Of the 16 proxy access proposals filed by proponents in 2012 and listed on the ISS Checklist, eight are being challenged at the SEC. Ferro, Hewlett-Packard, Nabors Industries, CME Group, Pioneer Natural Resources, Staples and Charles Schwab have not sought no-action relief from proposals at the commission, according to data from ISS. Conversely, Bank of America, Chiquita Brands International, MEMC Electronic Materials, Sprint Nextel, Textron, Goldman Sachs, Western Union and Wells Fargo have asked the SEC for permission to omit the proposals. Continue Reading →
Tag Archives | CII
Reuters reports that “Chevron Corp. and eight other corporations were sued by shareholders on Tuesday for adopting a bylaw that requires common types of shareholder lawsuits be brought exclusively in Delaware’s Chancery Court.” Continue Reading →
Glyn Holton, the executive director of USPX, once again expresses his concerns over efforts by Broadridge Financial Solutions to make virtual meetings palatable to shareowners. I urge you to Continue Reading →
These are some relatively quick notes that I’m sharing from the Corporate Directors Forum 2012, held on the beautiful campus of the University of San Diego, January 22-24, 2012. This post may be a cryptic… not complete sentences bt hopefully mor intelligible thN txt msgN. Continue Reading →
Equilar, the leading provider of executive compensation benchmarking and research solutions, announced the release of its Pay-For-Performance Analytics suite yesterday, along with the fact that the Council of Institutional Investors (CII), whose members hold $3 trillion in assets, has signed on as the first client. According to the press release:
By combining an innovative market-based algorithm to identify peer companies with a realizable pay methodology using long Continue Reading →
I’m somewhat heartened by a recent CII announcement on access proposals:
We welcome the changes to Rule 14a-8(i)(8). We encourage Council members and other long-term shareowners to consider using this new tool in a focused and consistent manner that enhances the U.S. corporate governance model and Continue Reading →
A group of 43 House Democrats is urged the SEC to require public companies to disclose their political contributions. The Council of Institutional Investors also sent a comment letter on a petition (File Number 4-637) filed by prominent law professors.
Rep. Gary Ackerman (D., N.Y.) and 42 other House colleague argue the high court’s ruling in the case, Citizens United v. Federal Election Commission, was “misguided” and left shareholders “completely in the dark, unaware that their money could be funding political attack ads.”
Shareholders cannot hold corporate management accountable for decisions the shareholders never knew were made. The present system is undemocratic and untenable.
Shortly after the decision, Rep. Gary Ackerman (D-NY) introduced the Corporate Politics Transparency Act, which would require corporations Continue Reading →
The SEC will not challenge the decision of the U.S. Court of Appeals for the District of Columbia Circuit, No. 10-1305, which struck down the agency’s rule to make it easier for shareowners to nominate directors to corporate boards.
The announcement, made late on Tuesday by SEC Chairman Mary Schapiro, marks a major blow to large investor advocacy groups. In a statement, Schapiro said the SEC has no plans to seek a rehearing before the appeals court or a Supreme Court review. But she said she remains “committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.” (SEC will not seek rehearing on proxy access rule, 9/6/2011)
Given the composition of the DC Circuit and the Supreme Court, perhaps such an appeal would have had little chance. However, by letting the decision stand the SEC now faces a bad precedent. As a letter from the Council of Institutional Investors pointed out:
It is well-settled “that ‘a court is not to substitute Continue Reading →
I recently got this from an anonymous member (here are related thoughts from Cydney Posner and Marty Lipton):
You may have seen the stories regarding ISS’ recommendation that shareholders withhold against the entire Hewlett-Packard nominating committee for the way new directors were selected. I haven’t seen the ISS report, but the news stories (eg. WSJ article) probably describe it pretty well.
At issue seems to be the fact that five new directors of H-P were identified by an ad hoc committee, which according to H-P’s proxy statement “consisted of the CEO and three non-employee directors, which was formed in November 2010 to assist in identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors.”
ISS and Glass Lewis criticize the addition of the CEO to this committee, since only the independent directors of the Nominating and Governance Committee are supposed to responsible for director nominations. While CEOs play a role in nominations, it does seem unusual to formally include the CEO on the search committee. It likely also didn’t help that, as according to this Bloomberg article, many of the new directors had connections to the CEO. None of those relationships are disclosed in the proxy, as much of it relates to the CEO’s former company.
In additional soliciting materials filed on Friday, H-P responds to ISS’s recommendation. (How You Find New Directors: “True Independence” Under the Microscope – TheCorporateCounsel.net Blog, 3/14/2011)
Go to theCorporateCounsel.net/Blog article to read the links. I highly recommend the one by Cydney Posner. Personally, I come down on the side of ISS on this one, although their action might have been better with some warning. At least now other companies have it. Don’t involve your CEO in a search committee pre-screening candidates. And some people wonder why shareowners favor split chair/CEO positions and proxy access.
Taking a quick glance at CII corporate governance policies, the action at H-P appears to be at least an attempt to circumvent:
2.5 All-independent Board Committees: Companies should have audit, nominating and compensation committees, and all members of these committees should be independent. The board (not the CEO) should appoint the committee chairs and members…
7.2 Basic Definition of an Independent Director: An independent director is someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. Stated most simply, an independent director is a person whose directorship constitutes his or her only connection to the corporation.
Much more from J. Robert Brown Jr. on this subject at theRacetotheBottom.org under “The Myth of an Independent System for Nominating Directors” in several posts.
A major Web-based campaign to save the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) from the impact of proposed budget cuts will be launched at 1 p.m. Wednesday (February 16, 2011) by ShareOwners.org in cooperation with the Consumer Federation of America (CFA) and the Council of Institutional Investors (CII).
The U.S. House is currently looking to slash budgets of the SEC and CFTC, which would be forced to scale back operations and dismiss hundreds of employees at the same time they are seeking to implement pro-investor reforms mandated by the last Congress in the wake of the recent U.S. financial crisis.
The new campaign, spearheaded by ShareOwners.org, will mobilize small and large investors to get actively involved in urging Congress to avoid making cuts that would cripple the leading federal agencies responsible for ensuring that America’s financial markets operate in a fair and open fashion. The new effort by ShareOwners.org is one of a number of emerging pushes by a variety of important groups to protect investors and the integrity of the capital markets by shielding the SEC and CFTC against unwarranted budget cuts. (ShareOwners.org To Launch Major Campaign To Save SEC, CFTC in the Face of Budget Cut Proposals – FierceFinance)
News event speakers will be:
- Tracy Stewart, executive director, ShareOwners.org;
- Barbara Roper, director of investor protection, Consumer Federation of America; and
- Jeff Mahoney, general counsel, Council of Institutional Investors.
Phone-based news conference (with full, two-way Q&A) at 1 p.m. EST on Wednesday, February 16, 2011 by dialing 1 (800) 860-2442. Ask for “Save the SEC/CFTC Campaign” news event. A streaming audio replay of the news event will be available on the Shareowner’s Website as of 4 p.m. EST on February 16, 2011. Please join in this important effort to keep the SEC and CFTC strong. Regulations mean little, without enforcement.
The Council of Institutional Investors filed a brief strongly supporting the Securities and Exchange Commission’s (SEC) “proxy access” rule, rebutting claims of business groups seeking to overturn the rule.
The Council’s CII TIAA-CREF et al amicus brief 01-27-11, filed with TIAA-CREF and 14 other pension funds, was submitted January 27 in the U.S. Court of Appeals for the D.C. Circuit, in Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission.
“Proxy access will make companies more responsive to their shareowners and more vigilant in their oversight of management,” said Ann Yerger, executive director of the Council of Institutional Investors, an association of public, union and corporate pension funds with combined assets in excess of $3 trillion. “This basic shareowner right is widely accepted in many countries. U.S. investors deserve this same, fundamental protection.”
Proxy access gives shareowners a meaningful voice in corporate board elections by letting them place their nominees for director on the company’s proxy card when they are dissatisfied with the board and want to run their own candidates. This allows investors to avoid the often-prohibitive cost of distributing their own proxy materials to other shareowners. The SEC last August approved a rule granting certain long-term investors proxy access at U.S. public companies. But the rule was not put into effect because of the Business Roundtable-Chamber lawsuit.
The Council’s brief argues that the benefits of proxy access far outweigh the costs, citing enhanced communication between investors and management in countries where proxy access is permitted. The increased dialogue “keeps directors in touch with market sentiment which strengthens board independence, reduces risk surprises and improves corporate governance,” the Council and pension funds contend. The brief also dismisses business claims that the proxy access rule will saddle corporate boards with special-interest nominees
See also, CalPERSattachment-CIIpublicationEqualAccess (an attachment to a CalPERS Board meeting agenda from years ago).
Boardmember.com is a great source for corporate governance videos every week. TK Kerstetter, President, Corporate Board Member does a good job with his interviews, such as the 11/11/2010 one with Thomas Quaadman, VP, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce. (This Week in the Boardroom – 11/11/10 – Boardmember.com) However, the guests and chatter too frequently reveal a bias towards management.
Directors are elected by shareowners, yet on This Week in the Boardroom we are much more likely to hear from the Chamber of Commerce than from the Council of Institutional Investors. Isn’t it about time than shareowners had access to the boardroom? Access to the proxy has been delayed. That’s no reason to delay access to this important weekly news show.
See also Corporate Board Member’s recent discussion with Brian Cartwright, former general counsel of the Securities and Exchange Commission and senior advisor, Latham & Watkins LLP, about the 2011 proxy season and what boards can do to prepare for the possible passage of proxy access. (Talking Points: Proxy Access Stalled But Still Important for Boards to Consider)
The SEC placed proxy access on hold and will ask the U.S. Court of Appeals for the District of Columbia for an “expedited review” of a legal challenge by the U.S. Chamber of Commerce and the Business Roundtable, according to a legal order posted on the agency’s website today. The move means rules allowing shareholders to nominate directors on corporate ballots won’t take effect Nov. 15 as planned. (SEC Delays Rules Easing Ouster of Directors Amid Review of Legal Challenge, Bloomberg, 10/4/10)
According to the SEC filing:
The Commission has discretion to grant a stay of its rules pending judicial review if it finds that “justice so requires.”…
the Commission has determined to exercise its discretion to stay Rule 14a-11 and related amendments to the Commission’s rules, including the amendment to Rule 14a-8, pending resolution of petitioners’ petition for review by the Court of Appeals.
The Commission finds that, under all of the circumstances of this matter, a stay of Rule 14a-11 and related rule amendments is consistent with what justice requires. Among other things, a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity. Because the Commission and petitioners will seek expedited review of petitioners’ challenge, questions about the rules’ validity will be resolved as quickly as possible.
The Commission further finds that, under all of the circumstances of this matter, it is consistent with what justice requires to stay the effectiveness of the amendment to Rule 14a-8 adopted contemporaneously with Rule 14a-11 because the amendment to Rule 14a- 8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.
