The Divine Right of Capital: New Corporate Paradigm?

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

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

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January 2002

2002 Proxy Season Preview and Briefing

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

E-mail from Phil Goldstein on Preventing Future Enrons

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

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

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

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

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

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

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

Unions Boycott Enron Directors

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

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

Corruption – a Stumbling Block in Good Governance

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

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

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

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

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

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

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Enron, CalPERS and Tax Dodgers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

High Corporate Governance Standards in Nairobi

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

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

NACD Governance Survey Available

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

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

UK to Require Pay Disclosure

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

Labor to Rebuild Chinese Wall

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

It’s the People

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

Shrinking Pensions

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

USA Networks Opens Books

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

Roundtable on Shareholder Proposals

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

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

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

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

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

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

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

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

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

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

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

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

3.4 Degrees of Separation

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

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

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

Corporate Irresponsibility: America’s Newest Export

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

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

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

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

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

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

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

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

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

Mitchell offers several solutions:

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

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

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

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

Kelly on NPR

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

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

Shareholder Action as a Social Change Tool

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

The agenda will include:

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

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

Canadians Want SRI

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

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

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

CalPERS Board Sued Again for Legal Violation

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

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

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

Governance Leader on Tour

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

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

Proportion of Income from Ownership Rises

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

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Archives: December 2001

Auditor Proposals on Rise

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

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

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

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

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

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

Cash is King

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

Increase Board Opportunities

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

Help for Fiduciaries in Meeting Triple Bottom Line

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

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

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

Director’s Monthly

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

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

Raid Agreement May Settle Suit and Help Balance Budget in California

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

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

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

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

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

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

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

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

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

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

Back to the topFood Chain: Watching the Watchers

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

ISS Sides With HERE

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

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

Millstein on 911

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

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

End of Limited Liability

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

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

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

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

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

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

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

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

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

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

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

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

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

Back to the topBroadgate Survey

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

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

Reddy on Indian First Principles

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

Domini Challenges SEC; We Urge You to Join Her

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

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

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

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

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

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

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

Asian Institute of Corporate Governance (AICG)

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

Longer term goals of the AICG are

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

Crompton to Head IRRC

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

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

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

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

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

Back to the topHistorical Review

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

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


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

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

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

Good Governance Pays

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

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

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

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

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

Catalyst Reports on Women’s Progress

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

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

Of the 178 seats:

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

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

HERE Opposes Lorillard Tracking Stock

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

HERE concerns include:

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

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Archives: November 2001

Monks Online

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

Corporate Governance – Turning Rhetoric into Reality

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

CREF Keeps Tobacco

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

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

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

401(k) Fatally Flawed

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

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

State Pensions Squander Surpluses

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

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

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

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

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

CEOs on the Line

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

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

UK Firms Improving but Still Fall Short

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

Labor’s Money

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

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IRRC Study Results

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

Study highlights include the following:

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

Canadians Call for Greater Board Independence

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

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

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

CalPERS Turns Up Heat

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


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

Continental Europe

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

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

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

New Books

Two major issues in corporate governance are the extent to which governance impacts financial performance, and the growing impact of social issues on corporate activity.

Corporate Governance and Economic and Economic Performance, edited by Claus Bugler, tackles the first issue with an analysis of Austria, Belgium, Germany, France, Italy, Japan, the Netherlands, Spain, Turkey, and the UK. He concludes that more direct shareholder monitoring is beneficial to a firm’s success and that minority shareholders are consistently worse off in countries with weaker shareholder protection and illiquid securities markets. The key to more efficient corporate governance is vigilance by institutional investors and prudent regulation by government.

John Elkington, whose Cannibals With Forks: The Triple Bottom Line gave us the concept of “triple bottom line” reporting (company disclosure of social, environmental and economic performance), now provides advice on how companies can build sustainability into their operations. The Chrysalis Economy: How Citizen CEOs and Corporations Can Fuse Values and Value Creation claims to be “an early guide to new forms of capitalism that will eventually come to dominate the global economy.”

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CalPERS Board Overruled

Last year the CalPERS Board raised their own salaries in defiance of Government Code limits and also raised their portfolio managers’ pay by 11%, claiming a provision in the state constitution that gives them protection from political interference also gives them broad authority to ignore state laws which make it difficult to fulfill their fiduciary duty. The California Department of Personnel Administration (DPA) refused to recognize such extralegal authority. The CalPERS Board then issued letters to State Controller Kathleen Connell to implement the pay hikes over DPA’s objections. When Connell refused, the Board set up its own payroll system. Connell took the Board to court, arguing the Board is subject to state law. I filed a similar action with the Office of Administrative Law.

Judge Charles C. Kobayashi, of the Sacramento Superior Court ruled that CalPERS can’t ignore state law. “The authority to administer the retirement fund does not mean CalPERS has become a separate system that is no longer subject to existing state laws that apply to all governmental agencies.” If CalPERS believed they were right, they should have challenged DPA and the Controller in court, instead of simply ignoring the law. CalPERS was permanently enjoined from increasing the per diem of Board members or employees, increasing the reimbursement to public agency employers of Board members, maintaining a separate payroll system for employees, increasing employee salaries and, most importantly, “declaring a statute unenforceable…unless an appellate court has made a determination that such a statute is unconstitutional.” CalPERS appealed the ruling. I’d guess their chances of success are slim to none. The only press coverage I saw on the ruling itself was in the October 29th edition ofPensions&Investments.

CalPERS Chief Investment Officer Daniel Szente also seems to have little faith the Board will prevail, announcing he will step down on November 30, 2001 to take a new job at McMorgan & Co. rather than await the outcome of the legal battle to roll back his compensation. Szente lasted only 15-16 months. SeeCalPERS press release.

Szente said that if Connell is successful it will hamper CalPERS’ ability to achieve excellent investment returns and effectively manage risk. Yet, for many years the CalPERS system operated just fine without offering enormous salaries to attract investment managers from outside the civil service. It would be interesting to see a comparison of portfolio performance (based on value added above the market) before and after the higher salaries. Since CalPERS has offered no such evidence of pay for performance, I doubt a positive correlation exists.

In addition, many, if not most, professionals who choose to work for the State of California are underpaid in relation to private sector counterparts. Why should investment managers at CalPERS be singled out for higher pay than their counterparts at CalSTRS or the Treasurer’s Office? The Board is in danger of creating a revolving door where CIO’s pick up a year or two investing huge amounts for CalPERS and then negotiate a fat deal for themselves elsewhere. If the Board really believes the high salaries are justified, they should sponsor legislation to raise their own pay and should document the need for higher pay for their investment officers with DPA.

Appealing through the courts on this case is a waste of money better spent on member retirements and services. In addition, whereas before the Board could argue they were complying with the law, even though their constitutional authority grants them certain exemptions, it will soon be clear to everyone that the constitution protects the fund against political raids; it doesn’t place the Board above the law. The court is no more likely to allow the Board to unilaterally raise their own pay and that of civil servants as it is to forgive speeding tickets to members who claim travel at the posted speed would cause them to violate their fiduciary duty because they’d be late for a meeting. Board members should learn to follow the law and plan ahead.

Which Shareholders Should Decide at TIAA-CREF?

Business Week’s Robert Barker has weighed in on the running battle between TIAA-CREF and SRI activistsLet Shareholders Decide This One, he says in the 11/19 edition. Barker points out that SRI advocates have failed to seek to get their issue on the TIAA-CREF “proxy” for fear of losing, even though a 1995 survey found that 81% of what he says are “contributors” (I’m sure most would see themselves as investors) to/in the Social Choice Account favored seeking out “companies who have an outstanding record of good performance on social issues rather than relying on negative screens.”

Barker says “the people whose money is at stake” should be able to “make broad decisions about how it is invested.” However, its not clear if his solution is to let all members of TIAA-CREF decide the issue by vote or just those invested in the Social Choice Account. How many of TIAA-CREF’s 2.3 million clients are invested in the Social Choice Account which makes up about 1.5% of its $260 billion portfolio? If investments are proportionate to members, should 98.5% of members who have nothing invested overrule the 1.5% that are willing to put their money at risk.

On the surface a vote appears very reasonable. I wish other funds, such as CalPERS had provisions for such voting on issues the board refuses to address. Even if the vote is limited to those with investments in the Social Choice Account, we all know that TIAA-CREF can easily influence the voting by inflating cost projections or claiming that positive investments are likely to earn less or that they are somehow illegal. TIAA-CREF should either honor the 1995 survey, which was to evaluate “whether any changes should be made,” or they should agree to be neutral on a vote by Social Choice investors.

SRI Gains Ground

Australian pension funds must now report on how they handle social issue proposals at corporations they’ve invested in, according to Fairvest’s Corporate Governance Review (CGR). Similar legislation was enacted not long ago in the UK and has been introduced in Canada as bill S-11. According to Stephen Davis, editor of Global Proxy Watch, pension fund disclosure will emerge as the “darling corporate governance bill of political parties around the world.” The same issue reports that average voter turnout (including proxies) ranged from a low of 35% in Australia to 83% in the US, with Britain, Germany, France and Japan following between from low to high.

Blueprint for Success

The October edition of Director’s Monthly contains an informative article on Compensation Committee Structure by James Reda of Buck Consultants in Atlanta. He include much of the usual good advice concerning the need for independence, the scope of activities, communication and minutes. However, one factoid stood out in my mind; committee chairmen are nominated by the CEO 40% of the time. Not exactly independence, eh?

E-Delivery Offers Savings Aplenty

The 2001 survey by the American Society of Corporate Secretaries estimates that E-delivery of annual reports and proxy materials could save $38 million industry-wide in postage savings alone. One method used is to collect e-mail addresses and send an e-mail notice when proxy season rolls around. No paper is involved so the potential savings is great. However, sending a paper proxy in the mail and instructions for finding the annual report online results in greater savings because twice as many shareholders opt in.

Also in the Fall edition of The Corporate Secretary is Gwendolyn King’s expectationss of a corporate secretary. They should have the administrative skills of a chief administrative officer, interpersonal skills of the chief human resources officer, legal skills of the general counsel, financial skills of the CFO and vision and decisiveness of the CEO.

Creative Accounting and Shareholder Lawsuit

The SEC’s Financial Fraud Task Force expects to review one out of every four annual reports. Prosecutors last year obtained convisions in 62 of 64 cases.

Ten Overnite Transportation worker/shareholders filed a shareholder suit against executives at parent company Union Pacific charging breach of ficuciary duty for wasting corporate assets on a “concerted, unlawful anti-union campaign.” According to the NLRB, Overnight has had more complaints filed per employee than any othher company in the US. “The severity of the misconduct is compounded by the involvement of high-ranking officers,” according to the NLRB. (For these and other interesting items, see Business Ethics, 9-10/2001 edition.

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Insurers Support Disclosure of Social, Environmental and Ethical Risks

The Association of British Insurers (ABI) announced that its members expect companies to disclose how social, environmental and ethical risks are being handled. Examples include board-level identification and assessment of risk, descriptions of company policies for managing risk, and descriptions of procedures for verifying company disclosures.

“SRI disclosure will provide investors with confidence that a company understands the risks it faces and is positioning itself to deal with them,” said Chris Mellor, chief executive of AWG, one of the UK’s largest water utilities. “The ABI’s guidelines are a crucial and valuable step in helping companies prove to themselves and others that they are up to the mark.” (Social Funds, 10/30)

ISO Tackles Corporate Social Responsibility

The International Organization for Standardization has launched an online forum to study the feasibility of standardizing the measurement of corporate social responsibility. The forum, hosted by the Canadian Office of Consumer Affairs, has been set up to facilitate worldwide discussion of the possible role of standards in defining the elements of corporate social responsibility. It is designed to provide a mechanism for increasing awareness and promoting constructive discussion of new and existing corporate social responsibility initiatives, and their relevance to existing or potential standards projects.

The forum operates as a list-serve. E-mail postings are sent to every member of the forum, and there is no cost to participate. To join the online forum, contact the forum facilitator, Dr. Kernaghan Webb, senior legal policy advisor and chief of research at the Canadian Office of Consumer Affairs, at[email protected]. At the initiation of the Trinidad and Tobago Bureau of Standards, a workshop on corporate social responsibility will take place on 10 June 2002, in Port-of-Spain.

IOD Establishes Indian Corporate Governance Center

Institute of Directors forms Corporate Governance Center to improve the functioning of corporations and the credibility and liquidity of stock markets by promoting research and practice of Corporate Governance Principles. For more information, contact [email protected]. The center will undertake the following functions.

  • Formulate Codes for good Corporate Governance in government, trade and industry.
  • Advise government and industry on best practices in good Corporate Governance.
  • Conduct research relating to best practices in Corporate Governance internationally.
  • Organize seminars, conferences, and workshops to create awareness in the Indian corporate sector of the need for good Corporate Governance.

NACD Report on Board Evaluation

The National Association of Corporate Directors has released its Report of the Blue Ribbon Commission on Board Evaluation: Improving Director Effectiveness. This groundbreaking study on effective self-evaluation is designed to help boards and individual directors improve performance. The report was led b a commission of 30 corporate directors and leading governance experts.

Regular board and directors evaluations are favored by 91% of directors, according to a recent NACD survey. The report provides tips on directors, issues, information, evaluation process and performance goals. It also provides sample evaluation forms, a case study and diagnostic tools. Copies available by calling Doreen Kelly Ruyak at 202-779-0509 or e-mailing you request to [email protected].

Director’s Pay Up in 2001

A Towers Perrin survey of annual proxy statements filed this year by 250 companies representing a cross section of the S&P 500 found that nonemployee corporate director compensation has risen to $118,337 in cash and stock in 2001, up from $100,807 in 2000. Most of the increase is in the form of stock options. Directors received three-quarters of their compensation in stock and one-quarter in cash, a shift from last year’s mix of two-thirds stock and one-third cash.

Ninety-four percent of all companies provided some form of annual or recurring stock compensation to directors. Median annual stock compensation, based on each company’s 2000 fiscal year-end stock price, jumped 23% to $73,205 in 2001 from $59,430 in 2000. Median cash compensation of $49,000 was up modestly from $46,000 in 2000.

Seventy-four percent awarded stock options; 26% made outright grants, and 25% awarded deferred, or phantom stock, which settle upon termination or at some future date. Restricted stock, granted subject to limits on sale or transfer until certain future conditions are met, was awarded by 18% of the companies.

One-time grants were awarded by 29% of the companies, typically paid when a director is first elected to a board. The median one-time stock-based grant was $151,587. Only 4% of companies reported a retirement plan, down from 22% four years ago.

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Archives: October 2001

Code Compliance Listed on Italian Stock Exchange Site

The Italian Stock Exchange site now includes information concerning the level of compliance with the Exchange’s voluntary corporate governance code. Unicredito SpA and Banca di Roma SpA are currently among the country’s most transparent firms with detailed annual or financial reports. Bulgari SpA was at the other end, ignoring most to the code’s recommendations and operating without a compensation committee, an internal audit committee, or any clear rules to determine how directors are chosen or how shareholder meetings are governed. The voluntary rules were adopted in 1998 to attract both foreign and domestic investors.

UK Pension Plan Reporting Incomplete

A survey by Friends of the Earth, London, indicates that more followup is needed to ensure recently enacted disclosures have an impact. Since 7/2000 UK pension plans have been obligated to publish a “Statement of Investment Principles” concerning the extent to which social, environmental and ethical considerations are taken into account when making investment decisions.

FOE surveyed the UK’s largest 100 plans but 35 either refused to participate or didn’t provide enough detail to properly evaluate. FOE found the majority of statements to be “vague or ambiguous,” with responsibility for implementation often passed to money managers without guidance or monitoring plans. (The same is true of studies of US funds who are charged with ensuring that proxies are voted in the best interest of beneficiaries.)

It appears that many funds are simply complying with the new legislation with the least amount of effort and commitment possible. Those plans that did include social, environmental, ethical and corporate governance issues often failed to include accountability mechanisms allowing trustees to monitor fund managers. Less than 1/3 of funds surveyed were able to show how they reported back their actions.

“It is clear that pension funds will have to significantly increase resources in the area of monitoring…to ensure the effective implementation of socially responsible investment objectives…,” the report said. (Large U.K. plans get failing grade on social responsibility concerns,Pensions&Investments, 10/1/01)

Proxy Solicitation at CREF

The College Retirement Equities Fund will hold its annual meeting at 10 a.m. on November 13, 2001. The event will take place at the company’s headquarters at 730 Third Avenue in New York City.

The annual meeting gives CREF participants the opportunity to elect or reelect trustees and vote on participant proposals presented in the proxy statement. TIAA trustees are selected by the TIAA Board of Overseers, but the annual balloting process allows participants to express their preferences for current nominees and recommend future candidates. Mailing of CREF and TIAA election materials to participants began on October 12. Eligible participants have until noon on November 13 to cast their votes.

The TIAA-CREF coalition for responsible investment plans an interesting twist by seeking to rally support by those in attendance and by proxy solicitation.

FIRST: Those who can attend the meeting are encouraged to attend a pre-meeting on Monday evening, November 12 in New York City. RSVP to Neil Wollman, no later than Monday, October 29, 2001.

SECOND: The group has appealed to those who are unable to attend to lend their proxy to another CREF activist so that they may legitimately attend the Annual Meeting. Kelle Louaillierat Infact is coordinating the paperwork and that effort.

Sheryl Pressler and Hypocrisy

Not long ago I got a call from Barry Burr ofPensions&Investments asking what I thought of Sheryl Pressler’s almost $8 million severance package from Lend Lease Corp. Pressler had been Chief Investment Officer at CalPERS prior to her stint at Lend Lease’s US unit, Lend Lease Real Estate Investments. I’m often critical of both high corporate severance pay packages and CalPERS, so Mr. Burr might well have expected something more than “no comment.”

Of course $8 million is a lot to pay when giving someone the sack, but apparently Ms. Pressler had a good law firm representing her in negotiating her entrance and exit packages. Jones Day Reavis & Pogue is the same firm that now employees her former general counsel at CalPERS, Richard Koppes, one of the major brains behind CalPERS’ successful corporate governance strategy. I thought to myself that Pressler’s package was outrageous but what else is new?

Now comes an editorial by Mr. Burr in the October 15th edition of P&I, right next to one on the 911 attack on the World Trade Center. Burr chides institutional shareholder activists from hypocrisy because of their lack of response to the large Pressler pay-out after only a year due in part to her refusal to take another assignment.

Having done no research on the matter, I may be completely off base, but I’d speculate that although TIAA-CREF, Lens and the various state pensions that Mr. Burr chides may use Lend Lease’s services, few have substantive investments in the firm itself. The Council of Institutional Investors and its members are generally critical of executive compensation at companies in their portfolio because excesses tend to drive down the value of their holdings.

It didn’t surprise me that Pressler didn’t work out at Lend Lease. CalPERS is a much different animal. Its portfolio generally tracks the market because such a large percent of its equities are essentially indexed. Doing well at CalPERS may mean moving the market through corporate governance activism, rather than picking good investments or timing the market.

For additional insight on those who manage investment managers take a look at the latest McKinsey Quarterly (2001/4). Based on a survey of 3,320 people working in the asset management industry, they found that only 38% of respondents feel their companies recruit better staff than do their competitors. “Most of the respondents think that their managers have effective processes for evaluating their performance but don’t use that information to develop and reward potential high performers or to move out low performers.” “Asset managers could manage their talent more effectively for less than they spend now on managing it poorly—in the eyes of their employees, at least.”

If Mr. Burr wants to look at pension funds and cry hypocrisy I’d advise him to look no further than the CalPERS Board. His editorial points to their alleged violation of state law when they raised the salary of 10 internal portfolio managers. Even clearer was the fact that raising their own salaries violated the law. I have requested a determination by the Office of Administrative Law and State Controller Kathleen Connell included that action in her recent lawsuit. Both may takeseveral additional months for a decision.

Even better, take a look at the current election at CalPERS. If Burr did, he would be the only member of the press doing so, even though 1.2 million members are eligible to vote and CalPERS Board members wield enormous power. The press has taken absolutely no interest. Want to write about hypocrisy? Incumbent Charles Valdes, currently seeking reelection, brags of his financial acumen and that “your fund will be safe” if he is reelected. What he doesn’t mention, and neither does the press, is that during the time he chaired the CalPERS Investment Committee he also declared personal bankruptcy twice, 24 members of the Legislature called for his resignation, and he represented public employees but failed to pay state and local taxes for approximately seven years.

CalPERS is widely known as a proponent of good corporate governance and more open corporate elections, yet Mr. Valdes voted with a majority of the Board for rules which, according to the Sacramento Bee “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it” (Calpers Muzzles Critics). They want corporate board members to avoid conflicts of interest, yet, this Board member and others routinely accepted gifts from CalPERS contractors.

(Note: In the interest of disclosing potential conflicts of interest, the Editor of Corporate Governance, James McRitchie, is running for the CalPERS Board against the incumbent.)

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Sidney Abrams Appointed to CalPERS Board

California Governor Gray Davis named Abrams to serve as the insurance industry representative on the California Public Employees Retirement Board. His term expires in January 2005. Abrams is an actuary with more than 30 years of experience providing services to Taft-Hartley pension (joint union/management) and other employee benefit plans. (press release)

SRI Funds Edge Out Competition

According to Morningstar, 35% of the socially responsible mutual funds (19 out of 54) they track earned either four or five stars, compared with 32.5% of all mutual funds. (Social Investment Forum News)

Reuel Khoza to Focus on Corporate Governance

South Africa’s new president of the Institute of Directors says “Good corporate governance creates an attractive climate for foreign direct investment. If investors do not know what to expect, their interest is dampened. My objective is to make corporate governance the thing for local companies to subscribe to not just for the major organizations but also for medium-sized and small businesses.” Mr. Khoza is also chairman of Eskom and Co-ordinated Network Investments, and a director of Standard Bank.

“I have been involved with Judge Mervyn King in hosting events to exchange points of view with other members of the commonwealth. Now, with the review of the King commission (final report due mid-February), there will be new challenges. Lately the thrust has been for the triple bottom line, involving the social, environmental and economic or financial aspects of business. I aim to push to the fore with this.”

Khoza, a long-time member of the institute and its deputy president for the past three years, says he will promote corporate governance in the Southern African Development Community and Europe. “I aim to be more than just the figurehead for the institute,” he says.

Khoza is the Institute’s first black president and Carol Scott, executive chairwoman of Imperial’s car rental and touring division and of Tourvest, is the first woman to be appointed a vice president of the body.

The latest membership figures show a female membership of 12%, while black membership is at 15%. (10/22, Africa News Service)

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Symposium on Corporate Governance in the Banking and Financial Services Industries

Few public policy issues have moved to center stage as quickly as corporate governance. Shareholders, creditors, regulators, and academics are all examining decision making in corporate and other organizational forms and, in some cases, are proposing changes to governance structures to enhance efficiency and accountability. In the banking and financial services industries, governance and board oversight received close attention during the turbulent late 1980s. A recurring theme among the interested parties is that poor governance played an important role in many serious problems. With this issue in mind, the Federal Reserve Bank of New York, the Journal of Financial Intermediation, and the Salomon Center and Department of Finance at New York University’s Stern School of Business have organized a symposium to foster a better understanding of managerial decision making and sound corporate governance practices in financial institutions.

The sponsors cordially invite you to attend the symposium, to be held at the Kaufman Management Education Center of New York University’s Stern School of Business on November 8-9, 2001. There is no registration fee for attending the symposium. Seating, however, is limited and therefore, you must register in order to attend the symposium.

Liabilities Up, Assets Down

Pension liabilities went up 26% in 2000 and assets dropped 2.5%, resulting in a drain of about 28.5%. This year, liabilities are up 2.8%, while assets are down 12.5%, resulting in a drain of 15.3%. As a result, pension funds with funding less than 140% two years ago may now be facing a deficit. Rob Arnott, of Quadrant LP, believes pension funds can no longer assume 8-10% returns. “I’d be leary of return assumptions of more than 6% to 7%,” he said. (Pension plans face tougher times as funding levels dip, Pensions&Investments, 10/1/01)

FSBA Wins Under PSLA

The Florida State Board of Administration (“FSBA”), the employee pension fund for Florida State and County employees, announced a $61 million settlement against Vesta Insurance Group.

This action, under the Private Securities Litigation Act of 1995, was brought as a class action on behalf of Vesta investors. Vesta has also agreed that a majority of its Board will be independent directors, that it will appoint audit, nominating and compensation committees comprised entirely of independent directors and that its audit committee would comply with the recommendations of the Securities and Exchange Commission’s blue ribbon panel on the effectiveness of audit committees.

Boardroom Analysis

The Boardroom Analysis Online Resources Database (BAORD) is a relatively new site intended as a resource for academics, analysts, activists – anyone with a general interest in issues of corporate governance and corporate social responsibility. It indexes hundreds of resource “providers” that make a contribution of one kind or another to this broad field.

Resource “providers” qualify for inclusion into BAORD if their sites make available documents, publications, databases, directories, events notifications, projects, online discussions, commentary, reference lists – anything that facilitates the research or information-finding process.

BAORD categorizes resources to facilitate focused searches. Search criteria can be set by the user via a simple web-based search form. The user can further narrow their search by using keywords or simply by selecting from a directory of “providers.”

If a potential “provider” would like to be included in BAORD or if an existing provider would like to make changes their listing this can also be done at the BAORD site. All submissions are moderated for appropriateness and authenticity.

This is a free resource and in order to keep it current and useful resource providers are encouraged to review listings.

Simon Deakin Named Robert Monks Professor of Corporate Governance at Cambridge University

Simon Deakin as the inaugural holder of the Robert Monks Professor of Corporate Governance. Professor Deakin joins the Judge Institute of Management from the University’s law faculty where he has been a lecturer for the last ten years. He is a leading expert in corporate governance and has published widely on the subject through a variety of research projects on inter-firm contracting, hostile takeover bids, the duties of company directors and the role of ‘stakeholders’ in corporate restructuring and insolvency.

The professorship has been established in perpetuity thanks to a donation of $4M from Mr Dennis Kozlowski of Tyco International. Press release. Robert Monks has already funded a research center at the Judge Institute. We look forward to great work coming out of the Judge Institute at Cambridge.

Accountability of Institutional Investors

CalPERS and TIAA-CREF are widely known as advocates of good corporate governance, but what about their own governance?

I have often called the CalPERS Board into question on this site and am currently engaged in running for the Board of Administration. (For more on the election, see the CalPERSand PERSWatch sites) The incumbent, Charles P. Valdes, wants to continue to represent CalPERS’ 1.2 million members, even though he didn’t pay “$6,000 in federal income tax; $54,856 in state income taxes, interest and penalties; $23,808 in county property taxes, interest and penalties; and $18,254 in delinquent mortgage payments, according to court documents. Valdes has not paid property taxes on his house in Carmichael since 1989 and is nearly six years delinquent in paying for garbage collection, sewer and storm drainage, according to county records.” (Member of PERS Board Faces Financial Difficulty; Debts Include More Than $84,000 in Taxes, 8/9/97, Sacramento Bee)

If having a tax evader represent public employees is not ironic enough, Mr. Valdes also chaired the CalPERS Investment Committee while declaring bankruptcy twice. Valdes voted for rules which “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (Calpers Muzzles Critics, 5/25/99, Sacramento Bee Editorial) He and others on the Board accept gifts from CalPERS contractors and have voted to ignore various California laws, claiming their constitutional authority exempts them from public notice and other rulemaking requirements, as well as from statutory limits on their own salaries, even though the overextension of their authority has been discredited in Sacramento County Superior Court. (Kathleen Connell for Controller et al. v. CalPERS Board of Administration, case no. 98CS01749) (CalPERS board votes itself big pay increase, 9/21/00, Sacramento Bee) Further, as a result of his ethnic slurs, 24 members of the California Legislature have called for his resignation. (Resignation of CalPERS Official Urged, 10/27/99, Sacramento Bee)

The list goes on and on. Yet, since he has been endorsed by the California State Employees Association, has all the advantages of incumbency and because the elections traditionally receive no press coverage, he is likely to be reelected. In California we need to not only reform the CalPERS election process (some reforms that I worked on will take effect next year) but some of our unions as well. At least the CalPERS structure provides for direct nomination and election of almost half its board by members of the System. I’ve frequently reported here on the efforts of Abby Fuller, Neil Wollman and others involved in the Social Choice for Social Change: Campaign for a New TIAA-CREF. Recently, I received the following article from David E. Ortman, Executive Director of the Northwest Corporate Accountability Project, which calls into question TIAA-CREF’s Corporate Governance policy and attributes some of its failings to TIAA-CREFs own governance structure.

TIAA-CREF’s Policy Statement On Corporate Governance Disappoints Shareholders

In March 2000, TIAA-CREF posted its latest Policy Statement on Corporate Governance. What is surprising is how weak it is. If TIAA-CREF is complying with its own policy there is little to praise because the bar is set so low.

For example, TIAA-CREF does not oppose “independent” directors working on contract for the corporation. TIAA-CREF does not support shareholder resolutions concerning separation of the positions of CEO and chairman. Otherwise, TIAA-CREF’s own CEO, Chairman of the Board, and President John Biggs couldn’t wear so many hats. TIAA-CREF does not support the formation of shareholder advisory committees, the requirement that candidates for the board be nominated by shareholders, or a requirement that directors must attend a specific percentage of board meetings, unless the board supports such measures. TIAA-CREF’s policy says that staggered election of directors can provide legitimate benefits to the board.

