Stern Stewart’s EVA product got a boost when CalPERS adopted its use in creating their annual focus list. It should help CalPERS pinpoint their targets with better accuracy and may result in increasing the “CalPERS Effect.” In other CalPERS news, they voted 36% of the time against executive stock plans and 39% of the time against exec bonus plans during the 1996-97 season. They voted in favor of management proposals 78% of the time and against 57% of shareholder proposals. Continue Reading →
On September 19, 1997 the SEC released its draft amendments to Rules on Shareholder Proposals [Rel. No. 34-39093; IC-22828; File No. S7-25-97]. Comments are accepted for 60 days. Amendment language is available online athttp://www.sec.gov/rules/proposed/34-39093.htm. Comments from Commissioner Wallman are also available. As expected, the rule would overturn the 1992 Cracker Barrel Old Country Store decision that the restaurant chain didn’t have to include a shareholder resolution that sought to bar discrimination against gay job applicants. The proposed rule was crafted to benefit both activist shareholders and companies seeking to limit shareholder proposals. It includes a provision allowing shareholders who can muster significant support to override some of the exclusions companies now use to keep resolutions off their proxy statements but it also raises the support needed for resubmissions. (see SEC Proposed Rules) Comments can be submitted via electronic mail to [email protected]. We urge our readers to do so and to cc us at [email protected]. Continue Reading →
On September 19, 1997 the SEC released its draft amendments to Rules on Shareholder Proposals [Rel. No. 34-39093; IC-22828; File No. S7-25-97]. Comments are accepted for 60 days. Amendment language is available online athttp://www.sec.gov/rules/proposed/34-39093.htm. Comments from Commissioner Wallman are also available. As expected, the rule would overturn the 1992 Cracker Barrel Old Country Store decision that the restaurant chain didn’t have to include a shareholder resolution that sought to bar discrimination against gay job applicants. The proposed rule was crafted to benefit both activist shareholders and companies seeking to limit shareholder proposals. It includes a provision allowing shareholders who can muster significant support to override some of the exclusions companies now use to keep resolutions off their proxy statements but it also raises the support needed for resubmissions. (see SEC Proposed Rules) Comments can be submitted via electronic mail to [email protected]. We urge our readers to do so and to cc us at [email protected].
World Bank came out with a report which said “Governments are more effective when they listen to businesses and citizens and work in partnership with them in deciding and implementing policy.” Money has been pouring into authoritarian states such as China, Indonesia and Vietnam from the market at a much quicker rate than India and Russia. The World Bank says that “capable” countries have managed to boost per-capita income by about 3% a year, as opposed to 0.5% for weaker countries. Its not exactly a ringing endorsement for democracies. India is “capable” by these standards but gets only 16% of the capital that goes to China. Ideal for the “market” seems to be Hong Kong. A first world infrastructure that fulfills “work in partnership” bordering an authoritarian state. One of the more hopeful signs is the chief economist of Deutsche Bank in Asia saying “In the end, the risks of autoritarian rule are so much higher than the prospective payoffs.” (9/18, WSJ, Free to Choose)
Labor’s use of pension funds to reshape corporate governance and policies is covered by an article in 9/29 edition of Business Week entitled “Working Capital: Labor’s New Weapon?” AFL-CIO Secretary-Treasurer Richard L. Trumka will announce a new Center for Working Capital prior to the AFL-CIO’s biennial convention in Pittsburgh. “Our goal is to make worker capital serve workers, not just when they retire, but on a day-to-day basis.” Union pension funds hold $1.4 trillion in corporate stock (14% of all outstanding US shares but the article notes few unions have chosen to bargain over the governance of single-employer plans and demand the appointment of union trustees. Trustees of multi-employer funds must be half-management and half-union and unions often have even more clout in public pension funds. The Center for Working Capital hopes to help 6,000-odd union trustees become activist investors.
The 9/12 Philadelphia Inquirer carried an interesting article on AT&T, Kodak, Sears, and Procter & Gamble. These firms and a handful of others are linking compensation of top execs to employee or customer satisfaction or to social and environmental performance as well as financial performance.
Institutional investors, brokerage research analysts and registered representatives can attend corporate presentations live via The Internet through Wall Street Forum.
H.J. Heinz proxy included pages on corporate governance which sings the praises of insiders and indicates that no practicing attorney “shall serve as a director of the company.” (Investor Relations Business who says attorney jokes are dead?) (for additional coverage on other aspects see Business Week). IRB also reports that Congress is gearing up to force securities class action suits to be heard in federal court, ensuring coverage by the Litigation Reform Act of 1995. FASB’s proposal on derivatives is on their site athttp://www.rutgers.edu/Accounting/raw/fasb/supplement/sep5.exe. (WSJ had interesting article in support on 9/11/97) More on the recent Korn/Ferry study of boards. 16% of those surveyed say they evaluate performance of individual members, 75% say individual directors should be evaluated.
Back to the topBoth ISS and IRRC covered a New York Times report on newIRS data showing that exec pay rose 182% between 1980 and 1995 while revenue rose 129.5%, profits 127%, and taxes 114% during the same period. However, the IRS understates the rise in exec pay because the heavy use of stock options delay tax deductions, often until after retirement. Graef Crystal told the Times the value of options awarded but not yet exercised by CEOs at the 1,000 firms he tracks was $9.9 billion last year in contrast to $1.1 billion they did exercise. Exec pay increased 29% faster in the 1st year after the 1993 law limiting compensation to $1 million for non-performance related pay went into effect. Robert Monks, of LENS, told the Times “the simple truth is that executives are setting their own pay.”
Back to the topCEO compensation doubled last year, with the median pay package rising from $1,152,000 to $2,615,000, according toKPMG Peat Marwick LLP’s annual study of publicly held financial services companies. Long-term incentives, tied to shareholder return measures, comprise 45% of the typical CEO pay package, annual incentives, which depend on achieving short-term financial goals, make up approximately 30%, base salary, accounts for only 25%, or $653,000. The median CEO option grant (shares times exercise price) was $3.5 million, up from $2.2 million last year.
The Business Roundtable put out a press release on September 11th which refers to “a white paper issued today” which cautions against the application of rigid requirements that don’t take into account individual circumstances. Audit, compensation/personnel, nominating/governance committees should be limited to outside directors. They don’t endorse a specific limitation on the number of directorships an individual may hold. Boards should consider some form of equity as a portion of each director’s compensation. Corporations are generally well served by a structure in which the CEO also serves as chairman of the board. (ed. no great revelations)
The latest Friday Report cites a recent study by Investor’s Business Daily which targeted CEOs and CFOs from the fastest growing companies. 71% don’t expect a resurgence of labor in the wake of UPS. Among those heading union shops, 80% believed the strike would have little impact compared to 69% in companies who don’t have organized labor forces.
Septembr’s Directorship reports that of the 878 Fortune 1000 public companies in 1996, 73% had investment bankers on their boards, 53% had government workers, 53% had academic and 27% had commercial bankers. In the same issue, Richard J. Mahoney suggests raising the bar for performance-based stock options. He points out that a typical annual CEO stock option grant issued in 1990 giving the right to buy 100,000 shares before the year 2000 at the 1990 issued price – say $50 per share, would be worth $6 million if the company simply tracked the S&P index. And that’s just one year. Mahoney suggests adding a requirement that options don’t vest until the company meets targets such as exceeding the S&P index or industry peer groups by a specified amount.
Del Guercio, Diane,[email protected] and Jennifer Hawkins, The Motivation and Impact of Pension Fund Activism, 8/97. Examines the impact of pension fund activism by the largest and most active funds (CREF, CalPERS, CalSTRS, SWIB and NYC) during the period 1987-93. Their overall conclusion is that fund behavior is consistent with maximization of fund value and that funds do have a significant impact on target firms. (for more see annotated bibliography)
Back to the topIn the September/October Employee Ownership Report, Michael Brown, CFO of Microsoft, says that Microsoft went public not to raise capital (it didn’t need it even back then) but to provide liquidity for the 85% of its employees who were owners. The issue also contains a primer on the Black-Scholes model of valuing options drawn from one of NCEOs publications, the “Stock Options Book.”
The August Investor Relations Business newsletter included a report from ASCS re annual meetings. New York remained the most popular location, followed by Houston and Chicago. April and May are the most popular months, while August and December are the least. Bell & Howell and BCE went live on the internet. Wal-Mart had the largest attendance; each store sent a representative at company expense.
August’s Director’s Monthly featured articles on not-for-profits suggesting the need to institute clearer measures of accomplishment, definition of stakeholders and focus on legal duties such as care and loyalty and business judgement. Also of interest is a primer on “best practices” for corporate web sites.
The latest Issue Alert carries a roundup of the 1997 proxy season… labor-sponsored proposals scored more majority votes and higher average support than resolutions sponsored by pension funds, individuals, or private groups. Binding bylaw amendments remain the season’s primary innovation. Compensation, boardroom, and measures to sell the company continue. Next year will prove the most interesting season ever, if the SEC loosens up, as expected, on issues such as sweatshops, forced labor and child labor. The same issue includes an informative survey of pension reform in Latin America. Their August 15th “Friday Report” was titled the “Russian Edition” and contains one of the best survey’s we’ve seen. We’ve added The Federal Commission for the Securities Market to our links under “international Corporate Governance.”
Back to the topThe news is getting personal. First the Sacramento Bee ran a story about Charles Valdes, chairman of CalPERS‘ Investment Committee, filing for personal bankruptcy protection. NowPensions & Investments is running a profile of the personal investments of Alexis Herman, Secretary of Labor, David Strauss, Executive Director of PBGC, and Olena Berg, Assistant Secretary of Labor, PWBA. The article points to the irony that Herman and Berg often stump for employers to better educate their workers on financial planning. Yet, the author believes all three “need a class in investing” claiming they have “learned little about such concepts as diversification, or long-term investment planning.”
Legislation has been introduced to restore the tax exempt status ofTIAA-CREF and Mutual of America, a New York pension administrator for various charities.
CEO celebrity was the subject of a WSJ cover story on 9/3/97. CEOs have emerged like royalty putting a human face on multinational conglomerates. They noted that Time magazine last year concluded 7 of the most powerful 10 Americans were CEOs. “While probably nothing can silence an hysterical shareholder, many CEOs find celebrity can help them rouse employees… in an era when loyalty has been blunted by corporate downsizing… CEOs say their top priority is to enhance ‘intellectual capital’ by managing human relationships.” Sara Teslik, executive director of the CII warns “too many CEOs have the attitude that “I am an entity to be marketed, and the company will be lucky to have me.”
At the root of this condition, we believe, is a massive income shift from workers to top management. CEOs say they value intellectual capital but the rise in the proportion of managerial employees mirrors the decline in wages for 80% of employees. In the US, 13% nonfarm workers are managerial and administrative compared to 4.2% in Japan, 3.9% in Germany, and 2.6% in Sweden. (see Fat and Mean) Why does it take so many managers to ensure employees are working? Again, we would stress the benefits of ownership and participation in decision-making by all employees, not just by the CEO and the Board.
I offer the following which I expect to see in Dilbert soon (if you have trouble with the formulas ask a scientist or engineer):
Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.
Work/Time = Power and since Knowledge = Power and Time = Money, then
Work/Money = Knowledge
Solving the equation for Money we get Work/Knowledge = Money
Therefore, as Knowledge approaches zero, Money approaches infinity regardless of Work done. Conclusion: The less you know, the more you make. (ed. Who says we don’t have a sense of humor at Corporate Governance?)
