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 Nettaxi.com

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.com. Nettaxi has seen its stock decline 99.5% since its peak in April of 1999. According to Seedling, Nettaxi.com 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 Nettaxi.com 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, SocialFunds.com, 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.

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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 Amazon.com 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 athttp://www.shareholdervalue.org.

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
Globalisation
,” 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, CNETNews.com)

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.

Continue Reading ·

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 (eRaider.com 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.

Sincerely,

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
219-982-5009

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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 fidelity.com; 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

eRaider.com 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 ATTInsider.com 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.

Compensation:

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 SocialFunds.com 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 theboardmember.com 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: http://www.paed.uscourts.gov/documents/opinions/01D0329P.HTM.

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

SocialFunds.com 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 webb-site.com 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 EDGEvantage.com. 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&Tinsider.com.

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Link Added to RealCorporateLawyer.com

RealCorporateLawyer.com 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, TheStreet.com, 3/1/01)

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EDGEvantage.com Reports on Several News Items

The March issue of EDGEvantage.com 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 StockJungle.com 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. (FT.com, 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 http://www.secinfo.com/drbZu.5f89v.htm (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 Webb-site.com, 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 thelawdepartment.network.

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

“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 eRaider.com 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 socialfunds.com 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 TheSteet.com, 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 http://lists.essential.org/pipermail/corp-focus 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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Mutual Funds Should Disclose Votes

On December 19, 2000 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). 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 consistent with their values.

As early as 1988 the Department of Labor 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, it’s about time that mutual funds and other institutional investors also accepted the responsibilities of ownership.

Most mutual funds don’t disclose their proxy voting policies or their votes. Perhaps they are reluctant to provide such disclosure for fear of being deselected by corporate 401(k) plans over particular votes. 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 losing 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. I encourage all readers to add their voices to the AFL-CIO’s request. If fulfilled, it would be one of the most important developments in corporate governance ever.

For more information, read Mercer Bullard’s article “Make 2001 the Year You Become an Activist Fund Shareholder” in TheStreet.com, or go directly to his Fund Democracy website 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, mutual fund vote disclosure would rank in importance with the DOL mandate that pension funds treat voting as a plan asset and the SEC’s 1992 reforms which allow shareholders to communicate with each other without going through elaborate and expensive filing procedures.

 

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Archives: November 2000

LENS Files Complaint at Metromedia
Shareholder activist, Lens Investment Management, LLC, filed a formal complaint, under Section 220 of Delaware General Corporation Law, against Metromedia International Group, Inc. (Amex: MMG), a diversified global media company. Lens is seeking to inspect corporate records to determine whether top execs have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting from Metromedia International at the expense of its public shareholders. For more, see Yahoo! and Lens’ campaign.

Disclosure for Fund Fees

The Securities and Exchange Commission will soon release a study on mutual fund fees recommending that funds disclose the amount of expenses paid on a hypothetical $10,000 account, according to Mercer Bullard, CEO of Fund Democracy. In SEC Preparing to Shine a Brighter Light on Fund Fees (TheStreet.com, 11/17), Bullard indicates SEC Chairman Arthur Levitt pointed out that fund fees can take a huge bite out of returns. “He used the example of a $1,000 investment in an S&P 500 index tracking fund made in 1950, which should be worth about $500,000 today. But after fees, this total drops to $230,000, and if the fund is not tax efficient it shrivels to $65,000.”

International Shareholder Advocacy

Lauren Compere, of Walden Asset Management, provides guidance to shareholders seeking to advocate abroad in their November issues of Values. Access to company proxies varies, ranging from an ownership threshold of 1% in Germany and Japan to 5% of outstanding shares in France. How can U.S investors influence companies in their international portfolios?

  • Learn the rules of country specific markets.
  • Develop global proxy voting guidelines.
  • Pursue alternatives to shareholder resolutions, such as letter writing and meetings.
  • Develop a network of local partners to gain legal representation at annual general meetings.

Exec Pay Too High

An editorial in the 12/13 edition of Business Week makes the case for CEO churning (Why CEO Churn is Healthy). “They’re flying out of the corner office like quail being flushed out of cover.” Lucent, Xerox, Gillette, Procter & Gamble, Coca-Cola and Aetna have thrown their CEOs out within the last 12 months. According to Challenger, Gray & Christmas Inc., 103 CEOs left their jobs in September, more than twice last year’s rate. “Many CEOs are barely in control of their companies’ fate, much less their own.” “In the transition to the New Economy, it may be that CEOs can be expected to manage only a portion of the change before they fall victim to an unexpected trend or are overwhelmed by inadequate execution.”

While CEO churn may be logical in an era of rapid transitions, should temporary help be paid 500 times their average employee? A recent Hay Group survey found that 85% of institutional investors believe that executive pay at UK firms is insufficiently related to performance and that 100% thought pay incentives covering three or more years should make up a much larger proportion of total reimbursement. Yet, that same survey showed that 91% oppose the introduction of a procedure whereby shareholders could move resolutions on pay issues at the annual meeting and 97% oppose shareholders having to sanction reimbursement packages. (Governance, 9/2000)

Executive pay is much more extreme in the US than in the UK. Voting on exec pay doesn’t appear to translate to shareholder empowerment but too few institutional investors on either side of the Atlantic have really pushed for the long term incentives tied to performance they say they want. Until they do, the paradox will remain.

Back to the topConvergence

Gerald F. Davis and Michael Useem make a convincing case for convergence, not among nations but among firms with higher stock market valuations. To survive global industry consolidations, many such firms will seek a listing on American stock exchanges, and will thereby become subject to US legal standards. In their paper, “Top Management, Company Directors, and Corporate Control,” the authors point to the need for further research in five key areas “if we are to know what works and what does not, and which theories are useful and which are not”:

  1. Boards and directors: What does the decision process inside the boardroom look like? What are the sources of power and influence of inside and outside directors? How are the decision process and director influence contingent on the ‘institutional matrix’ in which a board is embedded? (Example: Pettigrew and McNulty, 1998.)
  2. Comparative governance: What really accounts for the astonishing and remarkably persistent diversity in the national systems of corporate governance? How do national institutions, cultures, and social structures shape and constrain the evolution of corporate governance systems? (Examples: Kogut and Walker, 1999; Bebchuk and Roe, 1999.)
  3. Financial globalization: If the surge of cross-border investing is a major driver of corporate change, what can we expect of financial flows and their regulation in the years ahead? How is the evolving organization of investors and companies likely to affect the internationalization of capital flows? What aspects of corporate governance will affect the attractiveness of a national economy for international investors? How are actions by the International Monetary Fund and World Bank likely to affect national systems of corporate governance? (Example: Evans, 1995; Mizruchi, 2000).
  4. Inequality in a “globalized” world: How do systems of corporate governance affect distributions of wealth within and among nations? What is the likelihood that social movements for change may mobilize in the face of – or to resist – globalization? Does the globalization of finance lead to a leveling up or a leveling down of national standards for labor relations, environmental protection, and income inequality? (Example: Firebaugh, 1999).
  5. Business and Political Leadership: To what extent is a shared leadership style emerging among top company managers and government officials around the world? Are such institutions as the World Economic Forum creating a global network among those who govern the major commercial and political institutions in the leading economies? As worldwide relations among business and political elites do emerge, are they undermining traditional relations among elites within economies? (Examples: Davis and Mizruchi, 1999; Khanna and Palepu, 2000).

eLOT Adopts Model Bylaws 

eLot, a leading web-based retailer of governmental lottery tickets, implemented bylaw amendments requiring two-thirds of the members of the board to be independent. The bylaws establish a strict definition of independence and mandate audit, compensation, nominating and transaction committees, all members of which must be independent. The bylaws also require that independent directors elect a “lead director” at any time when the chairman of the board is also an executive officer. The lead director and the other independent directors must meet in executive session following every meeting of the full Board. (Disclosure: the Editor owns stock in eLot)

CEO Options Under Water

Graef Crystal reports 45% stock option grants out of 1,036 studied were below there strike price. William Schrader at PSINet Inc. is down the most with a decline of 85% but WorldCom’s Bernard Ebbers lost the most money, $51.3 million with a drop of 61%. See U.S. CEOs With the Most Underwater ’99 Options.

LENS Investment Still Active

Founded in 1991 by Robert A.G. Monks as an investment management firm, Lens was among the first to take an active role in corporate governance. Some activists were worried when it ceased operation as an investment manager and took on the role of a specialist in investor activism. Recent action at Metromedia ensures us that Lens continues to be active. SeeShareholder Activist, Lens, Supports Announcement From Metromedia International Group — Global Communications and Media Company Considers Selling Assets, 11/9/00, andMetromedia International Group Response to Lens Investment Management, 11/14/00.

Spread it Around

Stock-based incentive programs pay double dividends, according to a survey of 173 firms by Hewitt Associates, since they also deliver higher returns to shareholders. (WSJ, 11/21/00)

New Era of Shareholder Activism

The Christian Science Monitor notes “the Internet allows individuals like Stoller to air their opinions, marshal support, and put pressure on heretofore unapproachable boards of directors.” The experience of Martin Stoller and Aaron Brown of eRaider and Nell Minow of The Corporate Library are highlighted, as well as Les Greenberg’s current campaign at Luby’s. See “A place at the table,” 11/20/00 and monitortalk.

New Proposal to Ensure Audit Independence

The Corporate Monitoring Project has expanded the field of battle for shareholder activism with a different spin from therecent SEC action on auditor independence. While the new SEC rules require companies that use their accounting firms for both auditing and consulting to jump through new regulatory hoops, the Corporate Monitoring Project proposes to let shareholders decide. Its too bad the SEC didn’t adopt the proposal as an option but the idea is also compatible with the new rules. Under the proposal, shareowners would vote to choose the company’s auditor, instead of just rubber-stamping or rejecting management’s choice. As under its corporate monitoring proposal, auditing firms would self-nominate and shareholders would select from among them. This would encourage auditors to build their reputations in the eyes of investors rather than in the eyes of management, creating new pressure for higher standards. The first resolution to seekauditor independence by shareholder vote will be submitted atSONICblue.

Back to the topShareholders Score

Progress is being made by shareholders. One small measure of success is the recent favorable votes on shareholder sponsored resolutions.  During the 1999-2000 season they garnered an average 22.6% vote, compared to an historical average of 5%.  Governance related proposals won an average of 36.5%. (Strategic Compensation Research Associates, as reported in the November edition of Directorship)

“Vote No” Gets Teeth?

The Court of Chancery of the State of Delaware issued an opinion on 11/8 confirming that directors of Dime Bancorp, Inc. nominated by Dime for re-election at its annual meeting held in July were not re-elected to a new three-year term. The directors must stand for re-election at Dime’s annual meeting of stockholders to be held next year.

Apparently, shareholders rejected Dime’s nominees by more that a two to one margin. North Fork Bancorporation, Inc. intends to nominate several directors to the Dime board of directors at the Dime 2001 annual meeting. See North Fork Announces Victory Over Dime in Delaware Court.

Unfortunately, although this appears to be a groundbreaking case which could lend teeth to “vote no campaigns,” I have not been able to locate a copy of the decision on the Internet or any real analysis. Any additional information readers have on this case would be appreciated. Please send it along to[email protected] or post to http://eraider.com/message.cfm?topicID=31&catID=64&messagenumber=183

CalPERS Sets International Investing Standards

California Public Employees’ Retirement System, the nation’s largest public pension, approved a standards for human rights, labor and the environment for overseas investments. State Treasurer Phil Angelides appears to have spearheaded the move, while State Controller Kathleen Connell opposed the move. (Calpers sets new standards for emerging markets, Reuters, 11/14, Yahoo!)

Microsoft Political Contributions Under Fire

A resolution calling for Microsoft to report its political contributions was filed by Trillium Asset Management Corporation and three members of Responsible Wealth last year and received a 7.6% yes vote. The resolution may be introduced again at the 2001 meeting. Common Cause reports that Microsoft’s soft money contributions went from $77,000 in the 1996-1997 election year cycle to approximately $1.8 million in the first eighteen months of the 1999-2000 election year cycle. (SocialFunds.com, 11/13)

Standard and Poor’s Rates Russian Firms

Companies wanting to attract investments can use their benchmarks to improve corporate governance practices in four key areas: ownership structure, financial shareholder relations, financial transparency and information disclosure, and board structure and process. Performance is against codes and Organization for Economic Cooperation and Development, World Bank and European Bank for Reconstruction and Development guidelines and principles. Ten firms have reported signed up so far. (see World standards to rate Russia business practice, ITAR/TASS News Agency, 11/14 via Northernlight and Russian firms choose transparency or taxman-S&P, Yahoo! 11/14)

IMF Calls for Competition in Hong Kong

The International Monetary Fund urged creation of a legal framework to crack down on anti-competitive behavior but Stephen Ip Shu-kwan, Secretary for Financial Services, indicated that, “all-embracing competition legislation could have profound implications for our market efficiency and flexibility, particularly given that Hong Kong is a small and open economy.” (see IMF pushes for competition law, South China Morning Post, 11/15)

China to Tighten Disclosure

China is tightening disclosure rules for financial companies. Public banking, insurance and securities will be required to disclose information on asset quality as well as non-performing assets. Financial statements would be audited by foreign accountants under international accounting rules. (seeDisclosure rules tighten up for financial listings, South China Morning Post, 11/15)

UK Pension Funds Respond to New Disclosure Law

UK pension fund trustees are now required to disclose how they account for social responsibility issues in their investment strategies, if at all. A survey by the UK Social Investment Forum reveals that 59 percent of the UK pension funds surveyed, representing 78 percent of total assets, incorporate socially responsible investment into their investment strategies. Only 14 percent of funds, representing 4 percent of total assets, state specifically that social concerns will not be taken into account. (see UK Pension Funds Embrace Social Responsibility, SocialFunds.com, 10/11)

Back to the topRiot Police at Smirnov Boardroom

As further evidence that Russia is still in need of corporate governance reform, black-masked riot police, wearing body armor and brandishing nightsticks, broke down the doors of a Russian vodka distiller involved in a shareholder dispute. (seeIn Russia, Riot Police Hold the Golden Share, International Herald Tribune, 11/8)

India’s the Place

Gary Wendt, CEO of Conseco, an Indiana based financial holding company, argues there is an oversupply of money chasing Asian investment opportunities. Taiwan, Singapore and Australia are overpriced. Indonesia, the Philippines, Malaysia, Burma and Thailand remain high risk countries, as does China. Japan is facing debt overload; the average firm’s debt-to-equity ratio is 90%.