Accordingly, it is ORDERED, pursuant to Exchange Act Section 25(c)(2) and Administrative Procedure Act Section 705, that the motion of petitioners filed on September 29, 2010 for a stay of the effect of Commission Rule 14a-11 and related amendments pending resolution of petitioners’ petition for review by the Court of Appeals be, and hereby is, granted; and it is further
ORDERED, pursuant to Exchange Act Section 25(c)(2) and Administrative Procedure Act Section 705, that the amendment to Commission Rule 14a-8 adopted on August 25, 2010 is stayed pending resolution of petitioners’ petition for review by the Court of Appeals.
“While we are disappointed in the delay, it is not the end of the world,” said Amy Borrus, deputy director of the Council of Institutional Investors. “The Council and concerned investors have pressed for years for this basic shareowner right. A few more months’ wait will not make a big difference. Given the timing of the rule approval and publication in the Federal Register, it was already a stretch for active investors to use access in the 2011 proxy season. We look forward to expedited resolution of this case because of the cloud of uncertainty hanging over the rules as a result of the litigation. We continue to believe that access to the proxy is a fundamental shareowner right and that it will make boards of U.S. public companies more responsive to shareowners and more diligent in their oversight of management.” (The SEC Puts Proxy Access Rule on Hold, RMG Blog, 10/4/10)
As one who petitioned for proxy access in 2002, this delay looks appropriate for 14a-11 filings and, I suppose, 14a-8 resolutions also must be stayed because 14a-11 becomes the floor. Hopefully, we will have a clear route to access before the 2012 proxy season. I’m glad I didn’t spend a lot of time working on language for 14a-8 resolutions.
Steven Towns, writing for Seeking Alpha (Questioning Symantec’s ‘Virtual’ Shareholder Meetings, 9/20/2010) joined CII, CalSTRS, CalPERS, USPX and others in objecting to an all virtual meeting held buy Symantec. This follows up on Ted Allen’s September 16, 2010 article for RiskMetrics, Investors Object to Symantec’s Virtual Annual Meeting, my post of September 7, 2010 (also on Shareowners.org) and USPX’s page of resources on the issue with copies of letters sent.
Bruce Herbert of Newground Social Investment tuned in to the meeting and apparently found it frustrating. I’ll give it a few days to see if anyone else in the press reports on the virtual-only meeting or maybe Herbert will blog about it. If not, I’ll give Symantec at least one more post. I urge all readers and all funds to write to Ms. Corcos of Symantec protesting the virtual-only meeting. Please cc USPX. See this USPX page for sample letters.
In an e-mail to me and others, Corcos indicated “Symantec received a Low Concern rating on each of the four categories that RMG evaluates: Board Structure, Compensation, Shareholder Rights and Audit.” Maybe RMG also needs to hear from shareowners.
Corcos goes on to say: “If stockholders preferences change, we will reconsider hybrid models for future meetings.” I take that to mean, if enough protest they will switch to a hybrid model. Shareowners should keep bombarding them with letters and e-mails until they publicly announce next year’s meeting will be a hybrid one. That will deter other companies from moving to virtual-only meetings.
Gary Lutin’s Shareholder Forum has done a great deal to date trying to come to grips with the various issues through his leadership and that of Avital Louria Hahn. I anticipate USPX, which intends to hold additional ongoing forums on the topic, will build on their work and extend it, developing a broad consensus among shareowners of best practices.
The Council of Institutional Investors published an independent assessment of client directed voting, a topic that is under consideration by the Securities and Exchange Commission (SEC) as part of its wide-ranging review of the U.S. proxy system.
The paper was written by Alan Beller, Janet Fisher and Rebecca Tabb of the law firm Cleary Gottlieb Steen & Hamilton. While the paper will inform the comment letter that the Council plans to submit to the SEC on its concept release on the proxy system, it is an independent study and does not necessarily reflect the views of the Council or its members. The white paper on client directed voting is posted here on the Publications page of the Council’s Web site.
I gave it a quick read. At least they clearly see the danger in a likely reversion back to broker votes if going with the proposal from Stephen Norman. I don’t see much likelihood of support for changes that will help fund vehicles leading to more informed voting and I’m not real happy with the characterization of a single page from Broadridge being labeled “The most advanced thinking.” (page 6)
The report gives voting in elections substantially more force than voting in the market by buying or selling shares. I’m not sure that’s true.
Disclosure and conflicts of interest would appear to be issues that need to be addressed as we discuss in Part IV. Second, if an investor who has not made informed investment decisions (or whose agent does not) loses money, other investors and the company generally do not suffer the consequences. The same may not be true in the exercise of voting rights insofar as a substantial uninformed vote (or misinformed vote, if the voting mechanism failed to protect against fraud or conflicts of interest) can influence the outcome of a ballot item. (page 9)
Interesting discussion of Rules 14a-1 and -2. Looks to me like changes are needed. According to the report, “A robust CDV model is likely to have a long gestation period.” Better to leave it alone while systems build than to implement a closed system with limited options. See An Open Proposal for Client Directed Voting, HLS Forum CorpGov & FinReg, 7/14/10 and Investor Group Releases Paper on Client-Directed Voting, RMG, Ted Allen, 9/1/10.
SEC Set to Open Up Proxy Process (WSJ, 8/5/10) As reported last week, the meeting is apparently scheduled for August 25.
Under the language being drafted, shareholders would have to own a 3% stake in a company for at least two years to qualify.
As I write this, the SEC still has not confirmed the August 25th meeting date. However, I did spot this August 3rd letter from CII, which reiterates their position that access be based on
at least three percent of a company’s voting stock, to nominate less than a majority of the directors. Eligible investors must have owned the stock for at least two years.
The SEC appears to be endorsing the 3% threshold and 2 year holding requirement of CII. While it isn’t clear how the SEC’s final rule will handle proxy access at small companies, in my opinion that is where it is most needed.
Mercer’s Responsible Investment Newsletter (June 15, 2010) outlines preliminary results of integrating ESG analysis into global equity portfolios.
Our analysis of the beta of ESG integration has so far been quite positive – ESG factors are material and integrating these factors into investment decision-making can reduce investment risk without sacrificing return…
Initial analysis on adding alpha to a global equity portfolio through a tilt towards sustainable themes, indicates the following:
- A portfolio with a tilt towards sustainable themes has a higher risk/reward ratio versus a broad market index, but has mixed results when versus a comparable themed index.
- In the sustainable themed space, the risk of bubbles and strategies’ short track records make manager selection key.
- The themes of renewable energy and water so far show strong return potential versus the broader market.
The Newsletter also addressed the fatalism of many investors, including large funds, who doubt their proxy vote can make a difference, providing several examples to refute that assertion. Even if you are not ready to take the plunge into “active” ownership, Mercer argues an interim step, “informed” ownership. “This could be defined simply as being satisfied, through due diligence, that votes are being cast in the best long-term interests of the end client or owner.”
Of course, Mercer offers due diligence on investment managers, including evaluation of resources and processes dedicated to proxy voting and ESG issues. They also cite membership organizations, such as the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility and the UN’s Principles for Responsible Investment.
Around the world, institutional investors work hard to achieve the best long-term returns for their clients, participants or beneficiaries. We believe that voting and constructive engagement with companies and peer organizations can help mitigate company specific risks for which investors may not be compensated. There is also reason to believe that more shareholder participation over time can raise the bar for corporate governance in the broader market and improve beta. If your organization agrees with these arguments, then voting and engagement may be a low cost way to help achieve these results.
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:
- Adapt, Don’t Just Adopt. Don’t just extend your existing model, use Web 2.0 for engagement/dialogue to enhance accountability.
- Cultivate Participation. Build community and technology in parallel; don’t assume if you build it, they will come.
- 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.
- Foster Mutual Accountability. Model self-accountability, when asking other parties to hold themselves accountable, to create a culture of mutual accountability.
- 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.
- 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.
- 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
- Obtain useful information necessary to make activism decisions;
- Commit staff time to implementing an activism strategy;
- Adopt proxy voting guidelines that follow or improve upon a recognized corporate governance framework (see those of CII and CalPERS, for an example);
- 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;
- 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;
- Adopt a process to handle “No” votes on directors;
- Provide for an override mechanism so the fund can vote individual proxies on a case-by-case basis, even if voting is otherwise delegated;
- Factor into share lending practices a mechanism to retain voting rights on a targeted basis;
- 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;
- Disclose the fund’s proxy voting guidelines on the web site, or alternatively on CII or other web site;
- Go public with issues or views on proxy votes through press releases, Twitter, a blog or other mechanisms that move toward 2.o;
- Withhold votes from directors of specific companies and/or committees;
- 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;
- 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;
- 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;
- Monitor the discretionary voting by investment managers of shares held for other clients to ensure alignment;
- File binding and/or precatory shareowner proposals… foster mutual accountability by modeling self-accountability before introducing proposals that are also applicable to fund governance;
- Solicit support (not proxies) for shareowner proposals or opposition to management proposals;
- 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;
- Use contract provisions based on standards of behavior to ensure that financial advisors are responsive to corporate governance principles;
- Employ managers and investment consultants who build shareowner value by emphasizing corporate governance reforms as part of their investment strategy;
- 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);
- Work with CII members and others to develop a backbench of potential director candidates with a wide variety of skill sets;
- Disclose proxy votes in advance of AGMs on web site, through RSS feeds, ProxyDemocracy.org, MoxyVote.com, and other such sites as the develop;
- 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;
- 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;
- Use Twitter and/or a blog to broadcast votes and invite discussion, especially from stakeholders;
- Build communities around fund activism that will provide feedback, identifying success and flagging problems;
- Run a short slate of directors;
- 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
- 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;
- 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.);
- 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.
Expanded Activism Practices
The Council of Institutional Investors wants your horror stories on barriers to annual shareowner meeting attendance. We’ve been hearing that companies seem to be making investors jump through more and more hoops to attend annual meetings. If you have any horror stories that will help Council staff identify and discourage unreasonable barriers to attending annual shareowner meetings, please notify Council staffer Justin Levis.
Nell Minow told a recent audience, MAXXAM once “moved their annual meeting from Houston, a city you can fly to, to a small city in Texas, Huntsville, that is impossible to reach. They also set the meeting for 8 in the morning and bought up all of the hotel rooms in town. And then they had the chutzpah to put in the proxy, ‘We look forward to seeing as many of you as possible at the annual meeting.'” John Chevedden tells me that some serous shareowners actually rented a motor home in order to attend the MAXXAM meeting.
Your story doesn’t have to be that bad to be worthy of passing on to CII. Of course, I’d appreciate letting our readers know about them too.