Back to the topRick Crangle with ISS reports that Radnor Financial Advisors president Edd Hyde is going after mutual funds with 70 other independent advisors. While mutual fund assets have quadrupled, fees and other expenses have continued to rise. Where are the economies of scale? Shareholders are demanding changes and are getting a boost from the ranks of investment managers. (see alsoBusiness Week 9/1)
The August 9th edition of The Economist looks at strikes at “employee owned firms such as UAL and UPS. Why would employee owners strike their own firm? In the case of UAL, the 20,000 flight attendants are not owners. At UPS 27,000 supervisors and managers own a combined 29% of the firm, whereas 60,000 nonmanagement employees own less that 3% and part time employees own an insignificant amount. “Giving all employees a chance to own a stake in their company can be a unifying, productivity-boosting strategy; making shares available only to a select group will simply deepen existing divisions.” However, they also warn that “even the most equitable share-ownership schemes will flounder if workers feel they still have no say in how their firm is run.” The NCEO says that 9,500 firms, such as UAL and UPS, are on average enjoying a 10% faster growth rate because of employee ownership and participation.
In our opinion, if this is so for “employee owned” firms like UPS, it is even more true with respect to companies where the CEO is an owner but the average employee is not. Today when firm specific human capital contributes so much more heavily to the bottom line, it is important that workers be owners and decision-makers as well.
McKinsey finds that from 1970-90, a focus on shareholder value actually leads to more jobs (comparison between companies in U.S./Canada with Continental Europe). (Businessweek)
August 28th WSJ reports the SEC will vote in early Sept on proxy reforms so they will be in place for the 1998 meetings. The rule is expected to reverse Cracker Barrel and raise the threshold of those eligible to file to owning at least $2,000 shares in the company.
The August 16th edition of The Economist reports on papers presented to the Academy of Management meeting in Boston. James Westfal, University of Texas, found that CEOs with outsider boards spend their time doing favours for the board. Such companies diversified, increased executive pay and weakened the link between pay and performance. In another study with Edward Zajac, Northwestern University, Westfal found CEOs attend to measures that affect their own income more than those that don’t…pay for performance promotes “tunnel vision.” William Sanders, Bringham Young, found a link between pay in options and M&A and divestiture activity. Churning promotes the image they are doing something important. With options they lose nothing on the way down but reap substantial rewards on the way up. CEOs are smart enough to beat the system; are shareholders and boards smart enough to call them on it?
Dr Mark Blair, of the Australian Stock Exchange, announced ASX is developing a guidance note for listed companies which will “add flesh to the bones and assist as new codes [of corporate governance] are developed”. (see Financial Review)
August’s e-mailed Wharton Leadership Digest includes a list of corporate governance publications…added to their June list interested readers will now have a fairly comprehensive list.
Representatives of CalPERS and CalSTRS indicated the systems would reexamine current polices and would probably modify them to disclose votes in closed session taken on investments. The announcements came after continued pressure from the press (including Corporate Governance) and Senator Schiff who held a hearing on “pay to play” and related issues. At the hearing Senator Schiff focused on the fact that elected officials on the boards receive substantial contributions from investment firms and other contractors and yet disclosures of potential conflicts of interest are not required during deliberations nor are votes ever made public if taken in closed session.
CalSTRS Fiduciary Counsel, Ian Lanoff, dropped a bomb on the proceedings when he indicated he has repeatedly advised CalSTRS board members that they are prohibited, by provisions in the California Education Code, from assisting contributors and should recuse themselves from such votes and deliberations. It was clear the strength of Lanoff’s conviction came as a surprise to CEO James Mosman who indicated that constitutional officers on the CalSTRS Board had received different advise from their own counsels and did routinely participate in deliberations and votes involving contributors. It was also clear that potential conflicts of interest are not routinely discussed during such deliberations.
Defined-Benefit Pensions to Benefit by Tax Law, says Vanessa O’Connell in the 8/14 (WSJ). A little-noticed technical provision gradually lifts the cap on employer pension-fund contributions from 150% to 170% of current liabilities. Amounts beyond the caps are subject to stiff penalties. 59% of current plans reached full-funding limits in 1995, according to a recent study of 218 companies by Buck Consultants in New York. The current limit prohibits companies from putting money away and later forces them to make large contributions.
David Weidner, in a recent article questions the ability of Michael Price to sustain the performance that made him such a money magnet. Price’s numbers are starting to lag. The $7 billion Mutual Shares Fund, has underperformed its growth and income peers by nearly 4% so far in 1997. Camparisons are made with other fund managers who grew too fast. 8/14 (WSJ)
KPMG’s research found long-term incentives comprise 45% of most CEO executive pay packages (median value of $1,138,000). Base salary comprised only 30% of total compensation (median value of $694,000), bonuses comprised 25% (median value of $626,000). Total median CEO compensation was $2,219,000. The study, Executive Compensation Practices in Manufacturing, Retailing & Distribution Companies – 1997 examines the base pay, annual incentive and long-term incentive practices of 218 top publicly held companies in nine industries: automotive, chemicals, consumer products, energy, food and beverage, industrial products, retail, transportation and utilities. (KPMG)
Options now account for 40% of senior management pay, according to a recent study by Stanford C. Bernstein, as reported in The Eonomist 2/28 p. 77. Buybacks have also hit a record. Microsoft incurs a $1 billion liability each time its shares rise by around $4 to pay for options it has issued. The buybacks “largely represent a direct transfer of wealth from shareholders to employees,” according to the researchers.
Golden Boot award goes to John Walter, former president of AT&T Corp. After 7 months the AT&T board was denounced his lack of “intellectual leadership” while demonstrating its own decisiveness–$26 million to hit the road. (Upside.com)
Shareholder activists are given some credit for the turnaround ofDigital Equipment (DEC). Bob Monks, of LENS said the sale of the printer business is a step in the right direction. “But the company should focus its energy where it has a future, and I worry that this might be a little too late. The company lacks a sense of where it is going.” Herbert Denton, of Providence Capital, said they’ve sent a wake-up call to the board of directors. (see c/net)
With the loss of tax exemption status, TIAA-CREF plans to tap into a number of new markets, including huge state-run pension funds for the country’s three million elementary and high-school teachers. TIAA-CREF already sells its retirement funds to state-employed college workers in 46 states. The pension fund also is weighing offering retirement investments to college employees’ families, and to hospital workers who previously were members of TIAA-CREF when they worked at teaching hospitals. (WSJ)
EVA, CFROI, MVA and other measures of value creation are reviewed in an August 2nd article titled Valuing Companies: A Star to Sail By? in The Eonomist.
Franklin Resources Inc. (BEN) reported that third-quarter net income rose 37% from the year before. Analysts attribute the company’s recent share-price charge to several factors – not the least of which is Michael Price, the company’s star fund manager, who is one of the only mutual fund managers occasionally using corporate governance strategies. 85% of its funds have 4 or 5-star ratings from fund tracker Morningstar Inc.
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The Hampel committee, headed by ICI chairman Sir Ronald Hampel, released their report, which follows the earlier Cadbury code on governance and Greenbury recommendations on executive pay, and came out against “box-ticking” — where companies have to comply with lists of principles. It also called for a lead non-executive director to be identified in the annual report, regardless of whether the roles of chairman and chief executive were combined. It stopped short of recommending that voting at meetings should be compulsory, but said institutional investors had an obligation to their clients to “adopt a considered policy on voting their shares.” Hampel also suggested shareholder bodies the Association of British Insurers and National Association of Pension Funds should examine a problem caused by the existence of different and incompatible shareholder voting guidelines. Hampel invited comments on the report to arrive by the end of September, with the aim of producing a final report with a single set of recommendations uniting Cadbury and Greenbury, in December. The impact of both the Cadbury and Greenbury codes of practice stems largely from their adoption by the London Stock Exchange. Through its listing rules, the LSE obliges companies to comply with the codes or explain why they haven’t.
Executives of Apple Computer are scheduled to meet withCalPERS on 9/3 to address their concerns. “Although they stacked their board with some heavy hitters, they aren’t out of the woods until we talk to them about their process for choosing a CEO. This is the most critical element as far as CalPERS is concerned,” said Brad Pacheco, a CalPERS spokesman. (c/net)
Kurt Schacht, general counsel for the State of Wisconsin Investment Board raises the alarm in the August edition ofCorporate Agenda about the over use of options. “It is no longer unusual to see options representing over one-third of a company’s stock being given to managers and directors.” The result is a “huge transfer of value from existing shareholders.” He also denounces repricing ‘underwater’ options. “Oddly, they always say it is unforeseen circumstances or market gyrations that cause stock to decline – it is strong management that makes the stock go up.”
The same issue also carries an article by Dr Brancato, director of the Global Corporate Governance Research Center which provides several figures turnover by fund type and pointing to greater control over US equities by the top 25 institutional investors. They controlled 16.7% of total outstanding equities in 1996, up from 15.4% just a year before. Institutions have increased their holdings from an average of 46.6% of total stock in 1987 to an average of 58.8% of total stock by the beginning of 1997. Editor Lucy Alexander writes on the tobacco companies and speculation of a renewed attempts at spinoffs, such as last year’s effort by Carl Icahn and Bennett LeBow at RJR Nabisco. There is also a report from the American Society of Corporate Secretaries’ annual conference. At a panel on successful board practices, Jonh Wilcox of Georgeson dismissed discussion of term limits, separation of CEO and chair, etc. as “external matters.” “What is really important is what goes on in the boardroom and companies need to find a way of informing investors about that.”
An 8/4 editorial in Pensions & Investments calls for an end to sole trustees of pension and trust funds. It points to the disruptions. For example, “every Connecticut state treasurer since 1958 has left office in midterm.” The lure of lucrative positions in the investment management industry is too great to hold them. However, more important than the lack of continuity is the lack of accountability. “The system doesn’t ensure accountability when the sole trustee decides which investment companies to hire and fire, perhaps talking to them about future, very-well-paying employment opportunities.” They argue that closed door investment advisory meetings contribute to a lack of accountability. In addition, as elected office holders, many have accepted thousands of dollars in campaign contributions from firms hoping to get their business.
We agree that a board is much less susceptible to corruption, although even some of the best boards are not immune from criticism. Note an article which appeared in the Sacramento Bee on May 17th about a questionable $100 million closed door deal where the placement agent was a former board member. CalPERS has called for the individual accountability of directors for corporations. We would take the P&I editorial one step further and call on public pension funds to make all relevant closed session meeting notes public, once the investments have been executed.
In the same issue, Keith Ambachtsheer of KPA Advisory Services Ltd., Toronto, argues against a previous commentary by Douglas B. Roberts and Mathew J. Hanley who asserted that a defined contribution (DC) plan was right for Michigan. Ambachtsheer compares the total expense ratios of a defined benefit (DB) plan like CalPERS (17 basis points) with that of the typical 401(k) plan (100 basis points). While DC plans often enhance vesting and portability, create greater cost transparency and stakeholder symmetry between who benefits and who underwrites losses, they jetison other important benefits. DB plan participants typically benefit from risk pooling, large scale economies and from dedicated corporate governance which leads to “a healthy reconnection of corporate ownership and control in the economy.”
Yet, the growth of DC plans continues. Pensions & Investmentsreports that abolition of tax credits, combined with the effects of the 1995 Pensions Act will lead many U.K. firms to abandon DB plans. A recent Aurther Anderson survey found “80% of employers plan to review their plan structures, with fully two-thirds saying changes would trigger a move to defined contribution schemes.” Recent Italian pension fund reforms will also lead to new DB plans with assets expected to exceed $50 billion by the end of 2002.
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An interesting article in Corporate Governance: An International Review provides a broader than usual perspective. See the Politics of Corporate Control and the Future of Shareholder Activism in the United States under authors Thompson, Tracy A. and Gerald F. Davis.