Wendt’s “dark horse” candidate is India, which has the largest quantity of today’s most important resource: people. While wage rates for educated workers are high in other English speaking countries, India’s still have a long way to catch up. What was previously done in Indianapolis can now be done in India with the same efficiency. As reported earlier, CLSAranked emerging market companies in terms of corporate governance. Three of the top ten are based in India: Infosys,Hindustan Lever, and Wipro.

An edited version of Gary Wendt’s speech at the Conference Board’s Global Leadership Forum appears in Across the Board’s 11-12/00 edition. In the interest of disclosure, it should be noted that the editor of CorpGov.Net, James McRitchie, recently purchased Wipro ADRs.

$259 million PSLRA Settlement at 3Com

3Com Corporation has agreed to pay $259 million to settle a securities class action filed by the Louisiana School Employees’ Retirement System and the Louisiana Municipal Police Employees’ Retirement System on behalf of 3Com shareholders. The Funds were appointed to the role of principal lead plaintiffs by the United States District Court for the Northern District of California pursuant to the Private Securities Litigation Reform Act in March 1998 and were represented by Bernstein Litowitz Berger & Grossmann LLP.

The settlement is the second largest ever obtained from a corporate defendant in a securities class action, next to that obtained against Cendant Corporation. The settlement also requires the 3Com Audit Committee to include at least three directors, all of whom must be independent and at least one of whom has accounting or financial management expertise. Newsalert, 11/8, Louisiana Pension Funds Announce $259 Million Class Action Settlement With 3Com

Southeast Asian Markets Endangered

The Wall Street Journal warns that “Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come.” Poor corporate governance has led some funds, such as activist Julian Robertson’s Tiger Management, to close up shop. CLSA Emerging Markets found that during the 1997-1998 financial crisis, a basket of 108 emerging-market stocks fell 10.5%, whereas the 10 companies that scored best on corporate governance criteria gained 133%. The top five rated firms included: TSMC, Infosys, HSBC Holdings, Hindustan Lever, and Wipro. CLSA also ranked 25 emerging market countries based on environments that are good for corporate-governance practices. The survey placed Singapore and Hong Kong number one and two, but most Southeast Asian markets didn’t fare well. Thailand, Indonesia, Philippines, and Malaysia all placed in the bottom ten. (WSJ, 11/8, Corporate-Governance Issues Hamper Emerging Markets)

Proxy Contest Central

Anticipation mounts for the upcoming debut of Investors’ Bullhorn. If it works as planned, iBullhorn.com will empower investors by dramatically reducing the cost and complexity of proxy solicitations. Creative software, knowledgeable monitors and the Internet will allow shareholders to communicate and take collective action, all within the boundaries of SEC rules. Some of the site’s features, as described by Kristy Kaepplein, iBullhorn.com’s founder and president, are as follows:

  • share with others, either anonymously or publicly, how they plan to vote, and view others’ planned votes
  • read research from independent proxy research services on proxy voting items
  • suggest nominees for the Board of Directors, and even “nominate” them if they choose to solicit proxies from other shareowners
  • communicate with each other, management and the board, anonymously if they wish
  • feel more confident that others posting to the site actually own shares in the company, because iBullhorn validates their positions
  • initiate shareholder proposals by selecting from iBullhorn’s library or craft their own; iBullhorn transmits electronically
  • solicit and grant proxies from/to other shareowners (as permitted by state and federal law)

The site may give every investor the opportunity to become a “relational investor,” even those who’s shares are held by mutual or pensions funds. Fiduciaries are likely to learn that providing fundholders and beneficiaries with the tools to communicate and act collaboratively may be one of the most important ways to build customer loyalty. A fund’s corporate governance rating could become increasingly important and may be dependent on attracting and keeping those who are knowledgeable and active.

If Kaepplein and associate David Sensenich have their way it will be underperforming managers who do the “Wall Street Walk,” not shareholders. To get the whole story, read “Democracy for capitalists” in Governance, October 2000.

Back to the topMalaysian Audit Committees

The 2000 National Conference on Internal Auditing in Kuala Lumpur brought reflections by star.com.my on the Malaysian Code which is expected to be adopted by the KLSE as part of its listing rules. Last year’s US Blue Ribbon committee on improving audit committee effectiveness and the Malaysian Code on Corporate Governance issued last March have created more focus on auditing. Boards should be aware of the risks the organization faces, the systems of internal control and should ensure they are adequate. The KLSE is likely to require boards to include a statement in company annual reports on internal controls. (Life gets difficult for audit committees, 11/6) (see also, Update on Malaysian Code on Corporate Governance)

Demonstration at TIAA-CREF November 14th

Social Choice for Social Change, a campaign to have the largest nongovernmental pension fund in the world invest 5-10% of its assets ($200-400 million) in community development institutions and companies that are models of social and environmental responsibility, will be protesting outside their annual shareholder meeting and establishing a presence inside. Where: 730 Third Avenue in Manhattan, between 45th and 46th Streets. When: 11/14, 9-12 noon. Contact: Paul Sheridan, Brooklyn College (718) 951-5359 (office) (718) 783-4196 (home).

Social Choice will supply fliers and signs, as well as graduation caps and gowns for those who choose to wear them (for a visual effect–a number of prominent national media plan to attend or will otherwise be covering the story). You can also bring a gap/gown or sign of your own. TIAA-CREFprotesters will be joined by people associated with a number of community organizing groups in NYC who are working for increased low-income housing. Also joining them will be other protesters calling for TIAA-CREF to divest from Philip Morris tobacco and from Unocal Oil, which has operations tied to the brutal dictatorship in Burma. Together, they are telling TIAA-CREF to “Get out of the bad and into the good.”

Norms and Corporate Law Symposium

A symposium on the choice between law and non-legally enforceable norms in the governance of business organizations will be held at the University of Pennsylvania on December 8th and 9th. Here’s a real bargain. Advance registration is required but the fee is only $100 and that includes continental breakfasts, lunches, and dinners on both days. Contact Bonnie T. Clause. Presentations include:

Bernard S. Black, Stanford Law School
“Do Corporate Governance Norms Matter? A Crude Test Using Russian Data”
Commentator: John C. Coffee, Jr., Columbia Law School

Margaret Blair and Lynn Stout, Georgetown University Law School
“Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law”
Commentator: John C. Coates, Harvard Law School

Robert D. Cooter and Melvin A. Eisenberg, Boalt Hall
“Norms and Organizations”
Commentator: Lisa Bernstein, University of Chicago Law School

Oliver Hart, Dept. Economics, Harvard University
“Norms, Corporate Law and the Theory of the Firm”

Marcel Kahan, New York University School of Law
“Economics and Law, Networks and Norms: An Analysis of the Incentive Structure of the Corporation”
Commentator: Henry B. Hansmann, Yale Law School

Saul Levmore, University of Chicago Law School
“Compensation Norms”
Commentator: David M. Schizer, Columbia Law School

Paul G. Mahoney and Chris Sanchirico, Univ. Virginia School of Law
“The Self-Contradictory Nature of Norms and the Belief-Stabilizing Role of Law”
Commentator: Jack Knight, Dept. Political Science, Washington Univ.

Curtis Milhaupt, Columbia Law School
“On the Evolution of Japanese Corporate Norms”
Commentator: Reinier H. Kraakman, Harvard Law School

Edward B. Rock and Michael L. Wachter, Univ. Pennsylvania Law School
“Islands of Conscious Power: Laws, Norms and the Self-Governing Corporation”
Commentator: Jeffrey Gordon, Columbia Law School

Mark Roe, Columbia Law School
“The Shareholder Wealth Maximization Norm and Industrial Organization”
Commentator: Ian Ayres, Yale Law School

David Skeel, University of Pennsylvania Law School
“On the Role of Shame in Corporate Law”
Commentator: William T. Allen, New York University School of Law

Eric L. Talley, University of Southern California
“Disclosure Norms”
Commentator: Eric Posner, University of Chicago Law

Institute For International Corporate Governance and Accountability

Capital markets, dominated by multinational institutional investors, and product markets, rather than governments, are defining corporate behavior. The Institute, with the help of a grant from the Ford Foundation, will attempt to create an international umbrella organization bringing together scholars, practitioners and policymakers who are willing to question the American influence on the corporate governance systems and consider structural approaches to corporate accountability.

The Institute will open up a dialog that crosses disciplinary boundaries including law, economics, sociology, psychology, philosophy, political science, history, anthropology, ethics, and business, among others. They start from the premise that “responsible corporate behavior — rather than stockholder-centered corporate behavior — ought to be the norm.” The Institute aims to reconcile the compatibility of wealth creation with economic and environmental justice. To learn more, viewECGN posting.or contact Tanya McCain.

Unsavory Backgrounds Disproportionate Among Internet Execs
Kroll Associates reports that Internet executives are four times more likely to have “unsavory backgrounds” than those of other industries. Of the 70 background investigations, 39% were found to have problems such as insurance fraud, undisclosed bankruptcies, securities violations and even links to organized crime. Apparently, moving at Internet speed doesn’t allow for careful checks on employees, internal auditing or security. Financial Times, 10/25

Economic Professors Rate Gore Above Bush

According to a survey by The Economist of economics professors, less than 60% rated Gore’s proposed economic policies a B or better, while less than 40% gave a B or better to Bush’s policies. Clinton’s record scored a B with 90%. Most of the economists agree with Greenspan that projected surpluses are best used to pay down the debt. Gore’s plans call for going further in that direction than Bush’s and so, should be better for the economy. (Poor Grades for Al and George, 9/30)

Back to the topExec Pay

America leads that pack by miles. While our bosses take home 475 times more than workers, our closest rivals are Venezuela, Brazil and Mexico where they earn almost 50 times more than their underlings. In Europe, the ratio runs 11 to 24 times. In Canada its about 20 times and in Japan around 11, according to a study by Towers Perrin.

Levitt’s Legacy

His boat, named Full Disclosure, may soon get more use. Arthur Levitt is likely to step down as chairman of the Securities and Exchange Commission (SEC) near the end of the Clinton administration. The Economist review his legacy in Shining light on the markets, 10/26. One of his greatest accomplishments was the October 23rd Regulation FD (for fair disclosure), which requires companies to provide the public with information at the same time as security analysts and portfolio managers. He is still working on prohibiting accounting firms that audit a company’s books from selling the same company other services. Sunlight and integrity, not a bad record.

Buy Means Sell

The Economist recommends shareholders take a closer look at share buybacks. When pioneered by Henry Singleton of Teledyne, repurchases cut the number of outstanding shares by 85% while increasing profitability and stockmarket value by buying shares when they were cheap. Today, many are overpaying. “Worse, companies may be buying only because their managers are selling.” Those who have made repurchases above current prices to provide shares for options exercised by staff include Dell Computer, Adobe, Chiron, Autodesk, and KLA-Tencor. (Buy Means Sell, 10/7)

Pension Funds Ignore Voting Responsibilities

Years ago the Department of Labor (DOL) set ruled that, since proxy voting can add value, voting rights are subject to the same fiduciary standards as other plan assets (see “Avon” letter). According to a recent article in Institutional Investor Magazine (10/1) pension funds are Passing the Buck on their responsibilities.

“More than one third say they believe that voting doesn’t make a difference.” “Only 4.2 percent of funds polled say that they have ever tried to place an issue on a proxy ballot, and just 1.6 percent indicate that they have ever voted in favor of a social issue.” According to Institutional Investor Magazine, pension funds could “find themselves liable if a socially motivated action proved costly. Respondents unanimously say that social issues are not a shareholder’s responsibility.”

Directors Should Go Back to School

The State of Wisconsin Investment Board will advocates that directors of corporate boards take continuing education classes, much as attorneys are required to do. SWIB will contact 140 companies where the $65 billion fund holds at least a 5% stake and will gauge future actions on their response, according to aDow Jones report.

