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Why do Target Shareholders Buy into Mergers and Acquisitions?

Andrew Clearfield

Andrew Clearfield

Guest Post: Andrew Clearfield is an internationally-known investment manager, corporate governance expert, and independent corporate director. He founded Investment Initiatives LLC in 2005 to aid institutions engaging with portfolio companies, as well as coordinating their efforts with other concerned investors. 

Looking at a range of research reports, it seems conservative to say that at least half of all mergers and acquisitions fail to deliver their anticipated objectives and a third or more actually destory value. Yet, buy-side investors seem to be very likely to support most M&As. Why? Continue Reading →

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Is the President's Position on Climate Change an Issue for Corporate Governance?

When Rick Perry says global warming is an unproven theory  — in defiance of mainstream science — he seems to be pandering to the “tea party” faithful that he needs for the GOP nomination. Nearly 8 in 10 Democrats believe that global warming is happening, as do just over 7 in 10 independents. Just over half of Republicans share that view. But only 34% of tea partiers accept the notion. (Perry’s climate views shared by ‘tea party’ faithful, survey says, LATimes, 9/9/2011)

Perry went on to compare himself, or those who agree with him, to 17th century astronomer Galileo Galilei, who in Perry’s words also “got outvoted for a spell” when he adopted a minority opinion on a scientific issue. It would be far more accurate to compare Perry to Pope Urban VIII, who put Galileo on trial for heresy in 1633 because his conclusions that the Earth revolved around the sun contradicted Scripture. (Is it reasonable to compare Rick Perry to Galileo?, LATimes, 9/9/2011)

OK, Perry and the Tea Party don’t believe scientists. What about insurance companies? In the United Sates, (re)insurers are strategizing for the potential onslaught of climate change-related claims. Two and a half years ago the U.S. National Association of Insurance Commissioners (NAIC) mandated (re)insurer disclosure of financial risks due to climate change and actions taken to mitigate them. (Climate Change, Part IV: (Re)Insurance Industry Response)

Do companies that support Perry have their head in the sand on the most important risk issue we face or are they just rationally hoping to externalize costs a few years longer in what is possibly the next administration? Should this be a corporate governance issue? Personally, I think that companies supporting Perry face reputational risk, especially if they are already seen as climate change deniers.

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Executive Pay

Pay continues to be the biggest issue this proxy season. The May 17 edition of Pirc Alert had several articles on point. In “A challenge to high pay” they discuss some of the findings by the High Pay Commission. Here’s a few choice tidbits from the Commission’s report:

  • attempts to link top pay with company performance only seem to have resulted in pushing up remuneration, with little corresponding step up in business success.
  • the top 0.1% earners – are finance workers (30%), those working in business (38%) and company directors (34%)
  • Excessive rewards are undermining relationships with employees and shareholders; they are encouraging harmful risk taking and creating an economic elite which wields enormous power but appears to have lost touch with how the rest of us live.
  • Defenders of high pay talk about executives being poached by international competitors but only one FTSE 100 company has been the victim of poaching in the last 5 years, that was from another British firm.
  • a feeling that business leaders are ‘in it for themselves’ pervades all discussions on the behaviour of businesses.
  • 58% of people either agree or strongly agree there is one rule for the rich and another for the poor; 18% disagree
  • The failure of our corporate governance system means that we are now paying more and getting less

The Commission will now look at options, such as “reforms of the Remuneration Committees and the inclusion of other stakeholders.” PIRC has also argued that introducing dissident elements onto committees may restrict excess. We look forward to the Commission’s recommendations later this year.

Yesterday Broc Romanek reported “four more companies filed Form 8-Ks reporting failed say-on-pay votes: Helix Energy Solutions (34%); Curtiss-Wright (41%); Intersil (44%); and Cincinnati Bell (34%). I keep maintaining our list of Form 8-Ks for failed SOPs in’s “Say-on-Pay” Practice Area.”  His list was up to 24 when I looked yesterday; it could be higher today. See the agenda for their upcoming November 1 conference.

Thanks in part to “say on pay,” U.S. directors are receiving less opposition from investors this season. As of May 12, the average “withhold” vote was 4.7 percent, as compared with 5.5 percent last year. At S&P 500 companies, the average opposition rate has fallen from 4.1 percent in 2010 to 3.9 percent this year, according to ISS data. (Advisory Votes Help Shield Directors From Investor Dissent, Ted Allen, ISS, 5/19/2011)

The United States Proxy Exchange (USPX) released draft guidelines for shareowners to use in making say-on-pay voting decisions. Our guidelines call for a no vote on “say-on-pay” when the ratio of CEO pay to average workers exceeded a shareowner specified threshold or when the CEO was higher than the median. We also recommend voting against compensation committee members when shareowners vote down pay packages.

Is this a good strategy, or should we wait until the following year to vote out compensation members who don’t take voting down pay packages seriously? That seems to be the strategy of many shareowners this year. What are your ideas on how to ratchet down pay packages that seem to rise every year, regardless of company performance and oblivious to the widening gap between the super-rich and the rest of us?