We’ve added the Investor Responsibility Research Center (IRRC)to our list of Stakeholders. Their May-June Corporate Governance Bulletin carried a wealth of information as IRRC begins to analyze results of the 1997 proxy season. Investors continue to make inroads on antitakeover defenses. One of the big developments was the submission of binding bylaw amendments by theInternational Brotherhood of Teamsters at Fleming. Shareholders filed 120 proposals on executive compensation, up from 63 in 1996.
IRRC reports the SEC received 333 responses to its survey on the shareholder proposal process (177 corporations, 82 shareholder groups, 58 individuals, 15 institutional investors and 1 proxy solicitation firm). Most corporations advocated raising thresholds of stock held to qualify for submission of proposals. The Bulletin lists hundreds of proposals and their status. It also includes articles on significant developments in Japan, the Netherlands and Russia as well as the CalPERS draft guidelines and many other important topics. Another IRRC publication, Corporate Governance Highlights, recently included coverage of a no-action letter suggesting that Nike may exclude a broad-based sweatshop resolution submitted by the Board of Pension and Health Benefitsof the United Methodist Church and others. IRRC also reports that the National Association of Corporate Directors will launchanother “blue ribbon commission” on CEO succession. They will begin on September 11 and expect to release a study six to eight months later.
The Securities and Exchange Commission, Department, and FBI are investigating possible kickbacks in exchange for steering investments to the former Shawmut National Bank in Boston. (Washington Post)
Managing CEO succession is a major theme in the current issue of Business Week.
CalPERS and the Florida Retirement System Trust Fund are appealing an $8 million lawsuit settlement made by Archer-Daniels-Midland Co. (ADM), which awarded $4 million to plaintiffs attorneys and included a watered-down attempt to improve corporate governance practices. (WSJ)
Dissident Sallie Mae shareholders, the Committee to Restore Value at Sallie Mae, defeated a management’s slate for the board of directors, and overwhelmingly approved privatization. Albert Lord, who will become the CEO indicated top priority would be to the cost of buying student loans by 50% within five years. It will also tie directors’ compensation to stock performance and provide performance incentives to its 4,700 employees. Sallie Mae shares jumped $4.8125 to close at $149.9375. (WSJ)
With Delano E. Lewis, president and CEO of National Public Radio stepping down, the board of Apple Computer now has 4 vacancies. Most of the board members, with the exception of A.C. “Mike” Markkula Jr., have little or no stock in the company and are not in the computer industry. (TechWire)
Two press releases by CalPERS. One praised the actions of Japan’s Ministry of Finance for issuing severe penalties against Nomura Securities Co. for the company’s involvement with corporate extortionists, or “sokaiya.” The second expressed outrage at Governor Wilson’s inaccurate portrayal of negotiations that had been conducted to enable the state to stretch out a court-ordered $1.236 billion payment of money owed CalPERS. “The Governor has revictimized the victims — using the pension system as his pawn in a political chess game played over non-CalPERS related matters, including tax cuts, welfare reform and pay raises for state employees,” said Dr. Crist, president of the Board. “He essentially asked CalPERS to loan the state money at below market rates. This would violate both the California constitution and the federal tax laws. Under long-held principles of pension law, CalPERS would be allowed to accept delayed payments ONLY as long as the beneficiaries were compensated by a comparable offsetting benefit,” CEO Burton said.
Best practices conference to be held in Las Vegas December 11-12, 1997 sponsored by Investors Research Insitute, Inc., a non-profit organization whose mission is to develop higher standards of investor information accessibility for small cap companies. For information contact the Chinook Group at 206-667-8558, fax 206-667-8660, or via email at [email protected] or[email protected].
The Dow Jones News Wire Service carried an interesting 7/29 report on a seminar organized by the Confederation of Indian Industry which sought feedback on their April draft code of draft code of desirable corporate governance. S.H. Khan, chairman of Industrial Development Bank of India indicated that directors nominated by financial institutions must be held to the same standards but should net be expected to undertake additional investigations. Omkar Goswami, Business India magazine, empowering small shareholders through a strong mutual fund industry would help ensure good corporate governance. Pratip Kar indicated the Securities & Exchange Board of India has recently introduced a series of measures to ensure greater responsibility by mutual fund trustees.
Back to the topWhile the US ponders privatization of Social Security other countries are going ahead with at least parts or their systems. Japan, singapore, Malaysia, Sweden, Chile, Argentina, Peru, Switzerland, Norway, Taiwan, and others are mentioned in a 7/29WSJ article. Most are reportedly faring well but Japan’s Nempuku has lost $8.6 billion. Some worry about companies being nationalized but CalPERS is noted as having large holdings without taking over industries. U.S. Social Security trust funds-which are invested in special issue U.S. government bonds-had an average annual return of 8.8% over the past 10 years.
The budget agreement will strip TIAA-CREF, the largest pension fund, of its tax exempt status.
The Stock Exchange of Singapore (SES) is working on corporate governance guidelines which will focus on ensuring timely and fair disclosure, and preventing directors and controlling shareholders from using their influence to personal advantage.
We’ve added recent articles about lenders by Drukarczyk, unions by Schwab, and exchanges as regulators by Mahoney to ourannotated list of articles. Other recent additions include an article by James Repetti on tax incentives, such as capital gains, which subsidize management inefficiencies. Lawrence Mitchell argues for a “conduit” theory of the corporation which views stockholders as humans.
Corporate pension funds underperformed a benchmark of 60% S&P 500 and 40% Lehman Bros Gov/Corp Bond Index by 1.16-1.41% per year between 1987 and 1996, according to a study by Piscataqua Research reported in Pensions & Investmentson 7/21/97. “To leave 1% on the table doesn’t sound like much,” according to Stephen Church, “but when you convert it to dollars…that’s $70 billion.” Performance has improved during the last 10 years largely due to increased use of indexing.
Kent Simons, co-manager of Neuberger & Berman Guardian Fund cautions that investing in the S&P 500 is increasingly risky because a few companies, like GE and Coke, comprise such a large share of the index which beat 90% of all growth-and-income funds in the past 10 years. (7/23, WSJ)
The May/June issue of the Corporate Governance Advisor carried an excellent article by Koppes, Ganske and Bereday on how directors should design and implement guidelines on corporate governance. The trio cite individual elements from guidelines adopted by TRW, BankAmerica, Campbell Soup, Pfizer, International Paper, Dayton Hudson, Colgate-Palmolive, CPC International, McDonald’s and others. The discussion ranges from the role of directors to the fine details of guidelines concerning the distribution of written materials in advance of board meetings. One worthy idea which few have adopted (Colgate-Palmolive being an exception) is providing boards access to their own legal and financial advisers. The authors also call for guidelines to be more specific in the process used and standards applied in the board’s own self-assessment. While man of the ideas discussed begin to form a consensus around the NACD Report, the authors emphasize tailoring guidelines to fit the individual.
I would add, that not all the ideas of the Report were good. For example, the idea that “Boards should require that all directors submit a resignation as a matter of course upon retirement, a change in employer, or other significant change in their professional roles and responsibilities.” I would argue with Joseph Hinsey IV, “the message to the outside world is that board membership is geared to the position, not the person. Stated another way, the apparent objective is to have a board stocked with celebrities, and if the director loses his or her brilliant colors – turns from a butterfly into a moth – then he or she no longer measures up. This view of the director’s role creates a terrible perception for the public. Beyond that, it is the antithesis of enlightened corporate governance.”
Waste Management may be finally getting approval from shareholders with the appointment of Ronald LeMay. The most colorful quote came from Nell Minow; “I haven’t popped the champagne cork, but I’ve put the bottle on ice.” Soros Fund Management also appears pleased. (ISS)
Back to the topJoann S. Lubin’s 7/18 WSJarticle “Turnover at the Top Puts Heat On Many Boards of Directors” is worth a read. She draws lessons from the recent experience at AT&T, Apple Computer, Waste Management and Delta Airlines. One common problem is the unwillingness to make a clean break from past management.
Back to the topSenator Adam Schiff will hold hearings on 8/25/97 to examine possible “pay-to-play” abuses CalPERS and STRS. (WSJ, 7/21/97) I hope to attend the hearings and bring our readers some interesting tidbits.
C/net reports that Apple canceled its meeting with CalPERS. The story includes an interesting quote. “We’re focused on improving the company and its performance,” said director Edgar Woolard, last night. “Personally, I’m not concerned about CalPERS. They can do whatever they want.” This doesn’t sound like a positive attitude towards an important shareholder.
An interesting course, The Virtual Chancery Court, is being offered though the internet.
Wharton professor Constance Helfat and colleague Dawn Harris of Loyola University completed a study which found that when a firm goes for outsiders it is willing to pay 36% more for executives with generic management and leadership skills but no industry- or company-specific experience. The return on assets among firms going to the outside for top talent is only 38% of the return among firms that select from the inside. (Wharton Leadership Digest)
Senator Adam Schiff will hold hold hearings on 8/25/97 to examine possible “pay-to-play” abuses CalPERS and STRS.
So far this year, only 101 of 2,577 general equity funds have outperformed the S&P 500. For the last year, it was 128 out of 2,302. For the last 3 years only 71 out of 1,421 funds. That’s 5%. As people come to realize the odds, they are pouring more money into indexed funds. Yet, the danger is that capital will no longer be allocated to companies that actually produce the greatest wealth. Its worth taking another look at Break the Wall Street Ruleand the possibilities inherent in “ownership” or “relational” funds.
Hoover’s opened a new site, StockScreener, which allows searches and sorts of 7,500 stocks by criteria such as P/E, beta, earnings growth, price/book value. To test it, I asked for all companies with a P/E lower than 1.2, and earnings growth rates above 20% for 1 and 5 years. Only one company fit the criteria,Raytech. The nice numbers could have something to do with the fact that Raytech has had asbestos personal injury and environmental liabilities pending since March 1989. Nevertheless, StockScreener is interesting to play with so we’ve added it to ourlinks.
In a move which surprised us, STRS sold it investment inMaxxam, the company which has become anathema to environmentalists for threatening to cut down old growth redwoods. The sale had been recommended by the California Federation of Teachers last February. The decision was made on investment factors not political pressure, according to STRS.
It makes us wonder about all those tobacco stocks. The Pennsylvania Public School Employees Retirement System can be added to the list of those who have stopped buying shares. I doubt if the recent settlement will stick. While I generally believe pension funds and other institutional investors should work for change through corporate governance mechanisms, the tobacco industry is a little different. They can split off their tobacco related components but they are not likely to fold up shop. Pension funds who were forced to sell their stock in companies doing business in South Africa may want to remember how much they lost. If the political pressure is going to rise, it might be better to move now, while prices are still relatively high.
Michael Price finally took an action we think will soon become more common for mutual funds; he succeeded in getting an independent director, Martin Solomon, elected to the board ofTelephone and Data Systems (New York) by a 78% margin. Franklin Mutual holds almost 10% of TDS (seePensions & Investments)
The July 7th edition of Pensions & Investments carries an editorial saying the tax-exempt status of TIAA-CREF is an anachronism. TIAA-CREF argues that “TIAA’s incorporation as an insurance company in no way offsets the fact that a pension system is what we are. As such, our participants should be entitled to the same tax exemption afforded to all other pension systems and multiemployer pension trusts throughout the nation.”
A recent Korn/Ferry study finds that boards of the largest U.S. companies are moving toward the ideals which were contained in the CalPERS corporate governance policies. Larger companies are phasing in stock payments and phasing out retirement benefits for directors. The vast majority have age limits (even though CalPERS is likely to back away from this as an ideal). Directors serve on an average of 2.5 boards vs the CalPERS maximum of 3. However, only half require the former CEO to leave the board, few have term limits (the final CalPERS guidelines will probably change in this area as well), boards usually have 2 inside directors instead of 1, and less than half have regular board evaluations. The study also notes increasing diversity among board members…an area which the CalPERS draft was silent on but which, we believe, will be covered in the standards when adopted. (for more details see Businesswire)
Back to the topThe Irish Times reports that Alan Hevesi, New York’s comptroller, is still ready to throw his weight behind the Ireland Peace Bonds plan which would pour billions of investment dollars into Irish businesses if a peace process is worked out.
