Tag Archives | board

Review: Rethinking the Board's Duty to Monitor

In “Rethinking the Board’s Duty to Monitor: A Critical Assessment of the Delaware Doctrine,” to be published in 2011 in the Florida State University Law Review (current version available ssrn.com), Prof. Eric Pan of the Cardozo Law School substantially advances the discussion of how corporate governance needs to be improved in order to minimize the macroeconomic impact of poor decision-making at the firm level and the need for costly bailouts. Moving beyond the recent “hot” topics of maximizing director independence, enhancing minority shareholder proxy access and improving the executive compensation process, he focuses on considerations directly impacting the outcome of board deliberations.

This is an essential complement to such topics in that it addresses actual board performance in consideration of issues of business policy – that is, once directors are installed, we need to ensure that they do a good job in addressing company business. Prof. Pan recognizes that the problem of board performance is not solved once we get the “right” people in place.

He correctly observes that to the extent that present Delaware law addresses director performance in its management oversight role at all, it does so by focusing on failure to “monitor” management in order to prevent major legal violations, and almost entirely absolves directors from any responsibility for adverse business outcomes, no matter how disastrous for the single firm or for the economy, so long as appropriate process was utilized. The implications of the Caremark and Citigroup decisions for the former and latter propositions, respectively, are well described. The implications of poor oversight by the Citigroup board for that firm and our economy need no further description. Prof. Pan argues quite persuasively that we need to expand the board’s duty to monitor created in Caremark to encompass management decisions leading to poor business outcomes, even if no laws are violated, irrespective of the process which is utilized.

Rather, boards should be held responsible for business as well as legal outcomes. Courts should shift the burden onto directors to show they made an effort to be informed and to respond to developments leading to such outcomes.

This reviewer has argued in “Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance,” 48 Duquesne Law Review 33, reviewed on this site in an April 22, 2010 post, that fixing this gap in corporate law with such burden shifting in order to avoid disastrous decisions by our largest firms is a fundamental but overlooked step in the financial reform overhaul currently in process.

Like this reviewer, Prof. Pan argues for a regimen where directors have some – in his view, seemingly undefined – financial responsibility when their firms suffer major losses as a result of management decisions which are not meaningfully challenged by the board, even where there is no legal violation. Presumably, this would apply to situations requiring public bailouts such as the recent financial industry debacles. Prof. Pan would enhance his case by attempting to enumerate specific circumstances, such as a need for governmental assistance, in which such responsibility should attach.

As contemplated in Prof. Pan’s article, the new responsibilities would apply to all firms (or at least to all publicly traded ones). This reviewer strongly disagrees with such breadth.

In that all concerned, including Prof. Pan, agree that such a change would likely reduce business risk-taking, we need to apply it only in cases involving companies of sufficient size and interconnectedness and events of sufficient magnitude, where poor decisions can have significant external effects for the broader economy.

A third concern is that the duty to monitor as advocated in this paper, will usurp the board’s discretion in determining the appropriate degree of monitoring and inhibit risk-taking. We do not want the duty to monitor to prevent corporations from conducting certain activities which may actually be beneficial to the company and its shareholders. In other words, the board may conclude that it is in the best interest of the corporation for it to expose itself to extreme amounts of business risk.

The Citigroup court correctly notes that the present business judgment rule is intended to permit entrepreneurial activity – i.e. risk-taking. While it obviously worked too well for Citigroup, especially today when we face a nascent economic recovery, we should not inhibit risk-taking – and often employment – any more than necessary. There are many large public (and private) companies where the consequences of a poor decision will be limited to that firm and its shareholders without any material ramifications for the economy.

The situation addressed by the Delaware Supreme Court in upholding under the business judgment rule, the actions of Disney’s directors despite their signing off on a wasteful compensation and severance package for a former President illustrate where the current regimen of deference to director business judgment is working effectively. Even though this decision turned out to be a very poor one for Disney, it had no implications elsewhere.
In any event, as Prof. Pan notes in his discussion of how as a result of resistance at the state level, recent innovations in corporate law have largely been under the guise of the federal securities laws, it will be difficult to implement any of the changes he suggests. As such, what is proposed should be as narrow as possible in order to increase the likelihood of its enactment.