Comment letters are due by June 2nd to [email protected]. Please put “Say-on-Pay Guidelines” in the e-mail subject line. Letters will be posted to the USPX website, unless you indicate you would rather remain anonymous.

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DC Plans and Employee Input

The UK’s industry-led Investment Governance Group (IGG) recently published a best practice guidance for defined contribution (DC) pensions, which include six principles for DC schemes designed to encourage better investment governance and decision making by all stakeholders, including trustees, employers, advisers, providers, and members.

As I glance at this guidance it makes me realize how little I know about how my own plan is run and where opportunities for input are for plan participants. I contacted the administrator years ago, asking about how the funds vote their stocks and if the program has any requirements in that regard. The answer came back that they must be voted in the interest of fund holders (which, in practice, generally means in the interest of fund and corporate management).

I just got a statement the other day and was looking at how poorly my international investments have been doing this year. I concluded it is probably because the only options they offer are heavily invested in Europe and Japan, instead of emerging markets like China, India, Brazil and Indonesia.

How does your fund operate? The UK best practices guidance could be used as a framework for questions to understand how your program operates and what input you/we, as those who have invested our hard earned dollars, have in the system.

Ten years ago, James P. Hawley and Andrew T. Williams wrote extensively about “universal ownership” and the likely shift in norms (see The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic).

Since universal owners internalize positive and negative externalities of the firms in their portfolios and since they bear the consequences of firms’ norm based liabilities, their fiduciary duty requires universal monitoring of their portfolio. It is in their long-term interest and the interest (by definition) of their investors and beneficiaries to maximize the positive externalities of their holdings and minimize the negative externalities. This may create direct costs (e.g. pollution abatement, product and process redesign) for some firms and sectors of the economy, but will generate gains to other sectors and firms. However, as a general proposition, negative externalities impose costs on affected firms that outweigh – sometimes greatly outweigh – the benefit to polluting firms. Thus it is in the long-term interest of a universal owner, one that owns all firms, to pursue externality monitoring in an attempt to reduce negative externalities and to encourage positive externalities among portfolio firms. This should be combined with portfolio wide norm shift linked risk monitoring resulting in universal portfolio analysis and universal monitoring. (Norm Shifts, Center for the Study of Fiduciary Capitalism)

During the last ten years there’s been a shift away from defined contribution plans, where trusteeship is often held jointly with union or other employee based or elected representatives, toward DC plans where such influence is often less direct. While union and employee representatives seem to give a lot of thought to issues like the need to minimize negative externalities, many management dominated DC plans do not appear to do so. Movement in the direction of a more equitable and environmentally sustainable economy isn’t likely to come about on its own. Change depends on informed public participation, political will, and acquiring the democratic tools necessary so that those who invest our funds on our behalf are more fully accountable to us.

I’d love to hear from readers about their DC plans. If it is mostly invested in stock of the company you work for you, do they pass voting rights along to you? If your plan is like mine, with several fund alternatives, how are those funds chosen? What input opportunities are provided to you on that decision or others? Please let me know.

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Question Re Broker Letter Dates: Collective Work

I see this blog as something of a collective work, since it started out as an internet site that simply shared a bunch of bookmarks and corporate governance items that needed attention. This post continues in that tradition and mainly goes out to those of you who have been submitting shareowner proposals for many years. It comes as a result of a review I am conducting with Glyn Holton of the United States Proxy Exchange and shareowner activist John Chevedden. Has the SEC changed its interpretation of when broker letters should be dated?

We all know what happened in the 2006 case of AFSCME v AIG. The court found the SEC had reinterpreted its own proxy rules without going out to public notice on the change or even informing the public. People had known about this for years. I mentioned it in a 5/26/2003 comment letter on the first recent proxy access proposal. Jane Barnard mentioned it in 1990 in her seminal paper, “Shareholder Access to the Proxy Revisited” (Catholic University Law Review, Volume 40, Fall 1990, Number 1). So, here’s another issue entirely, that I’d like readers to put to your memory banks.  Was there a similar reinterpretation by the SEC regarding the date of broker letters supporting shareowner proposals? If so, when did it occur?

I started submitting proposal sporadically beginning 1999. Frankly, I don’t recall that submitting a broker letter dated a couple of days before the date of my proposal was an issue.  However, earlier this year when I was reviewing Apache’s Brief on the Merits in Apache v Chevedden, they listed 30 no-action letters with what they claimed was  “near unanimous support … both before and after the staff’s issuance of the Hain Celestial no-action letter” for their position that documentation of beneficial share ownership must come from DTC or some other party listed on the stock ledger.

My review of the no-action letters cited by Apache found no indication that proof must come directly from DTC or another party listed on the stock ledger, either before or after Hain Celestial. More germane to this post, I also found that in fully one-third of the no-actions —  EQT Corp, Microchip Tech, Rentech, McGraw Hill (2008), Verizon, and IBM — proponents submitted broker letters that evidenced ownership prior to the date of the proposal. No-action was granted because Rule 14a-8(b) was interpreted as requiring verification from the proponent’s broker or bank “at the time you submitted your proposal,” not before. The same may also have been true of MeadWestvac and McGraw Hill (2007)  but I could not verify through Westlaw because of missing exhibits.