“Bank of America persuaded the SEC to drop “proxy access” provision as they negotiated a $150 million settlement of a lawsuit tied to the takeover of Merrill Lynch & Co… The U.S. Chamber of Commerce, which represents more than 3 million companies, has said “activist shareholders” would use proxy access to hijack elections to pursue “political or social issues.”” (SEC Said to Push BofA Proxy Rule in Enforcement Case, Bloomberg.com, 2/18/10) “SOX substantially beefed up the obligations of the audit committee, at least for Exchange traded companies. See Section 301 of SOX. The committee was given the direct authority to supervise and to hire/fire the outside auditor. The committee was also given the authority to hire counsel without full board approval.” “In the proposed settlement with BofA, the SEC is seeking to augment the authority of the audit committee one more time. The Commission is giving to the audit committee (not the full board) the authority to hire counsel. Counsel must not only review filings but must discuss possible deficiencies with the audit committee in executive session, without the presence of the non-indpendent directors. The latter restriction is significant.” (The Board of Directors and a Review of Corporate Disclosure, theRacetotheBottom.org, 2/17/10)
Interesting, Bloomberg failed to get the Chamber’s new line. “Late last month, for the first time in more than a decade, the US Chamber of Commerce changed the boilerplate language that appears at the bottom of its press releases. The nation’s largest business lobby no longer claims to be “representing more than 3 million businesses and organizations of every size, sector, and region.” Instead, it claims to be “representing the interests of more than 3 million businesses” (emphasis added). The smallness of the tweak masks its major significance: Representing somebody, which strongly implies a direct relationship, is very different from representing their interests. The Chamber is in effect acknowleging that the “3 million” businesses aren’t actually its members… It was forced to admit that its true membership isn’t the 3 million businesses that it has claimed, but something on the order of 300,000.” (Chamber of Commerce No Longer “Represents” 3 Million Businesses, Mother Jones, 2/12/10)
I guess we at CorpGov.net should be claiming to represent the interests of the approximately 100 million Americans who own stocks or mutual funds… but why stop at Americans, since we occasionally cover corporate governance issues in other countries as well?
Apple, lags industry peers on sustainability reporting and has not made public greenhouse gas reduction commitments. Apple shareowners are beginning to vote their proxies on Moxy Vote, based on recommendations from Calvert Investments to support a resolution on on sustainability reporting. (Is Apple green enough?, Mac News) The problem is there is another proposal seeking a bylaw requiring a board committee on sustainability… and there are all those directors to vote for or against. While I love Moxy Vote and own Apple stock, at this point, in Beta form, I’m disappointed the site has no one to advise me on how to vote the other issues or on the directors. So, I turn to ProxyDemocracy.org and even they have collected no votes in advance of the 2/25/10 meeting from “ten institutional investors that are particularly engaged in corporate governance.” I’ll wait until next week to vote.
Eric Jackson does a nice job interviewing John Gillespie and David Zweig, co-authors of “Money for Nothing.” Gillespie says we won’t have real change until the old players like Bernanke, Geithner and Summers leave. Zweig says, “corporate governance needs a new name to encourage change, maybe corporate democracy.” (Corporate Governance Role in Meltdown, TheStreet.com, 2/17/10) See my review under the heading Fix the Boards – Fix the System. Buy the book.
“Advocates of genocide-free investing won another important victory this week, when American Funds, a family of mutual funds with more than $775 billion in investments, decided to divest virtually all its holdings in PetroChina. Before a shareowner meeting held on November 24, American Funds owned 167 million shares in PetroChina, worth $190 million.” “Investors Against Genocide advanced a resolution asking that the Board of American Funds “institute procedures to prevent holding investments in companies that…substantially contribute to genocide or crimes against humanity.” American Funds opposed the measure, and affirmative votes for the proposal ranged from 8.5% to 11.8% at the meeting.” (American Funds Sells PetroChina Holdings, SocialFunds.com, 2/18/10) The showing on their resolution would have probably been much higher had voting instructions issued by Broadridge actually complied with the requirements for proxies to clearly indicate the voting topic instead of simply referencing “a shareholder proposal described in the proxy statement.” Broadridge could get away with it because that the language the issuer wanted and since Broadridge uses a voter information form, they don’t feel they are bound by SEC requirements that apply to proxies. (see our coverage of that issue at Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.
Corporate governance advisory firm PIRC made history again. In January 2009 they took a radical step, and began publicly disclosing via their website the voting recommendations they make for company meetings. Now they have set out have set out six best practice principles for corporate governance advisors, as follows:
- Clear voting policy guidelines should be made available to clients, the companies whom the adviser is monitoring and to the market;
- Clear audit trail and explanation of the process for assessing companies and making voting recommendations should be available to clients and the companies monitored;
- Possible conflicts of interest should be disclosed to clients and to companies monitored and, where necessary, to market regulators (i.e. paid consulting with companies);
- Companies monitored should be given reasonable opportunity to comment on voting recommendations made and the basis of such recommendations;
- Voting agencies should routinely report to clients on actions taken on their behalf;
- All voting recommendations made by a voting adviser should be publicly disclosed post-meeting. (Corporate governance agencies: the need for transparent voting decisions by Tom Powdrill on Responsible Investor, 2/18/10)
The Securities and Exchange Commission Investor Advisory Committee will meet in DC on February 22 at 9 a.m. The agenda for the meeting includes consideration of a Committee recusal policy, a report from the Education Subcommittee, including a presentation on the National Financial Capability Survey, a report from the Investor as Purchaser Subcommittee, including a discussion of fiduciary duty and mandatory arbitration, a report from the Investor as Owner Subcommittee, including recommendations for the Committee on Regulation FD and proxy voting transparency, as well as reports on a work plan for environmental, social, and governance disclosure and on financial reform legislation, and discussion of next steps and closing comments. I’ll be tuning into the webcast if time permits.
The Conference Board issued a new report, Directors’ Duties under the New SEC Rules on Disclosure Enhancement, available to members. From my quick review, the report appears comprehensive but written clearly and in an easy to understand format. Highly recommended for directors, their advisors and monitors. Additionally, the SEC posted six new Compliance and Disclosure Interpretations 116.07, 117.05; 119.21, 119.22 and 119.23, which offer guidance on disclosure under Items 401, 402(a), and Item 402(c) of Regulation S-K. Staff also added new question 121A.01 related to Exchange Act Form 8-K, which explains calculation of the four-business day filing period for disclosing the results of a shareholder vote. See also guidance on the new requirements from Compliance Week issued in January and December as well as the original rule. Additional guidance from the Altman Group, Walking the Tightrope – New Proxy Disclosures on Director Qualifications, Board Risk Oversight and Board Diversity – and new Climate Change Disclosures for the 10K.
The Corporate Library’s ‘2010 Proxy Season Foresights #3: The Growth of Clawback Provisions, ($15) found that the number of companies with clawback provisions continued to increase in 2009, and almost half of such companies are smaller-cap firms outside the Russell 1000.
The Centre for Corporate Governance Research (CCGR) is organising its 8th International Corporate Governance Conference on Wednesday 23rd June 2010, to be held at the University of Birmingham, UK. The theme of the conference is ‘Corporate Governance and Sustainability’. Keynote speakers include Colin Melvin (Chief Executive, Hermes Equity Ownership Services Ltd), Dr Michael Blowfield (University of Oxford) and Dr Beate Sjåfjell (University of Oslo). Sir Adrian Cadbury, the CCGR’s External Advisor, will be attending the event. Papers are invited on issues relating to any area of corporate governance and sustainability. Papers should be sent as an electronic copy in PDF format, by 31st March 2010 to Karen Hanson.
Moxy Vote is running a series, Here’s to the many pioneers!, Part 1 includes yours truly, Jim McRitchie, along with Mark Latham, Andy Eggers and Matt Keenan. Part 2 will include Glyn Holton, Nell Minow, and the Social Investment Forum. I’m blushing to be in such company. Thanks to Mark Schlegal and to all the fine work at Moxy Vote for facilitating involvement by retail investors and providing advocates such an important pipeline of influence.
The Council of Institutional Investors (CII) published a White Paper, The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting, authored by Alan Beller and Janet Fisher of the law firm Cleary Gottlieb Steen & Hamilton LLP. Mr. Beller is a former Director of the SEC’s Division of Corporation Finance. From the Executive Summary:
The SEC is likely to be cautious in seeking to change the current framework in significant ways, at least in the near term. Defining the objective is critical to developing a proposal. If the goal is to increase the ability of shareowners and companies to communicate directly, a number of incremental steps may be taken to address the OBO/NOBO distinction and facilitate direct distribution of proxy materials, without discarding the current distribution platform. Such an approach could lead to meaningful improvements, without seriously affecting the interests of many of the participants in the current framework, and we believe it has a greater chance of widespread support than more radical alternatives… On balance, we believe that the immediate interest of shareowners and companies in better communications would be better and more effectively served with an incremental approach that promotes less reliance on — or eliminates altogether — the OBO/NOBO distinction and otherwise increases the potential for direct communications.
Shareowner organizations are working together to advance a three-pronged response to the last month’s U.S. Supreme Court decision providing much greater latitude to corporations making campaign contributions:
- Direct engagement of management at publicly traded companies, modeled on the work done by Bruce Freed at the Center for Political Accountability and a number of institutional shareholders, as well as under the guidelines of the Council of Institutional Investors (CII). That engagement through shareholder resolutions and one-on-one company “dialogues” typically involves (1) disclosure of a company’s soft money contributions, payments to trade associations and other tax exempt organizations used for political purposes, and grassroots lobbying expenditures; (2) disclosure of a company’s policies and procedures for political contributions and expenditures; (3) identification of persons participating in decision-making on the contributions and expenditures, and (4) board oversight of the company’s political contributions and expenditures.
- Outreach to the Securities and Exchange Commission (SEC), through both the Investor Advisory Committee and a direct petition requesting SEC rulemaking in this area.
- A letter to Congress from the shareholder community asking lawmakers to ensure that shareholders have all tools they need to ensure that decisions about political spending by public companies does not erode shareholder value and the long term sustainability of the company.
More information available at ShareOwners.org. Can shareowners wrench control over the corporations they own before managers consolidate their already often dominate positions over boards and Congress? Will company funds pour into political campaigns that benefit a broad base of long-term shareowners whose interests are closely aligned with that of the whole nation, or will they be used to reinforce a greedy few?
Robert A.G. Monks said: “The bad news is that Citizens United represents the worst judicial decision since Dred Scott; the good news is that the Supreme Court of the United States has held that there is such a thing as corporate democracy. Now is the time for shareholders to put that democracy to work to protect their own interests against boards that may want to ‘play politics’ and have no clue as to how to do so without devaluing their companies.”
The SEC is considering a proposal to rescind an exemption that would cause Nationally Recognized Statistical Rating Organizations to be included in the liability scheme for experts set forth in Section 11, as is currently the case for credit rating agencies that are not NRSROs.
NRSROs “have generally escaped accountability for their shoddy performance and poorly managed conflicts of interest, at least in part because of their statutory exemption from liability. Rule 436(g) shields only those few rating agencies designated as NRSROs from liability as experts for making untrue or misleading statements when their ratings are included in registration statements,” according to the Council of Institutional Investors.
CII believes effective reform of the credit ratings industry hinges on the following steps:
- Enhanced SEC oversight
- Reduced reliance on ratings by all market participants
- Strengthened internal controls of NRSROs
- Expanded transparency of credit ratings
- Heightened standards of accountability for NRSROs
See CII’s letter to the SEC in support of Concept Release on Possible Rescission of Rule 436(g) Under the Securities Act (File Number: S7-25-09) (see also Concept Release No. 33-9071A). SEC Fact Sheet. Speech by Commissioner Luis A. Aguilar.
Intel Corp. recently announced they will no longer hold annual shareholder meetings. Instead, they plan to host shareholder forums, or “virtual shareholder meetings.” In 2000, Delaware enacted legislation allowing corporations to do exactly this. Arrogantly, that state’s legislators granted shareholders no say in the matter, leaving the decision solely to the discretion of corporation’s entrenched boards.