As much a concern is what TIAA-CREF’s policy does not say. Under “Fiduciary Oversight” nothing is said about the current controversy of auditors also working as consultants for the corporation. Under “Global Standards of Corporate Governance” nothing is said about avoiding bribery in international dealings. Under “Social Responsibility Issues” there is no specific reference to an environmental audit. Also, in the Appendix on “Executive Contracts” TIAA-CREF opposes any outright ban on “golden parachute” severance agreements.

Don’t TIAA-CREF participants deserve better?

If you have comments on Mr. Ortman’s observations, please send them directly to him at [email protected] and cc me at [email protected].

The “Get Out of the Bad, and Into the Good” campaign continues in New York City. As the nation’s largest pension fund, TIAA-CREF, a retirement fund mainly for educators, prides itself on being responsive to shareholders and a “concerned investor” on social responsibility matters. The fund, however, continues to hold large investments which put public health, factory workers, and citizens at risk. Why should life-giving pension money be invested in deadly tobacco, sweatshop labor, or an oil company tied to one of the most brutal dictatorships in the world? There are more positive ways to invest and still earn good returns. A broad-based coalition is calling for funds to be invested in affordable housing and in companies which are, for example, pioneering socially or environmentally responsible products or services. Contacts for further information: Main contact in NYC is Dave Wilson, 212–674-9499, [email protected]; or national campaign organizer, Neil Wollman, 219-982-5346,[email protected].

The coalition urges supporters to call John Biggs, CEO, 1-800-TIA-CREF (842-2733), ext. 4280.; or 212-490-9000. You’ll likely have to leave a message with his secretary, but do ask for a response. You can also email Mr. Biggs, as well at “Contact Us” or at [email protected].

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Join eRaider’s Battle to Redefine Contested Elections

The NYSE has given eRaider a unique chance to make its case against broker votes in contested elections and they are asking for your help. Please visit their website and help them write their proposal. While many have been trying for years to do away with all broker votes, they have met with stiff opposition and have been unsuccessful thus far. eRaider is proposing a narrower but more winnable argument. They have asked the NYSE to re-consider how it designates elections. Currently there is a strict rule that for an election to be declared contested, dissidents must solicit each shareholder by mail. For any beneficial owner who is unsolicited and does not vote, the broker will be allowed to vote the shares and of course will vote them for management. Broker votes are the reason why proxy contests are expensive and weighted towards management. A recent stuy found that allowing broker votes added an average of 14.2% to management’s total.

eRaider had requested that the NYSE change the way it defines active solicitation to include the Internet and to drop the exclusive focus on each separate shareholder. In return, the staff at the NYSE has requested that we present a position paper on the subject. eRaider proposes changing the definition of “active solicitation” from mailing a letter to actively soliciting on the Internet. Those methods would include emailing owners, posting on all active message boards and maintaining a website with proxy material.

Come to their Shareholder Rights message board and post your thoughts about defining contested elections. They will submit their proposal on October 10, and are open to any ideas, suggestions or arguments. They want to convince the NYSE that they speak not just for an Internet activist fund, but also for a representative sample of serious stockholders that use the Internet.

You can be part of our proposal in three ways. If you agree with eRaider, just post your name and they’ll list it in the final document. If you don’t agree, argue and maybe they’ll change their proposal. Anyone is free to add a comment that they will include as an appendix to the proposal to show the NYSE the range of individual investor opinions. Comments must be signed with a real name and address; and emailed to eRaider at[email protected].

Corporate Governance Series by Council on Foreign Relations

Is capital market integration inducing global convergence on the so-called “Anglo-American” model of minority investor protections? What explains the variation in response to convergence among countries and between institutional practices? Who are the winners and losers from governance reforms, what types of resistance does this provoke, and what is the role of foreign governments in molding governance changes? Above all, what are the policy implications of corporate governance change for the United States government and its regulatory agencies? Is there a role for official intervention, or should this be left to market forces?

The Roundtable series will seek to answer these questions on two parallel tracks. One track will examine the role in global governance changes by actors such as institutional investors, financial professionals such as accountants and investment bankers, international financial organizations such as the IMF, World Bank, OECD, and BIS, and governments, including the European Union. The other track will analyze the pattern of governance change in specific countries and regions.

James Shinn and Peter Gourevitch are managing the Roundtable series. Jim Shinn is a Fellow at the CFR in New York. He spent 15 years in Silicon Valley, where he founded Dialogic, later acquired by Intel, and several other software firms. He has a BA from Princeton, an MBA from Harvard, and a PhD from Princeton. Peter Gourevitch is a Professor at the University of California San Diego, former dean of UCSD’s Graduate School of International Relations, and editor of International Organization. He has a BA from Oberlin and a PhD from Harvard, where he is spending 2001/02 as a Research Fellow at Harvard’s Center for European Studies.

Founded in 1921, the Council on Foreign Relations is a nonpartisan membership organization, research center, and publisher. It is dedicated to strengthening America’s role in and understanding of the world by better comprehending global trends and contributing ideas to U.S. Foreign Policy. For further information about the Council or the Roundtable Series, please contact Lisa Shields, the Director of Communications, or James Shinn.

South Africa’s First Corporate Governance Unit Trust

The Fraters Earth Equity Fund aims to influence corporate behavior by constructive engagement in the companies in which it invests. The fund will also has a socially responsible investment fund agenda but no restrictions imposed on the portfolio manager. According to James Frater, managing director of Frater Asset Management, “The release of the draft King II report on corporate governance, set to be implemented in January next year, has highlighted the need for broader reporting, not just purely financial disclosure.” “We fully support the call for reporting on social, environmental, health and ethical issues, or the so-called ‘triple bottom-line reporting’ as we acknowledge the relationship between good corporate citizenship and financial performance.”

The collapse of Leisurenet, Regal, Macmed, Paradigm, and other have demonstrated the need for better corporate governance monitoring by shareholders in South Africa. Corporate Footprint will provide Frater with an analysis of corporate citizenship practices to be used to guide investment decisions and engagement strategies. Practices to be monitored include transparency, accounting, community involvement, workforce engagement, AIDS awareness, empowerment, customer and supplier relations, and environmental concerns. Like more progressive funds in the US and EU, the Fraters Fund will publish their voting records on our web site.

“A typical resolution could call on the company to appoint additional independent directors, adopt an environmental management plan or declare its HIV/AIDS policies and strategies,” said cofounder Michael Leeman. Fraters, established in 1998, has managed the Futuregrowth Pure Fund unit trust, which has excluded tobacco, alcohol, gambling and financial services since July 2000 and earned a 38.5% return over the 12 months ending June 2001. (Africa News Service, 10/05/01)

Corporations Becoming More Dependent on Open Market Equity

Corporations have become increasingly dependent on open market equity to finance their expansions, according to The Conference Board. Governance activism is “shifting the economic clout to investors with equity stakes,” says Carolyn Kay Brancato, Director of The Conference Board’s Global Corporate Governance Research Center and co-author of the report.

International equity holdings by the largest US pension funds continue to show that a small group of activist investors among them can exert considerable leverage over corporations in these countries. The largest 25 US pension fund holders of international equity held $288.4 billion in international stocks as of September 30, 2000, accounting for roughly 16% of the $1.85 trillion foreign equity held by all US investors.

US and UK financial institutions held 57.2% and 57.7%, respectively in the largest 25 corporations. There is significant pressure to bring disclosure of information up to US standards. Regulators and/or stock exchanges are pushing companies to increase disclosure and transparency. Global equity markets are competing for capital, opening up traditionally close relationships between companies and institutional investors, especially banks, in countries such as the United Kingdom and Germany. As major blocks of shares are unwound in favor of broader equity participation, minority shareholders insist on improvements with regard to fair voting rights, access to proxies, and ability to provide input to management.

The attitude of management of a company toward corporate governance is a crucial factor. Does management view the board of directors as an asset, or as a barrier to overcome so that they can get on with the business of running the company? Is the board kept properly informed by management and, in turn, does the board keep investors informed so that they can act as responsible owners?

Also high on the list of investor wants are adequate auditing systems. Boards must establish procedures to ensure the reliability and independence of the auditing process, and to quickly come to terms with and correct any failures. “A striking development is the extent of communications among institutions around the world,” concludes Brancato. “Institutional investors abroad are able to give support to local investors and learn from them about the key issues in their particular markets. When possible, they also try to forge alliances with local investors to share knowledge and expertise, creating a world of global investors.”

Research Report 1297-01-RR, The Conference Board: What Do Institutional Investors Want? Calling The Conference Board’s Customer Service Department at (212) 339-0345 or visit The Conference Board’s website. Media can request a free copy by calling (212) 339-0231.

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Archives: September 2001

World Council for Corporate Governance to Hold Conference

The Council’s mission is to make a difference to national economies by improving the quality of their corporate governance practices. They hope to become a leading provider of knowledge about best practices in corporate governance to company boards, policy makers, investors, fund managers, financial advisors, researchers, academics and other interested parties by creating active partnerships and fostering cooperative relationships between organizations committed to improving quality of corporate governance worldwide.

The theme of their second conference, ICCG 2002, is “Corporate Governance -Turning Rhetoric into Reality.” It is recognized that many countries have developed corporate governance codes. Yet, how are these codes being implemented? The Conference will provide a unique platform for exchanging information on the practices of corporate governance worldwide. It is expected to be attended by 500 delegates from 38 countries and offers an unrivaled opportunity for interaction and networking with global leaders in business and government.

ICCG 2002 will be held from 18-19 January 2002 in The Taj Mahal Hotel, Mumbai, India. For more information, contactKlaus Bohnke, Director General.

FASB Accepts Comments on Intangible Asset Project Until October 5th

Due to the recent tragic events in New York, Washington and Pennsylvania, the Federal Accounting Standards Board (FASB) has extended its deadline for comments on its is proposed project on disclosure of intangible assets until October 5th. Go to and download “Proposal for a Project on Disclosure About Intangibles.”

I encourage readers to write a note of support to FASB’s Director, Timothy Lucas. Better disclosure and valuation of key intangible assets could eventually lead to better corporate disclosure on topics such as human capital, corporate governance, environmental management, labor issues, human rights and other corporate responsibility indicators.

Corporate governance experts and social investors argue that governance and social issues impact the bottom line through the creation or destruction of intangible assets such as the trust of shareholders, reputation, satisfaction of its workforce, consumer appeal, etc. Here a chance to eventually get the leading accounting standards body in the US to put some methodology, numbers and hopefully accounting principles in place.

The proposed scope is relatively narrow, being focused on disclosure about “intangible assets that are not recognized in statements of financial position, but would have been recognized if acquired either separately or in a business combination. It would also include in-process research and development assets that, under FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, are written off to expense on the day they are acquired.”

I believe that focus is about right for an initial project. However, I would hope the FASB’s focus would eventually evolve to include corporate governance and social issues.

Delaware Remains Virtually Alone

Shareowner activists succeeded in amending a provision in a Massachusetts bill that would have allowed companies to hold their annual meetings solely over the Internet. The bill now allows companies to broadcast annual meetings over the Internet, but still requires face-to-face meetings. The bill also allows companies to send proxy statements via the Internet to shareowners. Stephanie Haug, Assistant Portfolio Manager at Walden Asset Management, also indicates there is an effort underway in Delaware to rescind their recently enacted law allowing annual meetings to be held solely online. (see Shareowners Rally to Defeat Online Annual Meeting Provision in MassachusettsSocialFunds.Com, 9/21)

Shareowner Alignment Index

Stern Stewart and Hackett Benchmarking & Research released findings of a new study of best practices in generating and sustaining shareholder value. Over 60 Global 2000 companies participated in the study, including Allied Waste, Briggs & Stratton, Conoco, Best Buy, Kimberly-Clark, RR Donnelly & Sons and Northrop Grumman, along with many leading firms based in Europe, Asia and Latin America. Top performers in the study produced more than twice the amount of shareholder value than nonaligned firms over the past five years. Overall, the study found that “value-aligned companies” — those that consistently deliver value to shareowners — share the following characteristics:

  • Business decisions are made based on long-range economic value over short-term earnings impact
  • Board members and top managers have significant equity holdings at risk
  • Performance measurement focuses on a few objective and straightforward value metrics that include the cost of capital
  • Incentive plans are uncapped, to instill a culture of ownership by offering an unlimited upside pegged to sustained value-creation
  • Projects are ranked and funded strictly according to their economic value
  • Middle-level managers possess a high degree of business and financial literacy
  • Financial information is measured and freely shared throughout the

An executive summary of the Shareowner Alignment Index is available online from Hackett Benchmarking & Research.

Florida State Board of Administration Nations Most Litigious Pension System

The FSBA is involved in almost 300 securities fraud lawsuits against companies whose deceptive behavior it alleges compromised the value of its investments. “We have all seen an increasing number of corporate actions that border on criminal – and sometimes are criminal,” commented FSBA Executive Director John T. Herndon. The agency is currently lead or co-lead plaintiff in eight lawsuits, and has filed private actions against an additional 14 companies. In comparison, CalPERS, widely held as the paragon of corporate governance activism, has acted as lead plaintiff in only one suit. (Miami Daily Business Review, September 11, 2001 as reported by The Corporate Library, 9/18/01)

Providence Capital to Launch Anti-Poison Pill Campaign

Providence Capital will launch a major Anti- Poison Pill Campaign at a “Town Hall” meeting and simultaneous audio webcast on Tuesday, September 25, 2001 at 4:15 PM. The meeting will be held in New York City at the Le Parker Meridien Hotel (118 West 57th Street). The discussion will be open to the media and members of the investment community. A Q&A session will follow the presentation by Bert Denton, Founder & President of Providence Capital.

Speakers will include Jeffrey N. Gordon, of the Columbia University School of Law; and Michael Hanrahan, a Delaware corporate practitioner. Participants can register to attend in person by calling (212) 888-3200 or sign up for the webcast online or by calling (800) 540-0559, Conference ID: PC925.

The focus of the seminar will be on a director nomination by-law amendment (DNBA), viewed as a potential cure for the poison pill. The DNBA would attempt to hold board members accountable for failing to abide by shareholder votes to eliminate poison pills. Courts in Delaware, where most U.S. companies are incorporated, have ruled that poison pills fall under the domain of the board of directors. However, if the suggested DNBA is passed by the holders of the majority of outstanding stock, board members who have failed to approve elimination of poison pill rights within 180 days after passage of a stockholder resolution requesting such action would no longer qualify for nomination for an additional term as directors, unless the board has submitted to the stockholders a binding resolution to abolish the poison pill.

Advance publicity quotes include the following:

  • Denton: Poison pills impede the maximization of value. If the DNBA initiative is successful, institutional investors will be able to hold directors accountable for their support of poison pills.
  • Gordon: Drastic anti-takeover measures destroy stock value and investor confidence, injuring those they purport to protect. The DNBA will use corporate democracy to respond to directors who ignore those who the company is intended to serve – its owners.
  • Hanrahan: Because the DNBA does not require or preclude board action, it avoids the primary legal argument against poison pill bylaws, by relying instead on the very mechanism pill supporters have cited in defending the pill – the ultimate right of the stockholders to control who serves on the board.

Back to the topMore Thoughts on The New Global Investors

Anne Simpson, senior specialist in corporate governance with the World Bank and coauthor of Fair Shares: The Future of Shareholder Power and Responsibility, has also written areview of Robert Monks’ recent book, The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide. In contrast to my own rambling essay (several items below), Simpson gets right to the point. “Monks’ prognosis is useful” but the problem is that his proposals don’t adequately address “the conflicts of interests within the private pension funds” which his book highlights so well. “Tackling these requires overhauling the governance regime of investors. Principles of good governance – transparency and accountability – need to be applied to the institutions that invest on behalf of the public.”

Transparency, according to Simpson, would mean that banks, insurance companies, mutual and pension funds would all be required to provide full details of their voting records. “We do not yet have a fully fledged model of investor governance that reflects the principles of transparency and accountability. One solution is visible in the activist public funds in the US, which elect trustees from active members and pensioners and thus allow the funds to tackle corporate abuse without fear or favor.”

Activist public pensions, such as CalPERS, do offer a model for private funds in that six of their 13 members are elected by members. However, many distant observers of CalPERS, along with many members of the System, appear to have an unrealistic view of its operations, which are far from ideal.

For example, the CalPERS Board long argued that they were under no legal or moral obligation to release minutes or vote counts from closed door investment sessions. Without such a record being made public there was no way to determine if contributions or gifts were influencing Board members in their decisions and no way to hold them accountable. Only after a scandal involving what was essentially a Ponzi scheme, made against the advice of staff and a CalPERS consultant, was legislation enacted requiring such disclosures.

The Board of CalPERS continues to argue that their constitutional authority places them above the law, even though that position was discredited in Sacramento County Superior Court. (Kathleen Connell for Controller et al. v. CalPERS Board of Administration, case no. 98CS01749) and again in a 1999 Office of Administrative Law Determination (No. 18), which I filed.

The purpose of Proposition 162, which grants the Board authority under Caliofornia’s Constitution, was to prevent raids, limit political interference, and firmly establish the System’s primary obligation to its members. It was never meant to allow the Board to avoid public scrutiny or to place itself above the law. Last year the Board gave itself a raise even though their reimbursement rates are set in the Government Code. Kathleen Connell again took them to court; I again sought the less expensive route of a determination by the Office of Administrative Law.

When one recent candidate (the author) raised potential conflict of interests during his campaign, such as the Board members accepting gifts from contractors and serving, staff violated the System’s election rules in order to assist the incumbents reelection. After negative press, the Board proposed rules to avoid such future embarassments by banning discsussion of the issues in materials sent by the System to members. A Sacramento Bee editorial said the proposed rule “muzzles challengers in ways that risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (CalPERS muzzles critics: Ballot rules protect board, keep others in the dark, 5/25/99)

Anne Simpson is right, the most likely route to getting corporations to be responsible and accountable is through a law or other action that allows direct election of a substantial proportion of pension fund trustees from acttive members and pensioners. However, even if more funds provide such elections, like CalPERS, we will still need to educate members and pensioners.

One might expect that at a minimum, members and beneficiaries of CalPERS would vote out Board representatives who have declared bankruptcy more than once, failed to pay their taxes for years that support members and don’t get along with the Legislature whose support is required for raising benefits. Yet the incumbent in this year’s election is almost certain to get reelected, even though he failed all the above tests and more. (Member of PERS Board Faces Financial Difficulty: Debts Include More Than $84,000 in Taxes, 8/9/97, Sacramento Bee and Low Road At PERS: Ethnic Remarks Are Another Sign Of Arrogance, 11/2/99, Sacramento Bee). Since CalPERS is one of the best pension systems, it makes me wonder what world shaking changes would occur if all pension funds were run democratically and their members were well informed.

Activism Pays, But Could Pay Better for CalPERS

Gary L. Caton (Washington State University), Jeremy Goh (Singapore Management University) and Jeffery Donaldson (University of Tampa Florida) found that institutional activism to reform corporate governance pays. Evaluating 108 companies included in the Council of Institutional Investors’ annual hit list. “For those companies with little chance for improved performance (measured by Tobin’s Q-ratio), inclusion on the focus list is interpreted by the market as bad news initially but (it) tends to stop the slide in stock performance indicated in the pre-release period.” “For companies with performance slack, however, making the list not only stops the pre-release slide in equity values but also seems to mark an upturn in stock market performance, as indicated by the post-release average of abnormal (excess) return.”

Perhaps the most frequently cited study of such efforts is that of Stephen L. Nesbitt of Wilshire Associates. He found that prior to being targeted by CalPERS the stock returns for the 95 companies appearing on their targeted lists averaged 14% below the S&P index return. For the 5 year period after targeting, they averaged a return 2.6% above the S&P. (“Study finds activism does pay off,” Pensions & Investments, 8/20/01)

What continues to amaze me is that that CalPERS doesn’t take greater advantage of the “CalPERS effect” by increasing investments in targeted firms prior to public release of such lists. Would Warren Buffet, Michael Price, Robert A. J. Monks or any other rational investor who targets corporations for needed changes fail to take advantage of probable bounce in price? I don’t think so and neither should CalPERS. The current Board is cheating CalPERS members, beneficiaries and employers out of the benefits of their own activism. When will they wake up and smell the money?


In 1998 and 2000, the National Center for Employee Ownership conducted surveys of companies using broad-based stock option plans. In 1998 they found that 35% of respondents said they had repriced in the last three years. In 2000, only 8% had repriced since the new accounting rules requiring variable accounting for became effective (12/15/98). Attracting and retaining employees was the primary objective of options plans. About 3/4 also hoped to create an ownership culture. Half the companies reported regularly scheduled meetings for employees to discuss work issues in 2000, compared to 38% in 1998. To obtain the full 500 page report, “Current Practices in Stock Option Plan Design,” contact NCEO.

Geneva based Sustainability Asset Management has created a European Employee Ownership Index. Each company is assessed in terms of the availability and quality of its broadbased employee ownership program. ABN/AMRO Bank (Germany) will offer a specific financial product based on theSAM Employee Ownership Index.

NCEO, in conjunction with Watson Wyatt Worldwide and Katherine Klein at the University of Maryland, is conducting a major national survey. Participating companies will receive detailed feedback on how their plans compare with the others in the sample. If your company is interested in participating, contact Ed Carberry.

Employee ownership case studies sought for articles to be developed for trade and professional publications. ContactCorey Rosen. International case study participants sought for large-scale case study and survey on US and US multinational companies. If interested in participating, contract Michael Jones.

Guy Adams Wants Reforms

Guy Adams, the Lone Star Steakhouse & Saloon shareholder who unseated its chairman in July, told a Dow Jones reporter that the proxy process needs reform to make it easier for small shareholders to vote over the Internet and to make it easier for dissident groups to get reimbursed for legal efforts if they win. Adams reportedly spent about $50,000 on proxy materials and $350,000 in legal costs to defend his campaign. I’m a small shareholder and I’ve found it fairly simple to vote over the internet. Just how difficult is it to get legal expenses reimbursed? Can anyone enlighten me? (Dissident Who Won Wants Proxy Fights To Be Easier To Wage, Dow Jones Newswires, 9/10)

Compromised Audits

Research of 4,200 companies concluded that auditors are potentially compromised if clients pay them less for the annual audit then they do for consulting services…and almost half of the surveyed companies did. The authors found that such companies are more likely to carry substantially higher discretionary reserves for hyping future earnings. They’re also more likely to beat earnings benchmarks, suggesting a reduction in the quality of earnings. However, such companies may be paying a price, since the authors also conclude that investors are discounting the earnings and paying less for the stock of companies that pay the most in consulting fees to their auditors. (Does consulting compromise independent audits?Directorship, 9/01)

Back to the topVirtual shareholder meetings flop

That’s the headline of a c/net article by Margaret Kane. Flop refers to the fact that although Delaware recently passed a law allowing companies to hold shareholders’ meetings in virtual, instead of physical reality, none have done so. Charles Elson, director of the Center for Corporate Governance at the University of Delaware is quoted saying, “No one has (held a meeting solely online) and no one will. The surest way to encourage substantial shareholder ire and potentially run afoul of possible legal constraints would be to do that.”

Sorry, I’m just too cynical to believe no one ever will. Amy Domini, of the Domini Social Equity Fund points out in the article that management today can “just turn off the mike and say, ‘we don’t want to hear from you,’ but they can’t physically turn (shareholders) away. You go online and the sky’s (the) limit. You can have a phony person pretending to be a real person, zero accountability, and total control by management of the owners.”

Most will recognize they need to continue to play the charade that shareholders control the corporation. They’ll increasingly webcast the meetings and secretly hope that shareholders will eventually just go away.

I love the quote near the bottom of the article from Donald H. Meiers, a partner at Holland & Knight and a former adviser with the Securities and Exchange Commission. “If you take a typical look at shareholder votes on board-of-director-initiated proposals vs. shareholder-initiated proposals, board proposals usually get a 90 percent approval and shareholder proposals usually get a 5 percent approval. So you can’t say there’s ever been any meaningful input by shareholders from that standpoint.” I think there’s been “meaningful input” from shareholders on a growing number of issues but Meiers conclusions just adds to the need for a wake-up call, perhaps for something like the Shareowners’ Alternative Voting Information proposal.

Recognition of Need for Board Independence Grows

Written corporate governance guidelines are up this year (75% vs 69% last year). Two-thirds have a formal process for evaluating the CEO and 71% believe directors should receive individual performance evaluations regularly but only 19% conduct them, so there is still plenty of room for improvement. Independence is evolving, according to the latest Korn/Ferry Study. “Five years ago, 57 percent of respondents said the CEO chose committee chairs and members. This year, only 37 percent indicate the CEO continues to wield the same authority. Now, this responsibility is assumed by a corporate governance committee (33 percent) or the full board (27 percent).” (Korn/Ferry’s ’28th Annual Board of Directors Study’ Finds CEO, Board Evaluations on Upswing, Outsiders Deciding Committee Membership, Compensation Static, 9/5)

CalPERS Bows to Pressure

CalPERS has deleted individual fund performance statistics for private equity firms from its website. “Based on feedback we got from the market, we concluded that posting per fund performance might hurt our competitive position,” a CalPERS representative said. Publishing the data was felt to put at risk accessibility to further investment in some of the funds. According to a report in London’s Financial Times, “the figures, listing the returns to the end of last year for every private equity fund in which Calpers has invested in the last decade, lifted the lid on the performance of a secretive industry.” The data had been available for years in reports to the CalPERS Board, but apparently posting on the Internet got a lot more attention. (Calpers bows to pressure and axes fund data from website)

CorpGov.Net Bytes

King Committee Report

Another King Committee Report on Corporate Governance in South Africa was released and assigned some blame for the inertia of shareowners and, more particularly institutional shareowners, as being responsible for the non-enforcement of steps taken against directors and managers who breach their trust. The report recommends the office of the Registrar of Companies should establish a register of delinquent directors which should be posted on a website. Committee chair, Mervyn King says responsible corporate entities are driven by fairness, accountability and transparency.

The King Report also calls for the separation of the positions of chairman and chief executive. The primary responsibilities of the chairman are to ensure governance, conduct director inductions and director evaluation. The chief executive should be able to develop a vision, strategy, business plans, values of the organization and monitor operations.

The report recommends that payment of directors be transparent and disclosed in the company’s annual report. A substantial portion should be performance based. While share options can be granted to directors, prior approval by shareowners should be required.

New Institute

The European Corporate Governance Network – a loose grouping of people interested in governance issues – has incorporated. With plans for permanent funding and new articles of association, it has launched itself as the European Corporate Governance Institute. The 11 directors are split five academic and six general. ECGI’s mission is to improve corporate governance through independent scientific research and related activities taking into account the interests and concerns of the corporate, financial and public sectors.

Another Good Year for Dissident Shareholders

Shareholders seeking minority positions on boards have captured victories in 40% of 20 proxy contests, according to figures from proxy advisor Institutional Shareholder Services (ISS). The Wall Street Journal (WSJ) reports that record is on track with last year and compares with 26% in 1999. Entire boards are rarely outsted (partly because 57% have staggered boards). This year was no exception, with no such revolutions.

Shareholders who endorse the need for change often see attempts to replace the entire board as going too far. Yet, even minority changes can be dramatic. Last month investors of Lone Star Steakhouse & Saloon Inc. ousted Chairman, CEO and largest shareholder Jamie B. Coulter and replaced him with Guy W. Adams, an individual investor with no background in the restaurant business but who did have the backing of ISS. (Shareholders Shy From Board Ousters, Instead Opting for Dissident Members, WSJ, 8/30)

Back to the topWorker Owners: Global Investors

Monks, Robert A. G., The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, Capstone Publishing, 2001.

Like many, Robert Monks recognizes that corporations have become the most dominant institution of our time. While they appear to be the most effective tool for creating wealth ever created, they also exact a growing cost…primarily the corruption of government and externalization of risks and responsibility with growing social and environmental damage.

Monks weaves an effective tale but his perspective is that of an aristocratic shareholder activist, not a street demonstrator against the World Trade Organization. For example, he sees the biblical Parable of the Talents as a lesson in active investment. In the parable, those with more money (talents) invested and doubled their money, while the poorest amongst them buried it, stagnated and caught God’s wrath. I always viewed the Parable of the Talents as a Darwinian justification as to why the rich get richer and the poor deserve what they get.

Monks discusses early innovations of the East India Company, such as power sharing between investors and the leaders of government (often the same people) and the growing recognition of the need for long-term commitments, instead of voyage by voyage investments. Yes, this was an important innovation but the relationship of the Company with the government might also be seen as one of the earliest military-industrial complexes, with its corrupting influences.

When discussing Bill Gates’ rise through the “fruits of his own genius” and “some help from outside investors,” his praise appears unqualified. There is no mention of criminal activity or anticompetitive practices. Again, when Monks discusses the classic Berle Means dilemma of the separation of ownership and control, he sees it as the death of corporate social responsibility. Maybe so, but the social responsibility of Carnegie and Rockefeller certainly was very paternalistic…not based on balanced power and too often came at the end of their careers.

