Tag Archives | activism

Directors Forum 2019

What follows are quick takes, with many incomplete sentences, from the recent Directors Forum 2019 held in San Diego. These are highlights from the notes of one participant, from my perspective as a shareholder advocate. If you attended, I am sure you have different takeaways. Please share them as comments. Like all Directors Forums, this one operated under the Chatham House Rule, so you will find no direct quotes. I am not even including names, although you can find them in the Agenda. Additionally, because of that restriction I do not report below on any of the featured speakers. Believe me, they were all fascinating and informative.

To learn more about Directors Forum 2019, click on the following: #directorsforum2019  @cordirforum on Twitter, website, and Linkedin. The tweets from Directors Forum 2019 could be the most comprehensive point-by-point reporting I have seen from any conference. 

While Directors Forum 2019 had great speakers and panels, the primary benefit for me and many others, cames from the informal side conversations as we rekindle old friendships and begin new ones. For example, I got tips on how to increase turnout in campaigns to overturn supermajority requirements where management endorses. I also learned what funds might be most receptive to announcing their votes in advance of public meetings. That will be important in getting retail shareholders to vote going forward. Continue Reading →

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Retail Shareowners – Facilitating Votes & Activism: Part 3 ASA

Australian Shareholders' Association, ASARetail shareowners own about 1/3 of shares traded in the United States but vote only about 1/3 of the shares we own. Moreover, when we do vote, we frequently do so by blindly or unknowingly voting with management. In Part 1 and Part 2 of this series, I explored five internet platforms that were designed to increase knowledgeable participation by retail shareowners. In this post I start to take a look at the Australian Shareholders’ Association (ASA) as a potential model for the United States. The following is largely drawn from Wikipedia and from the ASA’s internet site. Continue Reading →

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Retail Shareowners – Facilitating Votes and Activism: Part 2

Engaging Retail Inestors

Image from retailinvestorconferences.com

In part 2 of a post on facilitating votes and activism by retail shareowners I continue to speculate on what could be done to improve the situation by recalling some of the better features of major efforts to date and possible improvements that would help conscientious shareowners. As Mark Latham reminded me after yesterday’s part 1,

We retail shareowners own all of the shares traded in the United States — 1/3 directly through buying shares and 2/3 indirectly through our investments in institutions like mutual and pension funds. Those two modes of ownership result in very different patterns of voting on director elections and other shareowner decisions…

That’s why Proxy Democracy et al are so important: They help us vote our directly owned stock better (in our interests), and they help us push intermediaries to vote our indirectly owned stock better (in our interests)…
Somehow this reminds me of the saying “All politics is local.” In this case: “All stock ownership is retail.”

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Retail Shareowners – Facilitating Votes and Activism: Part 1

Engaging Retail Inestors

Image from retailinvestorconferences.com

Retail shareowners own about 1/3 of shares traded in the United States but vote only about 1/3 of the shares we own. As Nell Minow once quipped, “you can lead a shareholder to a lot of dense material, but you can’t make them read it.” (Video Friday: SEC Proxy Voting Roundtable) Our voting influence is much smaller than it could be. If more retail shareowners not only voted but participated in discussions on corporate governance and in filing shareholder proposals, that might lead to greater accountability of managers and boards. Continue Reading →

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Recent Research in Corporate Governance: Part 3

Recent Research 3Now that proxy season is finally winding down, I had a few minutes to take a quick glance at recent research reported on SSRN. Below I am simply including a few citations and abstracts of studies I might find useful in my own activities as a shareholder advocate in the US. I’m sure I included some that are strictly academic and missed many more that would be useful. I would welcome  guest posts on such research from authors, critics or other interested parties. Please contact me via e-mail for by leaving comments below. I would welcome  guest posts on such research from authors, critics or other interested parties. Please contact me via e-mail or by leaving comments below. Part 1; Part 2. Continue Reading →

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Recent Research in Corporate Governance: Part 1

Recent Corporate Governance Research Part 1 2015Now that proxy season is finally winding down, I had a few minutes to take a quick glance at recent research reported on SSRN. Below I am simply including a few citations and abstracts of studies that might be useful for shareholder advocates in the U.S. I’m sure I included some that are strictly academic and missed many more that would be useful. I would welcome  guest posts on such research from authors, critics or other interested parties. Please contact me via e-mail or by leaving comments below. Continue Reading →

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ICGN Annual Conference in London: Register Now

ICGNThe ICGN Annual Conference, hosted by the City of London, is now only a few weeks away. The organization will welcome over 600 delegates to and celebrate its 20 year anniversary. Places for the conference are limited, so register now to avoid any disappointment.