Prof. Pan makes a major contribution to the corporate governance discussion by focusing on actual governance issues as opposed to process, compensation and board composition issues, and his ideas should be heeded by those considering changes in this area. However, it is preferable for those ideas to be refined to ensure that they are properly targeted (by firm and event) so as to cause as little disruption to business risk-taking as is possible.

Publisher’s Note: Thanks to guest reviewer Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.

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Common Law Power Struggle

The Rising Tension between Shareholder and Director Power in the Common Law World by Jennifer G. Hill, available at SSRN, explores the rising tension between shareholder and director power in the common law world. First the article analyzes key arguments in the shareholder empowerment debate, and current US reform proposals to grant shareholders stronger rights, from a comparative corporate law perspective, examining how traditional US legal rules diverge from other common law jurisdictions. Secondly, the article discusses power shifts in the opposite direction – namely toward the board – in some parts of the common law world.

The article shows that US shareholders have traditionally possessed significantly fewer participatory rights than their counterparts in other common law jurisdictions, and examines particular legal rules that contribute to this divergence. Indeed, the current reform proposals to enhance shareholder rights, despite being the subject of great controversy in the US, fall far short of rights already held by shareholders in other common law jurisdictions, such as the UK and Australia.

The article also identifies an important tension between legal rules designed to enhance shareholder power, and commercial practices designed to subvert it. It shows how strategic commercial responses to regulation can affect the operation of legal rules. The existence of commercial pushback of this kind suggests that, even if US shareholder powers are significantly strengthened, that will by no means be the end of the story.

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February 2009 Special News Supplement: Corporate Governance Roundup 2009

Yippee-i-o-ki-ay! From the conference flyer, I half expected Will Pryor, Director of the IAFF Local 10Ehnes14 and conference “go-to” guy, to show up in chaps, especially with his e-mail encouraging attendees to dress casually. Well, maybe next year. Suits and jackets prevailed in the fashion arena but there was little in the way of pretense as funds from all over California and beyond shared mostly proxy strategies. The conference was also well attended by consultants, service providers and investment advisors. Jack Ehnes (right) was the emcee and set the tone for moderators by keeping everyone on track and additing insights, without dominating the conversation.

Session One

The fist panel was composed of Bill McGrew of CalPERS, Ann Sheehan of CalSTRS (left), and John Wilson of TIAA-CREF, ASheehanmoderated by Ralph Whitworth of Relational Investors. I was a little surprised to learn that TIAA-CREF, with more than twice the assets of CalPERS, has about half as many staff working on corporate governance issues. (6 vs 11) Maybe the bigger you are, the less you need to spend to influence outcomes. Each discussed their fund’s proxy policies and initiatives. Since I live near Sacramento and am more familiar with CalPERS and CalSTRS, I paid more attention to Wilson discussing TIAA-CREF’s collaborative approach.

They don’t look at themselves as “activists” but as moderates, engaging in private dialogue, using a non-prescriptive approach but having influence behind the scenes. With holdings in about 7,000 companies, they view themselves as universal owners and all that entails, focusing more on driving changes in the market vs at individual companies. Their efforts can largely be broken into three areas: proxy voting, corporate engagement, and thought leadership. Wilson made one of the stronger arguments at the conference that divestment simply allows companies to profit from genocide in Sudan, for example, by selling shares to investors who don’t care. TIAA-CREF emphasizes reputational risk to companies in situations where they aren’t open to other arguments. (Although in the case of the Sudan, it is now mostly Asian companies that continue operating there.)

All three giant funds emphasized their relationship with CII, ICGN, global reporting initiative and other national and international organizations. All are concerned with executive pay and agreed the problem is more the rationale of the pay package, not so much the size. Pay needs to be structured in a way that it can’t be gamed. It should encourage sustainable development of the company. All support proxy access, as did just about everyone at the event.

Session Two

This was a short session with two panelists: Ann Yeger of CII (below, right) and Allen MacDougal of PIRC, HKimmoderated by Hank Kim of NCPERS (left). Is your public pension fund under attack? See Lies, Lies and More Attacks on Pension Plans, as well as other publications from NCPERS.