Back to the topRussia now has a higher proportion of private shareholders than the US, and the share of GDP in private hands is higher than Western Europe’s. Managers and employees controlled 64% of corporations in 1996 and 2/3 reject bringing in “outside” capital to modernise. (Kremlin Capitalism: Privatising the Russian Economy by Joseph R. Blasi, Maya Kroumova and Douglas Kruse. Cornell University Press.1997) (review, chapters)
A study by James A. Brickley of the University of Rochester and Jeffrey L. Coles and James S. Linck of Arizona State University finds that 90% of retiring CEOs from major corporations sat on at least one corporate board and nearly two-thirds held at least two seats. Performance as a CEO was related to the number of seats held. (BusinessWeek 7/14/97)
A study conducted by William M. Mercer, Inc showed that Illinois companies lead the nationwide trend towards compensating outside directors with stock. 97% percent of the Illinois companies surveyed reported some sort of stock-related compensation scheme, compared to 89% percent nationwide. “The larger a company, the higher the profile of its directors. Given this high profile and the company’s likelihood of institutional shareholder involvement, its board is more likely to be concerned with good corporate governance and related directors compensation practices,” noted Erin Milligan, a principal in the area of executive compensation in Mercer’s Chicago office.
The Economist (6/28/97 issue) carried a Survey of Japanese finance which includes one of the better explanations of how the current system came about historically as well as current moves to increase competition and returns for savers. Expect bankruptcies to rise and creative entries into unrelated fields to fall as cheap capital comes to an end.
A wide ranging article on corporate governance was featured in the June 1997 edition of International Fund Strategies. Jim Mellon, of Regent Pacific, and Stephen Viederman, of the Jessie Smith Noyes Foundation provide contrasting perspectives which both depend on corporate governance activism in varying degrees.
One interesting note in the article is a reference to a CalPERS mission statement, “to advance the financial and health security for all who participate in the System.” “Although CalPERS makes clear that its corporate governance activity is firmly returns-based, a mission to advance the health of plan participants could naturally extend into co-called “social” shareholder activism, as a natural progression of fiduciary responsibility.” I believe the author is reading more into the CalPERS statement than is intended. The reference to advancing the health security of participants is much more likely tied to the benefit programs administered by CalPERS than to any corporate governance efforts. The bulk of the article is on-target and extends the dialogue between those focused strictly on increasing shareholder value and those seeking a wider responsibility. We welcome their favorable mention of theCorporate Governance site and their reference to several of thebooks we have reviewed recently.
Back to the topA Korn-Ferry study of Australian and New Zealand company boards found less than 1% of Australasian companies had foreign nationals on their boards, far below Britain, where foreign directors sit on 38% of the boards, and the US, with 17%. Women still only made up 6% of all directors. (The Age)
A recent study of 1,000 companies by Graef Crystal finds that executive pay rose 16% in 1996, while employee raises averaged only 3%. Crystal found links between pay and performance in 5% of the cases. “A similar study of baseball players salaries found some years ago that 75 percent of pay differences could be explained by differences in batting averages, earned run averages and the like. (Philadelphia Inquirer)
E: the Environmental Magazine for July/August includes an article by Marshall Glickman on “How to Use Your Shares to Change Company Environmental Behavior.” One example from the article is the use by Steve Viederman, executive director of the New York-based Jessie Smith Noyes Foundation, of a shareholder resolution to influence Intel’s hiring practices, its water use and toxic emissions. Intel agreed to work on its community disclosure policy, and Noyes has at least temporarily withdrawn its resolution.
Howard M. Friedman’s (email: [email protected])Securities Regulation In Cyberspace has just been released by Bowne & Co., Inc. $175 (800) 370-8402. For a review seeFriedman. Securities Regulation in Cyberspace is a must read for anyone concerned with the future of shareholder communications and the use of cyberspace in corporate governance.
A recent draft study by Mark R. Huson (email:[email protected]), Does Governance Matter? Evidence from CalPERS Interventions lends additional support to the CalPERS Effect. see Huson
A Proxy Process Forum, sponsored by ASCS, was held in New York city on June 20th. This was an opportunity to followup on the new fees which apply to mailings made during the 1997 proxy season as part of a one-year pilot program and to focus on multiple additional issues. In other ASCS news, they will be mailing out their second Current Board Practices questionnaire within the next couple of weeks. Only those who respond will get copies of the report…that’s one way to ensure a high return rate.
Shareholders and Stakeholders benefit or suffer together, according to a new study by SCA Consulting, reports Patrick McGurn, Director of Corporate Programs for ISS. Further, “there appears to be a strong link between consistent returns to shareholders and stakeholders and corporate governance.” See 6/20/97 ISS Friday Report.
Investor activists target high tech firms
Report from Morningstar Mutual Fund conference in Chicago: the average turnover rate for stock mutual funds is 80% to 90% a year, which costs shareholders money in the form of higher expenses and, often, higher capital gains distributions, which can cost shareholders more in taxes.
Shareholder resolutions addressing executive compensation nearly tripled from 1995 to 1997. Rep. Martin Olav Sabo (D-Minn.) is sponsoring a bill that would limit the deduction for executive compensation to 25 times the pay of the lowest-paid worker. See Putting the brakes on CEOs’ riches.
On June 16th the WSJ reported “Directors of the California Public Employees’ Retirement System today are expected to endorse corporate-governance standards for the first time.” First, CalPERS has already adopted corporate governance standards applicable to global, British, and French markets. Second, taking a page from their own advise, the CalPERS Board didn’t rubber stamp staff’s recommendation. They will study the issues and make a few changes. The Board is unlikely to adopt its “U.S. Corporate Governance Principles” until August. Staff hopes to distribute the Principles widely and move beyond the process concerns of the 1995 “report card” to an evaluation of the substance of corporate governance practices in U.S. based firms. Given their high profile and activist stance, it would be prudent for corporate boards to obtain copies of the draft report and to provide feedback to the CalPERS Board before August. To obtain a copy contact their Office of Public Affairs.
So what’s wrong with the report so far? Its certainly well organized and written. I would probably add the recent quote from William T. Allen about the most basic responsibility of the board being the duty to monitor (see a few paragraphs below) but more substantively the most glaring error is ageism. I can see no sound basis for a fundamental requirement that boards adopt an “age range criterion” for its directors, unless it is to rule out the obviously immature. Nor can I embrace the notion that on the ideal board no more than 10% of the directors are over age 70. Boards consisting of 11 WASP male engineers over 70 are not likely to prove effective under most circumstances but I would caution against being too prescriptive. I believe what CalPERS staff were seeking with this requirement is diversity. A fundamental requirement might be that board nomination policies consider the value of diversity and that the ideal board achieve diversity with regard to experience, gender, race and age.
A second problematic notion is that the draft contains a long list of characteristics, largely drawn from CII’s policy, which would preclude a person from being defined as an independent director. One significant new addition is term limits. While term limits in California government may have served to shake lose politicians who had grown to own their offices, its long term benefits are less obvious. Institutional memory is vanishing and there is a growing reliance on experts who are not accountable to the electorate. I’m not sure how much is actually gained from such laundry lists. It may be better to adopt TSE’s broad policy that independent directors should be “free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding.” Whatever policy is adopted, the concept of term limits should be dropped.
These are some initial thoughts on this important document. I would appreciate hearing the reactions of our readers. Write toJames McRitchie.
Back to the topWe are delighted to add to The Bank of America’s Journal of Applied Corporate Finance and The Public Retirement Journal to the publications we scan. See our growing list of “Stakeholders.”
An excellent article appears in NACD’s Director’s Monthly. Richard A. Rosen, with Paul, Weiss, Rifkind, Wharton & Garrison, provides the first in a two part series on Corporate Governance in the 1990s. Rosen includes a quote from a speech from William T. Allen, former Chancellor of the Deleware Court of Chancery. In Allen’s opinion, “the duty to monitor the performance of senior management in an informed way” is “a most basic responsibility” of the board of directors. It is no longer acceptable to simply “select senior management, create incentive compensation schemes, and then step back and watch.”
More than 1/2 of executives use the Internet a few hours a week, typically as a way to keep tabs on the office from home. They consider the Internet slow, too little known by the business world and not secure enough, said the survey of 3,466 executives and managers by the American Management Association. In contrast, Internet users in general log on an average of 10.5 hours a week for business purposes, according to a separate recent survey. The rare executive who is a heavy Internet user — logging on more than 10 hours weekly — is typically under 35 and female, working in communications, public relations or a computer-related field. Executives tend to view the Internet as a library of contemporary information. Web users who retrieve news online say the Internet now accounts for about 20% of their total news intake, comparable to radio and nearly comparable to print sources. (credit: B2B eNews)
Too late to list under conferences. The Public Retirement Journal is sponsoring a seminar entitled “What Has Happened in Public Sector Benefits This Year? How Does It Affect You?”
Date: June 19, 1997
Place: CalPERS Auditorium, 400 “P” Street, Sacramento
Cost: $135, includes continental breakfast, lunch and training binder.
Topics Include: Pooling of Employer Assets and Risks, Inflation Protection (SB 234, Hughes), Medicare Part B and PEMHCA, Medicare and Social Security Reform, Alternative Retirement Plans, The New Legislature, Term Limits, Employer Surplus Accounts, PERS Investment Portfolio.
Our editor, Jim McRitchie, will be attending.
For reservations call Tom Branan at (916) 455-7322 or Dave Cox at (916) 456-5282.
Maybe there is less concern about the framework for proxy voting than we thought. Corporate Agenda reports the SEC received only 400 responses to its proxy survey. Among the reforms under consideration is the idea of opening up communications for both companies and investors, “letting them talk privately with each other as long as they don’t have a proxy solicitation,” says Brian Lane, SEC’s director of corporation finance.
Back to the topCambell Soup will publish its second annual board self-evaluation, according to Directorship. “Board members will assess each other as individual contributors, overall board performance as well as the record of the CEO and top management.” Also from Directorship, “out of 873 CEOs of Fortune 1000 companies, 296 sit on one board, 490 sit on two to four boards, and 87 sit on five or more boards.
BofA’s chairman and CEO David Coulter actually tried to inspire a shareholder activism at the company’s annual meeting…he urged them to write “to the newspapers and to your elected officials supporting our right to price our products and services without the government’s assistance.”
ADM must adopt a new definition of outside directors, form a new nominating committee for board members, and establish an audit committee made up of independent board members to ensure company compliance with its own bylaws and federal law. It also must conduct confidential shareholder voting according to a settlement reached with shareholders. (seePhiladelphia Inquirer)
Shareholders at Clemente Growth Fund won a vote requesting the board to solicit bids for a new advisor. Andy Zipser’s article in Barron’s brings “democratic” corporate governance to life.
Received for Review. Studies in International Corporate Finance and Governance Systems, ed. Donald H. Chew, Oxford University Press, 1997. Compares market based and relationship based models. Positioning Pensions for the Twenty-First Century, ed. Gordon, Mitchell and Twinney, Pension Research Council of Wharton, 1997. Discusses retirement options for the future.
A recent ISS Friday Report carried a review of several surveys on the issue of executive pay by Patrick McGurn. Both the public and execs believe “top officers of large U.S. companies” are paid too much and that corporate execs face little downside for corporate results. Solutions, however, differ. Seven in ten public respondents said exec pay should grow no faster than that of lower workers. Limiting the number of options, as a percent of shares outstanding – something already required to qualify under the IRS $1 Million cap – is favored by execs.