A new session has been added to the agenda this week: ‘Creating long-term, sustainable success. What do boards and investors need to do?’ hosted by Mazars. Speakers include Anthony Carey (Mazars), Michelle Edkins (BlackRock), Simon Fraser (Investor Forum) and David Pitt-Watson (London Business School).

View the latest agenda here. Continue Reading →

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Video Friday: Who's Winning the War on Corporate Governance (and should you care)?

Chad Norton

Chad Norton

Lecture given by Chad L. NortonVice President, Fund Business Management Group of Capital Research and Management Company at Banta Center for Business, Ethics and Society, University of Redlands.

Mr. Norton previously served as corporate secretary of The New Economy Fund and SMALLCAP World Fund, Inc., two of Capital’s retail mutual funds, as well as American Funds Insurance Series, which serves Continue Reading →

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Review: Shareholder Activism as a Corrective Mechanism in Corporate Governance

Paul Rose

Paul Rose

Bernard Sharfman

Bernard Sharfman

Rose, Paul and Sharfman, Bernard S., Shareholder Activism as a Corrective Mechanism in Corporate Governance (September 11, 2013). Ohio State Public Law Working Paper No. 225. Available at SSRN.

Type: Theoretical

Research Issue: How can activism be utilized to allow corporate decision making to be executed in the most efficient manner? Continue Reading →

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Video Friday: Milken Institute Discussion on Shareowner Activism

Shareholders are demanding more from managements and boards – not just as overseers, but in an effort to increase the value of the enterprise. Amid the backdrop of record-low interest rates, pent-up M&A demand and stacks of cash on corporate balance sheets, these activists are being backed by new capital. In addition, more companies are working with activist investors to identify opportunities to create and unlock substantial shareholder value. A recent panel at the Milken Institute explored the rise of investor engagement and its impact on all stakeholders. Continue Reading →

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Recent Research on SSRN

Abstracts from a few papers posted this month to the Social Science Research Newtork.

Hall, Thomas W. and Jörgensen, Fredrik A., Ownership and Performance in Europe (2012). Forthcoming, Review of Business. The authors consider the relationship between performance and ownership concentration in a large number of publicly traded and privately held companies located in smaller European economies (Austria, Belgium, Finland, Ireland, and Ukraine). Continue Reading →

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Shareholder Activism in U.S. Public Companies, 1900-1949

“Offensive shareholder activism” involves buying up sizeable stakes in underperforming companies and agitating for changes predicted to increase shareholder returns. Though hedge funds are currently highly publicized practitioners of this corporate governance tactic, there has been no analysis of the extent to which managers of U.S. public companies were faced with challenges of this nature during the first half of the 20th century. This paper correspondingly examines instances during this period where investors engaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurring between 1900 and 1949. Our findings indicate that offensive shareholder activism, while not commonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlier decades. We explain our results by reference to a simple model of offensive shareholder activism and argue that the ebb and flow of takeover activity may have been the primary determinant of the trends we observe…

It is widely assumed that with respect to corporate governance historically “market control over the allocation of U.S. corporate resources stands out as a recent phenomenon.”67 Under this view, it was not until the 1980s that an “expansion and empowerment of the shareholder class” shifted “interest group power from managers to shareholders.” It was at this point, according to the received wisdom, that the norm of shareholder primacy achieved pre-eminence, fostered initially by the rise of the hostile takeover bid and reinforced in the 1990s by the growing influence and power of institutional investors.

