trumka will announce a new Center for Working Capital prior to the AFL-CIO’s biennial convention in Pittsburgh. “Our goal is to make worker capital serve workers, not just when they retire, but on a day-to-day basis.” Union pension funds hold $1.4 trillion in corporate stock (14% of all outstanding US shares but the article notes few unions have chosen to bargain over the governance of single-employer plans and demand the appointment of union trustees. Trustees of multi-employer funds must be half-management and half-union and unions often have even more clout in public pension funds. The Center for Working Capital hopes to help 6,000-odd union trustees become activist investors.

The 9/12 Philadelphia Inquirer carried an interesting article on AT&ampT, Kodak, Sears, and Procter & Gamble. These firms and a handful of others are linking compensation of top execs to employee or customer satisfaction or to social and environmental performance as well as financial performance.

Institutional investors, brokerage research analysts and registered representatives can attend corporate presentations live via The Internet through Wall Street Forum.

H.J. Heinz proxy included pages on corporate governance which sings the praises of insiders and indicates that no practicing attorney “shall serve as a director of the company.” (Investor Relations Business who says attorney jokes are dead?) (for additional coverage on other aspects see Business Week). IRB also reports that Congress is gearing up to force securities class action suits to be heard in federal court, ensuring coverage by the Litigation Reform Act of 1995. FASB’s proposal on derivatives is on their site at (WSJ had interesting article in support on 9/11/97) More on the recent Korn/Ferry study of boards. 16% of those surveyed say they evaluate performance of individual members, 75% say individual directors should be evaluated.

Back to the topBoth ISS and IRRC covered a New York Times report on newIRS data showing that exec pay rose 182% between 1980 and 1995 while revenue rose 129.5%, profits 127%, and taxes 114% during the same period. However, the IRS understates the rise in exec pay because the heavy use of stock options delay tax deductions, often until after retirement. Graef Crystal told the Times the value of options awarded but not yet exercised by CEOs at the 1,000 firms he tracks was $9.9 billion last year in contrast to $1.1 billion they did exercise. Exec pay increased 29% faster in the 1st year after the 1993 law limiting compensation to $1 million for non-performance related pay went into effect. Robert Monks, of LENS, told the Times “the simple truth is that executives are setting their own pay.”

Back to the topCEO compensation doubled last year, with the median pay package rising from $1,152,000 to $2,615,000, according toKPMG Peat Marwick LLP’s annual study of publicly held financial services companies. Long-term incentives, tied to shareholder return measures, comprise 45% of the typical CEO pay package, annual incentives, which depend on achieving short-term financial goals, make up approximately 30%, base salary, accounts for only 25%, or $653,000. The median CEO option grant (shares times exercise price) was $3.5 million, up from $2.2 million last year.

The Business Roundtable put out a press release on September 11th which refers to “a white paper issued today” which cautions against the application of rigid requirements that don’t take into account individual circumstances. Audit, compensation/personnel, nominating/governance committees should be limited to outside directors. They don’t endorse a specific limitation on the number of directorships an individual may hold. Boards should consider some form of equity as a portion of each director’s compensation. Corporations are generally well served by a structure in which the CEO also serves as chairman of the board. (ed. no great revelations)

The latest Friday Report cites a recent study by Investor’s Business Daily which targeted CEOs and CFOs from the fastest growing companies. 71% don’t expect a resurgence of labor in the wake of UPS. Among those heading union shops, 80% believed the strike would have little impact compared to 69% in companies who don’t have organized labor forces.

Septembr’s Directorship reports that of the 878 Fortune 1000 public companies in 1996, 73% had investment bankers on their boards, 53% had government workers, 53% had academic and 27% had commercial bankers. In the same issue, Richard J. Mahoney suggests raising the bar for performance-based stock options. He points out that a typical annual CEO stock option grant issued in 1990 giving the right to buy 100,000 shares before the year 2000 at the 1990 issued price – say $50 per share, would be worth $6 million if the company simply tracked the S&ampP index. And that’s just one year. Mahoney suggests adding a requirement that options don’t vest until the company meets targets such as exceeding the S&ampP index or industry peer groups by a specified amount.

Del Guercio, Diane,[email protected] and Jennifer Hawkins, The Motivation and Impact of Pension Fund Activism, 8/97. Examines the impact of pension fund activism by the largest and most active funds (CREF, CalPERS, CalSTRS, SWIB and NYC) during the period 1987-93. Their overall conclusion is that fund behavior is consistent with maximization of fund value and that funds do have a significant impact on target firms. (for more see annotated bibliography)

Back to the topIn the September/October Employee Ownership Report, Michael Brown, CFO of Microsoft, says that Microsoft went public not to raise capital (it didn’t need it even back then) but to provide liquidity for the 85% of its employees who were owners. The issue also contains a primer on the Black-Scholes model of valuing options drawn from one of NCEOs publications, the “Stock Options Book.”

The August Investor Relations Business newsletter included a report from ASCS re annual meetings. New York remained the most popular location, followed by Houston and Chicago. April and May are the most popular months, while August and December are the least. Bell & Howell and BCE went live on the internet. Wal-Mart had the largest attendance; each store sent a representative at company expense.

August’s Director’s Monthly featured articles on not-for-profits suggesting the need to institute clearer measures of accomplishment, definition of stakeholders and focus on legal duties such as care and loyalty and business judgement. Also of interest is a primer on “best practices” for corporate web sites.

The latest Issue Alert carries a roundup of the 1997 proxy season… labor-sponsored proposals scored more majority votes and higher average support than resolutions sponsored by pension funds, individuals, or private groups. Binding bylaw amendments remain the season’s primary innovation. Compensation, boardroom, and measures to sell the company continue. Next year will prove the most interesting season ever, if the SEC loosens up, as expected, on issues such as sweatshops, forced labor and child labor. The same issue includes an informative survey of pension reform in Latin America. Their August 15th “Friday Report” was titled the “Russian Edition” and contains one of the best survey’s we’ve seen. We’ve added The Federal Commission for the Securities Market to our links under “international Corporate Governance.”

Back to the topThe news is getting personal. First the Sacramento Bee ran a story about Charles Valdes, chairman of CalPERS‘ Investment Committee, filing for personal bankruptcy protection. NowPensions & Investments is running a profile of the personal investments of Alexis Herman, Secretary of Labor, David Strauss, Executive Director of PBGC, and Olena Berg, Assistant Secretary of Labor, PWBA. The article points to the irony that Herman and Berg often stump for employers to better educate their workers on financial planning. Yet, the author believes all three “need a class in investing” claiming they have “learned little about such concepts as diversification, or long-term investment planning.”

Legislation has been introduced to restore the tax exempt status ofTIAA-CREF and Mutual of America, a New York pension administrator for various charities.

CEO celebrity was the subject of a WSJ cover story on 9/3/97. CEOs have emerged like royalty putting a human face on multinational conglomerates. They noted that Time magazine last year concluded 7 of the most powerful 10 Americans were CEOs. “While probably nothing can silence an hysterical shareholder, many CEOs find celebrity can help them rouse employees… in an era when loyalty has been blunted by corporate downsizing… CEOs say their top priority is to enhance ‘intellectual capital’ by managing human relationships.” Sara Teslik, executive director of the CII warns “too many CEOs have the attitude that “I am an entity to be marketed, and the company will be lucky to have me.”

At the root of this condition, we believe, is a massive income shift from workers to top management. CEOs say they value intellectual capital but the rise in the proportion of managerial employees mirrors the decline in wages for 80% of employees. In the US, 13% nonfarm workers are managerial and administrative compared to 4.2% in Japan, 3.9% in Germany, and 2.6% in Sweden. (see Fat and Mean) Why does it take so many managers to ensure employees are working? Again, we would stress the benefits of ownership and participation in decision-making by all employees, not just by the CEO and the Board.

I offer the following which I expect to see in Dilbert soon (if you have trouble with the formulas ask a scientist or engineer):
Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.
Work/Time = Power and since Knowledge = Power and Time = Money, then
Work/Money = Knowledge
Solving the equation for Money we get Work/Knowledge = Money
Therefore, as Knowledge approaches zero, Money approaches infinity regardless of Work done. Conclusion: The less you know, the more you make. (ed. Who says we don’t have a sense of humor at Corporate Governance?)

Back to the topRick Crangle with ISS reports that Radnor Financial Advisors president Edd Hyde is going after mutual funds with 70 other independent advisors. While mutual fund assets have quadrupled, fees and other expenses have continued to rise. Where are the economies of scale? Shareholders are demanding changes and are getting a boost from the ranks of investment managers. (see alsoBusiness Week 9/1)

The August 9th edition of The Economist looks at strikes at “employee owned firms such as UAL and UPS. Why would employee owners strike their own firm? In the case of UAL, the 20,000 flight attendants are not owners. At UPS 27,000 supervisors and managers own a combined 29% of the firm, whereas 60,000 nonmanagement employees own less that 3% and part time employees own an insignificant amount. “Giving all employees a chance to own a stake in their company can be a unifying, productivity-boosting strategy; making shares available only to a select group will simply deepen existing divisions.” However, they also warn that “even the most equitable share-ownership schemes will flounder if workers feel they still have no say in how their firm is run.” The NCEO says that 9,500 firms, such as UAL and UPS, are on average enjoying a 10% faster growth rate because of employee ownership and participation.