Our opinion? It is a great idea that we hope most directors will embrace. Much has changed in the last few years. Directors would benefit from learning from others knowledgeable in such areas as the changing role of the audit committee, best practices in corporate governance, recent legal developments such as the SEC’s “Fair Disclosure” rules, and the growing role of shareholder activists, such as SWIB.

Investigate Directors

The Corporate Library’s new beta Director Screening Toolhelps you analyze individual directors of the 1,500 companies in the S&P supercomposite (essentially the 1,500 largest public companies). Fields include number of shares held, attendance record, inside or outside director, and the text of the director’s proxy profile.

For example, I queried the database to identify all directors with poor attendance and got 150 names. How many female directors? (912) How many males? (11972) How many males had a poor attendance record? (137) How many females had a poor attendance record? (13) How many directors served on 13 boards? (two, Robert E. Foss and Mark D. Groban, M.D.) How many board members are age 30 or under? (seven) How many own 100 shares or less in the company whose board they serve on? (589)

You get the picture…another useful tool from the great folks at The Corporate Library. Be careful though. Remember this is a test model. The data may need confirmation. It is hard for me to believe, for example, that three members of the Adobe Systems Board hold no stock in the firm.

Update 1: After this item was posted, Ric Marshall, Chief Executive Officer of The Corporate Library did a little more digging on Adobe. It appears that two out of the three Adobe Directors they listed as having 0 shares hold exercisable options (5,000 and 7,500 shares each), but “as of the most recent proxy filing neither is a shareholder of the company!!! On the third, Mr. Geschke, we were way off, though the 886,077 shares over which he has voting and investment power (and which are now shown in our database) are held in a family trust.”

Marshall points out the “correlation between lagging company performance and outside director shareholdings represents one of the very few demonstrable links between corporate governance and performance. That’s somewhat the case here, as Adobe is currently underperforming their peer group, though it is still outperforming the S&P500. But if the Directors of the firm don’t believe in the company enough to risk their own money why should anyone else?”

I’ve written to the investor relations department at Adobe (e-mail: [email protected]) to seek confirmation that directors Delbert W. Yocam and Carol Mills Baldwin hold exercisable options but no stock in the company. I also asked for an explanation. I’ll let you know how they respond.

The Corporate Library is to be congratulated for offering the most powerful tool to date on the Internet for holding corporate directors accountable. Keep up the great work!

Update 2: I received the following response from Mike Saviage, Sr. Director of Adobe Investor Relations concerning the fact that two of their directors lacked sufficient confidence in Adobe to invest any money in it:

In regard to your question about director ownership of our stock, individuals make investment decisions based on their own personal circumstances (tax and otherwise). Section 16 reporting persons in particular have significant limitations on their ability to trade in the stock of companies for which they are directors or officers. Adobe does not monitor the individual circumstances or the investment choices of its directors and officers.

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Archives: October 2000

LENS Files Complaint at Metromedia

Shareholder activist, Lens Investment Management, LLC, filed a formal complaint, under Section 220 of Delaware General Corporation Law, against Metromedia International Group, Inc. (Amex: MMG), a diversified global media company. Lens is seeking to inspect corporate records to determine whether top execs have breached their fiduciary duties by engaging in related party transactions or by otherwise unfairly profiting from Metromedia International at the expense of its public shareholders. For more, see Yahoo! and Lens’ campaign.

Disclosure for Fund Fees

The Securities and Exchange Commission will soon release a study on mutual fund fees recommending that funds disclose the amount of expenses paid on a hypothetical $10,000 account, according to Mercer Bullard, CEO of Fund Democracy. In SEC Preparing to Shine a Brighter Light on Fund Fees (TheStreet.com, 11/17), Bullard indicates SEC Chairman Arthur Levitt pointed out that fund fees can take a huge bite out of returns. “He used the example of a $1,000 investment in an S&P 500 index tracking fund made in 1950, which should be worth about $500,000 today. But after fees, this total drops to $230,000, and if the fund is not tax efficient it shrivels to $65,000.”

International Shareholder Advocacy

Lauren Compere, of Walden Asset Management, provides guidance to shareholders seeking to advocate abroad in their November issues of Values. Access to company proxies varies, ranging from an ownership threshold of 1% in Germany and Japan to 5% of outstanding shares in France. How can U.S investors influence companies in their international portfolios?

  • Learn the rules of country specific markets.
  • Develop global proxy voting guidelines.
  • Pursue alternatives to shareholder resolutions, such as letter writing and meetings.
  • Develop a network of local partners to gain legal representation at annual general meetings.

Exec Pay Too High

An editorial in the 12/13 edition of Business Week makes the case for CEO churning (Why CEO Churn is Healthy). “They’re flying out of the corner office like quail being flushed out of cover.” Lucent, Xerox, Gillette, Procter & Gamble, Coca-Cola and Aetna have thrown their CEOs out within the last 12 months. According to Challenger, Gray & Christmas Inc., 103 CEOs left their jobs in September, more than twice last year’s rate. “Many CEOs are barely in control of their companies’ fate, much less their own.” “In the transition to the New Economy, it may be that CEOs can be expected to manage only a portion of the change before they fall victim to an unexpected trend or are overwhelmed by inadequate execution.”

While CEO churn may be logical in an era of rapid transitions, should temporary help be paid 500 times their average employee? A recent Hay Group survey found that 85% of institutional investors believe that executive pay at UK firms is insufficiently related to performance and that 100% thought pay incentives covering three or more years should make up a much larger proportion of total reimbursement. Yet, that same survey showed that 91% oppose the introduction of a procedure whereby shareholders could move resolutions on pay issues at the annual meeting and 97% oppose shareholders having to sanction reimbursement packages. (Governance, 9/2000)

Executive pay is much more extreme in the US than in the UK. Voting on exec pay doesn’t appear to translate to shareholder empowerment but too few institutional investors on either side of the Atlantic have really pushed for the long term incentives tied to performance they say they want. Until they do, the paradox will remain.

Back to the topConvergence

Gerald F. Davis and Michael Useem make a convincing case for convergence, not among nations but among firms with higher stock market valuations. To survive global industry consolidations, many such firms will seek a listing on American stock exchanges, and will thereby become subject to US legal standards. In their paper, “Top Management, Company Directors, and Corporate Control,” the authors point to the need for further research in five key areas “if we are to know what works and what does not, and which theories are useful and which are not”:

  1. Boards and directors: What does the decision process inside the boardroom look like? What are the sources of power and influence of inside and outside directors? How are the decision process and director influence contingent on the ‘institutional matrix’ in which a board is embedded? (Example: Pettigrew and McNulty, 1998.)
  2. Comparative governance: What really accounts for the astonishing and remarkably persistent diversity in the national systems of corporate governance? How do national institutions, cultures, and social structures shape and constrain the evolution of corporate governance systems? (Examples: Kogut and Walker, 1999; Bebchuk and Roe, 1999.)
  3. Financial globalization: If the surge of cross-border investing is a major driver of corporate change, what can we expect of financial flows and their regulation in the years ahead? How is the evolving organization of investors and companies likely to affect the internationalization of capital flows? What aspects of corporate governance will affect the attractiveness of a national economy for international investors? How are actions by the International Monetary Fund and World Bank likely to affect national systems of corporate governance? (Example: Evans, 1995; Mizruchi, 2000).
  4. Inequality in a “globalized” world: How do systems of corporate governance affect distributions of wealth within and among nations? What is the likelihood that social movements for change may mobilize in the face of – or to resist – globalization? Does the globalization of finance lead to a leveling up or a leveling down of national standards for labor relations, environmental protection, and income inequality? (Example: Firebaugh, 1999).
  5. Business and Political Leadership: To what extent is a shared leadership style emerging among top company managers and government officials around the world? Are such institutions as the World Economic Forum creating a global network among those who govern the major commercial and political institutions in the leading economies? As worldwide relations among business and political elites do emerge, are they undermining traditional relations among elites within economies? (Examples: Davis and Mizruchi, 1999; Khanna and Palepu, 2000).

eLOT Adopts Model Bylaws 

eLot, a leading web-based retailer of governmental lottery tickets, implemented bylaw amendments requiring two-thirds of the members of the board to be independent. The bylaws establish a strict definition of independence and mandate audit, compensation, nominating and transaction committees, all members of which must be independent. The bylaws also require that independent directors elect a “lead director” at any time when the chairman of the board is also an executive officer. The lead director and the other independent directors must meet in executive session following every meeting of the full Board. (Disclosure: the Editor owns stock in eLot)

CEO Options Under Water

Graef Crystal reports 45% stock option grants out of 1,036 studied were below there strike price. William Schrader at PSINet Inc. is down the most with a decline of 85% but WorldCom’s Bernard Ebbers lost the most money, $51.3 million with a drop of 61%. See U.S. CEOs With the Most Underwater ’99 Options.

LENS Investment Still Active

Founded in 1991 by Robert A.G. Monks as an investment management firm, Lens was among the first to take an active role in corporate governance. Some activists were worried when it ceased operation as an investment manager and took on the role of a specialist in investor activism. Recent action at Metromedia ensures us that Lens continues to be active. SeeShareholder Activist, Lens, Supports Announcement From Metromedia International Group — Global Communications and Media Company Considers Selling Assets, 11/9/00, andMetromedia International Group Response to Lens Investment Management, 11/14/00.

Spread it Around

Stock-based incentive programs pay double dividends, according to a survey of 173 firms by Hewitt Associates, since they also deliver higher returns to shareholders. (WSJ, 11/21/00)

New Era of Shareholder Activism

The Christian Science Monitor notes “the Internet allows individuals like Stoller to air their opinions, marshal support, and put pressure on heretofore unapproachable boards of directors.” The experience of Martin Stoller and Aaron Brown of eRaider and Nell Minow of The Corporate Library are highlighted, as well as Les Greenberg’s current campaign at Luby’s. See “A place at the table,” 11/20/00 and monitortalk.

New Proposal to Ensure Audit Independence

The Corporate Monitoring Project has expanded the field of battle for shareholder activism with a different spin from therecent SEC action on auditor independence. While the new SEC rules require companies that use their accounting firms for both auditing and consulting to jump through new regulatory hoops, the Corporate Monitoring Project proposes to let shareholders decide. Its too bad the SEC didn’t adopt the proposal as an option but the idea is also compatible with the new rules. Under the proposal, shareowners would vote to choose the company’s auditor, instead of just rubber-stamping or rejecting management’s choice. As under its corporate monitoring proposal, auditing firms would self-nominate and shareholders would select from among them. This would encourage auditors to build their reputations in the eyes of investors rather than in the eyes of management, creating new pressure for higher standards. The first resolution to seekauditor independence by shareholder vote will be submitted atSONICblue.

Back to the topShareholders Score

Progress is being made by shareholders. One small measure of success is the recent favorable votes on shareholder sponsored resolutions.  During the 1999-2000 season they garnered an average 22.6% vote, compared to an historical average of 5%.  Governance related proposals won an average of 36.5%. (Strategic Compensation Research Associates, as reported in the November edition of Directorship)

“Vote No” Gets Teeth?

The Court of Chancery of the State of Delaware issued an opinion on 11/8 confirming that directors of Dime Bancorp, Inc. nominated by Dime for re-election at its annual meeting held in July were not re-elected to a new three-year term. The directors must stand for re-election at Dime’s annual meeting of stockholders to be held next year.

Apparently, shareholders rejected Dime’s nominees by more that a two to one margin. North Fork Bancorporation, Inc. intends to nominate several directors to the Dime board of directors at the Dime 2001 annual meeting. See North Fork Announces Victory Over Dime in Delaware Court.

Unfortunately, although this appears to be a groundbreaking case which could lend teeth to “vote no campaigns,” I have not been able to locate a copy of the decision on the Internet or any real analysis. Any additional information readers have on this case would be appreciated. Please send it along to[email protected] or post to http://eraider.com/message.cfm?topicID=31&catID=64&messagenumber=183

CalPERS Sets International Investing Standards

California Public Employees’ Retirement System, the nation’s largest public pension, approved a standards for human rights, labor and the environment for overseas investments. State Treasurer Phil Angelides appears to have spearheaded the move, while State Controller Kathleen Connell opposed the move. (Calpers sets new standards for emerging markets, Reuters, 11/14, Yahoo!)

