Tag Archives | CorpGov

Chipotle Mexican Grill Proxy Guide

Chipotle Mexican Grill, Inc. (CMG), together with its subsidiaries, operates Chipotle Mexican Grill restaurants. As of December 31, 2017, it operated 2,363 Chipotle restaurants throughout the United States, as well as 37 international Chipotle restaurants; and 8 non-Chipotle restaurants. Most shareholders do not vote because reading through 70+ pages of the proxy is not worth the time for the small difference your vote will make.

Below, I tell you how I am voting and why. If you have read these posts related to my portfolio for the last 22 years, have values aligned with mine, and trust my judgment (or you don’t want to take the time to read it), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts. The annual meeting is coming up on May 22, 2018. I voted with the Board’s recommendations 38% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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PayPal Holdings Proxy Recommendations

PayPal Holdings (PYPL), operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products.

Most shareholders do not vote because reading through 100+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I am voting and why. If you have read these posts related to my portfolio for the last 22 years, have values aligned with mine, and trust my judgment (or you don’t want to take the time to read it), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts. The annual meeting is coming up on May 23, 2018. I voted with the Board’s recommendations 44% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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Intel Proxy Voting Recommendations

Intel Corporation (INTC), designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. Most shareholders do not vote because reading through 100+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I am voting and why. If you have read these posts related to my portfolio for the last 22 years, have values aligned with mine, and trust my judgment (or you don’t want to take the time to read it), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts. The annual meeting is coming up on May 17, 2018. I voted with the Board’s recommendations 53% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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United-Guardian Proxy Rule Violation

United-Guardian (UG), United-Guardian, Inc. manufactures and markets cosmetic ingredients, personal care products, pharmaceuticals, medical lubricants, healthcare products, and specialty industrial products in the United States and internationally. Most shareholders do not vote because reading through the proxy is not worth the time for the small difference your vote will make, although this one is only 16 pages Below, I tell you how I voted and why. The annual meeting is coming up on May 16, 2018. I voted with the Board’s recommendations 0% of the time, since our Company flagrantly violated regulations. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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Charles Schwab Proxy Voting Guide

Charles Schwab Corporation (SCHW), through its subsidiaries, provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Most shareholders do not vote because reading through 100+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I voted and why.

If you have read these posts related to my portfolio for the last 22 years, have values aligned with mine, and trust my judgment (or you don’t want to take the time to read it), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on May 15, 2018. I voted with the Board’s recommendations 60% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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3D Systems Proxy Voting Guide

3D Systems Corporation (DDD), through its subsidiaries, provides three-dimensional (3D) printing products and services worldwide. Most shareholders do not vote because reading through 50+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I voted and why. If you have read these posts related to my portfolio for the last 22 years and trust my judgment (or you don’t want to take the time to read my rationale), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on May 15, 2018. I voted with the Board’s recommendations 67% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A).

Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.

3D Systems: ISS Rating

From the Yahoo Finance profile:

3D Systems Corporation’s ISS Governance QualityScore as of April 1, 2018 is 4. The pillar scores are Audit: 2; Board: 3; Shareholder Rights: 1; Compensation: 10.

Corporate governance scores courtesy of Institutional Shareholder Services (ISS). Scores indicate decile rank relative to index or region. A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk. Therefore, we need to pay closer attention to executive compensation.

3D Systems: Board Proposals

1. 3D Systems Proxy Voting Guide: Directors

Egan-Jones Proxy Services recommends “For,” with the exception of: William E. Curran (1A), Kevin S. Moore (1I) and Jim D. Kever (1F) because they have served for more than ten years (with compromised independence) and sit on key committees, which should be composed only of independent directors. Although I agree with the thrust of their arguments, I am not ready to set that as my policy.

Since I voted against the pay package, I also voted against all members of the compensation committee: William E. Curran, William D. Humes, and Kevin S. Moore. I also note, there are no women on the board. I am inclined to vote against the nominating committee next year, if that continues.

2. 3D Systems: Executive Compensation

3D Systems’ Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Vyomesh I. Joshi at $1.9M. I’m using Yahoo! Finance to determine market cap ($1.3B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. 3D Systems is a small-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at small-cap corporations was $3M in 2014, so pay was under that amount.

3D Systems shares substantially underperformed the Nasdaq over the most recent one, two, and five year time periods. For 2017 the ratio of the annual total compensation of Mr. Joshi, our CEO, to the annual total compensation of our median employee was 35 to 1.