In our opinion, if this is so for “employee owned” firms like UPS, it is even more true with respect to companies where the CEO is an owner but the average employee is not. Today when firm specific human capital contributes so much more heavily to the bottom line, it is important that workers be owners and decision-makers as well.

McKinsey finds that from 1970-90, a focus on shareholder value actually leads to more jobs (comparison between companies in U.S./Canada with Continental Europe). (Businessweek)

August 28th WSJ reports the SEC will vote in early Sept on proxy reforms so they will be in place for the 1998 meetings. The rule is expected to reverse Cracker Barrel and raise the threshold of those eligible to file to owning at least $2,000 shares in the company.

The August 16th edition of The Economist reports on papers presented to the Academy of Management meeting in Boston. James Westfal, University of Texas, found that CEOs with outsider boards spend their time doing favours for the board. Such companies diversified, increased executive pay and weakened the link between pay and performance. In another study with Edward Zajac, Northwestern University, Westfal found CEOs attend to measures that affect their own income more than those that don’t…pay for performance promotes “tunnel vision.” William Sanders, Bringham Young, found a link between pay in options and M&ampA and divestiture activity. Churning promotes the image they are doing something important. With options they lose nothing on the way down but reap substantial rewards on the way up. CEOs are smart enough to beat the system; are shareholders and boards smart enough to call them on it?

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Archives: August 1997

Dr Mark Blair, of the Australian Stock Exchange, announced ASX is developing a guidance note for listed companies which will “add flesh to the bones and assist as new codes [of corporate governance] are developed”. (see Financial Review)

August’s e-mailed Wharton Leadership Digest includes a list of corporate governance publications…added to their June list interested readers will now have a fairly comprehensive list.

Representatives of CalPERS and CalSTRS indicated the systems would reexamine current polices and would probably modify them to disclose votes in closed session taken on investments. The announcements came after continued pressure from the press (including Corporate Governance) and Senator Schiff who held a hearing on “pay to play” and related issues. At the hearing Senator Schiff focused on the fact that elected officials on the boards receive substantial contributions from investment firms and other contractors and yet disclosures of potential conflicts of interest are not required during deliberations nor are votes ever made public if taken in closed session.

CalSTRS Fiduciary Counsel, Ian Lanoff, dropped a bomb on the proceedings when he indicated he has repeatedly advised CalSTRS board members that they are prohibited, by provisions in the California Education Code, from assisting contributors and should recuse themselves from such votes and deliberations. It was clear the strength of Lanoff’s conviction came as a surprise to CEO James Mosman who indicated that constitutional officers on the CalSTRS Board had received different advise from their own counsels and did routinely participate in deliberations and votes involving contributors. It was also clear that potential conflicts of interest are not routinely discussed during such deliberations.

Defined-Benefit Pensions to Benefit by Tax Law, says Vanessa O’Connell in the 8/14 (WSJ). A little-noticed technical provision gradually lifts the cap on employer pension-fund contributions from 150% to 170% of current liabilities. Amounts beyond the caps are subject to stiff penalties. 59% of current plans reached full-funding limits in 1995, according to a recent study of 218 companies by Buck Consultants in New York. The current limit prohibits companies from putting money away and later forces them to make large contributions.

David Weidner, in a recent article questions the ability of Michael Price to sustain the performance that made him such a money magnet. Price’s numbers are starting to lag. The $7 billion Mutual Shares Fund, has underperformed its growth and income peers by nearly 4% so far in 1997. Camparisons are made with other fund managers who grew too fast. 8/14 (WSJ)

KPMG’s research found long-term incentives comprise 45% of most CEO executive pay packages (median value of $1,138,000). Base salary comprised only 30% of total compensation (median value of $694,000), bonuses comprised 25% (median value of $626,000). Total median CEO compensation was $2,219,000. The study, Executive Compensation Practices in Manufacturing, Retailing & Distribution Companies – 1997 examines the base pay, annual incentive and long-term incentive practices of 218 top publicly held companies in nine industries: automotive, chemicals, consumer products, energy, food and beverage, industrial products, retail, transportation and utilities. (KPMG)

Options now account for 40% of senior management pay, according to a recent study by Stanford C. Bernstein, as reported in The Eonomist 2/28 p. 77. Buybacks have also hit a record. Microsoft incurs a $1 billion liability each time its shares rise by around $4 to pay for options it has issued. The buybacks “largely represent a direct transfer of wealth from shareholders to employees,” according to the researchers.

Palo Alto’s Wilson, Sonsini, Goodrich & Rosati administered 12 pills — twice as many as New York’s Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom. (The Recorder)

Golden Boot award goes to John Walter, former president of AT&T Corp. After 7 months the AT&ampT board was denounced his lack of “intellectual leadership” while demonstrating its own decisiveness–$26 million to hit the road. (

We’ve added The Conference Board’s Across the Boardmagazine to our list of Stakeholders.

Shareholder activists are given some credit for the turnaround ofDigital Equipment (DEC). Bob Monks, of LENS said the sale of the printer business is a step in the right direction. “But the company should focus its energy where it has a future, and I worry that this might be a little too late. The company lacks a sense of where it is going.” Herbert Denton, of Providence Capital, said they’ve sent a wake-up call to the board of directors. (see c/net)

With the loss of tax exemption status, TIAA-CREF plans to tap into a number of new markets, including huge state-run pension funds for the country’s three million elementary and high-school teachers. TIAA-CREF already sells its retirement funds to state-employed college workers in 46 states. The pension fund also is weighing offering retirement investments to college employees’ families, and to hospital workers who previously were members of TIAA-CREF when they worked at teaching hospitals. (WSJ)

EVA, CFROI, MVA and other measures of value creation are reviewed in an August 2nd article titled Valuing Companies: A Star to Sail By? in The Eonomist.

Franklin Resources Inc. (BEN) reported that third-quarter net income rose 37% from the year before. Analysts attribute the company’s recent share-price charge to several factors – not the least of which is Michael Price, the company’s star fund manager, who is one of the only mutual fund managers occasionally using corporate governance strategies. 85% of its funds have 4 or 5-star ratings from fund tracker Morningstar Inc.

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The Hampel committee, headed by ICI chairman Sir Ronald Hampel, released their report, which follows the earlier Cadbury code on governance and Greenbury recommendations on executive pay, and came out against “box-ticking” — where companies have to comply with lists of principles. It also called for a lead non-executive director to be identified in the annual report, regardless of whether the roles of chairman and chief executive were combined. It stopped short of recommending that voting at meetings should be compulsory, but said institutional investors had an obligation to their clients to “adopt a considered policy on voting their shares.” Hampel also suggested shareholder bodies the Association of British Insurers and National Association of Pension Funds should examine a problem caused by the existence of different and incompatible shareholder voting guidelines. Hampel invited comments on the report to arrive by the end of September, with the aim of producing a final report with a single set of recommendations uniting Cadbury and Greenbury, in December. The impact of both the Cadbury and Greenbury codes of practice stems largely from their adoption by the London Stock Exchange. Through its listing rules, the LSE obliges companies to comply with the codes or explain why they haven’t.

Executives of Apple Computer are scheduled to meet withCalPERS on 9/3 to address their concerns. “Although they stacked their board with some heavy hitters, they aren’t out of the woods until we talk to them about their process for choosing a CEO. This is the most critical element as far as CalPERS is concerned,” said Brad Pacheco, a CalPERS spokesman. (c/net)

Kurt Schacht, general counsel for the State of Wisconsin Investment Board raises the alarm in the August edition ofCorporate Agenda about the over use of options. “It is no longer unusual to see options representing over one-third of a company’s stock being given to managers and directors.” The result is a “huge transfer of value from existing shareholders.” He also denounces repricing ‘underwater’ options. “Oddly, they always say it is unforeseen circumstances or market gyrations that cause stock to decline – it is strong management that makes the stock go up.”

The same issue also carries an article by Dr Brancato, director of the Global Corporate Governance Research Center which provides several figures turnover by fund type and pointing to greater control over US equities by the top 25 institutional investors. They controlled 16.7% of total outstanding equities in 1996, up from 15.4% just a year before. Institutions have increased their holdings from an average of 46.6% of total stock in 1987 to an average of 58.8% of total stock by the beginning of 1997. Editor Lucy Alexander writes on the tobacco companies and speculation of a renewed attempts at spinoffs, such as last year’s effort by Carl Icahn and Bennett LeBow at RJR Nabisco. There is also a report from the American Society of Corporate Secretaries’ annual conference. At a panel on successful board practices, Jonh Wilcox of Georgeson dismissed discussion of term limits, separation of CEO and chair, etc. as “external matters.” “What is really important is what goes on in the boardroom and companies need to find a way of informing investors about that.”

An 8/4 editorial in Pensions & Investments calls for an end to sole trustees of pension and trust funds. It points to the disruptions. For example, “every Connecticut state treasurer since 1958 has left office in midterm.” The lure of lucrative positions in the investment management industry is too great to hold them. However, more important than the lack of continuity is the lack of accountability. “The system doesn’t ensure accountability when the sole trustee decides which investment companies to hire and fire, perhaps talking to them about future, very-well-paying employment opportunities.” They argue that closed door investment advisory meetings contribute to a lack of accountability. In addition, as elected office holders, many have accepted thousands of dollars in campaign contributions from firms hoping to get their business.