The Philadelphia Municipal Pension Fund has adopted a new proxy voting policy to vote against requiring directors to own specified amounts of company stock, fearing the many qualified directors will not be able to afford it. The Fund also opposes efforts to limit terms of nonemployee directors because companies could lose experienced and knowledgeable directors. (P&I)
Those discussing proxy reform are unlikely to reach agreement, according to several participants. Some pension funds and religious groups want the SEC to stop acting as a referee on “ordinary business” matters. Corporations want to raise the level of ownership required to file proposals, caps on the number of proposals, and increases in voting levels required for resubmissions. (P&I)
Binding resolutions are a significant trend, according to Patrick McGurn, director of corporate programs at ISS in an article for Investor Business Relations. In January a federal judge ordered Fleming Companies to include a poison pill proposal, sponsored by the International Brotherhood of Teamsters on its ballot. If the ruling stands up in court it will set a huge precedent. The next target may be super majority requirements contained in company bylaws.
In negotiations with SWIB, Scios Inc. agreed to oppose nonbinding shareholder resolutions in return for a commitment to add two new independent directors to its board over the next year. Apparently Scios Chairman and CEO Richard Casey had indicated he would name former CalPERSexecutive Richard Koppes as chairman but then balked. Dissidents apparently believe SWIB’s deal – trading one board seat per million votes is a good one. Many would love to trade enough votes to change the compensation committee which they believe has made Casey rich and shareholders poorer. (seeISS)
FASB has published a proposed Technical Bulletin providing guidance on accounting for certain employee stock purchase plans under FASB statement 123, “Accounting for Stock-Based Compensation.” Comments are requested by 7/21. A free copy is available by calling FASB at (203) 847-0700, ext 555. (from Investor Relations Business)
The SEC’s Web site now contains over a billion pages of text and data.
The TIAA Securities Division of TIAA-CREF has established a new Emerging Markets Team and expects to be investing a minimum of $200 million to $300 million a year initially, and ultimately upwards of $750 million a year, in intermediate long-term purchases in emerging markets, including investments in structured finance and project finance deals in those markets.
The latest issue of Corporate Agenda carries an article about education in the boardroom. It seems that directors organizations, pension funds, shareholder activists, and universities think it’s important for directors to get a few days of training concerning their responsibilities and current corporate governance issues. “But companies themselves seem less than enthusiastic about the idea of educating their boards.” Their unscientific sample found that “none of the ten randomly chosen S&P 500 companies send their board members on director education courses.” Author Lucy Alexander concludes that for some, “director education will probably only begin to be taken seriously when things start to go wrong, by which time, it may be too late.”
Layoff leaders had average compensation increases of about 67% in 1996 in comparison with 54% for the typical CEO at the top 365 U.S. firms and 3% for workers, according to the report by the Institute for Policy Studies in Washington and United for a Fair Economy in Boston. A Business Week-Harris poll shows that half of top executives think executive pay is out of control. 71% said large companies reward good results but don’t penalize laggards.
Back to the topPublic pension funds are facing growing pressure to kick the tabacco habit. Proponents of divestment are gaining ground in Maine, Vermont, Massachusetts, Texas, Floridia and Oregon according to P&I.
The vast majority of U.S. corporations have used one or more ADR procedures in the last three years. 88% reported using mediation, 79% have used arbitration. Over 84% indicated they would use mediation in the future whereas 69% indicate they will use arbitration in the future. The survey was a joint initiative of Cornell University, The Foundation for the Prevention and Early Resolution of Conflict (PERC) and Price Waterhouse LLP. The findings were culled from over 530 corporations in the Fortune 1,000 category. The smallest respondent had sales of over $1 billion. Contact Christopher Colosi at [email protected].
We have added links to Pensions Investment Research Consultants (the UK’s “leading source of independent advice on proxy voting”) and The Conference Board (“the world’s leading business membership and research organization”). You’ll find them on our Links page under Investor Communications/Relations Services and Public Interest Groups and Research Centers. We count on readers for identifying about 20% of all links and articles, so please let us know when you find something which may be of interest. Contact [email protected]
Average stockholder runs for board of BellSouth with backing of the Communications Workers of America. (seeAtlanta Business Chronicle)
The Boston-based Coalition for Environmentally Responsible Economies (CERES) in 1996 filed a record of 43 shareholder resolutions with U.S. companies, including five in Massachusetts. That’s up from 16 resolutions filed nationwide in 1995. But shareholders shouldn’t expect to see CERES resolutions on proxies. Instead, executives are going to the negotiating table. According to Mark Tulay, a spokesman for CERES, that’s exactly what the coalition wants. Of the 43 resolutions filed in 1996, all but 13 were withdrawn in favor of negotiations. The resolutions, filed by institutions which support CERES, ask companies to adopt the 10 CERES principles governing environmental business standards. This year the group expects additional progress. (see Boston Business Journal)
Pennsylvania’s Supreme Court ruled that shareholders who want to sue management or directors on behalf of a Pennsylvania corporation must first submit all claims to the board, which can then decide to pursue the claims or drop them. The board’s decision can’t be challenged unless plaintiffs show the directors failed to act in good faith. For more, seeWSJ 4/28/97, B3.
The National Association of Corporate Directors (NACD) will convene a panel of business and academic leaders beginning in 1997 to study governance issues affecting entrepreneurial public companies such as new regulations and laws designed to protect shareholders against fraud and illegal acts. The panel, which will be sponsored annually by Grant Thornton LLP, a major accounting and management consulting firm, will be called the NACD/Grant Thornton Best Practices Council. (see announcement)
Corporate Board Governance and Director Compensation in Canada, a survey conducted by Patrick O’Callaghan & Associates and The Caldwell Partners Amrop International covered 2,284 directors in 290 Canadian corporations. The average Canadian board has 11 people who have served eight, one-year terms. Average age is 59 years, they are male (93%), receive an annual retainer of $12,000 and are paid $900/meeting eight times a year. Nearly half have a stock component as part of their compensation, yet 15% don’t own any stock in the company.
The author’s believe the TSE guidelines are having an impact. Over 50% of boards have a corporate governance committee compared to 2% 2 years ago. More than 60% have a process for assessing board effectiveness, 41% for committee effectiveness and 45% for judging individual director performance. Almost 2/3 have separated the roles of CEO and Chair. For a copy, contact Patrick O’Callaghan, 604-685-5880 or Anne Fawcett, 416-920-7702. (Canadian Corporate NewsNet)
Back to the topEntrenched CEOs get higher pay and their companies have lower returns and weaker stock performance, according to a study by Wharton Professors John Core, Robert Holthausen and David Larker. Six characteristics were correlated with higher CEO Pay and weak performance: dual CEO/chairman; large boards, outside directors directly appointed by the CEO; outside directors who receive income from an association with the company; outside directors who sit on 3 or more other boards (six for retirees); and outside directors aged 70 or older. The study also found that better performance was linked to someone other that the CEO owning more than 5% of the stock. WSJ, 4/25/97, C2
Ira Millstein is termed “The Gruru of Good Governance” in aBusiness Week article focusing on his ability to prod companies into transforming their boards. The story provides a broad glimpse of this statesman of the field from selling hot dogs while working his way through Columbia University to GM to current efforts at Dow Jones & Co.
The April 28 issue of Time Magazine has gotten into the news glut on CEO pay. “The CEO-pay issue is beginning to feel like the start of a class war.” “One solution embraced by the likes of DuPont and BankAmerica is to grant CEO stock options that can be cashed only after the stock has risen a specified amount. That way a CEO doesn’t make a killing unless the stock really zooms. An even better answer is to devise stock options that are indexed to the market or some peer group. They would remain worthless unless the stock outperforms its competitors.” The second option is one endorsed by ISS in a recent editorial.
Theresa Welbourne and Alice Andrews have studied the initial public offerings (IPOs) of stock by 136 non-financial companies in 1986. Half of the firms had fewer than 110 employees at the time of the IPO, while a fifth had more than 700. They evaluated the company’s offering prospectus for evidence that the firm (1) placed a high value on its employees as a distinct asset, and (2) rewarded employees for organizational performance through such devices as profit sharing. The researchers find that the companies that value employees and use performance compensation at the time of the IPO are significantly more likely to survive for at least five years.
The researchers also interviewed the most senior executive who had been with each company since the IPO five years earlier. When they asked the executive to rate a set of factors that best explain the company’s performance since the IPO, the factor deemed most important is the quality of the top management team.
Implication: Build employee capacity and top leadership for growth and survival.
Source: Theresa M. Welbourne and Alice O. Andrews, “Predicting The Performance of Initial Public Offerings: Should Human Resource Management be in the Equation?” Academy of Management Journal 39 (August, 1996), 891-919.
The above is taken directly from the WHARTON LEADERSHIP DIGEST, April, 1997, Volume 1, Number 7. Michael Useem, Professor of Management, serves as editor, and suggestions for items or topics for inclusion in future digests can be sent to him at [email protected]. The same address can be used to subscribe to the digest. Back issues.
Back to the topA new publication from Deloitte & Touche LLP, “Questions at Stockholders’ Meetings 1997,” can help you prepare by anticipating critical issues of concern. Mergers and acquisitions could be high on the list this year. Copies of are available by calling Natalie Saviano at 203-761-3065.
CalPERS is using the Internet to seek out active domestic equity managers to manage more than $6 billion of the Fund’s assets. The RFP is online athttp://www.calpers.ca.gov/invest/rfp/index.html. Release of The RFP is the latest step in CalPERS approach to reorganize management of its domestic equity portfolio. Last month, the Board approved changes to the Fund’s domestic equity portfolio that included the development of an internal active management capability, and an increase in the active management portion of the portfolio up to 20%. Currently, 13% of domestic equities are managed actively by external fund managers.
From Directorship. CEOs of multi-billion dollar American companies were paid, on average $4.85M in 1996 up 11% form last year according to a survey by Pearl Meyer & Partners. In an unrelated story, Campbell Soup last year offered no gifts or refreshments at its annual meeting. Attendence was down from 1,500 to 200.
Back to the topA new report worth getting is “Twenty Best Practices To Improve Board Performance,” by Korn/Ferry in conjunction with the University of Southern California.
Some of the recommendations include: Tie the compensation of board members to changes in shareholder value. Formally evaluate the performance of the board and the individual board members every year. Provide independent board members the opportunity to meet without company executives present. Set board member compensation based on what directors of other comparable corporations receive. Make sure to have a sufficient number of independent directors. To obtain a copy, call Stephanie Rosenfelt at Korn/Ferry International at 212/984-9316.
An interesting story covered by ISS on excessive executive compensation (primarily in the form of options) points out that, to keep dilution under control, companies are repurchasing their own shares at a record rate (up 70% in 1996 from 1995). These outlays are eating into cash flow and profits. Dividend payouts are at an all time low. In the current downturn the pressure will be on to reprice “underwater” options. In addition, the broad adoption of increased equity shares for insiders may lead to insider control.
From P&I. Vermont may pull their pension funds out of tobacco stocks. The following joined CII: Compaq, Marriott, Morgan Guaranty Trust; Navistar; Indiana Public Employees Retirement Fund; Hartford City Municipal Employees Retirement Fund; Massachusetts Pension Reserves Investment Management Board; Milwaukee City Employees’ Retirement System; Montana State Board of Investments; Virginia Retirement System; CWA/ITU Negotiated Pension Plan, IAM National Pension Fund and United Association Local Union Officers and Employees Pension Fund. Two funds dropped out: Consolidated Freightways Inc. and Detroit City General Retirement System.