There is every reason to believe that, with strong safeguards, virtual shareholder meetings could enhance shareholder participation in meetings while protecting—even restoring—shareholder rights that have atrophied over the decades. However, no such safeguards are in place. Intel and other smaller corporations are taking a go-it-alone approach, forcing virtual shareholder meetings on unhappy shareholders. After Delaware changed its laws, the Council of Institutional Investors wrote the CEOs of all Delaware corporations asking them not to conduct virtual meetings. Unions have expressed concerns. Walden Asset Management has encouraged shareholders to write letters to Intel.
Here are just a few scenarios illustrating how virtual meetings will deprive shareholders:
- A well known shareholder activist plans to ask some pointed questions at the shareholder meeting, but his connection to the meeting somehow fails. He is left wondering if he was targeted or if there truly was an honest technical problem.
- A shareholder wants to challenge the chair’s conduct of the meeting with a point of order. She is within her rights to do so and may interrupt the chair for this purpose, but she finds that the electronic forum software won’t allow her to do so ….. one more shareholder right lost.
- A shareholder wants to make a floor amendment, but the software doesn’t allow that either.
- The meeting software provides no means of group communication, such as applause of booing, so shareholders come away from meetings with no sense of how other shareholders felt.
- Corporate executives decide to pre-record their comments for a virtual shareholder meeting, including answers to pre-selected “shareholder questions.” The executives then don’t bother logging in during the actual “meeting.”
Most annual meetings are heavily scripted. The chance for real interaction often comes in informal encounters before and after the formal meeting. Those opportunities will also be gone with virtual meetings.
Shareholders have been discussing what might be an appropriate response to Intel’s move, but there are few attractive options. The SEC will not intervene to preempt a Delaware law. We could launch a withhold vote campaign against the directors of Intel and other corporations that host electronic-only meetings. That would entail participating in—and thereby accepting as legitimate—the virtual meetings.
We reject Delaware’s law in the same way abolitionists rejected the Supreme Court’s Dred Scott decision in 1857. A corporation that doesn’t hold shareholder meetings is dead in the same way that a human being that doesn’t breathe is dead. Putting up a website and calling it a “meeting” doesn’t change that.
This is a crisis because the problem is going to spread. Working with Jim McRitchie of CorpGov.netand other interested parties, the United States Proxy Exchange (USPX) is exploring whether to launch a withhold proxy campaign against Intel and other corporations that adopt electronic-only meetings. Under such a campaign, shareholders would refuse to participate in those “meetings” on the grounds that they are illegitimate. Shareholders would withhold their proxies. If enough did so, offending corporations would fail to achieve quorum. Because retail brokers will vote “routine” matters, such as management sponsored resolutions, it won’t be enough for investors to not return their proxy materials. They will have to explicitly ask their broker to withhold a proxy on their behalf.
If we decide to proceed with a withhold proxy campaign, we will implement a web portal through which institutional and retail shareholders may join the campaign and coordinate their activities. At this early stage, please e-mail Glyn Holton to express support or ask questions. We will then keep you informed of developments.
Note from CorpGov.net publisher: See also virtual meetings Virtual Shareholder Meetings by Elizabeth Boros. The USPX aims to be a chamber of commerce, representing the legitimate interests of shareholders and is in the process of getting 501(c)(6) status with the Internal Revenue Code. The board set dues at $9 a month. Membership benefits include advocacy, web-based resources, and a magazine to be launched this Spring. Step up to the plate and e-mail Glyn Holton to become a member.
Yippee-i-o-ki-ay! From the conference flyer, I half expected Will Pryor, Director of the IAFF Local 1014 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.
The fist panel was composed of Bill McGrew of CalPERS, Ann Sheehan of CalSTRS (left), and John Wilson of TIAA-CREF, moderated 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.
This was a short session with two panelists: Ann Yeger of CII (below, right) and Allen MacDougal of PIRC, moderated 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:
- 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 Government, 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.
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 the 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.
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.”
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 Responsibility. “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 final 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
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.
- What Will TARP Bring? (RMG, 11/24/08), see especially comments from Connecticut State Treasurer Denise Nappier
- Issues to Consider: Special Meetings to Authorize TARP Preferred Stock(TheCorporateCounsel.net Blog, 11/25/08). Most companies don’t have the authority to issue preferred shares under their charter and are scrambling to file preliminary proxy materials for a special meeting to obtain shareholder approval.
- CII letter re: Executive compensation provisions of the Troubled Assets Relief Program’s (TARP) Capital Purchase Program (CPP) Importantly, CEOs should hold a “significant portion of their equity-based compensation for a period beyond their tenure.”
- RiskMetrics Group Releases 2009 Proxy Voting Policies. Policies available through their Policy Gateway. Sign up for their December 4, 1:00 p.m. EST webcast to review 2009 policy updates.
- Tweaks: Now showing management positions on upcoming meeting. ProxyDemocracy also hints at “a new voting service.”
Where Were the Directors?
Citigroup Saw No Red Flags Even as It Made Bolder Bets (NYTimes, 11/22/08) provides a good look at how one bank faltered. Was the board just stupid? No, says MIT’s Michael Schrage, “it’s NOT stupidity; it’s the absence of rigor and skepticism combined with incentive systems that encouraged people to ‘cheat’ on their risk assessment… again, people are entitled to be ‘wrong’ – they are not entitled to say that it’s OK to make $100 billion bets [loans/securitization, etc.] based on models that don’t allow real estate prices to go down… or worse yet, assume historical ‘default rates’ for people who have literally put nothing down on their ‘homes.’ At least one or two directors should be asking: how is our exposure hedged? Where were those questions? Will it take another round of shareholder suits to get answers? Sad… and (even worse) unprofessional.”
Being a director in these difficult times has obviously gotten less attractive. Not only are they now expected to ask those “difficult” questions, they also need to meet more frequently. “So far this year, 46 outside directors who are CEOs or chief financial officers left the boards of 42 companies in three struggling industries — financial services, retail and residential construction — concludes an analysis for The Wall Street Journal by Corporate Library in Portland, Maine… The departures come as CEOs had already been trimming their outside board commitments. CEOs of Standard & Poor’s 500 companies held an average of 0.7 outside directorships this year, down from one in 2003, according to recruiters Spencer Stuart.” (As Firms Flounder, Directors Quit, WSJ, 11/24/08)
Fully half of the California’s 400 largest public companies have no women in top executive positions. Just over 3% of the state’s CEOs are women. One bright spot, “Women occupied 10 percent of board seats, up from 9.4 percent in 2007 and 8.8 percent in 2006.” (UC Davis study: Women still lag in holding top business posts, SacBee, 11/24/08)
Eliot L. Spitzer, former governor of New York and state attorney general from 1999-2006, offers his recommendations for revitalizing corporate governance and the market in Capitalism’s beneficiaries must compete in reworked market. (Newsday, 11/24/08)
RiskMetrics Group says will advise investors to withhold votes from corporate directors who approve tax “gross-ups” to cover executives perks. “A 1984 law imposed a special 20% tax when such packages exceed a certain limit. But many companies agree to pay the taxes — often at huge cost.” (Proxy Firm Targets Practice of Paying Executives’ Tax Bills, WSJ, 11/24/08)
“CEOs of large U.S. corporations averaged $10.8 million in total compensation in 2006, more than 364 times the pay of the average U.S. worker, according to the latest survey by United for a Fair Economy.” Peter Drucker suggested “CEO salaries should be a maximum of 20 times the salary of the lowest paid worker.” Haruka Nishimatsu, CEO of Japan Air Lines, gets $90,000 annual salary to run one of the worlds top 10 airlines. Bob Selden argues 20 is the magic number (Management-Issues, 11/21/08) with several bonus possibilities based on 20.
CalSTRS CEO Jack Ehnes has joined the board of Ceres, a national network of investors and environmental organizations. “Joining the Ceres board is a natural fit for CalSTRS. We’ve a history of considering climate change and other risks in assessing investment opportunities,” Ehnes said. “Together, we will move sustainability principles more prominently into the investment equation, for the good of the planet and the bottom line.” (press release, 11/21/08)
In the 20 years of publishing an annual list of the 10 Worst Corporations of the year, this year’s group is “in many ways, emblematic of the worst of the corporate-dominated political and economic system that we aim to expose with our annual 10 Worst list.” (The 10 Worst Corporations of 2008, Robert Weissman, Multinational Monitor, 11/24/08.
Behind the first tsunami wave, there may be another on the way which is potentially more lethal. $55 trillion in credit derivatives built around $16 to $17 billion of corporate debt. Yet, Vince Cable MP, Liberal Democrat Shadow Chance, says “These staggering figures – many times the size of the world economy – are less overpowering than they appear since most institutions have hedged any exposure they have to credit derivatives… There will have to be a strengthening and redefinition of multilateral bodies if we are to steer clear of the beggar-my-neighbour, nationalistic, economics which helped to turn the global financial crash of the inter-war period into a major slump. Whether or not this process is christened Bretton Woods II is less important than a recognition that there have to be strong, respected, multilateral rules and institutions. (Strengthen our systems of global governance, eGov Monitor, 11/24/08)
The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing provides additional evidence that shareowner activism works. They examined the economic consequences of more than 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004.
Targeted firms were more likely to adopt ESO expensing relative to a control sample of S&P 500 firms, particularly when the proposals received a high degree of voting support. Non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted by an ESO expensing shareholder proposal, suggesting the presence of spillover effects of this shareholder initiative.
Targeted firms also experienced a decrease in the level of CEO compensation relative to a control sample of S&P 500 firms.
Guide for Pension Turbulence
A new guide from the Principal Financial Group offers advice to employers reviewing the their retirement programs. Navigating Your Way through Market Turbulence takes a look at how the market volatility may be affecting four retirement plan types: defined benefit, defined contribution, Employee Stock Ownership, and nonqualified deferred compensation. (Principal Guide Outlines a Course, PlanSponsor.com, 11/18/08) Elsewhere, PlanSponsor.com noted that stock investments of state and local government retirement systems have declined 35% so far this year. I’m sure it is more by now.
The Corporate Library’s latest report, “The Corporate Library’s Preliminary 2008 Director Pay Survey” finds:
- S&P 500 index companies spent an average of more than $2 million on board compensation last year
- the median increase in total board compensation was just under 11%;
- the median increase in compensation for individual directors was almost 12%, the third year of double-digit increases for directors and boards, though the rate of increase appears to have slowed;
- median total board compensation for the S&P 500 is over $2,000,000; and
- median total compensation for individual directors of S&P 500 companies is just under $200,000.