Yerger discussed CII’s efforts and involvement in economic reforms. For example, the Investors’ Working Group (IWG), led by William Donaldson, and Arthur Levitt Jr., both former SEC chairs. The non-partisan panel of experts is co-sponsored by CII and
the CFA Institute Centre for Financial Market Integrity. An initial report and
recommendations are expected by late spring. In April, CII expects to release a white paper commissioned by their credit rating
agencies subcommittee. I liked this phrase from a handout: “The ability to attract capital and investors, not just listings, is what makes markets competitive… investor interests should always come first.” Top concerns for CII were identified as:Yerger

  • majority voting for directors
  • proxy access
  • broker voting eliminated
  • independent board chairs
  • independent compensation consultants
  • say on pay
  • clawback provisions for unearned bonuses
  • no pay for failure – termination for poor performance

MacDougal (below left), from PIRC went on to discuss “a way out of the crisis.” He brought up the need for asset managers to be subordinate to fund trustees and the need for trustees to get involved in market reform. He also mentioned the United Kingdom Shareholders Association (known as “UKSA”), formed in 1992 to support and to represent the views of private (ie. non institutional) shareholders. UKSA provides investment education and conveys the views of investors to the boards of British companies, to the MacDougallGovernment, to the Stock Exchange, to the media and to other bodies. Wouldn’t it be grand to have something like this in the US?

He also brought up an organization that arose to help get qualified independent directors on boards. ProNed was established in 1981 by the Bank of England, following a series of banking crises in the 1970s. Yes, somewhat similar to what we now face in 2009. With proxy access likely to be granted soon, it would be great to see a clearinghouse like this in the US. Shareowner groups seem much more likely to take action if they can easily coalesce around director candidates already vetted by shareowners. There’s a ProNed in Australia. I’m not sure how involved shareowners are in it, or even how involved they were in the original.

A few of MacDougal’s other ideas involved independence of compensation and audit consultants, collective funding by investors of the effects of incentives on behavior (with regards pay), employee representatives on boards would provide another avenue of oversight (as in European countries), additional investor representation is needed in government commissions and regulatory bodies, and he favors mandatory voting disclosure for all fund managers. “We need to be radical AND practical,” he said. I say, we need to get more speakers, like MacDougal, from outside the US with a fresh perspective. I’m glad he made the long trip for the event.

Session Three

Ralph Whitworth, of Relational Investors, Denis Johnson, of Shamrock Capital, Scott Zdrazil of Amalgamated Bank and Mike Ibarra of Landon Butler presented their investment opportunities, proxy strategies and practices. Dan Pedrotty of the AFL-CIO moderated. Relational Investors and Shamrock take stakes in just a few companies. Relational focuses on:

  • business strategy (long-term value, mitigating risk),
  • capital allocation to maximize return,
  • capital structure (optimal use of debt/equity),
  • governance (transparent, responsive, accountable),
  • board composition (diverse, independent, engaged),
  • compensation (LT alignment, reinforce strategy and risk mgt.),
  • communication (timely, accurate, consistent, realistic)

During thDenis Johnsone Q&A, Whitworth said he doesn’t favor more rights for long-term investors. I haven’t heard anyone from these types of funds who does. I suppose when a fund makes a commitment of time and effort, they want to be heard right away, not ignored for the first few years.

Shamrock’s strategy was similar, although Johnson (left) placed more emphasis on removing anti-takeover provisions and providing shareowners the ability to call a special meeting. Shareowners need to accept more responsibility for removing ineffective directors. Withhold votes should have been greater in the past. Shamrock will help ensure such votes will be higher in the future. Proxy voting policies should place a greater emphasis on poor relative stock performance, he says.

Scott Zdrazil, of Amalgamated Bank, emphasized their resolutions for 2009. They’ve been using resolutions to try to “move the market” since 1992. This year they have over thirty. Zdrazil highlighted the following:

  • majority vote standard for director elections
  • annual election of all directors
  • separation of CEO and chair
  • oversight and disclosure of political contributions
  • curtailing “golden coffins”
  • clawbacks for unearned compensation
  • say on pay
  • double trigger change in control provisions – to kick in, must be change of control and termination of CEO
  • ban gross-up – let CEOs pay their own taxes
  • golden parachutes
  • healthcare reforms – adopt universal principles for national healthcare reform
  • adopt ILO labor standards

Mike Ibarra, of Landon Butler, emphasized the history of their Multi-Employer Property Trust (MEPT) funded mostly by building trade unions and pensions. He described their Responsible Property Investing as comprehensive in terms of environmental, social and governance, to preserve and enhance economic returns. The MEPT claims to have created 52 million jobs through 2006 and has played a key role in revitalization and historic preservation. They’re beating the comparable indexes, so you can do well by doing good.

