Tag Archives | Gary Lutin

Virtual-Only Meetings: The Nuclear Option

Virtual-Only Meetings Growth

Virtual-Only and Hybrid Meetings Data Reported by Broadridge in the FT

Virtual-Only Meetings are quickly being adopted by entrenched boards who fear both adverse publicity and any attempt by shareholders, especially retail shareholders, to hold them accountable. Broadridge Financial Solutions ($BR) has a direct financial incentive to push companies toward virtual-only meetings. Although many funds and organizations oppose such meetings, no one in the opposition has a such a direct financial incentive to oppose them. 

Take Action: Vote against any all all directors serving on governance or similar committees at companies that hold virtual-only meetings.  Continue Reading →

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Wayback: Five, Ten and Fifteen Years Ago in Corporate Governance

Mr. Peabodys WayBackMachine

Mr. Peabody and Sherman prepare to go back in time to visit corpgov.net 5, 10 and 15 years ago.

Five years ago in Corporate Governance

In the year-end reflections two contributing factors deserve more attention. First, “prophetic warnings” from religious groups on the dangers of subprime loans via shareowner resolutions. Second, a call from Sanford Lewis for boards to revoke implicit policies of “don’t ask, don’t tell” with regard to liability issues. (Two Overlooked Lessons From the Financial Crisis)

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Symantec Audio-Only Meeting Gets National Coverage

At last, there have been a couple of articles in the national press on the Symantec Corp. virtual-only meeting. First, Ross Kerber reported for Reuters, Shareholder meetings via Web mute dissident voices (9/24/2010) Kerber observed,

Soon movies might be the only place to hear pointed outbursts from investors. This year more than a dozen companies moved their annual meeting to online-only settings where they can rephrase or ignore contrarians.

Bruce Herbert, Steve Schueth, U.S. Proxy Exchange, CalPERS and CalSTRS were mentioned as opposing the move. Symantec claimed the fact that it included a pointed question on its performance during the online meeting, provided evidence it wasn’t stifling dissent.

Then on 9/26/2010 the New York Times published Gretchen Morgenson’s Questions, and Directors, Lost in the Ether.

Unlike other companies that broadcast video along with audio, Symantec held its meeting as audio-only — making it impossible for investors to observe the goings-on or see which Symantec executives had decided to make themselves available.

Symantec management read and answered only two questions from shareholders and failed to answer a question from Bruce T. Herbert, chief executive of Newground Social Investment. Morgenson also quoted several Symantec shareowners who were displeased with the audio-only meeting and she focuses on the fact that not all Symantec directors “attended,” although she was unable to find out who the missing directors were.

Morgenson mentioned the recent shareholder forum by Gary Lutin.

PARTICIPANTS in the forum have proposed these standards of fairness involving electronic shareholder meetings: a company should provide all shareholders with a reasonable opportunity to ask management questions relating to director elections and other matters to be decided at a meeting; a company should present those questions or views to management publicly so other shareholders can consider them; and, finally, a company should generate responses to these questions from managers or directors so other shareholders can consider them as well.

Morgenson ended her article with important observations from Lutin.

Most corporate managers also like being able to learn what interests their shareholders so they can respond before decisions are made. But it’s important to be alert to abuses that hide questions. If you want the marketplace to work, investors need to see which managers deserve their support.

Not mentioned in the article is the fact that Glyn Holton, of the United States Proxy Exchange (USPX), initiated the protest against Symantec. USPX appears to be on the threshold of building on the work of Lutin by

drafting a white paper detailing the legal, technology and procedural issues raised by virtual meetings. That will be followed with a members forum through which shareowners will draft shareowner-approved guidelines for the conduct of virtual meetings. Find out more and how you can be involved on our Virtual Shareowner Meetings page.

Long-term, we cannot address the issue of virtual meetings one company at a time. There are approximately 13,000 annual meetings in the United States each year. At some point, the trickle of corporations experimenting with virtual meetings will become a torrent. We need a comprehensive solution.

To that end, the USPX has formed the Coalition to Preserve Shareowner Meetings to pursue a two-pronged strateg:

1. Hold an on-line forum to draft shareowner-approved minimum guidelines for the conduct of virtual and/or hybrid meetings, and

2. Agree to sanctions the shareowner community will impose on corporations that conduct virtual meetings not in accordance with those guidelines.