The report is available for $45.00 at The Corporate Library’s online store. See also S&P 500 Cos’ Median Board Compensation Rises 11% – Survey, CNNMoney.com, 11/19/08)
Executive Compensation and Coming Targets
As Dave Lynn notes, the first issue of the new quarterly “Proxy Disclosure Updates” Newsletter, free for all those that try a no-risk trial to Lynn, Romanek and Borges’ The Executive Compensation Disclosure Treatise & Reporting Guide, has now been posted. The first issue focuses on key new disclosures all companies will need to address in the wake of the Emergency Economic Stabilization Act of 2008 (EESA) and other regulatory responses to the crisis. (Your Upcoming Proxy Disclosures – The EESA Effect, TheCorporateCounsel.net Blog, 11/20/08)
Bonuses and Layoffs
Of note, companies that participate in the various relief programs administered by Treasury (hundreds are expected), that pay bonuses to CEOs or NEOs, and have laid off employees during the year will need to disclose in their CD&As whether the bonus formula would have been met without the cost savings from the layoffs. If they can’t show the bonuses resulted from real growth and they are essentially paying bonuses “on the backs of fired employees,” not only will their CD&A be deficient, they will soon be facing outrage from their shareowners and the general public. The newsletter says, “we expect that, at many companies, CEOs and other executives will forgo their bonuses this year.” Look for companies that did pay bonuses and that laid off employees to be targeted from every angle.
Also of note in this excellent newsletter is a discussion of the reduction in the annual deduction limit from $1 million to $500,000 for senior executive compensation at companies getting relief. Mark Borges and David Lynn write, “it’s difficult to see how financial institutions that exceed the cap won’t have to disclose that fact (including the amounts paid to each NEO in excess of the cap) and explain why in their CD&A.” “The more stringent cap imposed by the new standard will likely cast the spotlight on compensation deductibility for all companies, not just financial institutions.” (my emphasis) “Boilerplate” language won’t suffice. They further note that in the current environment, “foregoing a compensation deduction is likely to be considered material by most investors.” Therefore, they recommend including the aggregate amount of the foregone deduction. Even better, would be to address the deductibility of each element as they are discussed.
Whether such disclosures will be enforced by Treasury or the SEC may, in some sense, be immaterial, since failure is likely to bring on the wrath of shareowners and the general public. Failure to follow the advice offered in Proxy Disclosure Updates could be costly.
Of related interest, scientists found that people in experiments “offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.” (What’s the Value of a Big Bonus?, 11/19/08) Maybe cutting those bonuses will actually improve performance.
While investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago, a WSJ survey finds that Before the Bust, These CEOs Took Money Off the Table (11/20/08) Top executives at 120 public companies cashed out a total of more than $21 billion. “The issue of compensation and other rewards for corporate executives is front-and-center in the wake of the financial meltdown.”
Planet Hero Dies
Ceres Founder Joan Bavaria passed away on 11/18/08 after a battle with cancer. She was the co-founder of the Social Investment Forum, a collection of research, advisory, banking and community loan fund organizations dedicated to advancing socially responsible investing. She founded Trillium Asset Management, the first U.S. firm dedicated to developing social research on publicly traded companies. Bavaria also co-founded Ceres, with a mission to move companies, financial markets and policy makers to find solutions to sustainability challenges such as global climate change. Few have done so much in so little time. See Ceres Honors the Life of its Visionary Founder Joan Bavaria.
They Took on Napster: Who’s Next?
Corporate Secretary ran an interesting article by Brendan Sheehan on three outsiders who launched a proxy fight at Napster. (The outsiders, 11/08) “What makes this situation startlingly unique is the demographic of the dissident group: the action was begun by a young investor with a very small holding in the company who was joined by two other small retail holders, none of whom had any prior history with leading a shareholder fight against a company.” It is a tale of shareowner empowerment worth reading.
The shareholder action has been credited by some as being the catalyst for the sale of Napster to Best Buy. The three involved were Perry Rod, a 29 year-old professional investor, Kavan Singh, an entrepreneur who operates ice cream franchises, and Thomas Sailors, an investment manager. Perry Rod is involved in Market Rap, a discussion board hoping to “bring together, embolden, entertain, and empower investors with tools that have never before been a part of the investment community.” We’ve added a link to Market Rap on our Forums page. We’re always looking for good conversation on corporate governance. Let us know what you think of Market Rap.
ISPs and Privacy
Trillium Asset Management Corporation (TAMC) is filing a number of proposals at internet service providers (ISPs) on freedom of speech and privacy issues. Trillium filed resolutions with AT&T and co-filed at CenturyTel (NYC Pension Funds lead) and Verizon (Harrington lead) and will be filing at Comcast (NYC Pension Fund lead) in the next few days.
ISPs serve as gatekeepers to the Internet. They have extraordinary power over political, social, artistic and commercial use of the Internet. With this power comes the responsibility to protect human rights and democratic values. It also presents the companies with a number of financial, legal, commercial, reputational and regulatory risks. As such, these funds are asking ISPs to issue a report “examining the effects of the company’s Internet network management practices in the context of the significant public policy concerns regarding the public’s expectations of privacy and freedom of expression on the Internet.”
The effort is being coordinated by Open MIC, which TAMC founded using the Ceres and IEHNorganizing model and includes participation by NYCPF, Harrington Investments, Calvert Investments, and Boston Common Asset Management. (see also: FCC shouldn’t tolerate abuses by Internet’s corporate gatekeepers, The Seattle Times, 8/15/08)
Accountability of Bailout Questioned
Naomi Klein, author of The Shock Doctrine: The Rise of Disaster Capitalism, has described the bailout as “borderline criminal” when she spoke to Amy Goodman of Democracy Now!
- Rather than being used to get banks lending again, the bailout money “is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers.”
- Without Congressional authorization, “the Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government.”
- Dwarfing the $700 billion bailout itself, is “$2 trillion that’s been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don’t really know who they’re handing the money out to, because, apparently, it’s a secret.”
She also describes the conflicts of interests with the law firm Treasury hired to work on the language of the bailout bill. It is no wonder we didn’t get the same rights the UK got, like board seats, voting rights, higher dividends, suspension of dividends to shareholders, restrictions on bonuses and requirements the money be loaned. “It is not the banks that were partially nationalized, it is Treasury that has been partially privatized.” Klein argues Congress should challenging violations of the bailout legislation. Instead they are saying “we can’t afford to enforce the law … that somehow, because there’s an economic crisis, legality is a luxury that Congress can’t afford.” (Naomi Klein: Bailout is ‘multi-trillion-dollar crime scene,’ David Edwards and Muriel Kane, rawstory.com, 11/18/08)
It isn’t a bailout, Kine says, but a parting gift to Bush’s base, looting the Treasury on the way out the door. Will Democrats and Obama address the issues or simply use the looting to justify coming cuts?
Bank Directors Under Fire
MIT Sloan School researcher Michael Schrage writes, “The most important governance reform in financial services would make risk management the explicit duty of the board. The experience of the past decade shows that non-executive directors cannot rely on representations by management about risk exposure.” That isn’t new; boards have always had this responsibility.
However, Schrage goes on to say they should be required to disclose “the most serious exposures of their companies in trades, positions, investments and operations,” as well as their approach to monitoring and managing those risks. Additionally, “the Fed would have the right to interview the company’s non-executive directors to hear their reasons and rationales for their risk assessments.” They could then pass along the transcripts to regulators and post them for shareowner review. Schrage also recommends that bailout bank boards also have government “observers” on their boards, nominated by regulators. (How to sharpen banks’ corporate governance, Financial Times, 11/17/08) Banks think they have trouble attracting board candidates now. If Schrage’s recommendations went through it might be nearly impossible. Still, he has some creative thoughts worth exploring.
A 10Q filed by Capital Corp. of the West (CCOW) reveals the CEO, who gets paid $500,000 a year, also gets a $55,000 car. Footnoted.org suggests that “in light of the fact that the bank is asking the feds (read: taxpayers) for a $46 million helping hand… couldn’t Cupp settle for a Nissan Versa?” ($55K for a bailout-mobile?, 11/18/08)
Pension Funding Dips
The 100 largest corporate pension plans posted an asset value loss of more than $120 billion. “We’ve been issuing this index for eight years and have never seen a monthly asset loss so large,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index, in the announcement. Funding now stands at 92.7%, a 12-percentage-point decline from the funded ratio at the beginning of the year. (100 Largest Pensions Face Record Loss in October, PlanSponsor.com, 11/17/08)
Tell Obama: Truth to Both Capital and Labor
Drivers for DHL Express recently learned they would be losing their jobs next year, but many of them didn’t learn it from their employer. They heard the news from customers, while dropping off packages. Fifty-four percent of American workers said they’ve heard nothing from their employers about the economy and how it is affecting business, and 71 percent said they want to hear more from the top in this moment of uncertainty. (For employers, a quandary: speak of woes or wait?, Boston Globe, 11/15/08)
Publicly traded companies are legally obligated to make any disclosure that could have a “material” effect on their share price to all stockholders at the same time and they are prohibited from lying to their shareownrs. This helps create more efficient markets for capital flows. Unfortunately, similar rules do not apply to their communications with employees.
Boston college law professor, Kent Greenfield, lays out why such a law would create a competitive market that more efficiently allocates labor in his book “The Failure Corporate Law.” It is very simple and is modeled after SEC Rule 10b-5. See also his paper “The Unjustified Absence of Federal Fraud Protection in the Labor Market” available online through the Social Science Research Network.
Such a law could be an important move for the Obama administration in addressing the economic crisis and also in establishing the dignity of labor. Fraud should be treated as theft, whether it is perpetrated on shareowners or employees. Contact the Obama-Biden Transition Team. Tell them we want a level playing field and more efficient labor markets. We want a law protecting workers modeled after the current SEC Rule 10b-5 that prohibits lies to shareowners.
Incentives Channeled Greed
“The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished… No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s.” Michael Lewis, who chronicled the excesses of 1980’s Wall Street in Liar’s Poker, returns to his old haunt to figure out what went wrong this time.
Grab a cup of coffee; its a long article but it reads more like a novel than your typical report on the meltdown. Toward the end, Lewis takes John Gutfreund, who took Salomon Brothers public, out to lunch. “It’s laissez-faire until you get in deep shit,” says Gutfreund. I guess that’s where we all come in with the bailout. But who’s going to bailing us out… oh, right.. our children and our children’s children. Thanks to Mark Latham for alerting me to The End (Portfolio.com, 11/11/08). If you still have energy after reading Lewis, take a look at Latham’s VoterMedia Finance Blog. He actually offers some interesting solutions to the mess.
China has done a much better job of the bailout than the US with the largest stimulus package in history (20% of GDP), focused on construction and social services… health care, low-income housing, rural infrastructure, water, electricity, transportation, the environment, and technological innovation. This sounds more productive in the long run than buying into banks so they can buy other banks.
As Joshua Holland writes, “China is not in the same position as the United States — they’ve got huge cash reserves and a trade surplus, while we’ve got massive debt and a trade deficit. China also isn’t hemorrhaging cash to maintain 700 military bases and occupy a couple of far-flung countries. But the “full faith and credit” of the U.S. government is still worth something, and we may not have any option but to follow their lead.” (Our Economy May Be in a Death Spiral — Will Washington Stop the Bleeding?, AlterNet, 11/15/08)
Two Posts: One for Us, One for Obama
Two posts worth noting. First, Broc Romanek notes the SEC now accepts interpretive queries in writing via online form. (Corp Fin’s New Bag of Tricks: E-mail Your Questions!, TheCorporateCounsel.net Blog, 11/14/08) News you can use… if they answer.