Session Four

After a nice lunch, we heard from the AFL-CIO, CTW/SEIU, AFSCME and LIUNA, moderated by Carolyn Widener, of CalSTRS. Dan Pedrotty, of the AFL-CIO said they will shortly issue a rating for registered investment advisors, discussed the need to reregulate capital markets, focus more on risk management, and push for greater disclosure. He then talked about some of their new proposals:

  • golden coffins
  • hold past retirement – retain 75% of comp shares until two years after termination
  • healthcare initiative – universal, continuous, affordable, high quality

Rich Clayton then discussed the focus of Change to Win and SEIU. The focus was broader than most, with initial emphasis on the Investor and Employee Free Choice Act, which is critical to ensuring that higher productivity leads to improved paychecks. He had plenty of graphs to demonstrate our new gilded age and how the increasing disparity on income and benefits has helped fuel our problems and the financial crisis. The proportion of workers wanting to join a union has risen substantially during the last 10 years but intimidation has kept them from doing so. Clayton also touched on the 2009 resolutions being introduced by SEIU’s Capital Stewardship Program. These include:

  • say on pay
  • climate risk and greenhouse emission targets
  • labor standards / ILO compliance
  • regulatory reforms
    • proxy access
    • say on pay, and other exec compensation reforms
    • ending broker votes
    • ESG disclosure and clarification of fiduciary standards
    • reinvigorating long-term ownership discussions

Scott Adams described AFSCME’s top three governance priorities as say on pay, proxy access and vote no or withhold campaigns on directors. They will continue pushing majority vote requirements, board declassification, anti-gross ups, and in attempting provisions to recover solicitation expenses. New initiatives this year are requirements to hold equity shares for several years in escrow and to delete golden coffins. They are also working on reforms to reconstruct bond rating agencies.

Richard Metcalf then described LIUNA’s program. They seem to make more of an effort than most (TIAA-CREF in this bunch excepted) to engage companies before filing. They are using a questionnaire to determine if companies have done adequate succession planning. Turnover of CEOs has increased and there is a growing trend of looking to the outside (presumably for a savior). We’ve seen high exposure misfires, such as at Home Depot. They’re also disturbed by conflicts of interest among executive compensation consultants. LIUNA is seeking annual performance reviews by the board, development of criteria for internal candidates, planning three years in advance and annual disclosures on succession planning. He also described efforts to limit the SEC’s “ordinary business” exclusion, which has been used to exclude proposals like those submitted by LIUNA in 2006 seeking evaluation of risk at mortgage lending by home builders. Others thrown out sought to draw attention to credit rating conflicts, succession planning and evaluation of risk. He quoted former SEC Chairman Harvey Pitt, “It is impossible for the SEC to determine what the ordinary business of a corporation really is.”

Session Five

The final session saw brief presentations from Glass Lewis, Corpgov.net, ICCR, and the RiskMetrics Group. Bob McCormick of Glass Lewis led off with a comprehensive presentation that touched on the credit crisis, executive compensation, majority vote for directors, say on pay, M&A, contests, the new administration, initiatives from 2008 and those we will see in 2009. The loss of broker votes, combined with majority requirements, will make a difference in director elections. In his handout, McCormick discusses the Waxman Report on Conflicts of Interest Among Compensation Consultants, which found that almost half of the S&P 500 got executive pay advice from conflicted consultants. Another issue he raised that has been too little discussed is redomestications to lower corporate tax rates. Apparently, several are or were looking to Switzerland. For 2009, he discussed many of the same proposals already mentioned above and the likelihood of SEC and Congressional support for proxy access, eliminating broker votes, say on pay, compensation consultant conflicts, etc.

You can pull up a four-up pdf of my presentation, IncreaseVotingClout4 at and a copy of my very brief paper at corpgov.net/news/2009/GRU.doc. My hope is to generate additional interest and involvement in Proxy Democracy and the Investor Suffrage Movement. If you get inspired or have questions, please contact me. At Proxy Democracy we are primarily seeking funds willing to post their votes in advance of annual meetings; including the reason(s) for votes would be even better. ProxyDemocracy will soon beta test the ability of retail shareowners to vote directly through the site based on information posted there, including votes by trusted funds. At the Investor Suffrage Movement we are developing a network of people willing to present shareowner proposals locally, saving proponents, such as public pension funds, substantial expenses for time and travel. We are also helping shareowners write proposals, defend them against no action requests and, as mentioned, present them at annual meetings.