The rise of institutional investors, combined with a strong corporate governance counter-reaction to the building of conglomerate empires in the 1960s and revelations of widespread corporate kick-backs and bribes in the 1970s, no doubt reshaped relations between executives, directors and shareholders of U.S. public companies.70 This does not mean, however, that those running U.S. public companies in earlier eras were entirely insulated from investors inclined to take aim at firms with the intention of orchestrating changes designed to improve returns. The activist hedge funds of today lacked direct antecedents during the first half of the 20th century, as only rarely did collective investment vehicles initiate activism campaigns. Nevertheless, our research into shareholder activism during this period has uncovered numerous instances where investors targeted public companies and built up a sizeable stake with the intention of either launching a proxy contest or seeking to obtain outright voting control. Underperforming public companies no doubt have faced in recent times investor-driven discipline that is more robust than would have been the case during the period we have focused on. However, our research indicates the difference may have been one of degree rather than kind.

Cheffins, Brian R. and Armour, John, Offensive Shareholder Activism in U.S. Public Companies, 1900-49 (February 11, 2011). University of Cambridge Faculty of Law Research Paper No. 11/09. Available at SSRN. Hat tip to Jason Schloetzer.

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We Must All Be Activist Shareowners

Shareholders – mainly large institutions running pension funds – are supposed to invest for the long-term on behalf of their ultimate owners: you and me.

They are also charged with channelling funds into businesses that will grow, boost the UK economy and so generate a decent retirement income for tomorrow’s pensioners.

The reality is they do none of those things. As the well-known US fund manager Bill Gross said this week, no fewer than four out of five active money managers underperform the market, despite the large fees they charge for their supposed expertise.

The core of the problem is that big institutional investors and company managements are co-worshippers at the discredited shrine of shareholder value. This notion, that a company’s duty is to pander to the short-term needs of large shareholders, led to a headlong rush to maximise profit at any price.

It came at the expense of employees, millions of whom lost their jobs or had their wages curbed in cost-cutting drives, and of consumers. Taken far enough, it is a self-defeating concept as it drives down people’s spending power and depresses demand for products. (read more at SUNDERLAND ON SATURDAY: Why we must all be activist shareholders | Mail Online, 2/4/2011.

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"Low-Cost" Activism More Effective Since Enron

Ferri, Fabrizio, ‘Low Cost’ Shareholder Activism: A Review of the Evidence (December 1, 2010). Research Handbook on the Economics of Corporate Law, Claire Hill & Brett McDonnell, eds., Elgar Publishers, Forthcoming. Available at SSRN.  Ferria looks at studies of shareholder proposals filed under Rule 14a-8 and shareholder votes on uncontested director elections. He finds that “collectively, these studies suggest that low-cost activism has become a more powerful tool, capable of driving governance changes at target firms, promoting market-wide adoption of governance practices, and influencing key policy reforms.”

The decisions of proxy advisors appear to be key in many of the outcomes. Here are a few interesting tidbits:

  • A puzzling result in Choi et al. (2009) is that proxy advisors do not seem to take into account the conduct that led to a withhold recommendation for a director at firm A in issuing a recommendation for the same director at the annual meeting of firm B. Consistent with this result, Ertimur et al. (2010a) report that none of the directors of firms involved in the backdating scandal received a WH (withhold) recommendation from ISS/RM when up for election at another firm (and they were not penalized in terms of votes withheld), even when ISS/RM recommended to withhold votes from them at the backdating firm. If proxy advisors and shareholders do not take into account directors‘ conduct at other firms when, respectively, issuing recommendations and casting votes, then the reputation penalties for monitoring failures are limited.
  • Studies suggest that shareholder dissatisfaction expressed through director elections is followed by value-enhancing choices and a reduction in agency costs.
  • Ertimur et al. (2010b) find significant voting support for proposals aimed at affecting the pay setting process (e.g., proposals requesting shareholder approval of large severance payments), lower support for proposals aimed at micromanaging pay (e.g. proposals to adopt specific levels and structure of pay) and almost no support for more  ̳radical‘ proposals arguably reflecting objectives other than shareholder value (e.g., proposals to link executive pay to social criteria or to abolish incentive pay).
  • Shareholder proposals have become an effective activism tool in prompting firms to modify their governance practices. Firms are more likely to expense stock options (Ferri and Sandino 2009), declassify boards (Guo Kruse and Noel 2008; Cai et al. 2009), and remove poison pills (Akyol and Carroll 2006; Cai et al. 2009) after receiving a shareholder proposal requesting these actions.