Second, Nell Minow offers an Agenda for a New President: Improve Corporate Governance on The Ichan Report (11/14/08). Minow quickly lays out eight recommendations, all well worth implementing. Here’s a few more:
- Proxy access. Shareowners need to be able to avoid the cost of a separate solicitation and should have the ability to place the names of their director nominees on the corporate ballots. Ownership thresholds should be at 3% or 100 shareowners, holding at least $2,000 of stock for a year. We need that provision for groups of small shareowners (like they have in the UK) because many small companies in need of corporate governance reform have no significant institutional share ownership. We need proxy access so that “independent” directors will know they ultimately answer to shareowners, not CEOs.
- Proxy exchange. Shareowners shouldn’t have to instruct management as to how they want their proxies voted. Instead, they should provide their instructions to an independent proxy exchange.
- Proxy assignment. Institutional investors should be encouraged to announce their votes in advance so that retail shareowners can “vote by brand,” imitating the decisions of trusted investors. The law should facilitate the assignment of proxies to voting agents without fear of penalty for solicitation.
- Expand fiduciary duty. The ultimate purpose of corporations should be to serve the interests of society as a whole, not just shareowners. As Kent Greenfield notes, “there is no such thing as a limited liability society.” Extending fiduciary duties to employees would begin the process of making the internal governance of companies more responsible to the larger society. Many studies have shown that companies with employee ownership and participation are more productive and efficient. (Greenfield, Reclaiming Corporate Law in a New Gilded Age)
- No More Lies to Labor. The law attempts to protect investors, but not investors, from corporations that lie. A very simple law modeled after SEC Rule 10b-5 could create more competitive and efficient markets for the allocation of labor. The rights of labor to the truth should be no less than the rights of investors. (Greenfield, The Unjustified Absence of Federal Fraud Protection in the Labor Market)
Advice on Corporate Website Disclosure
Jane K. Storero and Yelena Barychev offer advice on the SEC’s August interpretive guidance concerning the use of company websites for compliance with disclosure requirements. (Corporate Governance of Public Web Sites, Law.com, 11/14/08)
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Harrington Resolution Would Broaden Fiduciary Duty
In response to the global economic meltdown brought on by the country’s largest financial institutions,Harrington Investments, a socially responsible investment (SRI) advisory firm, announced they have submitted binding bylaw amendments at Citigroup, Bank of America and Goldman Sachs to create board committees on “U.S. Economic Security.”
Together, the banks have received a total of $60 billion in Federal assistance under the Troubled Asset Relief Program (TARP) of the U.S. Treasury. Citigroup and Goldman Sachs received $25 billion each and Bank of America received $10 billion. The bylaw requires bank boards to consider the impact of bank policies on U.S. economic security as part of their fiduciary duty:
Considerations may include:
- the long term health of the economy of the U.S.,
- the economic well-being of U.S. citizens, as reflected in indicators such as levels of employment, wages, consumer installment debt and home ownership,
- levels of domestic and foreign control, and holdings of securities and debt, of companies incorporated or headquartered in the U.S. and
- the extent to which our company holds securities of foreign companies or has employees or representatives holding positions on the boards of directors of foreign companies.
The U.S. Treasury has purchased preferred stock in these companies but waived all voting rights. This effectively leaves no mechanism for U.S. taxpayers to intervene, should these banks act irresponsibly or against the interest of their most important shareowner – the American people.
“Following recent government interventions, there can be no doubt that the financial integrity of these companies is interdependent with a strong and secure U.S. economy, said John Harrington, CEO of Harrington Investments.
“The time has come for shareholders and members of the public to demand that bank managers and boards work to ensure that recent events are not repeated and that the investment by the US taxpayers brings reciprocal benefit to U.S. economic security in general,” stated Harrington.
The shareowner resolution argues that such a dramatic taxpayer effort to stabilize the U.S. economic system was precipitated by “years of irresponsible lending and business practices. Unregulated trading in speculative derivatives and a general lack of management and board oversight at major U.S. financial institutions has brought the global economy to the brink of disaster.”
Harrington Investments has a long history of advocating that corporations act in the interests of all stakeholders in society, a strategy they believe is also in the long-term interest of shareowners.
Although buying bank stock is a better strategy than buying toxic assets, TARP still puts the cart before the horse because it doesn’t address the fundamental problems. Full investor confidence won’t return until laws are changed and regulations promulgated to build a safer market. Broadening the fiduciary responsibility of boards to include all stakeholders, rather than just shareowners, is one of many ideas outlined by Kent Greenfield in his important book, The Failure of Corporate Law: Fundamental Flaws & Progressive Possibilities.
More fundamentally, Greenfield argues that corporate law should not be seen as a narrow field of private-law, but should be part of the larger social and macroeconomic policy, like environmental and tax laws. The so-called “free market” is not the creation of nature but of laws, defining the rights of property, contracts, and the rules of internal governance for the largest and most powerful institutions in the world — corporations.
Free market defects such as externalities, collective action, lack of transparency, “tragedies of the common,” short-termism and many more are better addressed not by imposing more laws to constrain corporations from the outside but by building more democratic mechanisms into corporations themselves. The resolutions offered by Harrington Investments move in that direction and deserve support. Harrington Investments has taken the lead in recognizing corporate governance as a public policy tool.
Taxpayers Say NO to Bonuses
U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don’t want executives’ bonuses reduced. They want them eliminated, writes Christine Harper for Bloomberg News. Compensation at Goldman Sachs, Morgan Stanley, Citigroup and the six other banks that received the first $125 billion of the federal funds is under scrutiny.
Goldman paid CEO Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. Goldman’s profit is down 47% this year and is expected to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67% this year and Goldman received $10 billion from the U.S. government in the bailout last month.
“I’d advise the CEO to say he can’t take anything if it’s one of these firms getting bailed out by the government,” said former compensation consultant Graef Crystal. (Bonuses for Wall Street Should Go to Zero, U.S. Taxpayers Say, 11/11/08) I couldn’t agree more.
Of course, bonuses and executive pay aren’t simple matters. For those who want to dig beneath the surface, I recommend Crystal’s page of recent reports. In the Spring of 2009, he will be teaching a course in executive compensation at the University of California at Berkeley’s Boalt School of Law. Too bad he won’t be getting a few million for all the effort he’s put into this field during the past several decades. For an education on stock options and repricing, read his paper on Apple. How would Steve Jobs have fared had he kept his 55 million underwater option shares and not exchanged them for 10 million free shares? Instead of $647 million, they’d be worth $4.4 billion. “Steve Jobs is a terrific innovator and one of the most admired people in America. But in this one instance, he sure got it wrong.” (Disclosure: The publisher of CorpGov.net is a shareowner in both Goldman and Apple)
Call for Climate Risk Disclosure
In response to the SEC’s request for public comment on its 21st Century Disclosure Initiative, which proposes to modernize the disclosure system so that the information is more useful and transparent to investors, the Investor Network on Climate Risk (INCR) called on the SEC to consider environmental, social and governance (ESG) reporting as a key element of the project. They called on the SEC to “integrate reporting of material ESG risks into its new disclosure system.” (Institutional Investors Call on SEC to Require Climate Change Disclosure, SocialFunds, 11/5/08)
INCR is a network of institutional investors and financial institutions overseeing more than $7 trillion in assets. The 14 signatories to the letter include institutional investors such as CalPERS, CalSTRS, and the Maryland, New Jersey, New York City, and New York State public pension funds or treasurers.
In December 2007, Congress required the U.S. EPA to propose a reporting rule for industrial plants and other large sources of greenhouse gases. The EPA has yet to comply with the law. Let’s hope there is a change with the Obama administration.
According to a survey conducted for the Network for Sustainable Financial Markets, as reported inPIRC Alerts, three things are judged almost certain to happen in an attempt to address the financial meltdown: more intrusive regulation with stronger penalties; greater scrutiny of executive pay and rewards; and governance of financial institutions will be much tighter, with greater involvement in governance seen as the most likely development. Only 11% of the respondents said they will not change their professional behavior as a result of this crisis. (Blame game, latest installment, 11/11/08)
You Don’t Ever Want a Crisis to Go to Waste
So says Rahm Emanuel, President-Elect Obama’s new chief of staff. We’re all trying to anticipate and influence the direction of this rare opportunity. Consider this, in 2002 scandals at Enron and WorldCom totalling $80 billion or so led to Sarbanes-Oxley. The current melt-down has vaporized $6.5 trillion, according to Jay Whitehead, publisher of CRO. The response will be massive.
Paul Krugman notes that “what really saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.” Krugman hopes Obama’s economic plans have the “necessary audacity.” (Franklin Delano Obama?, NYTimes, 11/10/08) Gretchen Morgenson’s How the Thundering Herd Faltered and Fell, says Obama should ensure that finance officials in charge of taxpayer-financed bailouts operate them with more transparency. She also suggests banks be forced to raise additional capital in the markets and develop and exit strategy. (NYTimes, 11/8/08)
FT points to a speech made during the campaign for clues to Obama’s direction. “The change we need goes beyond the laws and regulation. We need a shift in the cultures of our financial institutions and our regulatory agencies . . . It’s time to realign incentives and the compensation packages so that both high-level executives and employees better serve the interests of shareholders.” He then called for the creation of a “financial market oversight commission” to update the president, Congress and regulators about the state of financial markets. (Obama has told financial industry what to expect, 11/08/08)
Pay is for the general public, the hot-botton issue. Congressman Henry Waxman, chairman of the Committee on Oversight and Government Reform, sent a letter instructing State Street and eight other banks to provide details about the compensation packages of their 10 best paid executives by 11/10/08. “You might as well put on your red flannel pajamas and run around in a field of bulls if you’re going to pay State Street’s CEO more this year than you paid him last year,” said Frank Glassner, a consultant with Design Compensation Group in San Francisco. (The compensation question, Boston Globe, 11/9/08) See also Why We Need to Limit Executive Compensation, BusinessWeek, 11/4/08)
Of course, Obama’s first order of business is making appointments. Doug Halonen, writing for P&I, speculates on possibilities for the SEC, the Department of Labor’s Employee Benefits Security Administration assistant secretary’s post and director of the Pension Benefit Guaranty Corporation. (Help wanted sign is out for top jobs, 11/10/08)
Topping the legislative wish list of corporate governance experts, according to Barry Burr, are proposals giving shareholders a say on pay and proxy access. Patrick McGurn expects a bill within the first 100 days. Charles Elson agrees, the election results “will mean an increase in government involvement, for better or worse, through the SEC and Congress.” (Shareholders see victory in Obama administration, P&I, 11/10/08) Rep. Barney Frank, says he wants to reintroduce “say on pay” legislation early next year—and pair it, perhaps, with a provision allowing proxy access.
Of course, everyone isn’t just waiting on January. Rich Ferlauto, of AFSCME, has announced their “signature shareholder proposal” will be to require executives to hold stock options until after retirement. The proposal will target as many as a dozen companies next year. Ed Durkin, of the United Brotherhood of Carpenters, says they will focus on “core executive comp issues” at financial services firms, such as freezing new stock option awards to senior executives unless those options are indexed to peer-group performance and limiting severance to double an exec’s annual salary. Golden coffins and parachutes will also be a popular target in 2009, according to Nicholas Rummell, who also cites proposals by John Chevedden to request reincorporation in North Dakota, which enacted shareholder-friendly laws. (Proxy activists upping exec-pay ante, Financial Week, 10/9/08)
RiskMetrics-ISS will feature an 11/12/08 webcast “What’s Next on Say on Pay?” at 1 pm EST. A second forum on the subject will be held in the New York on the 13th, hosted by the Drum Major Institute for Public Policy to address social interests in executive compensation issues. See also, Gary Lutin’s Shareholderforum.com, which has been focused on the subject for several months with excellent posts from a large number of experts.