Microsoft Political Contributions Under Fire

A resolution calling for Microsoft to report its political contributions was filed by Trillium Asset Management Corporation and three members of Responsible Wealth last year and received a 7.6% yes vote. The resolution may be introduced again at the 2001 meeting. Common Cause reports that Microsoft’s soft money contributions went from $77,000 in the 1996-1997 election year cycle to approximately $1.8 million in the first eighteen months of the 1999-2000 election year cycle. (SocialFunds.com, 11/13)

Standard and Poor’s Rates Russian Firms

Companies wanting to attract investments can use their benchmarks to improve corporate governance practices in four key areas: ownership structure, financial shareholder relations, financial transparency and information disclosure, and board structure and process. Performance is against codes and Organization for Economic Cooperation and Development, World Bank and European Bank for Reconstruction and Development guidelines and principles. Ten firms have reported signed up so far. (see World standards to rate Russia business practice, ITAR/TASS News Agency, 11/14 via Northernlight and Russian firms choose transparency or taxman-S&P, Yahoo! 11/14)

IMF Calls for Competition in Hong Kong

The International Monetary Fund urged creation of a legal framework to crack down on anti-competitive behavior but Stephen Ip Shu-kwan, Secretary for Financial Services, indicated that, “all-embracing competition legislation could have profound implications for our market efficiency and flexibility, particularly given that Hong Kong is a small and open economy.” (see IMF pushes for competition law, South China Morning Post, 11/15)

China to Tighten Disclosure

China is tightening disclosure rules for financial companies. Public banking, insurance and securities will be required to disclose information on asset quality as well as non-performing assets. Financial statements would be audited by foreign accountants under international accounting rules. (seeDisclosure rules tighten up for financial listings, South China Morning Post, 11/15)

UK Pension Funds Respond to New Disclosure Law

UK pension fund trustees are now required to disclose how they account for social responsibility issues in their investment strategies, if at all. A survey by the UK Social Investment Forum reveals that 59 percent of the UK pension funds surveyed, representing 78 percent of total assets, incorporate socially responsible investment into their investment strategies. Only 14 percent of funds, representing 4 percent of total assets, state specifically that social concerns will not be taken into account. (see UK Pension Funds Embrace Social Responsibility, SocialFunds.com, 10/11)

Back to the topRiot Police at Smirnov Boardroom

As further evidence that Russia is still in need of corporate governance reform, black-masked riot police, wearing body armor and brandishing nightsticks, broke down the doors of a Russian vodka distiller involved in a shareholder dispute. (seeIn Russia, Riot Police Hold the Golden Share, International Herald Tribune, 11/8)

India’s the Place

Gary Wendt, CEO of Conseco, an Indiana based financial holding company, argues there is an oversupply of money chasing Asian investment opportunities. Taiwan, Singapore and Australia are overpriced. Indonesia, the Philippines, Malaysia, Burma and Thailand remain high risk countries, as does China. Japan is facing debt overload; the average firm’s debt-to-equity ratio is 90%.

Wendt’s “dark horse” candidate is India, which has the largest quantity of today’s most important resource: people. While wage rates for educated workers are high in other English speaking countries, India’s still have a long way to catch up. What was previously done in Indianapolis can now be done in India with the same efficiency. As reported earlier, CLSAranked emerging market companies in terms of corporate governance. Three of the top ten are based in India: Infosys,Hindustan Lever, and Wipro.

An edited version of Gary Wendt’s speech at the Conference Board’s Global Leadership Forum appears in Across the Board’s 11-12/00 edition. In the interest of disclosure, it should be noted that the editor of CorpGov.Net, James McRitchie, recently purchased Wipro ADRs.

$259 million PSLRA Settlement at 3Com

3Com Corporation has agreed to pay $259 million to settle a securities class action filed by the Louisiana School Employees’ Retirement System and the Louisiana Municipal Police Employees’ Retirement System on behalf of 3Com shareholders. The Funds were appointed to the role of principal lead plaintiffs by the United States District Court for the Northern District of California pursuant to the Private Securities Litigation Reform Act in March 1998 and were represented by Bernstein Litowitz Berger & Grossmann LLP.

The settlement is the second largest ever obtained from a corporate defendant in a securities class action, next to that obtained against Cendant Corporation. The settlement also requires the 3Com Audit Committee to include at least three directors, all of whom must be independent and at least one of whom has accounting or financial management expertise. Newsalert, 11/8, Louisiana Pension Funds Announce $259 Million Class Action Settlement With 3Com

Southeast Asian Markets Endangered

The Wall Street Journal warns that “Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come.” Poor corporate governance has led some funds, such as activist Julian Robertson’s Tiger Management, to close up shop. CLSA Emerging Markets found that during the 1997-1998 financial crisis, a basket of 108 emerging-market stocks fell 10.5%, whereas the 10 companies that scored best on corporate governance criteria gained 133%. The top five rated firms included: TSMC, Infosys, HSBC Holdings, Hindustan Lever, and Wipro. CLSA also ranked 25 emerging market countries based on environments that are good for corporate-governance practices. The survey placed Singapore and Hong Kong number one and two, but most Southeast Asian markets didn’t fare well. Thailand, Indonesia, Philippines, and Malaysia all placed in the bottom ten. (WSJ, 11/8, Corporate-Governance Issues Hamper Emerging Markets)

Proxy Contest Central

Anticipation mounts for the upcoming debut of Investors’ Bullhorn. If it works as planned, iBullhorn.com will empower investors by dramatically reducing the cost and complexity of proxy solicitations. Creative software, knowledgeable monitors and the Internet will allow shareholders to communicate and take collective action, all within the boundaries of SEC rules. Some of the site’s features, as described by Kristy Kaepplein, iBullhorn.com’s founder and president, are as follows:

  • share with others, either anonymously or publicly, how they plan to vote, and view others’ planned votes
  • read research from independent proxy research services on proxy voting items
  • suggest nominees for the Board of Directors, and even “nominate” them if they choose to solicit proxies from other shareowners
  • communicate with each other, management and the board, anonymously if they wish
  • feel more confident that others posting to the site actually own shares in the company, because iBullhorn validates their positions
  • initiate shareholder proposals by selecting from iBullhorn’s library or craft their own; iBullhorn transmits electronically
  • solicit and grant proxies from/to other shareowners (as permitted by state and federal law)

The site may give every investor the opportunity to become a “relational investor,” even those who’s shares are held by mutual or pensions funds. Fiduciaries are likely to learn that providing fundholders and beneficiaries with the tools to communicate and act collaboratively may be one of the most important ways to build customer loyalty. A fund’s corporate governance rating could become increasingly important and may be dependent on attracting and keeping those who are knowledgeable and active.

If Kaepplein and associate David Sensenich have their way it will be underperforming managers who do the “Wall Street Walk,” not shareholders. To get the whole story, read “Democracy for capitalists” in Governance, October 2000.

Back to the topMalaysian Audit Committees

The 2000 National Conference on Internal Auditing in Kuala Lumpur brought reflections by star.com.my on the Malaysian Code which is expected to be adopted by the KLSE as part of its listing rules. Last year’s US Blue Ribbon committee on improving audit committee effectiveness and the Malaysian Code on Corporate Governance issued last March have created more focus on auditing. Boards should be aware of the risks the organization faces, the systems of internal control and should ensure they are adequate. The KLSE is likely to require boards to include a statement in company annual reports on internal controls. (Life gets difficult for audit committees, 11/6) (see also, Update on Malaysian Code on Corporate Governance)

Demonstration at TIAA-CREF November 14th

Social Choice for Social Change, a campaign to have the largest nongovernmental pension fund in the world invest 5-10% of its assets ($200-400 million) in community development institutions and companies that are models of social and environmental responsibility, will be protesting outside their annual shareholder meeting and establishing a presence inside. Where: 730 Third Avenue in Manhattan, between 45th and 46th Streets. When: 11/14, 9-12 noon. Contact: Paul Sheridan, Brooklyn College (718) 951-5359 (office) (718) 783-4196 (home).

Social Choice will supply fliers and signs, as well as graduation caps and gowns for those who choose to wear them (for a visual effect–a number of prominent national media plan to attend or will otherwise be covering the story). You can also bring a gap/gown or sign of your own. TIAA-CREFprotesters will be joined by people associated with a number of community organizing groups in NYC who are working for increased low-income housing. Also joining them will be other protesters calling for TIAA-CREF to divest from Philip Morris tobacco and from Unocal Oil, which has operations tied to the brutal dictatorship in Burma. Together, they are telling TIAA-CREF to “Get out of the bad and into the good.”

Norms and Corporate Law Symposium

A symposium on the choice between law and non-legally enforceable norms in the governance of business organizations will be held at the University of Pennsylvania on December 8th and 9th. Here’s a real bargain. Advance registration is required but the fee is only $100 and that includes continental breakfasts, lunches, and dinners on both days. Contact Bonnie T. Clause. Presentations include:

Bernard S. Black, Stanford Law School
“Do Corporate Governance Norms Matter? A Crude Test Using Russian Data”
Commentator: John C. Coffee, Jr., Columbia Law School

Margaret Blair and Lynn Stout, Georgetown University Law School
“Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law”
Commentator: John C. Coates, Harvard Law School

Robert D. Cooter and Melvin A. Eisenberg, Boalt Hall
“Norms and Organizations”
Commentator: Lisa Bernstein, University of Chicago Law School

Oliver Hart, Dept. Economics, Harvard University
“Norms, Corporate Law and the Theory of the Firm”

Marcel Kahan, New York University School of Law
“Economics and Law, Networks and Norms: An Analysis of the Incentive Structure of the Corporation”
Commentator: Henry B. Hansmann, Yale Law School

Saul Levmore, University of Chicago Law School
“Compensation Norms”
Commentator: David M. Schizer, Columbia Law School

Paul G. Mahoney and Chris Sanchirico, Univ. Virginia School of Law
“The Self-Contradictory Nature of Norms and the Belief-Stabilizing Role of Law”
Commentator: Jack Knight, Dept. Political Science, Washington Univ.

Curtis Milhaupt, Columbia Law School
“On the Evolution of Japanese Corporate Norms”
Commentator: Reinier H. Kraakman, Harvard Law School

Edward B. Rock and Michael L. Wachter, Univ. Pennsylvania Law School
“Islands of Conscious Power: Laws, Norms and the Self-Governing Corporation”
Commentator: Jeffrey Gordon, Columbia Law School

Mark Roe, Columbia Law School
“The Shareholder Wealth Maximization Norm and Industrial Organization”
Commentator: Ian Ayres, Yale Law School

David Skeel, University of Pennsylvania Law School
“On the Role of Shame in Corporate Law”
Commentator: William T. Allen, New York University School of Law

Eric L. Talley, University of Southern California
“Disclosure Norms”
Commentator: Eric Posner, University of Chicago Law

Institute For International Corporate Governance and Accountability

Capital markets, dominated by multinational institutional investors, and product markets, rather than governments, are defining corporate behavior. The Institute, with the help of a grant from the Ford Foundation, will attempt to create an international umbrella organization bringing together scholars, practitioners and policymakers who are willing to question the American influence on the corporate governance systems and consider structural approaches to corporate accountability.

The Institute will open up a dialog that crosses disciplinary boundaries including law, economics, sociology, psychology, philosophy, political science, history, anthropology, ethics, and business, among others. They start from the premise that “responsible corporate behavior — rather than stockholder-centered corporate behavior — ought to be the norm.” The Institute aims to reconcile the compatibility of wealth creation with economic and environmental justice. To learn more, viewECGN posting.or contact <

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Archives: September 2000

Proxy Monitor Acquires Investors Research Bureau

Proxy Monitor, a leading proxy voting advisor to institutional investors, announced its acquisition of Investors Research Bureau, Inc., publisher of Securities Class Action Alert, the authoritative publication on federal securities class action lawsuits.

“Tracking securities litigation, and making sure that they participate in settlements and judgments, is an increasingly important compliance responsibility for our clients,” said James E. Heard, Proxy Monitor’s CEO. “This acquisition will enable us to provide Proxy Monitor’s clients with timely, accurate and comprehensive information about class action suits nationwide.”

“Decisions by institutional investors to become lead plaintiffs and record-setting settlements such as last year’s $3.42 billion Cendant Corporation’s settlement underscore why institutional investors need to carefully track securities litigation,” says Newman. “I am very excited at the opportunity to be a part of Proxy Monitor and to have a chance to work with Proxy Monitor and its clients while also continuing to serve existing Securities Class Action Alert clients.”

Pension Board Sets Own Course

The California Public Employees’ Retirement System’s board voted to invest $125 million in CIM California Urban Real Estate Fund, despite objections from investment staff who recommended only $50 million because of the firm’s inexperience managing money for institutions, according to the ISS Friday Report, 9/22. California Treasurer Philip Angelides (who often favors the “double dividend” of investing in California), State Controller Kathleen Connell and CalPERS President William Crist objected to the investment. The Sacramento Bee reported that former board members Villalobos and Shimada, as well as retired state state Senator William Campbell, will split a $2.5 million “placement agent” fee from CIM.

Name and Shame

Regulations which took effect in July required UK pension funds to disclose the extent, if any, to which “social, environmental or ethical concerns are taken into account in the selection, retention and realization of investments.” They don’t need to create such policies but, if they have them, they must be disclosed. Expectations are that fund managers and analysts will be under pressure to become familiar with socially responsible investment practices if they want to attract pension fund business. Friends of the Earth and others have promised to name and shame those funds that state they apply no social, environmental or ethical considerations but others warn that fund trustees aren’t the nation’s moral arbiters; that’s government’s job. To learn more see, U.K. Pension Funds Forced to Reveal Ethical Policies, Kit Bingham, ISS Issue Alert, 7-8/00.