I have my differences with Monks’ perspective but our basic concerns are similar and our musings regarding solutions at least point in the same general direction. Fundamentally, Robert A. G. Monks is worried that corporations aren’t being socially responsible. He quotes a Harris poll conducted in late summer of 2000, which found that only 4% of Americans thought corporations should have only one purpose – to make the most profit for the stockholders, while 95% agreed that corporations owe something to their workers and communities (1% weren’t sure or didn’t answer).

Monks appears to believe, and I agree, that corporate control has been largely hijacked by CEOs for their own selfish interests. “Corporations are truly getting to the same place as Church and nation state before them, where the position of the leader rather than the institution becomes paramount. This is the condition that precedes loss of legitimacy and collapse.” At bottom, we’re both not so much concerned with the corporation as an institution but with the people who are impacted by it. Monks sees the rise in CEO pay to 475 times what their workers earn, as well as their political arrogance and their path of environmental degradation, as analogous to Marie Antoinette’s “Let them eat cake.”

David Korten presents an interesting analogy in his recent book, The Post-Corporate World. Just as King Midas destroyed and himself and those he loved when everything he touched turned to gold, the modern corporation has the potential to destroy everything in its path by turning nature and human relationships into money.

Change can come from outside the corporation in the form of laws or the marketplace or it can also come from inside the corporate structure itself, through the CEOs or shareholders. In previous books, Monks has rejected the need for new laws. “No new laws need be passed, no new regulations promulgated, no new agencies formed,” he says on page 184. However, by the next page he concludes that “amendments or possibly new regulations may prove necessary.”

My guess is that as a Republican, he’d love to see our problems solved by the marketplace, without government intervention. He founded Institutional Shareholders Services (ISS), a service which tells institutional investors how to vote in corporate elections to increase shareholder value. He founded LENS, a corporate governance turnaround fund, which has successfully outperformed the S&P 500 since its inception. Monks has certainly done more than most to use the market to move corporations toward more responsible governance to their shareholders.

As both a Democrat and public employee, my primary reservation against depending on government to solve our problems is that it is too often indistinguishable from the interests of corporate CEOs. Corporate contributions appear to determine who gets elected and corporate lobbyists largely determine what laws they write. That concern also appears to be shared by Monks.

We’re both pinning our hopes on pension funds. They’ve got the money, holding almost a third of US and a growing portion of global equity markets. With a base in millions of employees, their long-term perspective and universal ownership (owning a chunk of virtually all public companies) make them the vehicle of choice. Pension funds can set the standards for corporate governance around the world. The flow of money, much of it from pension funds, “creates the future of society”…”determining which regions will prosper, what technologies will be advanced, which jobs will be created, and what educational requirements will be set.” (p. 81)

“Why substitute a new institution – pension funds – for an existing one – large corporations? The answer is simple: pension funds have more of a stake in the good of society and the world.” “If pension funds can be liberated from the dead hand of tolerated trust abuse, this significant ownership element can function as the independent force that can call management to account.” (p. 181)

Pensions have more of a base in the average worker than other funds. They have more flexible rules governing their investments than other funds and they also have a longer timeline. They’re not dependent on getting a bump in the next quarter. Instead, they can look to the next ten or twenty years. With that long-term perspective, they should be more likely to favor sustainable environmental practices, community involvement, and employee participation.

We’ve identified the tool, but now the problem is putting it to use. Pension law, ERISA, requires funds to be administered solely in the interests of the participants and beneficiaries. That standard applies to all duties charged to a fiduciary, including the voting of proxies. However, as Monks points out, “there is the problem of proof. How can it be proven that the vote, or failure to vote, of a single shareholder caused a specific amount of damage.” Certainly corporate pension funds don’t want to develop an activist stance; voting against management at other corporations is likely to lead to retaliation.

One part of his solution would be a revision in the law, which would presume the following:

If a corporation has underperformed drastically for a substantial period of time, it can be presumed that the fiduciary shareholders have failed to take appropriate action to safeguard the interests of their beneficiaries.” (p. 130)

Monks provides support for his position that active investors help unleash wealth enhancing. A few of his citations include:

  • McKinsey Study showed investors are willing to pay up to 27% more for companies with good governance.
  • LENS, Hermes, and ABF Euro V.A. funds have all performed better than the standard indexes.

Investing based on corporate governance practices is likely to get a boost with the recent announcement by ISS that they will soon release their “corporate governance quotient” (CGQ). This will give clients one number, ranging from 0 to 100, which will reflect ISS’ judgement as to where a company’s corporate governance practices rank. Better performers will not only be more open to shareholder influence, as a reflection of their standing in the ratings, but will also be viewed favorably for additional investments, thus lowering their cost of capital.

Monks is nothing but prolific in citing good ideas.

  • He points to the need to reform Generally Accepted Accounting Principles (GAAP), since “the absence of a convention for valuing ‘intellectual property’ has doomed GAAP to obsolescence.” Although he doesn’t mention Margaret Blair’s work in this area which shows that such intangibles often make up about 75% of a firm’s value, he does cite Baruch Lev’s “Knowledge Capital Scoreboard,” which attempts to rank companies by their return on investments in research and development.
  • Paul Hawken and W. McDonough’s “Seven Steps to Doing Good Business,” which include eliminating waste, restoring accountability, reflect cost in prices, promote diversity, make conservation profitable, trade based on sustainability, minimal interference by businesses and unions in government.
  • Coalition for Environmentally Responsible Economies (CERES) Global Reporting Initiative (GRI) to design globally applicable guidelines for enterprise-level sustainability reports based on environmental, social and economic factors…the triple bottom line.
  • Innovest’s survey that found the top half of firms ranked by environmental sensitivity outperformed the bottom half by up to 21.8% over a two year period, depending on industry. Their Eco-enhanced S&P 500 has outperformed the actual index by 11% over the same period.
  • Brightline, Monks’ own brand of performance simulation that he hopes will be used by pension fund trustees a prudent basis for activism, directing their focused portfolio companies to comply with the law. His simulations have shown that while “the most aggressive, externalizing and Eco-unfriendly companies gain a market advantage” in the short-term, the focus companies win 17 out of 20 simulations over a 12 year time horizon.

His idea that chronic underperformance and inaction by pension fund trustees should give cause to lawsuits by beneficiaries has merit. I’m not sure this will lead to social justice but at least it will help dislodge CEO dictators who rob from their own companies.

What tears it for me is Monks’ belief that the President of the United States “can simply state that as a matter of policy the public good and the law of the land require effective and informed shareholder involvement in the governance of corporations.” (p. 184) What would that mean coming from the President, especially the current President?

While Monks has embraced the probable need for new laws, his proposed vehicle to explore what “may prove necessary” is Congressional and Parliamentary hearings regarding shareholder rights, conflicts of interests among fiduciaries, and the role of governmental agencies in enforcing trust laws. Certainly such hearings could result in great steps forward. However, they aren’t likely to address the needs of people marching in the streets against corporate power.

A more likely vehicle, although not nearly as well written (because it is a collection of essays, rather than the more coherent package of one brilliant mind) is the book Working Capital: The Power of Labor’s Pensions by Archon Fung, Tessa Hebb and Joel rogers (ILR Press, Ithaca, New York, 2001). Working Capital is written from a worker owner perspective. Like Monks’ book it stresses sustainable economic growth and triple bottom line returns. However, it also focuses on more equitable distribution of the wealth created by corporations, their employees, and their communities.

Worker owners (largely pension fund holders) want more secure better paying jobs, affordable housing, reduced environmental degradation and a more cooperative/participatory workplace. High CEO pay lowers worker morale. One of the authors, Marleen O’Connor, goes so far as predicting that corporate governance will trump labor laws in importance. Institutional shareholders, led by public pensions are creating new norms of conduct in the boardroom. Labor-shareholder proposals receive a statistically higher percentage of favorable votes. Unions have a great incentive to make sure firms are healthy because of the firm specific investments their members make, not just in their 401(k) plans but in their “firm specific human capital.”

Working Capital is replete with examples of innovations by labor in corporate governance from binding bylaw amendments to acting by written consent without waiting for formal shareholder meetings. Unions have become the leading proponents of shareholder resolutions and they know how to organize a winning campaign in the boardroom, in the press and on the streets. Unions can provide their members with the academic research needed to justify taking “social issues” into account in fiduciary voting. For example, Executive Paywatch (the AFL-CIO’s Internet site on CEO greed) cites a 1992 Berkeley study that found that pay inequality leads to less cooperative work environments, higher turnover, and lower product quality.

Labor’s shareholder activities provide good publicity for labor by demonstrating concern for long-term value. Those reading Working Capital will learn that pension plans with representatives from labor are more likely to transmit gains from bull markets to plan beneficiaries than single employee plans. They also have enhanced security. Maybe if enough of us learn about the power of our deferred wages we’ll recognize the need to get greater control over how our money is invested and how our shares are voted. Teresa Ghilarducci’s essay, “Small Benefits, Big Pension Funds and How Governance Reforms Can Close the Gap,” discusses legislation has been introduced to require pension boards to have worker representation but who knew about it? Ideas like that need to be pushed by voters all around the country.

Reforms and revolution will take the combined efforts of those working with corporate and institutional investor elites, as well as union members and street demonstrators. The New Global Investors and Working Capital point to the enormous potential of pension funds. Both provide ideas and examples that provide realistic models for pension fund management in the the twenty-first century.

Back to the topContact: [email protected]

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

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Review – The New Global Investors & Working Capital Contrasted

Monks, Robert A. G., The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, Capstone Publishing, 2001.

Like many, Robert Monks recognizes that corporations have become the most dominant institution of our time. While they appear to be the most effective tool for creating wealth ever created, they also exact a growing cost…primarily the corruption of government and externalization of risks and responsibility with growing social and environmental damage. Continue Reading →

Continue Reading ·

Archives from August 2001

Survey Finds “Enormous Potential” for Growth in Religious Investing

A national opinion survey sponsored by MMA Praxis Mutual Funds found that of the more than 1,000 investors surveyed nationwide by Opinion Research International in late June, 36% said they incorporated their faith with their finances at least part of the time. An additional 20% said they would do so if they knew how. Four out of five survey respondents said they didn’t know religious-oriented mutual funds existed. The majority of these investors said they would be inclined to invest in religious funds once they learned more about them.

Out of 15, 573 open-ended mutual funds in the US, 43 have a religious orientation, according to Lipper Inc. With 8 out of 10 respondents describing themselves as religious or spiritual, there appears to be room for considerable growth. The top five corporate ethical issues were the same for religious and non-religious investors:

  • product safety,
  • involvement in sweatshops,
  • environmental impact,
  • labor relations, and
  • equal employment opportunity

However, religious investors are somewhat more likely to avoid investments in traditional “sin” industries such as alcohol, gambling, and tobacco, as well as companies producing abortion-related products. (Putting Their Faith in Investment Choices, LATimes, 8/30)

ISS to Set Corporate Governance Quotient

Institutional Shareholder Services, a proxy advisor, is putting the final touches on a newly developed corporate governance rating system, targeted to begin early next year. The corporate governance quotient, CGQ, will give clients one number, ranging from 0 to 100, which will reflect ISS’ judgement as to know “how good a corporate governance performer a company is,” according to Patrick McGurn, director of corporate programs at ISS.

The raw score will reflect 50 measures, 40% of which are derived from board issues and practices. Beginning with the Russell 3000, ISS plans to include all 10,000 US public companies that ISS follows. ISS expects the ratings will be used as an investment screening device or in deciding which way to vote in close merger contests.

Phyllis Plitch of Dow Jones Newswires notes, “those governance laggards who want to start getting in shape may want to think about taking steps like establishing a corporate governance committee, setting up a structure for independent directors to meet outside the presence of company insiders and asking shareholders for their approval before lowering the strike price of underwater executive stock options – all point boosters.”

Beta tests, involving several hundred companies, showed a strong correlation between financial performance and the measures to be used in the CQG. Personally, I see it as the ideal base for a corporate governance mutual fund that would keep most of its investments in a CQG index, but would use a relatively small portion of its funds for active targeted investments aimed at converting laggards to the fold. (Proxy Adviser To Rate Companies On Investor Friendliness, 8/21, Dow Jones Newswires)

Financial Literacy Quiz

Each month Ralph Ward’s Boardroom INSIDER provides a wealth of information to help create better boards and directors. Ralph depends on subscribers to keep his business going so I can’t reproduce most of what he says here but often there are a few tidbits I just can’t help passing on. One such item is a quiz on financial literacy put together by Financial Executives International. The 24-question test will take you about 15 to 30 minutes. No, you won’t get a certificate suitable for framing but you will have some idea if you need to brush up. Ralph does a lot by the numbers. This month’s issue includes 5 boardroom yardsticks, 5 lures for tempting CFOs onto your audit committee, and 5 ways boards drive CEOs nuts. You’ll find information that’s quick and to the point.

Seedling Technologies Takes a Run at

Seedling Technologies Corporation announced that is has initiated legal proceedings in Nevada in order to present a new slate of Directors to the shareholders of Nettaxi has seen its stock decline 99.5% since its peak in April of 1999. According to Seedling, has failed to hold annual shareholder meetings for the past three years, and its current Board of Directors is anything but independent. (Seedling Initiates Shareholder Vote To Oust Incumbent Board Of Directors)

Mobias to Focus on Corporate Governance Issues

Over the last 5 years, Templeton Emerging Markets has returned a compound negative 33.89%, while the S&P 500 has returned 95.08% in the same period. According to the Wall Street Journal, Mark Mobius realizes poor returns are a result of poor corporate governance in emerging markets. Although weak regulations and legal systems make fighting questionable governance practices expensive and usually unrewarding, Mobius is cutting the number of firms in his portfolio so that he has less incentive to follow the Wall Street Rule. He’s also thrown out a house rule prohibiting investments of more than 10% in any given firm. Limiting themselves to small stakes didn’t guarantee they would be able to get rid of them” during a selloff.

Mobius wants to own companies “where we can get on the board and where we can vote” or where they can help those with sympathetic views act as their watchdogs. (Wall Street Journal, “Templeton Fund Manager Takes Aim At Corporate Governance Problems,” 8/9/01) We wish Mr. Mobius well in his strategy and believe it is a good one. The often quoted McKinsey study (search Three surveys on corporate governance, The McKinsey Quarterly, 2000 Number 4 Asia) found that while investors say they would pay 18% more for the shares of a well-governed UK or US company, they would be willing to pay a 27% premium for a well-governed company in Indonesia. There is more room for improvement in emerging market countries where the quality of financial disclosures and shareholder rights protections are poor. Identify companies in such markets that meet international standards and other investors will follow with additional investments.

Additional Coverage of Proxy Monitor’s Purchase of ISS

“They are the Dear Abby and Ann Landers of the arcane world of proxy advice, and now they’re teaming up to write one column,” wrote The Wall Street Journal. (Is Anyone Left to Give Advice After This Deal? 7/26) Proxy Monitor, which began in 1989, serves about 150 clients and was joined in the buy-out by Warburg Pincus and Hermes Pensions Management. Founded by Robert A.G. Monks in 1985, ISS boasts more than 700 institutional and corporate clients in North America, Europe, and Asia with assets in the trillions. ISS issues voting recommendations for more than 9,000 U.S. and 10,000 non-U.S. shareholder meetings each year.

It is rumored that Thomson Financial received $45 million for ISS. Others who may have been interested in purchasing ISS included the Investor Responsibility Research Center (IRRC) and Automatic Data Processing. Proxy Monitor and ISS will apparently maintain their respective voting guidelines, and each will continue to provide sometimes conflicting voting advice based on those guidelines. (see Proxy Monitor Buys ISS,, 8/13) James Heard, CEO of Proxy Monitor and former CEO of ISS said the deal will allow the companies to expand faster into Europe and Asia, where governance issues are increasingly taking center stage.

Back to the top

Monks Editorial in Barron’s

A guest editorial by Robert A.G. Monks, author of The New Global Investors, cites a study by Innovest that found the stock price of the more environmentally friendly top half of surveyed firms outperformed the bottom half by 21.8% in global forest products, 15.9% in U.S. chemicals, 17.2% in U.S. petroleum and 12.4% in U.S. electric utilities. He also cites a June 2000 survey by McKinsey & Co, which showed that institutional investors are willing to pay a premium of 18% to 27% for companies whose directors own stock and have no ties to management. (Profiting Responsibly: Companies can do well by being good, 8/6)

Monks calls on institutional investors to require the companies they invest in to:

  • Fully disclose all of their impacts on society.
  • Reveal how much they spend on involvement in the elective, administrative and regulatory public processes.
  • Obey the law, which itself should not have been improperly influenced by corporate power.

Guidance for Corporate Secretaries

The American Society of Corporate Secretaries has published a new report, Responsibilities of the Corporate Secretary’s Office. The report includes detailed data and analysis on the duties performed by corporate secretaries and their staffs, based on a 2001 member survey. (2001) ($95) Call 212.681.2000.

EDGAR Hyperlinks

Although EDGAR does not publish hyperlinks outside the system, “if a filer includes impermissible hyperlinks in a filing, the linked material will not become part of the official filing for purposes of determining whether the disclosure requirements are satisfied. The linked material will, however, be subject to the civil liability and antifraud provisions of the federal securities laws.” See Final Rule: Rulemaking for EDGAR System. As explained previously in SEC Interpretation: Use of Electronic Media, you’re basically liable for whatever you link to in a filing. “In the context of a document required to be filed or delivered under the federal securities laws, we believe that when an issuer embeds a hyperlink to a web site within the document, the issuer should always be deemed to be adopting the hyperlinked information.”

In fact, as explained by Eileen Smith Ewing in July’s The Corporate Counsellor, you can not only be liable for misinformation found on the third-party site you link to, but also for any misinformation found on other, more remote web sites hyperlinked to the third-party web site. Lesson: don’t link outside your own documents.

NYSSA Ends Forum

The New York Society of Security Analysts (NYSSA) dissolved its corporate governance forum known for challenging the governance practices of such high profile firms as and Dun & Bradstreet. Society president Jeffery Evans said the decision came “in view of the possibility that the forums could be misinterpreted by individuals as platforms for the expression of their own personal opinions.” Evans also cited limited participation in the forums by NYSSA members. The Financial Times, 7/19/01, The Corporate Library

Results from TIAA-CREF Institute’s Forum on Pay for Performance

“In order to maximize investment performance, some institutional investment managers, such as TIAA-CREF, continually monitor the performance and policies of the companies in which they invest. A key governance issue at many public companies is compensation policy: the system of incentives and rewards that corporations use to encourage employees to act in shareholders’ interests.”

A recent TIAA-CREF Institute forum on compensation policies at public corporations provides important background information on compensation issues, demonstrates the need for a judicious and informed approach in the design and implementation of compensation programs, and highlights the consensus on several issues that arose at the forum. See Has Pay for Performance Gone Awry? Views from a Corporate Governance Forum.

The forum’s diverse audience included corporate officers and directors, academic and other researchers, compensation consultants, corporate human resources, personnel, institutional investors, regulators, and other practitioners. It was recognized that investors are concerned with the “heads I win, tails you lose ” arrangement of stock options grants, which company representatives argued the need to motivate in a tight labor market. The conference went beyond the executive suite and included a discussion of other general issues such as measuring the cost of options, repricing, as well as the role of the board.

The forum highlighted the widely recognized disconnect between pay and performance but also pointed to the apparent undervaluing of options by employees, relative to their potential cost to shareholders. Surprising to me, the wide ranging group did reach some consensus.

No, they didn’t agree to seek a reversal of the Business Roundtable’s 1994 victory which successfully lobbied the Senate to express its “sense” that the cost of options didn’t need to be included on company income statements. The Financial Accounting Standards Board seems to have been left out of the equation for now.

However, they did agree on 10 points, including that “development of ‘best practices’ from accounting, board, investor and company perspectives is essential” and that it would be desirable to level the accounting playing field “so that alternate forms of performance-based compensation are not disadvantaged relative to standard at-the-money options.”

I feel another task force coming on. “There may be a role for a task force of qualified representatives to focus on the elements of compensation policy and the pay-setting process.” Who will be included?

TIAA-CREF Institute has made an important contribution to establishing a dialogue on this important issue as TIAA-CREF continues their campaign to ensure that all stock-based plans for which executives and directors are eligible, and any plan that could result in significant dilution, will be submitted to shareholders for approval. See TIAA-CREF Policy Statement on Corporate Governance.

[email protected]

Olivia S. Mitchell, professor of insurance and risk management, and a member of the Bush Commission to Strengthen Social Security, explains individual accounts and where we may be headed in Social Security: You Do the Math.

News From the Foundation for Enterprise Development

Corey Rosen, Executive Director of the National Center for Employee Ownership, reviews Thomas Petzinger’s The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace. The corporate organism is better able to react to its increasingly complex environment than the mechanical model. According to Petzinger, there “came a great awakening, a sense that people are gifted with the instinct to innovate, collaborate, and economize; that through countless local actions, whether in corporations, communities, or entrepreneurial confederations, they create global order without central control.” Participation and ownership are key.

study by Martin J. Conyon and Richard B. Freeman finds that firms and establishments that use shared compensation tended to outperform other firms and establishments in productivity and financial performance.

The Future of Success

Robert Reich’s The Future of Success reflects on the changes in the work lives of Americans. The former U.S. Secretary of Labor describes how standardization gave way to personalization because computerized technologies allow narrowly targeted marketing. In an economy focused on constant growth, work never ends and social attachments are commodified. Reich apparently concludes that you can either be successful or have a life…but not both. We’re stuck working 350 more hours a year than the average European.

Yet Reich recognizes there is no such thing as a free market. Markets are social constructs made up of rules about property and contract and liability. Rules about bankruptcy, rules about reorganization, rules having to do with how the system is going to be run. Markets are human creations. It is our obligation to make it operate within just and moral boundaries.

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Contact: [email protected]

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

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July 2001: Archives

Acutant Shareholder Sought

If you are a Actuant (ATU) shareholder who voted for the shareholder proposal recommending a shareholder vote on poison pills (approved by shareholders at the 2001 annual meeting), the proponent, John Chevedden asks that you contact him immediately at [email protected]. He would like to discuss options for encouraging the company to adopt the proposal prior to the Aug. 3, 2001 deadline for resubmittal for the Jan. 2002 annual meeting.

ISS Selling to Proxy Monitor

Financial information group Thomson Corp. announced it is selling its much-respected proxy vote research arm Institutional Shareholder Services to smaller rival Proxy Monitor. Both firms provide proxy research, vote recommendations, and voting agent services to institutional shareholders who use them while deciding on corporate strategies including mergers and restructuring at companies in which they invest.

Privately owned Proxy Monitor is being backed by private equity firm Warburg Pincus and Hermes Pensions Management, a UK-based firm owned by the pension scheme of the British Telecommunications.

ISS did not say give any value on the deal but industry sources said it was around $45 million. The deal will, however, leave money managers with just one major provider of influential advice on how to vote proxies.

The only remaining proxy analyst is Investor Responsibility Research Center, a provider of impartial analyses on shareholder issues that provides analysis but not recommendations.

Tobacco Transition

IRRC reports that more government-owned tobacco companies are falling into private hands, presenting new opportunities and ethical dilemmas for investors. While the privatization trend supports economic reforms advocated by free-trade groups like the World Trade Organization, it also invites more aggressive marketing practices that spread the health risks of smoking. To view the entire press release clickhere.

Labor Standards

IRRC also reports that an analysis of 2001 proxy votes showed an increase in shareholder concern over labor and human rights standards. Of the 28 proposals garnering 10% or more of the shareholder vote, 16 related to fair employment or the adoption of International Labor Organization standards. “These votes reflect that a growing number of shareholders are sending management the message that they don’t want their companies profiting at the expense of workers being discriminated or ruthlessly exploited,” said Meg Voorhes, director of IRRC’s Social Issues Service.

The main benefactors of the ongoing industry consolidation are private sector tobacco companies now dominated by three global players — Philip Morris, British American Tobacco and Japan Tobacco. These companies account for more than 60 percent of tobacco product sales by 99 publicly traded tobacco companies worldwide, according to the just-released tenth edition of IRRC’s Tobacco Industry directory. Besides Japan Tobacco, other large regional players that were until recent years wholly owned government enterprises include Altadis, Korea Tobacco & Ginseng and Austria Tabak. Gallaher Group of the United Kingdom is acquiring the Austrian government’s remaining stake in Austria Tabak, making it the latest government-owned tobacco company to be fully privatized.

Labor Shines Light on Bunge Limited IPO

The AFL-CIO Office of Investment criticized the proposed initial public offering of agribusiness giant Bunge Limited (NYSE:BG). Closely held by the descendants of company founder Johann Peter Gottlieb Bunge, Bunge Limited hopes to raise an estimated $300 million from outside investors next week. This small group of insiders will continue to control 79 percent of the outstanding shares following the IPO.

“We feel the proposed offering price may be too high for a company with significant risk factors such as Bunge. Institutional investors who are the pension fund fiduciaries of America’s working families need to carefully review the terms of the Bunge IPO,” said Richard Trumka, Secretary-Treasurer of the AFL-CIO.

According to the report, Bunge is a highly leveraged company with poor profitability and weak cash flow. The proposed offering would create liquidity for Bunge’s family-owners, but will do little to address the company’s high leverage or marginal profitability. Bunge shareholders will also be exposed to substantial risks associated with emerging market investments, including currency and political risk from its South American operations.

Bunge’s shares will be registered in Bermuda and subject to Bermuda securities laws, which afford weaker rights and protections to shareholders than they generally enjoy under U.S. law. Bunge’s operations are also subject to additional risks that may not be adequately discussed in its Registration Statement, including its exposure to genetically modified organisms and the growing labor problems related to the ten-week strike at its Danville, Illinois plant that is believed to be the largest dry corn milling facility in the world.

The AFL-CIO Office of Investment provides research and assistance in support of shareholder advocacy and corporate governance initiatives by collectively-bargained benefit funds. A copy of the report is available by calling the AFL-CIO Office of Investment at 202-637-3900 or at

Global Compact

The Global Compact, a U.N. program intended to help businesses become better world citizens, celebrated its first anniversary this week with more than 300 corporate partners, up from 44 at its launch. However, critics say that it has little to show for its efforts. Participating firms are to post their techniques for dealing with the many labor, human rights and environmental challenges spawned by globalization on the program’s Web site but even the United Nations itself was not yet applying the guidelines in its own procurement policies.

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United Airlines Active Ownership Committee

The International Association of Machinists (IAM) held the first meeting of its new United Airlines Active Ownership Committee in New York. Input from rank and file employee owners will be the basis for the committee to formulate proposals that will allow employees to be more involved with the governance of their company.

“The employees of United Airlines control 55% of the company,” said District 141 President Randy Canale. “This marks the beginning of a campaign to address our members’ requests to be more active shareholders. We will educate our members on how to use the power they posses as a result of the ESOP.”

The committee is discussing various means for exercising ownership rights, including possible proposals to be submitted in connection with the next annual shareholders meeting. “Our members wanted to be more involved as owners of United Airlines,” said General Vice President Robert Roach, Jr. “This committee will allow them to have their voices heard. It is time Jim Goodwin and his team realized they work for us.” (prnewswire, 7/30)

Directors’ Summit

The Directors’ Summit is one of the first conferences accredited by Institutional Shareholder Services as a Preferred Boardroom Education Program. As a result of this designation, boards composed of directors who have participated in the Directors’ Summit will receive an upward adjustment in their corporate governance quotient (CGQ) under ISS’ new rating system to be introduced later this year.

Keynote speakers include:

  • Abby Joseph Cohen, chief market strategist, Goldman Sachs, speaking on the occasion of the 50th anniversary of the State of Wisconsin Investment Board
  • Patricia Dunn, global chief executive officer, Barclays Global Investors, on the importance of corporate governance to stakeholders
  • Lynn E. Turner, chief accountant, Securities and Exchange Commission, on government regulatory issues
  • Constance Horner, director, Pfizer, on director independence and board culture

More than 18 sessions, breakouts and keynote speeches on best practices, current issues and regulatory trends in corporate governance.

For additional information:
Contact: Ted Beck, Associate Dean, at 1-608-441-7300
E-mail: [email protected]
Contact: Patricia Seaman, Marketing Director, at 1-608-441-7315
E-mail: [email protected]

Michaels Stores

Its great to see more firms proclaiming their corporate governance reforms. A recent press release by Michaels Stores, (Nasdaq: MIKE) announced:

  • Expansion of its Board of Directors to seven members. Five of the seven Michaels directors will be independent of the family of Charles J. Wyly, Jr. and Sam Wyly, currently Chairman and Vice Chairman of the Board of Michaels Stores. (Its not clear if they are independent of the firm though.) All seven directors will be independent of the CEO, Michael Rouleau, who is not on the Board.
  • Creating a new Corporate Governance and Nominating Committee, whose duties include developing corporate governance guidelines for Michaels Stores.
  • Disbanding the Board’s Executive Committee, which will result in key corporate issues being reviewed by the full Board.
  • Eliminating staggered election of Board members in favor of a Board that will stand for re-election all at once beginning in 2002, subject to shareholder approval.

This is in addition to existing policies such as:

  • Executive compensation tied to profit targets and share price appreciation.
  • No repricing of stock options without shareholder approval.
  • No poison pill.

Swiss Developments

The SWX Swiss Exchange and Economie Suisse, a private economic development group, are developing codes of corporate governance that are expected to be issued in 2002. The SWX code will deal with disclosure and transparency in financial reporting, while Economie Suisse is preparing a code to address such issues as shareholder rights. The drafts will go out for comment sometime this autumn.