Aside from Gary Lutin, members of the Social Investment Forum and public pension funds have mostly taken the lead in this area. We need others, especially retail shareowners to step up to the plate. I hope readers of CorpGov.net will join in those efforts by sending concerns and advice to [email protected]. I encourage individual shareowners, institutional shareowners and interested parties to join this newly forming coalition to participate in the forum and other activities. Join the USPX today. Member dues are modest and fund important activities.

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Apache v Chevedden: More Comments

Gary Lutin was kind enough to forward some additional comments on this case from a few of his Forum participants. Two of them are noteworthy and were not discussed in my prior post on this case. I found Clearfield’s statement straightforward by Nelson’s more puzzling.

Andrew M. Clearfield, CEO of Investment Initiatives, LLC, formerly Managing Director of International Corporate Governance at TIAA-CREF and a Governor of the International Corporate Governance Network (“ICGN”), in an email statement:

“The problem is compounded three- and four-fold if you look at cross-border ownership.  Custodians and securities houses don’t want to address it, because it is cheaper and more profitable for them to play the shell game with investors’ shares than to make sure it is clear at all times who owns what. They will not lobby for change, and may fight it.  It is up to investors to (a) demand cooperation from their custodians (after all, it is the investors who pay the custodians, rather than the other way around), and (b) to go to the trouble to lobby the authorities for clarification in the laws.  No one else is going to do it for investors; they must spend the money and take the time to do it themselves, or it will never happen.”

Allen Nelson, President of Allen Nelson & Co., Inc., the firm that provides WorldProxy solicitation and investor relations services, in an email statement:

“I don’t believe the Apache Corporation v. John Chevedden case is an example of a “proxy plumbing” problem nor, necessarily, demonstrates that the current system of defining share ownership is dysfunctional. It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.

“Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares. …It is standard practice to refer to the Cede & Co. list as well as the registered shareholder list to determine the validity of proxy votes. The Cede & Co. listing would be of no use in ascertaining how long Northern Trust or the underlying beneficial owners have had held Apache’s shares.

“Mr. Chevedden should have known better. He could easily have established his standing as a shareholder of record by directing his broker to deliver the Apache shares out to him. Then Apache and its lawyers would have been able to confirm that he was named on the registered shareholder list. Mr. Chevedden would also have had a dated stock certificate that would prove that he was a registered shareholder of long standing.

“I agree that securities lending and derivatives practices have created serious problems that need to be addressed.”

    Mr. Nelson says, “Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares.”
    According to the court filing by Apache, Chevedden submitted evidence of ownership from his broker, Ram Trust, indicating he has held fifty share continuously since November 7, 2008. That’s all I’ve ever had to submit, when filing a resolution. However, Apache checked their list and Ram Trust wasn’t on it. Ram Trust then identified Northern Trust as the actual record holder (presumably with Chevedden actually holding a security entitlement). Apache again checked and didn’t find Northern Trust on their records.

    According to Nelson’s note, “While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.”

    If Apache is trying to see if Northern Trust is an owner, wouldn’t they automatically look to Cede & Co. to find them on their list? I’m not a proxy solicitor but I think that’s what I do if I were one, since Cede legally holds the shares of most “shareowners.”

    According to Nelson, Chevedden should have directed his broker to deliver the Apache shares out to him. Then Apache would have been able to confirm him as registered shareholder.  However, it is my understanding from this advisory from Edwards Angell Palmer & Dodge and others who covered the change that DTC began charging $500 for such deliveries as of July 1, 2009.

    At base, Nelson’s position appears to be, “It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”

    Nelson almost makes denying shareowners the right to submit resolutions to be a sport, rather than a right. To me, that is simply further evidence that shareowning, for far too many, has become nothing more than legalized gambling. Owners shouldn’t have to withdraw their shares from their broker, paying at least the $500 fee required by Cede, in order to simply put a question on the proxy that would inform the board of the sentiment of company owners concerning an important issue of governance.

    I also find it ironic that Steve Farris, President of Apache, was named one of the “Best CEOs in America” in the January 2006 issue of Institutional Investor based on his vision, integrity and ability to “deliver superior results.” While those are characteristics well worth cultivating, shouldn’t it also be important to investors that CEOs should at least respect their rights as shareowners? Would Institutional Investor have honored Farris if they had know his position on shareowner resolutions?

    In comments on a 2007 SEC rulemaking, Farris argued that non-binding resolutions should be banned outright.  Absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.

    If Apache is successful against Chevedden, all shareowners will lose their rights to participate in governing their own companies. Is there anything like an Environmental Defense Fund for shareowners? If not, one should be created to come to the defense of Chevedden and other shareowners faced with slapp suits. One sharp attorney could make a name for themselves by defending the rights of shareowners in this potentially landmark case. Volunteers?