Egan-Jones Proxy Services rates compensation practices as “Neutral” and recommends For.
Egan-Jones

However, to me it looks like 3D Systems is gaming the system, since they substantially reduced pay from $8.1M to $1.9M in one year. I feel I cannot ignore this recent history of overpaying. That factor and continued underperformance led me to vote “AGAINST” the say-on-pay item, as well as members of the compensation committee.

3. 3D Systems: Ratify Auditors

I have no reason to believe the auditor has rendered an inaccurate opinion, is engaged in poor accounting practices, or has a conflict of interest.  However, Egan-Jones notes the auditor has been serving as the Company’s auditor for more seven years and their independence is compromised. I also believe that the companies should consider the rotation of their audit firm to ensure auditor objectivity, professionalism and independence. I have not set a specific number of years. In this case I voted FOR.

3D Systems: Shareholder Proposals

4. REDUCE THE OWNERSHIP REQUIRED FOR STOCKHOLDERS TO CALL A SPECIAL MEETING 

This proposal is from Myra Young, as written and recommended by me (James McRitchie), so we certainly voted in favor. Most states allow 10% to call a special meeting. Before we submitted the proposal 3D Systems had a threshold of 50+%, so we have already won substantial ground prior to this vote. We believe 15% is a reasonable compromise above the 10% standard.

Vote FOR.

3D Systems CorpGov RecommendationsProxy Insight

Proxy Democracy was down. Proxy Insight reported on CalSTRS. which also voted AGAINST the pay package and compensation committee. They voted FOR all other items, including our shareholder proposal to lower the requirements for calling a special meeting.

CorpGov Votes:

  1. Directors: Vote AGAINST William E. Curran, William D. Humes, and Kevin S. Moore.
  2. Auditor: Vote For.
  3. Ratify Executive Pay: Vote Against.
  4. Reduce Ownership Requirement to Call a Special Meeting; Vote FOR

3D Systems: Issues for Future Proposals

SharkRepellentLooking at SharkRepellent.net for other provisions unfriendly to shareowners:

  • Special meetings can only be called by shareholders holding not less than 25% of the voting power.
  • Proxy access provisions are Lite.  A shareholder or group of no more than 20 shareholders holding at least 3% of the outstanding common stock continuously for at least three (3) years may nominate directors, so long as the number of directors elected via proxy access does not exceed 20% of the board.

3D Systems: Mark Your Calendar

Under Rule 14a-8 of the Exchange Act, certain stockholder proposals may be eligible for inclusion in our proxy statement and form of proxy for our 2019 Annual Meeting. The date by which we must receive stockholder proposals to be considered for inclusion in the proxy statement and form of proxy for the 2019 Annual Meeting of Stockholders is November 28, 2018 or, if the date of our 2019 Annual Meeting is changed by more than 30 days from May 15, 2018, a reasonable time before we begin to print and mail the proxy materials for the 2019 Annual Meeting.

Warnings

Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime). I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.

Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs. For more on the subject, see CEO Pay Machine Destroying America.

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Ford Motor Company Proxy Voting Guide

Ford Motor Company (F) designs, manufactures, markets, and services a range of Ford cars, trucks, sport utility vehicles, and electrified vehicles; and Lincoln luxury vehicles worldwide. Placing a big bet on the continued profitability of gas guzzling SUVs and trucks, they recently announced phasing out most sedans. Most shareholders do not vote because reading through 100+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I voted and why. If you have read these posts related to my portfolio for the last 22 years and trust my judgment (or you don’t want to take the time to read my rationale), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on May 10, 2018. I voted with the Board’s recommendations 52% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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Invesco Proxy Voting Guide

Invesco Ltd. (IVZ) provides investment management services to retail clients, institutional clients, high-net worth clients, public entities, corporations, unions, non-profit organizations, endowments, foundations, pension funds, financial institutions, and sovereign wealth funds. Most shareholders do not vote because reading through 70 pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I am voting and why. If you have read these posts related to my portfolio for the last 22 years and trust my judgment (or you don’t want to take the time to read it), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on May 10 2018. I voted with the Board’s recommendations 35% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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Gilead Sciences Proxy Voting Guide

Gilead Sciences (GILD), a biopharmaceutical company, discovers, develops, and commercializes therapeutics in the areas of unmet medical needs in the United States, Europe, and internationally. Most shareholders do not vote because reading through 80+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I voted and why. If you have read these posts related to my portfolio for the last 22 years and trust my judgment (or you don’t want to take the time to read my rationale), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on May 9 2018. I voted with the Board’s recommendations 61% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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3M Company Proxy Voting Guide

3M Company (MMM) operates as a diversified technology company worldwide. Most shareholders do not vote because reading through 80+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I voted and why. If you have read these posts related to my portfolio for the last 22 years and trust my judgment (or you don’t want to take the time to read my rationale), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on May 8, 2018. I voted with the Board’s recommendations 44% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A). Continue Reading →

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Prison Labor: Corporate Supply Chain

NorthStar Asset Management, Inc., a Boston-based wealth management firm, announced that it has published a white paper outlining its perspective on the issue of domestic (U.S) prison labor in company supply chains, and recommending best practices for companies and investors to uncover and respond to abusive labor practices.