New King Report Calls for Additional Reforms

South Africa’s 2001 King Report on Corporate Governance call for the use of state resources to deal with company directors and officers who break the law. Financial observers have pointed out that the absence of a proper system able to monitor compliance with corporate rules and regulations has resulted in local companies paying only lip service only to the original 1994 report.

The second report recommends that the Registrar of Companies be provided with sufficient resources to monitor compliance with the Companies Act. “The resources of the South African Police Service and those of the judicial system also need to be enhanced to ensure that complaints are adequately investigated.”

The of a contingency fee system would allow minority shareholders faster, easier access to the law “in the context of delinquency in the management of a company.” The Report also calls for amending the Companies Act to compel private companies to file their annual statements with the Registrar of Companies. Such statements would then be open to public inspection.

The registrar should also be encouraged to establish a register of delinquent directors and the votes of the top 25 shareholders, or of those holding at least 1% of the equity securities in a company, should be made public on conclusion of the shareowners meeting. (Africa News Service)

ICGN Draws Crowd

The International Corporate Governance Network (ICGN), representing institutions with some $10 trillion (US) in assets, concluded its seventh annual meeting in Tokyo with a call for regulators to treat global investors equally and for companies to be responsive to the concerns of all shareholders. A record 450 members attended the ICGN meeting, jointly sponsored by the Tokyo Stock Exchange and the Japan Corporate Governance Forum.

“The large attendance for ICGN’s first meeting in Asia since our founding in 1995 underscores the intensified interest in good governance as a way to alleviate some of the economic malaise in the region,” said Peter Clapman, director of corporate governance activities for TIAA-CREF and chairman of the ICGN for 2001-2002.

ICGN members stressed their support for: uniform global accounting standards; equitable shareholder voting procedures for all investors, whatever their country of origin; and sharper focus on corporate governance matters by company managements; the need to address and resolve cross-border proxy voting problems.

The organization accorded three members special recognition for exceptional achievements throughout their careers to promote good corporate governance and fair treatment of all shareholders: Sir Adrian Cadbury, former chairman of the Cadbury Group; Ira Millstein, managing partner of the law firm of Weil, Gotshal and Manges, LLP; and Professor Hasung Jang, finance professor at Korea University.

Four new individuals were elected to the ICGN Board: Leo Goldschmidt, director of the Brussels-based European Association of Securities Dealers (EASD); Sanda Guerra, managing director of the Brazilian Institute of Corporate Governance; Peter de Koning, an attorney and a managing director of the Dutch Railways Pension Fund; and Sophie L’Helias, CEO of Franklin Global Services, an advisory firm which assists corporations in governance matters.

The next annual meeting of the ICGN will be held in Milan, Italy in July of 2002.

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Independence in China Not Enough

The announcement by the China Securities Regulatory Commission (CSRC) in May requiring a system of independent directors for all domestically listed firms has been well received. However, since most listed companies in China came from restructured State-owned enterprises (SOEs), the State and its representatives will still control a majority of shares in listed companies. Ni Xinxiang, vice-president of the Asia Business Consulting, points out that smaller shareholders need minority rights “such rights as vetoing and appealing.” In addition, the impartiality of independent directors may mean little because they can easily be fired. Under the proposed model, a gathering of 7% of shareholders can fire an independent director.

According to the rules set by the CSRC, all listed firms must have at least one-third of its directors as independents by July next year. Based on the number of listed companies, that means at least 3,000 independent directors. Currently, most are drawn from universities and research institutes. However, some scholars already act as independent directors for as many as 10 companies at the same time. Ni also calls for regulations to require independent directors to report on their performance every year at the general shareholders’ meeting. (see Asiaport Daily News, 7/4)

Actuant Corporation (ATU)

Shareholder activist John Chevedden has issued a call for help. His proposal for shareholder vote on poison pills passed in Jan. 2001 and he would like to resubmit it before the 8/3 deadline for the January 2002 meeting. Unfortunately, he needs a co-sponsor since the value of his stock has dropped below $2000 in value. ATU is a Milwaukee-based diversified global company that provides electronic systems and components, tools, equipment and supply items to a variety of end users and OEMs in the computer, semiconductor, telecommunication, datacom and other industries. Sales are $500 million annually.

If you own more that $2,000 worth of Actuant stock, and would consider co-sponsoring Mr. Chevedden’s proposal, please e-mail him immediately at [email protected].

Stakeholders v Shareholders

David Finegold, Edward Lawler III, and Jay Conger ask how stakeholders can have a say in corporate governance, given the dominant Anglo-American model. Failing to recognize the importance of firm-specific human capital can result in “alienating their most valuable and mobile assets,” their high skilled employees. Yet, the German model of codetermination and the Japanese model of lifetime employment aren’t real options when countries risk alienating world capital markets if their governance standards are less friendly to shareholders.

How to avoid a race to the bottom and poor relations with knowledge employees? The authors embrace “enlightened self-interest,” demonstrated through

  • High levels of employee involvement in decisionmaking.
  • Flexible work schedules and other programs which help balance work and personal life.
  • Heavy investment in employee training.
  • Generous benefits and perks.

Yet, they doubt such programs will lead boards to value employees as highly as stockholders. Boards can too easily breach their trust with workers through corporate takeovers or due to recession. In addition, such programs often fail to address the needs of 80% of the workforce that have seen their incomes stagnate or decline.

The answer is to turn employee stakeholders into employee shareholders. Eventually employee ownership will translate into employee voice in the boardroom. They cite Margaret Blair’s arguments that employee ownership:

  • Fits well within existing US governance systems
  • Is embraced by both right, left and center political factions.
  • Brings firms closer to a widely successful entrepreneurial model.
  • Provides a powerful retention tool in tight labor markers.
  • Provides a basis for employee commitment in the absence of job security.
  • Fosters greater alignment between employee and shareholder interests.

coverTo learn more, see “To Whom Are Boards Accountable?” in the July/August edition of The Corporate Board or order a copy of Corporate Boards: New Strategies for Adding Value at the Top.

Japan’s Stock-Buying Companies

The Asian Wall Street Journal — July 4, 2001, carried a commentary by Nicholas Benes, president of JTP Corporation. He discusses Japan’s plans to establish a “stock-buying fund,” supported by government guarantees and tax advantages. “The objective is to soak up the supply overhang that will occur when banks sell stocks worth Y14 trillion through 2004 to comply with new rules that limit their stockholdings to total bank capital.”

Apparently, the proposed stock-buying corporation has no duty to exercise corporate governance rights (e.g., voting by proxy) for stocks that it holds. “It’s likely that corporate governance rights either will not be exercised — reducing the efficiency of the capital markets — or will be retained by the banks (who do not exercise them much either).”

Benes calls for various conditions for any such funds including: “The fund managers must exercise corporate governance rights (e.g., voting by proxy) solely in the interests of the fund as defined by its investment criteria and standards, and must document their actions.”

Agreed, this would be an important condition, not only for these proposed funds but for all funds around the world where fiduciaries hold other peoples money in trust. Yet, nowhere is it currently required, except in the US under ERISA for pension funds and here the Department of Labor has never taken an enforcement action against any violation.

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Dutch Revolution

The Amsterdam Court of Commerce ruled in favor of shareholders in construction company Hollandsche Beton Group (N.HBG), that an investigation was warranted into actions taken by management over the past eighteen months. HBG had rejected an attractive-looking bid for its dredging operations from rival Koninklijke Boskalis Westminster, then hastily announced a merger with Ballast-Nedam, without an explanation to shareholders.

Peter Paul de Vries, head of the Dutch shareholder rights advocacy group VEB, hailed the decision. “What it says in essence is that management must take shareholders’ interest more into account when making decisions.” (Dow Jones Newswires, 7/5)

European Summer University

Better hurry; deadline: July 15th, 2001. “Corporate Governance of European Companies, Between National Systems and
,” September 8-15, 2001, Montpellier, France.

– Trends of the World Economy and Theories of “Corporate Governance”
– Facts and Experiences in Several European Countries (I & II)
– Convergence ? World Model or European Model ?
– Emerging Issues

The program includes:
– a special session on corporate governance and sustainable development
– a Doctoral Seminar

Travel and accommodation scholarships are available. Sessions will be bilingual (French or English).

Focus on NACD

The National Association of Corporate Directors encourages professional excellence in corporate leadership and encourages self-improvement in the boardroom. Members get discounts to continuing education programs, NACD’s annual corporate governance conference, publications, director’s registry, and fast and reliable corporate governance information fromExpresSource. If you’re a director, you’re bound to benefit from membership and as shareholders we all benefit our firms have enlightened directors.

Everyone can view the cover article in this month’s issue ofDirector’s Monthly, but only members can read the additional insights on regulation FD, antitrust in M&A transactions, intellectual property management, book reviews and more. For example, this month’s Capitol Hill column discusses the AFL-CIO’s Paywatch site, the SEC’s proposed rule on executive compensation and President Bush’s call for Social Security Reform.

36% of Households Have a Stake

Wall Street Journal/NBC found that 36% of respondents (65% of whom were employed) said they have stock options or a financial stake at their place of employment. That percentage is consistent with NCEO‘s estimates that 25 to 30 million individual workers out of a civilian work force of 108 million people currently own stock in their companies. (May/June 2001 newsletter)

Northwest Poison

Northwest Airlines announced that a proposal to repeal their poison pill won 35% shareholder approval. However, given that executives and directors own 40% of the outstanding stock, the introducing shareholder, John Chevedden, finds the results impressive. Independent shareholders apparently gave a majority approval for the shareholder right to vote on maintaining any poison pill at Northwest. According to Chevedden the annual meeting was postponed 2 months due to its labor problems.

News from Electronic Business

Electronic Business says the best defense against irritating corporate gadflies is tender loving care. Michael Claes, managing director of public relations firm Burson-Martseller, recommends the following: CEOs follow these principles when dealing with active shareholders:

  1. Treat all shareholders with respect as owners, regardless of how many shares they own.
  2. Act in the interest of all shareholders.
  3. Seize every opportunity to build and strengthen relationships with shareholders.
  4. Every announcement should reinforce key messages about a company’s strategy or plan.
  5. CEOs should never be rude, brusque or unresponsive to shareholders. As owners of the company, shareholders should be treated with respect. (A pox upon you, 7/1/01)

Investment professionals believe companies are using the SEC’s new Regulation FD as an excuse to tighten their news grip. In polling 6,000 of its analyst and portfolio manager members last winter, the Association for Investment Management and Research, found that 57% believed public companies were releasing less information. Over 80% agreed with the following statement: “Now that Regulation FD has gone into effect, companies that want to minimize communication can do so more effectively.” Stonewallers now have another defense. The SEC has not yet brought any charges, but says it is investigating roughly half a dozen potential cases. (Tight lips sink stock tips, Electronic Business, 7/1/01)

ESOPs Improve Performance

In what NCEO calls the “largest and most significant study to date,” Douglas Kruse and Joseph Blasi of Rutgers have found the employee stock ownership plans apppear to increase sales, employment and sales per employee by about 2.3% to 2.4% per year. ESOP firms are also more likely to have other retirement-oriented benefit plans than comparable non-ESOP companies.

In Review

I just received a review copy of Working Capital: The Power of Labor’s Pensions. It covers the groundwork of how pension funds are failing workers and what reforms are necessary to build sustainable wealth. I’ll have more to say on this book later, but it appears like a good wake up call.

Too Many Carrots, Too Few Sticks

“There’s no risk anymore in being a CEO,” says compensation expert Graef “Bud” Crystal. Priceline gave outgoing CEO Daniel Schulman a separation package worth $5.8 million. Webvan’s ex-CEO George Shaheen, 58, will collect $375,000 a year for the rest of his life–equal to $7.5 million over the next 20 years. That’s in addition to a $6.7 million loan that isn’t expected to be repaid.

My own tiny investment in Webvan has gone from a value of $740 to $16 and I didn’t buy anywhere near the peak. Nell Minow, editor of The Corporate Library, says board members should know that an executive candidate who asks for a cushy severance package is “telling you he’s the wrong person for the job.” Severance proposals were the subject of eight proxy votes this year and the number is expected to go up, especially if the economy stays flat or goes down. (Some departing tech CEOs land big money,

EBF Debates: Is Corporate Governance Delivering Value?

The European Business Forum, a joint initiative of PricewaterhouseCoopers & Community of European Management Schools, invited distinguished panel to address corporate governance issues. Valter Lazzari, outlines the basic, theoretical principles from which corporate governance has emerged and explaiw why divergent patterns in Europe are best understood by reference to national law.

Robert Monks exposes the gulf between appearance and actual practice in the US and UK, as well as offering reflections on the appropriate model for continental Europe. Next, Sir Adrian Cadbury argues that what we are witnessing a convergence of governance standards and processes, if not necessarily of structures. Claudio Demattè, former chairman of Italy’s Railways and main television network, and Lutgart van den Berghe, founding partner of the European Corporate Governance Forum, put the spotlight on organisations where governance standards should be improved.

EBF then focus on governance issues in three European countries: the merits and demerits of the German supervisory board system (Wolfgang Salzberger and Manuel René Theisen); the case of voting rights in Italy (Francesco Chiappetta and Stefano Micossi); and the impact and significance of recent corporate governance initiatives in Spain (Miguel Trias). Finally Graham Gilmour of PricewaterhouseCoopers sums up the debate and offers some useful guidelines.

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Archives: June 2001

Proxy Monitor Recommends Lone Star Shareholders Dissidents

In a contested election, Guy Adams, is seeking to unseat Jamie Coulter, the company’s chairman and CEO. Mr. Adam’s objective is to enhance the independent representation on this board and to bring change and accountability to a board he believes has supported unacceptable corporate governance practices and a management team he believes has failed to return sustainable value to shareholders.

Two month’s after Adams filed his solicitation materials, Lone Star sued seeking to prevent him from soliciting or accepting proxy votes. The company alleged that Adams filed misleading proxy materials but a federal judge ruled he could proceed after correcting two errors in his filing. The company also implicated a highly-regarded institutional investor, claiming that Adams was a “stalking-horse” for the investment fund and “not a bona fide Lone Star investor.” In doing so Lone Star alienated at least a few investor groups who found the move to be arrogant and offensive.

Proxy Monitor ultimately asked and answered two questions:

1) Has the board done its job?
2) Could Mr. Adam’s membership on the board enhance shareholders’ long-term interests?

To the first question, we answered no. Not in terms of its compensation decisions, not in terms of its governance practices, and certainly not in terms of fully appreciating its fiduciary role nor respecting the shareholder franchise (including those “activist pension funds” with “unknown political agendas”). Indeed, we believe that management’s over-the-top response to Mr. Adam’s exercise of his ownership rights, lends itself to support the dissident’s concerns about the board’s commitment to an impartial and high-quality decision-making process, not to mention its good judgment.

To the second question, we answered yes. Mr. Adams is not seeking to gain control of the board or to push an agenda that management describes as different from other shareholders. Quite simply, Mr. Adams is seeking to ameliorate shareholders’ rights on a rather basic level – by respecting proper governance practices and by restoring accountability. Furthermore, we are not swayed by management’s assertion that Mr. Adam’s membership would “disrupt” or “destroy the progress that Lone Star has achieved.”

Accordingly, we recommend that shareholders DISCARD the WHITE proxy card, and vote FOR Mr. Adams using the GOLD proxy card.”

Institutional Shareholder Services also reportedly supports the dissident slate.

Rationalization of SRI Codes Predicted

Corporate social responsibility have proliferated so much that leaders in the field say they’re worried about company confusion and fatigue, as well as inconsistency. At the recent conference of Social Accountability International, Michael Goldstein, chairman of Toys R Us, and Mil Niepold, director of programs at Verite, said the proliferation of codes has left many suppliers “reeling.” The publication Ethical Performancepredicts that “ultimately institutional investors will force a rationalization because they require standardized measurement tools in order to assess companies.” From the July issue of BizEthics Buzz, a free service of Business Ethics magazine. Just e-mail your postal address to [email protected] and they’ll send you a sample issue and include a special introductory offer for new subscribers.

SRI Codes Meeting Benchmark

Resolutions asking companies to improve worker standards — or adopt those set forth by the International Labor Organization — were among the top vote-getters of 138 social policy shareholder proposals that came to votes during annual meetings. Of the 27 proposals garnering support from 10 percent or more of shareholders, 15 addressed global labor standards or fair employment in the United States and Northern Ireland. The highest votes were at two companies with operations in Burma — Unocal Corp. (23% and McDermott International (16%). The International Labor Organization and other rights monitoring groups have raised alarm about the extensive use of forced labor in Burma, also known as Myanmar, which is run by a military junta.

“These votes reflect that a growing number of shareholders are sending management the message that they don’t want their companies profiting at the expense of workers being discriminated against or ruthlessly exploited,” said Meg Voorhes, Director of IRRC‘s Social Issues Service. Voorhes noted that some institutions, like CalPERS, are placing labor and human rights screens on their investments in emerging markets.

Among the other social issues proposals getting support of 10% or more were ones linking executive pay to social criteria at AT&T, Boeing, FleetBoston Financial and Unocal, and a resolution asking Chevron to report on its controversial plans to drill in Alaska’s Arctic National Wildlife Refuge (ANWR). Another ANWR resolution — filed with ExxonMobil — fell just shy of the 10% mark.

The 10% figure is an important because under the SEC a proposal that earns this level of support may be resubmitted, regardless of how many times it has appeared on the company’s proxy statement. Overall, the number of social issues shareholder proposals receiving 10% or more support this year has nearly doubled compared to recent proxy seasons, according to IRRC, which has tracked such shareholder activity since 1972.

Transparency Begins at Home

Pax World Funds, home of the original socially responsible mutual fund to be made available to investors, announced another milestone: The fund family is now the first in the socially responsible investment (SRI) world to provide complete details on the Web about the voting at its own annual meetings. The new step by Pax World also is a rarity in the broader mutual fund world, which has been slow to divulge the specifics of the voting behind closed doors at investment companies.

Information is now available about the most recent annual meeting of shareholders held on June 14, 2001. Voting tallies are accessible on such matters as the selection of fund Directors and public accountants, as well as other key administrative functions. In May 2000, Pax World was among the first mutual fund families to announce that it would publish its proxy voting in individual portfolio stocks. This information, provided in conjunction with Proxy Monitor, has become one of the most popular areas of the Pax World Funds Web site.

ASCS Survey

The American Society of Corporate Secretaries, with membership at 3/31 of 4,256, reports that

  • 51% of surveyed companies provided electronic voting as an option for their annual meeting, compared with 39% last year
  • 41 companies are making their annual meetings available via Internet with 24 “live,” compared to 4 companies using “live” broadcasts last year
  • 89% reported all directors attending their annual meeting (88% schedule a board meeting for the same day

Directors Survey

The Segal Company has conducted “The Annual Study of Small-to-Midsize and Large Public Company Boards: 2001” which examines the compensation of directors of companies by size group and reports on director’s fees, non-cash compensation, stock-option grants and stock held.

  • Large companies pay higher retainer fees than do small-to-midsize companies ($36,000 median annual retainer vs. $10,000).
  • Small-to-midsize companies grant more stock options than do large companies (Initial stock awards — 8,250 vs. 3,000). The median ongoing award at small-to-midsize companies is also greater (5,000 compared to 3,500).
  • Although most board members of small-to-midsize companies (82%) and large companies (91%) own company stock, directors of small-to-midsize companies have a greater number of shares in the companies they serve than their large company counterparts (50,000 vs. 18,787).
  • Some large companies offer benefits such as deferred compensation plans, life insurance, or retirement plans to directors; but very few small-to-midsize companies follow this practice.
  • Large companies address more issues at the board-committee level than do small-to-midsize companies. Only 51% of small-to-midsize companies have 3 to 6 board committees compared with 85% of large companies.
  • More large companies have committees dealing with corporate governance issues than do small-to-midsize companies. 37% of large committees have a governance committee compared with 2% of small-to-midsize companies.

The sample in the 2001 study includes 189 large public companies with median annual sales of $17 billion and median net earnings of $932 million as of December 31, 1999. It also includes 180 small-to-midsize companies with median annual sales of $154 million and median earnings of $13 million as of December 31, 1999. This is the fourth study of this type that The Segal Company has conducted. The first two were conducted with Grant Thornton, LLP. Contact Mary Feldmanfor copies of the complete study report.

Challenges to Executive Pay

Randall S. Thomas’ and Kenneth Martin’s paper, “Litigating Challenges to Executive Pay: An Exercise in Futility?“, finds that plaintiffs win a greater percentage of the time in compensation cases against closely held companies than against publicly held companies. Plaintiffs average about 30% success in maintaining duty of care claims. With waste claims, plaintiffs succeed about 40% of the time, while for duty of loyalty claims, they win about 35% of the time.

Comparison of Takeover Law

‘Share Ownership, Takeover Law and the Contestability of Corporate Control’ in Company Law Reform in OECD Countries. A Comparative Outlook of Current Trends is th title of Guido Alessandro Ferrarini’s paper on corporate control contestability as a policy objective for company law reform. He considers the impact of large shareholdings disclosure on the market for corporate control and posits that legal barriers to takeovers have a limited impact on the contestability of corporate control; their practical effect might simply be to re-orient defensive actions towards different techniques.

Ferrarini finds, for example, that legislation directed at mitigating the impact of mandatory bids on transfers of corporate control will lower the number of efficient transfers of control but a higher number of inefficient transfers will be allowed if the bid’s price is lower than that paid for the controlling block.

Self-Dealing: A Comparative Analysis

Luca Enriques, of the Universita’ di Bologna, looked at the legal tools employed in the United States, the United Kingdom, Italy, France, and Germany in order to regulate self-dealing. His paper, “The Law on Company Directors’ Self-Dealing: A Comparative Analysis,” published in the International & Comparative Corporate Law Journal, Vol. 2, 2000, describes the trade-off that any legal system faces in regulating self-dealing (deterrence versus the risk of overkill). It then provides a description of the individual legal tools adopted to regulate self-dealing transactions (i.e., prohibition, disclosure, approval or ratification by the board, approval or ratification by shareholders).

His analysis shows that the regulation of self-dealing is more sophisticated and has more bite where equity markets have a longer traditions and dispersed ownership is more common, i.e., in Britain and the United States. The paper concludes with possible explanations for the minor significance of self-dealing regulations in continental Europe, and advocates a reform of the Italian law on self-dealing.

Shareholder Activism in Malaysia

A minority shareholder watchdog group has been set up in Malaysia to encourage active shareholder participation in listed companies. According to Securities Commission chairman Ali Abdul Kadir, “the watchdog group will be licensed as an investment advisor in order to ensure its independence and is expected to be fully operational by this year.” Ali also said corporate success in raising funds hinges directly on their ability to earn good corporate governance reputations. Institutional investors will pay a premium for shares of companies with good corporate governance but will also butally punish companies perceived to practice poor corporate governance. (AFX News, 6/26)

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South Africa Leads

South Africa is ahead of other emerging markets in terms of corporate governance, according to Stephen Dover, chief investment officer for Franklin Templeton Investments’ global activities. However, he believes institutional investors should be more proactive to ensure independence of directors, protection of minority interests and linking executive remuneration to performance.

The World Bank’s task force promoting corporate governance indicates that South Africa, Brazil, South Korea, Russia and India would benefit most by corporate governance reforms, but, according to Dover, South Africa is “far ahead” of the other four. (Country Faring Well in Terms of Corporate Governance)

Monks and Sykes Offer Advice on Myners

The central proposal of the Myners review of UK institutional investment, closely modeled on the approach taken on corporate governance by the Cadbury (and subsequent) Codes, is a short set of clear principles of investment decision-making. These would apply to pension funds and, in due course, other institutional investors. As with the Cadbury code, they would not be mandatory.  But where a pension fund chose not to comply with them, it would have to explain to its members why not.

One of the more provocative recommendations is incorporation of the US ERISA principle on shareholder activism into UK law quoted on p. 92 of the report, making intervention in companies, where it is in shareholders’ interests, a duty for fund managers. According to the report, managers should have an explicit strategy, elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy.

In a recent e-mail, corporate governance author and activist Robert AG Monks writes, “There has been so much talk about activism and corporate governance over the last 15 years that it is gratifying finally to contemplate a government formally adopting activism as a national policy and taking specific steps in order to implement that policy.” He also includes a link to a recent posting to his own site, a letter to the Myners Commission with some specific suggestions entitled “Principles of Institutional Investment Decision Taking: A Response to the Treasury’s Requested Consultation on the Myners’ Proposals,” by Robert A G Monks (author of The New Global Investors: How shareholders can unlock sustainable prosperity worldwide and Allen Sykes (who recently wrote Capitalism for Tomorrow: Reuniting Ownership and Control).

Monks and Sykes argue that government retirement policies have fundamentally altered the previously existing state of shareholder control by encouraging development of pension funds, which are now majority shareholder. “No longer do individuals have the power to require accountability because government created fiduciaries have majority control which they choose not to exercise.” “Only government action can remedy the fault created by government inaction.”

Under absentee ownership, managements have become self-governing, self-perpetuating and self-serving. “This concentration of power has led to widely recognised abuses by executive directors, to often huge remuneration packages poorly related to performance, and to takeovers and mergers frequently driven by managements’ motives rather than shareholders’ interests.”

In both America and Britain the most active fiduciary shareholders are public sector pension funds, even though they are largely staffed by personnel with little or no professional business experience. This is because of the more direct conflicts of interests faced by funds in the private sector. Investment institutions have trustee and fiduciary duties to their beneficiaries to act solely in their interests but cannot exist without corporate business. The crux of the problem is that institutional investors are powerless to fulfill their fiduciary duties to it and there is at present no enforcing mechanism.

I also raised this issue years ago in an essay entitled Fiduciary Responsibilities For Proxy Voting where I noted that the Pension Welfare Benefits Administration had never taken an enforcement action against a fiduciary for failing to monitor or for voting a proxy contrary to the best interests of plan participants.

Referring primarily to the Myners recommendation to incorporate an ERISA type duty for fund managers to intervene in companies where it is in shareholders’ interests, Monks and Sykes indicate the result is “by far the boldest and most far reaching of any major official enquiry on institutional investment for a generation, and on corporate governance ever.” However, they believe that voluntary efforts are likely to be “stillborn,” since the risk-cost-benefit ratios are likely to be unfavorable for pioneering activists as compared to their passive competitors who also reap the benefits of their action.

To address these concerns, Monks and Sykes recommend the following:

  • The government should affirm that creating an effective shareholder presence in all companies is in the national interest, that there should be no power without accountability and that this principle should be taken into account by all regulators, the Takeover Panel, the competition authorities, etc.
  • All pension fund trustees and other fiduciaries holding shares, must act solely in the long-term interests of their beneficiaries and for the exclusive purpose of providing them with benefits. (While it can fairly be argued that this is already trust law, it needs to be given specific, continuous and strong public emphasis and enforcement to overcome present inertia and conflicts of interest – i.e. to make all trustees, fiduciaries, etc., pro active in the sole and exclusive interest of their beneficiaries.)
  • To give full effect to the first two proposals institutional shareholders should be made accountable for exercising their votes in an informed and sensible manner above some sensibly determined minimum holding (e.g. £10m). As the Report notes, votes are an asset (voting shares always have a market premium over non-voting ones). Accordingly they should be used to further beneficiaries’ interests on all occasions. In effect, the voting of all institutionally held shares would be virtually compulsory.

Additionally, the authors call for a regulator to enforce the law and express their belief that once market forces have been established there may be no further need for such government enforcement.

While I strongly agree that enforcement is the key and am eager to see the Myners recommendations implemented, along with the reforms called for by Monks and Sykes, I think the best long term answer may lie in developing a framework which 1) allows the members and beneficiaries of trust funds to have more say in their governance, 2) provides a clear framework for disclosing how proxy voting and other fiduciary decisions are made, and 3) provides a clear avenue to sue for breach of duty. As Monks and Sykes indicate, “no-one looks after other people’s assets as well as their owners.”

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CalPERS Approves $250 Million Investment to Relational Investors

The action increases CalPERS’ investment in Relational to $750 million. Relational’s investment strategy often involves two steps. The fund makes a moderate investment and begins to communicate with the company’s management, board of directors and other investors. Depending on the outcome of the communications, the firm may increase its investment to gain more leverage in negotiations with management. In cases of persistent underperformance or where other factors warrant, Relational may submit shareholder proposals or seek board representation.

As of March 31, 2001, Relational made 34 investments. Examples include Apria Healthcare Group, Mattel, and Waste Management. Annualized returns on realized investments have exceeded more than 70%, versus an approximately 24% return for the same period for the S&P 500 Index.

Shareholders Less Patient

Russell Reynolds Associates annual survey of institutional investors finds that investors in a bearish market increasingly willing to act. Fifteen-percent of investors polled reported having called for a CEOs’ termination within the past year.

Ninety-four-percent of all respondents cite a company’s financial performance as among the most important factors influencing investment decisions. Eighty-five-percent point to poor strategy and lack of vision as key early warning signs indicating that a CEO is in trouble. With regard to CEO compensation, overwhelming majorities of those polled feel that boards should link CEO compensation more directly to performance and that CEO severance packages are excessive (93 percent and 89 percent, respectively).