Laura Berry (left) then gave an impassioned presentation on the Interfaith Center on Corporate ResponsibilityLaura Berry. “Inspired by Faith. Committed to Action.” ICCR represents about 300 faith-based institutional investors with over $100 billion in invested capital. She emphasized how their prophetic voice has anticipated emerging areas of corporate responsibility. Over many years prior to the recent market collapse, they introduced 120 resolutions on subprime lending and securitization. Resolutions allow them to begin a conversation and to educate. This year, they filed 292 resolutions but engaged in 350 dialogues. They introduced some on governance issues, such as executive pay, but many more on social issues, such as: adopt human rights policy, reduce emissions, recycle, health care reform. They are making good use of data developed by Trucost to determine which companies to target on climate risk indicators. One example of their successes is that WalMart is now boycotting Uzbekistan cotton over its use of force child labor during harvest. I have bulletins from ICCR going back a dozen years and, of course, they’ve been around since the early 1970s.

The finCBowieal presentation of the day was from Carol Bowie (right) of the RiskMetrics Group. She described their elaborate process to develop policies and requested feedback on information posted on their Policy Gateway, a really great resource. She also highlighted some of the key policy updates for 2009. I’ve got resolutions in at companies to reincorporate to North Dakota because of their shareowner friendly policies, and was a bit disappointed that RMG is taking a case-by-case approach on such resolutions… better than opposing them all. RMG has come out with a strong bias in favor of pay resolutions calling on executives to hold until retirement and “bonus banking,” holding for years. It appears they are taking a much harder look at executive pay, with revised performance tests. Say on pay factors include:

  • alignment of incentive plan metrics with business goals (something which few CD&As address)
  • peer group benchmarking process
  • performance trend vs. pay trends
  • internal pay disparity
  • balance of fixed vs. performance-based pay
  • poor pay practices
  • information/rationales in CD&A regarding pay determination
  • board’s responsiveness to investor input

See also Hot Proxy Season Topics for 2009 and Explorations in Executive Compensation.

All in all, it was a great conference, close to the airport (less hassle), low key and very informative. Sorry for all the clipped head shots. Next year I’ll bring a camera. I went to a similar conference about 15 years ago in Oakland and there were only about twenty people attending, as I recall. This time there were about 150. Next year, I’m sure attendance will be in the hundreds. Three cheers to the Los Angeles Pension Trustees Network for sponsoring the event.

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Corpocracy and How to Get Our Democracy Back

One book on corporate governance made Ralph Nader’s list of Nine Books That Make a Difference: A Reading List for the Holidays. Here’s his brief review:

Corpocracy by Robert A.G. Monks (Wiley Publishers) summarizes its main theme on the book’s cover-“How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine-and How to Get it Back.” Corporate lawyer, venture capitalist and bold shareholder activist, Monks gives us his inside knowledge about how corporations seized control from any adequate government regulations and especially from their owners, their shareholders, and institutional shareholders like mutual funds and pension trusts. This is a very readable journey through the pits and peaks of corporate greed and power that shows the light at the end of the tunnel.

From a review of the same book, Philip L. Levine writes “Robert A.G. Monks has pulled away the covers, revealing who is in bed with whom, and very clearly articulating how we got to the unbalanced and unhealthy state we find ourselves in.” Nell Minow also sings the book’s praises:

Robert Monks is a true visionary, and this assessment of corporate control of every institution set up to provide oversight or assure accountability will provoke a series of “aha” moments from anyone who has wondered why we permit corporations to determine everything from pollution levels to the outcome of elections. With mastery of the languages of finance, economics, business, politics, culture, and values (in all senses of the word), Monks ties together the Babel of vocabularies with analysis that is utterly clear-eyed and recommendations that are creative but utterly rational.

Sir Adrian Cadbury, most noted for the Cadbury Code, a code of best practice which served as a basis for reform of corporate governance around the world, wrote a lengthily review posted at Amazon.com. (Or course, it wasn’t nearly as long as my rambling review.) Below are a few bits:

The balance of power between boards and CEOs in the United States remains a paradox, given the country’s regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by “ballot stuffing”, nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.