Prison Labor in the United States: An Investor Perspective goes into detail about how prison labor has become a critical issue related to economic inequality, racial justice, and human rights. Explained CEO Julie Goodridge, Continue Reading →

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Lobbying Disclosure Sought @ 50 Companies

Lobbying disclosure remains a top shareholder concern for the 2018 season, as evidenced by proposals filed at 50 companies by 74 institutional and individual investors. A coalition is asking for lobbying reports that include federal and state lobbying payments, payments to trade associations used for lobbying, and payments to any tax-exempt organization that writes and endorses model legislation. (Above graphic from The Nation’s Where Have All the Lobbyists Gone?)

I urge readers to vote in favor of all these resolutions. In Citizens United v. Federal Election Commission, dealing with the related issue of political contributions,  Justice Kennedy’s majority opinion justified the Supreme Court’s decision by pointing to the Internet.

With the advent of the Internet… Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.

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Compensation: The Difference it Makes

Compensation:  The Difference it Makes

Compensation. Most Americans think CEOs of the 500 largest publicly traded corporations are overpaid, even though they think CEOs made less than a tenth of what they actually earn. The Rock Center for Corporate Governance at Stanford University conducted a nationwide survey of 1,202 individuals — representative by gender, race, age, political affiliation, household income, and state residence — to understand public perception of CEO pay levels among the  Key takeaways are:

  • CEOs are vastly overpaid, according to most Americans
  • Most support drastic reductions
  • The public is divided on government intervention

Americans and CEO Pay: 2016 Public Perception Survey on CEO Compensation found 74% believe that CEOs are not paid the correct amount relative to the average worker. Only 16% believe that they are.

A brave panel tackled the topic, Compensation: The Difference it Makes, at the Corporate Directors Forums I attended in San Diego last month. Like all Corporate Directors Forums, this one operated under the Chatham House Rule, so you will not find any direct quotes below. These are my notes on Compensation: The Difference it Makes. As such, they include my opinions as well observations made by speakers panelists and others in attendance at the Forum. This is certainly not a transcript. However, I hope even those who attended the Forum will find the post useful, especially my attempt to provide additional context through links and commentary. Continue Reading →

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Culture Impact: Directors Forum 2018

The Culture Impact: Values, Attitudes & Strategic Directions

Culture impact in corporate governance got a big boost with NACD Blue Ribbon Commission report Culture as a Corporate Asset. A brave panel tackled the topic, The Culture Impact: Values, Attitudes & Strategic Directions, at the Corporate Directors Forums I attended in San Diego. Like all Corporate Directors Forums, this one operated under the Chatham House Rule, so you will not find any direct quotes below. These are my notes on The Culture Impact. As such, they include my opinions as well observations made by speakers, panelists and others in attendance at the Forum. This is certainly not a transcript. However, I hope even those who attended the Forum will find the post useful, especially my attempt to provide additional context through links and commentary.

To learn more about the 13th annual Directors Forum: Directors, Management & Shareholders in Dialogue conference, click on the following: @corpdirforum on Twitter, tweets from  that often link to other posts,   website, and Linkedin.

The Culture Impact: Panelists

  • Moderator: Michael Berthelot, Director, Fresh Del Monte Produce Company, CEO, Cito Capital Corp; and Managing Principal, Corporate Governance Advisors, Inc.
  • Stephen L. Brown, Senior Advisor, KPMG Board Leadership Center
  • Joann Lublin, Pulitzer-Prize Winning Journalist & Management News Editor, The Wall Street Journal; Author, Earning It
  • Bryan Cornwall, Founder & Principal, Cornwall Bioengineering & Communications
  • Hanna Grene, Policy Director, Center for Sustainable Energy

The Culture Impact: My Notes

Paper forthcoming on Wells Fargo and Uber by Hanna Grene and Bryan Cornwall to be published on Equilar website. I will be waiting with anticipation. How would we react? What tools do we have available? It seems to me, the problems were an open “secret,” not unlike Harvey Weinstein.  The basics of the Wells Fargo scandal were reported in the LA Times in 2013. Los Angeles sued in 2015. The Board didn’t issue their own internal study until April 2017. Too little, too late with Federal Reserve placing the first firmwide limit on a bank as Chair Janet Yellen stepped down. Wells Fargo announced concurrently that it would replace 4 board members, three by April. Wells Fargo will be included in case studies on culture impact for years to come.