We agree that a board is much less susceptible to corruption, although even some of the best boards are not immune from criticism. Note an article which appeared in the Sacramento Bee on May 17th about a questionable $100 million closed door deal where the placement agent was a former board member. CalPERS has called for the individual accountability of directors for corporations. We would take the P&ampI editorial one step further and call on public pension funds to make all relevant closed session meeting notes public, once the investments have been executed.

In the same issue, Keith Ambachtsheer of KPA Advisory Services Ltd., Toronto, argues against a previous commentary by Douglas B. Roberts and Mathew J. Hanley who asserted that a defined contribution (DC) plan was right for Michigan. Ambachtsheer compares the total expense ratios of a defined benefit (DB) plan like CalPERS (17 basis points) with that of the typical 401(k) plan (100 basis points). While DC plans often enhance vesting and portability, create greater cost transparency and stakeholder symmetry between who benefits and who underwrites losses, they jetison other important benefits. DB plan participants typically benefit from risk pooling, large scale economies and from dedicated corporate governance which leads to “a healthy reconnection of corporate ownership and control in the economy.”

Yet, the growth of DC plans continues. Pensions & Investmentsreports that abolition of tax credits, combined with the effects of the 1995 Pensions Act will lead many U.K. firms to abandon DB plans. A recent Aurther Anderson survey found “80% of employers plan to review their plan structures, with fully two-thirds saying changes would trigger a move to defined contribution schemes.” Recent Italian pension fund reforms will also lead to new DB plans with assets expected to exceed $50 billion by the end of 2002.

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An interesting article in Corporate Governance: An International Review provides a broader than usual perspective. See the Politics of Corporate Control and the Future of Shareholder Activism in the United States under authors Thompson, Tracy A. and Gerald F. Davis.

We’ve added the Investor Responsibility Research Center (IRRC)to our list of Stakeholders. Their May-June Corporate Governance Bulletin carried a wealth of information as IRRC begins to analyze results of the 1997 proxy season. Investors continue to make inroads on antitakeover defenses. One of the big developments was the submission of binding bylaw amendments by theInternational Brotherhood of Teamsters at Fleming. Shareholders filed 120 proposals on executive compensation, up from 63 in 1996.

IRRC reports the SEC received 333 responses to its survey on the shareholder proposal process (177 corporations, 82 shareholder groups, 58 individuals, 15 institutional investors and 1 proxy solicitation firm). Most corporations advocated raising thresholds of stock held to qualify for submission of proposals. The Bulletin lists hundreds of proposals and their status. It also includes articles on significant developments in Japan, the Netherlands and Russia as well as the CalPERS draft guidelines and many other important topics. Another IRRC publication, Corporate Governance Highlights, recently included coverage of a no-action letter suggesting that Nike may exclude a broad-based sweatshop resolution submitted by the Board of Pension and Health Benefitsof the United Methodist Church and others. IRRC also reports that the National Association of Corporate Directors will launchanother “blue ribbon commission” on CEO succession. They will begin on September 11 and expect to release a study six to eight months later.

The Securities and Exchange Commission, Department, and FBI are investigating possible kickbacks in exchange for steering investments to the former Shawmut National Bank in Boston. (Washington Post)

Managing CEO succession is a major theme in the current issue of Business Week.

CalPERS and the Florida Retirement System Trust Fund are appealing an $8 million lawsuit settlement made by Archer-Daniels-Midland Co. (ADM), which awarded $4 million to plaintiffs attorneys and included a watered-down attempt to improve corporate governance practices. (WSJ)

Dissident Sallie Mae shareholders, the Committee to Restore Value at Sallie Mae, defeated a management’s slate for the board of directors, and overwhelmingly approved privatization. Albert Lord, who will become the CEO indicated top priority would be to the cost of buying student loans by 50% within five years. It will also tie directors’ compensation to stock performance and provide performance incentives to its 4,700 employees. Sallie Mae shares jumped $4.8125 to close at $149.9375. (WSJ)

With Delano E. Lewis, president and CEO of National Public Radio stepping down, the board of Apple Computer now has 4 vacancies. Most of the board members, with the exception of A.C. “Mike” Markkula Jr., have little or no stock in the company and are not in the computer industry. (TechWire)

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Archives: July 1997

Two press releases by CalPERS. One praised the actions of Japan’s Ministry of Finance for issuing severe penalties against Nomura Securities Co. for the company’s involvement with corporate extortionists, or “sokaiya.” The second expressed outrage at Governor Wilson’s inaccurate portrayal of negotiations that had been conducted to enable the state to stretch out a court-ordered $1.236 billion payment of money owed CalPERS. “The Governor has revictimized the victims — using the pension system as his pawn in a political chess game played over non-CalPERS related matters, including tax cuts, welfare reform and pay raises for state employees,” said Dr. Crist, president of the Board. “He essentially asked CalPERS to loan the state money at below market rates. This would violate both the California constitution and the federal tax laws. Under long-held principles of pension law, CalPERS would be allowed to accept delayed payments ONLY as long as the beneficiaries were compensated by a comparable offsetting benefit,” CEO Burton said.

Best practices conference to be held in Las Vegas December 11-12, 1997 sponsored by Investors Research Insitute, Inc., a non-profit organization whose mission is to develop higher standards of investor information accessibility for small cap companies. For information contact the Chinook Group at 206-667-8558, fax 206-667-8660, or via email at [email protected] or[email protected].

The Dow Jones News Wire Service carried an interesting 7/29 report on a seminar organized by the Confederation of Indian Industry which sought feedback on their April draft code of draft code of desirable corporate governance. S.H. Khan, chairman of Industrial Development Bank of India indicated that directors nominated by financial institutions must be held to the same standards but should net be expected to undertake additional investigations. Omkar Goswami, Business India magazine, empowering small shareholders through a strong mutual fund industry would help ensure good corporate governance. Pratip Kar indicated the Securities & Exchange Board of India has recently introduced a series of measures to ensure greater responsibility by mutual fund trustees.

Back to the topWhile the US ponders privatization of Social Security other countries are going ahead with at least parts or their systems. Japan, singapore, Malaysia, Sweden, Chile, Argentina, Peru, Switzerland, Norway, Taiwan, and others are mentioned in a 7/29WSJ article. Most are reportedly faring well but Japan’s Nempuku has lost $8.6 billion. Some worry about companies being nationalized but CalPERS is noted as having large holdings without taking over industries. U.S. Social Security trust funds-which are invested in special issue U.S. government bonds-had an average annual return of 8.8% over the past 10 years.

The budget agreement will strip TIAA-CREF, the largest pension fund, of its tax exempt status.

The Stock Exchange of Singapore (SES) is working on corporate governance guidelines which will focus on ensuring timely and fair disclosure, and preventing directors and controlling shareholders from using their influence to personal advantage.

We’ve added recent articles about lenders by Drukarczyk, unions by Schwab, and exchanges as regulators by Mahoney to ourannotated list of articles. Other recent additions include an article by James Repetti on tax incentives, such as capital gains, which subsidize management inefficiencies. Lawrence Mitchell argues for a “conduit” theory of the corporation which views stockholders as humans.

Corporate pension funds underperformed a benchmark of 60% S&ampP 500 and 40% Lehman Bros Gov/Corp Bond Index by 1.16-1.41% per year between 1987 and 1996, according to a study by Piscataqua Research reported in Pensions & Investmentson 7/21/97. “To leave 1% on the table doesn’t sound like much,” according to Stephen Church, “but when you convert it to dollars…that’s $70 billion.” Performance has improved during the last 10 years largely due to increased use of indexing.

Kent Simons, co-manager of Neuberger & Berman Guardian Fund cautions that investing in the S&ampP 500 is increasingly risky because a few companies, like GE and Coke, comprise such a large share of the index which beat 90% of all growth-and-income funds in the past 10 years. (7/23, WSJ)

The May/June issue of the Corporate Governance Advisor carried an excellent article by Koppes, Ganske and Bereday on how directors should design and implement guidelines on corporate governance. The trio cite individual elements from guidelines adopted by TRW, BankAmerica, Campbell Soup, Pfizer, International Paper, Dayton Hudson, Colgate-Palmolive, CPC International, McDonald’s and others. The discussion ranges from the role of directors to the fine details of guidelines concerning the distribution of written materials in advance of board meetings. One worthy idea which few have adopted (Colgate-Palmolive being an exception) is providing boards access to their own legal and financial advisers. The authors also call for guidelines to be more specific in the process used and standards applied in the board’s own self-assessment. While man of the ideas discussed begin to form a consensus around the NACD Report, the authors emphasize tailoring guidelines to fit the individual.

I would add, that not all the ideas of the Report were good. For example, the idea that “Boards should require that all directors submit a resignation as a matter of course upon retirement, a change in employer, or other significant change in their professional roles and responsibilities.” I would argue with Joseph Hinsey IV, “the message to the outside world is that board membership is geared to the position, not the person. Stated another way, the apparent objective is to have a board stocked with celebrities, and if the director loses his or her brilliant colors – turns from a butterfly into a moth – then he or she no longer measures up. This view of the director’s role creates a terrible perception for the public. Beyond that, it is the antithesis of enlightened corporate governance.”