In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system… The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.

I was lucky enough to get a pre-print, which I read in a couple of sittings within a few days of its arrival. Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine — And How to Get It Back both delights and informs in a way only Bob Monks can, because he has been at the center of so many of the important battles to make corporations more accountable. His lifework has been delineating the underlying dynamics of corporate power to devise a system that combines wealth creation with societal interest. No one else can write as well about “How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine” because no one else has been as engaged as Bob Monks from so many angles.

His insights into pivotal points of view and decisions are enlightening. For example, he points to the role of Douglas Ginsburg, a leader in the field of law and economics, in instilling a belief that it is okay for corporations to violate environmental laws, as long as they account for possible sanctions in their budget. Under Ginsburg’s view, according to Monks, people aren’t motivated by moral or social obligation but by simple desire and cost-benefit analysis. Then there is Bob analysis of Lewis Powell’s court decisions. His finding of a constitutionally protected right to “corporate speech” provided the judicial framework for management “to commit untold corporate resources to influence public opinion and public votes – resources so huge and unmatchable that individual contributions are now all but meaningless in state and nationals elections.” And, of course, the Business Roundtable hold a special place in Bob’s heart. The “BRT has come to function in significant part as an agent for the CEOs…who have established themselves as a new and separate class in the governance of American corporations, answerable to virtually no one, accountable only to themselves.”

Monks appears to be a believer in the forces of markets but regulated to ensure a level playing field. Without that, the overall effect has been to turn the stock market into “a gigantic, round-the-clock casino that runs the biggest game the world has ever seen.” Market values and goals have become national goals. Corpocracy is another top-notch effort from the individual who continues to have greater lasting impact on the field than anyone else. Still, I would have placed a different emphasis in the “How to Get it Back” portion of the book..

Monks may be A Traitor to His Class, but he is also a gentleman, reluctant to force change. Through many books, Monks repeated what became almost a mantra that “no new laws” are necessary. I don’t recall seeing that in Corpocracy, although Cadbury repeats the phrase in his review. I think Bob is weakening on this point. However, he still seems too confident in the power of persuading elite leaders of the need for change. I’m with John Edwards, when he said recently, “It is unrealistic to think that you can sit at a table with drug companies, insurance companies and oil companies and they are going to negotiate their power away.”

When Les Greenberg, of the Committee of Concerned Shareholders, and I started preparing our petition on proxy access in July of 2002, I remember e-mailing Bob, asking if he would sign on with us. It was late in the week when Bob e-mailed back that he had a meeting scheduled with then SEC chairman Harvey Pitt on Monday. If we could get him the proposal over the weekend, he might be able to discuss it at his meeting. We did. My impression is that Bob’s primary focus was on Pitt’s 2/12/02 response to a letter Ram Trust Services had sent 13 years earlier where Pitt clarified the SEC’s stance that proxy voting is in fact an investment adviser’s fiduciary responsibility, generally governed by state law. I think Monks was asking Pitt for regulations to enforce that duty through required disclosures. Pitt was apparently won over by Monks, Amy Domini, and others.

My little story has two points. First, most of us don’t routinely meet with SEC chairmen. Bob’s history of involvement in corporate governance has been as one member of the elite meeting with other members of the elite. Like the fictional character, Forrest Gump, Monks met with many historical figures and has influenced important development. Unlike Gump, Monks has done so with candid intelligence and a deep awareness of the significance of his actions. Second, like the earlier Avon letter, the Ram Trust letter and follow-up eventually led to regulations. Monks may espouse “no new laws or regulations are needed” but several of his most important actions have led down that path.

Perhaps Monks is correct, as Cadbury points out in his review, that foundations have a special obligation to reform the market system which sustains their existence. That’s where Monks places much of his emphasis in the “How to Get it Back” portion of the book. In his flights of fantasy, Bob dreams of a president who will use his/her powers to end conflicts of interest and compel good governance in contractors. “The framework is in place. The laws exist,” he insists.