  • Ertimur et al. (2010c) report an implementation rate of 31% for proposals winning a majority vote and only 3% for proposals receiving between 30% and 50% of the votes cast.

  • Ertimur et al. (2010c) report a rate of implementation of 40-42% of majority vote proposals in 2003-2004 versus 16%-24% in 1997-2002.

  • There is little doubt that shareholder proposals and shareholder votes have become a more effective tool in the post-Enron period (see also Section 2.2), with boards listening to shareholder ―voice‖ more than ever before.
  • Cuñat et al. (2010) find that approved shareholder proposals yield an abnormal return of 1.3% over the ones not approved, with a more pronounced price reaction for proposals related to anti-takeover provisions.

A recent example of such activism can be found at Zoran: Shareholder Activist as Catalyst, SeekingAlpha, 1/23/2011.

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Global Research on Shareowner Activism

Corporate Governance: An International Review has been one of our “stakeholders” from the beginning. The July issue, which I just got around to reading, provides excellent articles around the general theme of research on shareholder action.

Antecedents of Shareholder Activism in Target Firms: Evidence from a Multi-Country Study, by William Q. Judge, Ajai Gaur, and Maureen I. Muller-Kahle, looked at shareholder activism targeted at firms located in three common law countries (i.e., USA, UK, and Australia) and three civil law countries (Japan, Germany, and South Korea) during the 2003–07 time period.

Findings: Activists target firms with two motives (a) to improve the financial performance, and (b) to improve the social performance of the firm. Firm size is unrelated to financial activism, but positively related to social activism; ownership concentration is negatively related to both financial and social activism; and prior profitability is negatively related to financial activism, but positively related to social activism. These relationships in the case of financial activism are generally stronger in common law legal systems, whereas those in the case of social activism are generally stronger in environments with a greater level of income inequality.

Takeaway: Boards need to understand the motivations of shareowners and open two-way lines of communication. Expect social activism to rise with growing income inequality. Continue Reading →

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Corporate Accountability, Web 2.0 & CorpGov Functions at Public Funds

Bill Baue and Marcy Murninghan have authored a recent working paper that deserves wide circulation and thoughtful consideration. The Accountability Web: Weaving Corporate Accountability and Interactive Technology can be downloaded from the website of the Corporate Social Responsibility Initiative at the Harvard Kennedy School of Government. Since I’m trying to get you to read the paper, I’ll provide just a small taste. Then I’ll show how it might be applied to the corporate governance functions at public pension funds, as an example.  Let’s start with a very abbreviated version of the introduction in the Executive Summary:

Corporate accountability and Web 2.0 share a common thread: both are rooted in interaction and thrive on engagement. This overlap creates opportunities for corporate accountability and Web 2.0 to join forces to create mutual benefits for firms and their stakeholders. However… current business use of Web 2.0 tools focused more on improving performance and increasing efficiencies inside the firm, and on brand management, customer relations, or crisis management outside it.

At a time when our economy is navigating a crisis, and public trust of business activity is in short supply, the intersection of concerns about corporate sustainability, accountability, transparency, and ethics with the proliferation of Web 2.0 communication tools offers an opportunity for new forms of collaborative leadership and participation… an evolution in the concept of who is “inside” and who is “outside” the organization.

Accountability 1.0 is marked by one-way proclamations, campaigns, and PR communications. Accountability 2.0 rests on the assumption of two-way communication, cooperation, and mutual engagement.

Almost anyone will find the tale they weave informative, even entertaining. For example, from a section titled “The Progression of Corporate Accountability,” they start with what may be the first case of stakeholder activism, soon after the Dutch East India Company launched their initial public offering.