CEO pay jumped 20% last year while corporate profits grew 11% and workers’ wages rose just 3.3%, is now 212 times greater than the average worker’s pay, up from 44 times greater in 1965, according to the AFL-CIO. Executive Paywatch, will provide salary and other compensation information for the CEOs of Fortune 500 companies and allow workers to compare their pay with that of the boss. The site will also carry proxy information. It was getting 4,000 hits an hour the first day. For more on executive pay see San Jose Mercury News.
Back to the topCEOs will see more challlenges to their pay with 112 proxy resolutions, up from 63 in 1996, according to IRRC. The share of stockholders voting against new executive pay plans jumped to 19% last year, up from 3.5% in 1988. Lawrence Coss, of Green Tree Financial brought home $102.4 million last year. The average salary and bonus for a CEO rose a phenomenal 39%, to $2.3 million. Add in retirement benefits, incentive plans, and gains from stock options, and total compensation jumped 54% to $5,781,300. That largesse came on top of a 30% rise in total pay in 1995. CEOs earned 209 times that of factory employees, who garnered a 3% raise in 1996. White-collar workers eked out just 3.2%, though many now get options too. (Business Week related stories and tables).
CEO pay was up 5.2% in 1996 according to a William M. Mercer study for the Wall Street Journal. Stanford Weill ofTravelers Group took $93.9 million to head the list. Median total compensation rose from $2M in 1995 to $2.4M in 1996. More people are beginning to ask the question, how much is to much?
Mark J. Roe kicks off the special issue with his proposition that politics restricting the activities of financial intermediaries played a role in the evolution of U.S. corporate governance.
Frank Easterbrook argues that differences corporate governance reflect differences in the efficiency of capital markets. Unlike nations in Asia and most of Europe, the U.S. and the U.K. have large, efficient capital markets with no restrictions on cross-border capital flows.
Julian Franks and Colin Mayer characterize corporate governance systems in the U.K. and the U.S. as “outsider” systems with large numbers of widely held public corporations and well-developed takeover markets. By contrast, German and French corporations are governed by “insider” systems — where founding families, banks or other companies maintain controlling interests, and outside shareholders are not able to exert significant control.
F.H. Buckley suggests we look to our northern neighbor where most large firms are members of a keiretsu — an interlocking group of corporate clients, investment dealers, trust companies and professional advisors that is designed to “facilitate information-sharing and monitoring among group members.”
Jonathan R. Macey and Geoffrey P. Miller believe German and Japanese governance systems fail to produce well- developed capital markets along with active takeover markets. The problem with U.S. corporate governance stem from “regulatory restrictions and misguided legal policies” which make takeovers more difficult.
William S. Haraf argues that instead of eliminating remaining entry barriers, Congress should promote genuine financial integration with a much simpler and more streamlined system of regulation. Manuscripts for the Journal and letters to the editor are welcome. For more information about the Journal, contact Bank of America editors Stephen Scheetz, 312-974-1930, or Kelly Chambers, 312-828-7130.
Back to the topThe Corporate Board, The Journal of Corporate Governance, is hosting its 3rd Annual Corporate Board Symposium on September 14-16, 1997 at Lansdowne Conference Resort in Lansdowne, Virginia. CEOs and directors interested in attending the 3rd Annual Corporate Board Symposium may obtain more information and register for the conference by calling The Corporate Board at (800) 757-0667. For more information see conferences.
The April 14th edition of Business Week rates annual reports on the Internet.
The Washington Post reports that “in an unscientific sample of proxy statements of a dozen companies whose stock prices have declined, it appears that while some chief executives shared in the pain of their shareholders, just as many others did not.” Graef Crystal points out that one reason is that nearly all companies aim to pay their chief executive at least what the “average” CEO makes at comparable companies, if not more. But as every company moves to put its CEO at or above the average, the average is continually moved upward. “If you read these reports from the directors, when things are going well it’s always because of the brilliance of the CEO,” Crystal said. “But on the downside, it’s those damn politicians in Washington or it’s Wall Street or it’s the drop in oil prices; somehow it’s always someone else’s fault.”
The Wall Street Journal picked up on a study by Grundfest and Perino on the results of the Private Secutities Litigation Reform Act. We linked to their Securities Class Action Clearinghouse, about a month ago. According to the authors, “the level of class action securities fraud litigation has declined by about a third in federal courts, but that there has been an almost equal increase in the level of state court activity, largely as a result of a “substitution effect” whereby plaintiffs resort to state court to avoid the new, more stringent requirements of federal cases. There has also been an increase in parallel litigation between state and federal courts in an apparent effort to avoid the federal discovery stay or other provisions of the Act.” WSJ reports that Rep. Joseph Kennedy may carry a bill to stop the law from being so easily circumvented.
The Washington Post reports that “three prominent Washington insiders have the dubious distinction of topping the Teamsters pension fund’s second annual list of America’s ‘least valuable’ corporate directors. Former House Democratic whip Tony Coelho leads the lineup, followed by former secretary of defense Frank C. Carlucci and former secretary of state Lawrence Eagleburger. Directors get named to the list by serving on too many boards, collecting consulting or other fees from the company, poor attendance at board meetings and being on a board that overpays a chief executive even when the company is performing poorly.”
Back to the topMoney management is going global. P&I reports on a survey by Investment Counseling; “the 50 largest money managers handled 43% of the total invested assets in the US in 1996, compared with 50% in 1989.” In other news from P&I, “CalPERS and the New York City Employees’ Retirement System will support a shareholder proposal asking RJR Nabisco at its April 16 annual meeting to stop using the Joe Camel advertising campaign by 1998, unless research shows the ads do not promote underage smoking.” A Federal Reserve study found that funds with an average of $85 billion under management had average annual expense ratios of 0.7%. Small companies, with an average of about $33 million, had expense ratios of 2.8%. P&I also reports on a study byRandal S. Thomas, University of Iowa and Kenneth J. Martin, New Mexico State University, which found that labor-sponsored proxy proposals receive higher votes than those sponsored by private institutions and individuals. An editorial in the 3/31 edition advised pension funds not to prohibit tobacco-related investments. “Such a policy would lead to pension funds hiring nutritional consultants to add to the coterie of consultants they now employ to analyze investment decisions. Ultimately, investments would have to be subjected to moral or health scrutiny on almost every aspect of our lives…the system would go up in smoke.” The guest editorial points out that 159 individuals control $762 billion in public funds and applauds Michigans’s shift to defined contibution plans.
The Washington Post carried an interesting article on executive compensation. Use their searcher to locate Green Tree CEO Paid $102 Million Bonus.
A recent survey by KPMG and the Australian Institute of Company Directors showed fewer than one in six directors had a total understanding of corporate governance. Less than a third of the directors were implementing corporate governance initiatives, although another 21% said they already had initiatives in place. 58% said they would be looking at increasing shareholder value, while only 34% would be examining the fairness of remuneration of directors and upper management.
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The LA Times reports on sokaiya gangsters who threaten to disrupt shareholder meetings or threaten to expose corporate scandals. The Shareholder Ombudsman group, formed last year to increase corporate disclosure and accountability, now has its court calendar full of organized crime cases as they try to muscle the mob off the corporate payroll. Takashimaya execs pleaded guilty to paying $1.3M, Nomura may have paid $4000,000.
A survey by Grant Thornton LLP finds the boards of directors for many Minnesota midsize manufacturing companies do not meet frequently enough to be effectively involved in a number of critical areas.
In a mail survey of 125 Minnesota manufacturing companies, local board members report they are most involved in reviewing/approving corporate acquisitions (51%), monitoring their company’s financial status (34%) and reviewing strategic plans (33%). On the national level, board members are significantly more involved in monitoring their company’s financial status (56%), and in reviewing strategic plans (48%). The study reveals local boards are far less likely to be involved in reviewing/approving capital projects (19%) than are their national counterparts (42%).
More than a third (41%) of the Minnesota boards comprise five members or less while another 49% have between 6 and 10 members. Only 10% have more than 10 members. This compares to the national results which report nearly three-fourths (71%) of the company boards have five or fewer members, 24% have between 6 and 10 members and only 5% have more than 10 members.
More than half of Minnesota manufacturers (56%) compensate their boards with meeting fees compared to 32% nationally. Significantly more local manufacturers (40%) grant stock ownership to their board members than reported on the national level which is at only 22%. The number who pay an annual retainer fee (37%) is more than double the number (18%) indicated by the results of the national survey.
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CalPERS announced corporate governance principles for the United Kingdom and France building on six basic concepts that CalPERS has identified as fundamental to free and fair markets throughout the world. The six “global” principles include director accountability to shareholders, transparent markets, equitable treatment for all shareholders, easy and efficient voting methods, codes of best practices that clearly define the director-shareholder relationship, and long-term corporate vision which at its core emphasizes sustained shareholder value.
CalPERS principles are designed to complement the Cadbury Code and Greenbury Report in Britain, and the Vienot Report in France. In Britain this means regular elections of all directors, confidential voting, and improved access for shareholders to present resolutions through the company proxy. In France, CalPERS recommends an accountable and independent board and identifies ways to strengthen the director-shareholder relationship. The recommendations include a one-share, one-vote capital structure, an end to cross shareholding, the regular elections of all directors, and a greater disclosure of executive compensation.
Currently, CalPERS international equities comprise more than $20 billion of the System’s total investment portfolio. The System is expected to develop and consider governance principles for Germany and Japan by the end of the year.
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On March 19th Investor Relations Magazine announced the winners of its U.S. awards for excellence in the profession. The highlight was the presentation of the National Investor Relations Institute Grand Prix for Best Overall Investor Relations by a U.S. Company to General Electric, in the large-cap category, and to Morton International, in the smaller-cap category. Award winners and runners-up in 18 categories were determined by a survey of over 1,450 portfolio managers and buy and sell-side analysts. General Electric also won for best corporate governance.
TIAA-CREF is starting six no-load mutual funds.
Fortune carries an interesting article, CEO PAY: MOM WOULDN’T APPROVE by Thomas A. Stewart. He cites Pearl Meyer, an executive pay consultant in New York. The typical CEO pay package is now “21% salary, 27% short-term (annual) incentives,16% long-term incentives, and 36% stock-based pay (mostly options, which usually cannot be exercised for three years).” But he adds that “we’re still a long way from pay heaven. In the first place, the usual way to add risk to CEO pay has been simply to stack goodies on top of existing pay. Result: The CEO runs only the risk of making tons more money. Getting stock options, for example, is nothing like buying shares, since options have no downside.” Stewart’s main gripe, however, is that “shareholders don’t act like owners.” “hard numbers on the value of investor loyalty are hard to come by, but all the anecdotal evidence shows that superior long-term performance and a loyal shareholder base go hand in hand.”
CalPERS announced they will begin managing more of their domestic equity portfolio in-house. Currently, about 83% of that portfolio is passively managed. The move will bring the actively managed proportion up to about 20%. (see press release) A March 17th editorial in Pensions & Investments says the plan “deserves tough scrutiny and skepticism” and goes on to raise doubts concerning probable success.
We have added a link to the Securities Class Action Clearinghouse, under LinksLaw. I expect it will become an important site to any of you who are taking advantage of provisions of Private Securities Litigation Reform Act of 1995. We also want to point out an important new article “Does Coordinated Institutional Activism Work? An Analysis of the Activities of the Council of Institutional Investors.”
Institutional investors are calling for more information on individual directors, including their business track records and their specific contributions. They want boards to be evaluated by outside observers and they want boards to be more aggressive in weeding out underperforming members, according to the 1997 U.S. Survey of Institutional investors, released by Russell Reynolds Associates.
The survey, entitled “Setting New Standards for Corporate Governance,” was conducted for Russell Reynolds Associates by Wirthlin Worldwide, and is based on interviews with 231 portfolio managers and institutional shareholders. 62% of investors opposed limits on CEO compensation. In the past year alone, 77% of the investors surveyed have communicated their opinions directly to a board either verbally or by letter, sought more direct involvement in board oversight, sponsored a shareholder resolution or voted in favor of one. CONTACT: Russell Reynolds Associates, Sally Laroche, 212/351-2000 Fax: 212/286-8518.