Waste Management may be finally getting approval from shareholders with the appointment of Ronald LeMay. The most colorful quote came from Nell Minow; “I haven’t popped the champagne cork, but I’ve put the bottle on ice.” Soros Fund Management also appears pleased. (ISS)

Back to the topJoann S. Lubin’s 7/18 WSJarticle “Turnover at the Top Puts Heat On Many Boards of Directors” is worth a read. She draws lessons from the recent experience at AT&ampT, Apple Computer, Waste Management and Delta Airlines. One common problem is the unwillingness to make a clean break from past management.

Back to the topSenator Adam Schiff will hold hearings on 8/25/97 to examine possible “pay-to-play” abuses CalPERS and STRS. (WSJ, 7/21/97) I hope to attend the hearings and bring our readers some interesting tidbits.

C/net reports that Apple canceled its meeting with CalPERS. The story includes an interesting quote. “We’re focused on improving the company and its performance,” said director Edgar Woolard, last night. “Personally, I’m not concerned about CalPERS. They can do whatever they want.” This doesn’t sound like a positive attitude towards an important shareholder.

An interesting course, The Virtual Chancery Court, is being offered though the internet.

Wharton professor Constance Helfat and colleague Dawn Harris of Loyola University completed a study which found that when a firm goes for outsiders it is willing to pay 36% more for executives with generic management and leadership skills but no industry- or company-specific experience. The return on assets among firms going to the outside for top talent is only 38% of the return among firms that select from the inside. (Wharton Leadership Digest)

Senator Adam Schiff will hold hold hearings on 8/25/97 to examine possible “pay-to-play” abuses CalPERS and STRS.

So far this year, only 101 of 2,577 general equity funds have outperformed the S&ampP 500. For the last year, it was 128 out of 2,302. For the last 3 years only 71 out of 1,421 funds. That’s 5%. As people come to realize the odds, they are pouring more money into indexed funds. Yet, the danger is that capital will no longer be allocated to companies that actually produce the greatest wealth. Its worth taking another look at Break the Wall Street Ruleand the possibilities inherent in “ownership” or “relational” funds.

Hoover’s opened a new site, StockScreener, which allows searches and sorts of 7,500 stocks by criteria such as P/E, beta, earnings growth, price/book value. To test it, I asked for all companies with a P/E lower than 1.2, and earnings growth rates above 20% for 1 and 5 years. Only one company fit the criteria,Raytech. The nice numbers could have something to do with the fact that Raytech has had asbestos personal injury and environmental liabilities pending since March 1989. Nevertheless, StockScreener is interesting to play with so we’ve added it to ourlinks.

In a move which surprised us, STRS sold it investment inMaxxam, the company which has become anathema to environmentalists for threatening to cut down old growth redwoods. The sale had been recommended by the California Federation of Teachers last February. The decision was made on investment factors not political pressure, according to STRS.

It makes us wonder about all those tobacco stocks. The Pennsylvania Public School Employees Retirement System can be added to the list of those who have stopped buying shares. I doubt if the recent settlement will stick. While I generally believe pension funds and other institutional investors should work for change through corporate governance mechanisms, the tobacco industry is a little different. They can split off their tobacco related components but they are not likely to fold up shop. Pension funds who were forced to sell their stock in companies doing business in South Africa may want to remember how much they lost. If the political pressure is going to rise, it might be better to move now, while prices are still relatively high.

Michael Price finally took an action we think will soon become more common for mutual funds; he succeeded in getting an independent director, Martin Solomon, elected to the board ofTelephone and Data Systems (New York) by a 78% margin. Franklin Mutual holds almost 10% of TDS (seePensions & Investments)

The July 7th edition of Pensions & Investments carries an editorial saying the tax-exempt status of TIAA-CREF is an anachronism. TIAA-CREF argues that “TIAA’s incorporation as an insurance company in no way offsets the fact that a pension system is what we are. As such, our participants should be entitled to the same tax exemption afforded to all other pension systems and multiemployer pension trusts throughout the nation.”

A recent Korn/Ferry study finds that boards of the largest U.S. companies are moving toward the ideals which were contained in the CalPERS corporate governance policies. Larger companies are phasing in stock payments and phasing out retirement benefits for directors. The vast majority have age limits (even though CalPERS is likely to back away from this as an ideal). Directors serve on an average of 2.5 boards vs the CalPERS maximum of 3. However, only half require the former CEO to leave the board, few have term limits (the final CalPERS guidelines will probably change in this area as well), boards usually have 2 inside directors instead of 1, and less than half have regular board evaluations. The study also notes increasing diversity among board members…an area which the CalPERS draft was silent on but which, we believe, will be covered in the standards when adopted. (for more details see Businesswire)

Back to the topThe Irish Times reports that Alan Hevesi, New York’s comptroller, is still ready to throw his weight behind the Ireland Peace Bonds plan which would pour billions of investment dollars into Irish businesses if a peace process is worked out.

Rep. Bill Archer (R., Texas), estimates a proposed tax on TIAA-CREF would bring an additional $1.1 billion into federal coffers over the next 10 years. TIAA-CREF cries foul.

Back to the topRussia now has a higher proportion of private shareholders than the US, and the share of GDP in private hands is higher than Western Europe’s. Managers and employees controlled 64% of corporations in 1996 and 2/3 reject bringing in “outside” capital to modernise. (Kremlin Capitalism: Privatising the Russian Economy by Joseph R. Blasi, Maya Kroumova and Douglas Kruse. Cornell University Press.1997) (reviewchapters)

A study by James A. Brickley of the University of Rochester and Jeffrey L. Coles and James S. Linck of Arizona State University finds that 90% of retiring CEOs from major corporations sat on at least one corporate board and nearly two-thirds held at least two seats. Performance as a CEO was related to the number of seats held. (BusinessWeek 7/14/97)

A study conducted by William M. Mercer, Inc showed that Illinois companies lead the nationwide trend towards compensating outside directors with stock. 97% percent of the Illinois companies surveyed reported some sort of stock-related compensation scheme, compared to 89% percent nationwide. “The larger a company, the higher the profile of its directors. Given this high profile and the company’s likelihood of institutional shareholder involvement, its board is more likely to be concerned with good corporate governance and related directors compensation practices,” noted Erin Milligan, a principal in the area of executive compensation in Mercer’s Chicago office.

The Economist (6/28/97 issue) carried a Survey of Japanese finance which includes one of the better explanations of how the current system came about historically as well as current moves to increase competition and returns for savers. Expect bankruptcies to rise and creative entries into unrelated fields to fall as cheap capital comes to an end.

A wide ranging article on corporate governance was featured in the June 1997 edition of International Fund Strategies. Jim Mellon, of Regent Pacific, and Stephen Viederman, of the Jessie Smith Noyes Foundation provide contrasting perspectives which both depend on corporate governance activism in varying degrees.

One interesting note in the article is a reference to a CalPERS mission statement, “to advance the financial and health security for all who participate in the System.” “Although CalPERS makes clear that its corporate governance activity is firmly returns-based, a mission to advance the health of plan participants could naturally extend into co-called “social” shareholder activism, as a natural progression of fiduciary responsibility.” I believe the author is reading more into the CalPERS statement than is intended. The reference to advancing the health security of participants is much more likely tied to the benefit programs administered by CalPERS than to any corporate governance efforts. The bulk of the article is on-target and extends the dialogue between those focused strictly on increasing shareholder value and those seeking a wider responsibility. We welcome their favorable mention of theCorporate Governance site and their reference to several of thebooks we have reviewed recently.

Back to the topA Korn-Ferry study of Australian and New Zealand company boards found less than 1% of Australasian companies had foreign nationals on their boards, far below Britain, where foreign directors sit on 38% of the boards, and the US, with 17%. Women still only made up 6% of all directors. (The Age)

A recent study of 1,000 companies by Graef Crystal finds that executive pay rose 16% in 1996, while employee raises averaged only 3%. Crystal found links between pay and performance in 5% of the cases. “A similar study of baseball players salaries found some years ago that 75 percent of pay differences could be explained by differences in batting averages, earned run averages and the like. (Philadelphia Inquirer)

E: the Environmental Magazine for July/August includes an article by Marshall Glickman on “How to Use Your Shares to Change Company Environmental Behavior.” One example from the article is the use by Steve Viederman, executive director of the New York-based Jessie Smith Noyes Foundation, of a shareholder resolution to influence Intel’s hiring practices, its water use and toxic emissions. Intel agreed to work on its community disclosure policy, and Noyes has at least temporarily withdrawn its resolution.

Howard M. Friedman’s (email: [email protected])Securities Regulation In Cyberspace has just been released by Bowne & Co., Inc. $175 (800) 370-8402. For a review seeFriedmanSecurities Regulation in Cyberspace is a must read for anyone concerned with the future of shareholder communications and the use of cyberspace in corporate governance.

A recent draft study by Mark R. Huson (email:[email protected]), Does Governance Matter? Evidence from CalPERS Interventions lends additional support to the CalPERS Effect. see Huson

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Archives: June 1997

A Proxy Process Forum, sponsored by ASCS, was held in New York city on June 20th. This was an opportunity to followup on the new fees which apply to mailings made during the 1997 proxy season as part of a one-year pilot program and to focus on multiple additional issues. In other ASCS news, they will be mailing out their second Current Board Practices questionnaire within the next couple of weeks. Only those who respond will get copies of the report…that’s one way to ensure a high return rate.