Similarly, Uber’s “hard charging” workplace environment was hardly a secret and had adverse corporate culture. Culture was key. Uber was (is?) aggressive and overbearing. Whereas founder Travis Kalanick’s motto might have been something like, “get it done,” the new CEO Dara Khosrowshahi has adopted ‘We do the right thing. Period.’ Media impact was huge reason for change. We see the influence of media, especially social media, even more after the latest mass shooting. (Mass shootings have made gun stocks toxic assets on Wall Street)

The Culture Impact: Public Opinion Sidebar

Renee Aggarwal, Isil Erel and Laura T. Starks, Influence of Public Opinion on Investor Voting and Proxy Advisors (August 6, 2014, Georgetown McDonough School of Business Research Paper No. 2447012; available at SSRN) found that investors have been “voting less with the recommendations of management or proxy advisors.” In contrast,

public opinion on corporate governance issues, as reflected in media coverage and surveys, is strongly associated with investor voting, particularly mutual fund voting. In addition, even proxy advisor’s recommendations are associated with public opinion… media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.

The researchers looked at each proxy proposal for each firm in the Russell 3000 Index for the period January 2004 through November 2010. They looked not only at voting records and ISS recommendations but also media coverage of executive compensation, as well as Gallup surveys of public opinion.

A few highlights from their research are as follows:

  • Mean support for shareholder proposals increased from 23.6% in 2004 to 31.8% in 2010, after peaking at 37% in 2009.
  • Institutions voted with management on shareholder proposals 74% of the time in 2004 but only 54% of the time by 2010.
  • Investor agreement with ISS advice went from 78.4% in 2004 to 57.5% in 2010.
  • In 2004, 60% of investors followed ISS opposition to proposals but only 20% did so by 2010.
  • The proportion of shareholder proposals opposed by ISS declined from 156.4% in 2010 to 30.5% by 2010.
  • Support for shareholder proposals increases by 3.15%-2.69% if there is a one standard deviation increase in media coverage.

They conclude:

Our results suggest that public opinion, as measure through either Gallop Poll survey or media coverage at the aggregate and firm level, influences shareholder voting. The implications of these results are that financial intermediaries, such as mutual funds, pay attention to the shareholders’ preferences regarding corporate governance. These results hold even after controlling for the recommendations of the proxy advisor.

The Culture Impact: Back to Conference Notes

Executives sometimes make it known they did not want negative feedback. How do directors make changes before a negative story appears on the upper fold of a major newspaper?

If you are a high performer, culture impact may be nonexistent for a while; you can do anything you want. But the buck stops at the board, not the CEO. The board needs to be willing to second guess. The board needs to wonder about what you do not know. The board should insure it has independent sources of information. Some argue they have their own independent staff. Activists often do, and they often turn out to be good board members in part because of those additional resources.  Every board member should have a responsibility to visit branches, have many experiences as a customer or user. Uber board members seem to have been blind-sided with rapid growth. They waited to long to go after the CEO. Mandatory unconscious bias training might have helped.

The NACD Blue Ribbon report has many tools. Regulatory or the courts; markets or self-reflection. Unfortunately, too often boards seem to be wearing blinders. We are unlikely to see regulatory reform on culture impact. Pressure seems more likely from major shareholders like BlackRock’ announcement to gunmakers. Shareholders have the ability to push back. They have the right to vote boards off the island. Larry Fink’s letter this year said companies must have “a sense of purpose.” Companies have culture impact.

Furthermore, the board is essential to helping a company articulate and pursue its purpose, as well as respond to the questions that are increasingly important to its investors, its consumers, and the communities in which it operates. In the current environment, these stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.

Your vote is really important. At Wells Fargo and Uber we saw a failures of courage. Uber had frat boy culture. Culture, character and courage… that is what it takes. Wells Fargo seems to have had a culture of, ‘cheat and you can stay; don’t cheat and you are fired.’ Boards need to be more transparent around reports and actions taken, not just to reduce potential liabilities but also to help your company live up to its purpose.

Investigations must be reported up. HR should number and track complaints so they do not get lost. Boards should get routine reports to assess culture impact — to see trends and outliers. Boards should seek the right answers. Non-financial measures should be to be tied to compensation. In an M&A, which culture will prevail? Which culture to keep.

The role of HR. Is it to protect the company or to protect and develop employees? Heads of HR should address boards more frequently. Directors have to spot the data anomalies. Culture is important and is part of their fiduciary duty.