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The LENS site recently posted an excerpted version of“Putting a Value on Corporate Governance” which appeared in The McKinsey Quarterly. In a survey of investors and CEOs, the authors found that investors would pay more for good corporate governance. Those more likely to do so were investors with low turnover in their portfolio, “value” investors, and those with high net worth.
February’s Corporate Secretary carried an article by Olena Berg, of the PWBA. She discusses the findings of PWBA’s third proxy practices project, pointing out that a significant number of plans did not routinely monitor their managers’ voting to ensure that proxies were voted in accordance with the plans’ stated policies…many did not even provide investment managers with voting guidelines. In addition, few of the plans surveyed engaged in any form of corporate governance activism.
Berg cites a study by the Competitiveness Policy Council saying that institutions should acquire larger stakes in fewer companies. This would encourage them to act as long-term owners. Since corporate managers complain of pressures for short-term results from impatient investors, such a shift would meet their needs as well. However, the Council also recommended that PWBA allay unfounded fiduciary concerns with respect to prudent investing by clarifying that ERISA’s diversification standard does not require investment in hundreds or thousands of stocks. Although Berg’s remarks implied agreement, we still haven’t seen formal clarification through administrative guidance. In addition, although she is obviously concerned, Berg’s agency has never taken action against a plan sponsor for failure to monitor the voting decisions of outside managers tainted by conflict of interest. Perhaps she will have more to say about these issues when she addresses the Society of Corporate Secretaries at their conference this July in Boston.
The WSJ featured an article about the growing trend by mutual fund managers to have a substantial investment in the funds they run. Among those so mentioned were Neuberger & Berman; Tweedy, Browne Co.; Franklin Resources (Michael Price); Baron Asset Fund; Delafield Fund; Yacktman Fund; Davis Selected Advisers (Davis New York Venture); Friess Associates (the two Brandwine funds); Southeastern Asset Management (the three Longleaf Partners funds); Harris Associates (the Oakmark funds) and the Crabbe Huson Special Fund.
CalPERS continues to shake Apple. According to CalPERStwo of Apple’s directors sit on four or more boards. They question if Apple’s directors have the time and dedication to turn around Apple when they sit on other boards and are also concerned that three board members don’t even own stock.
Apple’s 1996 compensation plan was to provide senior executives bonuses correlated with performance. However, when losses continued to drain the company, Apple changed the plan so that senior managers would get a bonus if Apple reported a profit in the fourth quarter. They did it by taking a one-time gain from inventory adjustments. In the tree quarters that didn’t count last year (for executive pay) Apple lost $841 million. Shareholder’s might well wonder if Gilbert Amelio really earned his bonus of $2,334,000.
TIAA-CREF increases its investments in Project Finance, according to PRNewswire. Their portfolio of loans for large capital projects is now crossing the billion dollar mark.
The increasing value of “human capital” is acknowledged inFortune magazine article by Thomas Stewart.
The Conference Board released the first issue of their Institutional Investment Report. At the end of the second quarter of 1996, U.S. institutions held more than $11.1 trillion in total assets, up from $10.5 trillion at the end of 1995 and $6.3 trillion in 1990. In the past five-and-a-half years, institutional assets have increased by slightly more than 75 percent, rising 15.1 percent from 1994 to 1995 alone, and another 6.2 percent during the first six months of 1996.
“These data are important because they indicate changes in the balance of power between corporate managements and institutional shareholders,” says Dr. Carolyn Kay Brancato, the report’s principal author and director of the Board’s Global Corporate Governance Research Center. Pension funds continue to control the largest block of U.S. institutional assets, although their share of total assets has been giving way to open-ended mutual funds. Open-end mutual funds have enjoyed staggering growth during the past few years, rising 14% during the first six months of 1996 alone. Investment companies increased their share of total U.S. equity markets from 6.4% in 1990 to 11.7% in 1996. Continue Reading →
Investor Relations Business [email protected]reports that representatives of the Council of Institutional Investors,American Society of Corporate Secretaries, National Association of Individual Investors and the Interfaith Center on Corporate Responsibility have “tentatively agreed to tentatively agree” to proxy reforms outline by Commissioner Steve Wallman of the SEC in a speech before CII last October. Proposals from those holding 3% or more of company’s outstanding stock would be automatically included in a company’s proxy along with mainstays such as proposals for staggered boards, director compensation and takeover policies. The “Cracker Barrel” decision eliminating all employment-related proxy proposals under the ordinary business exclusion would be overturned. A draft is currently being hashed out by attorneys.
In other news from IRB, the number of companies with Internet sites has increased from 35% in 1995 to 80% in 1996 with only 1% not planning a site according to a recent survey by Straightline International (compare with last year’s findings). 57% of money managers surveyed use the Internet for company research. Continue Reading →
Spencer Stuart survey of Midwestern companies confirms trend towards alignment of corporate boards and shareholders.
The annual study of board practices at 95 leading Midwestern companies with sales of $500 million or more found the number offering retirement plans to board members fell from 54% in 1995 to 34% due to mounting pressure from shareholder activist groups to eliminate benefits that may compromise director independence.
Compensation is increasingly in stock. Stock options were offered at 38%, 35% offered stock grants, and 21% offered directors the option to receive their annual retainer in cash, stock or a combination of the two. Baxter International, Brunswick Corporation, Chrysler Corporation, McDonnell Douglas, Sears, and the Tribune Company provide 100% director compensation in stock. Last year 13% of companies surveyed required directors to hold stock; this year its 21%. Continue Reading →
Nasdaq will seek public and industry comment on a series of changes to its asdaq will seek public and industry comment on a series of changes to its listing qualification standards. Among the governance standards are: a minimum of two independent directors; an audit committee with a majority of independent directors; an annual shareholders meeting; and shareholder approval for large, below-market issuances. The comment period runs through Dec. 20, 1996.
A survey of 203 company officers responsible for relationswith investor asked which factors have greatest impact on their company’s stockprice. Topping the list: the quality of senior management. (See National Investor Relations Institute.) We learned of the survey through the “Wharton Leadership Digest.” If you would like to receive it via e-mail, send a message to [email protected] . In the subjectline, enter the word subscribe. Continue Reading →
Investor Capitalism: How Money Managers Are Changing the Face of Corporate America. Managerial capitalism ascended during the century’s middle decades. “The decisions they made often affected the lives of thousands of people, yet they were seemingly accountable to no one.” The large holdings of institutional investors and the growth of indexing as a major investment strategy have prevented the ready selling of underperforming companies; investors are now more likely to “speak out than to cash out.” Whereas managerial capitalism tolerated a host of company objectives, Useem argues that under investor capitalism enhancing shareholder value has become paramount. Continue Reading →
What would you do if the company in which you’ve invested your hard earned dollars throws it away on fat retirement benefits to outside members of its board of directors? One individual investor, Richard Ayers, conducted a proxy battle this year with Nevada Power Company over the issue. Although he won more than 30% of the vote, individual investors and “ethical” funds face a Sisyphisian task in bringing change to today’s corporations.
The reality is that if you don’t like the way the management handles your business, you have traditionally had two choices: hold your nose or sell out. The message is usually the same whether it is being dispensed by Barron’s, Merrill Lynch or the manager of a so-called “socially responsible” investment fund. It’s called the “Wall Street Walk.”
But dumping stocks is an easy short term solution that only compounds the short term investment horizon that plagues Wall Street. In many cases, this conventional wisdom may not only be wrong for the investor, the cumulative effect of such acts may also profoundly impact the quality of our products and environment, the treatment of employees, our balance of payments, and the well being of society-at-large. The real issue is often not last quarter’s balance sheet but the strategic direction of a company and the integrity of its management.
Corporate governance, the nuts-and-bolts of how a public company fulfills its responsibilities to investors and other stakeholders, is oddly frequently overlooked in debates over corporate social responsibility. Despite its still relatively low profile, it’s where much of the real action is going on when it comes to positively changing corporate behavior.
In 1932, Lewis Gilbert owned 10 shares in New York’s Consolidated Gas Company and found that his questions were ignored at the annual meeting. Lewis and his brother pushed for reform. Finally, in 1942, the Securities and Exchange Commission adopted a requirement that companies put shareholder resolutions to a vote under specified circumstances. In 1967 organizer Saul Alinsky, a Rochester based community organization, and several national churches turned to shareholder activism to target Kodak’s poor record of minority hiring.
More recently, the social investment community has focused on high profile, public campaigns aimed at divestment of corporations involved in perceived social injustices such as involvement in apartheid South Africa, Dow Chemical, GM, or companies that operate in Burma. Although such shareholder actions have certainly had an impact, most won only a small fraction of votes. Progress has been made largely because targeted corporations wanted to minimize adverse publicity.
Corporate governance actions spearheaded by huge, multi-billion dollar pension funds such as CalPERS, the California Public Employees’ Retirement System, and other large funds, changes the balance when such social concerns are seen as affecting share value. Their entry provides the foundation for the beginnings of a much larger degree of meaningful self regulation of businesses by owners.
Robber Baron Accountability
At the turn of the century, corporations were dominated by “captains of industry.” Carnegie, du Pont, Mellon, Morgan, Rockefeller, and others owned large blocks of stock and exercised direct control over their investments. “Agency costs” were not much of a problem because ownership and control were embodied in the same individuals. Corporations were accountable to their owners.
By 1932, however, Adolph Berle and Gardiner Means documented a significant shift in their book The Modern Corporation and Private Property. Ownership had become so dispersed that control had shifted from owners to managers. Owners essentially traded their ability to monitor management for increased diversification and liquidity. Being an active shareholder no longer paid because, despite potential gains to shareholders as a group, it was no longer rational for any one shareholder to act. Why shoulder the entire expense of corporate activism for only a small portion of the gains while other shareholders get a “free ride?”
Mark Roe, a professor of law at Columbia University, recently reexamined the historical evidence and concludes that our corporate system based on strong managers and weak owners is not the inevitable result of large scale production as Berle and Means assumed. Instead, it is the unintended consequence of political decisions which reflect the public’s dislike of concentrated financial power. The framework of corporate democracy, much of which developed in reaction to the stock market crash of 1929, restored public confidence by subordinating finance to commerce and providing legitimacy for the otherwise uncontrollable growth of power in the hands of a few private individuals.
The New Deal’s Glass-Steagall Act separated investment and commercial banking. Similar laws limited control of stock by insurance companies and mutual funds. Together, they insured that financial institutions could not easily control industry, but they also restricted collective action. Although these reforms may have saved us from the real evils of concentrated wealth and power in the finance sector, they had the unintended result of ensuring that management of America’s corporations would soon be accountable to no one. The framework of corporate governance set up in the aftermath of the 1929 crash has the appearance of being democratic (one share, one vote) but lacks basic mechanisms to carry out more than an illusion.
Since the 1930s, corporate governance consisted primarily of attorneys engaged in theoretical debates about reducing “agency costs” – essentially inefficiencies which arise when the “principles” (stockholders) hire an “agent” (chief executive officer, CEO) whose interests differ from their own. Stockholders want their shares to increase in value and pay higher dividends; the CEO wants status, a high salary, bonuses and perks. The Holy Grail for those in the field of corporate governance has been to develop a variety of rewards and punishments to better align the CEO’s interests with those of the shareholders. Instead of actively participating in corporate governance issues, shareholders became passive. With few options left to them, dissatisfied owners were told by the system to love it or leave. That strategy became known as the “Wall Street Walk” or the “Wall Street Rule.”