Most noteworthy among this year’s findings may be that succession planning is a major concern of the institutional investor community. Eighty-one-percent of investors surveyed are troubled by the perceived failure of companies to properly groom internal CEO candidates. Most investors believe that companies in their country adhere to sound corporate governance practices; notable exceptions include Japan (3 percent) and Australia (37 percent). Two-thirds of investors surveyed have voted for a shareholder resolution within the past year; 15 percent have sponsored a resolution.

The survey, titled “CEO Turnover in a Global Economy,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, an international opinion research organization, and is based on interviews with more than 300 institutional investors from six countries: Australia, Canada, France, Japan, the United Kingdom and the United States.

High Plains Continues Reforms

Ethanol makers, High Plains (O-HIPC), moved to de-stagger its board of directors. Lawndale Capital Management’s Andrew Shapiro noted, “that High Plains voluntarily and pro-actively adopted this governance improvement is quite refreshing. We hope more companies will follow High Plains’ lead and come to the realization that good corporate governance adds shareholder value.”

This action will increase the Board’s accountability to shareholders,” said Donald Schroeder, High Plains’ Board Chairman, “and is one more step in the progression of good corporate governance we initiated last year with the adoption of a formal corporate governance by-law.” The prior by-law amendment, announced May 9, 2000, formalized increased oversight responsibilities of the Board, and requires at least two-thirds of the Board (and 100 percent of many critical committees) to be independent, and to meet in independent executive session each meeting.

“We believe de-staggering the Board will increase potential institutional interest in High Plains, and will help us focus on our priority of enhancing shareholder value,” continued Schroeder. “The Board has been sensitive to the fact that many large institutions prefer the annual election of all directors. We also recognize that this is an era in which management of many large companies is in conflict with its shareholders over out-dated corporate control provisions, and we are proud to have adopted one of the strongest, and most shareholder friendly, corporate governance programs of any public company,” he concluded. The previous board independence by-law put in place by High Plains Corp. in July 2000 is virtually similar to the Quality Systems (O-QSII) governance bylaw Lawndale introduced to members of the Council of Institutional Investors at its Fall 2000 Meeting in Boston.

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eRaider Triumphs in Goldfield Proxy Contest

Activist investor website eRaider claims to have became the first Internet organized group of dissident shareholders to win a proxy contest with its victory at Goldfield Corporation(Amex: GV). ERaider’s Shareholder Value Slate outpolled management on the key question of cumulative voting at the annual shareholder meeting near GV headquarters in Melbourne, Florida. ERaider’s victory to save cumulative voting for the next election ensures that shareholders can continue to make their voices heard by management. “Shareholders won a victory even before a single vote was counted because Goldfield’s stock price has been very well supported during this contest which has energized shareholders and management alike, ” according to eRaider co-founder Aaron Brown.

Although the Shareholder Value Slate prevailed on the question of cumulative voting, the management-recommended slate of directors won a narrow victory over eRaider’s dissident slate. Management nominees received 11.6 million to 10.4 million for eRaider’s nominees. “This victory proves that Internet shareholder activists are a force to be reckoned with,” eRaider co-founder Aaron Brown says. “As big a win as it is for website message boards and eRaider, it’s an even bigger win for Goldfield and its shareholders. We began this fight because we want to make money for this company and its shareholders, and now we’re in a better position to do that..”

Unlike most dissident groups, eRaider’s Goldfield Shareholder Value Slate candidate ran on a platform that pledged not to break up the company, fire management or impose similar radical changes. Instead, it promised more aggressive oversight of management, highlighting low stock ownership among incumbent outside directors, and to raise Goldfield’s profile in the investing community.

Corporate Governance and the Indian Private Sector

A new book by that title has been authored by Jairus Banaji and Gautam Mody, two visiting fellows of the University of Oxford who studied corporate governance in the context of large private sector companies in India, against a changing regulatory background and mounting public concern ((1998-2000). The study consists of two reports:

  • The first report deals with the results of 170 interviews with a very wide range of business representatives including CEOs, non-executives, fund managers and audit firms on the main issues in question (boards, accounting and disclosure standards, institutional investors).
  • The second report examines the fragmented nature of corporate regulation in India and the need for consistency at this level.

The authors recommend that:

  • regulatory intervention needs a much stronger definition of ‘independence’ for directors, in line with best practice definitions now adopted in the US and UK, as well as the mandatory introduction of nomination committees,
  • financial institutions need not rely primarily on their own resources in the job of monitoring managements; a more active approach to corporate governance on the part of these shareholders requires larger changes in the nature of the FIs’ ownership and control by government, greater autonomy for institutional managers, and the active development of a market for corporate control.

Available from Orient Longman Limited, Kamani Marg, Ballard Estate, Mumbai 400 001, Tel: +91 022 261 6918, 261 6919, Fax: +91 022 2691278; E-mail:[email protected] Special 10% discount on orders for 6 copies and above.

Phantom FDI

The staggering increase in foreign direct investment into Hong Kong last year suggests a growing flight of hot money out of China with Hong Kong at considerable risk to its financial reputation. FDI into Hong Kong climbed from about $14.7 billion in 1998 to $24.4 billion in 1999 to a staggering $64.3 billion last year, far in excess of the $38 billion in offshore investment that poured into mainland China. Over the same period that $64.3 billion flowed in last year, about $62.9 billion described as outward FDI left the city. Under IMF guidelines, FDI is defined as when an investor based in one country acquires an asset in another country with the intent to manage that asset.

Money from tax havens and the mainland made up almost 70% of Hong Kong’s FDI inflows according to official statistics. Apart from mainland money, the boom in Taiwanese investment in the mainland could also explain some of the influx because the island’s businesses are forced to conceal their transactions to avoid Taipei’s restrictions on cross-strait economic ties. Analysts see much of the inflow as due to tax avoidance and disguised capital flight from domestic corporations which overprice exports and the “re-nationalize” the money, taking advantage of generous tax breaks and other incentives extended to foreign investors.

Apparently, Beijing has been trying to curb illegal outflows but it is extremely difficult for governments to tackle this problem when the international banking system is so accommodating. (China’s Money Laundry, Far Eastern Economic Review, 6/21 issue) See also People’s Republic Of Cheats in the same issue. “Half of all business contracts signed in China are fraudulent in some way, officials say, while two-thirds of all state firms cook their books.” According to recent officially published figures:

  • Economic corruption eats up 13%-17% of the country’s annual GDP.
  • Tax evasion accounts for 50% of taxes due in the private economy, while total losses from tax evasion are 100 billion renminbi ($12 billion) a year.
  • Counterfeit goods and substandard goods account for 40% of all products made in China, with losses running at 200 billion renminbi a year.
  • Two-thirds of the biggest state firms produce false accounts.
  • The underground economy is the equivalent of 20% of GDP (actually twice that, say independent estimates).
  • 15%-20% of the spending on an average infrastructure or building project is lost to bribery, fraud, and poor-quality work.

Phantom Wealth

Thomas Parker is the author of What If Boomers Can’t Retire : How to Build Real Wealth Security, Not Phantom Wealth. An article based on his book appears in the May/June issues of the Conference Board’s magazine of ideas and opinion, Across the Board. Parker argues that baby boomers will all want to cash their stock in upon retirement and the result will be an insufficient number of workers continuing in employment to pay the prices boomers expected. Stocks are a dangerous way to fund your retirement unless you sell them all out long before 2008 because of demographics.

Parker argues that we should value the stocks in our retirement portfolios conservatively at cost or market, whichever is lower. “Gains should not be recorded until the stocks have been sold and the gains have become cash in hand.” What would that do for a portfolio the size of CalPERS, which recently dipped about $20 billion? He has good points. Many with dotcom investments would agree with his assessment that “phantom wealth often comes before the company has created real wealth by adding to the pie, and sometimes it vanishes before additions have been made to the pie.

The article and book are certainly spurring debate. The same issue of Across the Board contains commentaries from Ken Goldstein of the Conference Board, corporate governance notable Robert A. G. Monks, and Jeremy J. Siegal of the Wharton School. In my opinion, Parker is raising important issues but offers little in the way of solutions.

Instead of recommending more money be funneled into smaller more risky ventures as he seems to, I’d recommend that we require our pension and mutual funds to act more like owners instead of speculators. If they were to take a growing role in governance, we’d have greater disclosure and fewer bubbles. In addition, corporations think they are surrounded by gadflies at annual meetings now; just wait until we retire! I know people who are amassing wealth and investments primarily so that they can wield power in their old age. They’re not going to cash out. They hope to keep building wealth through eternal vigilance.

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ISS Backs Goldfield

The Goldfield Corporation (Amex: GV) announced that Institutional Shareholder Services (ISS) recommended that shareholders vote FOR management’s slate of director nominees at the Company’s Annual Meeting, scheduled to be held on June 19, 2001, rather than the dissident nominees proposed by an e-Raider activists.

ISS noted: “The company’s operational and stock performance have been exemplary, especially for a micro-cap company. Management has implemented a specific long-term strategy for the company to improve shareholder value.” The report concluded that “it would be in the best interests of all shareholders for the company to ‘stay the course.'”

However, Aaron Brown, eRaider co-founder provides perspective. According to him, ISS “supported eRaider’s ( Inc.) dissident recommendations over management’s on two out of the three agenda items. On the third item ISS took a neutral stance, recommending an independent outside director with mining or electrical construction experience (eRaider’s original proposal) over eRaider’s and management’s nominees.”

“Goldfield adopted many of our proposed changes in order to win the neutral verdict on one item,” Brown stated. “John Sottile indicated he would resign from the nominating committee of the board, thus opening up the board to independent nominees. Further he said he would have no objection to the board redeeming his preferred stock, which gives him controlling voting rights in some circumstances, despite representing only about 1.5 percent of the shares outstanding. He finally answered questions about a missing $583,000 that shareholders have been asking for ten months. Outside members of the board increased their holdings of Goldfield stock from a low of $375 among all members to $65,000 and officers of the Company bought another $425,000. Sottile outlined a long-term strategy that impressed ISS, but had never before been communicated to shareholders. Even if we lose on every agenda item, we have won most of what we set out to accomplish.”

There appears to an inaccuracy here one party or the other but it also appears that eRaider may be on the verge of a victory dispite that lack of full support from ISS.

Social Choice for Social Change’s Response to Editorial inPensions&Investments (see Limits to Activism, CorpGov.Net, May)

We are writing to present the context of our protest tactics that you judge “extremist” (“Brokers, not soldiers,” April 30, 2001). In particular, our group decided to carry signs in front of the high-rise residence of CEO John Biggs only after several years of using less confrontational means failed to convince the firm to heed its own survey, which found that 81 percent of participants support positive investing in its socially responsible Social Choice Account. We want TIAA-CREF to invest in companies
with outstanding track records on environmental or social issues. The respected Natural Investment Service rated the fund one of the worst ethical funds because of its failure to do so.

We have presented sound arguments for positive investing that are supported by experts in the field. We met with Mr. Biggs personally (and were told within three minutes why he wouldn’t implement our proposal). We instituted a call-in campaign. We took our story to the press. We held a peaceful protest in front of TIAA-CREF headquarters. Nothing worked. So, in the time-honored tradition of grassroots groups in pursuit of a just cause, we upped the ante.

This is deja vu for us. In the 1980s, we lobbied for four years for TIAA-CREF to create the fund in the first place. We heard essentially the same arguments then–financial, administrative, and legal–as now. When they finally consulted with experts who assuaged their concerns, they set up the fund. TIAA-CREF has refused to meet again with outside consultants. We hope the picture is becoming clear.

Intimidation? Groups like ours must utilize the kinds of power we have at our disposal (short of violence or threats thereof), which includes the power to bring public attention to the actions of a high-ranking executive. The anti-apartheid movement that the author finds “honorable” was successful in part because when polite entreaties to divest from South Africa failed, activists organized more disruptive rallies and sit-ins. In any case, the possible negative consequences of ours and others’ protests typically pale in comparison to the injustices they fight.

Instead of brokers seeking protection against protesters, perhaps they should pay more attention to what activists–and shareholders–are saying. More often than not, protests escalate because people in powerful positions fail to listen to reasonable arguments in support of popular causes.


Abigail A. Fuller
Co-chair, Social Choice for Social Change: Campaign for a New TIAA-CREF
MC Box 178, Manchester College
604 E. College Ave.
North Manchester, IN 46962

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BusinessWeek’s Barker to Fidelity’s Johnson

BusinessWeek’s Robert Barker offers advice to Fidelity’s Abigail Johnson (Offering Advice to Abby, 6/18/01), indicating that “Fidelity does little to explain the key legal fact of life for every investor in every mutual fund: when investors buy in, they become the outright owners of the fund.” Barker expresses his disappointment that Fidelity’s trustees are almost nonexistent on; he found only their names on the last page of the fund’s annual reports. As an example, he notes a new name on the list, Marie L. Knowles, indicating that investors can only find out about her by obtaining an “obscure Securities & Exchange commission filing called ‘Statement of Additional Information.'” Fidelity is not alone in leaving its trustees in obscurity. He found no mention of directors at Janus and only the barest of description at T. Row Price, although the Vanguard Group did a much better job.

“By early next year, the SEC will force funds to include basic information on trustees in annual reports. That’s why now is the moment to steal a step on your rivals…Encourage your independent trustees to take a high profile. Highlight their watchdog role in your marketing materials and new-account applications.”

I would add that disclosing how Fidelity votes its proxies would also go a long way in helping the owners of the fund know if trustees are doing their job. Such disclosures would be welcomed not only by those interested in the many social issues raised in proxies but also by those looking for the correlation between good governance and increased profitability.

eRaider’s Shareholder Value Battle

Goldfield’s management has countered eRaider’s Shareholder Value Slate challenge by spending more than 1.5% of the Goldfield’s market capitalization on a proxy fight and trying to reverse the company’s 95-year-old policy of cumulative voting for directors, which gives dissidents a better chance of gaining a seat. If management fails to overturn cumulative voting, it now plans to adjourn the meeting before electing directors. eRaider is soliciting proxies for Goldfield’s annual meeting on June 19, 2001. eRaider strongly advises all shareholders to read the proxy statement or by emailing [email protected], or a free copy is available from:

Privateer Asset Management
PO Box 20170
Park West Station
New York, NY 10025

Goldfield’s market capitalization declined from over $100 million in 1969 to $5 million in 1998, despite the injection of additional shareholder capital. If it had performed in line with the S&P 500 over that period, Goldfield share would be priced about $75 rather than the current $0.66. The stock has rebounded 76% from its low since eRaider announced it had accumulated shares in the company and invited stockholders to its Internet message board to use them as a resource to revitalize the stock. (6/10/01)

Watch for June 19th News of Internet-Organized Victory Inc. filed a definitive proxy statement to run a dissident slate of directors at Goldfield Corp. (AMEX: GV). eRaider is unhappy with the level of oversight offered by the existing Goldfield board so it has nominated a short slate of Sam Rebotsky (a 25-year shareholder and CPA), Aaron Brown (eRaider CEO and finance professor) and Deborah Pastor (eRaider portfolio manager and MBA). Other participants in the solicitation are Martin Stoller (communications professor), Paul Zarowin (accounting professor), David Groelinger (CFO of Riddel Sports) and Scott Lodin (Chief Counsel of Andrx).

eRaider has organized an Internet alliance of individual Goldfield shareholders (there are no known institutional holders other than eRaider) with 875 names. If self-reports are accurate and everyone in this group votes for the slate, eRaider expects to elect two or three directors on June 19th under cumulative voting. Should eRaider succeed in getting even one nominee on the board it will prove that Internet energy can wage a successful proxy contest without the expenses of mail or telephone solicitation.

The larger message will be that activist institutions can hope to gain 25 percent to 40 percent of the individual shareholder vote in contested elections on business issues without significant expenditure. For many companies this would be the difference that will allow a jump from passing generic governance resolutions to electing directors, requiring or vetoing merger proposals and enforcing binding shareholder will on major strategic issues. I’m looking forward to the news. (6/08/01)

Union-Based Shareholder Activism

The Council of Institutional Investors (CII) reports that CII member union funds file 58% of all proxy resolutions in 1999. Georgeson, a proxy solicitation firm, said they filed 43% of those dealing with corporate governance in 1998. Nneka Fletcher discusses the trend in ISSue Alert, 3/2001. She points to labor based web sites such as and the AFL-CIO’s Executive Paywatch. Critics argue that shareholder activism is being used simply as another tactic to further collective bargaining. Some inside labor are concerned that maximizing shareholder value may take away from traditional concerns.

Fletcher, however, concludes that union shareholder activists bridge the gap between shareholders and stakeholders. If shareholder value is maximized using excellent corporate governance practices, the company will perform better with increased profits also trickling down to employees in the form of pay raises. The way I see it is that unionized employees typically receive higher compensation. Shareholder activism is one more tool in a long tradition of working smarter and ensuring that unionized workplaces are more efficient.

“CalPERS Effect” Updated

Stephen Nesbitt, senior managing director and a principle of Wilshire Associates, updated his assessment of the impact of CalPERS’ good governance campaign. CalPERS has been a leading activist in the US corporate governance movement since its beginnings. Indeed, CalPERS has been the prime instigator of many aspects, including annual focus lists for poor performance and governance, which CalPERS awards each proxy season. Nesbitt, who’s firm has provided CalPERS with advice concerning firms to be targeted, assessed the performance of the 95 firms awarded this dubious distinction, beginning in 1987 through November 2000.

Key finding: “Despite underperforming the S&P 500 Index by 14 percentage points for the five years up to CalPERS’ shareholder activism, the 95 companies that were targeted by the system from 1987 to 2000 have outperformed the S&P 500 Index by 14 percentage points over the subsequent five-year period.” (The “CalPERS Effect” on targeted company share prices, Directorship, 5/01)

The obvious lesson is that poorly managed corporate assets present a substantial opportunity to obtain a premium on investments. However, the implication is that such turnarounds are not merely regression to the mean but are the result of intervention by CalPERS. Resources spent on identifying and rectifying poor corporate governance can be profitable. Both Nesbitt and CalPERS have been asserting such for years.

I assume that Nesbitt has earned money over the years by providing his advice to CalPERS. What strikes me as absurd, however, is that, as far as I know, CalPERS has still never made a move to increase its holdings in target firms prior to announcing their intention to seek changes. Although they have benefited financially from their annual Focus List because their existing holdings include most top US firms, they continue to forgo additional revenues that any private investor, such as Warren Buffett, would not fail to mine by increasing his stake prior to announcing his efforts to add value at the firm through corporate governance activism.

Perhaps this is because almost half the Board members are elected by members of the System who do not benefit directly from increased earnings? Most of the System’s gains have gone back to employers in the form of lowered contribution rates and members of the System have seen little in the way of increased benefits. If they shared more directly in the gains, wouldn’t the “CalPERS Effect” be mined more deeply?

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Archives: May 2001

Colorado Covered

Colorado Public Employees’ Retirement Association has embraced covered call selling as a way of “having your cake and eating it too,” according to Norman G. Benedict, deputy executive director for investments at the $31 billion fund. The hedging strategy designed to limit downside risk allows them to hold 80% in equities with the sam risk of a normal equity allocation of 65%. The obvious drawback to covered calls is the limit they also impose on upside gains but in today’s volatile market, that’s a risk more might be willing to take. Ohio and Wisconsin pension funds are apparently looking into the possibilities. (Pensions & Investments, “Colorado’s use of call strategy covers its 80% equities allocation,” 5/14/01)

Great Opportunity!

The Center for Working Capital is a nonprofit corporation based in Washington, DC, with a current staff of five. The Center is looking for an executive director to oversee all activities of the organization. This person will report to the Board of Directors.

The Center for Working Capital focuses on five program areas:

1. Pension fund trustee education and training programs;
2. Developing the capacity of trustees to be active fiduciaries;
3. Trustee information sharing through a quarterly newsletter and a website;
4. Developing the capacity of trustees to be effective participants in the global capital markets; and
5. Supporting capital stewardship initiatives by assisting trustees with such issues as corporate governance.

Responsibilities of the executive director will include:

  • Providing a vision for working capital
  • Managing staff and overseeing work product
  • Coordinating trustee training and education activities through seminars, conferences and information programs
  • Coordinating a team of consultants, investment managers, financial advisors and legal service providers to advise the Center on approaches to capital stewardship
  • Developing and implementing a fundraising plan; and
  • Developing effective forms of accountability for service providers.

The ideal candidate should have:

  • A broad and deep knowledge about issues related to pensions and capital investment;
  • Previous experience developing curricula for and implementing adult education programs;
  • A proven record on managing non-profit organizations, including successful fundraising, building staff, working with a board of directors, and coordinating communications initiatives;
  • Successful experience collaborating with unions, government and companies on pension and benefits issues and with pension and benefits fund trustees and service providers;
  • An understanding of the role of worker partnerships, collective bargaining and organized labor in creating investment value for beneficiaries; and
  • An advanced degree with minimum of five years experience managing an agency.


The compensation for the Executive Director will include a salary comparable to executive directors of not-for-profits of a similar size and an excellent benefits package.

To apply
Please send your resume to Bill Patterson, Director of the Office of Investment, AFL-CIO, 815 16th Street, NW, Washington, DC 20006 or fax it to (202) 508-6992, or e-mail it to[email protected]. The closing date for applications is June 11, 2001. Once you get the job, get in touch with me at [email protected] so that we can collaborate.

News from the Corporate Monitoring Project

Mark Latham and company have put out Newsletter #11. Support for the “Shareowners’ Alternative Voting Information (SAVI)” proposal to let shareowners choose an independent proxy advisor was mixed this year. Mr. Latham represented me at the Equus II shareholder’s meeting and we won approximately 17.8% of the vote. As far as I know, this was without major institutional backing. However, at Gillette Latham’s proposal only picked up 2.4% of the vote, including the 1,842,391 cast by CalPERS. Both firms lost about 40-45% of their value during the last two years. You’d think both groups of shareholders would be equally receptive to innovative ideas for recovery.

I was disappointed to learn that Latham’s proposal to let shareowners vote to choose the auditor, instead of just rubber-stamping the Board’s choice, was killed by the SEC as an ordinary business decision. Clearly, the importance of auditor independence was raised by no less than the chair of the SEC itself. According to Arthur Levitt, shareholders could be compromised if audit partners are concerned about losing lucrative consulting business.

Maybe next year. In the meantime, I highly recommend subscribing to Mr. Latham’s informative newsletter and keeping up on the Project’s latest activities.

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Emerging Trends

Half of Americans log onto the Internet on a daily basis. Increasingly, we want a say in how “our” corporations are governed. Just as sharing information with employees led to a managerial revolution that generated wealth, informed investors are also adding value.

As in any revolution, there are casualties. This year, eRaider related Allied Owners Action Fund folded and iBullhorn was still-born. However, more funds are posting their votes and the AFL-CIO is grading money mangers. Sites like allow readers to research issues and to communicate directly with corporate investor relations officers. The Wall Street Journal’s Portfolio feature is sure to follow suit. Rational shareholder apathy is fading because activism via the Internet is inexpensive and easy.

Corporate Board Member, a journal for corporate directors and boards, has formed an Academic Council to participate in identifying emerging trends in corporate governance and issues impacting today’s corporate boardrooms. The council – made up of the leading academic authorities on board governance representing the country’s most prestigious universities and graduate programs – will convene for its first set of roundtable discussions in Boston, Massachusetts on May 30.

Members of the Academic Council include William T. Allen, professor of law and director for the Center for Law and Business, Stern School of Business, New York University; Duke K. Bristow, financial economist, Anderson Graduate School of Management, University of California, Los Angeles; B. Espen Eckbo, director of the Center for Corporate Governance, Tuck School of Business, Dartmouth College; Charles M. Elson, chair of corporate governance, Center for Corporate Governance, University of Delaware; Steven N. Kaplan, professor of entrepreneurship and finance, University of Chicago Graduate School of Business; Paul D. Lapides, director of the Corporate Governance Center, Coles College of Business, Kennesaw State University; and Jay W. Lorsch, professor of human relations and former senior associate dean and chair of the Executive Education Program, Harvard Business School.

Peter D. Crist, of Korn/Ferry International, and Richard M. Steinberg, of PricewaterhouseCoopers, the largest global professional services organization, will co-chair the Academic Council and facilitate the two upcoming roundtables.

“Our goal for the council is to identify emerging trends in America’s boardrooms through council roundtables, interviews, and selected research,” says Corporate Board Member COO TK Kerstetter. “Our belief is that directors, officers, educators, and students can benefit as we create a more focused approach to this cottage industry commonly referred to as governance.”

The dialogue of the council’s May roundtable discussions will be highlighted in a Corporate Board Member supplement titled “Emerging Trends in Corporate Governance.” CEOs, chairmen, and presidents of every publicly traded company on the Nasdaq, AMEX, and NYSE will receive the supplement. In addition, the proceedings of the roundtables will be published in their entirety on Web Resource Center.

Willamette Employees Silenced

On 5/7 the Wall Street Journal Interactive Edition reported that employees of Willamette Industries Inc. have shut down a Web site that opposed an ongoing hostile bid for Willamette being made by Weyerhauser Co. According to the report, the US Securities and Exchange Commission informed a representative of the employee group that the group would have to file a Form 14D-9 with the Commission if it wished to keep the site up. The group reportedly decided to close the Web site when it learned that legal fees for such a filing could be “as high as $50,000.” Volume 2, Issue 33 of CyberSecuritiesLaw Tribune (Week of May 21, 2001)

Proxy Monitor Supports Dissident Slate at Willamette Industries

New York-based Proxy Monitor, a leading proxy voting advisor to institutional investors, announced today that it is recommending clients vote for the dissident slate of director nominees brought forth by Weyerhaeuser Co. at Willamette Industries, Inc. (NYSE: WLL) annual meeting. The slate of directors is scheduled to come to a vote at the meeting on June 7, 2001.

Weyerhaeuser has made numerous attempts to negotiate a merger and in doing so has made a couple of tender offers including the most recent on May 10, 2001, offering a price of $50 per share. The Willamette board rejected the $5.5 billion offer as a gross under-valuation of the company.

Proxy Monitor said in its recommendation to clients:

“One has to wonder whether the Willamette board would accept ANY offer from Weyerhaeuser, or any other suitor for that matter. Management has consistently refused to negotiate with Weyerhaeuser, has not given any indication of a price it might accept, and has not looked for other buyers…While there is certain to be discord in the boardroom if Weyerhaeuser’s nominees are successful, Willamette shareholders must ask themselves if they wish the present board to continue to represent their interests. We think not.”

Will the West Face a Boardroom “Trade Deficit?”

Booming Western economies take great pride in the powerful success their economic structure provides and even feel a bit smug, sure that they have nothing to fear from those young economies of Asia. Such hubris nearly led to trade disaster a few decades ago — but a replay could now be underway in a vital new arena — good corporate governance.

Ralph D. Ward, editor of the Boardroom INSIDER online newsletter, warns in the May issue that good governance standards (disclosure; shareholder laws; strong, independent boards) “probably offer nations and companies a stock price premium.” Western nations, especially the U.S. and the U.K, have long been the world leaders in offering these protections to global investors, but today, Ward notes, “Asian countries are making strong moves to build their own world-class corporate governance.”

For example, Hong Kong in March published a model governance code with excellent financial disclosure and board oversight. In January, new rules from Malaysia’s Kuala Lumpur stock exchange demanded continuing education for corporate directors, “something even the West hasn’t caught up with yet.” Surprisingly soon, Ward warns, “Western economies may find that the good governance rules that now swing world investment their way have become a global commodity.”

Exercise in Creative Writing

Phil Goldstein, of Opportunity Partners, continues his creative use of SEC filings in his battle with Lincoln National Convertible Securities Fund, Inc. His latest, DFAN14A “THIS IS THE LETTER LNV MANAGEMENT WILL NEVER SEND YOU!! (so I wrote it for them),” is so creative that we decided to republish the entire letter here. Further information can be obtained from
Phillip Goldstein
60 Heritage Drive
Pleasantville, NY 10570
(914) 747-5262 // Fax (914) 747-5258

Dear Shareholder:

I am writing to you on behalf of my fellow directors. We recently advised you that the Annual Meeting of Stockholders of Lincoln National Convertible Securities Fund (the “Fund”) has been postponed from May 18th to June 22nd to give shareholders “adequate time to consider important issues and developments in connection with this year’s proxy contest.” Because you may be wondering what the heck we were referring to, we have decided to come clean. Here’s what really happened.

When we originally told you that the incumbent directors were “duly elected” at last year’s meeting of stockholders by a “valid vote of the Fund’s shareholders” that was not really true. After a trial, a federal judge determined that (1) we breached our fiduciary duty to shareholders by conducting an illegal election last year (2) we violated the anti-fraud provision of the SEC’s proxy rules by failing to disclose how we staggered our own terms so that shareholders could not later de-stagger them. As a result, the judge ordered us to conduct another election for the two seats that were filled last year. The court’s opinion can be found at the following address:

Our lawyers have been trying to put a more favorable spin on this “development” but it is hard to find a euphemism for “violation of fiduciary duty.” One thing we have done is to fire the law firm that lost the case for us and hire another one to appeal the judge’s decision. If we had to spend our own hard-earned money, we would probably think long and hard about appealing. Being able to use shareholder money makes the decision much easier. So, despite what the judge said, please continue to trust us. By the way, we appreciate your financial support of our efforts to clear our tarnished names.