Yet, two pages later he notes the need for legal changes. He reminds us the First Amendment “was not meant to protect the Church from government intrusion, but rather to protect the government… We need similar protection today from the dominant institution of our own time, the corporation.” He defines corpocracy as “government by the corporations; that form of government in which the sovereign power resides in corporations, and is exercised either directly by them or by elected and appointed officials acting on their behalf.” I can’t help but believe that the tide won’t turn until the rabble of individual investors demands change. Individual investors have a vote in electing government representatives — the sovereign power; institutional investors don’t.

Lucian Bebchuk and Zvika Neeman, in a recent paper entitled Investor Protection and Interest Group Politics, also proceed on the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.” Yet, their own model contains the following hypotheses.

Therefore, educated individual investors are critical if we have any hope of electing public officials who will protect politics from corporate influence and who will revise the legal framework so that it better combines wealth creation with societal interest. Roger Headrick’s “win” last year at CVS/Caremark, based on a margin decided by broker votes, lead to additional calls for the SEC to approve NYSE’s proposal to bar brokers from casting uninstructed investor votes in board elections.

According to Broadridge Financial, broker votes on average account for about 19% of the votes cast at US corporate meetings. However, the elimination of broker voting, if the SEC ever gets around to approving it, just takes 60-70% of retail shareowners out of the picture. It doesn’t address the more fundamental issues. How can we get shareowners to think of themselves as long-term owners rather than as betters at what Bob calls the biggest casino the world has ever seen? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent? There are dozens of possible reforms. Here are seven worthy of further attention:

1. Proxy Assignment

Drawing from the other six, this may be the easiest to implement with a relatively large possible impact. That’s why I’m working on it. We need system(s) or perhaps just instructions, so that lazy but somewhat conscientious shareowners can assign their votes to others based on reputation, rather than tossing their proxies in the shredder. I surveyed brokers and determined that making such assignments will not be a problem at most. Now I simply need to find an institution or two willing to take the proxies. Of course there are lots of technical and legal details but they don’t appear insurmountable.

2. My Proxy Advisor

That’s the working name for a project Andy Eggers started. Andy is working on a PhD in political science at Harvard. The project is now housed within a nonprofit, Proxy Democracy, which Andy also founded. Here’s part of what he has posted as a brief description:

Before each voting deadline, we find out how respected institutional investors with a variety of voting philosophies have chosen to vote their shares. We’ll help you figure out which funds have similar voting philosophies to yours. When a fund you agree with makes a decision on a stock you own, we’ll send you a free alert. You’ll have a week or two to look at their decisions and cast your own ballot.

The system appears to depend on funds posting how they voted or intend to vote prior to the shareholder’s meeting…with Andy’s software crawling the internet to gather the information. This may work well in high profile cases. However, we’ll need more institutions to routinely post votes in advance.

3. Proxy Exchange

Glyn Holton outlined how a “proxy exchange” could allow shareowners to transfer voting rights among themselves or to trusted institutions to increase voter effectiveness (see Investor Suffrage Movement). His proposal lays out a fairly complex system involving four classes of participants:

4. A US Shareholder’s Association

Shareholders in Europe “are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, the Children’s Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands, reports the New York Times. (Boards Feel the Heat as Investor Activists Speak Up, 5/23/07)

The Times goes on to discuss the costs of such activist campaigns that appeal to shareholders through newspaper ads. Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, says sacrifices for short-term gain would remain exceptions because short-term investors could only sell their shares at a profit if they find new investors who believe in the long-term potential of the revamped company.

In reading the article, what struck me is the growing assemblage of activist funds and shareholder associations in Europe. Where is the US equivalent of the VEB (Vereniging van Effectenbezitters or Dutch Investors’ Association) or the UK Shareholders’ Association? In the US, BetterInvesting is the largest nonprofit organization dedicated to investment education.

Although their goals include helping their members to “learn, share, grow and more fully experience the rewards of investing success,” I find no mention on their site equivalent to the UK Shareholders’ Association’s vow to “protect your rights as a shareholder in public companies and promote improved standards of corporate governance.” It might make for more interesting investment clubs in the US if members acted as owners, instead of just stock pickers at the casino.