The Politics of Corporate Governing
This rather dry history has been overtaken by a series of high-profile, hot button debates swirling around the role of the corporation in society. Issues of corporate governance — junk bonds, corporate takeovers, downsizing, executive pay, the rise of pension funds– are discussed daily in the press. So what has changed and how can it lead to more effective and responsible, corporate leadership?
In the 1960s, empire building by CEOs led to a kind of merger madness, as conglomerates gobbled up unrelated companies. When many of these conglomerates lagged in price in the 1970s, it heightened the realization that CEOs needed oversight. Accountability, of a sort, came in the 1980s when corporate raiders using “junk bonds” took many companies private, disassembled them and sold them back to the public in parts. The results to employees and communities were often devastating in the form of plant shutdowns and lost jobs. While workers and communities struggled with massive layoffs, CEOs invented golden parachute severance packages and designed poison pills which made takeovers less attractive through stock dilution mechanisms which hit new shareholders.
By the late 1980s, a backlash set in. The “junk bond” market imploded, and an irate public and corporate boards began to demand a more active role in corporate governance. They recognized that their intervention could soften the impact of corporate restructuring on workers, communities, operations, and profits.
These developments led to the modern field of corporate governance which examines the legal, cultural and institutional arrangements that determine the direction and performance of corporations. Practitioners include: (1) the shareholders, who usually hold one vote per share of common stock owned, (2) the board members, whom shareholders elect, and (3) the management of the firm, which is usually headed by a CEO appointed by the board. Other participants include advisors, creditors, employees, customers, suppliers, government and its citizens. Each party can influence the firm’s direction.
Pension Fund Power
Between 1955 and 1980, the institutional investor share of outstanding stock rose from 23% to 33%. In 1990, it had risen to 53% and now stands at more than 60%. Pension funds, as a subset, experienced even more rapid relative growth. Their share of the market rose from 0.8% in 1950 to 9.4% (1970), to 18.5% (1980), to 28% (1990) and stands above 30% today. This shift has set the stage for the rise of a subtler form of corporate governance which has yet to be fully realized. Instead of waiting for corporate raiders to impose dramatic changes through hostile takeovers, pension funds have the opportunity to become long term “relational” investors, working with boards and CEOs to make needed adjustments earlier and less painfully. Corporate governance would then move from revolutions and palace coups to the smoother transitions characteristic of democratic governments.
While legal impediments largely preclude mutual funds, insurance companies, and banks from holding large blocks of stocks, fewer such prohibitions apply to pension funds. Most pension funds are free to hold blocks of stock large enough to make monitoring of management feasible, from a cost-benefit standpoint. In addition, the Department of Labor, which governs most pension funds under the Employment Retirement Securities Act (ERISA), has clarified that voting rights are plan assets. It is, therefore, the duty of pension fiduciaries (trustees) to ensure such assets are voted solely in the interest of plan participants and beneficiaries. Unlike individual investors who can just throw their proxies away, pension funds are legally required to follow the issues of corporate politics and to vote.
Ideally, pension funds, who have predictable payouts, should be taking a long term investment time horizon and should be urging the firms they invest in the to do the same. The growth of pension funds dramatically increases the capacity of the financial community to identify and redress agency costs, since they bring the possibility of sophisticated monitoring by professional analysts. Unlike other institutional investors, pension funds have nothing to sell their portfolio companies and no intrinsic interest in acquiring operating control.
CalPERS: Leading the Pack
The California Public Employees’ Retirement System involvement with corporate governance issues can be traced back to a morning in 1984. Jesse Unruh, then treasurer of California and a CalPERS board member, read that Texaco had repurchased almost 10% of its own stock from the Bass brothers at a $137 million premium. Essentially, Texaco’s management paid “greenmail” to avoid loss of their jobs in a takeover. CalPERS was also a large shareholder but, of course, was not given the same option of selling its stock back to the company at a premium. Unruh quickly organized a powerful shareholder’s rights movement with the creation of the Council of Institutional Investors (CII — composed mostly of pension funds) to fight for equal and fair treatment of shareholders, shareholder approval of certain corporate decisions, and needed regulatory reforms.
CalPERS has $100 billion in assets, serves 1 million members and is administered by a 13 member board. Six are elected by various membership groups; the others are either appointed by elected officials or serve by virtue of their elected office. In contrast to the short time frame of most institutional investors, CalPERS takes along-term perspective. Their average holding period ranges from 6 to 10 years.
CalPERS equity strategy consists of making long-term investments so it can be in a position to influence corporate governance. Many pension fund managers, subject to the “star” system on Wall Street, actively manage their funds with hopes of beating the market. But recent studies have shown that active management is not cost effective. After factoring in fees and turnover expenses, “indexing” – owning a representative share of a particular market – is the best strategy for most pension funds (as well as for most individuals through low-cost index funds such as those offered by Vanguard).
CalPERS targets poor corporate performers in its portfolio and pushes for reforms. These range from firm specific advise, such as arguing a few years ago that Sears and Westinghouse should divest poorly performing divisions and redefine their strategic core businesses, to more general advice. For example, CalPERS believes most firms need to expand employee training and shared managerial authority with lower level employees. Although CalPERS must often bear the full cost of monitoring, and other shareholders get a “free ride,” the sheer size of its investments makes such monitoring worthwhile.
A 1995 study by Steven Nesbitt, Senior Vice President of the consulting firm of Wilshire Associates which was under contract with CalPERS, examined the performance of 42 companies targeted by CalPERS. It found the stock price of these companies trailed the S&P 500 Index by 66% in the five year period before CalPERS acted to achieve reforms. The same firms outperformed the Index by 52.5% in the following five years. A similar independent study by Michael P. Smith (with Economic Analysis Corporation, Los Angeles) concludes that corporate governance activism has increased the value of CalPERS’ holdings in 34 firms over the 1987-93 period by $19 million at a monitoring cost of $3.5 million.
CalPERS’ investment strategy is hardly typical. Most institutional stock owners are adopting shorter and shorter time horizons, evaluating companies on a 1-3 year time frame, rather than the longer term outlook of CalPERS. The average holding period has declined from more than 7 years in 1960 to about 2 years today. The result has been an increase in transaction costs. In 1987, for example, $25 billion was spent on stock trading in the U.S. That is an amount equal to one-sixth of corporate profits or 40% of dividends that year. Money managers have shifted the emphasis of capital from long-term investments to making a quick buck.
Although CalPERS has been active in corporate governance, most pension funds are not. While some progress is being made, the Department of Labor reports that only 35% of plans which delegated voting authority could provide evidence that they performed substantive monitoring of how their investment managers carried out proxy voting. But its no wonder plans don’t monitor; the Department has never taken an enforcement action against a fund for their failure to properly monitor voting decisions.
Most pension funds exist in a culture of “blame avoidance” built around the legal concept of “prudence.” Although portfolio theorists generally agree that 99% of the risk management value of diversification can be achieved with a portfolio of only 100 stocks, pension plans continue to over diversify. While the aggregate holdings of institutional investors now stand at more than 60%, the holdings of individual institutional investors in individual companies rarely exceeds 2% and tends to be in the 0.1% to 1% range. Since the holdings of most pension funds are not nearly as large as those of CalPERS, they would derive similar benefits from active corporate governance only if they consolidated their holdings into larger blocks to make monitoring cost effective.
If more pension funds would follow CalPERS’ lead, accountability might finally make its way into the boardroom. That would be a healthy development for investors, companies, employees and the environment. For example, it is widely accepted that employees in “knowledge” industries, such as computer software, hold the key to additional wealth generating capacity in their training, skills and information networks. Margaret Blair, a Senior Fellow at Brookings Institution,points to evidence that this is true not only in Silicon Valley but for most industries in the United States. Blair calculates that tangibles, such as property, plant and equipment, accounted for 62% of the total value of mining and manufacturing firms in 1982 but only for 38% in 1991. The value of intellectual property has risen dramatically as workers have become more educated.
More democratic and flexible workplaces make fuller use of employee capacities and yield tangible economic benefits. Yet managers faced with a potential loss of status and power have been slow to change. A 1986 study by the National Center for Employee Ownership found firms with significant employee ownership and participation in decision making grew 8 to 11% faster than their counterparts. A year later the General Accounting Office found that such firms experienced a 52% higher annual productivity growth rate. Findings, such as these, led CalPERS to advocate employee training and shared managerial authority. Similar findings linking “social responsibility” to the bottom line have led TIAA-CREF (a cooperative pension fund for educators) to push for more women and minorities on boards.
Corporations have a profound effect on the quality of our environment and our lives. If they were governed and operated more democratically the influence they have on other social institutions such as government, education and even the family could be expected to change in a positive direction.
Ending Corporate Demockery
What measures can be taken to bring about more genuine democratic corporate governance? Perhaps the most important are in the area of corporate elections. Corporate board elections are about as democratic as old-style communist regimes: they talk the talk but don’t walk the walk. A 1991 study found that over 80% of board candidates were filled by CEO recommendations. Until 1992, when the SEC revised its proxy rules under pressure from CalPERS, CII, and others, shareholders could not even communicate with each other without going through elaborate and expensive filing procedures. Serious obstacles to communication remain. Filing is still required whenever a voting group owning 5% or more, in total, agree to vote together. In addition, most votes are only advisory and access to shareholder lists is limited.
Management controls the proxy machinery. Since proxies are normally voted well in advance of the annual meeting, they can find out how shareholders vote. Many money managers, who act as investment and voting agents for fiduciaries, have business relations with the management of firms holding elections. They are not required by law to maintain written records of how they voted on behalf of their clients, so they are likely to change their vote, if requested by management. In addition, unvoted proxies are often counted in favor of management.
To realize the potential of more democratic corporate governance we need to encourage monitoring and active participation in corporate governance by investors, especially pension funds. Among the many reforms needed, Congress and/or the Securities and Exchange Commission could:
- Institute proxy reform measures, especially for confidentiality in collection, independence in tabulation and uniform treatment of votes and abstentions.
- Change the definition of a “voting group” so that shareholders who are not seeking to control a corporation can freely communicate with each other.
- Allow groups of investors holding at least 10% of outstanding shares access to proxy statements to nominate at least one independent director and to present other non-control related proposals to shareholders.
- Require investment companies, banks and insurance companies to meet the same fiduciary standards for the voting of proxies as pension funds under ERISA.
Congress and/or the Department of Labor could:
- Require ERISA trustees to keep records to demonstrate they have acted for the exclusive benefit of plan participants in their voting and governance actions.
- Ensure pension funds are voted solely in the interest of plan participants and beneficiaries through enforcement efforts.
- Clarify, through administrative guidance, that diversification standards under ERISA do not require investment in hundreds or thousands of stocks; prudence is to be evaluated on a portfolio-wide, rather than individual investment, basis.
- Require trustees of employee stock ownership plans to vote unallocated shares in the same proportion as employees vote.
Denham, Robert and Michael Porter, “Lifting All Boats: Increasing the Payoff From Private Investment in the US Economy,” Report of the Capital Allocation Subcouncil to the Competitiveness Policy Council, Washington, DC, 1995.
1730 Road Island Avenue, NW #512, Washington, DC 20036
Telephone: (202) 822-0800.
National Center for Employee Ownership
1201 Martin Luther King Jr. Way Oakland, CA 94612-1217
Telephone: (510) 272-9461
National Council of Individual Investors
803 East Street Frederick, MD 21701
Telephone: (800) 663-8516
Thanks, to Jon Entine for several suggestions to the above article. For an example of Jon’s work see, The Messy Reality of Socially Responsible Business. An edited version of “Ending The Wall Street Walk: Why Corporate Governance Now?” appeared in the September/October 1996 edition of At Work [email protected], by Berrett-Koehler Publishers. The issue also carried several articles on ethical investing and corporate accountability/responsibility. For more current news and commentary, see corpgov.net/news.
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