Shareholders and Stakeholders benefit or suffer together, according to a new study by SCA Consulting, reports Patrick McGurn, Director of Corporate Programs for ISS. Further, “there appears to be a strong link between consistent returns to shareholders and stakeholders and corporate governance.” See 6/20/97 ISS Friday Report.

Investor activists target high tech firms

Report from Morningstar Mutual Fund conference in Chicago: the average turnover rate for stock mutual funds is 80% to 90% a year, which costs shareholders money in the form of higher expenses and, often, higher capital gains distributions, which can cost shareholders more in taxes.

Shareholder resolutions addressing executive compensation nearly tripled from 1995 to 1997. Rep. Martin Olav Sabo (D-Minn.) is sponsoring a bill that would limit the deduction for executive compensation to 25 times the pay of the lowest-paid worker. See Putting the brakes on CEOs’ riches.

The National Investor Relations Institute (NIRI) launched Investor Relations Quarterly: The Journal of Corporate Value. contact: Beth Carty, 703-506- 3573.

On June 16th the WSJ reported “Directors of the California Public Employees’ Retirement System today are expected to endorse corporate-governance standards for the first time.” First, CalPERS has already adopted corporate governance standards applicable to globalBritish, and French markets. Second, taking a page from their own advise, the CalPERS Board didn’t rubber stamp staff’s recommendation. They will study the issues and make a few changes. The Board is unlikely to adopt its “U.S. Corporate Governance Principles” until August. Staff hopes to distribute the Principles widely and move beyond the process concerns of the 1995 “report card” to an evaluation of the substance of corporate governance practices in U.S. based firms. Given their high profile and activist stance, it would be prudent for corporate boards to obtain copies of the draft report and to provide feedback to the CalPERS Board before August. To obtain a copy contact their Office of Public Affairs.

So what’s wrong with the report so far? Its certainly well organized and written. I would probably add the recent quote from William T. Allen about the most basic responsibility of the board being the duty to monitor (see a few paragraphs below) but more substantively the most glaring error is ageism. I can see no sound basis for a fundamental requirement that boards adopt an “age range criterion” for its directors, unless it is to rule out the obviously immature. Nor can I embrace the notion that on the ideal board no more than 10% of the directors are over age 70. Boards consisting of 11 WASP male engineers over 70 are not likely to prove effective under most circumstances but I would caution against being too prescriptive. I believe what CalPERS staff were seeking with this requirement is diversity. A fundamental requirement might be that board nomination policies consider the value of diversity and that the ideal board achieve diversity with regard to experience, gender, race and age.

A second problematic notion is that the draft contains a long list of characteristics, largely drawn from CII’s policy, which would preclude a person from being defined as an independent director. One significant new addition is term limits. While term limits in California government may have served to shake lose politicians who had grown to own their offices, its long term benefits are less obvious. Institutional memory is vanishing and there is a growing reliance on experts who are not accountable to the electorate. I’m not sure how much is actually gained from such laundry lists. It may be better to adopt TSE’s broad policy that independent directors should be “free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding.” Whatever policy is adopted, the concept of term limits should be dropped.

These are some initial thoughts on this important document. I would appreciate hearing the reactions of our readers. Write toJames McRitchie.

Back to the topWe are delighted to add to The Bank of America’s Journal of Applied Corporate Finance and The Public Retirement Journal to the publications we scan. See our growing list of “Stakeholders.”

An excellent article appears in NACD’s Director’s Monthly. Richard A. Rosen, with Paul, Weiss, Rifkind, Wharton & Garrison, provides the first in a two part series on Corporate Governance in the 1990s. Rosen includes a quote from a speech from William T. Allen, former Chancellor of the Deleware Court of Chancery. In Allen’s opinion, “the duty to monitor the performance of senior management in an informed way” is “a most basic responsibility” of the board of directors. It is no longer acceptable to simply “select senior management, create incentive compensation schemes, and then step back and watch.”

More than 1/2 of executives use the Internet a few hours a week, typically as a way to keep tabs on the office from home. They consider the Internet slow, too little known by the business world and not secure enough, said the survey of 3,466 executives and managers by the American Management Association. In contrast, Internet users in general log on an average of 10.5 hours a week for business purposes, according to a separate recent survey. The rare executive who is a heavy Internet user — logging on more than 10 hours weekly — is typically under 35 and female, working in communications, public relations or a computer-related field. Executives tend to view the Internet as a library of contemporary information. Web users who retrieve news online say the Internet now accounts for about 20% of their total news intake, comparable to radio and nearly comparable to print sources. (credit: B2B eNews)

Too late to list under conferences. The Public Retirement Journal is sponsoring a seminar entitled “What Has Happened in Public Sector Benefits This Year? How Does It Affect You?”
Date: June 19, 1997
Place: CalPERS Auditorium, 400 “P” Street, Sacramento
Cost: $135, includes continental breakfast, lunch and training binder.
Topics Include: Pooling of Employer Assets and Risks, Inflation Protection (SB 234, Hughes), Medicare Part B and PEMHCA, Medicare and Social Security Reform, Alternative Retirement Plans, The New Legislature, Term Limits, Employer Surplus Accounts, PERS Investment Portfolio.
Our editor, Jim McRitchie, will be attending.
For reservations call Tom Branan at (916) 455-7322 or Dave Cox at (916) 456-5282.

Maybe there is less concern about the framework for proxy voting than we thought. Corporate Agenda reports the SEC received only 400 responses to its proxy survey. Among the reforms under consideration is the idea of opening up communications for both companies and investors, “letting them talk privately with each other as long as they don’t have a proxy solicitation,” says Brian Lane, SEC’s director of corporation finance.

Back to the topCambell Soup will publish its second annual board self-evaluation, according to Directorship. “Board members will assess each other as individual contributors, overall board performance as well as the record of the CEO and top management.” Also from Directorship, “out of 873 CEOs of Fortune 1000 companies, 296 sit on one board, 490 sit on two to four boards, and 87 sit on five or more boards.

BofA’s chairman and CEO David Coulter actually tried to inspire a shareholder activism at the company’s annual meeting…he urged them to write “to the newspapers and to your elected officials supporting our right to price our products and services without the government’s assistance.”

ADM must adopt a new definition of outside directors, form a new nominating committee for board members, and establish an audit committee made up of independent board members to ensure company compliance with its own bylaws and federal law. It also must conduct confidential shareholder voting according to a settlement reached with shareholders. (seePhiladelphia Inquirer)

Shareholders at Clemente Growth Fund won a vote requesting the board to solicit bids for a new advisor. Andy Zipser’s article in Barron’s brings “democratic” corporate governance to life.

Received for Review. Studies in International Corporate Finance and Governance Systems, ed. Donald H. Chew, Oxford University Press, 1997. Compares market based and relationship based models. Positioning Pensions for the Twenty-First Century, ed. Gordon, Mitchell and Twinney, Pension Research Council of Wharton, 1997. Discusses retirement options for the future.

A recent ISS Friday Report carried a review of several surveys on the issue of executive pay by Patrick McGurn. Both the public and execs believe “top officers of large U.S. companies” are paid too much and that corporate execs face little downside for corporate results. Solutions, however, differ. Seven in ten public respondents said exec pay should grow no faster than that of lower workers. Limiting the number of options, as a percent of shares outstanding – something already required to qualify under the IRS $1 Million cap – is favored by execs.

The Philadelphia Municipal Pension Fund has adopted a new proxy voting policy to vote against requiring directors to own specified amounts of company stock, fearing the many qualified directors will not be able to afford it. The Fund also opposes efforts to limit terms of nonemployee directors because companies could lose experienced and knowledgeable directors. (P&ampI)

Those discussing proxy reform are unlikely to reach agreement, according to several participants. Some pension funds and religious groups want the SEC to stop acting as a referee on “ordinary business” matters. Corporations want to raise the level of ownership required to file proposals, caps on the number of proposals, and increases in voting levels required for resubmissions. (P&ampI)

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Archives: May 1997

Binding resolutions are a significant trend, according to Patrick McGurn, director of corporate programs at ISS in an article for Investor Business Relations. In January a federal judge ordered Fleming Companies to include a poison pill proposal, sponsored by the International Brotherhood of Teamsters on its ballot. If the ruling stands up in court it will set a huge precedent. The next target may be super majority requirements contained in company bylaws.

In negotiations with SWIB, Scios Inc. agreed to oppose nonbinding shareholder resolutions in return for a commitment to add two new independent directors to its board over the next year. Apparently Scios Chairman and CEO Richard Casey had indicated he would name former CalPERSexecutive Richard Koppes as chairman but then balked. Dissidents apparently believe SWIB’s deal – trading one board seat per million votes is a good one. Many would love to trade enough votes to change the compensation committee which they believe has made Casey rich and shareholders poorer. (seeISS)

FASB has published a proposed Technical Bulletin providing guidance on accounting for certain employee stock purchase plans under FASB statement 123, “Accounting for Stock-Based Compensation.” Comments are requested by 7/21. A free copy is available by calling FASB at (203) 847-0700, ext 555. (from Investor Relations Business)

The SEC’s Web site now contains over a billion pages of text and data.