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AFSCME Sides with Tenet

The American Federation of State, County and Municipal Employees, owner of 6.5 million Tenet Healthcare Corp shares valued around $235 million, urges Tenet shareholders to reject a slate of dissident directors headed by Dr. M. Lee Pearce and to support Tenet’s nominees. Their letter, cites Pearce’s conflicts of interest with Tenet and its shareholders and his lack of qualifications as a corporate governance reformer. Once again working capital is leading with full disclosure and smart tactics. See AFSCME Lobbies Shareholders to Vote Against Dissident Slate at Tenet Citing Group’s Conflicts of Interest, Checkered Governance Record.

However, California’s public employee pension system CalPERS has announced its 1.8 million Tenet shares will support the Pearce slate, citing Tenet’s failure to honor shareholder votes for annual director election and proposed “excessive” stock option grants to board members. Institutional Shareholder Services (ISS), the nation’s leading institutional shareholder advisory firm and provider of corporate
governance services, has also sided with the dissident nominees. ISS wrote in its report, “the incumbent board has shown a brazen indifference toward shareholder demands over the last few years. We also harbor concerns about senior management’s equity participation in Tenet’s Broadlane joint venture.”

ISS was particularly biting in its commentary on Tenet’s corporate governance philosophy: “Management … believes that varying industry and regulatory forces demand that directors take a longer-term view of company strategy and that a staggered board provides the continuity to achieve that end. This paternalistic argument — that shareholders somehow must be saved from themselves — does not hold water in today’s investment and corporate governance landscape. Effective corporate governance depends upon the board being accountable to shareholders … and we believe the Tenet board has failed on this account.”

Investor Relations Advice

Investor Relations on the Web by Stephen J. Dolmatch & Amy L. Goodman offers excellent advice in a reprint from American Corporate Counsel Association Docket Magazine. Find it free on FindLaw.com. Companies are responsible for the accuracy of their Internet postings if they “reasonably can be expected to reach investors or the securities markets.” The article focuses on reviewing your firm’s entire website from the standpoint of securities law disclosure. Major points: avoid the duty to update through the use of archives, use disclaimers, hyperlink with caution, take special precautions before and during securities offerings, avoid a general solicitation of company securities, beware of chat rooms and message boards, recognize the limitations the SEC has placed on the Internet for fair disclosure, but take advantage of the tremendous opportunities the Internet offers for investor communications.

Corporate Rule or Shareholder Loss?

Russell Mokhiber and Robert Weissman’s latest article,Withering Democracy, calls attention to political contributions by corporations. Every major industrial sector except for communications/electronics now favors the Republican Party but most hedge their bets by contributing to both. Already, corporate contributions are 50 percent higher than in the 1992, and there’s plenty of time to go. “The system formally remains one of one person, one vote, but is it the people or the corporations who rule?” I would further question if such contributions are a wise investment of shareholder resources. The trouble is that one company can’t easily stop unless their competitors do as well. Campaign reform would pay double; more democracy for citizens, more money left for shareholder dividends or reinvestment.

Improving Survival of Family Firms

Privately-held companies have the advantage of being able to make long-term strategic decisions based, on “patient capital” but only if family members trust each and share a common vision for the company. Research by Wharton’s Family-Controlled Corporation Program (FCCP) focuses on relationship dynamics that include trust levels, goal agreement, a participatory culture and views on the long-term health and competitiveness of the business. Family leaders should invest time in building unity among shareholders and professionalizing the strategies and structures through which they interact, according to FCCP director Timothy G. Habbershon. Why they don’t and how they can are the subjects of a research paper, Improving the Long-run Survival of Family Firms.

Corporate Governance Responsibilities Outlined

Simeon Chanduru, partner in charge of Business Risk Consulting, Ernst & Young Zimbabwe, highlights the duties and responsibilities that directors assume when they accept appointment to the board in Zimbabwe’s The Financial Gazette, 9/21. For a Malaysian perspective, see Corporate governance way to renew vigour, by Cheah Foo Song, thestar.com.my, 9/5.

Corporate Governance in the New Economy – Singapore

The New York Institute of Finance is offering a course in Singapore (30 October – 1 November 2000) which will cover topics such as: the legal environment for directors, what makes an effective board, how to assess board performance, minimizing risk, financial statements and audits, strategic planning, employee issues and future trends. For more information contact Calyn Siew, Director – Marketing (Asia Pacific), New York Institute of Finance, Tel : +65 236 9690.

Size Does Matter

As we reported last month, Dan Dalton and Catherine Daily, both of Indiana University, have found a positive correlation between large boards and performance. They reviewed 27 studies published over the last 40 years covering more than 20,000 firms. (Number of Directors on the Board and Financial Performance: A Meta-Analysis. Academy of Management Journal) In August’s Director’s Monthly, the authors explain that larger boards are better able to secure critical resources through the networks their directors create. In addition, larger boards allow coalitions to form that are more likely to challenge CEOs and moderate their dominating influence, they promote diversity and they provide an indispensable training ground for succession planning.

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Board Investments Make Difference

Donald Hambrick and Eric Jackson tracked the level of stock ownership at companies over a 10 year period and found that board members held an average $470,000 for top perfomers in each sector, in comparison with $80,000 for poorly performing companies. They suggest a matching purchase program so that each board member would have at least 5% of their net worth invested in the companies they serve. (CFO, September 2000, page 27)

Bits

Webcasting of conference call is now up to 61%, compared with 48% six months ago, according to a survey by the National Investor relations Institute. Hybrid pensions, including cash balance plans, now make up 32% of the Fortune 100’s plans, according to Watson Wyatt Worldwide. Pearl Myers survey finds that 17.5% of largest 200 firms offer stock options to all employees. Corporate giving as a percent of pretax income declined between 1986 and 1996 from 2% to 1%. Pensionsnet.com aims to create greater transparency within Europe’s pension fund industry by providing news and information, analysis, statistics, company details and jobs in an interactive format. International Federation of Accountantsinvites comment on their code of ethics regarding independence.

CalPERS Shouldn’t Ignore the Law

The California Public Employees Retirement System Board recently voted themselves pay increases and higher reimbursements to their employers so they can put in more time on Board activities. See CalPERS board votes itself big pay increase, Sacramento Bee, 9/20/00. On the surface their action sounds fine, but the Board is ignoring the law and risks permanent alienation from its members.

Government Code, section 20092 limits the reimbursement CalPERS can provide to a Board member’s employer to an amount “not to exceed 25 percent of the member’s total annual compensation.” The wise men and women who created CalPERS wanted to ensure those elected by the System’s members remain well connected to the membership. Yet, a majority of the Board voted reimbursements well beyond the legal limit of 25%, voting increases ranging from 60% to 90%.

Article XVI, section 17 of the California Constitution, enacted by Proposition 162, gives the Board sole and exclusive fiduciary responsibility over the Fund. The Board now argues, that it is “impossible” for them to fulfill their fiduciary duty if they are “limited to the 25 percent cap specified in Government code 20092.”

Several of the same Board members previously invoked this same Constitutional authority in an attempt to ignore public participation and other requirements of the rulemaking process. Thankfully, both the Office of Administrative Law and the court thoroughly rejected their argument. (see OAL Determination 18, requested by James McRitchie, and Kathleen Connell for Controller et al v. CalPERS Board of Administration, Sacramento County Superior Court Case No. 98CSO1749.)

The purpose of Prop 162 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.

A majority of the Board now argues they need more time to do their jobs. President Crist, for example submitted a claim that he is working up to 105 hours a week on CalPERS activities. However, previous testimony by Dr. Crist revealed that he counted time for sleeping because he dreams of CalPERS. Questioned about counting more hours of work than there are in a week, Dr. Crist joked that he had passed over the international dateline.

Do Board members really need more time for trips to Frankfurt, Paris and Sardinia? Conference providers are eager to pay their expenses because they attract attendance from firms that want to sell investments and services to the world’s largest pension fund. However, the benefits to members are questionable.

Board members who spend little time with their fellow workers, who are wined and dined all over the world and who can look forward to $800,000 “placement fees” for selling investments to CalPERS once they leave the Board are unlikely to relate to member needs for health care or disability claims. (see also CalPERS may boost board pay, Sacramento Bee, 9/20/00) When we worked and voted to enact Proposition 162, we did so to keep greedy politicians from diverting our money. We never dreamed it would be used by the Board to place themselves above the law.

CalPERS Board members should get a pay raise and there should be some adjustment in the 25% ceiling. However, they should do so by seeking a change in the law, not by ignoring it. In the words of a previous Sacramento Bee editorial on the Board’s election process, let’s not “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (see CalPERS muzzles critics, Sacramento Bee, 5/25/99)

The Board should take a direct approach and seek the necessary changes in statute. However, if a majority on the Board wants to maintain the legal fiction that Prop 162 places them above the law, they could “save face” by calling for “cleanup” legislation. They could argue, for example, that although the Constitution gives them the authority to raise the ceiling, they are seeking Legislative concurrence in order to remove any inconsistency in statute. Either way, members should demand that CalPERS not ignore the law and the need to change it.

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Reg FD Criticised By Trade Associations

Fair disclosure rules which take effect October 23rd are still coming under fire from trade associations like the Financial Executives Institute which says two business days would have been more reasonable than 24 hours for reporting accidental releases. Their members may only recognize the significance of information provided once analysts use it. Stuart Kaswell, of the National Investor Relations Institute, says “many companies will probably clam up. Reg. FD creates an uneven playing field and stymies competition – it will do the exact opposite of what it’s intended to do.”

However, an analysis by Investor Relations Business says “those companies that make it a point not to practice selective disclosure say that the rule will not change much of what they did before.” If those who have been selectively disclosing “clam up,” the regulation will have served its purpose. FD mandates an even playing field for information users. Those who are not adept at providing it fairly are likely to stumble. Its up to trade associations like FEI and NIRI to build their membership and provide training so that companies have an even playing field when it comes to knowing what information is likely to be deemed materially significant. The competition for providing good information on how to live within the rules may be just beginning.

Backers of FD, such as the Council of Institutional Investors are right, analysts who owe a company for selective disclosure aren’t producing objective reports. FD isn’t a perfect solution but it certainly is a step in the right direction. I doubt if it creates the precipice that critics imagine but only time and future SEC enforcement actions will tell. (see Criticism of Reg. FD Continues, Investor Relations Business, 9/11)

Paid Exposure

Wallstreetbeat.com offers monitoring and reporting exposure. Companies can send in a brief summary, and $11,250 for the first 90 days. The company also collects a fee from companies for arranging introductions to outside analysts and distributing research to brokers and investors. According to Investor Relations Business (9/11), wallstreetbeat.com’s 18 own analysts write reports “at their own discretion.” Companies covered “have no control over the content of reports.” Of course if their reports are unfavorable, companies aren’t too likely to renew, are they? They are reportedly “in negotiation with six or seven companies” for their services.

I’ll be stopping by their site now and then to see how business is going. I’ve got a feeling the SEC might also be popping by for a visit.

Group Under PSLRA Defined

Group created by Milberg Weiss Bershad Hynes & Lerach isn’t a “group” within the meaning of the 1995 Private Securities Litigation Reform Act, according to U.S. District Court Judge Jeremy Fogel who held it “beyond dispute that one of the Reform Act’s primary purposes was to eradicate lawyer-driven securities fraud class actions.” The Policemen and Firemen retirement System of the City of Detroit was awarded lead plaintiff status instead, even though the reportedly alleged half the damages of the solicited group. (Corporate Governance Highlights, 8/25)

Exec Pay Levels Inconsistent With Healthy Democracy

CEO compensation rose 535% in the 1990s, while the S&P 500 rose 297%, according to a report by the Institute for Policy Studies and United for a Fair Economy. If the minimum wage had risen as quickly, it would now be $24.13/hr. instead of $5.15. The trend toward greater inequity “is inconsistent with a healthy democracy, according to the Institute. Top execs as 50 top Internet firms held an average $235 million in unrealized options. The report also expresses concern that an increasing gap between top level public and private sector execs will lead to a government brain drain, especially since 65% of government’s senior execs will be eligible for retirement by 2004. (ISS Friday Report, 9/8)

In a related item, a PricewaterhouseCoopers survey found Internet firms are transitioning to exec compensation packages similar to traditional firms, large base salary and bonuses for meeting revenue and profit goals. Fewer managers are now willing to accept lower cash compensation. (ISS Friday Report, 8/25)

Labor Coalition Blocks Insider Takeover

The AFL-CIO and the Paper Allied-Industrial, Chemical and Energy Workers Union won a vote against the Crown Central Petroleum insider Takeover by Rosemore Acquisition, run by the Rosenberg family which also owns a controlling interest in Crown. The Rosenbergs controlled nearly 46% of Crown’s voting power but the offer required a two-thirds majority of all shareholders. Labor’s clout in corporate governance continues to grow. (ISS Friday Report, 8/31)

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Europeans to Disclose Executive Pay

Disclosure of executive pay is taboo no longer in Europe, according to a 9/11 report in the Wall Street Journal. In France the Socialist-led coalition government wants to require it through federal regulations. The Irish Stock Exchange has mandated salary disclosure a condition for listing. “The writing is on the wall: Secrecy is on the way out for executive pay,” says Stephen Davis of Davis Global Advisors.

Dick Cheney: Corporate Governance Hero Or Political Greedhead?