The US hasn’t had an effective advocate for retail shareholders since United Shareholders Association. Deon Strickland , Kenneth Wiles and Marc Zenner documented that USA’s 53 negotiated agreements are associated with a mean abnormal return of 0.9 percent, a $54 million shareholder wealth gain. Although Peter Kinder, President, KLD Research & Analytics, Inc., tells me USA “was a significant factor in turning ‘good governance’ into a checklist of factors that made easy or easier ‘maximizing shareholder value’, i.e., flipping or extorting the corporation” — something we obviously have to guard against in any new iteration.  I’ve repeatedly contacted the National Association of Investors Corporation (NAIC) but they do not appear interested in governance issues. As I recall, USA was originally funded by a shareholder’s lawsuit. Maybe we need another.

5. Shareholder Advocacy Trust

Richard Macary’s AVI Shareholder Advocacy Trust presents an innovative mechanism to combine small shareowners to advocate changes in corporate governance. The Trust sets out its goals, makes its case to shareholders, and then is dependent on contributions. The Trust depends on a monitoring/activist agent who is so compelling that shareholders freely pony up contributions to support work that might pay off. Free rider issues abound.

The Trust is not a “for profit” vehicle nor can any contributor expect to get any kind of return on their contribution. In a way, it’s similar to contributing to a campaign or political action committee where you agree with their platform or want to see a specific candidate elected, so you contribute. Your only upside in that scenario is that if your candidate wins, you believe it will be good for you or your position, be it lower taxes, a cleaner environment, less regulation, etc. The trust is also set up to compensate the managing trustee, who is essentially the coordinator, director and general contractor of the effort. The trustee is very much like a general contractor in that he, she or they will essentially hire and direct all of the professional and advisors needed to execute upon the trust’s goals.

6. Collectively Paid Proxy Research

Because of the expense and free rider issues, the only reason most institutions vote are the federal regulations Bob Monks helped to create that require pension and mutual funds to vote stock in their beneficiaries’ interests. Of course another of Bob’s important contributions was founding Institutional Shareholder Services, increasing the research done on proxy issues and its availability. The biggest obstacle to voting now is not the time it takes to vote but the research needed to make an informed vote. Most people realize that just going along with the board of directors for lack of an easy alternative is not a meaningful vote. But understanding the proxy issues requires too much time and expertise, especially for individuals.

On that front, the Corporate Monitoring Project and VoterMedia.org, both initiated by Mark Latham, have shown the way to empower voters with better information. Latham’s system allows shareholders to allocate collective corporate funds to hire a monitoring firm to advise them on the issues and how to vote. Latham’s system would eliminated free rider issues and creates an incentive to pay for much more research.

“Comprehensive analyses of proxy issues and complete vote recommendations for more than 10,000 U.S. companies are delivered by ISS’s seasoned U.S. research team consisting of more than 20 analysts.” We can thus estimate about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting.

Mark proposes use of shareowner resolutions to choose an advisor from among competitors. Any proxy advisor could offer its services, specify its fee, and have its name and fee appear in the ballot. The winner would give proxy advice to all shareowners in that company for the coming year. The advice would be published on a website and in the next year’s proxy. The company would pay the specified fee to that advisor. The voting could even be designed to hire more than one advisor, with a separate yes/no vote on each candidate. Advisor name brand reputation can make these voting decisions feasible without another level of paid voting advice. (see Proxy Voting Brand Competition, Journal of Investment Management, Vol. 5, No. 1, (2007).

7. Provide Full Public Disclosure of Votes as Tabulated

This is more of a technical fix, rather than a monumental reform that will bring in more individual investors but I thought I’d just stick it in here at the end of “how to’s” Bob might have discussed. Yair Listokin’s Management Always Wins the Close Ones highlights the need for open ballot counting.

Informational asymmetries between management and potential opponents should be mitigated by allowing anyone to obtain a real-time update of the voting. The status quo allows management to obtain frequent vote updates, while shareholder opponents of management often have no comparable knowledge. This allows management to win votes when underlying shareholder preferences are against a proposal because management can tailor its expenditures as needed; if management sees that it is well behind, it can undertake an extraordinary effort, while its opponents have no obvious way of responding. If all parties had the same knowledge about the likely outcome of the vote, then managerial opponents could respond and potentially neutralize management’s efforts to push the vote in a particular direction.

Obviously, anything we can do to make corporate elections less rigged will also help to bring shareowners out to vote. Why bother if the fix is in? My hope is that once shareowners get used to voting in their best interests in corporate elections, that behavior will also carry over to civic elections. Activists in either social institution will likely carry over to the other.

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