Dutch religious pacifists, appalled by the reliance of the company’s business model on the “generous application of warfare, blockade, piracy, assassination, imprisonment, plunder, terror, slavery, [and] bribery,” campaigned by lamplight house-to-house to gather signatures for a notarized public petition, to boycott investment, and to make a show of selling shares in protest (Baue 2008; Davis et al. 2006:175-6).

Let’s take a quick look at the paper’s recommendations, greatly abbreviated here:

  1. Adapt, Don’t Just Adopt. Don’t just extend your existing model, use Web 2.0 for engagement/dialogue to enhance accountability.
  2. Cultivate Participation. Build community and technology in parallel; don’t assume if you build it, they will come.
  3. Develop Clear Terms of Engagement. Electronic media is susceptible to misunderstanding. Set guidelines for critiquing practices and policies, not people. Use assessment and feedback mechanisms to identify keys to success and flag problems.
  4. Foster Mutual Accountability. Model self-accountability, when asking other parties to hold themselves accountable, to create a culture of mutual accountability.
  5. Use Blended Engagement. Augment Web-based communication with face-to-face meetings, choosing the medium based on which is most likely to serve the objectives.
  6. Broaden the Media Palette. Social networking, augmented reality (AR) and wikis tools may be pushing the envelope too quickly, try them internally first to unfreeze thinking.
  7. Build Communities of Inquiry and Practice.  Utilize experts with experience in building communities of inquiry and practice to convene, facilitate, moderate, and/or curate online engagement.

Like corporations navigating the financial crisis, public trust of public pension funds is also in short supply. Many have suffered scandals around placement agents, face huge deficits because of falling portfolio values, are resented by taxpayers who have lost their own defined benefit plans, and are always vulnerable to funded attack by money managers who want the profits that would incur if public employees were converted to defined contribution plans.  The most powerful adversaries of public pension fund might be organizations, like the Business Roundtable and the US Chamber of Commerce, that represent top corporate managers. The more coordinated and powerful shareowners are, the likely directors will represent their interests in corporate boards rather than acceding to every whim of management. The percentage of the profits taken by top management has gone from about 5% to 10%. It isn’t hard to imagine they want to keep it and public pension funds have taken a leadership role in weakening the power of the imperial CEO… for example, by advocating the roles of CEO and board chair be split.

Public employees want to keep their defined benefit plans. They know their pension funds are under attack but they often have little understanding of how corporate governance plays a role in the earnings of their plans or the dynamics of initiatives, legislation and other attacks that may be orchestrated by forces not easily identified, especially after the Supreme Court’s decision in Citizens United. Web 2.0 and Accountability 2.0 could offer public funds a way to integrate their corporate governance concerns about sustainability, accountability, transparency, and ethics with their own internal governance.  These tools offer an opportunity for new forms of collaborative leadership and participation with their own stakeholders… an evolution in the concept of who is “inside” and who is “outside” the organization. By utilizing such tools, funds may not only increase the understanding of stakeholders (which might expand beyond unions and direct members to taxpayers and others) but they may also benefit from what Baue and Murninghan call “cultivating communities of inquiry and practice.”

Now let’s try to apply these recommendations to the corporate governance functions of public pension funds. At some funds, these functions may be largely contracted out or carried out by one individual. Other funds may have dozens of contractors as well as dozens of in-house staff. Therefore, I’ll divide them into basic and expanded activism practices. Most of these practices will be Web and Accountability 1.0 but some will move into 2.0 and be informed by the paper. I’m drawing heavily for large portions of the list from Council of Institutional Investor (CII) publications.