The usually obscure world of “golden parachute” payments to departing chief executives has burst into the headlines with media fretting over the rich package Haliburton Corp. is paying departing CEO (and US Republican VP nominee) Richard Cheney. The Haliburton board’s fond farewell drew fire for its richness (originally $20 million by some estimates) and for its unvested stock options (currently worth over $13 million) that Cheney announced on September 1 he’d abandon.

But the fuss is based far more on political perception than on corporate governance reality, says Ralph D. Ward, publisher of online newsletter Boardroom INSIDER and a speaker on governance issues. “Corporate boards should – and do – get slammed for giving fat parachutes to failed CEOs” he says, citing the recent controversial cases of Mattel chief Jill Barard and Times Mirror’s Mark Willes.

At Haliburton, however, Ward notes that Cheney spent the past five years building shareholder value, boosting company sales to $14.9 billion in a tough industry (up 14% in just the last year). Cheney even shaped a solid succession plan that leaves the respected David Lesar in charge. “This is just the sort of performance by a corporate leader the Haliburton board should reward.”

Ward adds that CEO pay and severance packages are not designed solely to keep chief executives at the company, but to drive them toward — and reward — excellence during their tenures. “Do shareholders want CEO pay incentives to incent, or don’t they? The Cheney controversy suggests that the difference between the worlds of corporate governance and politics seems to be that the former rewards achievement, while the latter punishes it.” (Editor’s comment: The stock option award set up a potential conflict of interest that had to be addressed. Both corporate governance and politics should reward achievement and demand independence, neither of which were likely with the conflict of interest Cheney faced before abandoning the stock options.)

Click Locally, Vote Globally

That’s the reported unofficial motto of proxymaster.com, a new service of Institutional Shareholder Services, which will enable institutional investors to customize their proxy voting policies and vote online for 9,000 US and 8,400 nonUS firms. (see Proxymaster website to offer proxy voting, Pensions and Investments, 9/4 or contact )

Analysts Need to Retool

An editorial in Pensions and Investments (Everyone an Analyst, 9/4) praises the SEC’s rule requiring broader disclosure and calls on analysts to take a new role in providing “value-added interpretation of data.” “Analysts have spent far too much time trying to estimate, with the help of nods and winks form corporate managments’, next quarter’s earnings per share. But research suggests analysts’ earnings estimates, despite the information from corporate managements, are unreliable.”

Severance Pay Reaches Obscene Levels for Failure

Louis Lavelle editorializes in Business Week the with regard to CEO pay, “Nothing Succeeds Like Failure.” Looking at the severance packages of failed CEOs, Lavelle finds them “insulting not just to us workers, but to shareholders as well.” The latest evidence is the $9.5 million bonus given to ousted Durk I. Jager by P&G, even though during his short 17 months the stock is down 50%. “Directors should take the lead of Sunbeam Corp. (SOC), which after firing Albert J. Dunlap in the face of a disastrous restructuring and allegations of accounting improprieties, resisted his demands that he be allowed to accelerate all of his outstanding options.”

Business Week Calls for New Social Contract

Noting the American people are upset with corporations who invade their privacy, overwork and underpay them, threaten their safety and buy off their government, a Business Week editorial (9/11) (subscription required for link) calls on corporations to take the following steps:

  • Embrace the McCain/Feingold campaign-finance-reform legislation
  • Take responsibility for overseas factories
  • Spread option grants to more employees
  • Curb CEO pay

Cultural Exchange Promoted by Japanese Businesses

Japanese firms have gotten the message…more independent board members are needed to ensure better alignment of management and shareholder interests. However, in “High-profile foreigners take seats in Japan’s boardrooms” the Financial Times rightfully questions the value of substituting senior executives with little experience in other industries with foreign dignitaries.

FT notes that Corazon Aquino, recently appointed to the board of Sanyo Electric, is “more famous for her yellow dresses than her knowledge of semiconductors.” Former US vice president, Dan Quayle, has joined the board of Aozora Bank, the former Nippon Credit Bank. “Analysts warn the external director system may end up being little more than a cultural exchange between Japanese and foreign businessmen.”

Brazilian Reforms Stall

Corporate governance reform has been postponed again and a vote will not come until after the October elections. Under the stalled legislation, ordinary shareholders would be guaranteed the same selling price when a company is taken over as those with a controlling interest. Minorities with a stake of 15 percent or more would be entitled to a seat on the board. The powers of Brazil’s securities regulator would be strengthened and insider trading would be outlawed.

An editorial in the Financial Times says the reforms should go further, claiming that preferred shareholders should also receive “tag along” rights to the same selling price. In addition, they should consider an “alternative stock market on which only those companies meeting best practice of corporate governance and transparency could be listed.” Editorial comment: Brazil’s market, 9/6

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Ten Step Plan for Better Boards

The Board Book: Making Your Corporate Board a Strategic Force in Your Company’s Success bycover Susan F. Shultz is one of the most readable guides for directors available. The majority of the book is devoted to individual chapters on each of ten critical mistakes which boards commonly make:

  1. Failure to recruit strategically
  2. Too many insiders (more than two)
  3. Too many paid consultants (should have no paid; no more than two venture capitalists)
  4. Too much family (should have 3 independents to each family member)
  5. Too many cronies, interlocks and conflicted directors
  6. Getting the money wrong (CEO and board pay should be performance based in line with company pay scales)
  7. Fear of diversity
  8. Information block (should be open, unrestricted and effective communication)
  9. Passive boards (should be proactive, independent and strategic)
  10. Failed leadership (should have strategic leadership, positive culture, effective meetings, member rotation and transparency)

Shultz also includes a discussion of director liability and future board trends. Appendices contain additional resources:

  1. Comparing statutory and advisory boards
  2. List of actions requiring board approval
  3. Sample corporate governance guidelines
  4. Fortune 500 firms without women directors
  5. Sample director’s evaluation of a CEO
  6. Sample board evaluation
  7. Sample board self-assessment
  8. Governance resource list

Shultz interviewed an impressive list of academics, attorneys, CEOs, consultants, directors, institutional investors, and others for background material. This allows her to pepper her book with real life examples and compelling stories. The Board Book can help boards avoid common pitfalls and investors act like owners, instead of speculators.

Ethical Laws and Investments Go Hand In Hand

In “Look Who Demands Profits Above All” (Los Angeles Times, 9/1) former Secretary of Labor, Robert Reich, argues that CalPERS and TIAA-CREF are only doing their job, maximizing the value of their investors’ portfolios, when they refuse to consider ethics in their investments. “If we want companies to be more socially responsible, we’ll have to pass laws requiring them to be so, and those laws will have to be enforced. And not just national laws…ultimately, many such laws will have to be international.”

Reich appeared to take a much different position while at the Department of Labor when he released a booklet, “Road to High-Performance Workplaces: A Guide to Better Jobs and Better Business Results” which argues:

  1. High performance companies view their workers as valuable assets and make investments accordingly. Training is viewed as continuous, with a commitment to life-long learning.
  2. High performance workplaces encourage workers to accept multiple new roles as problem-solvers, self-managers, and entrepreneurs. Management also invites workers to participate in the day-to-day activities of the company.
  3. High performance companies gain long-term worker commitment by creating compensation systems tying pay to individual, team, and corporate performance. Such companies also seek to make executives more responsive to shareholder concerns by linking executive compensation to longer-term corporate goals.

While his more recent statement is true, international laws are needed and must be enforced, it is also true that pension and mutual funds have an important role in finding the correlation between responsible investments and positive returns. SRI funds have been out-performing the market, not just because they identify good management and reduce liability, but because SRI funds recognize social trends and consider them an essential part of their investment strategy.

Tobacco is one example. It can only be profitable if we give little value to life and society agrees to pay for the health care needs which tobacco use creates. The Council for Responsible Public Investment estimates that California looses more than $10 billion a year from tobacco use due to health costs and time lost at work. As these “hidden” costs are revealed tobacco profits erode. Outraged citizens demand litigation, increased taxes, reduced subsidies, etc. SRI pension and mutual funds will outperform where they can identify the convergence of investment opportunities and social concerns.

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Archives: August 2000

Minow Writes to SEC

Nell Minow of the Corporate Library recently wrote to the SEC to express her concerns a growing number of no action letters that make no sense. Her main focus is on a challenge made by Comshare based on the worthiness of the proponent. Nell Minow on Comshare Shareholder Proposal.

Shareholder Efforts Recognized

“The last time someone voluntarily gave up power was in 1800, when George Washington did it,” said Les Greenberg. Greenberg wants shareholders of cafeteria operator Luby’s to vote in favor of removing anti-takeover devices, electing directors annually and canceling bonuses for management if sales, profits or the share price decline. Oh, and he’s also running for the board. Small investors are fighting back and dailies all over the country are picking up on the corporate governance revolution.

San Antonio Express-News writer Bill Day observes that “a decade after democracy finally sprouted in Russia, Eastern Europe and South Africa, it makes sense that a pro-democracy movement would be pushed in corporations, where leaders still choose their own successors and where shareholders often allow the company to vote for them.” (Democratic Shift: Shareholders demanding a larger role in the running of corporations, 8/26)

Seven Veterans Profiled

The Washington Post’s Kathleen Day quickly moves from the origins of Martin Stoller and Aaron Brown’s eRaider.com to profile corporate governance giants in Soldiers for the Shareholder, 8/27. What are they doing now?

Robert A.G. Monks, who created Institutional Shareholder Services and then went on to start activist fund Lens which returned 160.2 percent in the three years ended June 30, compared with a return of 71 percent for the 500. He’s leaving Lens to concentrate on moving nonprofits endowments to become active shareholders. Nell Minow, who joined Institutional Shareholder Services as general counsel and has been partners in corporate-governance ventures with Monks, left Lens to focus on the Corporate Library, the best internet resource corporate governance.

T. Boone Pickens Jr., thought of as a villainous corporate raider in the 1980s, is now remembered for his push to replace passive directors with shareholder advocates. Carl Icahn is still at it recently netting $600 million by forcing the sale of Nabisco. “I don’t think the corporate governance movement has done much of anything, and our economy eventually will pay a major price because of it.”

Sarah Teslik, head of the Council of Institutional Investors, recently railed against her own members’ inaction. Unless she can persuade them to nominate alternate slates, she’ll quit. “The balance of power is still 96 percent with management and 4 percent with shareholders.” James Heard, of Proxy Monitor, says companies that ignore nonbinding shareholder proposals are “shortsighted and stupid…many still view shareholders as a nuisance.”

Executive compensation expert Graef Crystal continues to hammer on excessive compensation. His most recent study finds that corporate performance explains 2 to 4 percent: “the rest largely depends on the size of the company.” Day ends her review with a warning from Crystal.

By 2015 the ratio of the average executive’s pay to that of the average worker will approach that which existed in 1789, when Louis XVI was king of France. “And you know what happened to Louis XVI,” he says. “And by the way, they got his wife, too.”

Securities Litigation Year 2000

The Corporate Directors Forum will present a debate between William Lerach, attorney with Milberg Weiss Bershad Hynes & Lerach LLP in San Diego, and Michael Torpey, partner with Brobeck, Phleger & Harrison LLP at the La Jolla Marriott from 5:30-7:30 p.m. on September 21st . The cost is $35. Contact Sally Gault at (858) 455-7930 or at [email protected].

Institutional Investors Differ

An American Enterprise Institute study prompted by the sea change in share ownership of U.S. Corporations offers the following:

First, while there is broad agreement among institutional investors about the importance of shareholder rights, effective boards, and efficient CEO compensation and succession for corporate performance, the true economic value of “good governance” and effectiveness of shareholder activism are still matters of debate. Mutual fund investors tend to believe there is no “one size fits all” approach to corporate governance and are therefore disinclined to impose any form of “best practices” model.

Second, while investors may refer to “corporate governance” in their monitoring and intervention, actions relate far more frequently to poor performance. Except in highly publicized cases involving allegations of excessive executive compensation, dysfunctional boards, or fraud, it is generally only after firms are identified as troubled or long-term underperformers that governance practices are given more than routine scrutiny.

Third, institutional investors view good governance as most valuable when a firm or its industry is in trouble. Despite somewhat differing views on the overall value of good governance practices, all investors in the survey sample agreed that having an independent board, solid succession plans, and shareholder rights unfettered by restrictive antitakeover measures helps to assure the fastest possible recovery for the firm and share values. (Institutional Investors and Corporate Behavior, R. Glenn Hubbard, Ehud Houminer and Gile R. Downes, Jr.)