As long as we are `fessing up, here are some other things you should know. We hope our belated candor will induce you to vote for our nominees instead of Mr. Goldstein’s.

  • We still don’t know how much the litigation to prevent Mr. Goldstein from electing directors has cost and we don’t know what the final tab will be. OK, it could be millions of dollars. We just don’t know. Thankfully, the costs are being paid by shareholders and not coming out of our own pockets.
  • Mr. Goldstein has complained that we are targeting $190,000 of shareholder money for our solicitation expenses without obtaining SEC approval. We do not think we need SEC approval as long as we say our re-election is in your best interests. It is in your best interests that we get re-elected, isn’t it?
  • We were totally unprepared for the court’s decision. If we had promptly notified shareholders that we had breached our fiduciary duty and the annual meeting had taken place as scheduled on May 18th we might have lost the election. So, we passed a legal bylaw authorizing us (but not Goldstein) to postpone the meeting in order to give us time to plan our strategy after a crushing legal defeat. We apologize to any shareholders that showed up on May 18th for themeeting but it is not our fault. We just never imagined that we could lose in court.
  • We admit that we owe the investment advisor our jobs. We all serve on at least one other fund that it manages and we hold the directors’ meetings for both funds simultaneously. Also, we delegate much of the work to the advisor’s well-trained lawyers. So, how independent can we be? However, we do get a very nice paycheck for very little work. It is a pretty sweet deal. Please let us keep it.
  • The advisor benefits from keeping LNV a closed-end fund. Even though shareholder wealth would increase from open-ending, it might lead to lower management fees for the advisor. Goldstein is right about that. Hey, if you were in our shoes, would you oppose an advisor who can get you on more boards?
  • We have accused Mr. Goldstein’s nominees of being “hand-picked.” We now admit that it is a silly charge. How should a nominee be chosen? By a lottery?
  • We have also accused Mr. Goldstein of having a personal agenda, i.e., he wants to make money from his investment. We admit we also have an agenda. As a high level employee of the investment advisor, I want the investment advisor’s fees to be as high as possible. Open-ending the Fund would be contrary to that objective. There, I said it! I feel so much better.

Finally, if you have any questions, we have good news. In accordance with our new open-door policy, you no longer have to talk to our proxy solicitors. We are now willing to speak to any shareholder. Please call the Fund’s secretary, David Connor, at (215) 255-8864 and ask to speak directly to me. (I still need someone to filter out crank calls.) In the meantime, I will try to find out what the Fund’s legal expenses are. Thank you for your continued support. Who cares about fiduciary duty anyway?
Very truly yours,

David K. Downes (aka Phil Goldstein)
President and Director of 33 Funds
Managed by the Investment Advisor

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Korn/Ferry Launches Board Services Practice in China

Korn/Ferry International (NYSE:KFY), the world’s leading recruitment firm, announced the launch of its Board Services Practice in “Greater China.” The new practice will focus on providing independent board of director searches and corporate governance counsel to clients in China under the leadership of Korn/Ferry Managing Director, Robin Sears.

Sears began his career with the firm in Tokyo in 1994 and has since worked at the CEO- and board-level for global clients in the telecommunications, private banking, insurance and professional services areas, and additionally led Korn/Ferry’s Advanced Technology Practice in Asia. Sears will continue to serve those clients as Managing Director, Asia/Pacific Client Services, based in Hong Kong.

“With China’s imminent entry into the WTO, and the increasing role of international institutional investors in Asian companies, requests for assistance with independent director searches and corporate governance counsel are increasing rapidly. We have a large global network of experienced director candidates and 28 years of corporate governance expertise that we would like to share with our Asian client base,” Sears said. (Business Wire, 5/21)

Delaware Supreme Court Rules in Favor of Preferred Shareholder Rights

Andrew Shapiro, President of San Francisco-based Lawndale Capital Management (phone 415-288-2330), announced a long-sought legal victory in Delaware Supreme Court against Agrium, Inc. (AGU) for former Nu-West Industries Preferred Shareholders. The Delaware Supreme Court affirmed an October 2000 Chancery Court ruling that dividends on Nu-West’s Preferred Stock accrued daily to the date the Preferred Stock was redeemed and against Agrium’s position that dividends accrued annually. Mr. Shapiro initiated this action in 1996 to enforce the Preferred Shareholders’ rights when Agrium management and directors attempted to deny shareholders what was rightfully owed.

As a result of the decision (Smith v. Nu-West et. al. C.A. NO. 15442), Agrium must pay the Preferred Shareholders an additional $10.43 per Preferred Share redeemed plus 10% compounded interest since the 1996 redemption date. The judgement combined with the interest is expected to cost Agrium, a Canadian fertilizer company, approximately US$1.6 million, far more than the original $1 million claim.

Mr. Shapiro, a corporate governance and shareholder rights advocate, commented, “The decision certainly sends a clear message that management and directors owe a fiduciary duty to both the preferred and common shareholders alike. The award of compounded interest should also reinforce that delay doesn’t pay.”

We’ve Moved

The offices of Corporate Governance have recently relocated to 9295 Yorkship Court, Elk Grove, CA 95758-7413. E-mail address for the editor remains [email protected]. We are sorry for recent disruptions and sparse postings. We hope to be fully up and running within a couple of weeks.

Minority Shareholder Treatment Improves

Mark Mobius, of Templeton Emerging Markets Fund finds that Asian companies are starting to improve their corporate governance and treatment of minority shareholders. Improvements are driven by a concern that institutions may invest elsewhere if shareholder rights are not protected. Two years ago, Mobius campaigned in Hong Kong against companies placing new shares without first offering them to all existing investors, to enable them to avoid their holdings being diluted. (Minority shareholders’ lot improving)

Limits to Activism

Animal rights activists, upset with animal testing at Huntingdon Life Sciences Group PLC have taken their campaign to brokerage firms who deal in their stock. Protesters marched into the offices of securities firms, disrupting business, and then demonstrated at the homes of executives to intimidate them to stop trading their stock. Their tactics have met with success. Schwab Europe announced it will bar its clients from dealing in Huntington securities. MSF, the union for skilled and professional people, gave its whole- hearted support to the Association of the British Pharmaceutical Industry (ABPI) in its threat to boycott financial institutions who give in to animal rights extremists. (see PR Newswire, 5/2) Even social investors Matthew Kiernan, of Innovest Strategic Value Investors, and Peter Kinder of KLD & Co., have criticized their tactics of personal intimidation.

The April 30th edition of Pensions and Investments carries an editorial, “Brokers, not soldiers,” which is critical of the intimidating tactics used at Huntingdon and sees parallels in those used by Social Choice for Social Change: Campaign for a new TIAA-CREF. We embrace their goal of getting TIAA-CREF to invest 5 to 10 percent of social choice account assets ($200-400 million) in companies that are models of social and environmental responsibility. Social Choice has not, as far as I know, disrupted business as brokerage firms, but they have taken their protest to the high-rise residence of John H. Biggs, its CEO. The borders of civility are not immediately apparent but we agree with P&I that brokers should not have to be soldiers and that they should demand protection from the police, rather than giving in to intimidation.

Champion of Civil Rights and African Affairs, Leon H. Sullivan Dies at Age 78

Reverend Leon H. Sullivan, convener of the 6th African-African American Summit and world leader on Africa and related issues has succumbed to leukemia, announced his daughter Hope Sullivan Rose.

“Reverend passed away at 8:30 p.m. (PST), yesterday, at Scottsdale Healthcare Osborn Hospital; he was surrounded by his family and friends and was at peace. We ask that everyone respect our family’s wishes and give us time to grieve privately. We have shared our father with the world; allow us one moment to remember him amongst ourselves.”

Reverend Sullivan is survived by his wife, the former Grace Banks, three children: Julie, Howard and Hope, seven grandchildren and admirers around the world. The family asks that donations be made to:

The International Foundation for Education and Self Help (IFESH)
5040 E. Shea Blvd. Ste. 260
Phoenix, AZ 85254

Global Corporate Governance Forum Seeks Program Manager

The Global Corporate Governance Forum, founded by the World Bank and the Organization for Economic Co-operation and Development (OECD) promotes global, regional and local initiatives aimed at improving the institutional framework and practices of corporate governance of middle and low income countries. The Forum’s main activities include:

  1. awareness raising and best practice dissemination;
  2. capacity building and technical assistance; and
  3. sponsoring research and analysis on the costs and benefits of corporate governance reforms in developing and transition markets.

The Forum is governed by a Steering Committee and operated day-to-day by a Secretariat. The Steering Committee defines and directs the strategy of the Forum and oversees the Secretariat. The Secretariat is responsible for carrying out the work program of the Forum and is led by a Program Manager who heads a small team of professional and administrative staff. Applications and expressions of interest should be forwarded by May 11th. For additional information, see the Forum’s announcement.

Will corporations trump nations?

William Greider, a columnist for The Nation, sees corporate governance of a different form in FTAA negotiations designed to expand NAFTA’s rules to cover the entire western hemisphere. Chapter 11 of NAFTA allows corporations to demand compensation if the profit-making potential of their ventures has been injured by government decisions.

Greider cites the familiar case of Methanex, which filed a $970 million claim against the United States after California banned gasoline additive, MTBE, after the EPA reported potential cancer risks and at least 10,000 groundwater sites were found polluted by the substance. As many as 15 cases have been launched to date, according to Greider but no one can be sure of the number, since there’s no requirement to inform the public. “The contesting parties choose the judges who will arbitrate, choose which issues and legal principles are to apply and also decide whether the public has any access to the proceedings.”

Unlike other trade agreements, NAFTA allows corporations to litigate on their own, without having to ask national governments to act on their behalf in global forums. This isn’t the corporate governance advocated here. While corporations should be accountable to investors, they shouldn’t trump the rights of nations to protect the environment, the rights of labor and their own cultural values.

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Archives: April 2001

Enhancing Director Performance

Strong boards provide competitive advantage and add value. Six keys to top-performance based on research findings by P. Michael Masher and Talcum C. Munro are as follows:

  • Peer recognition. Ego and the basic need for recognition is a powerful motivator.
  • Peer association. The mental stimulation produced by interaction with bright experience individuals provides further motivation to work hard and perform well.
  • Opportunities to “make a difference.” If the expertise of individual board members is recognized and their talents sought out, they will work harder to accomplish agreed upon goals.
  • Communicate effectively. Ongoing opportunities for communication between meetings and agendas received well in advance, accompanied by well-focused material, facilitate good performance.
  • Celebrate victories. Selecting some directors with crisis management experience is critical to sucess in many difficult situations and may avoid the de-motivating effects of constant crisis management.
  • Choose board chairperson carefully. The chairperson is primarily responsible for harnessing the energy and talent of individual members. Setting the tone and establishing the culture are critical skills.

For more information, see the March/April edition ofBoardroom. That issue also contains a tribute to J. Keith Louden, author of The Corporate Director, a corporate governance classic from 1966, and The Director in 1982. Louden was an early advicate that the CEO should be the only inside director and that the chairman should always be an independent director, realizing that nobody could monitor performance objectively if they also held executive management responsibility.

Domini Issues Challenge

Amy Domini, the founder and a managing principal of Domini Social Investments, issued a challenge along with disclosure of their proxy voting guidelines and actual proxy votes. “In our view, mutual funds have an obligation to their shareholders to disclose how they intend to vote and how they actually do vote on important issues of corporate governance, including social and environmental policies. Proxy voting transparency should not simply be considered an aspect of socially responsible investing – it should be considered a fundamental indicator of responsible mutual fund governance.” “We strongly encourage our colleagues in the mutual fund industry to follow our lead by making their proxy voting record public so that investors can properly assess the full implications of their investment .”

Domini disputed the view, taken by some of the nation’s largest mutual funds, that investors “are not interested” in how their funds vote. In addition to publicly disclosing its voting guidelines and how it voted its shares, Domini also files shareholder resolutions each year on important social and environmental issues. This year, Domini filed sixteen resolutions on a range of issues, including diversity, environmental reporting and sweatshops.

CEO Turnover Slows

Boards may be more tolerant of poor results when the CEO can blame external factors. During the first quarter of 2001, 9 of the nation’s largest 200 public companies replaced CEOs who retired, quit or were fired, according to Pearl Meyer & Partners. By contrast, during the first quarter of 2000, 14 of the nation’s 200 biggest public corporations replaced their chiefs.Total search activity was off about 17% in the first quarter from a year earlier. (see MSNBC, 4/24)

Bragging Rights

Comments by Royal Bank of Scotland Deputy Chairman Sir George Mathewson have sparked fury over executive remuneration policy. Mathewson was quoted as saying that his 750,000 share of the GBP 2.5 million bonus awarded to himself and three other executives “wouldn’t have given you bragging power in a Soho wine bar.” He defended the bank’s decision not to seek shareholder approval for the plan by saying, “Frankly, it was not worthwhile talking to shareholders about.” The National Association of Pension Funds (NAPF) disagrees. Angered by the comments, NAPF is recommending blocking the re-election of two non-executive directors serving on the company’s remuneration committee. “It is pretty crass to talk about pounds 750,000 not being enough to talk about in a bar when it is a sum most can only dream of,” said one Royal Bank shareholder. (The Corporate Library, 4/3)

Governance Strong Predictor Where Laws Are Weak

Bernard Black, of Stanford Law School, examined the relationship between corporate governance behavior and market value for a sample of 21 Russian firms. The correlation between value ratios and governance ranking is striking and statistically strong: Pearson r = 0.90 (t = 8.97). A worst (51 ranking) to best (7 ranking) governance improvement predicts a 700-fold increase in firm value.”The results suggest that corporate governance behavior has a powerful effect on market value in a country where legal and cultural constraints on corporate behavior are weak.” see The Corporate Governance Behavior and Market Value of Russian Firms, forthcoming in Emerging Markets Review, Vol. 2, 2001.

Back to the topSocially Responsible Investing Gains Institutional Ground

Interest in SRI mutual funds has grown in recent years. A 1999 Yankelovich Partners study based on interviews with 800 men and woman showed that 35% worked for companies that offered a SRI 401(k) or similar option, up from 16% in 1996; seven in 10 said they used those options, up from 56% in 1996. Of those that did not have access to a SRI option, 70% said they would invest in one if it were available, the study said.

Last year, California State Treasurer Philip Angelides encouraged two of the state’s largest pension funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest tobacco and stocks. The funds have combined assets of about $265 billion. CalPERS also approved a plan to follow tough human rights, labor, and environmental standards when investing overseas. (see Dow Jones Newswires — April 20, 2001, Socially Responsible Invest Gaining Institutional Ground)

Class Action Settlements

Bank One Corp. has agreed to pay $45 million to settle a class action lawsuit that alleged the bank misled shareholders about the financial standing of its credit card operation. Shares of Chicago-based Bank One started to slide in August 1999, shortly after the company disclosed pricing and customer service woes at the unit First USA – problems that led to earnings shortfalls at Bank One. U.S.D.C. Judge Milton Shadur in Chicago is expected to rule on the settlement June 1. Plaintiffs’ lawyers plan to request payment up to $2.75 million, plus interest and reimbursement of expenses, all to be paid from the $45 million settlement fund.

MicroStrategy Inc.’s year long legal battle with shareholders accusing it of fraud officially ended recently when a federal judge approved a class-action settlement that awards investors an I.O.U. due in five years, but no cash upfront. The settlement approved by U.S.D.C. Judge T. S. Ellis III in Alexandria may deliver only pennies on the dollar for investors who bought MicroStrategy stock before the Vienna software firm reported in March 2000 that it overstated years of revenue and earnings and its share price plummeted.

Twinlab Corp. says that it has reached an agreement in principle to settle a series of shareholder securities class action lawsuits filed in the U.S.D.C. E.D. New York in late 1998 and early 1999. Under the agreement, which is subject to approval by the court, the company will pay $26 million, all of which is covered by existing insurance.

A federal judge in Chicago has ordered final approval of a $4.02 million agreement that settles five securities class actions filed against Nanophase Technologies Corp.

More details on these and other class actions can be found at the Stanford Securities Class Action Clearinghouse which is launching a new and improved database Their Website contains several new features designed in response to user requests. In addition to a new home page, they have dynamically updated tables that sort alphabetically, by name of corporate defendant, jurisdiction, and date of filing. They have also improved search features, and will soon be providing more extensive news services and bibliographies of securities related research.

Back to the topBelgian Government to Propose Reforms

The Belgian government will propose corporate governance reforms to meet concerns of investors in stock market-listed companies, L’Echo newspaper reported, citing finance minister Didier Reynders. The law will address conflicts of interest within groups, directors’ responsibilities, the independence of auditors, and disclosure of important stakes in companies. (AFX News, 4/20)

Canadian Social Investment Conference, June 3 – 5 in Montreal

For the first time in five years, financial advisors, asset managers and investors will gather to explore trends and developments in Canadian social investment. Confirmed speakers include:

Peter Kinder of Kinder, Lydenberg and Domini. Peter will discuss SRI trends and developments in the US. He will be joined by Michael Jantzi of Michael Janzti Research Associates (sponsor of the session); Stephen Hine of London-based Ethical Investment Research Service (EIRIS) and Dave Mowat, CEO of VanCity Credit Union in Vancouver.

Steve Viederman, formerly of the Jessie Smith Noyes Foundation, who is speaking on foundations and SRI. Steve will be joined by Tim Draimin, Executive Director of the Tides Canada Foundation and will talk about how foundations are aligning their investment policies with their granting missions.

Joe Henzlik of SRI Services, a division of Fairvest Proxy Monitor. Joe will be joined by Bill Mackenzie of Fairvest Proxy Monitor, Ginette Depelteau of Caisse de depot et placement du Quebec, Peter Chapman of the Shareholder Association for Research and Education (SHARE), Francois Rebello of Groupe Investissement Responsible (GIR) and Pat Doherty of New York City Pension Funds. This session will be devoted to the growing area of shareholder advocacy and institutional investors.

Jacky Prudhomme of Paris-based Arese, who will speak about public policy and SRI. Jacky will discuss new regulatory initiatives in France and the European Community on pension disclosure and other SRI-related policy issues.

To receive early registration discounts, register by May 4. Conference fees are CND $395, which includes a 12-month individual membership with the sponsor, Social Investment Organization.

Environmental Groups Endorse Shareholder Resolutions reports that a coalition of five environmental groups led by Michelle Chan-Fishel, with Friends of the Earth, recently announced their support of over 75 pro-environment shareholder resolutions.” The resolutions are divided into six major categories: environmental codes, climate change and energy, threatened people and places, genetically engineered food, toxics and waste, and governance and environmental disclosure.

SEC Examining Vote Disclosure For Mutual Funds

The Washington Post reported that in response to a written request from the AFL-CIO in December, the SEC has started to examine the proxy disclosure issue for mutual funds, according to Douglas J. Scheidt, chief counsel of the SEC’s division of investment management. Domini Social Equity Fund ($1.8 billion) is one fund cited in the article that reports their votes. The $7 billion Calvert Group of funds, based in Bethesda, recently made its voting record available on the Internet (see PR Newswire). The $1.3 billion PAX World Funds, based in Portsmouth, N.H., have been doing so for a year. According to the reporter, a Fidelity spokesmen says their funds’ investors just don’t care how the fund votes. Vanguard would consider disclosing proxy votes if its investors indicated a “significant” interest.

Ned Regan, former head of New York’s state pension fund, and now a director of Oppenheimer Funds, which manages $120 billion is quoted as saying that “I very strongly believe that mutual funds ought to be like pension funds and vote with shareholders in mind” but “nobody wants it.” “If we ever had shareholders asking, would we put it on the Web? I don’t know.” “I’m in favor of it. I’m in favor of lots of things. But it’s not at the top of the list of the items that investors in Oppenheimer want. In fact, it’s not even on the list.” (Prodding for Disclosure of Funds’ Proxy Votes, 4/7)

AFL-CIO Steps Up Campaign to Rein in Runaway CEO Pay

Average US CEO pay in the top 200 firms rose to $10.89 million in 2000, according to Pearl Meyers. The 28% increase in the use of stock options since 1999 results in their making up about 60% of the entire pay package. US Vice President Cheney for example, gained $22 million in 2000 by exercising stock options at Halliburton. Last year’s top pay, $293 million, went to John Reed, who retired at Citigroup.

United for a Fair Economy’s report entitled “The Bigger They Come, The Harder They Fall,” they concluded that a huge compensation package was no guarantee for rising stock prices, in fact the report’s author Scott Klinger says, “When Business Week releases their list of the ten companies with the highest paid CEOs for 2000, that would be a good list of stocks to sell short.” Klinger examined stock price performance of companies headed by the top ten highest paid CEOs for each of the seven years between 1993 and 1999. The stock performance of each company was compared to both the S&P 500 and the company’s peer group over one-year and three-year time periods. In six out of the seven one-year time periods following a CEO’s appearance on the top ten list, at least half the companies under-performed the S&P 500. In 40 percent of the cases, the companies trailed the S&P 500 by more than 15 percentage points.

The AFL-CIO’s Executive Paywatch site lists several ways the average person can use to join in the fight against excess exec pay.

Shareholders of Sprint, for example, defeated proposals to curb executive severance pay and discourage repricing of stock options, but the measures garnered more than a third of the shares cast at the company’s annual meeting. A resolution to limit severance agreements with senior executives received nearly 36%, while a measure seeking to limit option repricings got more than 42%. (The Kansas City Star, 04/17/01)

Business Ethics Puts Procter and Gamble on Top

Business Ethics magazine published its annual list of the top 100 most socially responsible companies. The top ten were listed as: Proctor and Gamble, Hewlett-Packard, Fannie Mae, Motorola, IBM Corp, Sun Microsystems, Herman Miller, Polaroid, St. Paul Cos. and Freddie Mac. Companies were rated on employee relations, environmental standards, community relations, diversity and customer relations. Read Business Ethic’s “100 Best Corporate Citizens” online andsubscribe to a year of informative articles for a mere $25.

Options Exchanges

BusinessWeek Online says “these new practices are just as bad for outside shareholders as the simple repricing schemes they replace. In some cases, they’re even worse.” “Such gimmicks don’t get around many of the problems investors have with repricings. Providing employees with the chance to make a huge equity gain through new, lower-priced options at a time when shareholders have suffered significant losses from stock drops simply isn’t fair play.” They recommend old fashioned cash that doesn’t dilute shares. ” It’s time for a reminder that options were intended to reward superior performance, not simply showing up.” (When Stocks Suffer, So Should Options, 4/11)

Back to the topHong Kong Watchdog Joins Oversight Committees

David Webb, longtime critic and corporate governance activist, joins two stock market oversight committees. Webb’s hard-hitting investment news service at has long been an excellent source of news in Hong Kong and East Asia. See A New Role for a Hong Kong Gadfly, International Herald Tribune, 4/7. Webb is among seven new members appointed to the Takeovers and Mergers Panel and the Takeovers Appeal Committee. He was also recently appointed to the Shareholders’ Subcommittee of the Standing Committee on Company Law Reform. Among other reforms, Webb has been promoting a proposal to establish HAMS – the Hong Kong Association of Minority Shareholders, as a levy-funded body to catalyse shareholder involvement in the corporate governance process.

Laurentian Bank Claims Lead in Corporate Governance

Jon K. Grant, the new Chairman of the Board of Laurentian Bank of Canada, opened the Bank’s annual meeting of shareholders, and discussed several Bank policies that make Laurentian a leader in corporate governance. (listen to speech)

  • separation of the duties of the Chairman of the Board and the Chief Executive Officer since 1984
  • representation of women on the Board at 27% instead of the Canadian averate of 12%
  • cumulative voting for electing its directors since 1993
  • reduction in the number of directors from 18 to 15
  • open and frank character of the Board’s discussions

Shanghai Stock Exchange (SSE) Guidelines for Corporate Governance

Draft guidelines require at least two independent board members in each listed company, who will make up at least 20 percent of the total number of board members. The principles also clarify the rights and duties of shareholders, directors and management, maintain the independence of the board, establish and guide the carrying out of effective disclosure standards, and guarantee equal treatment of all shareholders. (Asiaport Daily News, 4/11)

Proxy Contest

An article in the April 9th issue of Barron’s points out these words take on new meaning this season with “millions of investors in thousands of companies are being offered the chance to enter a $50,000 sweepstakes when they receive their proxy mailings.” Automatic Data Processing, which handles mailings for brokerage accounts, had the brainchild but asserts the prize “isn’t given for anyone who voted in a particular manner.” However, the same might have been said about contests held by Publishers Clearinghouse. Unfortunately, many people will think there is a connection, especially if it, for example, comes with a letter from Caterpillar recommending a vote for its slate of directors and against the three shareholder proposals. It looks like a bad idea from here.

Twilight of the Gods?

That’s the title of a guest editorial in the same April 9th edition of Barron’s by Ralph D. Ward, editor of the online newsletterThe Boardroom Insider. Ward points to the increasing churn rate for CEOs. “Lucent, Gillette, Mattel, Compaq, Maytag, and Campbell Soup are some of the major companies whose boards have pushed out chief executives over the last year. Altogether, 41 of the largest 200 U.S. corporations changed leaders in 2000, says pay consultant Pearl Meyer & Partners, with the pace accelerating in the first months of 2001.”

A turning point, noted by Ward and other commentators was the Coca-Cola board’s turn down of CEO Douglas Daft’s proposal to takeover Quaker Oats. After the $15.75 billion deal was rejected, observers questioned if anyone can negotiate for Coke now. Ward reveals that “those of us who have worked to empower corporate boards greet this revolution with cheers, but also with a few concerns.” How will companies be able to take bold moves or maintain long term strategies? Will we shift from the Imperial CEO to the Imperial Board or to a balance between CEO, board, and owners? For further insights, read Rolf Carlsson’s new book, Ownership and Value Creation.

Important New Book

Ownership and Value Creation: Strategic Corporate Governance in the New Economy by Rolf H. Carlsson argues the “role of the ownership function is to link the sources of risk capital in stock markets to the fundamental processes in corporations and indivudual businesses so as to achieve sustainable vallue-creation.”

Most books on corporate governance focus on accountability, balance of power issues and the costs of separating ownership from control. Whereas, management books focus on value-creation. Carlsson tries to show the role for “strategic” corporate governance or the role of the owner specialist in value-creation. The book does an admirable job of introducing the rise of corporate governance as an ownership concern. He then uses a case history, that of the Swedish Wallenberg dynasty, to explain the success of owner specialists based on ownership values, mega-management skills, institutionalization skills and business risk competence.

Fundamentally, Carlsson believes the corporate governance movement has done a good job in pressing for accountability but that role has been largely a reactive one. He now presses us to acknowledge the proactive role that owners can take in value creation by making direct investments and by investing through owner specialists. He also strongly makes the point that we need to be on guard with regard to instutional investor governance as well. “They should be accountable for how they exercise their francihised ownership as agents of the private owners, how they contribute to fundamental and sustainable value-creation in their total portfolios of investments.”

Carlsson’s work begins the foundations of what will likely become an important frame of reference. In an age of global financial markets, owners are likely to demand access to quality information, formal control aspects and a balance of power with incumbent management which works more in favor of capital. “Incessant renewal and meta-management, to manage the process of taking as well as reducing/eliminating risks, are the cornerstones of strategic corporate governance.”

Back to the topCorporate Governance and Merger Activity in the US: Making Sense of the 1980s and 1990s

Holmstrom and Kaplan describe and consider explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. They conclude that “if the stock markets are flat or down for the next few years, then the extensive reliance on stock options may again dissipate, leading managers to have less focus on stock prices. But even after taking such reservations into account, it seems to us that a more market-oriented style of corporate governance than existed up to the early 1980s is here to stay.” (Download from SSRN)

Does Corporate Governance Matter? A Crude Test Using Russian Data

Do a firm’s corporate governance practices affect its value? In most empirical tests in developed countries, firm-specific corporate governance practices have little or no effect on firm value. But these weak results could reflect limited variation between firms in governance practices.

In contrast, the corporate governance practices of Russian firms vary widely, from quite good to awful. Bernard Black tested whether firm-specific corporate governance affects the value of Russian firms using (1) corporate governance rankings developed in fall 1999 for a sample of 17 Russian public companies by one Russian investment bank, and (2) the “value ratio” of actual market capitalization to potential Western market capitalization for these firms, determined independently at the same time by a second Russian investment bank. He finds strong evidence that firm-specific corporate governance matters – and matters a lot – in a country where other constraints on corporate behavior are weak.

Black’s research has practical significance for investors in Russian firms, in predicting by how much governance affects value. A one-standard deviation governance change predicts a 6-fold increase in firm value; a worst (51 ranking) to best (7 ranking) governance change predicts a 450-fold increase in firm value. (Download from SSRN)

Conference Notice

A New Era in Corporate Governance: Regulatory Demands, Fair Disclosure & Best Practices
June 25-26, 2001
Washington D.C.
Featuring: Laura Unger, Acting Chairman of the U.S. Securities and Exchange Commission. Chancellor William Allen, Director of the Center for Law & Business, New York University, and Lanny Davis, former White House Special Counsel.

Contact: Julie W. Munro
Director of Conferences, C.P.E. Inc.
370 Reed Road, Suite 227, Broomall PA 19008
Phone (610) 328-7086 ext. 1101 Fax (610) 328-7061

Myners Report

The full text of the Myners Report, which calls for much greater transparency and more professional stewardship by pension trustees, is available for downloading at You’ll also find other, mostly UK and EU, related news items on corporate governance.