The TIAA Securities Division of TIAA-CREF has established a new Emerging Markets Team and expects to be investing a minimum of $200 million to $300 million a year initially, and ultimately upwards of $750 million a year, in intermediate long-term purchases in emerging markets, including investments in structured finance and project finance deals in those markets.

The latest issue of Corporate Agenda carries an article about education in the boardroom. It seems that directors organizations, pension funds, shareholder activists, and universities think it’s important for directors to get a few days of training concerning their responsibilities and current corporate governance issues. “But companies themselves seem less than enthusiastic about the idea of educating their boards.” Their unscientific sample found that “none of the ten randomly chosen S&ampP 500 companies send their board members on director education courses.” Author Lucy Alexander concludes that for some, “director education will probably only begin to be taken seriously when things start to go wrong, by which time, it may be too late.”

Layoff leaders had average compensation increases of about 67% in 1996 in comparison with 54% for the typical CEO at the top 365 U.S. firms and 3% for workers, according to the report by the Institute for Policy Studies in Washington and United for a Fair Economy in Boston. A Business Week-Harris poll shows that half of top executives think executive pay is out of control. 71% said large companies reward good results but don’t penalize laggards.

Back to the topPublic pension funds are facing growing pressure to kick the tabacco habit. Proponents of divestment are gaining ground in Maine, Vermont, Massachusetts, Texas, Floridia and Oregon according to P&ampI.

The vast majority of U.S. corporations have used one or more ADR procedures in the last three years. 88% reported using mediation, 79% have used arbitration. Over 84% indicated they would use mediation in the future whereas 69% indicate they will use arbitration in the future. The survey was a joint initiative of Cornell University, The Foundation for the Prevention and Early Resolution of Conflict (PERC) and Price Waterhouse LLP. The findings were culled from over 530 corporations in the Fortune 1,000 category. The smallest respondent had sales of over $1 billion. Contact Christopher Colosi at [email protected].

NIRI announced its headline speakers for their annual conference to be held June 2-4 in Indian Wells, California. SeePRNEWSWIRE or the National Investor Relations Institute.

We have added links to Pensions Investment Research Consultants (the UK’s “leading source of independent advice on proxy voting”) and The Conference Board (“the world’s leading business membership and research organization”). You’ll find them on our Links page under Investor Communications/Relations Services and Public Interest Groups and Research Centers. We count on readers for identifying about 20% of all links and articles, so please let us know when you find something which may be of interest. Contact [email protected]

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Archives: April 1997

Average stockholder runs for board of BellSouth with backing of the Communications Workers of America. (seeAtlanta Business Chronicle)

The Boston-based Coalition for Environmentally Responsible Economies (CERES) in 1996 filed a record of 43 shareholder resolutions with U.S. companies, including five in Massachusetts. That’s up from 16 resolutions filed nationwide in 1995. But shareholders shouldn’t expect to see CERES resolutions on proxies. Instead, executives are going to the negotiating table. According to Mark Tulay, a spokesman for CERES, that’s exactly what the coalition wants. Of the 43 resolutions filed in 1996, all but 13 were withdrawn in favor of negotiations. The resolutions, filed by institutions which support CERES, ask companies to adopt the 10 CERES principles governing environmental business standards. This year the group expects additional progress. (see Boston Business Journal)

Pennsylvania’s Supreme Court ruled that shareholders who want to sue management or directors on behalf of a Pennsylvania corporation must first submit all claims to the board, which can then decide to pursue the claims or drop them. The board’s decision can’t be challenged unless plaintiffs show the directors failed to act in good faith. For more, seeWSJ 4/28/97, B3.

The National Association of Corporate Directors (NACD) will convene a panel of business and academic leaders beginning in 1997 to study governance issues affecting entrepreneurial public companies such as new regulations and laws designed to protect shareholders against fraud and illegal acts. The panel, which will be sponsored annually by Grant Thornton LLP, a major accounting and management consulting firm, will be called the NACD/Grant Thornton Best Practices Council. (see announcement)

Corporate Board Governance and Director Compensation in Canada, a survey conducted by Patrick O’Callaghan & Associates and The Caldwell Partners Amrop International covered 2,284 directors in 290 Canadian corporations. The average Canadian board has 11 people who have served eight, one-year terms. Average age is 59 years, they are male (93%), receive an annual retainer of $12,000 and are paid $900/meeting eight times a year. Nearly half have a stock component as part of their compensation, yet 15% don’t own any stock in the company.

The author’s believe the TSE guidelines are having an impact. Over 50% of boards have a corporate governance committee compared to 2% 2 years ago. More than 60% have a process for assessing board effectiveness, 41% for committee effectiveness and 45% for judging individual director performance. Almost 2/3 have separated the roles of CEO and Chair. For a copy, contact Patrick O’Callaghan, 604-685-5880 or Anne Fawcett, 416-920-7702. (Canadian Corporate NewsNet)

Back to the topEntrenched CEOs get higher pay and their companies have lower returns and weaker stock performance, according to a study by Wharton Professors John Core, Robert Holthausen and David Larker. Six characteristics were correlated with higher CEO Pay and weak performance: dual CEO/chairman; large boards, outside directors directly appointed by the CEO; outside directors who receive income from an association with the company; outside directors who sit on 3 or more other boards (six for retirees); and outside directors aged 70 or older. The study also found that better performance was linked to someone other that the CEO owning more than 5% of the stock. WSJ, 4/25/97, C2

Ira Millstein is termed “The Gruru of Good Governance” in aBusiness Week article focusing on his ability to prod companies into transforming their boards. The story provides a broad glimpse of this statesman of the field from selling hot dogs while working his way through Columbia University to GM to current efforts at Dow Jones & Co.

The April 28 issue of Time Magazine has gotten into the news glut on CEO pay. “The CEO-pay issue is beginning to feel like the start of a class war.” “One solution embraced by the likes of DuPont and BankAmerica is to grant CEO stock options that can be cashed only after the stock has risen a specified amount. That way a CEO doesn’t make a killing unless the stock really zooms. An even better answer is to devise stock options that are indexed to the market or some peer group. They would remain worthless unless the stock outperforms its competitors.” The second option is one endorsed by ISS in a recent editorial.

Theresa Welbourne and Alice Andrews have studied the initial public offerings (IPOs) of stock by 136 non-financial companies in 1986. Half of the firms had fewer than 110 employees at the time of the IPO, while a fifth had more than 700. They evaluated the company’s offering prospectus for evidence that the firm (1) placed a high value on its employees as a distinct asset, and (2) rewarded employees for organizational performance through such devices as profit sharing. The researchers find that the companies that value employees and use performance compensation at the time of the IPO are significantly more likely to survive for at least five years.

The researchers also interviewed the most senior executive who had been with each company since the IPO five years earlier. When they asked the executive to rate a set of factors that best explain the company’s performance since the IPO, the factor deemed most important is the quality of the top management team.

Implication: Build employee capacity and top leadership for growth and survival.

Source: Theresa M. Welbourne and Alice O. Andrews, “Predicting The Performance of Initial Public Offerings: Should Human Resource Management be in the Equation?” Academy of Management Journal 39 (August, 1996), 891-919.

The above is taken directly from the WHARTON LEADERSHIP DIGEST, April, 1997, Volume 1, Number 7. Michael Useem, Professor of Management, serves as editor, and suggestions for items or topics for inclusion in future digests can be sent to him at [email protected]. The same address can be used to subscribe to the digest. Back issues.

Back to the topA new publication from Deloitte & Touche LLP, “Questions at Stockholders’ Meetings 1997,” can help you prepare by anticipating critical issues of concern. Mergers and acquisitions could be high on the list this year. Copies of are available by calling Natalie Saviano at 203-761-3065.

CalPERS is using the Internet to seek out active domestic equity managers to manage more than $6 billion of the Fund’s assets. The RFP is online at Release of The RFP is the latest step in CalPERS approach to reorganize management of its domestic equity portfolio. Last month, the Board approved changes to the Fund’s domestic equity portfolio that included the development of an internal active management capability, and an increase in the active management portion of the portfolio up to 20%. Currently, 13% of domestic equities are managed actively by external fund managers.

From Directorship. CEOs of multi-billion dollar American companies were paid, on average $4.85M in 1996 up 11% form last year according to a survey by Pearl Meyer & Partners. In an unrelated story, Campbell Soup last year offered no gifts or refreshments at its annual meeting. Attendence was down from 1,500 to 200.

Back to the topA new report worth getting is “Twenty Best Practices To Improve Board Performance,” by Korn/Ferry in conjunction with the University of Southern California.

Some of the recommendations include: Tie the compensation of board members to changes in shareholder value. Formally evaluate the performance of the board and the individual board members every year. Provide independent board members the opportunity to meet without company executives present. Set board member compensation based on what directors of other comparable corporations receive. Make sure to have a sufficient number of independent directors. To obtain a copy, call Stephanie Rosenfelt at Korn/Ferry International at 212/984-9316.

An interesting story covered by ISS on excessive executive compensation (primarily in the form of options) points out that, to keep dilution under control, companies are repurchasing their own shares at a record rate (up 70% in 1996 from 1995). These outlays are eating into cash flow and profits. Dividend payouts are at an all time low. In the current downturn the pressure will be on to reprice “underwater” options. In addition, the broad adoption of increased equity shares for insiders may lead to insider control.