Attorney’s Get $262 Million

Record-breaking awards in the Cendant securities fraud case were approved by a federal judge Monday in New Jersey: a $3.1 billion settlement and $262 million in fees to attorneys for the plaintiffs’ class. The most controversial component of the ruling by U.S.District Judge William H. Walls was his rejection of New York City’s contention that the fees of the injured investors’ lawyers should be cut to $186 million. (law.com, 8/22)

Bigger is Better

A report by Dan Dalton and Catherine Daily, both of Indiana University, concluded there is a positive correlation between large boards and performance. They reviewed 27 studies published over the last 40 years coverning more than 20,000 firms. (Number of Directors on the Board and Financial Performance: A Meta-Analysis. Academy of Management Journal) (WSJ, 8/24)

Internet Resources for Board Members

Independent Director Initiative, run jointly by the UK Institute of Directors and Ernst & Young, to provide independent directors with online assistance. Their recent survey showed only 14% of companies provide training or support; the site aims to fill that gap. (Governance, 7/00)

Rice University to hold four hour broadcast on “The Basics and Beyond” for boardroom advice. Participants will interact in the moderator led discussion via phone, fax and e-mail. Mark 9/7 on your calendar and reserve your spot by calling 972-620-4015 or write to [email protected]. (Director’s Monthly, NACD, 7/00)

Not just for directors is the upcoming iBullhorn.com which bills itself as “a collaborative community built to enhance relationships between corporations and their investors.” We will hear more from this somewhat mysterious group later but for now they say their mission will be accomplished by:

  • Amplifying investors’ voices in corporate governance
  • Promoting increased direct communications between Investors, Corporate Management, and the Board of Directors.

Wealth Through the Workplace Act (H.R. 3462)

In June, the House Education and the Workforce Committee approved Rep. John Boehner’s Wealth Through the Workplace Act (H.R. 3462) that would create a new “super stock option” for rank-and-file workers. The original bill would have required a company to offer the super stock option to 50 percent of its workers in order to qualify; the markup sets the requirement at 70 percent. Workers would get tax deferral until underlying shares are sold (as capital gains if held for a year after exercise). Employers would get a tax deduction for the increased value of the option upon employee exercise.

According to an analysis by Institutional Shareholder Services, which appeared in The Corporate Governance Advisor, taxpayers would pick up a small portion of the tab in the form of slower and lower tax receipts but existing shareholders would foot the “lion’s share” in the form of lower future earnings per share and lower risk-adjusted rates of return. “Perhaps foreseeing such objections, the Bill’s sponsors give shareholders little say in the matter. Under the legislation, boards could unilaterally approve Super Option plans unless corporate bylaws require them to put the plans to shareholder votes.”

Korea at Critical Juncture

“The next six months to one year is a crucial period for the nation’s economy,” said Finance Minister Jin Nyum at the Seoul Foreign Correspondents Club. Hyundai’s makeover and the sale of Daewoo Motor are key milestones to regaining investor confidence. Also of major importance are banking reforms which may come soon after October, when troubled banks must submit their own plans for rescue. The government continues to emphasize the need for transparency in corporate governance and accounting standards. (news.excite.com/8/23)

The Korea Exchange Bank, Hyundai main creditor, threatened to call its loans if Hyundai fails “make good on its pledge to improve its corporate governance structure by separating management from ownership and ensuring a system under which top managers should be responsible for their failures.” (The Corporate Library, 8/9-15)

Guylaine Saucier to Chair Canadian Governance Committee

In July, the Toronto Stock Exchange (TSE) announced they have joined with the Canadian Venture Exchange and the Canadian Institute of Chartered Accountants (CICA) in appointing Guylaine Saucier to head a committee to “review the current state of corporate governance in Canada, compare Canadian and international best practices, and make recommendations for hanges that will ensure Canadian corporate governance is among the best in the world.” TSE released a set of 14 guidelines five years ago based on recommendations of a corporate governance committee chaired by Peter Dey. A recent review concluded that although many have embraced the voluntary guidelines, others have not. Can Saucier move the pack? (Corporate Governance Review, 6-7/00) (Profile in caMagazine, 6-7/99)

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Anonymous Humor

And, lo, it came to pass that the trader by the name of Abraham Com did take unto himself a young wife by the name of Dot. And Dot Com was a comely woman, broad of shoulder and long of leg. Indeed, she had been called Amazon Dot Com. And she said unto Abraham, her husband, “Why doth thou travel far from town to town with thy goods, when thou can trade without ever leaving thy tent?”

And Abraham did look at her as though she were several saddle bags short of a camel load, but simply said, “How, dear?” And Dot replied, “I will place drums in all the towns and drums in between to send messages saying what you have for sale and they will reply telling you which hath the best price. And the sale can be made on the drums and delivery by Uriah’s Pony Stable (UPS).”

Abraham thought long and decided he would let Dot have her way with the drums. And Dot said, “There will be a lot of banging in the land.”

And Abraham replied, “It is my most fervent wish that this be so.” And the drums rang out and were an immediate success. Abraham sold all the goods he had, at the top price, without ever moving from his tent.

But his success did arouse envy. A man named Maccabia did secret himself inside Abraham’s drum and was accused of insider trading.

And the young did take to Dot Com’s trading as doth the greedy horsefly to camel dung. They were called Nomadic Ecclesiastical Rich Dominican Siderites, or NERDS for short.

And, lo, the land was so feverish with joy at the new riches and the deafening sound of drums, that no one noticed that the real riches were going to the drum maker, one Brother William of Gates, who bought up every drum company in the land. And indeed did insist on making drums that would only work if you bought Brother William’s drumsticks.

And Dot did say, “Oh, Abraham, what we have started is being taken over by others.” And as Abraham looked out over the Bay of Ezekiel, or as it came to be known, “eBay,” he said, “We need a name of a service that reflects what we are.” And Dot replied, “Young Ambitious Helpful Owner Operators.”

“Whoopee!” said Abraham.

“No, YAHOO!” said Dot Com.

ICGN Push End to Broker Voting

The sixth annual International Corporate Governance Network held in New York included almost 350 delegates from over 22 countries. The group set a target date of July 1, 2001 for implementation of the ICGN Share Voting Principles aimed at knocking down hurdles to shareholder proxy voting in markets around the world. The four focus markets include France, Japan, Australia and the United States.

In France ICGN will try to overturn a law that requires signatures of beneficial owners on the proxy cards. In Japan and Australia, ICGN issues revolve around the length of time shareholders have to vote. In the US, ICGN members will fight to reverse rules which currently permit proxy vote practices that allow brokers to vote on certain corporate resolutions without first obtaining instructions from shareowners. The practice is a breach of ICGN Share Voting Principle #1, “The same voting rights should attach to shares regardless of how much equity a shareholder holds, or how geographically distant a shareholder may be from the company. Votes should be cast only according to instructions by the owner or the owner’s agent.”

ICGN elected 12 members to its board. Returning directors include: Andre Bladi (Baladi & Associates), Peter Clapman (TIAA-CREF), Sandy Easterbrook (Corporate Governance International), Claude Lamoureux (Ontario Teachers’ Pension Board), Pierre-Henri Leroy (Proxinvest), and Lars Millberg (Aktiesparana shareholder association). New members include: Peter Butler (Hermes), Stephen Davis Davis Global Advisors), Jon Lukomink, Ariyoshi Okumura (Lotus Advisory), Linda Selbach (Barclays Global Investors) and Dario Trevisan (Studio Legale Trevisan & Associates). (Corporate Governance Review, 6-7/00)

TIAA-CREF to Target Executive Compensation

Director’s Alert reports that TIAA-CREF is targeting excessive executive compensation in the upcoming 2001 proxy season. In 1980, average CEO pay was 40 times the average employee’s earnings. By 1998 it was over 400 times and by now it is higher still. Chief Counsel, Peter Clapman, says TIAA-CREF will meet with companies to build independent, educated compensation committees. “Many compensation committees don’t fully understand their role–or they don’t know how options really work,” said Clapman. If a company refuses to address the problem, TIAA-CREF may be prompted to withhold support for directors. (Director’s Alert, August)

Internet Voting Up Dramatically

That’s the usual headline, and its true. Between 1998 and 1999 there was a tripling of the number of accounts voting via the Internet, according to some estimates. However, that doesn’t mean anything like a majority. In fact, according to ADP, which processed about 88% of the total votes, only 3% of votes were returned online, whereas over 5% voted via telephone. (8/14, Investor Business Relations)

Institutional Investors Want Boards With Internet Savvy

Successful Internet executives may have their pick of blue-chip boards to join, according to John T.W. Hawikings, leader of the board service practice of Russell Reynolds, global executive and director recruiting firm. A survey based on more than 400 institutional investors by Russell Reynolds found that 2/3 believe all boards should have at least one director drawn from Internet or technology areas. About an equal proportion of respondents favor pricing options so that recipients are rewarded for company performance only if it does better than the market. About 58% believed corporate governance guidelines should be voluntary, rather than required by regulatory authorities. (Pensions & Investments, 8/7)

Need for Good Governance, a No Brainer

An editorial in the July edition of Dr Matthew Gaved’s excellent publication “Governance” argues:

Good governance may or may not feed into the share price. What matters is that shareholders believe that it does. They are prepared to pay more for the stock of well governed companies. What more incentive to managers need? …Academics and others may continue to search for the Holy Grail of statistical linkage, but shareholders should be content with dropping out of the quest. For them, the McKinsey study is all the proof they need.

It certainly is a no brainer for me. However, the McKinsey study focused on turnarounds and it was clear from the international differentials that existing disclosure and shareholder protections also play a key role in setting the floor which is higher in the UK and US than in Latin America and much of Asia. I’m afraid the naysayers will go unconvinced.

Folks at McKinsey are saying that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” Whether or not good corporate governance will yield much that can be measured at the average company may still be a matter for the statisticians but international companies that meet US listing requirements are often revalued at higher prices. As for making over companies in trouble, the more funds such as Lens, Lawndale, Relational Investors and Hermes keep beating the indexes, the more likely it is that others will jump on the bandwagon. By shifting to independent directors, evaluating their CEOs and their own performance, by separating CEO and chair and by investing more of their own money in their companies, the work of the likes of Robert Monks and Peter Butler will get harder. (for more on the McKinsey study see our June news and the McKinsey site)

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SEC Bans Selective Disclosure
Thanks to many of our readers and others who submitted 6,000 public comments, the SEC passed a slightly watered down version of their originally proposed rule which prohibits company officers from sharing market-sensitive information with analysts and institutions without providing the same information to the general public. See CBSMarketWatch.com, 8/10, Statement by SEC Chairman Arthur LevittFact Sheet.

The new regulation requires that when an issuer intentionally discloses material information, it must do so publicly, not selectively. The company may make the required disclosure by filing with the SEC, or by a press release. When selective disclosure of material information is made unintentionally, the company must publicly disclose the information through a method of wide distribution promptly.

Pax World Discloses Votes on the Internet
For nearly 30 years Pax World has used stockholder voting as a way to make shareholder voices heard. Since 1971, this socially responsible mutual fund has made their voting results available to shareholders upon request. Now, with the help of Proxy Monitor, Pax World has taken the next step, joining Domini Social Investments in posting their proxy voting decisions. (Thanks to Mark Latham for bringing this development to our attention.)

Virtual Meetings
A June ISSue Alert editorial points out that Delaware’s new law allowing annual meetings to be held entirely in cyberspace came with “some strings attached,” strings which I must admit, I didn’t notice. According to ISS, before directors switch to e-meetings, they must implement 1) voter verification procedures, 2) measures to ensure shareholders can participate at the meetings through two-way communication and 3) the means to record shareholder votes in real time.

ISS argues shareholder meetings have become a “giant soapbox” with shareholders paying for the microphone. ISS uses their editorial as an opportunity to slam stock exchange rules which allow broker voting but suggests that “real time” voting at cyber meetings should boost turnout. Again, I don’t know of any shareholder activists who oppose allowing cyber broadcasting and participation…as long as the physical meetings continue.

The real problem, according to the ISS editorial, is the lack of shareholder participation and the quality of discourse, especially among small shareholders. ISS suggests that shareholders “look for new avenues for communication with their elected representatives– the directors” by requesting one on one meetings, attendance at investor road shows and quarterly analyst calls.

While I agree with ISS that shareholders should demand that directors show up and be responsive at these venues, the fundamental issue is still information and the ability to hold the board accountable. One step in that direction is the corporate monitoring proposal devised by Mark Latham, which I first introduced at Whole Foods. The proposal would allow shareholders to collectively hire a firm, such as ISS, to inform and advise them of proxy issues.

ISS did shareholder’s no service by recommending against the proposal, which could have been a major step in improving the level of participation and quality of discourse. ISS indicates this is the major problem, especially with regard to small investors. If they really believe this is the case, let’s hope they change their stance on Mr. Latham’s proposal during the next proxy season.

Seven Deadly Sins
The June ISSue Alert also carried an article on “Equity-Based Compensation: the Seven Deadly Sins,” with biting humor by Patrick S. McGurn and Jill Lyons. CEO pay at 362 of the largest US firms is up six times since 1990 to an average $12.4 million, so the first deadly sin is gluttony.

Sloth is listed next, with the rise in unrestricted stock which rewards recipients for their ability to remain “living and breathing” until the awards vest, according to Matt Ward ofWestWard Pay Strategies.

Envy is coupled with “net envy” and the use of maga grants of options.

Lust is popularized through the TV show “Who Wants to be a Millionaire?” and broad based options now available at 30% of US firms.

Anger is how some companies have reacted to the difficulty of winning shareholder approval. The author’s note that New York was the last major corporate domicile to drop its mandate that shareholders approve stock plans but I’m sure companies will find other reasons to be mad at their shareholders.

Greed; Berkshire Hathaway’s Charlie Munger says director stewardship is like “putting a rat colony in a granary.”

Pride; few directors on compensation committees are willing to admit they need help.