Basic Activism Practices

  1. Obtain useful information necessary to make activism decisions;
  2. Commit staff time to implementing an activism strategy;
  3. Adopt proxy voting guidelines that follow or improve upon a recognized corporate governance framework (see those of  CII and CalPERS, for an example);
  4. Make the proxy voting guidelines available for public comment prior to adoption… using a 2.0 strategy, provide for and cultivate interactive comment and discussion, reaching out to unions and other interested parties who are also connected with members and taxpayers;
  5. Make sure fund proxies are voted by fund staff or by a specialized proxy voting service in accordance with the fund’s proxy voting guidelines;
  6. Adopt a process to handle “No” votes on directors;
  7. Provide for an override mechanism so the fund can vote individual proxies on a case-by-case basis, even if voting is otherwise delegated;
  8. Factor into share lending practices a mechanism to retain voting rights on a targeted basis;
  9. Obtain and post on the web an annual report on the fund’s proxy votes… using more of a 2.0 strategy, facilitate comment and discussion again after the fact, since there are often unanticipated proposals each year and we often learn a lot during proxy season;
  10. Disclose the fund’s proxy voting guidelines on the web site, or alternatively on CII or other web site;
  11. Go public with issues or views on proxy votes through press releases, Twitter, a blog or other mechanisms that move toward 2.o;
  12. Withhold votes from directors of specific companies and/or committees;
  13. .

    Expanded Activism Practices

  14. Develop a methodology and strategy for communicating and engaging with portfolio company directors or executives… making use of pre-season webinars and other 2.0 mechanisms as forms of blended engagement to reach out to more companies efficiently;
  15. Coordinate action with, or support the actions of other shareowners through international networks like ICGN, national networks like CII, as well as state and local networks like the Los Angeles Area Pension Trustees Network;
  16. Weigh in with Congress, the SEC and others to improve investors’ legislative and regulatory environment… use or work with constituent groups to use web-based tools for electronic messaging and other advocacy efforts;
  17. Monitor the discretionary voting by investment managers of shares held for other clients to ensure alignment;
  18. File binding and/or precatory shareowner proposals… foster mutual accountability by modeling self-accountability before introducing proposals that are also applicable to fund governance;
  19. Solicit support (not proxies) for shareowner proposals or opposition to management proposals;
  20. Disclose shareholder initiatives to stakeholders and the public… solicit feedback and dialogue from stakeholders though surveys, webinars and other methods before filing to ensure support or at least acquiescence;
  21. Use contract provisions based on standards of behavior to ensure that financial advisors are responsive to corporate governance principles;
  22. Employ managers and investment consultants who build shareowner value by emphasizing corporate governance reforms as part of their investment strategy;
  23. Use the legal system, such as filing class-action suits under the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995 (see On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance by Stephen J. Choi & Jill E. Fisch);
  24. Work with CII members and others to develop a backbench of potential director candidates with a wide variety of skill sets;
  25. Disclose proxy votes in advance of AGMs on web site, through RSS feeds, ProxyDemocracy.org, MoxyVote.com, and other such sites as the develop;
  26. Develop your reputation as a voting “brand” (see Proxy Voting Brand Competition at http://votermedia.org/publications). One way to enhance your brand is to provide a brief reason for your vote. As sites compiling votes become more popular, canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following;
  27. Develop education tools and games to help members with investments to supplement their pensions making use of mutual fund activism comparisons like those available at ProxyDemocracy.org;
  28. Use Twitter and/or a blog to broadcast votes and invite discussion, especially from stakeholders;
  29. Build communities around fund activism that will provide feedback, identifying success and flagging problems;
  30. Run a short slate of directors;
  31. Campaign to deny management a quorum in especially circumstances where the rules or procedures are inherently unfair (see Guest Commentary From Glyn Holton: Emergency at Intel and Intel Virtual Mtg Out for 2010 But Exploring Future with USPX
  32. Utilize corporate governance measures as part of an overall investment strategy. For example, GMI and The Corporate Library have both done studies showing that an index of funds weighted by certain corporate governance measures (mostly measuring risk) should lead to outperformance over traditional indexing;
  33. Work with the SEC to encourage the development of proxy advisory firms (PAFs) by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples from Mark Latham that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented. For more recent language, click here (Consider that RiskMetrics probably spends an average of less than $4,000 researching each proxy and think about how much more company specific recommendations can be made if $50,000 is allocated to PAFs by shareowners, partially from corporate funds.);
  34. Model self-accountability to your own stakeholders in ways similar to how you think corporations should be responsible to shareowners by transitioning from one-way communication to two-way or multi-directional interactivity.
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