From P&ampI. Vermont may pull their pension funds out of tobacco stocks. The following joined CII: Compaq, Marriott, Morgan Guaranty Trust; Navistar; Indiana Public Employees Retirement Fund; Hartford City Municipal Employees Retirement Fund; Massachusetts Pension Reserves Investment Management Board; Milwaukee City Employees’ Retirement System; Montana State Board of Investments; Virginia Retirement System; CWA/ITU Negotiated Pension Plan, IAM National Pension Fund and United Association Local Union Officers and Employees Pension Fund. Two funds dropped out: Consolidated Freightways Inc. and Detroit City General Retirement System.

CEO pay jumped 20% last year while corporate profits grew 11% and workers’ wages rose just 3.3%, is now 212 times greater than the average worker’s pay, up from 44 times greater in 1965, according to the AFL-CIOExecutive Paywatch, will provide salary and other compensation information for the CEOs of Fortune 500 companies and allow workers to compare their pay with that of the boss. The site will also carry proxy information. It was getting 4,000 hits an hour the first day. For more on executive pay see San Jose Mercury News.

Back to the topCEOs will see more challlenges to their pay with 112 proxy resolutions, up from 63 in 1996, according to IRRC. The share of stockholders voting against new executive pay plans jumped to 19% last year, up from 3.5% in 1988. Lawrence Coss, of Green Tree Financial brought home $102.4 million last year. The average salary and bonus for a CEO rose a phenomenal 39%, to $2.3 million. Add in retirement benefits, incentive plans, and gains from stock options, and total compensation jumped 54% to $5,781,300. That largesse came on top of a 30% rise in total pay in 1995. CEOs earned 209 times that of factory employees, who garnered a 3% raise in 1996. White-collar workers eked out just 3.2%, though many now get options too. (Business Week related stories and tables).

CEO pay was up 5.2% in 1996 according to a William M. Mercer study for the Wall Street Journal. Stanford Weill ofTravelers Group took $93.9 million to head the list. Median total compensation rose from $2M in 1995 to $2.4M in 1996. More people are beginning to ask the question, how much is to much?

Bank of America’s Journal of Applied Corporate Finance focuses leading academic theorists on corporate governance systems in the U.S., Canada, Japan and Europe.

Mark J. Roe kicks off the special issue with his proposition that politics restricting the activities of financial intermediaries played a role in the evolution of U.S. corporate governance.

Frank Easterbrook argues that differences corporate governance reflect differences in the efficiency of capital markets. Unlike nations in Asia and most of Europe, the U.S. and the U.K. have large, efficient capital markets with no restrictions on cross-border capital flows.

Julian Franks and Colin Mayer characterize corporate governance systems in the U.K. and the U.S. as “outsider” systems with large numbers of widely held public corporations and well-developed takeover markets. By contrast, German and French corporations are governed by “insider” systems — where founding families, banks or other companies maintain controlling interests, and outside shareholders are not able to exert significant control.

F.H. Buckley suggests we look to our northern neighbor where most large firms are members of a keiretsu — an interlocking group of corporate clients, investment dealers, trust companies and professional advisors that is designed to “facilitate information-sharing and monitoring among group members.”

Jonathan R. Macey and Geoffrey P. Miller believe German and Japanese governance systems fail to produce well- developed capital markets along with active takeover markets. The problem with U.S. corporate governance stem from “regulatory restrictions and misguided legal policies” which make takeovers more difficult.

William S. Haraf argues that instead of eliminating remaining entry barriers, Congress should promote genuine financial integration with a much simpler and more streamlined system of regulation. Manuscripts for the Journal and letters to the editor are welcome. For more information about the Journal, contact Bank of America editors Stephen Scheetz, 312-974-1930, or Kelly Chambers, 312-828-7130.

Back to the topThe Corporate Board, The Journal of Corporate Governance, is hosting its 3rd Annual Corporate Board Symposium on September 14-16, 1997 at Lansdowne Conference Resort in Lansdowne, Virginia. CEOs and directors interested in attending the 3rd Annual Corporate Board Symposium may obtain more information and register for the conference by calling The Corporate Board at (800) 757-0667. For more information see conferences.

The April 14th edition of Business Week rates annual reports on the Internet.

The Washington Post reports that “in an unscientific sample of proxy statements of a dozen companies whose stock prices have declined, it appears that while some chief executives shared in the pain of their shareholders, just as many others did not.” Graef Crystal points out that one reason is that nearly all companies aim to pay their chief executive at least what the “average” CEO makes at comparable companies, if not more. But as every company moves to put its CEO at or above the average, the average is continually moved upward. “If you read these reports from the directors, when things are going well it’s always because of the brilliance of the CEO,” Crystal said. “But on the downside, it’s those damn politicians in Washington or it’s Wall Street or it’s the drop in oil prices; somehow it’s always someone else’s fault.”

The Wall Street Journal picked up on a study by Grundfest and Perino on the results of the Private Secutities Litigation Reform Act. We linked to their Securities Class Action Clearinghouse, about a month ago. According to the authors, “the level of class action securities fraud litigation has declined by about a third in federal courts, but that there has been an almost equal increase in the level of state court activity, largely as a result of a “substitution effect” whereby plaintiffs resort to state court to avoid the new, more stringent requirements of federal cases. There has also been an increase in parallel litigation between state and federal courts in an apparent effort to avoid the federal discovery stay or other provisions of the Act.” WSJ reports that Rep. Joseph Kennedy may carry a bill to stop the law from being so easily circumvented.

The Washington Post reports that “three prominent Washington insiders have the dubious distinction of topping the Teamsters pension fund’s second annual list of America’s ‘least valuable’ corporate directors. Former House Democratic whip Tony Coelho leads the lineup, followed by former secretary of defense Frank C. Carlucci and former secretary of state Lawrence Eagleburger. Directors get named to the list by serving on too many boards, collecting consulting or other fees from the company, poor attendance at board meetings and being on a board that overpays a chief executive even when the company is performing poorly.”

Back to the topMoney management is going global. P&ampI reports on a survey by Investment Counseling; “the 50 largest money managers handled 43% of the total invested assets in the US in 1996, compared with 50% in 1989.” In other news from P&ampI, “CalPERS and the New York City Employees’ Retirement System will support a shareholder proposal asking RJR Nabisco at its April 16 annual meeting to stop using the Joe Camel advertising campaign by 1998, unless research shows the ads do not promote underage smoking.” A Federal Reserve study found that funds with an average of $85 billion under management had average annual expense ratios of 0.7%. Small companies, with an average of about $33 million, had expense ratios of 2.8%. P&ampI also reports on a study byRandal S. Thomas, University of Iowa and Kenneth J. Martin, New Mexico State University, which found that labor-sponsored proxy proposals receive higher votes than those sponsored by private institutions and individuals. An editorial in the 3/31 edition advised pension funds not to prohibit tobacco-related investments. “Such a policy would lead to pension funds hiring nutritional consultants to add to the coterie of consultants they now employ to analyze investment decisions. Ultimately, investments would have to be subjected to moral or health scrutiny on almost every aspect of our lives…the system would go up in smoke.” The guest editorial points out that 159 individuals control $762 billion in public funds and applauds Michigans’s shift to defined contibution plans.

The Washington Post carried an interesting article on executive compensation. Use their searcher to locate Green Tree CEO Paid $102 Million Bonus.

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Archives: March 1997

A recent survey by KPMG and the Australian Institute of Company Directors showed fewer than one in six directors had a total understanding of corporate governance. Less than a third of the directors were implementing corporate governance initiatives, although another 21% said they already had initiatives in place. 58% said they would be looking at increasing shareholder value, while only 34% would be examining the fairness of remuneration of directors and upper management.

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The LA Times reports on sokaiya gangsters who threaten to disrupt shareholder meetings or threaten to expose corporate scandals. The Shareholder Ombudsman group, formed last year to increase corporate disclosure and accountability, now has its court calendar full of organized crime cases as they try to muscle the mob off the corporate payroll. Takashimaya execs pleaded guilty to paying $1.3M, Nomura may have paid $4000,000.

A survey by Grant Thornton LLP finds the boards of directors for many Minnesota midsize manufacturing companies do not meet frequently enough to be effectively involved in a number of critical areas.

In a mail survey of 125 Minnesota manufacturing companies, local board members report they are most involved in reviewing/approving corporate acquisitions (51%), monitoring their company’s financial status (34%) and reviewing strategic plans (33%). On the national level, board members are significantly more involved in monitoring their company’s financial status (56%), and in reviewing strategic plans (48%). The study reveals local boards are far less likely to be involved in reviewing/approving capital projects (19%) than are their national counterparts (42%).

More than a third (41%) of the Minnesota boards comprise five members or less while another 49% have between 6 and 10 members. Only 10% have more than 10 members. This compares to the national results which report nearly three-fourths (71%) of the company boards have five or fewer members, 24% have between 6 and 10 members and only 5% have more than 10 members.

More than half of Minnesota manufacturers (56%) compensate their boards with meeting fees compared to 32% nationally. Significantly more local manufacturers (40%) grant stock ownership to their board members than reported on the national level which is at only 22%. The number who pay an annual retainer fee (37%) is more than double the number (18%) indicated by the results of the national survey.