A recent ISS report indicates that 28 proposals this year, according to, were omitted on grounds that investors failed to provide sufficient evidence of eligibility. I would bet that a good portion of those involved broker letters dated before the proposal. Rule 14a-8(b)(2) imposes conflicting requirements on proponents. One is

… at the time you submit your proposal, you must prove your eligibility to the company …

The other is

… submit to the company a written statement from the “record” holder … verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year …

The first appears to require that a letter be obtained from the proponent’s bank or broker on or before the date on which a proposal is submitted — so that documentation is available “at the time” of the submission. The second requires that the letter be obtained from the bank or broker on or after the date of submission — so it documents that the proponent satisfied the ownership requirement “at the time” of the submission.

Since the language has some degree of ambiguity, I’m wondering if the SEC’s interpretation, the broker letters be dated the same day or after the proposal, is a recent one. Any recollection from readers, especially with supporting evidence, would be helpful. I see that on July 13, 2001, the Division of Corporation Finance issued Staff Legal Bulletin No. 14, which included the following:

In the event that the shareholder is not the registered holder, the shareholder is responsible for proving his or her eligibility to submit a proposal to the company. To do so, the shareholder must do one of two things. He or she can submit a written statement from the record holder of the securities verifying that the shareholder has owned the securities continuously for one year as of the time the shareholder submits the proposal…

If a shareholder submits his or her proposal to the company on June 1, does a statement from the record holder verifying that the shareholder owned the securities continuously for one year as of May 30 of the same year demonstrate sufficiently continuous ownership of the securities as of the time he or she submitted the proposal?

No. A shareholder must submit proof from the record holder that the shareholder continuously owned the securities for a period of one year as of the time the shareholder submits the proposal.

The Bulletin seems less ambiguous than the rule. Was this July 13 2001 substantively different than previous interpretations? Please e-mail me or leave a comment. Either way, any requirement that the broker letter be dated on or very close to the date of the proposal seems to me to be rather arbitrary… but that’s the subject of a future post.

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Don't Touch that Receipt!

The plastic component bisphenol A (BPA) has been in the headlines nonstop as scientists, health experts and consumers press for a federal ban on food packaging made with this synthetic estrogen, shown to leach readily into infant formula, beverages and canned food. But most Americans are probably unaware that they are regularly exposed to the same endocrine-disrupting chemical in cash register receipts.

Synthetic estrogen BPA coats cash register receipts (Environmental Working Group) further reports,

A study published July 11 by Swiss scientists found that BPA transfers readily from receipts to skin and can penetrate the skin to such a depth that it cannot be washed off (Biedermann 2010). This raises the possibility that the chemical infiltrates the skin’s lower layers to enter the bloodstream directly… the total mass of BPA on a receipt is 250 to 1,000 times greater than the amount of BPA typically found in a can of food or a can of baby formula…

EWG analysis of CDC data has found that people who reported working in retail industries had 30 percent more BPA in their bodies than the average U.S. adult, and 34 percent more BPA than other workers. (CDC 2004). As of May 2009, 1 in 17 working Americans — 7 million people — were employed as retail salespersons and cashiers, according to the Bureau of Labor Statistics…

Since 60 percent of the receipts EWG collected did not have significant levels of BPA, it is apparent that many retailers are using alternatives. The leading U.S. thermal paper maker, Wisconsin-based Appleton Papers Inc., no longer incorporates BPA in any of its thermal papers (Raloff 2009). Reacting to concerns about the toxicity of BPA, the Japan Paper Association began to halt the use of BPA in 1998, completing the phase-out by 2003 (AIST 2007).

I contacted my local co-op and was informed they have not been able to find a thermal paper made without BPA or BPS. Apparently BPS is just as bad but paper makers can say it is BPA free. Does anyone know of a company that manufactures thermal paper that is both BPA and BPS free?  If so, please contact me.

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Tops in Corporate Governance Scores

GovernanceMetrics International identified the 20 U.S. companies in its database of more than 4,100 with the best corporate governance scores based on six broad categories: board accountability, financial disclosure and internal controls, shareholder rights, remuneration, market for control and corporate behavior.

The 20 companies are as follows in alphabetical order: American Electric Power, Baxter International, Colgate-Palmolive, Dover, Exxon Mobil, Gap, Home Depot, Integrys Energy Group, Kimberly-Clark, LSI, Lockheed Martin, NextEra Energy, Occidental Petroleum, PepsiCo, Ryder Systems, Sprint Nextel, Staples, Sysco, Waste Management, and Xerox. (The 20 Most Responsible Companies, Forbes, 8/3/10)

Since GMI and The Corporate Library merged, has The Corporate Library also endorsed the scoring method? I’d be very interested to hear from TCL or Bob Monks, considering his long-standing attempts at governance reform at Exxon Mobil.

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