    I put my concerns to Mr. Nelson who was kind enough to respond as follows:

    Dear Mr. McRitchie

    Management’s first duty when confronted with a shareholder demand, whether it be to submit a proposal or obtain a shareholder list in order to launch a proxy contest, is to determine if the shareholder has standing to do so; ie, has owned a minimum number of shares of the company for a certain amount of time as set out in the corporation’s articles and by-laws, state and/or federal law.  This is the opening move in the intricate chess game for corporate control which I have played many times over the decades for both management and activist shareholders.

    It appears to me that Apache and its lawyers are not all that anxious to confirm that Mr. Chevedden is a record holder entitled to have his proposal included in the company’s 2010 proxy statement.  Rather, they appear to be arguing the strict legal interpretation that Mr. Chevedden does not have standing because he is not named on the registered shareholder list even though he may be a beneficial owner of Apache shares that are held on the registered list by Cede & Co. who is acting as the electronic clearing house for Northern Trust which in turn is the correspondent for RAM Trust through whom Mr. Chevedden holds his Apache’s shares. As I wrote previously, Mr. Chevedden also has an obligation to prove to Apache that he is a shareholder of record.  The courts will decide.

    This doesn’t mean the system is broken, it simply means everyone must appreciate, understand and play by a strictly enforced set of published rules regardless of how complex they may appear to the uninitiated.  It is no more unfair than ancient rules stating that bishops can only make diagonal moves in chess.

    The fact that it now costs $500 to register shares in your own name does not indicate the system is broken, it merely says that the cost of registering share ownership is not free and someone has to bear this cost directly or indirectly.  The corporation pays its stock transfer agent to handle its share register and you indirectly pay your broker or bank to hold your shares in “street name.”

    For the past four decades there has been a concerted shift from paper stock certificates to electronic share records.  This has accelerated as computers became more powerful.  Today, it is relatively cheap to store financial records on computers and very dear to maintain paper records.  Therefore, I don’t consider a $500 charge to deliver out an actual paper share certificate to be onerous.  The price may be slightly more than actual cost, however, I don’t believe it is meant to disenfranchise investors, rather, it is an incentive for investors to hold their shares electronically.  Do you think $500 is too expensive an admission price to play the game of corporate control?

    Until recently, activist shareholders had to pay tens or hundreds of thousands of dollars out of their own pockets to challenge the management of a public company.  Corporate governance proponents and shareholder activists have made good progress in leveling the playing field between management and shareholders.  The system still favors management today and always will; it has also has given you and other small investors the tools to challenge them quite inexpensively.

    Regards,

    Allen Nelson

    Allen Nelson & Co., Incorporated
    International Proxy Solicitation Since 1977
    P.O. Box 16157
    Seattle, WA  98116

    There you have it, according to at least one well-informed proxy solicitor, shareowners should be expected to hold paper certificates if they want to “challenge management.” We can avoid this additional expense if we can shift to a system of direct registration.

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    Apache Files Slapp Suit: More Support for DRS

    As reported in Risk & Governance Blog (1/13/10), theCorporateCounsel.net Blog (1/13/10), GlobalProxyWatch (1/15/10), and by Gary Lutin via e-mail (1/15/10), Houston-based Apache has sued shareowner activist John Chevedden, contending that he failed to meet the proof-of-ownership requirements in SEC Rule 14a-8(b) required to submit a resolution. See Apache v Chevedden.

    Chevedden provided documentation of his ownership but Apache contends he didn’t submit enough information to trace the shares through to a record holder. Apache bypassed the normal route of first requesting a no-action letter from the SEC, choosing instead to go directly to court and to recover costs from Chevedden. To me, that looks like a slapp suit, designed to intimidate Chevedden and other activists with mounting legal costs and simple exhaustion.

    Apache has a long history of rejecting the rights of shareowners to influence management decisions. In 2007, “G. Stephen Farris, CEO of energy company Apache, argued that shareholder proposals should be banned outright, or absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.”

    However, even the hard-line U.S. Chamber of Commerce questioned the legality of an all-inclusive bylaw: “Under federal case law, a corporate bylaw (to opt out of allowing shareowner resolutions) … cannot act as ‘a block or strainer to prevent’ shareholder proposals from inclusion in a company’s proxy materials.” (Non-Binding Proposals Defended, RMG, Risk & Governance, 10/12/07)

    Here’s what others had to say:

    As reported by Risk Metrics Group–  “It’s fairly unusual for a company to sue its own investors, and it’s even more unusual to sue an investor before an SEC staff ruling,” noted Cornish Hitchcock, a Washington-based attorney who represents labor funds in no-action matters.