ICGN issued a statement on the global financial crisis emphasizing the importance of shareholder rights and responsibilities. (press release) It call for more transparency of derivative positions held by hedge funds, proxy access and say on pay. “Stronger rights will enable shareholders to hold boards more firmly to account for the longer term consequences of their actions. This is important because more effective boards are vital to prevent a recurrence of the crisis.” These issues and others will be further debated at the next ICGN Event being held in Delaware on the 9th and 10th of December.
Broc Romanek’s TheCorporateCounsel.net Blog alerts us to SEC Legal Bulletin 14D, the latest installment in pre-proxy season guidance on shareholder proposals from the Staff. According to Romanek, the Staff Legal Bulletin tackles these topics:
- Inability of proponents to seek companies to amend board charters if state law empowers board to initiate amendments
- Sending defect notices if registered owner proponent hasn’t met holding period
- Requirement that proponents send copy of their correspondence to the SEC Staff
- New e-mail address for the Staff to which no-action requests and correspondence can be sent
- Corp Fin has created a new page for incoming no-action requests that the Staff has not yet processed. This will be helpful for those in-house folk who like to track the other companies that have received a similar proposal during the proxy season.
Within a few years, I anticipate a very different landscape. Proxy access and say on pay will empower shareowners to police their own companies. However, the Business Roundtable isn’t likely to yield the power of its members easily. Their Shareholder Communications Coalition calling on the SEC to initiate a comprehensive evaluation of the shareholder communications process could very well lead to the increased ability of management to communicate directly with shareowners at about the same time as broker votes are removed. No one can offer reasonable arguments against increasing the ability of parties to communicate, even if one side has access to corporate coffers to get their points across.
Therefore, at least part of the next frontier may be efforts to educate retail shareowners. It is unrealistic to expect individuals with small investments to thoroughly read proxies and digest the issues before voting. Expect efforts that rely on reputational brands, such as the United Shareholders of America: The Icahn Plan, the Investor Suffrage Movement and Proxy Democracy to take a greater role as they get organized.
Aristotelian Corporate Governance
Modern democratic states have “cast aside meaningful deliberation about the end or purpose of human life.” The minimalist state attempts only to guarantee peace and facilitate the accumulation of wealth by its citizens. Likewise, the modern corporation.
Corporate Social Responsibility (CSR) widens the dialogue and scope of obligations from economic and legal to social and ethical. Both CSR and Alejo José G. Sison’s Corporate Governance and Ethics: An Aristotelian Perspective would move us from a minimalist approach of freedom from oppression or maximum return to one that focuses on the common good, fostering ties and promoting virtue.
Corporate citizenship should move beyond protecting the rights required for the pursuit of economic interests, to engaging in sociopolitical actions based on a broader mission. Instead of a “nexus of contracts,” Sison, though his study of classic political theory grounded in Aristotle, sees a “corporate polity,” reciprocally dependent on the flourishing of stakeholder-constituents.
Under a liberal-minimalist approach to corporate citizenship, each constituent is invited to actively participate in the deliberation and execution of the common corporate good. But not only is that not practical, it doesn’t fit Sison’s Aristotelian notion of a more civic-republican notion of communitarian corporate citizenship where shareholding managers “represent the stakeholder group best equipped to govern the corporation,” since they are fully invested in, and impacted by, their collective actions in the corporation.
Sison provides a strong critique of Coase’s “the nature of the firm,” Jensen and Meckling’s “agency theory,” and the “shareholder or financial theory” of the firm formulated by Friedman. “Under the guise of asceptic, value-neutral, amoral and ‘scientific’ theory, immoral business and management practices have in fact been promoted.” Prophecies tend to be self-fulfilling in the social sciences because the knower cannot be separated from the actor.
Behind these oversimplified theories is “an unenlightened subservience to mathematical models as the only vehicles worthy of the name of science.” While math may be neat, “real life is messy.” I like Sison’s call for a new theory of the firm grounded in realistic and ethical views of human nature that acknowledge the symbiotic relationship between working toward a common goal and perfecting the self.
Sison also moves readers nicely through a number of case studies that approach Weberian like “ideal types,” from “corporate despots and constitutional rulers” to “aristocratic and oligarchical corporate governance regimes.” Finally in that framework, he reviews an example of a “corporate democracy” and a “corporate polity.”
In democracies, “the majority that governs pursues their own particular interests,” whereas in a polity “the many that participate in governance seek the good of all, the common good.” Democracies, which strive after particular interests within a legal framework characterized by “an emphasis on justice as equality and freedom in the best, and doing whatever one likes in the worst, of cases,” are seen as less noble and inspiring than polities, with their greater focus on the common good.
Sison provides good critiques of United Airlines (the democratic model) and IDOM (the polity model), pointing to where they failed to live up to ideal types. However, I was disappointed that he did not conclude by positing a new theory of the firm that would draw on the lessons of Aristotle.
Instead, he ends with what I suspect he views as more practical advice. For example, those on nominations committees should look for loyalty, administrative capacity and justice as the most relevant characteristics in potential candidates.
Those on compensation committees should focus on moderation of temperance. CEO’s should be more interested in virtues rather than excessive pay. Aristotle, he notes, “advocated the education of desire,” such that “people would not crave more than what they actually need.”
The compliance committee should strive for the spirit of obedience to the law, especially in small matters for “small errors or faults are always easier to remedy or rectify than bigger ones.”
At bottom, Sison emphasizes the need for corporate governance to analyze and evaluate not only how changes impact the firm but how they cultivate virtues in those who govern the firm. Only virtue can ensure delivery of the good, since we must depend on virtue to ensure the rules are properly interpreted and implemented. Sison would place less emphasis on developing foolproof instruction manuals and more on developing virtuous habit and customs, since “it is only from habit and custom that the law could draw force and strength.”
“The key to good governance ultimately lies in the education of the governors or rulers,” writes Sison. It is a powerful notion, sure to be embraced by university professors and associations focused on training, such as the NACD. While in no way wishing to diminish the important role of education, I wish Sison had continued with a further exposition of how democratic and polity based business models could be improved. What fertile conditions foster both the common good and the proper education of virtue in employees and leaders? How can we restructure organizations to encourage active engagement in decision-making and the development of virtues in individual participants? Please give us a second volume.
CGQs in Stock Picking
Many studies have shown a correlation between some corporate governance elements and positive returns. The more such correlations can be found, the more shareowners will demand reforms. TheLENS fund (sadly gone), led the way in actively pursuing investments in companies that have unrealized value, pushing for governance reforms, and earning a good return. Now, Rich Duprey, at the Motley Fool, is running a series of articles that look at RMG’s Corporate Governance Quotient, or CGQas one factor to be analyzed in stock picking decisions.
“There are many factors that an investor should consider in deciding whether a company is good, and how well it treats shareholders shouldn’t be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies,” he says. Do These Stocks Deserve Your Support? (11/6/08), Duprey should be praised for at least broaching the subject. I hope others follow his example.
As I’ve written many times in the past, you can easily look up the CGQ of many companies on the Yahoo! Finance website. Just look up a company and then go to the “profile” page. You’ll then find the CGQ in the lower right corner. Sure, its something of a box ticking approach. A truly effective corporate governance rating system might be more “path-dependent.” Still, I find it to be a good rough guage. In my own investing, it is one of many considerations. However, I am much likely to submit proxy resolutions at companies in my portfolio with low CGQ scores.
For example, look at Whole Foods Market, which scores almost in the bottom 20% of the S&P 500. The company has lots of potential, even in this melting market. I like their emphasis on natural foods, their use of renewable energy, empowerment of workers through teams and many other features. I’m not giving up on them and have submitted a proposal seeking reincorporation in North Dakota, which provides an advisory vote on pay, majority voting in director elections, separation of the chairman and CEO positions, annual board elections, and the right of 5 percent shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures to empower investors. WFMI could move from a laggard to the vanguard… maybe even on to one of Rich Duprey’s future lists.
Draft Minow (updated)
Speculation on Obama appointments now abound. One of my favorites is a post by footnoted.org that Nell Minow would be a natural to chair the SEC. Wow, just the thought of it! Putting a shareowner’s advocate like Minow in charge of the SEC would be like putting an environmentalist in charge of the EPA.
For eight years, appointments have been given to people who disagree with the fundamental mission of the agency they’re appointed to. How would the world change if the regulators actually believed in their agency’s mission? With her experience at OMB, LENS, ISS, and The Corporate Library, it would be hard to find anyone more qualified. Minow is ready for the SEC. Is Obama ready for Minow?
Other names being mentioned are former Commissioner Harvey Goldschmid, now at Columbia University; current Commissioner Elisse Walter; New Jersey Governor Jon Corzine; New York Attorney General Andrew Cuomo; Damon Silvers of the AFL-CIO; John Olson, a partner with Gibson, Dunn & Crutcher; former SEC commissioner Mary Schapiro, now CEO of the Financial Industry Regulatory Authority; and Robert Pozen of MFS Investment Management. (Risk & Governance Weekly, 11/7/08)
Bloomberg says potential successors include William Brodsky, chief executive officer of the Chicago Board Options Exchange; Mellody Hobson, president of Ariel Capital Management; and Gary Gensler, a former Treasury Department undersecretary and partner at Goldman Sachs Group Inc., as well as former SEC Commissioner Harvey Goldschmid, former Fidelity Investments Vice Chairman Robert Pozen, AFL-CIO Associate General Counsel Damon Silvers, and Federal Deposit Insurance Corp. director Martin Gruenberg. (Obama Faces `Urgent’ Task in Replacing SEC’s Cox, Lawmakers Say, 11/7/08) For more names, see Rumors: Who Will be the Next SEC Chair? (TheCorporateCounsel.net Blog, 11/7/08)
Whoever gets the position, I hope they will be an advocate not only for large institutional investors but also for small retail investors. In this presidential election, we’ve seen what a difference can be made when people think their votes count. One of the benefits of increased involvement is increased legitimacy. Today the markets face their greatest failure of legitimacy since the Depression. Under e-proxy, less than 6% of retail shareowners are even bothering to vote.
The next SEC Chair can help bring back confidence in the markets by focusing on the legitimate roleall shareonwers should share, including the ability to place the names of director nominees on the corporate proxy. We need a rule like the UK’s that allows not only groups holding 3-5% of a corporation’s shares to access the proxy but also groups of 100 shareonwers. Many companies with the worst governance have no substantial institutional investors, leaving out a 100 shareowner provision would leave shareowners without the tools needed to regulate their own interests. In his approach to regulations, Obama should look first to mechanisms, such as access, that promise high value with very little cost.