AFL-CIO Key Votes

Last month the AFL-CIO issued their 2000 Key Votes Survey on the behavior of 156 money managers (representing $6.7 trillion in assets). They were rated on 38 shareholder proposals voted on during the 2000 season. Advocating a worker-owner view that values “management accountability and good corporate governance,” proxy voting performance continued to increase, even as the AFL-CIO was “raising the bar.” In 1998 the median score of money manager participants was 60.8%, rising to 65.1 in 1999 and 72.9 in 2000. The Survey will, once again, help trustees fulfill their fiduciary duty to ensure voting rights, which are pension plan assets, are managed in the long term interests of employee and retiree shareholders.

Ranked at the bottom of the list was PNC Advisors (0 out of 27 votes). It is hard to imagine they will be managing much Taft-Hartley or public pension money next year. According toIRRC‘s Corporate Governance Highlights (3/30), the AFL-CIO has released a list of 30 shareholder proposals, 2 vote no campaigns and one management proposal to be used in its Key Votes Survey for 2001. The proposals reportedly range from routine governance proposals, such as declassifying boards, to business in Burma. No, the management proposal on the list isn’t one they support; its AT&T’s charter amendment, which they have vocally opposed. To receive a copy of the full Key Votes Survey, call the AFL-CIO Office of Investment at 202.637.5372.

Corporate Governance Looking Up in Singapore

Singapore published its first corporate governance code, the result of a 15-month review of business practices by a special government-appointed committee. Recommendations in the code include

  • At least one-third of a board membership to be non-management for independence
  • Disclosure of directors and key executives remuneration
  • Audit committees made up entirely of non-executive directors
  • Disclosure of information to all shareholders should be “in a fair and equitable manner.”

January 1, 2003 is the deadline for all Singapore listed companies to start including their corporate governance practices in their annual reports, with explanations for any deviations from the official code. (AFX News via Northern Light) In related news, Institutional Investors Give Singapore’s Corporate Governance Regime the Thumbs Up. A PricewaterhouseCoopers survey found Singapore’s standard of corporate governance rated slightly higher than Hong Kong’s and Japan’s, with a larger gap separating Malaysia, Taiwan and Korea. Over half of survey respondents also voiced the need for

  • increased disclosure of directors’ dealings with related parties
  • separation of the roles of chairman and chief executive/managing director

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Archives: March 2001

Shareholder Activism

From a 1970 ruling on Dow Chemical’s napalm sales, which opened the door for social issues to be put to shareholder votes, to the focus lists of Council of Institutional Investors,[email protected] reviews the rise of shareholder activism.

Metromedia Yields to Records Demad

Documents will be examined by Lens Investment Management to determine if John W. Kluge, Metromedia’s founder and Chairman, and Stuart Subotnick, its Vice-Chairman, President and Chief Executive Officer, have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting at the expense of Metromedia’s public shareholders. NewsAlert, 3/28

Changing Corporate Bylaws Via Class-Action Suits

At the spring meeting of the Council of Institutional Investors, William S. Lerach, a partner at Milberg Weiss Bershad Hynes & Lerach, said that in recent negotiations with an Internet company, “we accomplished more in one hour than all the shareholder resolutions could have done in 10 years.” As part of larger settlements, Cendant, 3Com and Samsonite have been forced to agree that boards will contain a majority of independent directors, audit committees will be comprised entirely of independent directors, and stock repricings are prohibited without shareholder approval. Now, maybe it is time to make such reforms the central reason for such class-action lawsuits.

The items on Lerach’s wish list include: require that officers hold one-third of the stock they acquire through options for a year; require that directors receive 50% of their compensation through stock and hold it as long as they remain on the board; no stock option repricing without shareholder votes; no insider stock sales during repurchase programs; and no accelerated vesting of options when shareholders merely vote for a merger, rather than waiting for the consummation of the deal. (Dow Jones Newswires, Class-Action Suit A Way To Change Corporate Bylaws, 3/28)

PSPD Criticizes Plan by Samsung Group

The shareholder rights group People’s Solidarity for Participatory Democracy is calling on the Samsung Group to cancel a plan to sell stakes held by Lee Jae-yong, son of group chairman Lee Kun-hee, in eSamsung and other internet companies to Cheil Communications and other profitable Samsung units. PSPD, led by Korea University professor Jang Hasung, said the Samsung group is selling its stakes “to pass the responsibility of Lee Jae-yong’s management failure to minority shareholders of the profitable companies.” (AFX News via Northern Light, 3/27)

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Dark Cloud Over Directors

Hoffer Kakback, President of Gloucester Capital and a regular columnist in Directors & Boards, calls for further disclosures by director-candidates and better opportunities for shareholders to evaluate them. Four years ago, in an article “Pals on Board,” Kakback sought to have director-candidates disclose their relationships with the company’s CEO. “Were the candidate and the CEO (or were their wives) college roommates? Have their fathers been best buddies for 50 years?”

Three years ago, in “Two Modest Proposals,” he advanced the idea that proxy statements should contain a short essay from each candidate on why he or she would add value to the board. In addition, directors should participate in a conference call, well in advance of the shareholders’ meeting, at which they could be questioned by the shareholder-electorate.

Now in “The Albanian candidate,” (Directors & Boards, Winter 2001) he renews his call. “If one or two major companies implemented all (or some) of the proposals contained in this column, others might follow. The amazing thing is that our present method of electing directors has remained more or less the same for as long as it has.” Kakback’s proposals are certainly modest, in comparison with electoral politics. He isn’t even calling on shareholders to have a voice in the nomination process or a choice between candidates.

Unfortunately, even his modest proposal is unlikely to be heeded. Instead, we seem to be entering a period of greater entrenchment, with the SEC allowing omission of two more board independence proposals. One proposal, submitted by John Gilbert to Boeing, asked the company to adopt a policy that its key committees will be comprised of a majority of independent directors. The second, a similar proposal, by John Chevedden at AT&T, was also ruled beyond the power of the board of directors to implement. These join earlier rulings on similar proposals at PG&E, Marriott International and Bank of America. Let’s hope this growing dark cloud doesn’t discourage shareholders from continuing to seek sunshine and accountability.

CalPERS Announces Targets

The California Public Employees Retirement System narrowed this year’s “Focus List” to five companies, Circuit City, Lance, Metromedia, Ralcorp and Warnaco Group. Selection was based on a combination of long-term performance, corporate governance practices, and economic value-added (EVA). In other CalPERS news, their International Proxy Voting Guidelines and the Domestic Proxy Voting Guidelines were consolidated and amended on March 19, 2001 by the CalPERS Board of Administration and are now known as theGlobal Proxy Voting Guidelines.

Link Between Governance Activism and R&D

Institutional investors are influencing company decisions through proxy challenges, public criticism, and direct negotiation. Researchers evaluated the impact of investor activism on a company investment in research and development, predicting that companies facing activist holders would increase their R&D budget since owners tend to favor long-term investments, while managers typically prefer short-term payoffs.

Examining the impact of investor activism on R&D as a percentage of sales among 73 large U.S. industrial companies from 1987 to 1993, they found:

  • Companies targeted by investors increase their R&D spending over several years.
  • The impact is greatest on firms that faced growth opportunities and in high-technology industries that have under-invested.
  • Shareholder proposals and proxy contests fostered greater R&D increases than other forms of investor pressure.

See “The Influence of Activism by Institutional Investors on R&D” by Parthiban David, Michael A. Hitt, and Javier Dimeno in the Academy of Management Journal, February, 2001, pp. 144-157.

Canadian Report Recommends Charters and NonExec Chairs

Boards of directors can add value by fostering a culture aimed at improving the effectiveness of governance in Canadian public corporations. The Joint Committee on Corporate Governance report entitled Beyond Compliance: Building a Governance Culture contains 27 recommendations including:

  • All boards should have charters outlining their responsibilities
  • Boards should have non-executive chairs and should meet regularly without management present.

CII Joins Protest

The Council of Institutional Investors joined in protesting a recent decision by the SEC to allow AT&T to exclude from its proxy a proposal from the Communications Workers of America recommending the same person doesn’t serve as chairman and chief executive. AT&T argued the proposal was a thinly disguised vehicle to embarrass AT&T Chairman and Chief Executive C. Michael Armstrong by preventing his reelection as chairman of the board.”

However, CII, whose representatives hold $1.5 trillion in assets, argued the proposal “doesn’t call on shareholders to vote against current chair and CEO C. Michael Armstrong or vote for another candidate. Nor does it prohibit Mr. Armstrong from serving as director. The resolution simply calls on AT&T to adopt a policy that the chair and CEO jobs be held by separate individuals.” (Pension Grp Backs CWA In AT&T Shareholder Proposal Flap, Dow Jones, 3/19) For more, see CWA’s sponsored site, AT&

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Link Added to has been added to our Links page. The site, by publisher RR Donnelley Financial, focuses on legal issues involving corporate and securities regulation. Among the items covered are the following: Analyst Communications, Cybersmears and Message Boards, Direct Public Offerings, Direct Stock Purchase Plans, Disclaimers, Electronic Delivery, Free Stock Offerings, Hyperlinks, Multimedia Disclosure, Offshore and Crossborder Offerings, Private Offerings, Proxy Fights, Public Offerings, Regulation FD, Road Shows, Shareholder Proposals, Stock Plan Communications, Stockholders’ Meetings, Voting, and Web Site Liability. The site also features R.R. Donnelley Financial’s complimentary monthly Ezine that updates users on recent corporate and securities law developments and the latest corporate trends and practices. RR Donnelley also launchedAll About Edgar, a comprehensive information site about EDGAR, the SEC’s electronic filing system.

Welcome ALM

American Lawyer Media joins our growing list ofStakeholders, informing the direction of corporate governance debate. Watch for upcoming newsbites from The Corporate Counsellor and book reviews.

International Conference On Corporate Governance

April 23 – 24, 2001, at the Mandarin Oriental Hotel, Kuala Lumpur organized by the Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA) in collaboration with the Malaysian Institute of Corporate Governance (MICG). The theme of the Conference, “From Conformance to Performance,” is in line with the main objective of enhancing awareness and commitment of corporate leaders to accountability and transparency with a view to improving confidence. to view the program, see theMAICSA site. Sign up before March 24th for reduced registration fees.

Foliofn to be Offered at 401(k) Plans

For a flat fee of just $29.95 a month, you get 3 Folios, personalized baskets of stocks you can change as often as you wish. Former SEC Commissioner Steven M.H. Wallman’s online brokerage firm will soon be offered to some 401(k) plan participants, according to a recent article in Pensions & Investments. The average mutual fund investor pays $467 per year in fees on a typical $38,000 investment, according toFoliorfn, whereas Foliorfn costs are only $359. More important, from our perspective, is the increased likelihood that shareholders are more likely to be owner activists than mutual fund holders. (Foliorfn service to mimic mutual funds,Pensions & Investments, 3/5/01)

SEC Reversal?

Dow Jones newswires article asks, Who’s calling the shots in corporate boardrooms? While some corporations claim shareholders do, many shareholder activists think the Securities and Exchange Commission is blocking their proposals to strengthen the independence at corporate boards. Ann Yerger, director of research at the Council of Institutional Investors, says the trend is “extremely disturbing.” The SEC allowed Bank of America to exclude a proposal to install an independent audit committee and Marriott International to strike a proposal for an independent board.

The SEC “seemed to zero in on independence proposals this year” with a different stance, said Patrick McGurn, director of corporate programs at Institutional Shareholder Services. According to the article, activists say the SEC’s hostility emerged when they agreed that Pacific Gas & Electric could omit a shareholder proposal seeking a bylaw revision requiring independent directors on its audit, and nominating and compensation committees, even though it had been introduced and voted on three times before, with last year’s proposal winning 45% of the vote, according to Rosemary Lally, an editor at the Investor Responsibility Research Center.

PG&E argued the company didn’t have authority to implement the proposal since directors are elected by shareholders, not corporate boards. The SEC staff agreed, saying boards don’t appear to have the power to ensure the election of independent directors. Of course, the argument is absurd since shareholders “elect” directors, but boards have control over the nomination process.

Judith Burns, of Dow Jones Newswires, goes on to relate how subsequent approaches were attempted at Bank of America and Marriott. Edward Durkin, director of special programs for the United Brotherhood of Carpenters, says shareholders will eventually prevail. “We’ll get to the issue in another time and another way.” Shareholder activists don’t give up easily. (Shareholders See SEC Reversal On Corporate Governance, 3/14)

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SEIU Opposes Kodak Directors

The Service Employees International Union Master Trust announced it will campaign to oppose the directors at Eastman Kodak, after the company ignored repeated efforts to provide more accountability to stockholders. For an unprecedented fourth year, Kodak has ignored an SEIU proposal calling for annual board elections. That proposal has won majority votes at Kodak each year beginning in 1997.

“This is a core governance principle. Our members who have invested their retirement savings in companies such as Kodak expect them to be accountable to shareholders and meet the highest standards,” said Andrew L. Stern, SEIU president and chair of the Master Trust. “We have been patient investors but it is time for Kodak’s directors to understand that there is a price to pay when they ignore majority shareholder votes.”

This year, Kodak will put four directors on the ballot:

  • Alice F. Emerson, senior advisor to the Andrew W. Mellon Foundation;
  • Laura D’Andrea Tyson, dean of the Walter A. Haas School of Business, and a former Clinton economics advisor
  • Hector Ruiz, COO of Advanced Micro Devices, Inc.
  • A fourth director will be named in the proxy statement.

The vote will take place at the Kodak annual meeting on May 9th in St. Paul, Minn. The SEIU campaign comes as many institutional investors have adopted policies to press shareholder rights in board elections. Institutional Shareholder Services, the leading proxy advisory service, recommends withholding votes from directors where the board “ignore[s] a shareholder proposal that is approved by a majority of the votes cast for two consecutive years.”

The policy of the Council of Institutional Investors, whose members control well over $1 trillion in assets, provides that “Boards should take actions recommended in shareholder proposals that receive a majority of votes cast for and against. If shareholder approval is required for the action, the board should
submit the proposal to a binding vote at the next shareholder meeting.” (from Bart Naylor)

Swiss Cheese Argument by SEC has Holes

Phil Goldstein of Opportunity Partners sent me a copy of his response to SEC no action letter on Mayor Jewelers. The SEC apparently conclude that because his shareholder proposal implies the directors of the Fund violated their fiduciary duty, it may be excluded from the Fund’s proxy materials. Goldstein responds:

However, you do not say that we did not provide a factual foundation to support the charge. Rule 14a-9 only prohibits a malicious statement if it does not have a factual foundation. In fact, our supporting statement discusses the undisputed fact that the directors of the Fund recently adopted a number of bylaws whose primary purpose is to interfere with the shareholder franchise. Under Delaware law, such action is presumptively a violation of fiduciary duty.

We would ask along with Goldstein, is it the SEC’s policy to categorically ban any proposal malicious statement critical of a management regardless of evidence provided to support the allegation? For more on Goldstein’s battle and to engage him in conversation, see the eRaider corporate governance message board. (from Phil Goldstein)

Environmental Responsibility Pays

Investing in companies that use environmentally sound business strategies could lead to increase shareholder value, according to a a new report, “The Emerging Relationship Between Environmental Performance and Shareholder Wealth,” by the Assabet Group. They looked at studied both academic research and nine different environmentally focused investment funds. Each of the nine funds examined outpaced their respective benchmarks.

Bill Clinton in Your Boardroom?

Former president Bill Clinton has grabbed headlines more since leaving the White House than when he was in office but could this notoriety be sidelining his lucrative move into America’s corporate boardrooms? In the March issue of online newsletter Boardroom INSIDER, Ralph D. Ward notes that former presidents have traditionally been eagerly sought by the Fortune 500, and that rumor has Oracle Corp. CEO Larry Ellison flirting with adding Clinton to the software giant’s board.

Given Clinton’s controversial tenure, especially the pardon- and influence-peddling storm that has raged since he left office, Ward doesn’t see Clinton quietly slipping into any boardrooms soon. Ward further notes that corporate boards have become increasingly responsible, public faces for the company. No board can ignore the shareholder reaction of putting Bill Clinton on display at their annual meeting.

Fund Democracy Campaigns Against Self-Dealing Mutual Fund Directors

Maryland is considering a bill that would requiring courts to treat mutual fund directors as independent, even when they have significant conflicts of interest. According to Fund Democracy’s Mercer Bullard, the bill would effectively prevent tens of millions of fund shareholders from being able to sue companies that defraud their funds. We suggest you let the Maryland Assembly know that you oppose House Bill 1045. For more information, see Maryland Protection for Self Dealing Directors.

Fund Democracy has also teamed with proxy advisory firm Institutional Shareholder Services in asking the SEC to hold a hearing on the exemptions it has provided to hundreds of mutual funds from the requirement that shareholders approve contracts with fund managers. See Multimanager Funds and Your Voting Rights. Read about another SEC exemption, this one granted to Goldman Sachs from self-dealing prohibitions so that it could trade securities with the funds it advises. As Mercer Bullard observes, “How will the funds know if they are receiving a fair price from Goldman Sachs the securities dealer? Why, they’ll ask Goldman Sachs the fund manager, of course.” (Another Chink in the Wall: SEC Grants Self-Dealing Exemption to Goldman Funds,, 3/1/01)

Back to the top Reports on Several News Items

The March issue of reports on the following and other items:

  • stock option plans: the drive UK’s Hermes fund to require shareholder approval, the SEC’s proposal and the Wharton School of Management’s outline of the debate.
  • non-financial disclosures: a proposal from Shann Turnbull
  • French Commission des Opérations de Bourse expanded its mediation service between investors, intermediators and issuers.
  • guidance from the American Society of Corporate Secretaries on what proxy statements need to include about audit and non-audit fees paid
  • Call by Pensions & Investment Research Consultants demanding shareholder approval of director compensation at 800 UK firms.

SEC No-action Letters to be Posted

Commissioner Isaac C. Hunt Jr., of the US Securities and Exchange Commission, criticized the Commission for not requiring non-U.S. issuers to make required securities filings electronically via the SEC’s EDGAR system. He hopes that by the end of this year they will be required to do so. In addition, he indicated that the Commission’s no-action letters should be made available on the SEC’s site before the end of this year. (SEC’s Hunt Criticizes SEC, 3/2) Let’s hope that what should be done, will be done.

Unofficial Guide Asks Tough Questions

An editorial, “The Unofficial guide to Questions to Ask at an Annual Meeting,” in February’s ISSue Alert goes well beyond the usual Cliff Notes variety of pabulum regarding what to expect at the annual meeting. Get ready for embarrassing questions on consulting services provided by the company’s auditor, conflicts of interest among board members with other business ties to the company, the correlation (or lack of) between options awarded and shareholder value, severance provisions of CEO contracts and change-in-control provisions. In abbreviated form, that only takes us down the alphabet through letter “c” and the guide goes to “s.” This single page is more informative than most glossy guidebooks.

CorpGov.Net Editor Responds to Pensions & Investments

Joel Chernoff’s 2/19 article in Pensions & Investments asserts that State Controller Kathleen Connell’s suit against the California Public Employees’ Retirement System (CalPERS) over pay hikes will provide the “first court test of CalPERS’ independence” under Proposition 162, which was designed to protect it from political meddling. Unfortunately, that is not the case.

On September 17, 1998 the Sacramento County Superior Court ruled that restrictions imposed by the board on campaign contributions from those doing business with the System were invalid because the board did not follow the Administrative Procedure Act (APA) in adopting its regulations.

CalPERS had argued it was exempt from the APA. However, the court ruled that CalPERS is not exempt from state laws that are not inconsistent with the board’s exercise of its fiduciary duties.

In my opinion, there is little chance the court will accept CalPERS’ argument that it could not meet its fiduciary obligations without setting up its own payroll system, bypassing the State Controller’s statutory authority, in order to award pay increases to key employees.

The court is even less likely to agree that the board cannot meet its fiduciary obligations
(1) without exceeding the statutory limits on board member per diem by a factor of four, or
(2) by reimbursing employers substantially more than allowed by statute for the time their employee board member representatives spend on CalPERS board activities.

An editorial by Pensions & Investments in the same issue argues that “paying below-market salaries to executives at large, complex pension funds is short-sighted.” Agreed. However, the CalPERS board is stretching what was meant to be the minimum protection of Prop 162 against raids into nearly a whole wardrobe.

Skating on the edge of the law would be a bad habit for any public pension fund to acquire. CalPERS should work with the Legislature and Governor Davis to raise legal limits, rather than asserting that the board’s actions are above the law.

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Archives: February 2001

Allied Owners Action Fund to Call it Quits

Allied opened for business the same day the Nasdaq reached its all-time high. Now according to “Heard on the Net” at the Wall Street Journal (2/27), the fund is shutting down and returning the money invested by its 300 shareholders.

Allied invited investors and the public people to visit theirmessage boards, recommend underperforming companies and strategize. They aimed to give individuals the same governance clout as institutions such as the California Public Employees’ Retirement System. However, they largely went after relatively obscure firms with a low ratio of activist institutional investors.

Although the Wall Street Journal article indicates that other such “naked funds” such as Metamarkets Investments LLC’s Open Fund and Inc.’s Community Intelligence Fund are also down heavily, they also report that IPS Advisory Inc. plans to launch the IPS iFund shortly. Unlike other community-oriented funds, such as Allied Owners, where professional managers have final say on portfolio decisions, at the iFund shareholders will submit picks and vote on which stocks should be bought. For more on the collective intelligence of the mob, see Out Of Control.

Ownership Intensity Brings Gains

A study by Hewitt Associates found that companies ranking in the top half of their “ownership intensity” index had an average cumulative return to shareholders of 16 percent higher for the 1995-2000 period than those in the bottom half. Ownership intensity is a measure of the degree to which employees receive an equity stake, how much corporate information is shared with employees, and how much employees can influence day-to-day decisions. (Employee Ownership Report, 3-4/2001) Also reported in the same issue, one third of the households in Santa Clara County, California, have stock options.

Malaysian Shareholders Rights

Minority shareholders would gain derivative action and cumulative voting rights under recommendations outlined in the Capital Market Masterplan unveiled by the Securities Commission (SC). Datuk Megat Najmuddin Khas, president of the Malaysian Institute of Corporate Governance and one of the authors of the plan, explained that controlling shareholders “have their own agenda, which may not be the same as that of the minority shareholders and investors.” In addition, the SC is considering disclosure requirements regarding how securities issuance, restructuring, takeovers and merger exercises add value to shareholders. (, 2/23)

Disclosure Deadline Delayed

The Johannesburg Securities Exchange delayed a requirement that listed companies disclose directors salaries. Instead of an October 2000 implementation, the requirement will now take effect in March 2002. Objections have been that if directors revealed their remuneration, they or their families could become the targets of kidnappers or hijackers. (Africa News Service, 02/23)

CalPERS Emergency Election Rules Invalidated

Sacramento Superior Court judge James T. Ford voided emergency regulations filed by the California Public Employees Retirement System which had made several changes in the Board’s election process. Judge Ford ruled that the Board’s finding of emergency did not meet the statutory requirement that they were “necessary for the immediate preservation of the public peace, health and safety or general welfare.” The revisions would have allowed candidates to communicate more freely with members of the System and included language indicating that CalPERS staff cannot favor one candidate over another.

Lens Focuses on Metromedia International Group

Lens Investment Management, LLC, founded by Robert A.G. Monks, has taken shareholder activism to a new level by holding a meeting for shareholders of Metromedia International Group (MMG). Approximately 100 people attended in-person or by conference call, representing about 25% of the company’s common stock, or about a third of all common stock not controlled by MMG management. Shareholders expressed their frustration with MMG’s management and the company’s performance. Listen to a recording of the meeting and its discussion of shareholder initiatives until March 14th by calling 800-475-6701. See the accompanying slide presentation on the Lens site.

Business Courtesy

Normally dry SEC filings got hot on January 30th with thebody of a 13D filing by Robert L. Chapman Jr., whose Chapman Capital owns 9.5% of American Community Properties Trust. Apparently, Chapman’s repeated attempts to talk to management about their “highly leveraged balance sheet and unacceptably slow rate of asset liquidation,” were rebuffed until J. Michael Wilson, the REIT’s chief executive, finally took Chapman’s call. Seeking an explanation for the CEO’s unresponsiveness, Mr. Chapman said in the filing that Wilson responded, “You’re a f—ing pain in the a–, and we don’t want to talk to you.” Then Wilson hung up, according to the filing. Some people just can’t take criticism.

Responsible Wealth Battles for Tax Fairness and Corporate Responsibility

Responsible Wealth gets press coverage as dozens of the wealthy, including Warren Buffett, George Soros and William Gates Sr, join to fight repeal of the estate tax. All that attention should also provide a boost to their shareholder initiatives:

  • Freeze CEO Pay During Periods of Downsizing and Cost-Cutting
  • Executive Compensation Review Report
  • Severance Package Review
  • Broadening Ownership Resolutions

Rule 14a-8 Re-examined

In the Jan/Feb 2001 edition of the Corporate Governance advisor, John Wilcox of Georgeson Shareholder Communications takes another look at SEC rules governing shareholder proposals and declares the system broken. Investors are frustrated with “corporate indifference” to most of the 40 shareholder victories last year. The Council of Institutional Investors has recommended that boards implement any action recommended in shareholder proposals supported by a majority of votes cast. Institutional Shareholder Services recommends withholding votes from directors who ignore shareholder proposals approved by a majority of votes cast.

On the other side, companies complain that shareholder proposals often have little relevance to wealth creation and actually destroy value through costly distractions. According to Wilcox, the SEC’s Director of Corporation Finance, David B.H. Martin, has “warned repeatedly that administration of the rule is consuming staff time and wasting public funds” in processing nearly 500 no action letters last year.

Wilcox provides much good advice to issuers and proponents in preparing for the 2001 season but his assessment of how to move from the current gridlock seems way off. His claim that “shareholder activists have achieved virtually all of their goals in an unbroken string of successes,” would be widely disputed by shareholder activists.

In 1997, the SEC proposed that resubmission thresholds be raised from 3, 6 and 10 percent of votes cast to 6, 15 and 30 percent in years 1, 2 and 3 respectively. Although that proposal generated an enormous number of comment letters in opposition, Wilcox now proposes that thresholds be doubled every year, starting with 5 percent in the first year and rising to 40 percent in the fourth.

The bone he would throw to shareholders would be the power to override a company’s decision to exclude any proposal based on the troublesome “relevance” and “ordinary business” exclusions, if the proposal comes from owners representing at least 5 or maybe as high as 10 percent of the outstanding shares. Again, Wilcox proposes moving the bar considerably beyond the 3 percent bar previously proposed by the SEC.

His proposal looks like a win/win for management and a lose/lose for shareholders, many of whom are unlikely to be satisfied until they can use the proxy process to nominate board members.

CalPERS Board Puts Independence at Risk

By ignoring the legal limits to their own pay and voting themselves a raise (State controller sues CalPERS, 2/2/01, see also Connell’s 2/1 press release) the CalPERS Board breached its duty of care and loyalty. The interests of CalPERS members are served when the Board follows the law, not when they break it.

If CalPERS elections worked properly, we might expect members to vote for change. Unfortunately, the Board’sproposed election rules continue favor incumbents. They allow CalPERS staff, except those “directly involved” in the elections, to use their official positions to sway elections. In addition, they require an expensive dispute resolution process, paid for by candidates, with arbitrators chosen by the Board. Although an improvement over a previous proposal (seeCalPERS muzzles critics: Ballot rules protect board, keep others in the dark, Sacramento Bee editorial, 5/24/99), the draft regulations do little to level the playing field between incumbents and challengers.

Senator Burton has introduced SCA 2 to require Legislative review of CalPERS’ proposed budget for personnel, operating expenses and equipment. It would also require the System to submit to an independent actuarial and financial audit.

Board independence works when a board acts responsibly. Unfortunately, the CalPERS Board has too often abused itsConstitutional authority (see section 17), this time claiming (without evidence) that no qualified candidates would run for the Board without the raise. Not raising their own pay, they argued, would breach of their fiduciary duties and put the System at risk.

More clearly at risk is the Board’s ability to place the interests of the System’s members above their own. If the Board continues to ignore the law and members can’t change the Board, Legislative intervention will become almost inevitable.

Back to the topCoffee Named to Advisory Board

The Nasdaq Economic Advisory Board (EAB) announced the addition of three new members: Professor Michael J. Barclay, Professor John C. Coffee Jr., and Professor Frank M. Hatheway. The Board discusses and communicates specific policy recommendations to Nasdaq, meeting formally twice a year. John (Jack) C. Coffee Jr, a professor at the School of Law of Columbia University should bring a significant corporate governance perspective to the Board. Market News Publishing Inc.

Korn/Ferry Reports on Canadian Corporate Governance

The proportion of directors of Canadian companies who are U.S. residents rose from 10 percent in 1995 to 15 percent in 1999, according to the 8th annual edition of the Report on Corporate Board Governance and Director Compensation in Canada. The Report, the most comprehensive survey of corporate governance in Canada, collected data from 324 public companies for fiscal year-ends in 1999.