Who says corporate governance devotees are a sour lot? I say you’ve got to have a sense of humor to remain in a field where all too many speak the language of democracy while acting to continue oligarchic practices.

Shapiro Strikes Again
San Francisco based Lawndale Capital filed a 13-D increasing its position to 7% of Earl Scheib Inc. (A-ESH), a nationwide operator of 169 auto paint and body shops. Attached to the 13D filing is a letter expressing concern over the reduced activity of ESH’s Board and ESH’s compensation arrangement with its Chairman.

Lawndale seeks to have the Company publicly disclose the agreement with its Chairman, Mr. Colburn and an explanation of how the board monitors Mr. Colburn’s performance. Lawndale plans to vote “withhold” on his reelection as Director, may vote to withhold on other directors, and is initiating a search for one or more new directors to replace Board members who are unable to be active or to supplement the Board.

Ford Family Wins: Shareholders Lose
Shareholders approved a plan to help the Ford family to retain 40% of the voting power, even as they reduce common stock holdings. Short term greed won over long term interests, with the plan for a special dividend that will give shareholders new Ford shares plus some $6 billion in cash. TIAA-CREF and CalPERS, which together own 2% of Ford’s stock, voted against the plan. Excluding the impact of the Ford family’s Class B shares, about 26% of the common shares were voted against the proposal even though the plan won with “86% approval.”

High Plains Bylaw
High Plains, an ethanol producer, announced the adoption of a bylaw that requires at two-thirds of their Board to be independent of management, consultants, and significant customers or suppliers. It also requires key committees to be comprised solely of independent directors, and assigns new responsibilities to Board committees. The real news is that several companies are adopting such bylaws in order to demonstrate their commitment to shareholders. This one came at the initiative of Lawndale Capital. (PRNewswire, 7/31)

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Swiss Join Movement to Disclose
The Swiss Exchange is to build disclosure of director pay into the listing requirements. (see http://www.newsdirections.com/r/0008nzz.html, use the German to English translator at bottom of our front page.)

e-Board Strategy to Help Bush?
“The secret weapon behind the most promising E-commerce start-ups is a board of directors, especially a non-executive chairman, that serves as mentor to young, inexperienced and ambitious CEOs,” says Roger Kenny, co-author with Ram Charan of the recently published E-Board Strategies: How to Survive and Win. “Mentors with years of experience in the rough and tumble business world can guide the way, helping the less experienced through the challenges. The Bush-Cheney combination is a textbook example.” (PR Newswire, 8/03)

The Patterson Report
The Corporate Library now presents The Patterson Report by Dr. Jeanne Patterson, former professor at Indiana University, and author of a 1996 study on social investing and 1998 and 2000 reports for The Conference Board on this topic. Her report categorizes and summarizes the major empirical studies in corporate governance. A fantastic addition to valuable information on the Internet!

“The reviews in The Patterson Report will be continually updated. With the Internet, studies are coming at us at a great pace. We will be providing Internet links to the actual study whenever possible. We will also have an opportunity to add articles, correct mistakes, and respond to suggestions. We encourage our readers to help us to make the site useful by sending us studies that they develop or find useful.”

Shareholder Activists Compared
eRaider cofounder Aaron Brown compares 5 types of shareholder activists along a matrix of goals, tactics, typical shareholding, targets and corporate defenses. Then he indicates how he intends to blend the best characteristics of each. see http://eraider.com/commentary2.cfm?commID=209

Centre for Corporate Governance Research
Professor Christine Mallin of the University of Birmingham has established a new program for studies of company governance in the United Kingdom and other national settings. Housed at the Birmingham Business School, the “Centre for Corporate Governance Research” is focused on the relationship among directors, investors, and other stakeholders, and the impact of these relations on company strategy and performance.

The Centre has the following aims:

  • Conduct and encourage high quality research in corporate governance;
  • Engage in interdisciplinary and cross-border research through collaboration with contacts in the UK and overseas;
  • Consult with professional bodies, corporations and other groups, on corporate governance issues;
  • Disseminate the research of the Centre as widely as possible through published research, presentations at conferences and seminars.

Among the Centre’s research are studies of voting by institutional investors, the disclosure of directors’ compensation, and company compliance with the Cadbury and Greenbury recommendations for effective governance. It has also undertaken projects on the development of corporate governance in China, Malaysia, and Central and Eastern Europe. The Centre’s Administrator is Lesley Bodenham.

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Archives: July 2000

SRI Outperforms
Are you a pension fund trustee who’s counsel keeps saying you can’t do that when you suggest socially responsible investing strategies? Yes you can. Read “What Trustees Can Do Under ERISA” (the Employee Retirement Income Security Act) – A study of permissible trustee activism. Let Kirsten Snow Spalding and Matthew Kramer guide you.Fiefdoms to Continue
Earlier this month I reported that the founder of Hyundai had announced that neither he nor his sons would continue to serve on the board. “The three of us will watch over the company management only as shareholders,” said Chairman Chung at the end of June. Later in the month, I suggested the Ford family could take a lesson from Chung. More recently, the Wall Street Journal (Hyundai Resists South Korea’s New Economic Ways, 7/25) reports that one of the sons, Mong-ku, reversed himself and is now determined to defend his control of Hyundai Motor. In addition, Hyundai Heavy Industries continues to be controlled by another son, Mong-joon. Fiefdoms aren’t easily converted to democracy, either in the US or Korea.

Shanghai Conference On Sweatshops
Domini Social Investments, Ethical Funds, Calvert, and Walden Asset Management are sponsoring Verite’s Third Annual Supplier’s Conference in China. The conference will develop the capacity of factory managers to establish workplace conditions that meet internationally agreed upon human and labor rights standards. “Independent monitoring and verification are crucially important for addressing the problem of workplace standards that violate internationally agreed upon human and labor rights,” said Heather White, Verite’s founder and executive director. “Without credible independent monitoring, vendor standards and corporate codes of conduct are justifiably regarded as nothing more than public relations fluff.” (see Business Wire press release, 7/20)

Corporate Governance Issues Impact Cross-Border Mergers
Corporate governance issues can have a significant influence on cross-border mergers, according to a report, “Corporate Governance and Cross-Border Mergers,” released by The Conference Board. Europe alone has had more than $400 billion worth of hostile deals since the beginning of 1999. “Key corporate governance decisions in M&A transactions are not necessarily about corporate governance,” says author Lucy Alexander. “They are consequences of other decisions, such as where the company will be headquartered, and are influenced by other issues such as tax, politics and the relative strength of organizations. However… corporate governance issues may have a direct impact on whether deals happen or not and certainly on the price at which they occur.” (for press release go to the Conference Board site, click on “Our Expertise,” then on “global corporate governance,” then scroll down to press releases.

Virtual Meeting Law
The 7/21 ISS Friday Report carried additional reactions to newly adopted Delaware law which allows corporations to hold shareholder meetings solely in cyberspace. Dwight Mater of Bell & Howell says “it’s easier for shareholders.” Karen Hampton of Ford says webcasting of meetings will increase. Charles Elson, of the Center for Corporate Governance at the University of Delaware, indicates he likes to “see people eye-to-eye. Yet the world is changing.” Larry Hamermesh, a law professor at Widener University says meetings could get out of control “if you have 5,000 people online who all want to be heard.” (ISS Friday Report, 7/21)

Many seem to miss the point. I don’t know of anyone who opposes Internet broadcasting of the meetings or voting online. Of course it’s easier for shareholders to attend online and all companies should facilitate access. Professor Hamermesh comes close to the point. However, the problem isn’t that meetings will get “out of control.” By meeting solely in cyberspace it will be much easier for management to ensure there are no unexpected or embarrassing questions, no surprises. When 5,000 shareholders online want to be heard someone will need to select which questions will be addressed. Prescreening and prescripting become much more likely. The problem is that management will be more in control of the process than ever before.

Back to the topCheney Nomination May Help EDS Shareholders
The nomination of Dick Cheney to be George Bush’s running mate may help put the spotlight on poor corporate governance practices at Electronic Data Systems where Cheney serves as a member of the board. On May 23rd, 61% of shareholders voted in favor of allowing shareholders to vote on the adoption of poison pills. According to shareholder activistJohn Chevedden, EDS governance suffers a number of shortfalls:

  • No annual election of all directors.
  • Director James Baker’s law firm bills EDS substantial fees, which go undisclosed by EDS.
  • The American Bar Association discourages directors from sitting on boards of companies from which they take additional legal fees.
  • Directors with financial links to the company sit on Audit and Nominating Committees.
  • Directors Brown and Gray own only a nominal number of shares.
  • Directors Gray and Groves are overextended with 7 outside board seats each.
  • EDS has no provisions for confidential or cumulative voting.
  • An 80% shareholder vote is required on certain key items (equals a 100% requirement when only 80% of shares are voted).

Who Does ICI Represent?
The Investment Company Institute is paid by companies in the industry, but half of the dues come out of shareholders’ pockets, according to a lawsuit filed by Linda Rohrbaugh and Richard Krantz. Their suit seeks a return of money paid for representation because, according to the plaintiffs, ICI represents fund companies, not shareholders. A commentary by Lewis Braham, Staff Editor for BusinessWeek, says “ICI should either increase representation for shareholders or give them back their money.” Currently, 39 of the 45 members of ICI’s governing board work for fund-management companies. The other six are “independent directors” of member funds. Yet, ICI’s code of best practices says 2/3 of a mutual funds directors should be independent.

Braham reports that after shareholders scored a victory in 1997 with a ruling that the independence of directors could be questioned because they served on several boards in the same fund family, ICI successfully lobbied the Maryland legislature to nullify the judge’s ruling. ICI also tried to make it more difficult to get shareholder proposals on proxy statements and sought to prohibit proposals to fire advisers or buy back shares of closed-end funds. Clearly, Braham is right in his assessment. (see A Raw Deal for Fund Shareholders, BusinessWeek, 7/31, requires subscription) See also Conflict Of Interest?

Indian Families Remain In Charge
Manjeet Kripalani, Bombay bureau chief for BusinessWeek wrote a commentary with a familiar complaint; too few Indian executives are ready to walk the corporate governance talk. Ratan Tata, of the $8 billion Tata Group gave notice that in two years he will step aside and let the board appoint his replacement but few are following his lead. The new corporate governance code requires ownership disclosures, global accounting norms, independent directors, audit and shareholder grievance committees. The Securities & Exchange Board threatens fines and delisting for errant companies but “few believe it.” “Families continue to control 90% of publicly listed companies. And they have plenty to hide–not least intragroup loans and investments set up to minimize taxes, misappropriate funds, and cover up losses.” (see Commentary: India: Paying Lip Service to Corporate Disclosure, international edition of BusinessWeek, 7/24)

Shareholders Protest Ma Bell’s Porn
Twenty-seven religious and socially concerned institutional investors controlling over 2.8 million shares of stock are calling upon AT&T to reconsider its recent decision to partner with The Hot Network, which distributes sexually explicit material for broadcast on cable television systems. (see letter to AT&T) Jerome Dodson, of the Parnassus Fund, plans to enlist other AT&T investors in drafting a shareholder resolution voicing opposition to the Hot Network. If enough shareholders support the resolution, the measure will be voted on at AT&T’s next shareholder meeting. (Shareholders Fight AT&T Porn Channel, AP, 7/19)

Ford Protects Family Voting Power
Institutional Shareholder Services joined New York State Comptroller Carl McCall, TIAA-CREF and the California Public Employees’ Retirement System in opposing Ford’s plan which allows Ford family members to take cash out of the company by selling their new common shares without diluting their voting strength. When set up in 1956, class B shares allowed the Ford family, with 5.9 percent of the economic interest in the company, to control 40 percent of the voting power. Under the new plan, to be voted on at a special shareholder meeting on August 2, the family will have 7.1 percent of the economic interest and 41.8 percent of the voting power. (Reuters, 7/19) However, the Investor Responsibility Research Center reported the Ford family might retain 40% of voting power, although their class B holdings would decline from 5% to 3.6%, according to CalPERS. IRRC also reported the Council of Institutional Investors opposes the proposal as well. (Corporate Governance Highlights, 7/21)

Ford could soon be learning a lesson from the recent turmoil at Hyundai. (see below)

Good Governance Still Needed in Southeast Asia
John J. Brandon, assistant director of The Asia Foundation, says foreign investment will return to Southeast Asia as memory of the crisis of three years ago fades, but “countries that can make the most rapid progress on reforms in a transparent and accountable manner stand to benefit the most.” “Good governance and corporate reform are critical in order to achieve sustainable economic development. The pay-off, over time, should be better jobs, higher economic growth, and a brighter future for Southeast Asia. Weak legal systems, corruption, unaccountable government, and poor corporate oversight cannot factor into the equation. (for full opinion see “The wobbles in Southeast Asia’s rebound,” Christian Science Monitor, 7/19)

Back to the topAustralian Rules Regarding Extraordinary Meetings May Change 
A report to the Federal Government has outlined changes to the Corporations Law so that only shareholders who collectively hold at least 5 per cent of voting capital would have the power to request a general or extraordinary meeting, instead of the current threshold of 100 shareholders. (Sydney Morning Herald, 7/17/00)

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