Back to the top
Ralph Ward, publisher of Boardroom INSIDER, editor or The Corporate Board magazine and author of several books offers an important new volume on the boardroom leadership. Whatever differences people have concerning the direction of corporate governance, it is clear that much comes down to the deliberations of a very small group of people — corporate directors.
For many decades boardroom leadership came from the CEO who also chaired the board. Now, even where those two positions remain with the CEO, we are seeing a new locus of leadership among newly defined “independent” directors. While there are many good books that lay out the legal obligations of directors, none so clearly examines the concept of “leadership” in the boardroom. As this volume hits the bookstores, let’s take a brief look at the corporate governance environment.
A recent Booz Allen Hamilton study of the world’s largest 2,500 publicly traded corporations found that forced turnover among CEOs rose by 318% since 1995. Over the last several years, there has been a gradual change in board leadership structures. According to The Corporate Library’s 2008 Governance Practices Report, “focus on board independence has led many companies to separate the positions of CEO and Chair of the Board or to name an independent board member to serve as a lead or presiding director.” Their study found the chair position is completely independent of the company at 21% of the almost 3,000 companies studied. Large cap companies are less likely to split the positions than are small cap companies — 26% of small cap companies, 19% of mid cap, and only 13% of large caps split the positions.
Examining the principles of four very prominent associations we find all recognize this shift to board empowerment. CII says boards should be chaired by independent directors. If they are not, the board should provide a written statement in the proxy materials discussing why combining those roles is in the best interest of shareowners and they should name a “lead” independent director with approval over information flow to the board, meeting agendas, etc. to ensure an appropriate balance of power between CEO and directors.
ICGN principles say the chair of the board should neither be the CEO nor a former CEO and should be independent. The NACD says boards should consider formally designating a nonexecutive chairman. If they don’t, they should designate independent members of the board to lead its most critical functions. Even the BRT’s principles say that it is “critical that the board has independent leadership.”
Ward’s book is certainly timely. It is also fairly comprehensive, without getting bogged down in unreadable details. Although he acknowledges an independent chair may be the dominant model many years down the road, Ward also addresses what many shareowner activists view as interim models involving “lead” and “presiding” directors. He even has a chapter for combined CEO/Chairs on how to cope with the new realities. No matter where your company falls on the spectrum from board “independence” to board “capture,” you’ll find your board’s leadership needs addressed.
Ward begins with a very short history of boards that takes us from when they were composed primarily of the largest shareowners, to an era of employee directors, and on through Sarbanes-Oxley, which “used the audit committee to bash its way into the boardroom.” Sure, you already know this history but don’t skip it. Ward keeps it brief and provides the reader with a good grounding to take the measure of our current trajectory.
The next several chapters cover the new legalities of directors, like meeting in “executive session.” There are better books for systematically laying out these requirements. One of the best is The Role of Independent Directors after Sarbanes-Oxley by Bruce F. Dravis. However, Ward’s focus is not so much the requirements themselves but on how they are being met and what best practices leaders are struggling to develop in board evaluations, board logistics, acting as a liaison with the CEO, educating the board, etc.
The book is chocked full of interesting statistics, legal requirements, but most importantly, opinions from experts who have faced the same problems your board is facing now. For example, how important is it to name a new independent chair from existing board members? Whatever you decide, you’re very likely to benefit from the advice of others who have already done it. Plus, he provides a large number of valuable references and links to additional resources, like job descriptions for presiding directors, lead directors, and independent chairs. His discussion of how these roles differ and what skills are needed for each is the best I’ve seen.
At one point, Ward points to the irony that “by forcing independent boards to wrestle more with the regulatory nuts and bolts of the business, we may have actually weakened their powers in relation to management,” presumably because they must depend on management for this information. Luckily, boards have risen to the challenge by developing specialized skills and processes.
How are governance, audit and compensation committees coping? Ward gives us an excellent picture of what is going on inside such committees, what problems they are grappling with, and how they are adapting to new demands. He sees the chairs of each of these committees and the board itself as moving in the direction of approaching these positions “as full-time, consulting-like jobs.” Ward is probably right that better pay and professionalization are next steps.
Further along the trajectory, I couldn’t put it any better than his final words. Directors will support management, but not to a fault; they don’t owe their position on the board to the CEO. Rather, the other outside board members and major shareholders elected them to their leadership position, and the latter will lay claim to their loyalty… These next generation board leaders may not have all the answers when it comes to independent board leadership. But they definitely won’t be afraid to ask questions.” The New Boardroom Leaders: How Today’s Corporate Boards are Taking Chargeprovides an excellent guide to those wanting to take charge of corporations, the most pivotal institutions in our society.
Walden Calls Out State Street
Sometimes shareowners simply must call out companies who don’t live up to their own ideals. A case in point is State Street Corporation, a respected leader in the financial services industry. Their State Street Global Advisors (SSgA) has a long track record of responsive service to investment management clients, according to Walden Asset Management (Walden). Yet, Walden now finds itself in the position of filing a shareowner’s resolution to officially ask for a review of the guidelines and voting record of SSgA.
Last year according to a Ceres report, SSgA voted against all 50 shareholder resolutions addressing climate change. Walden wants State Street to look back at this history. The letter transmitting their resolution included the following:
SSgA has stated publicly that it understands how ESG factors can affect companies financially and has heralded its investment in Innovest. However, when it comes to proxy voting, it appears that State Street’s practice contradicts statements in its own Corporate Social Responsibility Reports and other public venues that recognize the importance of ESG factors in contributing to long term business success.
Further on in the letter, Walden notes that the central guiding principle in proxy voting “is whether a resolution would advance shareholder value by protecting reputation, reducing risk, or supporting a forward thinking strategic plan by the Board.” They go on to cite other financial institutions that have taken a more “nuanced” approach to ESG issues.
The resolution itself notes that SSgA’s annual Corporate Social Responsibility (CSR) Report claims that “corporate social responsibility is good for business.” SSgA was managing $80 billion in assets incorporating environmental, social and governance factors as of 2007. Yet, their proxy voting record “seems to ignore State Street’s proclaimed environmental commitment and stated position regarding the impact of key environmental factors on shareholder value.”
“Ironically, State Street reports its own greenhouse gas emissions in its CSR Reports and further describes the company’s active role in addressing climate change.” The resolution seems to ask why State Street doesn’t support efforts to require such disclosures at other firms, since failure to address this issue could lead to a decline in long term shareholder value. The resolved portion of the resolution reads as follows:
Shareholders request the Board to initiate a review of SSgA’s Proxy Voting Policies, taking into account State Street’s own corporate responsibility and environmental positions and the fiduciary and economic case for the shareholder resolutions presented. The review should consider updating State Street policies. The results of the review, conducted at reasonable cost and excluding proprietary information, should be reported to investors by October 2009.
I found it interesting to go onto the SSgA site to see what they are telling clients. Here’s one sentence from a report entitled Climate Change Poses Risks and Opportunities for Fiduciaries by Bill Page, dated, January 7, 2008: “Since, on average, more than 70% of pension fund portfolios consist of exposure to public corporations, trustees should seek to understand the potential of climate change to affect their portfolio companies and their underlying assets.” It isn’t difficult to see the irony here. How can trustees better understand the potential of climate change to affect their portfolios if State Street is out there opposing resolutions seeking such disclosures? I’m glad Walden is holding their feet to the fire.
First Field Agents Named
The first 10 field agents have been named to the Investor Suffrage Movement. These agents will begin by performing shareholder-related services on behalf of activists or institutional investors—tasks such as contributing their own proxies or attending a shareowner meeting to present a proposal. Moving forward, field agents will contribute in a myriad of ways to the development, testing and implementation of a Global Proxy Exchange.
Of the pioneers who signed on in October, most have made significant contributions to shareholder activism, corporate governance and/or socially responsible investing. Several are famous for those efforts. For example, the first agent named was John Cheveddan who learned at the arm of John Gilbert. John is the most active individual shareowner in submitting proxy proposals. Last year, he was involved in submitting 40 proposals and received a majority vote on 20 that were adopted by management.
The tenth agent named was John Harrington, President of Harrington Investments. Harrington is the author of Investing With Your Conscience: How to Achieve High Returns Using Socially Responsible Investing (1992) and The Challenge to Power: Money, Investing and Democracy (2005). He is the former President & Chairman of the Board or Working Assets Management Company and former Chairman of the Board of Progressive Asset Management. Those of us in between aren’t too shabby either.
The program is off to a great start. I expect that within a few years, we will have field agents in every major city and on every university campus.
Shareholder Communications Coalition
The Business Roundtable has formed a Shareholder Communications Coalition calling on the SEC to initiate a comprehensive evaluation of the shareholder communications process. The Coalition comprises five associations: Business Roundtable (BRT), National Association of Corporate Directors (NACD), National Investor Relations Institute (NIRI), the Securities Transfer Association (STA), and Society of Corporate Secretaries & Governance Professionals (SCSGP). See 10/29/08press release. According to the Coalition, this evaluation should include the following principles and recommendations:
- Direct Communications with Individual Investors. The SEC should eliminate the NOBO/OBO distinction thereby giving companies access to contact information for all of their beneficial owners and permit companies to communicate with them directly. Shareholders desiring to remain anonymous should bear the cost of maintaining their privacy, such as through the establishment of nominee accounts.
- Voting By Retail Investors. The SEC should examine how to protect the vote of the retail investor, particularly in the case of unvoted shares. Institutional investors generally vote 100% of the time, in response to their legal responsibilities and facilitated by electronic systems. They also are aided, as noted above, by proxy advisory services. Retail investors have no similar voting facilitators or proxy advisory services, and, in fact, often have no motivation to vote their shares. Among the alternatives that the SEC should consider to protect the interests of retail investors are: (a) pass through of voting rights directly to beneficial owners; (b) proportional voting; and (c) client directed voting.
- Competition among Proxy Service Providers. Brokers, banks, and other intermediaries should not stand in the way of direct communications between companies and the beneficial owners of their securities. Companies should have the ability to determine the distributors of their communications, and should not be forced to pay for the costs of a system in which the fees and the service providers are determined by third parties.
- Proxy Voting Integrity. The SEC should consider additional steps to ensure that the proxy voting system is transparent and verifiable. In this regard, the SEC should examine its ownership disclosure requirements and consider requiring disclosure of both voting and economic ownership along with both positive and negative economic ownership.
- Proxy Advisory Services. The SEC should review the role of proxy advisory services and the procedures used by these firms in generating recommendations.
The US Securities and Exchange Commission voted to approve five members of a new national accounting oversight board to be headed by ex-FBI-CIA chief William Webster whose only experience in accounting, as far as we know, was heading the auditing committee of U.S. Technologies, now bankrupt and facing fraud accusations. Shortly before Webster was appointed he told Harvey Pitt but Pitt chose not to tell the other four commissioners prior to their vote.
Webster edged out the much better qualified pension fund chief John Biggs, who would have done much to restore trust. The vote was 3-2. Webster becomes the first chairman of the Public Company Accounting Oversight Board, expected to get up and running early next year.
In addition to Webster, the commission approved former CalPERS attorney Kayla Gillan; accountant and former SEC general counsel Daniel Goelzer; former congressman Willis Gradison; and SEC Enforcement Division Chief Accountant Charles Neimeier. Continue Reading →
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 →
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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