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CalPERS announced corporate governance principles for the United Kingdom and France building on six basic concepts that CalPERS has identified as fundamental to free and fair markets throughout the world. The six “global” principles include director accountability to shareholders, transparent markets, equitable treatment for all shareholders, easy and efficient voting methods, codes of best practices that clearly define the director-shareholder relationship, and long-term corporate vision which at its core emphasizes sustained shareholder value.

CalPERS principles are designed to complement the Cadbury Code and Greenbury Report in Britain, and the Vienot Report in France. In Britain this means regular elections of all directors, confidential voting, and improved access for shareholders to present resolutions through the company proxy. In France, CalPERS recommends an accountable and independent board and identifies ways to strengthen the director-shareholder relationship. The recommendations include a one-share, one-vote capital structure, an end to cross shareholding, the regular elections of all directors, and a greater disclosure of executive compensation.

Currently, CalPERS international equities comprise more than $20 billion of the System’s total investment portfolio. The System is expected to develop and consider governance principles for Germany and Japan by the end of the year.

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On March 19th Investor Relations Magazine announced the winners of its U.S. awards for excellence in the profession. The highlight was the presentation of the National Investor Relations Institute Grand Prix for Best Overall Investor Relations by a U.S. Company to General Electric, in the large-cap category, and to Morton International, in the smaller-cap category. Award winners and runners-up in 18 categories were determined by a survey of over 1,450 portfolio managers and buy and sell-side analysts. General Electric also won for best corporate governance.

TIAA-CREF is starting six no-load mutual funds.

Fortune carries an interesting article, CEO PAY: MOM WOULDN’T APPROVE by Thomas A. Stewart. He cites Pearl Meyer, an executive pay consultant in New York. The typical CEO pay package is now “21% salary, 27% short-term (annual) incentives,16% long-term incentives, and 36% stock-based pay (mostly options, which usually cannot be exercised for three years).” But he adds that “we’re still a long way from pay heaven. In the first place, the usual way to add risk to CEO pay has been simply to stack goodies on top of existing pay. Result: The CEO runs only the risk of making tons more money. Getting stock options, for example, is nothing like buying shares, since options have no downside.” Stewart’s main gripe, however, is that “shareholders don’t act like owners.” “hard numbers on the value of investor loyalty are hard to come by, but all the anecdotal evidence shows that superior long-term performance and a loyal shareholder base go hand in hand.”

CalPERS announced they will begin managing more of their domestic equity portfolio in-house. Currently, about 83% of that portfolio is passively managed. The move will bring the actively managed proportion up to about 20%. (see press release) A March 17th editorial in Pensions & Investments says the plan “deserves tough scrutiny and skepticism” and goes on to raise doubts concerning probable success.

We have added a link to the Securities Class Action Clearinghouse, under LinksLaw. I expect it will become an important site to any of you who are taking advantage of provisions of Private Securities Litigation Reform Act of 1995. We also want to point out an important new article “Does Coordinated Institutional Activism Work? An Analysis of the Activities of the Council of Institutional Investors.”

Institutional investors are calling for more information on individual directors, including their business track records and their specific contributions. They want boards to be evaluated by outside observers and they want boards to be more aggressive in weeding out underperforming members, according to the 1997 U.S. Survey of Institutional investors, released by Russell Reynolds Associates.

The survey, entitled “Setting New Standards for Corporate Governance,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, and is based on interviews with 231 portfolio managers and institutional shareholders. 62% of investors opposed limits on CEO compensation. In the past year alone, 77% of the investors surveyed have communicated their opinions directly to a board either verbally or by letter, sought more direct involvement in board oversight, sponsored a shareholder resolution or voted in favor of one. CONTACT: Russell Reynolds Associates, Sally Laroche, 212/351-2000 Fax: 212/286-8518.

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The LENS site recently posted an excerpted version of“Putting a Value on Corporate Governance” which appeared in The McKinsey Quarterly. In a survey of investors and CEOs, the authors found that investors would pay more for good corporate governance. Those more likely to do so were investors with low turnover in their portfolio, “value” investors, and those with high net worth.

February’s Corporate Secretary carried an article by Olena Berg, of the PWBA. She discusses the findings of PWBA’s third proxy practices project, pointing out that a significant number of plans did not routinely monitor their managers’ voting to ensure that proxies were voted in accordance with the plans’ stated policies…many did not even provide investment managers with voting guidelines. In addition, few of the plans surveyed engaged in any form of corporate governance activism.

Berg cites a study by the Competitiveness Policy Council saying that institutions should acquire larger stakes in fewer companies. This would encourage them to act as long-term owners. Since corporate managers complain of pressures for short-term results from impatient investors, such a shift would meet their needs as well. However, the Council also recommended that PWBA allay unfounded fiduciary concerns with respect to prudent investing by clarifying that ERISA’s diversification standard does not require investment in hundreds or thousands of stocks. Although Berg’s remarks implied agreement, we still haven’t seen formal clarification through administrative guidance. In addition, although she is obviously concerned, Berg’s agency has never taken action against a plan sponsor for failure to monitor the voting decisions of outside managers tainted by conflict of interest. Perhaps she will have more to say about these issues when she addresses the Society of Corporate Secretaries at their conference this July in Boston.

The WSJ featured an article about the growing trend by mutual fund managers to have a substantial investment in the funds they run. Among those so mentioned were Neuberger & Berman; Tweedy, Browne Co.; Franklin Resources (Michael Price); Baron Asset Fund; Delafield Fund; Yacktman Fund; Davis Selected Advisers (Davis New York Venture); Friess Associates (the two Brandwine funds); Southeastern Asset Management (the three Longleaf Partners funds); Harris Associates (the Oakmark funds) and the Crabbe Huson Special Fund.

CalPERS continues to shake Apple. According to CalPERStwo of Apple’s directors sit on four or more boards. They question if Apple’s directors have the time and dedication to turn around Apple when they sit on other boards and are also concerned that three board members don’t even own stock.

Apple’s 1996 compensation plan was to provide senior executives bonuses correlated with performance. However, when losses continued to drain the company, Apple changed the plan so that senior managers would get a bonus if Apple reported a profit in the fourth quarter. They did it by taking a one-time gain from inventory adjustments. In the tree quarters that didn’t count last year (for executive pay) Apple lost $841 million. Shareholder’s might well wonder if Gilbert Amelio really earned his bonus of $2,334,000.

TIAA-CREF increases its investments in Project Finance, according to PRNewswire. Their portfolio of loans for large capital projects is now crossing the billion dollar mark.

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Archives: February 1997

The increasing value of “human capital” is acknowledged inFortune magazine article by Thomas Stewart.

The Conference Board released the first issue of their Institutional Investment Report. At the end of the second quarter of 1996, U.S. institutions held more than $11.1 trillion in total assets, up from $10.5 trillion at the end of 1995 and $6.3 trillion in 1990. In the past five-and-a-half years, institutional assets have increased by slightly more than 75 percent, rising 15.1 percent from 1994 to 1995 alone, and another 6.2 percent during the first six months of 1996.

“These data are important because they indicate changes in the balance of power between corporate managements and institutional shareholders,” says Dr. Carolyn Kay Brancato, the report’s principal author and director of the Board’s Global Corporate Governance Research Center. Pension funds continue to control the largest block of U.S. institutional assets, although their share of total assets has been giving way to open-ended mutual funds. Open-end mutual funds have enjoyed staggering growth during the past few years, rising 14% during the first six months of 1996 alone. Investment companies increased their share of total U.S. equity markets from 6.4% in 1990 to 11.7% in 1996. Continue Reading →

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Archives: January 1997

Investor Relations Business [email protected]reports that representatives of the Council of Institutional Investors,American Society of Corporate Secretaries, National Association of Individual Investors and the Interfaith Center on Corporate Responsibility have “tentatively agreed to tentatively agree” to proxy reforms outline by Commissioner Steve Wallman of the SEC in a speech before CII last October. Proposals from those holding 3% or more of company’s outstanding stock would be automatically included in a company’s proxy along with mainstays such as proposals for staggered boards, director compensation and takeover policies. The “Cracker Barrel” decision eliminating all employment-related proxy proposals under the ordinary business exclusion would be overturned. A draft is currently being hashed out by attorneys.

In other news from IRB, the number of companies with Internet sites has increased from 35% in 1995 to 80% in 1996 with only 1% not planning a site according to a recent survey by Straightline International (compare with last year’s findings). 57% of money managers surveyed use the Internet for company research. Continue Reading →

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Archives: December 1996

Spencer Stuart survey of Midwestern companies confirms trend towards alignment of corporate boards and shareholders.

The annual study of board practices at 95 leading Midwestern companies with sales of $500 million or more found the number offering retirement plans to board members fell from 54% in 1995 to 34% due to mounting pressure from shareholder activist groups to eliminate benefits that may compromise director independence.

Compensation is increasingly in stock. Stock options were offered at 38%, 35% offered stock grants, and 21% offered directors the option to receive their annual retainer in cash, stock or a combination of the two. Baxter International, Brunswick Corporation, Chrysler Corporation, McDonnell Douglas, Sears, and the Tribune Company provide 100% director compensation in stock. Last year 13% of companies surveyed required directors to hold stock; this year its 21%. Continue Reading →

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