Elan Pratzer, managing director of Korn/Ferry International in Toronto indicated, “The trend to U.S. directors on Canadian boards is not surprising, but it is significant. As Canada’s economy shifts increasingly north-south, Canadian companies are coming to view North America as their core market. So it makes sense that they would want counsel at the board level from people who are expert in 90 percent of that core market. If anything, the internationalization of Canadian boards will accelerate as our largest companies become more global in their presence and marketing.”

Nominating and governance committees, rather than CEOs, are increasingly providing leadership in identifying and selecting new directors. As a result of pressure from institutional shareholders and others, the number of companies with Governance Committees has risen from 2 percent in 1993 to 65 percent in 1999. The stock component of board compensation increased from 22 percent of the companies surveyed in 1993 to 65 percent in 2000. Market News Publishing Inc.

Women on Australian Boards

Research by corporate governance adviser Egon Zehnder shows that 65 percent of Australian boards have at least one woman director while 17 percent have at least two. Although this is far more than companies in Asia where 86 percent of boards have no female directors, it is far behind North America, where 16 per cent of all boards have three female board members. (The Australian, 2/7/01)

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Archives: January 2001

Double Nomination Approach Gains Ground

Richard Dee submitted six shareholder proposals last year requesting that companies nominate two candidates for each board seat. Four proposals came to a vote, averaging 8.1 percent support. Bart Naylor submitted a similar resolution at General Motors, receiving 6.9 percent of the votes cast. This year, Naylor plans to submit the double nomination proposal to AT&T, Coca-Cola, Intel, SBC and others. The first vote in 2001 on this type of proposal will come up at the

New Bulletin Board

We’ve moved our Bulletin Board to Yahoo! After five years, many of the old postings were growing stale. This version will be easier to search and will be easier to maintain. Try it out for your corporate governance announcements.

How Many Directorships is Too Many?

The January 23rd edition of the Wall Street Journal looked at that question in an article entitled “Companies Crack Down on Number Of Directorships Members Can Hold.” The Journal reports that more companies are setting guidelines. For example, Nuevo Energy Corp.’s limit for its CEO is two other boards. The article provides several examples of directors who have cut back the number of boards on which they serve in recent years.

Outside directors of the 200 biggest industrial and service concerns have seen their compensation rise to an average of $137,410 in cash and equity awards per directorship last year, from $70,528 in 1995. “About 61% of that compensation came from stock, compared with 28% in 1995.” The following are listed as the 10 directors with the most seats:

  • Ann D. McLaughlin, Chairman, Aspen Institute (9 boards)
  • Vernon E. Jordan, Senior managing director, Lazard Freres (8 boards)
  • John L. Clendenin, Former chairman, president and CEO, BellSouth (7 boards)
  • Willie D. Davis, President and CEO, All Pro Broadcasting (7 boards)
  • Martin D. Walker, Principal, MORWAL Investments (7 boards)
  • H. Jesse Arnelle, Counsel, Womble Carlyle Sandridge & Rice (6 boards)
  • Edward A. Brennan, Former chairman, president and CEO, Sears (6 boards)
  • Elaine L. Chao, U.S. Labor Secretary designate (6 boards)
  • Ronald L. Kuehn, Former chairman, El Paso Energy (6 boards)
  • Rozanne L. Ridgway, Former assistant U.S. Secretary of State (6 boards)

Investor Relations Advice (Update)

Karen Hendricks, CEO of the Baldwin Piano & Organ Company gives advice on the “care and feeding of institutional investors” in the January 2001 issues of Directorship. Having a strong authentically trusting relationship with investors can help your firm weather the downturns.

  • Establish an ongoing personal relationship with the individual decision-maker.
  • Understand and address your investor’s philosophies and policies.
  • Know their marketplace pressures.
  • Know when they are exceeding their expertise re knowledge of your firm or industry.

(Update 1/23) However, for another view on the situation at Baldwin and the advice given shareholders by ISS, see Phil Goldstein’s (of Opportunity Partners L.P.) remarks at (about half way down the page). “ISS supported management in a proxy contest launched in 1997 by a dissident shareholder of Baldwin Piano and Organ Company who had sought to have the company sold. Despite Baldwin’s prolonged underperformance and a consensus view that its stock price of $13-to $14 was significantly less than its breakup value, ISS recommended that shareholders support the incumbent board of directors.”

Goldstein goes on to note that “Baldwin’s board was re-elected in accordance with ISS’s recommendation but the company’s financial performance continued to deteriorate. Baldwin’s stock price is currently around $3.25.”

Call for Papers

Corporate Governance: The International Journal for Effective Board Performance

Corporate governance is a growing area of international interest and challenge, as new issues emerge throughout corporations in the world. Corporate Governance: The International Journal of Effective Board Performance will lead the international debate on board effectiveness by featuring practical and real-world discussions of current, past and future concerns of board membership. It is envisaged that articles will be based on good theory and research, but with the emphasis placed on practicality and application within organizations. Coverage includes but is not limited to the following subjects:

  • Increasing understanding of corporate governance – what it is, how its works and what it demands of organizations
  • Newly evolving techniques and developing trends such as member selection, membership profiling, decision consensus, executive succession and corporate decision making
  • Legal and governmental developments
  • Quality control
  • Ethics and corporate responsibility
  • Systems of outcome based performance
  • Environmental reporting and social reporting

Cases (with teaching notes) are also encouraged and welcome. Manuscript requirements The manuscript should be submitted as a Word or rtf document formatted with double line spacing with wide margins. Articles should be approximately 1,000 – 4,000 words in length and be sent or emailed to the editor below, together with a brief autobiographical note, up to six keywords, and an abstract of not more than 150 words. References to other publications should be in Harvard style. More detailed notes on article format and presentation and copyright requirements may be obtained from the publisher or journal homepage.

Manuscripts, abstracts or outlines of proposed articles should be submitted to:
Dr Samuel M Natale, Professor of Strategic Management, School of Business
Adelphi University
Garden City, New York 11530 USA

Back to the topMessage from Les Greenberg

The Committee of Concerned Luby’s Shareholders is pleased with the results that we have achieved. Our grass-roots campaign, with limited resources in terms of personnel (a few people who met on the Yahoo! Message Board) and funds (less than $15,000) as compared to those employed by the BOD, allowed Shareholders to voice their feelings toward the BOD and what the BOD has allowed to occur at Luby’s. We hope that we have demonstrated to shareholders of other corporations that they can make their voices heard.

We thank all who have shared their ideas with us, supported our efforts with their words of encouragement, voted for us and/or made financial contributions to us.

Even though we did not have sufficient funds to solicit the votes of all Shareholders, we received more than 25% of the net votes cast for Director nominees. Two of the four Shareholder Proposals for which we solicited were passed. Those Shareholder Proposals seek accountability of the BOD by requiring all Directors to stand for election each year and to remove all anti-takeover defenses. The Shareholder Proposal seeking to remove all anti-takeover defenses won by almost a 2-to-1 margin!

We wish the best for Luby’s. The Committee has prodded Luby’s to, at least, say that it is moving in the right direction. We hope that the BOD will become receptive to constructive criticism from customers, all Shareholders, employees and former employees. However, we will remain vigilant.

Hong Kong Event

The Chinese University of Hong Kong is arranging a high-profile event entitled “Corporate Governance and Disclosure: Enhancing the Competitiveness of Hong Kong.” This will take place on 2/22-23 at the New World Renaissance Hotel, Kowloon. Prominent speakers include representatives from the Securities & Futures Commission, China Securities Regulatory Commission, Hong Kong Monetary Authority, and others. David Webb, Editor of, will be speaking in the morning session on 23-Feb.

Tobacco Cut by UC

University of California (UC) regents are expected to adopt a recommendation that would exclude tobacco stocks from the school’s investment portfolio, the San Francisco Chronicle reported 1/12. UC President Richard Atkinson made the recommendation that the university be barred from investing in companies manufacturing tobacco products.

“It is focused on financial reasons, but it is also a result of health risks,” said Judith Hopkinson, chairwoman of the regents investment committee. “Due to the health risks of that product, we just don’t think it is the appropriate investment for the University of California.” (see JTO Direct)

Tidbits (mostly having little to do with corporate governance)

The number of labor disputes in China has risen from 8,000 in 1992 to 120,000 in 1999.
Americans work 350 more hours a year than the typical European and the hours are increasing.
Thirty-six percent of all experienced professionals are “passively” seeking jobs — three times the number of employed “active” job seekers. Target this group through referral programs.
Forty percent of newly promoted managers and execs fail within 19 months, largely because they don’t develop relations with peers and subordinates.

Turfgrass (lawns) cover 25,000 acres in the US — about the size of Pennsylvania. The average American (including men, women and children) spends 30 hours a year mowing lawns. In one hour of operation the typical gas mower releases as much pollution as driving a car 350 miles. In the West, up to 60 percent of all urban water is used to water lawns (30 percent in the East). The average acre of American lawn gets four times as much pesticide applied to it as the average acre of farmland. (from January’s Across the Board, which also has an informative interview with former Secretary of Labor, Robert Reich and features a discussion, “Should a Company have a Noble Purpose,” by Art Kleiner, George Roth and Nina Kruschwitz.)

Competitive Edge

James Wolfensohn, president of the World Bank, has indicated “the governance of the corporation is now as important to the world economy as the governance of countries.” Holly Gregory, of Weil, Gotshal & Manges LLP, argues that “good corporate governance gives US companies competitive advantage” in global competition. In conjunction with her work with the OECD/World Bank Private Sector Advisory Group she has compared the corporate governance systems of about 35 nations.

World Bank studies have shown that erosion of investor confidence was “directly linked to a lack of meaningful oversight of corporate performance and compliance” in the recent Asian meltdown. The US system offers important protections to investors, gives managers and boards discretion and flexibility and has an ability to self-correct and evolve with relative ease. However, it would be a mistake to believe that system can simply be imported into another country. “In order to work, governance reforms must develop over time, in relation to local culture and social values, and with the support of the private sector, writes Gregory.

She points to Russia as a country that tried to copy US securities laws but found that approach failed because they didn’t have a solid framework of private property rights, fiduciary, anti-corruption, antitrust, anti-fraud and bankruptcy laws and regulations. She also points to the support institutions from the exchanges to Institutional Shareholders Services to the American Society of Corporate Secretaries and many others who play an important role…what former Delaware Chancellor William T. Allen called the “institutions of capitalism.”

Gregory will follow her current article in the January 2001 issue of Directorship with a second in February but if you’d like to delve right in to this important subject, I’d advise taking a look at her excellent two part series on “The globalisation of corporate governance” which you can find at

Back to the topFoundation for Enterprise Development Conference

Sign up before Friday, January 19th and receive $40 off the conference fee. The 15th annual conference will be located at the Hilton La Jolla Torrey Pines in beautiful San Diego, California. San Diego, February 5th to the 7th. Learn from the leading experts in the field of equity compensation. see The Power of Sharing Ownership

Colgate-Palmolive Wins “Board Excellence” Award

SpencerStuart and the Wharton School of the University of Pennsylvania have granted its fifth top honor to Colgate Palmolive for outstanding performance. Contributing factors include the formal board evaluation procedures adopted in 1997, the company’s 1998 code of conduct governing all business dealings, and the company’s significant devotion to human resources. Pfizer received an honorable mention. Jan 9, 2001 (BUSINESS WIRE)

Member-to-Member Forum at ASCS

Another reason to belong the American Society of Corporate Secretaries is their member-to-member forum which provides online advice to members concerning shareholder proposals. Find out how similar proposals were omitted in the past. Don’t reinvent the wheel; get the answers directly from those who have already dealt with the same issues.

CERES Conference in Atlanta

On April 5th and 6th, 2001, it will happen again. As in past years, CERES is assembling an extraordinary mix of people–senior executives, environmental activists, labor leaders, major investors, and others–who are willing to reach across the boundaries of organization, culture, and language in a spirit of learning and dialogue. For more information about the conference, you can visit the CERES 2001 Conference Overview.

Option Plan Expansion Rejected at Micros Systems

Corporate Governance Highlights (1/5/2001) reports that shareholders rejected a proposal to increase the reserved shares under a stock option plan at Micros Systems’ November 17th annual meeting. The vote marks a dramatic turnaround since this is the 6th consecutive year they have sought shareholder approval for such an increase. Last year they won support of 78.6 percent of the votes cast but this year only 41.6 percent of shareholders voted in favor. IRRC notes this was the sixth stock option plan rejected by shareholders in 2000.

Shareholders Propose Denying Directors Indemnity

Two shareholders of Vari-L have submitted a proposal to prevent the company from spending money to defend its board members in lawsuits associated with accounting irregularities “first publicized in May 2000 or with their insider trading activities.” The shareholder contend that directors failed to meet the applicable standards of conduct for indemnification required under the company’s bylaws because they did not meet provisions requiring conduct “in good faith” they reasonably believed “was in the company’s best interests.”

The supporting statement says management didn’t disclose accounting irregularities until after three Vari-L directors had sold $10 million worth of their stock. see Corporate Governance Highlights (1/5/2001)

Nasdaq Comment Extended

The deadline to submit comments on Nasdaq’s plans to align stock option disclosures with NYSE recommendations. Comments can be submitted to [email protected] by 2/5/2001. When submitting comments, we urge readers to consider the opinions expressed by CII and also raise the issue of broker voting.

Corporate Governance Highlights (1/5/2001) again discusses the recent exchanges between CII and NYSE. In addition, it notes the study, “Corporate Voting and the Proxy Process: Managerial Control versus Shareholder Oversight,” (link to earlier version) by Jennifer Bethel of Babson College and Stuart Gillan of the TIAA-CREF Institute. Their research found that broker votes were associated with increasing management votes by more than 15 percent, depending on the type of proposal. As many as 4.7 percent of routine proposals might not have passed without broker votes. I can see no rationale for continuing this anti-democratic practice.

Canadian Governance Awards

Bank of Montreal, the Capital Health Authority and the Deposit Insurance Corporation of Ontario won the first National Awards in Governance by The Conference Board of Canada and Spencer Stuart in the private, not-for-profit and public sectors. The winners will be recognized at an awards dinner on January 30 at the 2001 Corporate Governance Conference, “Springboard to Excellence,” Hilton Toronto. seeNational Awards in Governance Showcase Best Practices the The Conference Board’s registration page.

Back to the topUndermining Pay for Performance

Pay for performance through option awards accounts half of executive compensation. A Business Week commentary by Louis Lavelle warns against the increasing practice of executives hedging such awards through zero-cost collars and similar devices. Microsoft’s Paul Allen saved almost a billion dollars last year through such a strategy.

Charles Elson, director of the University of Delaware’s Center for Corporate Governance is quoted saying, “It’s like a baseball player betting on the other team. If the executive is collaring, shareholders should be aware of it.” When managers sell stock their transactions are widely reported. Hedging transactions, reported on SEC fir 4, are rarely filed electronically and, therefore, do not appear on EDGAR. Since the transactions aren’t widely reported the chances of triggering a sell-off is small and executives retain voting rights while deferring taxes.

According to Lavelle, “whatever the motivation, when top managers hedge, shareholders deserve to know.” When executives hedge part of their stake, the pay for performance link is diminished. Lavelle compares such action to the captain of a ship who “sees an iceberg up ahead and heads for his lifeboat without waking the sleeping passengers.” However, Lavelle’s proposed remedy, to require disclosure in the annual report, is like allowing the captain to announce the iceberg only after he is not only in the lifeboat but is a mile away from the impending disaster. (Business WeekUndermining Pay for Performance, 1/15/2001)

Sprint Managers Sued

Amalgamated Bank’s Longview Collective Investment Fund filed suit in Kansas City accusing Sprint management of a “breach of fiduciary duty, waste of corporate assets, unjust enrichment and fraud,” claiming they used inside information that the merger with WorldCom “was almost certain never to occur.” The proposed merger “was used as a vehicle to make winners out of management and losers out of the shareholders,” according to Longview’s attorney William Lerach.

An accelerated plan to vest employee stock options valued at $1.7 billion went forward despite the failed merger. Early cashout provisions usually aren’t triggered until after a merger is completed. In this case there is apparently some dispute between the parties as to when Sprint’s rules changed so that “change of control” came to mean a shareholder vote to approve a sale or merger, instead of the being deemed to occur with an actual transfer in ownership. What is clear, however, is that the value of Sprint shares went from $60.875 on October 4, 1999, the day the deal was announced, to $18 a share on January 2, 2001. Shareholders lost a bundle and management made out like a bandit. (Pensions & Investments, 1/8/2001)

Green Investing Pays

A study by the Assabet Group of Concord, Massachusetts, finds that all nine environmentally focused funds studied have consistently beaten their benchmarks. The top two performers were the Winslow and Green Century funds with returns of 197% and 72% respectively. (Pensions & Investments, 1/8/2001)

Board Diversity and Independence

While 82 percent of S&P Super 1500 companies (small, mid and large cap companies) have at least a majority of independent directors, women only account for 10 percent and minorities only 7 percent of directors, according to a recent survey by IRRC. Compensation committees are now 90 percent independent, while audit committees average 87 percent independence. The popularity of corporate governance committees appears to be peaking at about 35 percent; many boards address such issues as a whole. (see Board Diversity Needs Improving, Investor Relations Business, 1/8/2001)

In Australia women hold just 3.4 per cent of positions on the boards of Australia’s publicly listed companies, according to a study by Dr Alison Sheridan at the University of New England. Out of 7341 positions on Australian public company boards, women hold just 251 posts while men hold 6409. (see Women in back seat on boards, The Daily Telegraph, 1/16/2001)


“Shaming in Corporate Law,” by David A.Skeel Jr. presents two perspectives: shaming by shareholder activists and judicial shaming. Shaming sanctions are in fashion and “range from requiring drunk drivers to wear tee-shirts announcing their crime to forcing polluters to place advertisements confessing and apologizing for their offense…. each is designed to elicit moral disapproval from the offenders’ fellow citizens” Shaming draws on shared social values.

The article reviews shaming activities by shareholder activists Monks and Minow and CalPERS’ focus firms. A third case study involves a decision of the Delaware chancery court stemming from alleged Medicaid and Medicare violations by Caremark Industries. The article also includes a discussion of shaming by the financial press (Fortune and Business Week). See The Corporate Library, “The Link between Governance & Performance – Reviews by Dr. D. Jeanne Patterson.”

Conference Board

Check out the latest corporate governance Products and Services from the Conference Board.

Back to the topInternational Certification

A Deloitte Touche Tohmatsu team, headed by Richard H. Murray, conducted a year-long study of 6,700 boards and will unveil their findings in the form of discussion points at the World Economic Forum (WEF) in Davos. Among the ideas to be explored:

  • international certification of corporate governance practices
  • active board involvement in strategic planning
  • stakeholder view vs shareholder primacy

See “Is shareholder value the only consideration for companies,” Earth Times News Service.

Aspen Technology

A shareholder proposal requesting the board of Aspen Technology (AZPN), of Cambridge Massachusetts, to rescind their shareholder rights plan reportedly received 54 percent of the votes cast. Last year the same proposal received 49 percent of the votes cast. To join in the fray contact the proponents,Carol R. Aronson and Donald E. Shobrys.

International Right to Know Campaign

A recent survey by the University of Maryland’s Program on International Public Attitudes showed that nearly 90 percent of the American public expect US companies to follow US environmental and safety standards overseas. A coalition of environmental, labor, social justice and human rights organizations will seek legislation to ensure that basic US right-to-know laws are applied to the overseas operations of US-owned companies. It looks like a long term battle.

Environment: The coalition seeks reporting of toxic release inventories, resource extraction, and emissions permits.

Labor: Require OSHA reports, disclosure of hazardous chemicals in the workplace, labor policies, complaints received and posting the ILO Declaration of Fundamental Principles and Rights at Work.

Human Rights: Require disclosure of security arrangements with police, military and paramilitary forces. Report on human rights policies, lawsuits and complaints.

Additionally, they hope to require disclosure of the name and address of all facilities, including those maintained by subsidiaries or contractors, and to enforce the law by allowing government prosecution and citizen suits.

Groups working on the initiative include Friends of the Earth, Amnesty International, American Lands Alliance, AFL-CIO, Global Exchange, Sierra Club, Oxfam America, Student Environmental Action Coalition, People of Faith Network, Rainforest Action Network, and the Center of Concern. For further information, contact David Waskow at Friends of the Earth at [email protected].To endorse the campaign, e-mail [email protected].

BP Targeted

Four resolutions will reportedly be filed at British Petroleum within the next two weeks on the subjects of:

  1. Global Warming – led by Greenpeace UK
  2. Arctic National Wildlife Refuge – led by US PIRG and World Wildlife Fund
  3. PetroChina/asking BP to apply its own human rights and environmental standards to corporations in which it invests – led by ECCR
  4. PetroChina/asking BP to divest from PetroChina – led by the Free Tibet Campaign (UK)

US and Canadian SRI firms likely to join in filing including Trillium Asset Management, Walden Asset Mgt., Green Century, Ethical Funds, MMA-Praxis.

Back to the topPets.Com Wins Anti-Shareholder Award

Shareholder rights advocate announces the winners of its “Bite the Hand that Feeds You” award for the worst corporate insult to shareholders in the year 2000.Pets.Com took first place. The company made headlines by burning up $150 million shareholder dollars in nine months. It went IPO on Valentine’s Day and was in critical condition by early summer. But over 100 other e-retailers failed in 2000; shareholders should have known this was a very risky investment. Then there was the $1.5 million paid out in management bonuses to oversee the liquidation of assets. This, too, is par for the course. According to eRaider, managers expect a big chunk of the gains if the stock price goes up, but cannot be expected to live on their salary alone if the stock price goes down.

The gratuitous insult that put them over the top was its donation of 20 tons of dog food to Alaskan sled dog owners. The company exploited the donation as a platform to attack shareholders. John Cummings, director of investor relations, told ABC News that Pets.Com waited until it was in liquidation before going ahead because it didn’t want to hear from grumpy stockholders who might want the inventory sold instead.

According to eRaider, most shareholders would probably not mind that 2 ounces of dog food per 100 shares—reducing the eventual payout to shareholders by about 1 percent—was given away. But they did mind Cummings’ arrogance—the person hired specifically to help shareholders appears oblivious to who owned the dog food and who pays his salary. Cummings went on to say, “Our company is committed to pets, to animal welfare. Most people at this company are passionate about it.” Not passionate enough to donate their own money, of course, just passionate enough to give away shareholders’ money and insult them while doing it.

Dime Bancorp, which owns and operates New York’s Dime Savings Bank, came in second. The financial geniuses running this bank spent most of the year using shareholder money trying to block a sale of the company to North Fork Bancorpation at a price more than 50 percent higher than the friendly deal negotiated by the board and management (which, of course, included generous contracts for themselves). But, again, this is standard practice and inspires shareholder cynicism rather than action.

Dime management broke new ground by trying to prove 30 percent is larger than 70 percent. The Dime proxy card allowed shareholders to vote for all director nominees or to withhold their vote…23.8 million shares were voted “for” and 55.2 were voted “”withhold.” Dime declared victory and seated its directors. North Fork and shareholder Lawrence J. Toal promptly sued, and the court quickly granted summary judgment against the Dime. Dime added insult to injury by wasting shareholder money to hire Sullivan & Cromwell, one of the most expensive law firms in the country, to argue its absurd anti-shareholder, anti-democratic, anti-common sense position.

Third place went to Sprint for the most insulting use of a poison pill. Pills are designed to prevent unfriendly takeovers by triggering expensive provisions if anyone acquires more than a certain percentage (most commonly 15 percent) of the company. Clearly this entrenches the board and management, and interferes with the free right of shareholders to get the maximum price for their shares.

Sprint made history by triggering its own pill with an announced merger with WorldCom, creating a $600 million windfall for management. The announcement allowed top managers to exercise options at the pinnacle of the stock’s merger inflated valuation, and then retire. When the merger fell apart, Sprint executives got to keep their options windfall. Today, they crowd Phoenix golf courses and make side income as telecommunications consultants while shareholders own diluted, devalued and undermanaged stock.

Four more companies qualified for dishonorable mention:

  • Storage Technology for saying one thing to defeat a shareholder resolution asking management and directors to hold more stock, then exactly the opposite to later justify their innovative method of repricing.
  • Heartland Mutual Funds for losing 70 percent of Net Asset Value in one day in a short-term municipal bond fund, then making nonsensical explanations to shareholders.
  • Lernout & Hauspie Speech Products NV for the famous “I am responsible for nothing” line from the Managing Director after $100 million in cash and all shareholder value disappeared.
  • Hershey for adopting a poison pill when voting control is already locked up in the Hershey Trust, then giving dismissive to shareholders who asked the obvious question of “why?”
  • Others receiving votes: DaimlerChrysler, Warnaco Group, Mattel, Hyundai, Crown Central Petroleum, Willamette Industries.

Warnaco was my nomination. Warnaco Group, Inc. (WAC) which designs, manufactures and markets a broad line of intimate apparel, jeans and sportswear. For the 9 months ended 9/30/00, revenues rose 13% to $1.70B but net losses totaled $130.3M vs. an income of $95.1M for the previous year. The results reflect higher revenues from sportswear and accessories, offset by an increase in personnel and interest expenses… at least in part to the CEO who was paid $2 million plus a $7.7 million bonus in fiscal year 1999. During the past 12 months, while the average value of DJ clothing/fabrics firms has gained 8.5%, Warnaco shareholders have seen the value of their stock decline by more than 86%.

In this age of Internet commerce, it also gripped me thatWarnaco’s Internet site has consisted of the same message for two years, “under construction.” It was “updated” last year …presumably to note lack of construction progress. Why would any company pay a $7.7 million bonus to the CEO for moving from net profit to net loss? Why would any company advertise their incompetence by having a sign posted on the Internet that indicates that can’t even construct a rudimentary site over the course of two years?

AFL-CIO Petitions SEC to Require Disclosure of Mutual Fund Votes

On December 19th the AFL-CIO petitioned the Securities and Exchange Commission to require mutual funds to disclose how they are voting their shares. Currently, mutual funds aren’t required to disclose the principles they use when voting in corporate elections. Nor do they have to tell investors how they voted. Unlike pension funds, there isn’t even a requirement that mutual funds vote in the best interest of shareholders.

Recently, the UK began requiring that pension funds disclose their social investment policies (if they have such policies). (see news) Just as that law brought a new level of scrutiny to the investment decisions of UK pension funds, the reforms advocated by the AFL-CIO would allow individual investors in the US to ensure their shares are being voted consistently with their values.

As early as 1988 the Department of Labor (DOL) set forth the opinion that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets. In my opinion, its about time that mutual funds and other institutional investors also accepted the responsibilities of ownership. (see December 2000 news for a list of mutual funds which do make such disclosures)

Most mutual funds have failed to disclose their proxy voting policies or their votes. Perhaps they have been reluctant to provide such disclosure for fear of being deselected by corporate 401(k) plans. In addition, in many fund families the votes of the funds are probably not in harmony. Some funds will initially find such disclosures difficult, since they risk loosing corporate clients. However, if it is a legal requirement, there will be a level playing field where advantage can best be gained by working in the shareholder’s best interest. Disclosure of mutual fund proxy voting policies and voting behavior should enhance the return on capital by increasing the accountability of corporate officers to corporate owners.

To make the information easy for investors to use, the AFL-CIO asked the SEC to require mutual funds to disclose both holdings and voting information on the Internet in a user-friendly format. A copy of the petition is available by calling (202) 637-3900. For information contact: Bill Patterson (202) 637-3900 or Lane Windham (202) 637-5018. (See AFL-CIO press release) I encourage all readers to join in the AFL-CIO’s request. If fulfilled, it would be one of the most important developments in corporate governance ever.

For more information, read “Make 2001 the Year You Become an Activist Fund Shareholder” by Mercer Bullard in, 1/2/01 or go directly to Fund Democracy for sample letters to the SEC and additional resources. In a follow-up article, “Are Ballots Too Secret? Fund Advisers Should Tell How They Vote Proxies,”Bullard says the AFL-CIO’s proposal “holds out the best hope for improving corporate democracy in 2001.” In my opinion, if adopted the development would rank in importance with the DOL mandate that pension funds treat voting as a plan asset and the SEC’s 1992 communication reforms which allow shareholders to communicate with each other without going through elaborate and expensive filing procedures.

Proxy Monitor Acquires Fairvest

New York’s Proxy Monitor, a leading voting advisor to institutional investors, acquired Fairvest, our primary source of corporate governance information and advice in Canada. The Toronto based firm will now be known as Fairvest Proxy Monitor Corporation. see 01/03/01 press release

Focus on the Corporation

If you’re interested in corporate governance, you may also be interested in a weekly column “Focus on the Corporation,” co-authored by Russell Mokhiber, editor of Corporate Crime Reporter, and Robert Weissman, editor of Multinational Monitor magazine. It reports and comments critically on corporate actions, plans, abuses and trends. Written with a sharp edge and occasional irreverence Corp-Focus can be read at or you can get a free rabble rousing e-mail subscription by sending a note to the moderated listserve at [email protected] with the text subscribe.

The latest edition points to cooperation between the FBI and insurance industry in fighting insurance fraud and asks, “wouldn’t it be great if consumer groups had a working relationship with the FBI — just pick up the phone and call your local FBI agents, and have them knock on the door of the CEO of the insurance company, and begin asking questions? Wouldn’t it be great if law enforcement sided with individuals against corporate criminals in our midst?”

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