    The RMG article says the lawsuit appears to be an attempt by Apache to get around the SEC’s no-action ruling in October 2008 that rejected a similar challenge where SEC staff said that a written statement from an “introducing broker-dealer constitutes a written statement from the ‘record’ holder of securities,” as required under the federal proxy rules.

    Federal judges aren’t bound by SEC staff opinions, and may have a different opinion on what constitutes proof-of-ownership.  The RMG article goes on to recount the successful activism of Chevedden and his network of retail investors in recent years on various issues. (Disclosure: I am one of those network members.) Those victories have angered corporate officials, especially when we submit more than one proposal on different topics at the same company. However, the SEC has held the group is not in violation since the filings are by different holders, with Chevedden acting essentially as our agent.

    Broc Romanek, at theCorporateCounsel.net Blog, appears to share the opinion of issuers with regard to Chevedden assisting other shareowners with their proposals, “Many corporate secretaries will be cheering to hear that Chevedden was recently sued over his efforts to submit a proposal (although this situation doesn’t involve alter egos).”

    Romanek goes on to quote an anonymous member of CorporateCouncil.net: “I am glad they are taking Chevedden to court. More companies should make sure his shenanigans have some real consequences. If he started getting his butt hauled into court all across the country, then his proposals would cost more than the price of a stamp.”

    That attitude simply reinforces my initial opinion that this is nothing more than a slapp suit. Escalate the cost dramatically and shareowners will be too intimated to file resolutions. Chevedden’s resolution to require simple majority votes isn’t even binding on the board if passed by shareowners. My opinion is that owners of a corporation shouldn’t be dragged into court for making a suggestion to be voted on by other owners.

    GlobalProxyWatch pointed out one irony: “Apache’s in-house governance domo is none other than Sarah Teslik, ex investor champion-in-chief at the Council of Institutional Investors. If Apache succeeds, expect similar tactics from other firms seeking to block resolutions like Chevedden’s.”

    Gary Lutin’s e-mail notes, “Mr. Chevedden provided records that he did in fact own shares, but the financial service firms that confirmed his position did not appear in the records of registered ownership. Leaving aside the comical aspects of this case, the court filing shows clearly that our current system of defining ownership is dysfunctional.”

    “Whether you think this effort to block a shareholder proposal is proper or not, I assume you will agree that there is something wrong with rules that allow this argument to be made. What seems like a simple matter of defining ‘ownership’ of stock has become a real challenge, especially in the context of recently evolved securities lending and derivatives practices, and needs to resolved before anyone can sensibly consider what kind of ‘plumbing’ hardware to order.”

    I think Lutin’s comments are spot on. With street name registration, how can Apache know if Chevedden is really a shareowner? (although, appears obvious in this case that he is)  How can anyone expect Chevedden to submit more in the way of proof? He’s already submitted a letter from his broker and, as I recall, another entity up the chain.

    As we point out in our draft petition to the SEC, we retail shareowners aren’t really shareowners at all. We simply trade in “security entitlements.” The further we stray from direct registration, the more complicated it becomes to enforce the rights of ownership.We moved to the convoluted system we have now because it was the easiest way to get through a paperwork emergency that was bankrupting dozens of brokers. Direct registration wasn’t feasible because we didn’t have adequate computer power. Those days are over. Isn’t it time to move on to direct registration where companies know who there owners are and shareowners can more easily communicate with each other?

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    Archives: November 2008

    Noteworthy

    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)

    CorpGov Bites

    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)

    Activism Pays

    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.

    Directors Pay

    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.

    Pay Deductibility

    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 InvestmentsCalvert 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.

    Auto Questioned

    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)

    Back to the top

    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:

    1. the long term health of the economy of the U.S.,
    2. the economic well-being of U.S. citizens, as reflected in indicators such as levels of employment, wages, consumer installment debt and home ownership,
    3. levels of domestic and foreign control, and holdings of securities and debt, of companies incorporated or headquartered in the U.S.  and
    4. 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.

    Predictions

    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.

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    Board Leadership

    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:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. Proxy Advisory Services. The SEC should review the role of proxy advisory services and the procedures used by these firms in generating recommendations.
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