The Culture Impact: Recent Related Posts

   

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Benefit Corporation: Accountability Matters

Benefit corporation governance provides increased accountability. Most of our financial capital is allocated and stewarded through a system that has a primary goal of creating financial return. This goal directs the real economy, where shareholders treat corporations as accountable for financial results, but not for their economic, social or environmental impact. Continue Reading →

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Directors Forum 2018: Best Stakeholder Interactions

Directors Forum 2018: Directors, Management & Shareholders in Dialogue brings together investors, directors and management to engage in open, off-the-record dialogue about today’s pressing governance issues. Speakers will put a spotlight on the escalating impact of “corporate culture” on business success.

Hosted by Corporate Directors Forum, Directors Forum 2018 will be held on January 21-23, 2018 at the University of San Diego.  It is designed to encourage interaction between attendees and the nation’s leading corporate governance authorities. Continue Reading →

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CorpGov Research Assistant Opening in India

CorpGov Research AssistantResearch Assistant Vacancy for a Project on Corporate Governance  Applications for the post of research assistants are invited from the students who are passionate about contemporary issues in corporate governance. Work is remunerated with provision for performance based bonus and other referral opportunities at the end of the tenure. Assignment will begin from 17th April & will end on 17th June. Continue Reading →

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ISS: Vote Against Directors Adopting Lite Proxy Access

Vote Against Directors

Vote Against Directors Adopting Lite

ISS’s 2015-2016 global voting policy survey indicate investors are prepared to vote against directors at companies that ignore shareholders wishes and adopt proxy access mechanisms with overly burdensome ownership requirements.

An overwhelming majority of investors said ISS should issue negative director recommendations if a shareholder proposal to provide proxy access receives majority support and a board adopts proxy access with material restrictions not contained in the shareholder proposal. 90% said an against or withhold vote in a director election would be warranted if a provision had an ownership threshold in excess of 5% or an ownership duration in excess of three years. From the ISS press releaseContinue Reading →

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The Coca-Cola Company (KO): How I Voted – Proxy Score 63 – Things Go Better With a Split CEO/Chair

CokeThe Coca-Cola Company $KO, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/23/2014. ProxyDemocracy.org had collected the votes of four funds when I checked and voted on 4/15/2014.  I voted with management 63% of the time.  View Proxy Statement, which by the way is very nice and user friendly. See 18 Cool Things about the proxy.

Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →

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Review: Handbook of Research on Promoting Women's Careers

The march of women into the upper echelon seems inevitable. A few points from the introduction:HandbookOfResearchOnPromotingWomensCareers

  • 60% of recent university graduates have been women, 50% of those graduating with advanced degrees in law and medicine, 1/3 of those with MBAs.
  • There will be labor and skill shortages in all developed countries over the next two decades as baby-boomers retire.
  • Women make 89% of the consumer purchasing decisions.
  • Companies with more women in top management positions are more successful.
  • Women are less greedy, less likely to engage in theft, fraud and corruption, protecting their organizations from failure and poor reputation.
  • Organizations retaining and advancing qualified women have an advantage in the war for talent. Continue Reading →
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NextEra Energy, Inc. $NEE: Proxy Score 69

NextEra Energy, Inc. (NEE) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/23/2013. ProxyDemocracy.org had collected the votes of three funds when I checked on 5/16/2013.  I voted with management 69% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →

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Goldman Sachs (GS): Vote for Proxy Access

Goldman Sachs ($GS) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/23/2013. ProxyDemocracy.org had collected the votes of two funds when I checked on 5/15/2013. I’ll check back and may post again on GS before the voting deadline, depending on developments. I voted with management 26% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →

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Ending the Wall Street Walk: Why Corporate Governance Now?

Wall Street BullWhat 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

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.

Unfulfilled Promise

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.

Further Reading

Blair, Margaret M., Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, The Brookings Institution, 1995.

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.

Hawley, James P. and Andrew T. Williams, “Corporate Governance in the United States: The Rise of Fiduciary Capitalism a Review of the Literature,” Saint Mary’s College of California, Moraga, 1/31/96.

Monks, Robert A.G. and Nell Minow, Watching the Watchers; Corporate Governance for the 21st Century, Blackwell Publishers Inc., Cambridge, MA, 1996.

Roe, Mark J., Strong Managers, Weak Owners: The Political Roots of American Corporate Finance, Princeton University Press, Princeton, NJ, 1994.

U.S. Department of Labor, Pension Welfare Benefits Administration, “Proxy
Project Report,” Washington, DC, 2/23/96.

Organizations of Interest

Council of Institutional Investors
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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All material on the Corporate Governance site is copyright ©1995-1997 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.

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